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248
BANKING ACT OF 1 9 3 5
The Chairman. That is what I understood, but I wanted to make
it clear.
Governor E c c l e s . Yes; the member and nonmember banks.
Mr. C r o ss . Y ou do admit that the dollar as it is today, untied to
any price level, is no measure of value, do you not? In other words,
its purchasing power is constantly expanding and contracting?
Governor E c c l e s . That has always been true.
Mr. C r o ss . Y ou have an exact measure of length, for instance, in
the linear foot; and you have an exact measure of weight in the
pound. You also have an exact measure of volume in a cubic foot.
But you cannot measure volume by weight. You might have two
cubes of exactly the same dimensions, one made of cork and one of
lead, but if you attempt to measure them bv weight you would not
get any idea about it at all, would you ? That is a simple question,
it seems to me. I am talking about the simple question of measure.
You could not get any idea as to the size of those two cubes by using
the measure of weight, per pound, could you ?
Governor E c c l e s . No.
Mr. C r o ss . One would probably weigh a hundred or a thousand
pounds more than the other.
Now, you attempt to measure the value by the pure unit of weight,
do you not, with so many grains of gold, for instance?
Governor E c c l e s . I do not think that a fixed gold content results
in stable prices.
Mr. C r o ss . I do not think it does either.
Governor E c c l e s . I t never has in the past.
Mr. Cross. I do not think so, but we put the price at $35 an ounce,
whereas it used to be $20.67.
Governor E c c l e s . That is right.
Mr. C r o ss . S o it is no measure of value, is it?
Governor E c c l e s . I do not think so.
Mr. C r o ss . N o w , the only way to get a measure of value is by a
price level; do you not think so \ Do you have any other suggestion
as to a measure of value outside of a price level ?
Governor E c c l e s . D o you mean by some index figure?
Mr. C r o ss . Yes; or some wholesale commodity price level.
Governor E c c l e s . That gives you a measure o f value, but it is not
what you want.
Mr. Cross. It does "ive a measure of value, does it not?
Governor E c c l e s . 1 es; it does give a measure of value.
Mr. C r o ss . Now, if you would tie your monetary unit of the dollar
as we call it in this country, to the price level, you would <*et a
measure of value, would you not?
Governor E c c l e s . I do not know just how you would tie a mone
tary unit to the price level.
Mr. C r o ss . I say, if you do do it.
Governor E c c l e s . Yes; if you can.
Mr. C ro ss . I am saying, if you can you would « a measure of
-et
value. As it is, you have not any measure of value, Do you know
of any other method by which you could approach a measure of
value ?
Governor E c c l e s . I think that a stable price level is a desirable
objective.
BANKING ACT OF 19 3 5
249
Mr. Cross. I know; we are talking about the price level. What
other way is there?
Governor E ccles. I should not say that I know of a way to get a
stable price level, and at the same time get a stable business condi
tion, which is a condition of full employment and prosperity.
Mr. Cross. Of course, that is what we all want to do, if we can.
Let me ask you this question: As the result of this instability,
fluctuation, expanding, and contracting in the purchasing power of
the dollar, and consequently affecting the earning power of a dol
lar, credit, or credit money, or check money is very sensitive, timid,
and easily affected by any economic disturbance, is it not?
Governor E ccles. I do not think that check money is more sensi
tive than any other money.
Mr. Cross. All right. Any kind of money is sensitive, is it not;
any other money, like legal tender ?
Governor E ccles. Yes; that is right.
Mr. C r o ss . If you can stabilize it on a price level, it will become
a dependable measure of value and relieve credit from the insta
bility and constant fear to which it is now subject, will it not?
th a t is, if a man knows that he will know that he will have a
dollar to spend in the aggregate, and would take into consideration
the figures you use in determining the wholesale commodity price
level, and he knows it will hold up the purchasing power and the
value, would not that tend to stabilize and give confidence?
Governor E c c l e s . I think it would.
Mr. Cross. The only method by which we know how to do that
are the levers you have in this bill, rediscount and open-market
operations.
Governor E ccles. Open-market operations, yes; that is right.
Mr. Cross. Now, with those three levers, do you not think you
could approximate holding the purchasing power of the dollar stable
with the price level?
Governor E ccles. Insofar as that can be done through monetary
action, I think you could accomplish that.
Mr. Cross. We know of no other action----Governor E ccles. In that connection let me read a short state
ment I have here which seems to me to cover this question.
Erofessor Olin, a Swedish authority—and they have possibly had
more experience in this question of managed currency----Mr. Cross. He has not had a long experience because this just
started recently.
Governor E ccles. That is true of the entire world. As a mat
ter of fact, as to the problem of central banking and money manage
ment, there is plenty to learn about it. There is no country which
has had any experience for any great length of time.
Mr. G o l d s b o r o u g h . There is plentv to unlearn about it, is there
not?
Governor E ccles. About the question of managed money?
Mr. G o l d s b o r o u g h . About the way to handle central banks. Can
you answer that?
.
Governor E c c l e s . I do not know enough about the history ot
central bank operations. Of course an automatic gold standard has
been a guide in the operation of the world’s banking system m the
past, up to the time of the war.
250
BANKING ACT OF 1 9 3 5
Mr. Cross. Controlled banking, was it not?
Governor E c c l e s . Very largely.
Mr. Cross. I wish you would read that book written by an
Englishman.
Governor E c c l e s . This man says, after surveying the Swedish
experiment in an article in index, volume 8, that—
A business cycle policy that aims at as full and regular a utilization of the
productive forces as possible, that is a maximization of the real national income
per head of the population over a long period, is bound to take many other
factors into account besides the development of prices; that is to say, it can
not be based on the idea of stabilizing any particular price level, especially if
the latter has been brought by an immediately preceding depression, but of
equilibrium with the other parts of the price system.
Mr. G oldsborough. Which means that there are two factors: One
is the factor of a scientific monetary system and the other is the
factor of distribution of production. That is what he is talking
about, is it not?
Governor E c c l e s . That is right: I agree with that.
Mr. Cross. My idea is that this bill is all right, except that there
are two amendments we ought to have.
I think it is up to Congress to provide for the regulation of the
value of money, through our agent, which is the Federal Reserve
Board.
And since, as I think I showed here yesterday, the member banks
are in the business of making money, and the 12 Federal Reserve
banks have that idea, too, and as Governor Harrison, of the New
York Federal Reserve Bank, said, the very time the Federal Reserve
Board wants to hold down inflation or credit, the banks insist on
expanding it, and the very time the Federal Reserve Board wants to
boost credit, the banks tend to shrink and contract it. As long as
they own the stock of the Federal Reserve banks, with their class A
and class B directors, with all those influences working, I am afraid
there will be cross-purposes, and I think they should be in a posi
tion, without any outside influence, to act for the whole people all the
time. That is why I believe that the stock should be taken over and
owned by the Government in those Federal Reserve banks.
Another amendment which I think should be adopted is this: I
think we ought to give them a goal to work to. It is the best we
have got; it might not be a perfect compass, and no doubt is not bv
any means; vet I think we ought to have some kind of a price level,
whether you take 50 or 100 commodities, or 784, or use the economists'
index, we ought to have some goal set for them to anchor on. We
can try it, and if it does not work we can change it.
I notice that England has let the pound slide down, no doubt with
the idea of getting constantly under our dollar, giving her the advan
tage. I think we ought to take 20 percent above the&wholesale com
modity price level of 1926. If we take that and go verv little below
that, I think we should do it, because if England or anv other countrv
is constantly trying to slide under us and cheapen their money to
give them an advantage in the export trade, I think we should be in
a position where we can follow along with them.
But I am sold on the question of tying the dollar to the price
level within a certain latitude.
1
Then I will tell you another thing I think about this bill at least in
connection with the psychological effect. You have 40 cents on the
251
BANKING ACT OF 19 3 5
dollar back of the Federal Reserve note, and I think if you would
make it, say, 35, and provide, say, for 10 cents in silver certificates, you
would be taking a wise step.
I realize if you can have stabilized and controlled currency you do
not need any metal at all, except as a matter of foreign traffic. But as
long as the balance of trade is in our favor we do not even need that
because they have to be constantly buying money to pay for our goods.
Of course, if we become an importing nation and the balance of
trade is against us, we would have to use a different currency.
Governor E c c l e s . A s to this question of fixing the price level in the
bill, I personally would not like to see that. I would suggest that, in
T
lieu of a fixed price level, something of this sort might be put in the
bill, as indicating the direction or objective to which the Federal
Reserve Board would be required to reach:
It shall be the duty of the Federal Reserve Board to exercise such powers as
it possesses to promote conditions making for business stability and to mitigate
by its influence unstabilizing fluctuations in the general level of production,
trade, prices, and employment, so far as may be possible within the scope of
monetary action.
Mr. C ross. That is a lot better than what we have in there now.
Mr. G oldsborough. Would you feel like including in that a state
ment indicating that the Board should also direct its attention toward
using its power in such a manner as to absorb the unemployment?
You have done that in a way, but it is not quite clear.
You know there are experts w I think are worthy of attention
’ho
who claim that you can use monetary powers in such a way as to
absorb unemployment to a certain point, and that when you do that
you then have notice that you have raised your price level to the
proper position.
I am wondering if you could put some sort of legislative direction
as that in what you have said. I think myself you have done very,
very well in what you just pointed out as a possible amendment.
Governor E ccles. I am trying to avoid a rigid requirement in the
law that may be impossible of accomplishment, and hence may cause
embarassment. I would like to see enough flexibility in the law; be
cause I do not believe that we can deal with our money, economic and
social problems, and they are all interrelated, as an exact science,
i ou have too many emotional factors to contend with, and when you
talk about the problems of business stability, stable prices, full em
ployment, and so forth, you have to take into account factors other
than purely the mathematical or mechanical factors of money.
Mr. G o l d s b o r o u g h . Will you read that proposed provision again.
Governor E ccles. It says:
It shall be the duty of the Federal Reserve Board to exercise such P°^®rS
as it possesses to promote conditions making for business stability and t
gate by its influence unstabilizing fluctuations in the
le\e o P
tion, trade, prices, and employment, so far as may be possible w
scope of monetary action.
Mr. G oldsborough. Y ou are statin g the objectives.
Governor E ccles. That is right.
, ,
_,T
.n
The C h a ir m a n . The present law was designed, of course, to.pro
general
mote sound business conditions and laid down a £uu
*llu TO s0
P
icy somewhat along the line of your suggestion, although not so
comprehensive.
252
BANKING ACT OF 19 3 5
Under the present law the language is :
The board of directors shall administer the affairs impartially—
And so forth—
and extend accommodations such as may be safely and reasonably made, with
due regard to the claims and demands of other banks, and to the requirements
c f industry, commerce, and agriculture.
It is not so comprehensive, but it is in the law, and to a certain
extent it is a recognition of the ends to be desired.
Personally, my view is that .you have expressed the true policy,
and that is to take the general results that would be desired as the
guide and standard of activities.
In connection with Mr. Cross’ inquiries, what is the relation be
tween actual currency, or Government currency, or Government
money, and check money and its velocity?
Governor E c c l e s . S o far as their functioning and purchasing
power are concerned, there is no difference. They serve the same
purposes as a means of payment. Currency is used largely as a
matter of convenience in meeting pay rolls, in retail buying by the
man with a small income, where the checking account is too ex
pensive, or is not wanted. Even in cases where checking accounts
are used, particularly is it true now with service charges and the
check tax, people will cash checks for a larger amount and pay bills
with currency rather than pay all bills with small checks. The use
of the check has been greatly diminished.
The C h a i r m a n . What I am undertaking to develop is the neces
sary part that must be played by actual money in the present scheme.
Governor E c c l e s . I do not know that I quite understand you, Mr.
Steagall.
The C h a i r m a n . We cannot get away entirely from the use of
actual money, even though we do 90 percent of our business by the
use of bank checks.
Governor E c c l e s . That is right. We possibly use the bank check
more than any other country.
The C h a i r m a n . A s we cannot rest our b a n k in g structure entirely
on air. we have to have a basis for that. What I am d irecting vour
attention to and asking you to discuss is the proper basis, and* the
necessity for it; how far the development of a sound bank-check
currency must rest upon the use of actual currency and the o p p o r
tunity to redeem the bank check in actual currency.
Governor E c c l e s . Of course, a bank has to be in a position to
pay its deposits in currency. At one time it was required to pay it
in gold, and of course we know what trouble that got us into. The
bank is required to pay the deposit in currency. We found that,
while banks were closing and the great deflation was goin^ on. that a
great many people and corporations wanted their deposits in cur
rency, to such an extent that the amount of currency outstanding
passed the all-time record of the use of currency, even when busi
ness was very active. It exceeded over seven billions of dollars, at
a time when our business activity was about 50 percent of what
it normally is, showing that a very substantial amount of that cur
rency was not drawn out for current or immediate use but was
drawn out for fear of loss through bank failures, to be held in safe
keeping. We must prevent bank failures so far as is humanlv
BANKING ACT OF 19 3 5
253
possible. When people found they could get their money if they
wanted it, confidence was reestablished in the banking system, and
the amount of currency outstanding greatly diminished.
The C h a i r m a n . Y ou say we go t into trouble under the system
under w hich we had to redeem everything in gold. Just w hat do
you mean by that ?
Governor E c c l e s .
I mean that when people demanded payment in
gold, since gold was used as a reserve for our money system, it did
not take the withdrawal of very much gold to force a suspension of
gold payments and to put an embargo on gold.
The C h a i r m a n . Let me ask you this question, “ Were we forced
to suspend gold payments ? ”
Governor E c c l e s . Yes; I think we were, not only because of with
drawals but also because of our price and debt structure and the
measures that were absolutely necessary to correct it.
Mr. C r o ss . Gold was leaving the country very rapidly, was it not?
Governor E c c l e s . Yes; it was leaving the country very rapidly;
not only that, but it was being drawn out by corporations and indi
viduals at a rapid rate.
The C h a i r m a n . When we suspended payment we had an un
precedented amount of gold on hand, did we not?
Governor E c c l e s . At the time we suspended we had lost a great
deal of gold.
The C h a ir m a n . We had lost a great deal of gold, but w e still had
more than half of the world’s gold, did we not?
Governor E c c l e s . N o ; we had about 40 percent of it.
The C h a i r m a n . But we had certainly something like a third—an
undue proportion of the world supply.
Governor E c c l e s . But at the rate at which it was being drawn out
it was evident that we might soon reach a position where it would
be necessary to dispense with gold payments and put an embargo
on, and therefore, why permit a preference to those people and cor
porations who demanded payment in gold ?
The Chairman. Had we not always been able, by the use of Gov
ernment credit, to get our hands on all the gold we needed to redeem
the outstanding gold obligations? I do not mean it was a desirable
tiling to do; far from it; that is not my view of it. I am simply
stating the facts.
Governor E c c l e s . We had panics in the past where we could not
e\en pay in currency, up until the time we got the Federal Reserve
System set-up. I remember the panic of 1907, when they suspended
payment in currency and used clearing-house certificates.
The C h a i r m a n . There was not any difficulty in redeeming the
currency in gold, was there? Of course, we have always had occa
sion when quite a number of banks could not pay out any kind of
money because they could not get it. But there never was any time
in those situations when there was any difficulty about exchanging
currency for gold, if you wanted it?
Mr. G o l d s b o r o u g h . In the panic of 1873 the gold reserve was
depleted.
Mr. C r o s s . And there is always a vast difference between dollars
and commodities. The whole world was trying to get back, and the
whole world was scrambling for it.
127297— 35------ 17
254
BANKING ACT OB 1 9 3 5
The C h a i r m a n . I am speaking about what did happen when Mr.
Cleveland was unable to get gold.
Governor E c c l e s . I think he negotiated a loan with Mr. Morgan.
The C h a i r m a n . A s a matter of fact, we maintained our gold
standard with $150,000,000, did we not? That leads to this question:
I am not one of those who think that our gold-standard system was
ideal; that is one of the things I think it might be said we had to
unlearn. Whether we have learned anything or not, I will not at
tempt to say.
But I think it will be agreed that is one of the things we have
unlearned.
But I was going to ask you this question: Why was it we could not
redeem in gold? Why could we not go along with that system?
Why was it not safe to continue it? That is what I am talking
about.
Governor E c c l e s . For the reason that----The C h a i r m a n . I s not this the fact, Governor, that the trouble
was there was not enough gold ?
Governor E c c l e s . Of course, there was not a fraction of enough
gold in this country or in the world to meet the gold obligations.
The C h a i r m a n . We did not have enough gold.
Governor E c c l e s . Not a fraction of enough to meet the obliga
tions, but that is always the condition. It works all right so long
as no questions are raised about redemption but in case of panic there
is not enough gold and payments have to be suspended.
The C h a i r m a n . Let me ask you another question. Was not that
the chief difficulty with the banks when they found themselves in
the situation where they could not meet their obligations in currency,
that the currency was too scarce ?
Governor E c c l e s . No ; the currency was not scarce, because the
banks had assets with wdiich they could go to the Federal Reserve
System and get credit, and they could have drawn down currency.
There was no shortage in the amount of currency available to a
bank, if the bank had assets acceptable to the Federal Reserve bank.
The C h a i r m a n . That is the point. The fact was they had de
posits, as you have said, I think, amounting to 26 billion, or sav
25 billion in round figures, that were in the nature of demand obli
gations. But they had only a trivial amount in comparison to their
deposit obligations of assets upon which they could apply for and
obtain actual currency; is not that right?
Governor E c c l e s . That is right.
The C h a i r m a n . And the fact was; as against 25 billion dollars
of demand-deposit obligations for which the banks were responsible
they had only in the country something like 5 billion dollars in
which to meet that responsibility. And for all their cash obliga
tions in the Nation they had only such a portion of actual cash that
they could have paid, plus their discountable or rediscountable
paper, and the amount of rediscountable paper had gotten to the
point where it vras trivial as compared with the amount of obliga
tions they had.
Governor E c c l e s . Oh, \es; and the amount of rediscountable
paper, even in 1928 or 1929, was only a fraction of the total deposit
liability.
255
BANKING ACT OF 1 9 3 5
The C h a i r m a n . As a matter of fact, the banks now owe deposit
obligations that I believe you say amount to about 25 billion.
Governor E c c l e s . That is, demand obligations.
The C h a i r m a n . The amount has increased from 19 billion to 25
billion of demand obligations outstanding against the banks ?
Governor E c c l e s . That is right.
The C h a i r m a n . And they have available today to meet those
demands something like three-quarters of a billion dollars of actual
money; is not that about right?
Dr. G o l d e n w e is e r . You mean cash in vaults?
The C h a i r m a n . Yes.
D r. G o l d e n w’e i s e r . T h a t is about right.
The C h a i r m a n . That is what I am talking
about.
That is a
fair way to state that position, is it not?
Dr. G o l d e n w e i s e r . No.
T h e C h a i r m a n . Of course, they have
in addition to the cash
available to them their privile ge of ob ta in in g currency on their
assets, which is still lim ited to a certain qu ality of assets.
Governor E c c l e s . Besides the cash value which they have in their
vaults, they have their balances in the Reserve banks, which are the
equivalent of cash, the reason being that they can draw down cur
rency against those balances with the reserve banks, and those bal
ances today are over 4 billion dollars.
The C h a i r m a n . Then they would be entitled to have Federal Re
serve notes issued.
Governor E c c l e s . That is right; against those balances.
The C h a i r m a n . That is, their excess balances?
Governor E c c l e s . They are required, of course, to carry a min
imum balance.
The C h a i r m a n . But they could not utilize that.
Governor E c c l e s . They could draw down their currency against
their excess balances, but they would be penalized if their balances
were below the legal requirements.
The C h a i r m a n . Which, of course, means that the legal require
ments could not be utilized, as a practical proposition.
Governor E c c l e s . Yes. I t could be utilized subject to the pay
ment of a penalty for any deficiency in reserves.
The C h a i r m a n . S o they would be limited to their excess balances
and their cash on hand, and such paper as they would have upon
which they might obtain currency.
Governor E c c l e s . That is right.
The C h a i r m a n . Does it not follow that the banks found them
selves in difficulties in undertaking to meet their demand obligations
growing out of the scant supply of actual currency, as compared with
the demand upon that supply, not alone by the banks but demands
from various sources in the Nation ?
Governor E c c l e s . The banks found that they were unable to meet
their deposit liabilities in currency because of the lack of assets
which the Reserve banks would accept. That reduced the amount
of currency that they were able to pay out, and the very fact that
many of them were unable to meet that demand caused the whole
Nation to want to convert their deposits into currency.
As soon as the people found that they could get their deposits in
currency, as the result of the emergency banking act of 1933 per-
256
BANKING ACT OF 19 35
mitting the banks, not only the member but also the nonmember
banks, to get credit, and hence currency from the Reserve banks
upon all of their sound assets, the people of the country did not want
their deposits in currency. The reverse action developed and the
currency which they had wanted when they thought they could not
get it began to come back into the banks and increased the deposits
of the banks by an amount of from a billion and a half to two
billion dollars.
So that it seems to me that the lesson that that experience should
have taught is that the Federal Reserve Board should have some
discretionary power in the making of rules and regulations that
will permit the Federal Reserve banks to accept the sound assets
of banks and thus stop what otherwise would be a repetition of
what we have had in the way of a credit contraction and the re
duction of our deposit money.
The C h a i r m a n . Governor, it is unquestionably true that we have,
to a large extent, restored confidence in the banks, and money in
hoarding, and no doubt considerable sums that have been with
drawn for legitimate uses, because of the distrust of the banks, has
been returned to the banks.
But does not that result mainly from the insurance of bank
deposits ?
Governor E ccles. I think that is a very important fact.
The C h a i r m a n . Let me ask you another question.
Governor E ccles. I think that is particularly----The C h a i r m a n . We will not have accomplished much, no matter
how fully we accomplish that, if we only succeed in restoring con
fidence in banks so that the public will leave its funds in banks
for safekeeping.
That would be a thing to be desired, and it seems to me a thing
which the public has a right to expect, but that would be a long
way from accomplishing what we need in this country, to bring
about a revival and recovery of normal business conditions; is not
that right?
Governor E ccles. Yes; that is right.
The C h a i r m a n . I t is a fact, is it not, that we did find the banks
in a condition where their demand obligations were so great that
they had no way on earth, with the limited amount of cash or cur
rency available to them, to meet their demand obligations. Even
though a bank might be solvent, the practical situation was that
there was no way for the bank to get enough currency to meet its
demand obligations. That was the situation that existed in manv
cases, was it not?
Governor E ccles. That is right.
The Chairman. That is the situation that confronts us and for
which we must find a remedy if we are going to make it possible to
bring about business recovery and the normal use of banlang credit
to support business in the United States; is not that right? ~
Governor E ccles. That is right.
The Chairman. And this is also true, is it not, that the emergencv
plans embodied in the emergency legislation which we passed in
BANKING ACT OF 1 9 3 5
257
1932 have certainly failed to accomplish those desirable results, have
they not?
Governor E c c l e s . I think that is the only conclusion one could
reach, from the present evidence.
The C h a i r m a n . Those provisions are so hedged about, even though
under the law, under the act of 1933, as it was finally written by
an amendment that extended to nonmember banks the privilege of
having their sound assets treated as eligible for advances by the
Federal Reserve banks, and as a basis for the issuance of currency,
the rules and regulations were so hedged about, the law being a
temporary measure, and being tried out as an emergency measure,
was not enough to reassure the banks that they were free to go ahead
and use their credit facilities freely for the support of business
and to promote recovery.
Governor E c c l e s . An abundance of excess credit is available in
the banking system. Excess reserves are sufficient at the present
time for the banking system, as a whole, to extend credit to an
amount in excess of 20 billion dollars, without the banking system
as a whole having to use its rediscount facilities with the Reserve
System. Interest rates are at possibly an all-time low level. The
discount rates of the Reserve banks have been steadilv reduced until
at the present time none of the banks have a rate in excess of 2 or 21A
percent.
The amount of the excess reserves held by the banks, the low dis
count rate, and hence the low rates that are prevailing for commer
cial paper, for high-grade bonds, industrial and municipal, and for
Government securities, are indicative of the excess supply of money
and credit in relation to the demand for it, on a basis" largely of
short-term credit.
In order to expand the use of money which is necessary for
recovery, either those holding deposits in banks must be willing to
spend their funds, which would increase the velocity of the total
existing deposits, or borrowers who can command bank credit must
be willing to go to the banks and borrow funds which they will
spend, or a combination of both is necessary.
If, in the first instance, owners of funds spend their funds, you
would get an improvement in business through an increase in the
velocity of the existing deposits. If new loans are made you would
then get an increase in the volume of money as well as an increase
in the velocity of money. In the absence of an increase in the
velocity of the funds held by the banks, or an increase in the volume
of private credit extended by the banks, the Government has been
required to inject into our system through using its credit an in
creased flow of funds. Government spending has the same effect
as private spending. It is somebod}7 income. Every one’s spend
’s
ing is somebody else’s income.
The C h a i r m a n . Let me ask you a question right there. Do you
think Government spending has the same effect as private spending?
Do vou think you want to adhere to that statement upon reflection ?
Governor E c c l e s . From the purely monetary standpoint----The C h a i r m a n . A s far as the actual transaction is concerned;
but as far as the psychological effect is concerned, and the effect
258
BANKING ACT OF 19 35
upon a lot of men who want the money spread into their business,
it would be a different matter would it not?
Governor E ccles. I t may be. I t is, of course, desirable to have
private spending instead of having Government deficits.
The C h a i r m a n . In that connection, let me ask you this question:
In reference to the matter of farm-land values, we have put a certain
amount of support under farm-land values by the assistance that
has been extended by the Government. But the average citizen who
might have some idle cash and might want to invest it for his
children does not know how long that policy will continue, or when
that support will be withdrawn, and in such an event, what effect
it would have on bank values. But if this support was given in a
normal way so a citizen would expect it to be maintained and to
endure, he would have a different mental attitude toward the situa
tion, it seems to me.
Mr. Cross. The difference, as I see it, is that money put up by the
Government in enterprises that would not come in conflict with the
activities of private business would cause those who receive wages
from that activity with the Government to spend money with the
merchants and others, but it does not affect the feeling or help the
condition. Everybody feels like the Government has to quit some
time somewhere, and therefore they remain nervous.
If private enterprise should take up this unemployment people
will feel as if that is natural and normal. If you could get prices to
where private enterprise could make a profit, I do not see how the
credit you are talking about will be used, because neither the fellow
will borrow, nor would the bank be foolish enough to loan; but you
have to get prices to where a man can get a loan and can sell his
products and make a profit and pay it back. Of course, that means
the employment of labor, and that means spending power.
I know we are in a jam, and it is hard to get out. Of course, we
can dig and dig, and get right back to where we find ourselves in the
mud. But I do believe if we could get prices back we will be going
ahead.
Governor E ccles. The only way you could get prices back is
through increasing the means of payment in the hands of the people
who will spend faster than you increase production. To get them
back any other way means to get them back through an artificial re
striction of production or the fixation of prices, w
’hich are not de
sirable ways to get prices up. In other words, to raise prices and
reduce production does not add anything to the national wealth.
Mr. Cross. We are in this situation. You have a fixed indebted
ness on the people. You say that Tom, Dick, and Harry own these
buildings in this city. They do not. In the courthouse you will see
a paper title in their names. But there is a mortgage against it. and
under present prices, with the taxes they have to pay, they do not
own anything. They are mere interest-paying tenants. That is all
they are, struggling like the dickens to pay their rent to the fellow
who owms the mortgage.
The dollar has so increased in its purchasing power that it takes
twice as much for him to get the necessities and comforts that he has
than he had to pay before, and with the taxes he has to pay now
BANKING ACT OF 1 9 3 5
259
he is up against it. Unless we can get it to where he can pay back
with the same kind of dollar that he borrowed, I do not see anything
ahead but a general liquidation, and possibly a revolution.
Governor E c c l e s . Of course, there are two ways out of depressions,
it seems to me. One is through the process of liquidation and
bankruptcy.
Mr. C r o ss . Then there may be a revolution.
Governor E c c l e s . The other is through an inflationary process.
We went through a period of liquidation and bankruptcy as a result
of allowing nature to take its course until we had extinguished a
third of our deposit-money supply and until we had 15 or 16 million
people out of employment, and until the quoted values of the
resources of America were less than the debt. In other words, we
liquidated down to a point where we had created a condition of
general insolvency as measured by the ability of the people through
the national income to support the debt structure.
The deflation was finally stopped because of the unrest and because
of the suffering caused thereby and because it not only was affecting
the debtor but the creditor was equally affected. The corner of
completing the job of deflation was so hot that it could not be
turned, and there was only one other course open. In order to save
the system of capitalism and to maintain order, the Government was
forced to step in, even under Mr. Hoover.
I he first effort was made through the organization of the Recon
struction finance Corporation, not for the purpose of directly reliev
ing unemployment but for the purpose of using Government credit
to support, through further debt, the railroad system, the banking
system and the insurance structure, all of which was very necessary
to support.
That action did not meet the problem of unemployment. It was
an effort to support the private credit structure through the use of
Government credit.
That action, plus similar actions by the Government through other
credit agencies which have been set up and have not been inflation
ary—I mean the Home Owners’ Loan Corporation, the Farm Credit
organization, and the Reconstruction Finance Corporation—stopped
deflation. The greatest portion of Government credit which has
been used during the depression is not of an inflationary nature, be
cause it is simply a question of transferring the debt from where it
is to a Government agency.
The Chairman. And by that process it did stop deflation?
Governor E c c l e s . Yes; that process stopped, or at least checked
deflation. The condition of inflation has to come about through the
increase in the volume and velocity of money either by Government
spending or by private spending, or by a combination of both.
Mr. F ord. Would not “ reflation ” be a better term?
Governor E c c l e s . Yes. The difficulty is that so many people,
when you say “ inflation ”, think it is something unsound; they think
of worthless money. W hat I mean is that a rise in the general price
level, in employment, and improvement in the business situation,
froin wherever it is, would be inflation, no matter how small the
extent.
260
BANKING ACT OF 19 35
The C h a i r m a n . Let me suggest that you just use the word politely
and call it “ expansion.”
Mr. C r o s s . They deflated until they got into this condition. Now,
if you go back to where we were, would we not simply be reflating,
or expanding?
Governor E c c l e s . “ Expanding ” or “ reflating ”—I do not care
what the term is. I think it is a question of what is meant.
Mr. C r o ss . I t ought to be controlled ?
Governor E c c l e s . Absolutely; it is very important, of course, that
it be controlled, and with the private banking system, with the excess
reserves now available, if the credit expansion should commence and
continue with the use of the present existing reserves, you could
get a business activity and a price level substantially higher, I think,
than we had in 1926, 1927, 1928 or 1929. You would have an in
crease in your total deposit money; or, in other words, your total
deposit money would be increased beyond any amount that we ever
had before.
Mr. C r o ss . We know that, Governor; but do you not think that
by these levers that have been put in this bill, as you have it, by
your control over the reserves, the rediscount rate, and so forth, you
could take the situation in hand any time so that you could control it?
Then, too, is it not much easier to control inflation, to stop things
from going up, than to stop deflation after it has once started? As
one of the Governors who testified here before told us, whenever you
attempt to stop deflation, it is the hardest problem with which you
have to deal.
Governor E c c l e s . I think that the control of inflation is a far less
difficult problem than the control of deflation. We have had a good
deal of talk for a year or two about the fear of inflation. If there
was any real fear of inflation, it would be evidenced by an increase
in equities. Stocks would be going up instead of down, high-grade
bonds would be going down instead of up, and the interest that
would be paid o n long-term municipal, Government, and other se
curities would be increasing rather than decreasing. Likewise, realestate values would be rapidly increasing, and rents would be
going up.
In other words, if there were a fear of inflation that we hear so
much talk about, money would be shifting from deposits into things,
and there would soon come a demand for increased credit, because
it would be profitable, with things going up, to use credit to buy
things.
Mr. C r o ss . Every time a statement is given out, purporting to
come from the White House, that there is or will be no inflation,
own drops the stock market and everything else.
i you have any influence over there, I wish vc would stop them
:ou
[L ig h te r .]
* f J*
n°t the situation that you are describing there one
nrv
e one hand and cupidity on the other? In a deflationhnilv
everJ 1 ody
b
shivering; and in a boom period, everycnnllb overf,onfident. and wants to get more. As I said, you have
~
‘
f
one1slde and fear on the other. You step from one
‘tage to the other, do you not?
0R®1
‘
2 8 61 iiO iO V 0 N D IN V 9
261
I am not criticizing that cupidity; that is human nature; but
that is what it amounts to.
Governor E ccles. Y ou have, of course, a lack of confidence on
the part of a good many people, and a timidity ; but on the other
hand, if they feel sure of inflation, that these things are going up,
the natural result is that they would buy things in order to make a
profit.
The C h a i r m a n . It is 12: 30, and I think that this would be a good
time to recess.
Governor E ccles. I would be glad to have the Federal Reserve
furnish to the members of the committee mimeographed copies of
the first 3 days’ hearings.
The C h a i r m a n . That will be very helpful. We will appreciate it.
Governor E c c l e s . And also, when I have finished here, or the
hearings have been finished, I will be glad to furnish the members
of the committee with a complete brief, just as I have it here, of
every phase of this legislation.
The C h a i r m a n . All right.
We will meet at 10:30 tomorrow morning.
(Thereupon, at 12:30 p. m., a recess was taken until Thursdav
morning, Mar. 14, 1935, at 10:30 a. m.)
1
B A N K IN G
A C T O F 1935
T H U R S D A Y , M A R C H 14, 1935
H o u se o f R e p r e s e n t a t iv e s ,
C o m m it t e e o n B a n k i n g a n d C u r r e n c y ,
Washington, D. C.
The committee met at 10:30 a. m., Hon. Henry B. Steagall
(chairman) presiding.
The C h a i r m a n . The committee will come to order. Mr. Eccles,
you may continue your statement. Mr. Cavicchia desires to ask you
some questions.
STATEMENT OF MARRINER S. ECCLES. GOVERNOR FEDERAL
RESERVE BOARD— Continued
Mr. C a v t c c iiia . Governor, I think the other day I asked you to tell
me the amount of mortgages held by member banks. I understand
that amount has already been inserted in the record, namely,
$2,270,000,000.
Governor E c c l e s . Yes; that is right.
Mr. C a v i c c h i a . The bill before us, as I understand it, authorizes
the national banks to lend on amortized mortgages up to 75 percent
of the appraised value; am I correct?
Governor E c c l e s . That is the limitation put in the bill; but I
made the recommendation that the Federal Reserve Board be given
the power to make rules and regulations governing mortgages to be
taken by member banks, in lieu of the 75 percent and 60 percent
limitations in the bill.
Mr. C a v i c c h i a . What do you mean by 75 percent and 60 percent ?
Governor E c c l e s . Seventy-five percent of the appraised value of
the property and 60 percent of the amount of the time deposits.
Mr. C a v i c c h i a . One of the reasons given for the banks’ inability
to meet the demands of the depositors, Governor, in this crisis we
have been going through in the last 5 or 6 years, was the fact that
they had so much of frozen assets on hand. Do you not think that
if you give authority to the banks to lend on mortgages on a higher
percentage than they have been loaning on heretofore that you will
make it still harder for them to meet the demands for payments in
case we should have another crisis?
Governor E c c l e s . I feel that the liberalization of the mortgage
provision should be considered in connection with the modification
of the eligibility changes in the legislation. I t seems to me that
unless the eligibility provision be liberalized, permitting the Federal
Reserve banks to loan on sound assets in order to meet conditions
of deflation, then the banks should be prohibited from loaning on
263
264
BANKING ACT OF 19 35
5-year 50-percent mortgages. They should be prohibited from loan
ing on or purchasing any bonds the maturity of which runs beyond
6 months or a year.
Mr. C a v i c c h i a . Y ou think that it is the short-term mortgages that
add to a feeling of fear?
Governor E c c l e s . N o ; what I think is this, that the banks, having
only 12 percent of their loans and investments eligible in 1929, and
those eligible assets not equally distributed throughout the banking
system were not able to meet a substantial contraction of credit with
out many of them being forced to the wall and without forcing the
payment of loans as they fell due.
There should be no more objection to the long-term amortized
mortgage as proposed in the bill than to the 5-year straight 50percent mortgage, which has been permitted for a period of 20
years, or to the investment in securities of all kinds without regard
to maturity.
I t is interesting to note as to the banks which closed throughout
the country, and I understand that it has been shown by investiga
tion, that the greater number of bank failures was in the area—
and this is according to Federal Reserve districts—where the small
est amount of real-estate mortgages were held by the banks. The
area where the larger percentage of real-estate mortgages was held
by the banks was where the percentage of bank failures was the
smallest.
I t is found that the investment in securities—in bonds—has a
very close relationship to bank failures.
Mr. C a v i c c h i a . That leads me to ask you this question: I think
you will agree with me that the decline in the value of real estate
has amounted to perhaps 25 percent or more during this crisis as
compared with what it was in 1923, 1924, and 1926. Do you agree
with me on that?
Governor E c c l e s . Yes; I think there is an average deflation of
real estate of at least 25 percent.
Mr. C a v i c c h i a . S o that if a bank loans up to 75 percent of the
appraised value on a mortgage, and then there should be a depression,
that 25 percent equity would lie wiped out overnight, would it not?
G ove rn or E c c l e s . I t w ould be w iped out over the period that it
took to b rin g about a deflation of that amount.
Mr. C a v a c c h ia . I t will not be as good a security
as a mort^aire
based on 50 percent, because if there is that difference there'will
still be a leeway there.
Governor E c c l e s . I think that is correct, with this exception:
That in the case of the 50-percent straight mortgage, which is now
permitted, the owner----Mr. C a v i c c h i a . What do you mean when you say “ which is now
permitted ” ?
Governor E c c l e s . The law now permits a mortgage of 50 percent
of the appraised value—up to 50 percent of the time funds. 1
Mr. C a v i c c h i a . I s that in the law now ?
Governor E c c l e s . That is in the law now, and it has been there
for 20 years.
Mr. C a v i c c h i a . You say “ time funds” ?
Governor E c c l e s . That is right.
BANKING ACT OF 19 3 5
265
Mr. G o l d s b o r o u g h . I think you are mistaken about the 20 years.
I know that Mr. Steagall and I fought the inclusion of a more
liberal provision in the banking act for years and years, and I have
only been on the Banking and Currency Committee for 15 years.
The C h a i r m a n . We liberalized the provision in the McFadden Act
of 1927.
Governor E c c l e s . Y ou might have liberalized it, but they have
been making real-estate mortgages for 20 years. I was incorrect in
stating that the present provision has been there for 20 years.
Mr. G o l d s b o r o u g h . They were not allowed to carry real-estate
mortgages before 1926.
Governor E c c l e s . There is a provision in the original Federal
Reserve Act.
Here is the provision of the original Federal Reserve Act:
Sec. 24. Any national banking association not situated in a central reserve
city may make loans secured by improved and unencumbered farm land, situ
ated within its Federal Reserve district, but no such loan shall be made for a
longer time than five years, nor for an amount exceeding fifty per centum of the
actual value of the property offered as security. Any such bank may make
such loans in an aggregate sum equal to twenty-five per centum of its capital
and surplus or to one-third of its time deposits and such banks may continue
hereafter as heretofore to receive time deposits and to pay interest on the same.
The Federal Reserve Board shall have power from time to time to add to
the list of cities in which national banks shall not be permitted to make loans
secured upon real estate in the manner described in this section.
Mr. C a v i c c h i a . That was confined to farm lands, as you read it.
Governor E c c l e s . Yes.
Ihe C h a i r m a n . Just a moment. This seems to be chasing niceties
rather than principles. Dr. Goldenweiser, can you give us off-hand
the history of this legislation?
Dr. G o l d e n w e is e r . I think Mr. Wyatt can answer that question.
Mr. W yatt . I cannot give you the details off-hand, but that sec
tion has been amended a number of times and all the amendments
were in the direction of greater liberality. The last extension of it
was in the McFadden Act of February 25, 1927.
Mr. G o l d s b o r o u g h . My memory is that Mr. Steagall and I fought
that for years and years and years, and finally we were steam
rollered in 1927. I also know that this Congress has spent a large
part of its time in the last 2 years bailing out the banks that accu
mulated these real-estate mortgages over our protest.
Mr. W y a t t . That section was amended twice: Once by the act of
September 7, 1916, which was in the direction of greater liberality,
and authorized loans on city real estate as well as farm land. I t was
amended again by the McFadden Act of February 25, 1927 which
authorized loans on city real estate for 5 years, instead of 1 year,
removed the prohibition against banks in certain reserve cities mak
ing any real-estate loans, and increased the aggregate amount of realestate loans which might be made by any national bank from onehalf of its time deposits to one-third of the savings deposits.
Mr. C a v i c c h i a . When we talk of 1-year mortgages, it does not
mean that they will be called in at the end of 1 year. If the people
will pay their interest and the property is kept 'up, the mortgage is
permitted to run along; am I correct or not?
Governor E c c l e s . I think that is true.
Mr C avicchia . That is the general practice, is it not?
BANKING ACT OF 1 9 3 5
266
Governor E c c l e s . That is the general practice, in connection with
most loans, whether real estate or otherwise.
Mr. C a v i c c h i a . I am only cognizant of what takes place in my
own State. I know of savings institutions----Governor E ccl . s . The borrower usually pays a commission, how
e
ever, each time the loan is renewed, and he is always in the position
of never knowing----Mr. C a v i c c h i a . That is not true in New Jersey. The savings in
stitutions make their mortgages for 1 year. They never pay a
bonus for getting the money. The mortgage is never renewed.
Under our law it may continue, even though it is for a 1-year period.
You will find mortgages that have been on some pieces of property
for 15, 20, or 25 years. As long as the people pay their interest, they
run on. They do not have to be renewed.
I t does not cost them a nickle, except in the case of some mort
gage companies, where some 5 or 6 years ago they got into the habit
of writing short-term mortgages for 3, 4, or 5 years. When those
mortgages expired, they did have to be renewed, which caused extra
cost to the borrower, and sometimes a great deal of trouble in having
them refinanced.
Let me ask you one more question in connection with the mortgages.
I take it that the reason you are liberalizing the mortgage clause
in this banking bill is that you are hoping to be able to provide
mortgage money, which has been very scarce during the last 6 years.
Am I correct about that ?
Governor E c c l e s . That is partly true. We had this in mind.
The commercial banking system has over 10 billion of time funds.
Those time funds, or savings funds, in the commercial banking
system are the equivalent, so far as the people are concerned, of funds
held by the mutual savings banks in the New England and New
York areas.
Either the banks are going to use those time funds in the longterm lending field, either long-term bonds of various kinds, or long
term mortgages, or long-term Government financing, or they are
going to have to stop paying interest and give up those time funds.
If a bank is confined to its loans to eligible paper, in order to lie
liquid, then the only other avenue for investment of its funds would
be Government bonds. That would mean at the present time that
8 percent of the total loans and investments of the banks would be
commercial paper, and the 92 percent would be Government secun ^les- This .would mean that the Government, through its agencies,
would be doing the lending business, furnishing long-term credit,
v ich it is largely doing today, and the banks which hold the
uncls of the people would be furnishing the Government the funds
> purchasing Government bonds or bonds guaranteed bv the Gov
}
ernment. That is the trend today.
° ^ act> percent of the assets of the banks are now
see no—
on(^s’ or bonds guaranteed by the Government, and I
Mr.
Long-term deposits?
th 1 t ° \ < z i C IrES' Forty-four percent of the loans and discounts;
C
that is, the investments of the banks represent Government bonds.
C r o ss .
BANKING ACT OF 19 3 5
267
What I am trying to do is to put the banking sytem in a position
where it can furnish long-term credit to the communities, just as
the mutual savings banks and savings and loan associations do with
the time-funds which they have.
If banks are not to be in a position to compete in that field for
loans and investments of that sort, then it seems to me that they
are put up against the problem of the use of these funds, which
they hold and which are greatly needed to bring about an improve
ment in business conditions.
As I indicated yesterday, the income velocity of our existing funds
was about two, whereas in 1926, 1927, 1928, and 1929 it was over
three. Of if we had the same velocity of our deposit money that we
had during that period, our national income would be at least from
20 to 25 billions more than it is.
But it is the stagnation of credit, the stagnation of funds, that
continues, it seems to me, to retard business recovery. As to the
extent to which an easing of credit by the use of long-term mort
gages or on the amortized basis, and the liberalizing of eligibility
requirements would bring about the use of that credit, nobody, I
think, is in a position to say.
Mr. Cavicchia. I think you will agree with me when I say that
whether they be national banks or State banks, or mutual savings
banks, they have a lot of money on hand at the present time and are
not loaning it; am I correct?
Governor E ccles. That is right; they have excess reserves.
Mr. Cavicchia. The savings banks or the mutual banks which are
now permitted under State laws to loan money on mortgages up to
50 percent of the appraised value are not loaning any, or^very little,
money at the present time.
Do you think, if this act* were passed, that the national banks
would do what the mutual banks are not doing now—lend money
on mortgages?
Governor E ccles. The mutual banks are lending money on mort
gages in certain sections. The insurance companies are lending on
mortgages, and one of the first things this act would do would be to
enable the banks which now hold over 2 billion of mortgages, many
of which are in excess of 50 percent of the appraised value----Mr. Cavicchia. That is because of the drop in the market?
Governor E ccles. That is right. Therefore, they are forced to
collect on the mortgages, and Congress is appropriating money for
the Home Owners’ Loan Corporation, the Federal Farm Mortgage
Corporation, and the R. F. C., to take up these mortgages.
The banks are not in a position to hold many of the mortgages
that they may have for the reason that their mortgages are in excess
of 50 percent, and they are due.
I Avould like to see the banks required to h old the m ortgages they
have and refund them on a long-term basis, req u irin g amortized p a y
ments w ith reduced interest. In ste a d of g o in g th rough the process
o f c h a n gin g the form o f the o b liga tion s they hold, they have to sub
stitute for their own loans obligations guaranteed by the Governm ent.
Not only that, there are many State nonmember banks which, if
they should come into the Federal Reserve System, would have more
than 50 or 60 percent of their time funds in mortgages. In many
sections the banks are permitted to loan in excess of 50 percent; and,
if there is a liberalization of the mortgage feature, the bill will make
268
BANKING ACT OF 19 35
it less difficult for the nonmember banks to come into the Reserve
System.
If we are going to proceed on the assumption that we are going
to have great cyclical booms and depressions, depressions that can
extinguish 30 percent of our deposit currency and can reduce the
national income by one-half, then I say that there is no way }t
ou
can set up a banking system that will serve the money needs of the
country and at the same time be prepared to meet that kind of a
catastrophe. Liquidity in deflation can only be provided by the
Federal Reserve System.
Mr. G o l d s b o r o u g h . Y ou mean as long as we are on this fractional
reserve basis of 10 percent? Is that what you mean?
Governor E c c l e s . Yes.
Mr. G o l d s b o r o u g h . O f course, when you have an accordion and
just blow the air in and out, you are right, but you do not have to
have that system.
Governor E c c l e s . Of course, it seems to me we do not have any
alternative at this particular time without a very revolutionary
change in the whole banking set-up. The 100-percent reserve idea
would, of course, eliminate the 10 to 1 ratio. But that is another
story.
Mr. C a v i c c i i i a . Governor, am I right in saying that one of the main
reasons why this provision is in the law is to encourage the banks to
hold onto the mortgages that they have now, because otherwise they
would have to resort to foreclosure, because their mortgages are no
longer on a 50-percent basis on account of the big drop in values ?
Governor E c c l e s . I would say that is true in some cases, and I
would say that is one of the constructive effects. The other construc
tive effect would be that the banks are put in a position to do what
the R. F. C. and other Government agencies are now doing.
There apparently is no demand for short-term commercial credit.
The business of this country is largely done by concerns with an ade
quate working capital. But there does seem to be some demand for
longer-term credit, and there is no prospect of getting any building
activity without providing long-term credit at low interest.
The English have provided 30-year credit for home construction
on 80 percent of the value of the property at 4^-percent interest, and
that is done by the private savings institutions.
The most unsound type of mortgage credit is the straight loan that
we have had in this country. I t means that the borrower, the builder,
will get a straight 50-percent loan from the banks and insurance
companies, and then a second-mortgage loan will be financed else
where at ruinous rates, until the cost of the mortgage money, consider
ing the first-mortgage cost and the second-mortgage cost, has made
the financing cost of the property ruinous to the home builder and
the home owner. The amortizing payments were to be made over a
period of time on the second mortgage. The first mortgage became
due and it was expected, of course, that the full amount would be
renewed.
Mr. C a v i c c h i a . Governor Eccles, I appreciate the fact that there
are many definitions as to what constitutes centralized banking One
of the charges made about the bill that is before us now is that it tends
to centralize banking.
BANKING ACT OF 1 9 3 5
269
Is this so, or is it merely regulatory in the sense that this bill tends
to do away with the great disparity heretofore prevailing between the
national and State banks?
Governor E ccles. Which part of the bill are you referring to?
Title I I does not deal, it seems to me, with the problems of national
and State banks, except by giving the Board the right to waive the
present legal requirements for membership of nonmember State
banks.
Mr. C avicchia. I mean in the strict sense that centralized bank
ing is used. This is not a bill aimed to centralize authority in the
Federal Reserve Board, is it?
Governor E ccles. I t centralizes some authority in the Federal Re
serve Board. The authority that is being centralized through this
in the Federal Reserve Board is the authority over open-market
operations.
The Board at the present time has authority over the discount
rate, and subject to the approval of the President, under the emer
gency act, has the authority to change reserve requirements by
declaring an emergency.
This bill is proposed to place in the Board, with the advice of the
governors, the third function of monetary control, that of openmarket operations, which, at the present time, is in the committee
of governors, subject to the approval of the Board, and then sub
ject, finally, to the decision of the twelve Federal Reserve banks as
to whether or not they will participate in the program recom
mended by the governors and approved by the Board.
Mr. C avicchia. Does that leave the ‘different Federal Reserve
banks in different districts to operate independently, if thev wish?
Governor E ccles. It leaves them to operate independently; and
that is not changed. The question of extending credit to member
banks is left with the credit division of each Federal Reserve bank.
It has been stated that the changing of eligibility requirements
would cause the Federal Reserve banks to be loaded up with long
term mortgages. I t seems to be assumed that the Reserve banks
would discount these mortgages or any slow assets that they may
choose to take, during the life of such assets.
In the first place, whether or not credit will be extended to a
member bank, and upon what basis, will be determined by the
regional Federal Reserve banks, which are responsible for the credits
extended to member banks. The Board will only make the rules
and regulations governing the basis upon which credit can be ex
tended, and it is proposed here to give the Board power to liberalize
the basis upon which the Reserve banks can extend credit to the
member banks. The occasion for the extension of credit arises
when the reserves of the banks get below the legal requirement, and
they find it necessary to borrow to build up the reserves.
Mr. C avicchia. The other day you showed the members of this
committee a chart, showing the conditions in England. This chart
seems to show that there is no relation between the price level and
the increase or decrease in employment; am I correct about that ?
Governor E ccles. That is correct.
Mr. C avicchia. Although we have been proceeding on the theory
in this country that if the price level goes up wages will increase
and unemployment will decrease; am I correct in that?
127297— 35----- 18
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BANKING ACT OF 1 9 3 5
Governor E ccles. Y ou say we have been proceeding on that
theory? I do not know what you mean by “ we.
Mr. C avicchia . There are certain economists; everything that
this Administration has done in the past 2 years—and I am not
criticizing the Administration; I do not intend to be partisan; but
it has proceeded on the theory that if the price levels went up wages
would go up and unemployment would decrease. But the chart
showing conditions in England seems to negative that assumption.
Governor E ccles. That is correct.
Mr. C avicchia . Governor Eccles, the Canadian banks, I am told,
are not permitted to make mortgage loans, and in depression times
they are not met with the problem of frozen assets. Is this one of
the reasons why they have had no bank failures in Canada during
this depression ?
Governor E ccles. I do not accept the assumption that a mortgage
is any more of a frozen asset during deflation than nearly any other
asset of the bank. The assets become frozen when every banking
institution wants to dispose of its assets to meet the demands of its
customers for money. The only liquidity that can be provided for
a banking system is through the central bank.
The Canadian banking system is a very different structure than
the American banking system. In the first place, they have very
few very large banks, and the creditor area—the eastern section of
Canada supplies the credit to the debtors of the interior provinces of
Canada. I have been told that the interior sections of Canada, had
they not been tied into the creditor or eastern section of Canada,
would have had the same kind of bank trouble that we have had in
this country; that it was the eastern section which was really furnish
ing the funds to develop the interior areas that enabled the system to
carry through.
The Canadian system had only a fraction of the credit contrac
tion that we had in this country. Had our credit contraction been
13 percent, as it was in Canada, we would not have had the banking
collapse that we had.
The credit contraction in the British banks during the depression
was practically negligible. The total amount of deposit money and
currency outstanding all during the period of the depression in
Great Britain remained almost uniform. Things might have been
different here also, had our Federal Reserve System been in a posi
tion to loan against sound assets. The demand for money would
have ceased—that is, the demand for currency—because we know
that when people were able to get their currency after the bank
holiday they did not want it, and currency came back into the banks
instead of continuing to go out of the banks.
Mr. H ollister. Y ou said Canada had very, very few very large
banks. ^ ou mean she only has a few very large ones.
Governor E ccles. That is right.
Mr. H ollister. I t sounded as if you m eant there were a lot of
little ones.
Governor E ccles. I mean that they have few very large banks,
but they have a large number of branch banks.
Mr. H ollister. I thought you might want to clear that up.
Governor E ccles. Yes; I thank you.
B A N K IN G ACT OF 1 9 3 5
271
Mr. Cross. Y ou say that in England they did not have trouble
with currency to take care of their deposits. Are the assets upon
which those banks loaned money broader than ours? Can they loan
upon any sound paper, where we are limited in that respect?
Governor E ccles. Are you referring to central banks—that is, the
new Canadian Bank and the Bank of England—or are you referring
to the commercial banks?
Mr. C ross. I am just referring to your statement that they could
loan on sound security, and that if we had been in their position
we would not have had the crash that we had. The question I am
trying to get at is, Could they loan upon different assets than we
loaned upon, because it is sound paper and ours is sound, but we are
not under our law permitted to loan on that paper or discount that
paper ?
Governor E ccles. In the first place, the Canadian banks, as 1
understand it—and I am not an authority by any means on that
subject; it is just what I have been told and hear—that the Canadian
banks and the British banks do not loan on real estate. The banking
structure, as I said, is entirely different; it is differently constituted.
The savings funds in Britain are largely built up, as I understand
it, in the savings and loan associations, the mutual savings and
loan associations, which carry the real-estate credit.
If our banking system was a large branch banking system such
as the Canadian system or the British system, it would "be a much
easier problem to segregate investments or savings funds from the
commercial banking system. But so long as we have unit banks
operated under the laws of 48 different States and the National
Bank Act, these unit banks have two functions: The function of pro
viding the check money through their deposits, and the function of
investing the community’s savings or investment funds.
Demand deposits representing our deposit currency should be in
vested in short-term paper, so far as possible, and in Government
securities. But when it comes to investment funds, interest-bearing
funds, it seems to me that we have another problem, and it is entirely
different from the problem in Canada or the problem in Britain, or
in any other country.
If we are going to avoid a banking collapse and the extinguishing
of a large part of our money supply in the future, it is going to be
necessary to make it possible, when contraction starts, for our Fed
eral Reserve System, which is our central bank and bears the same
relation to our banking structure as'the Bank of England does to the
English banks, to loan on sound assets to prevent a continuation of
credit contraction and bank failures.
Mr. Caviociiia. Y ou need not answer this next question if you
feel that you ought not to, Governor. This is the question: In your
opinion, should we have a metallic base for our money, such as gold,
or is that an exploded theory ?
Governor E ccles. A “ yes-or-no ” answer could be misunderstood.
That is a question which, in order to answer it, would need consid
erable explaining.
Mr. C avicciiia. The reason I asked it is this: Some people still
hold to the theory that we should have a metallic base, and that that
should be gold. Others say it has been tried and it as failed.. That
is why I asked the question.
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BANKING ACT OF 1 9 3 5
It is a problem upon which many opinions are expressed; but I
do not think it has been answered. The fact that the important
countries of the world have been wedded to gold by experience and
habit for so long a time makes it a very difficult matter to divorce
money from gold.
Mr. Cavicchia. Governor, it is a moot question whether or not
the United States is still on a gold basis just now. W hat do you
say about this?
Governor E ccles. Our currency and our deposits in the Federal
Reserve still require the same gold reserve that they always have,
of 40 and 35 percent. To the extent that gold is not being paid out,
we might say that we are not on gold. To the extent that we are
requiring the same gold reserves, we can say we are on gold. We
permit the export of gold under license, so that internationally we
are on gold.
Mr. C avicchia. S o far as our imports are concerned, we are on
gold, are we not?
Governor E ccles. The dollar has been fixed at a certain price at
the present time in relation to gold.
Mr. H ancock. It has been stated that we are today on a discre
tionary international limping gold-reserve standard. W hat do you
think about that?
Governor E ccles. I would prefer not to discuss that question. I
do not believe that has very much relation to title II of the banking
bill.
Mr. H ancock. Well, it is not irrelevant.
Mr. C avicchia. Under our present system, fear and confidence
have a lot to do with the banking question, have they not; and is
that not also true in relation to business in general ?
Governor E ccles. Not as much as I think is sometimes claimed.
What is confidence with one group would be lack of confidence with
another.
An effort to balance the Budget would give confidence to a group
of people who feel that, if it is not balanced, their taxes are going
to be higher; but it would put fear and consternation in the minds
of the group of people who are dependent upon what the Govern
ment appropriates for relief.
Therefore, when we speak of confidence, it does not have an equal
application to all our citizens.
Mr. G ifford . Governor, I question the necessity of title II. Mr
Hancock questioned you and you answered that that is reallv "the
primary feature of the bill, while the secondary feature is in refer
ence to the reserve of banks. I want to ask you a few question^
leading up to the necessity of it.
“
1
What is the total debt of the Nation, having in mind the present
expenditures and authorized expenditures? In the President’s mes
sage, was it 31 billion of authorized expenditure that faced us ud to
that moment?
1
Governor E ccles. I would not be certain. As I recall I know it
is over 30 billion, but I do not remember the exact figures.
Mr. G ifford . I t is 31 billion and some fraction, I think
Governor E ccles. I think that is approximately correct
Mr GnroRD Having in mind what has been done, we passed the
H. U. L . C. bill, carrying one and seven-tenths billion ?
BANKING ACT OF 19 35
273
Governor E ccles. That is right.
Mr. G ifford. And if we pass the bonus bill that will be two and
three-tenths billions additional, will it not ?
Governor E ccles. I t depends on which bill passes.
Mr. G ifford. I t is two billion three hundred million, is it not ?
Governor E ccles. I t will depend on which bill passes.
Mr. G ifford. Y ou are following these probable expenditures with
the idea in mind of the necessity for this law ?
Governor E ccles. No ; that is not correct. This law has no rela
tionship to that. If the Government were to balance its Budget,
we would propose the same law.
Mr. G ifford. I think my vote, so far as the necessity of this is
concerned, would be guided by the actual necessity presented.
Governor E ccles. I think there has been----Mr. G ifford. If the Public Works bill now pending in the Senate,
carrying $4,800,000,000 passes, and we provide for 1 billion to take
care of social problems, as suggested, and if another billion should
be required for farm-credit loans, we would get into the realm of a
national indebtedness of 42 billion dollars, should these things
transpire. You may subtract from your total, 3 billion, if you want
to, and take into consideration the $1,800,000,000 profit from gold,
but you would still have a debt of some 36 billion dollars. How
much did you say there were in deposits in the banks?
Governor E ccles. About 25 billion, eliminating interbank deposits.
That represents the demand deposits.
Mr. G ifford. There are 38 billion in currency and deposits in the
banks of the country. Do you recall the President’s warning about
the danger of the banks having to absorb the deficiencies in 1932,
causing a very dangerous situation—that is, the deficiency caused by
the operations of the R. F. C. ?
Governor E ccles. I do not recall that statement, but, of course, I
would not feel there was any danger in that.
Mr. G ifford. The President spoke very strongly, and I wish you
would read what he said, of the great danger of the banks having
to absorb that deficiency caused before March 4, 1933, and since
then we have added this large amount.
The purpose of this legislation is to control the privately owned
banks, which would still be privately owned, by a Government board
in Washington, so far as open-market operations are concerned?
Governor E ccles. Y ou mean control the investments that are
made by the Reserve banks?
Mr. G ifford. T o control open-market operations.
Governor E ccles. Yes; to control open-market operations by the
Reserve Board in Washington rather than by the banks themselves.
Mr. G ifford. They will still be privately owned, but they will be
Government controlled.
Governor E ccles. That is right.
Mr. G ifford. Y ou mean the Government as constituted at the
moment.
Governor E ccles. I would say they are publicly controlled, rather
than governmentally controlled. The control of open-market opera
tions is proposed to be placed in the Federal Reserve Board.
Mr. G ifford. Exactly; and that policy will be dictated by this new
board.
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BANKING ACT OF 19 3 5
Governor E ccles. It will be carried out by the Federal Reserve
Board.
Mr. G ifford. S o far as the Government as at present constituted is
concerned, that means just that, does it not, inasmuch as a provision
for refusal to reappoint was included in your bill ?
Governor E ccles. I do not think that has anything to do with the
political relationship.
Mr. G ifford. Oh, no; there is nothing political in this bill.
Governor E ccles. The fact is that the Governor has always been
appointed by the President, at his pleasure.
Mr. G ifford. This bill specifically indicates the method by which
the Governor might not be reappointed.
Governor E ccles. That is entirely incorrect. The bill provides that
the Governor shall be—that his term as a member shall expire when
he no longer----Mr. G ifford. I am talking about the members of this new Board.
Governor E ccles. It is not a new Board; there is no difference----Mr. G ifford. The present Federal Reserve Board----Governor E ccles. There is no change whatever proposed in that
Board.
Mr. G ifford. But they retire at 70, under a pension, after a term
of years, and there are many changes.
Governor E ccles. Rertirement at 70 w ill be compulsory only for
future appointive members.
Mr. G ifford. My point is, should another government come in,
otherwise constituted, could they get control of this Board?
Governor E ccles. In what way could they get control ?
Mr. G ifford. I am asking you.
Governor E ccles. X o ; they cannot, not unless their terms expire,
and the President chooses to appoint some one other than a member
whose term expires.
Mr. G ifford. By that method could not the new President get
control?
Governor E ccles. By what method?
Mr. G ifford. By the refusal to reappoint.
Governor E ccles. He could, if the terms expired. But a member
is appointed for a 12-year term.
Mr. G ifford. There is no way of getting rid of them ?
Governor E ccles. There is no way of getting rid of them except
for cause. That has always been in the bill. There is no proposal
to put in the bill any change in the method of appointing members
of the Board, or as to their terms.
Mr. G ifford. That reminds me of the lady who insured her home.
There was a fire, and when the agent came to the house he said he
would look into the cause of the fire. Then she said, “ I thought
there would be a catch in it.”
Governor E ccles. That has always been in the law; we are not
presenting any change.
Mr. G ifford. Then the banker who wrote this letter to me was
misinformed when he said that nothing short of a revolution could
ever change the condition that will be brought about by the enact
ment of this bill; is that correct?
Governor E ccles. When the Federal Reserve Act was passed in
the beginning, what did the bankers say?
BANKING ACT OF 19 3 5
275
Mr. G ifford. Getting back to the necessity of it, it is not quite as
tight as the United States Supreme Court, is it? I t is not quite as
tight, is it, so far as the appointments are concerned? Would you
be willing to provide for the appointments in that way, to have these
men appointed in the same way that members of the Supreme Court
are appointed?
Governor E ccles. They are appointed in the same way, by the
President of the United States, with the advice and consent of the
Senate.
Mr. G ifford. I think that has been challenged. But you claim it
is exactly the same?
Governor E ccles. I t is the same, so far as the appointment and
confirmation is concerned. The term of the members is 12 years,
in the case of the Federal Reserve Board, whereas the term of a
Justice of the Supreme Court is for life. I believe he maj7 be
removed for cause.
Mr. G ifford. For what cause may a Justice be removed? What
would be the cause in this case?
Governor E ccles. I suppose for dishonesty or improper conduct.
Mr. G ifford. Or unwillingness to cooperate with the Government;
would that be a cause?
Governor E ccles. I am not in a position to say what the cause
would be. All I know is that during the life of the Federal Reserve
Board of over 20 years no member of the Board has ever been
removed for cause. Their terms have expired or they have resigned
voluntarily.
Mr. G ifford. I think if they made it hot enough for them they
would get out, if they did not cooperate.
Now, coming back to the necessity for this bill: Faced with a
debt of 38 billion or 42 billion, do you want to make the assets of
the member banks sound assets, available for the issuing of cur
rency; is that it?
Governor E ccles. N o ; that is not the purpose of it. The law is
not being drawn with that idea, of assisting in the financing of the
Government.
The Government is having no difficulty with its financing. Its
interest rate has been going down steadily. The desire of the banks
to purchase Government bonds is so great that whereas at the end
of Mr. Hoover’s term the interest rate was nearly 4 percent, it is
now less than 2% percent.
Mr. G ifford. Of the present indebtedness of the Nation, how much
of it is in short-term loans?
Governor E ccles. D o you remember, Dr. Goldenwesier, what the
exact amount is?
Dr. G oldenwesier. I can look that up and let you know presently.
Mr. G ifford. Y ou have not been offering many loans to the public
on long-time paper, have you?
Governor E ccles. They have been doing a good deal of refunding.
Thev have just called one billion eight hundred m illion of the fourth
41/2-percent Liberty loan, and they offered in exchange a 25-year
bond at 2% percent.
.
. ,
,
,,
Mr. G ifford. They did that in other countries, based partly on the
ground of patriotism.
276
BANKING ACT OF 1 9 3 5
Governor E ccles . A s a matter of fact, the bonds held by the banks
of this country are less in proportion than the Government bonds held
by the English banks. Thirty-nine percent of the assets of the mem
ber banks are invested in Government obligations, whereas 41 per
cent of the assets of English banks are so held.
Mr. G ifford . Y ou said this morning it was 44 percent.
Governor E ccles . Forty-four percent of the total outstanding
bonds; 44 percent of the amount of Government bonds outstanding
are in the member and Reserve banks and 39 percent of the assets of
the member banks are invested in Government bonds; whereas 15
percent of the total bonds outstanding in Britain are held by the
London clearing banks and the Bank of England, but that represents
41 rcent of the resources of the British commercial banks.
. takes 5y2 percent of the national income of Great Britain to pay
the interest on the British national debt.
Mr. G ifford . Suppose we had to have an indebtedness of $40,000,000,000, and $9,000,000,000 was to be absorbed in the next year and a
half, what proportion would the banks probably hold?
Governor E ccles . What proportion of their resources in bonds?
Mr. G ifford . Yes.
Governor E ccles. Of course, if the banks took 9 billion of bonds,
the banks would increase their deposits by 9 billion.
Mr. G ifford . The term “ deposits ” is a rather tricky term. I sup
pose if I owed you $100,000, and you should be able to discount that,
you would get some more currency and loan me another $100,000, and
then take my second note and discount that, and still loan me still
another 100 thousand, and that process could go on indefinitely, could
it not ?
Governor E ccles . As a matter of fact, the banks could extend $20,000,000,000 of credit without rediscounting anything. The trouble
today is not the need of the banks to rediscount; the trouble is the
banks are unable to loan the funds that they now hold.
Mr. G ifford . We know that is a temporary situation. Idle money
is glad to get something to invest in. There have not been manv
long-term offerings made in these times. They are all anxious to
get. something. You do not consider that that condition will be
regular, do you?
Governor E ccles. I think—and this, of course, is my opinion
only—that for a long time to come there are not going to be in this
country short-term loans of sufficient quantity to create the inonev
that is required to carry our business structure.
Mr. G ifford . Why has not the Government—knowing that this
indebtedness cannot be paid off for many years—why has not the
Treasury offered long-term paper or bonds?
Governor E ccles . Why have they not?
Mr. G ifford . Yes.
Governor E ccles . That is a question I would prefer vou ask th e
Treasury. I would not want to answer that question for th em
Mr. G ifford . Y ou h a v e sa id m o n e y w a s p le n tifu l.
Governor E ccles . Money is extremely plentiful. But if the
Treasury had offered long-term bonds a year ago or 2 years a°-o. thev
would have paid a rate of maybe a half or three-quarters of a "percent
more than they are paying now. So lonjr as the Treasure can bor
row at a fraction of 1 percent, and the interest rate on long-term
1
BANKING ACT OF 1 9 3 5
277
financing is going down, would it not appear advisable to finance
on the cheapest basis of short-term credit, so long as the long-term
market is going down? It has been profitable up to date to defer
long-term financing.
*
Mr. G ifford. If they could sell these long-term securities at 2%
percent they would sell them, would they not ?
Governor E ccles. If they could, you say?
Mr. G ifford. Yes; they would offer them if they could be sold,
would they not?
Governor E ccles. I do not know whether they would or not.
Personally, I think you will see less than a 2% percent rate on long
term financing.
Mr. G ifford. Then you think there will continue to be plenty of
idle money and that business will not get busy and need this money ?
Governor E ccles. I cannot conceive of business using 20 billion
dollars of commercial credit, when in 1929 they only used 4 billion.
Mr. G ifford . You do not care to answer as to why the Treasury
does not now, when money is plentiful and rates are low, offer
long-term paper, that must, necessarily, be refinanced, a lot of it,
with short-term paper?
Governor E ccles. If they can borrow later at 2 or 2*4 percent,
would it seem advisable now to borrow at 2% percent?
Mr. G ifford. Let us put it the other way. If business recovers
and needs money, and money is at a higher rate, has not that been
the fear, that when these short-term securities are forced to be
refinanced bv long-term securities that the rate will be very high?
Governor E ccles. That has been the fear, but it has been unjusti
fiable, and the reverse has been true.
Mr. G ifford. I hope you w ill prove to be a prophet, and a correct
prophet, so far as the next 5 years are concerned.
You have no fear, so far as the Government using the method of
issuing currency to banks with sound assets is concerned, that they
will not ahvays have plenty of money to buy the issues put out by
the Government, and that this Government, under this plan of
banking, could go into that practically to any amount?
Governor E ccles. The amount of the Government debt that can
be supported depends upon the national income, and a 40-billiondollar debt here with an 80-billion income, is 6 months of the national
income.
Mr. G ifford. We had a 90-billion-dollar income once, but what
is it now ?
Governor E ccles. I think when Mr. Roosevelt came into office it
was around about 38 or 40 billion. It is now some 50 billion.
Mr. G ifford. Our capital structure was 38 billion, that being the
amount on deposit, available money and credits in the banks?
Governor E ccles. N o ; it was 26 billion 400 million in 1929. That
was the amount of demand deposits plus currency.
Mr. G ifford. There are two other questions I want to ask you,
which you may be willing to answer.
.
You have no particular fear of a 40-billion-dollar national debt m
this country ?
.
Governor E ccles. I have no fear of a 4 0 -billion-dollar national
debt.
Mr. G ifford. Your answer staggers me. 1 nave.
278
BANKING ACT OF 19 3 5
Governor E ccles. I can give you my reasons for not having it.
Mr. G ifford. Personally, I wish you would. With the present
national income you have no dread or fear of the consequences of a
40-billion-dollar debt?
Governor E ccles . I am concerned about the present national in
come, but you do not increase the present national income by di
minishing Government expenditures. It is the total expenditures
of the Nation that create the national income, and when the com
munity, as individuals and corporations, do not spend, then the
Government must.
Mr. G ifford. I am looking at it from the standpoint of m y cor
porate interest. If I owed a hundred thousand dollars to you and
you discounted my note and loaned me another hundred thousand,
you could then go to the bank and discount my second note and loan
me still another hundred thousand, and keep that up indefinitely.
But then what happens to me, finally? How long do you think that
a person, an individual, or corporation, can keep that up, and how
long can the Government keep that kind of thing up? The appli
cation is the same.
Governor E ccles . That is just where the mistake is usually m ad e.
Government credit is considered in the same way as we consider
individual or corporate credit, whereas when the Nation borrows
it is a question of the Nation borrowing from itself, so long as it is
a creditor Nation. Therefore, when it borrows from itself, that is
the----Mr. G ifford. If the citizen owed enough taxes, that is sound. But
the whole revenue is based on taxation, is it not?
Governor E ccles . Taxes are the basis of the Government’s income.
If by Government spending you increase the national income, you
increase the ability to pay taxes.
Mr. G ifford. Exactly. Then you have answered the question, that
a 40-billion-dollar debt can only be paid by taxes.
Governor E ccles. But the taxes will not be paid out of the present
national income. I believe in the Government spending to a point
that could prime the pump. If you increase that spending, in that
way you increase the demands for goods.
Mr. G ifford. Did you ever try to prime a pump and you did not
get quite enough water?
Governor E ccles . That has just been the case.
Mr. G ifford. That being the case----Governor E ccles . I t is the case today.
Mr. G ifford . Does anybody know the exact measure of water to
be poured in before you catch ?
Governor E ccles . The measure would be when you get your un
employment problem rapidly diminishing and with private'business
being required to employ those who are unemployed to meet the de
mand for goods, by reason of increasing purchasing power and
spending.
Mr. G ifford. Your statement about the 40-billion-dollar debt will
probably be of great comfort to those who vote for the soldiers’
bonus; it will probably be of great comfort to those who want social
legislation, that is, your statement that you have no fear of a 40billion-dollar debt. Do you realize the'importance of that state
ment?
BANKING ACT OF 1 9 3 5
279
Governor E ccles. Forty billion dollars in relation to the debt of
Australia and in relation to the debt of Great Britain and other
countries that we look upon as having met all the problems of the
depression possibly as successfully as anybody else----Mr. G ifford. S o far as a comparison of our banking system is
concerned it is no comparison to compare that with the system of
other countries, if you can prove that our indebtedness is nothing
to be worried about, in comparison with other countries.
Governor E ccles. When we speak of a future debt of 40 billion,
it seems to me it is only fair to deduct from the 40 billion the assets
which the Government has taken in lieu of the debt. We cannot say
that the loans which the R. F. C. has made are entirely uncollectible,
and we should also take into account the balance in the Treasury in
considering the net debt.
Mr. G ifford. And the gold profit?
Governor E ccles. I think any other country would take the gold
profit into account. It is there.
So that the debt is less than 23 billion today when you consider
the Treasury balance, and without considering the gofd profit, but
when you consider the assets that you can use to offset the debt.
That is less than 4 months of the normal national income of this
country.
The indebtedness of Great Britain is 35 billion, and it takes 5Y2
percent of the national income to support the British debt. That is,
what is considered the present national income, which is between 19
and 20 billion.
Mr. G ifford. Y ou do not want us to fall into their company, do
you ?
Governor E ccles. Our situation would require less than 1 per
cent of the normal national income to support the Federal debt.
Mr. C avicchia. W hat percent?
Governor E ccles. Less than 1 percent of the normal national in
come to support the present Federal debt.
Mr. G ifford. The national income?
Governor E ccles. I said the normal national income.
Mr. G ifford. What is that?
Governor E ccles. Eighty-two billion was the national income in
1929.
I am as anxious as anyone to see the Budget balanced. The
Budget can only be balanced, however, out of the national income.
The national income can only be increased by employment.
Mr. G ifford. May I say, before I go any further. Governor Eccles,
I may appear to be almost brutally frank in my questions, but that
is mv mannerism. I am the most harmless man on the committee.
I have letters from 25 commercial bankers in my district, all
fine bankers and upright men, who are opposed to this legislation,
and I want to find out about their opposition.
Governor E ccles. I appreciate the opportunity for giving my
answers. I have met with the bankers, with the representatives of
the American Bankers’ Association, and with many other bankers,
and I find that their opposition to the bill has been largely the
result of a misunderstanding. They do not understand what is
in the present law, and the opposition they raise to this bill is the
280
BANKING ACT OF 1 9 3 5
same opposition which might be raised to the present law, in a
great many instances.
Mr. G ifford. I am a new member of the committee, and know
little about the problems.
Governor- E ccles. I have now the figures of the Government
debt as of January 31, 1935, the total interest-bearing debt being
$27,952,000,000; due within a year, $5,606,000,000; from 1 to 5 years,
$8,792,000,000; and over 5 years, $13,554,000,000.
The C hairman . Let me suggest that in your statement you incor
porate the figures showing the holdings of the Government against
those obligations, in order to make the story complete.
Governor E ccles. Yes; I will do that.
Mr. H ancock. Y ou mean the credit balances in the general fund
of the Treasury?
Governor E ccles. The general fund balance is somewhere be
tween a billion and a half and two billion. We will have to insert
in the record the exact figures.
The C hairman . That is what I said, that you should do that to
complete the statement, showing the holdings in the R. F. C. and
other organizations inuring to the benefit of the Government.
Public debt and net assets of the United States, Jan. 31, 1935
[In m illion s of dollars]
Gross public debt________________________________________________ 28,476
Net balance in general fund (excluding balance of increment resulting
from reduction in weight of the gold dollar)_____________________ 1,519
Net debt__________________________________________________ 26,955
Proprietary interest of the United States in governmental corporations
and credit agencies:
I. Financed wholly from Government funds:
Reconstruction Finance Corporation----------------------------------- 2,321
Commercial Credit Corporation____________________________
41
14
Export-Import Bank_____________________________________
Public Works Administration_____________________________
269
90
Regional Agricultural Credit Corporation__________________
Products-Credit Corporation_______________________________
113
All other------------------------------------------------------------------------506
Total---------------------------------------------------------------------------II. Financed partly from Government funds___________________
3 3 5 4
y joQ
Total---------------------------------------------------------------------------------- 4 474
Increment from reduction in weight of the gold dollar______________ 2 812
Mr. G ifford. We have your Treasury statement every day on our
desks. I am speaking this morning of the probable billions to be
added. We have that fact staring us in the lace every day.
I want to bring out the fact that with this continual financing bv
the Government of Federal indebtedness we need this sort of protec
tion.
1
Governor E ccles. The budget of any government must be bal
anced over a period of time; there is not any question about that
Mr. G ifford. Would you suggest a time—possibly 5 years?
Governor E ccles. I would say it might be desirable over a 5-year
period, but I do not think it necessarily need be fatal if it is only
balanced over a 10-year period. A war condition could create an
BANKING ACT OF 1 9 3 5
281
unbalanced budget for a considerable period of time, if sufficient
taxes were not imposed to pay as it was carried on.
Mr. G ifford. Would you advise my creditors to carry me along
for 5 years ? If so, I wish you would send me a letter.
Governor E ccles. It has been my philosophy that the amount and
the rapidity with which the Government spends will reduce—that
is, if the amount and the rapidity are sufficiently great—they will
reduce the total amount that the Government may be required to
spend. To do that we have had a 40-billion-dollar deficiency in
national income and a 3-billion priming process last year; that is
about what it was.
I do not consider the transfer of the existing debt from where it is
to the Government as a priming process. I t stops deflation, but the
actual amount of the budgetary deficit as a result of the Government
spending and the Government lending for new structures that in
creases the buying power of our people has not been sufficient to stop
the process of5 deflation and to give the momentum necessary when
you consider the size of the pump.
By that I mean that with 10 or 12 million unemployed the buying
power cannot be sufficiently increased by a 3-billion-dollar spending
to utilize our existing productive capacity.
Mr. G ifford. That is a fine statement you are making, but I am
sure that the priming process must reach down far enough to give
constructive money that not only feeds and clothes people, but begins
to construct something out of which people can get an income.
If the Government had spent this money and it was being used by
people who were constructing something which was employing labor,
that would be different than simply feeding and clothing people and
building beautiful roads or race tracks, and ornamental things in the
country which, in the end, does not keep very many people at work
bringing in an income. That does not keep many people at work for
any length of time bringing in an income, does it ?
Governor E ccles. I think so. I think to spend money, or increase
productive capacity when you already have an excess of productive
capacity, is just the place where you do not want to spend it.
Mr. G ifford. In my section, they want to spend money on public
works, or on race tracks and beautiful roads through the woods, and
after they spend that money how much of an income will that
produce ?
Governor E ccles. After all, income has to come from spending.
Mr. G ifford. But if that spending is sim ply for feeding and clo
thing people and putting up ornamental unnecessary things, that will
not help them any in the future, so far as any income in the future
is concerned.
Governor E ccles. Of course, I do not believe that Government
spending should be in a field of competition with private enterprise,
where Government spending will be expected to return an income.
Mr. G ifford. You do not believe in the Government loaning to help
private business, do you ?
Governor E ccles. I would prefer that the lending should be done
by the private-credit system, but when you reach an emergency such
as we had in 1932, and set up the R. F. C., it became necessary to save
the credit structure and lend money.
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BANKING ACT OF 19 3 5
Mr. G ifford. Would you prefer that the $4,800,000,000 in the bill
pending in the Senate be loaned to private industry, the whole of
it, rather than have it expended in the method suggested ?
Governor E ccles. I would prefer that no part of it be loaned;
that every part of it be used as a grant, as leverage, so as to induce
private borrowing and spending.
Mr. G ifford. Would it be possible to make such a grant to private
industry by any such process without favoritism ?
Governor E ccles. I t is possible to make grants to cities, counties,
and States for noncompetitive public works, and induce leverage
through that process.
I t is possible, through a subsidy to home owners, to induce the
construction of new homes, and the subsidy will be the difference
between the cost and rents.
Mr. G ifford. Do you prefer non-Federal projects?
Governor E ccles. When it is a pure Federal project there is no
multiplying. If the funds are used as a leverage, as a subsidy, we
will say, to-cities, counties, and States, you get an increased spend
ing or a leverage added to-the spending by the home owner. We
have a differential between costs and rents today which is retarding
private construction.
Mr. G ifford. Y ou mean, do you not, if you grant 30 percent to
municipalities and the municipalities are putting up 70 percent,
therefore you get three times as much work done ?
Governor E ccles. Yes.
Mr. G ifford. Exactly.
Governor E ccles. But instead of the Government loaning 70 per
cent, let the municipalities arrange their own credit. I think 30 is
possibly not sufficient.
Mr. H ancock. I am very much interested in the statement you
made with respect to subsidizing the private home owner to induce
him to build a new home. If such a program as that were carried
out by the Federal Government, would it not have a tendency to
stagnate every private lending institution in this country?
Governor E ccles. I t would stimulate them greatly if the subsidy
represented the difference between costs and rents.
Mr. H ancock. Are you explaining the proposal that the news
papers carried not long ago. to the effect that you advocated or sug
gested a plan whereby the Government would make a grant or a gift
to a prospective home owner up to, say, 20 percent of the cosf of
construction ?
Governor E ccles. I am not sponsoring any plan. The question
was with reference to the spending of the $4,800,000,000, whether I
would prefer that to be spent by the Government or used as a loan
In answer to that I am simply making some observations here or
some suggestions as to what would be my own personal view, in order
to get the most out of the proposed appropriation.
Mr. G ifford. I think you have answered my question sufficiently.
Mr. C ross. I t seems to me we are going far afield from this bill
and that we have taken in all of the theories of loaning most, of
which have nothing whatever to do with this bill, and ?f we con
tinue along that line we will never get through with this hearing
Mr. G ifford. Mr. Cross went very far afield.
BANKING ACT OF 1 9 3 5
283
Mr. H ancock. I think the gentleman’s questions have been inter
esting and pertinent.
Mr. G if f o r d . I w ill be th rou gh in 2 minutes, if you w ill give me 2
m inutes longer.
I w ant to make two remarks.
I believe thoroughly in non-Federal grants, where the Government
itself pays only 30 percent and the municipality puts up 70.
I want to say simply in connection with this matter of priming
the pump, the answer seems to be suggested to me that we have poured
in the water, but the well is frozen. Lack of confidence has frozen
the well, and it does not amount to very much.
(Thereupon, the committee took a recess until 3 p. m. this day.)
AFTERNOON SESSION
The C hairman . All right, gentlemen. I believe we finished with
Mr. Cavicchia. Now, does anybody on this side want to interrogate
Governor Eccles?
Mr. S p e n c e . I w ant to ask h im some questions.
Mr. D irksen . I would like to ask some questions.
The C hairman . All right, proceed. Let us get along.
Mr. D irksen . Governor, I shall try to be brief. Perhaps I ought
to restate the question Mr. Gifford had in mind this morning, I
think, namely, that the President has authority to designate one
man to the Board as Governor of the Federal Reserve Board; is
that a Presidential designation?
Governor E ccles. That is right.
Mr. D irksen . And when a man ceases to be designated by the
President, he is no longer a member of the Board ?
Governor E ccles. No; lie is no longer Governor, but he is a mem
ber of the Board.
Mr. D irksen . He remains a member of the Board?
Governor E ccles. Yes; unless he resigns, which is usually the
case if he is no longer designated as Governor.
Mr. D irksen . I got the impression from reading your observations
on the bill that, when the President ceased to designate him as
Governor, he automatically divorces his membership as a member of
the Federal Reserve Board.
Governor E ccles. The present Federal Reserve Act requires that
the President designate a member of the Board to serve as Governor
at his pleasure.
Mr. D irksen . I think I see, and it will not take very long to state
the question. Now, with respect to the government of the Federal
Reserve bank, I think the residence requirement has been taken out
of the old act, has it not? In the new provision there is a state
ment to the effect that the Governor no longer has to be a resident
of the Federal Reserve district or Board on which he should serve.
Governor E ccles. That is right.
Mr. D irksen . I am wondering whether it would be possible, under
this provision, to take a man from New York, for instance, and bv
virtue of the fact that the power of approval is vested in the Federal
Reserve Board, insofar as the class C directors are concerned—if it
would be possible to transplant such a man to the seventh Federal
Iteserve in Chicago, and by either the giving or withholding of the
284
BANKING ACT OF 19 3 5
power of approval, you could make him a member of the Board?
Do you think that is possible, if not probable ?
Governor E ccles. Yes; it is possible to transfer a man from any
other reserve districts, and the proposal simply applies the same
and class C director. At present the Governor may be chosen from
other reserve districts, and the proposal simply applies the same
principle to the chairman and class C director, which is necessary in
combining the offices of governor, chairman, and class C director.
Mr. D irksen . I t would be possible then, to take somebody from
another section of the country and transport him to some other
place ?
Governor E ccles. Yes. The idea of that was to promote able
men in the Reserve System by moving them from one bank to an
other bank, creating a career system. The selection of the Governor,
however, must be made by the local board of the reserve bank.
Mr. D irksen . However, you have the power to approve?
Governor E ccles. That is right.
Mr. D irksen . And you could approve, or you could disapprove
anybody that you desired to disapprove? In other words, you
could prevent a man from becoming a combination governor, chair
man, and Federal Reserve agent by simply giving your disapproval
to his selection ?
Governor E ccles. They would have to submit some other name.
Mr. D irksen . S o really you wmuld have the power to control?
Governor E ccles. Well, whether the power of approval is the
power to control may be open to debate. It would become necessary
for the board of the Reserve bank and the Board here—at least a
majority of the board of the Reserve bank and the majority of the
Board here to agree upon a man that would be the executive head
of the bank.
Mr. D irksen . I think the matter is important, for this reason, and
this is not very familiar to me and may not be familiar to you, but
in 1927, I think, the rediscount rate was reduced for the purpose of
stimulating the investment interests and also stop the flow of gold
toward Europe,'and the directorate of the Chicago Federal Reserve
Bank was rather opposed to it, because they saw a possibility of the
flow of capital from every agricultural bank. They resisted the
idea, but it was done anyway; and I am not so sure but what, in
T
the light of hindsight, that was right, after all. So if it depends on
somebody out there who is absolutely sympathetic with all of the
things that are done, that might prejudice the interests of the par
ticular area. That brings up, of course, this question: I was inter
ested in your observations that it was seeking to make them respon
sive to the national interest. That was the idea I think that you
enlarged upon in the course of your remarks some days ago.
Governor E ccles. Make who responsive?
Mr. D irksen . Well, your Federal Reserve Board, and I suppose
your open-market committee; they would be responsive to the lar 'e
public interest, rather than to the sectional or local interest.
Governor E ccles. Yes; that is right,
Mr. D irksen . That would, of course, eliminate the checks and
balances that did exist between the open-market committee and the
Federal Reserve Board and the directors of the respective Federal
Reserve banks. In the light of that experience back in 1927 I am
1
BANKING ACT OF 1 9 3 5
285
just wondering whether it would be wise to eliminate that check,
because, in that instance it would have had a most salutary effect
upon the country, if the directors of a particular Federal Reserve
bank had prevailed, and that probably had been able to carry out
their own policies with respect to that Reserve bank district.
Governor E ccles. Well, of course, if each of the 12 Reserve banks
is going to be permitted to operate independently of the interests of
the country as a whole, with reference to their monetary policies, it
seems to me you would be sure to have great confusion.
Mr. D i r k s e n . If carried to the extreme?
Governor E ccles. S o long as you have 12 banks without a Federal
Reserve board, without coordination and the power to deal with the
problems of national interest, I cannot imagine how you could have
a monetary policy that would be effective in meeting a situation that
the Nation might be confronted with. No other country, so far as
I know, has a divided responsibility with reference to the monetary
policy that would be comparable to a polic}7 made by the 12 different
Federal Reserve banks.
Mr. D i r k s e n . Y ou know, section 205 of this bill, in speaking, for
instance, of the open-market committee, contains this language: I t
says that you are to deal, instead of through the Federal Reserve
Board, with the Federal Reserve banks, and then the language is,
“ and the Federal Reserve banks shall conform their open-market
operations to the provisions hereof.” So, you are going to estab
lish, after all, complete control at a time that might be disadvan
tageous to the interests of a particular geographical section. For
instance, I suppose in Atlanta and Dallas you have certain cotton
interests, in Minneapolis you have the grain interests, in Chicago
you have not only grain but industrial interests; and that very
question came up in 1027, and I am not so sure that, if it had pre
vailed, we might not have been infinitely better off. Of course, that
is a speculative thing, I admit, but that was one instance where it
proved out.
Governor E ccles. I feel that monetary policies must be dealt with
on a national basis, and that for each Reserve bank to act inde
pendently with reference to open-market policy or discount rates
would cause great confusion. Money is like water—it seeks a level;
and to raise rates in one section would cause the funds to flow to
the section where the rates were raised from the section where the
rates were low, which would act to increase the excess reserves in
one area substantially and, therefore, make for expansion of credit
and cheap money, and have the opposite effect in another area.
Mr. D irksen . But I think you will admit that was practiced in
one Federal Reserve district, and we might have had a 2 percent
rediscount, and in another place 21 percent, and another place
/4
possibly 3 percent, because that seemed to fit the conditions of that
Federal Reserve district at that particular time.
Governor E ccles. I do not believe it is necessary to have a uniform
discount rate at all the Reserve banks and, as a matter of fact, there
has rarely been uniformity in the discount rates. The discount rate
is proposed by the Reserve banks and approved by the federal
Reserve Board, as a general rule.
127297— 35------- 19
286
BANKING ACT OF 193 5
Mr. D irksen . But, examining the maximum possibilities of the
bill with respect to the open-market committee, it is quite possible
that the Federal Reserve directorate in any particular district would
not have anything to say about it, the System insisting that they
conform to whatever regulation is laid down about it?
Governor E ccles. That is correct. If the committee felt it was in
the national interest to raise rates to prevent undue expansion and
speculation, they would do so; and, if they felt on the other hand
that there was an unnecessary contraction, they would want to re
duce the rates and the reserve requirements in an effort to stop the
deflationary process, so far as they could. It seems to me that must
be done in the interests of the Nation, because we have found that
every part of the country is very interdependent with every other
part of the country, and that money has a very rapid flow and is
movable and transferable almost instantaneously.
Mr. D irksen . When Mr. Crowley was before the committee, I
asked him about the section entitled" I, which provides that mutual
savings banks and other banks may become member banks, or in
sured banks, after July 1 , 1937. In other word, you would have to
become a member of the Federal Reserve or otherwise have no Fed
eral Deposit Insurance. I presume you are familiar with that ?
Governor E ccles. Yes; 1 am.
Mr. D irksen . That, in the light of section 202 entitled “ II ” of
the bill, which provides that the Federal Reserve, in order to facili
tate their entry into the System, can waive the capital requirements.
You enlarged on that somewhat in your observations and said, “ and
any other requirements that may be necessary.” Now, you are fa
miliar with the facts, also, that in organizing many of these State
banks, you had to give deferred certiticates in lieu of deposits, and
I think you have answered that that is a contingent liability charged
against the capital and, therefore, you cannot take those banks into
the System.
What would you do about those banks, particularly in cases where
most of the deposit liability was made up by deferred certificates,
and there may be in small banks, as much as $30,000 or $40,000 out
standing of those certificates, and it may take 1 0 years to earn
enough money to pay them off ?
Governor E ccles. I am fam iliar w ith that rule and I do not know
that I, personally, agree with it.
Mr. D irksen . The rule does exist, however?
Governor E ccles. Yes; it was the opinion of counsel at the time
the question came up, that in the light of the present banking legis
lation, by reason of those deferred certificates which the banks had
issued, although they were secondary to the depositors’ claims, still
the bank was unable to qualify for membership. Now, one of the
reasons for this provision which you just read is, to permit the mem
bership of the banks of the class that you referred to.
Mr. D irksen . Well, now, the corollary of that is th is: What will
the present members of the Federal Reserve System sav if by whole
sale, you should take in these banks ? They might object to the
tact that you are cutting corners in order to get them into the
System, might they not?
Go\ ernor E ccles. I cannot see that the other members of the Re
serve bystem could be, in any way, affected by that, except fav<
BANKING ACT OF 1 9 3 5
287
ably. It would be to the interest of all of the member banks of the
System to have all of the nonmember banks members of the System,
for the purpose of uniformity in carrying out the banking practices
and procedure, and so forth. Admitting those banks into the System
does not, in any way, place any liability upon the present member
banks.
Mr. D irksen . Well, if this is a fair question, would you care to
say, categorically, whether you favor all banks coming into the Fed
eral Reserve System at this time?
Governor E ccles. I think that it is in the interest of the banking
situation as a whole, nonmember banks as well as member banks, to
have all banking institutions, which have the power to create money,
members of the Federal Reserve System.
I think that the period of 1937 is helpful, in that it gives to the
banks an element of time in adjusting their affairs to any extent that
they may desire to, before applying for membership; and I think
that, if this proposed legislation is passed, permitting the Board to
waive the requirements that the nonmember banks are unable to
meet, and providing the eligibility features that this bill carries, it
will be a great source of strength to the Federal Deposit Insurance
Corporation and to the banking system as a whole, through all
banks being members of the Federal Reserve System.
Mr. D irksen . Well, now, Governor, if I remember the figures, I
think 41 percent of all of the banks in the I nited States are in
towns of 1 , 0 0 0 in population. I am just wondering what distinct
advantage will accrue to a bank in a small town which is simplv
subserving the money and borrowing interests of that community
to buy G percent of the stock of the Federal Reserve, on which they
will get no interest and discount benefits and privileges, which they
probably would not use.
Governor E ccles . They get 6 percent on the stock which they buy,
which is a very profitable investment right now. Six percent is
what they get on the Federal Reserve bank stock which they buy
at the present time. Furthermore, the opportunity of rediscounting
or borrowing from the Reserve bank for seasonal requirements or
for emergency requirements should be a great source of help to the
local community and would tend to prevent bank failures which
otherwise might develop.
Mr. D irksen . Well, now, if all of these banks come into the Fed
eral Reserve System, manifestly, you are first destroying the banking
authority of your State, and that would be possibly, or would pos
sibly have the effect of superseding the laws of the State with refer
ence to branch banking, and you might have an extension and de
velopment of branch banking; is that possible?
Governor E ccles. I have not said very much about branch bank
ing-----Mr. D i r k s e n . Will you allow me to interpose and tell you that my
interest is aroused in the matter because of Senate bill 1926, which
was introduced recently by Senator Fletcher, a verv- short bill, and
the last phrase provides that—
Anv national banking association may, with the approval of the Federal
Reserve Board, consolidate with or purchnse the assets of. and thereafter
operate as a branch or branches thereof, and national or State banks, or banks,
located in the same State, with which such national bank association was on
288
BANKING ACT OF 1 9 3 5
January 1, 1935, and still is affiliated, or shares or majority of shares of
which were, on January 3, 1935, and still are owned by an affiliate of such
national banking institution.
Mr. G oldsborough. I am putting the committee on notice of the
fact that the bill is before us now, and there seems to be a trend
toward unification of the banking system. The extent of the branch
banking would be easier than it is at the present time, when you still
have checks and safeguards of some State law.
Governor E ccles. Of course, there has been a rapid development
of branch banking in the last few years.
The C h a ir m a n . Since the passage of the act that was to restrict
branch banking.
Governor E ccles. The National Banking Act or the Federal Re
serve Act permits State-wide branch banking in those States where
branch banking is permitted by State law.
Mr. G oldsborough. Just to give the historical fact, we let the
branch-banking features slip by with the express assurance on the
part of those who wanted it that they would stand by the permanent
insurance plan, and as soon as the law passed they began to fight the
permanent insurance plan; we have had that fight on our hands ever
since. Our theory was that it would be impossible to make any
branch-banking law effective, because the independent banks would
be so strong under the permanent insurance plan that they could
preserve themselves. That is the history of that legislation. The
branch-banking features would not have passed had we not had the
assurance that the permanent insurance plan would be allowed to
stand.
The C hairman . Governor, in connection with what Mr. Golds
borough said, the remark I made a moment ago had reference to
the McFadden bill, which dealt with the matter of branch banking.
Governor E ccles. The development of branch banking has been
brought about by the action of the various State legislatures, and
I understand that at the present time about one-half of the States
permit branch banking, either on a State-wide basis or in some form ;
and, of course, the national banks are permitted to carry on the
branch-banking business to the extent that is permitted in the States
in which they operate.
Now, there is nothing in this proposed legislation that in any way
changes the present laws with reference to branch banking, and
there is nothing that interferes, or encroaches upon, the State bank
ing organizations. 1 he provision that requires insured, nonmember
banks to become members in 1937 is not in this legislation, but in the
legislation that was passed last year. So there is nothing in this
legislation that is being considered now that in any way^changes
the relationship of the State banking authority with reference to the
banking structure.
Mr. D i r k s e n . I quite agree. What I was getting at, of course,
is that, if a little later, it was all set up it would be made infinitely
easier to extend the branch banks.
Now, getting over to section 206, there is a section there that
provides that any sound assets may be discounted, that any Federal
Reserve bank may discount any commercial, agricultural,"or indus
trial paper and may make advances to any certain member bank on
its promissory notes secured by any sound assets of such member
bank. I presume an asset may be sound and still be “ ill-liquid ”
rather than liquid, can it not 2 In other words, it might be good
security behind it, but still not liquid ?
Governor E ccles. Yes. Many of the assets which are considered
to be eligible and held to be liquid were less sound than many of the
assets held by banks which could not qualif}7 for rediscount or
security for borrowing from the Reserve banks.
The C hairman . Mr. Dirksen, let me ask him a question right
there, please.
If you have not already stated it, what percentage of the invest
ments of the banks, exclusive of Government securities, is eligible
for rediscount with the Federal Reserve bank ?
Governor E ocles. Well, at the present time, I do not know the
exact percentage, but I understand it is less than 8 percent of the
total loans and investments of the banks that are eligible; and that
is according to the classifications made by the banks themselves and
not according to the classification made by the Reserve banks. I
think, upon experience, the banks would find, if it were necessaiy to
use all the paper which they considered eligible, that some of it
would not be so considered by the Reserve banks. So that the figure
given, which is as I say, less than 8 percent, is the maximum.
Mr. D irksen . I see section 207 provides that guaranteed obliga
tions of the United States may be bought and sold without regard
to maturity. Those are such bonds as Home Owners' Loan Cor
poration—
Governor E ccles. And Federal farm mortgages, and so on.
Mr. D irksen . Well, now, I suppose that has to be considered in
the light of the provision in the bill which calls for the repeal of
the collateral requirements. Is there any notion of policy that some
thing else should be substituted for 50 percent of the eligible paper
anti collateral in addition to the 40-percent gold reserve (
Governor E ccles. No. Y ou see, this is providing for the elimina
tion of the collateral requirements against the Federal Reserve notes.
Die reason for the provision that you have just read is that it is
felt that there should not be discrimination between Government
bonds and bonds guaranteed by the Government. The fact that the
Reserve banks may buy direct obligations of the Government, and
the fact that they may not buy long-term guaranteed obligations of
the Government is an unjustifiable discrimination between the guar
anteed bonds and direct obligations.
Of course, at the time the law providing for the purchase of direct
obligations was originally passed, there were no guaranteed obliga
tions; and I feel that, had there been guaranteed obligations at
that time the law would very likely have included both direct and
guaranteed obligations.
Mr. D irksen . Well, now, heretofore, of course, the note-issuing
power was used largely commensurate with the rise and fall of
business in that area; and if there had to be a 40 percent gold re
serve and 60 percent of eligible paper, there had to be commercial
transactions behind all of that paper. And so as there was a fixed
volume of business, the chances of any demand on the Federal Re
serve agent for more Federal Reserve notes, or less, depended on
whether the tide of business was high or low.
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BANKING ACT OF 19 3 5
Now. that collateral requirement is to be repealed and you are
authorized to buy and sell in the market, and these guaranteed obli
gations of the Government—that is what is called elasticity, which
does not mean a great deal to me—however, it is taken away, and
from then on the amount of notes that will be issued will bear no
definite relationship to the amount of business in the 12 Reserve
districts, or it may be a very arbitrary amount.
Governor E ccles. That was the theory upon which the collateral
requirements for note issue were based, but that is proving to be
inapplicable to the facts in the case. The greatest requirements for
notes in any year in this country happened when the business volume
was at its lowest, showing that the demand for currency does not
necessarily follow the fluctuations of business. The fluctuation of
bank lending on short-term eligible paper reflects to some extent
the activity of business. The call for Federal Reserve notes in the
United States, a country where 90 percent of the business of the
country is done by check, has very little relationship to the volume
of business.
As I stated a few days ago in discussing this question, the Re
serve banks have two classes of liabilities: One is the deposits to
the member banks and the other is the notes outstanding.
The C hairman . Will you not add to that, the capital held by the
other banks ?
Governor E ccles. That is a liability to the stockholders, of
course; and the surplus is a liability to the Government. In
liquidation, the assets of the Reserve bank consist of the gold cer
tificates, and the investments that the Reserve banks make in gov
ernments, and loans and discounts which they make to member
banks.
I see no reason for putting up 40 percent gold certificates back
of notes and then putting up eligible paper to the extent of 60 per
cent. As a matter of fact, it would lx? perfectly impossible to cover
the note requirements of the banks bv 60 percent of commercial
paper; because the banks do not have the paper to cover that pro
portion of the note requirements. Therefore there would not be
sufficient Federal Reserve notes to meet the requirements, if the
Reserve banks were required to secure notes, as originally contem
plated in the act, by 60 percent of the commercial paper.
There is no difference between note liability and deposit liability.
They are both liabilities of the bank and there would seem no more
occasion for the securing of notes than it would for the securing
of deposits. All of the assets of the Reserve banks are back of
all of the liabilities of the Reserve banks. The type of assets that
the Reserve banks hold—outside of the Government bonds which
they buy and the gold certificates which they hold—is determined
by each Reserve bank, when that Reserve bank extends credit to
member banks.
Mr. D irksen . Well, Governor, if you have more than 40 percent
gold reserves, that means that the Federal Reserve bank has got
to issue $2.50 for every gold certificate dollar that it has: is that
correct ?
Governor E ccles. What is that?
Mr. D irksen . I f you haie that 40-percent uold reserve behind
every dollar of Federal Reserve notes issued, you will have issued
BANKING ACT OF 1 9 3 5
291
2 y2 times for every gold certificate that the Federal Reserve banks
may have?
Governor E ccles. That would be right.
Mr. D irksen . Then in the light of the fact that you could buy
and sell without limit, virtually, all of the outstanding contingent
obligations of the Government, or those that are guaranteed, you
could retire most of them today if you so chose, and if that was
going to be the policy, by rather copious note issue; that would be
entirely possible under the bill, would it not ?
Governor E ccles. As I understand it, the bill would not change
that situation, at all.
Mr. D irksen . But I would think that would be possible, would
it not?
Governor E ccles. The present law permits notes to be secured
by Government bonds and gold certificates. That is not in the
present law, it was in the Emergency Banking Act of 1932.
M r. D irksen . Y ou co u ld , in ste a d o f ju st se c u r in g th e m , re tire
th e m a lto g e th e r ?
Governor E ccles. What is that?
Mr. D irksen . I say, instead of securing them, you could retire
them altogether?
Governor E ccles. Retire what?
Mr. D irksen . Retire these bonds that had been guaranteed as to
principal and interest, being nothing more than a note issue----Governor E ccles. Y ou mean that the Reserve Bank, through openmarket, operations, could purchase all of the outstanding, or as many
of the outstanding Government bonds and guaranteed bonds as they
chose to do?
Mr. D irksen . Yes; as far as there were gold certificates available
that would be possible, would it not?
Governor E ccles. Yes; but, of course, that would increase the
reserves of the members by the amount of bonds which were pur
chased, and the excess reserves of the members today are something
over $2,000,000,000. To extend that reserve, banks purchase addi
tional Government bonds or bonds guaranteed by the Government—
they would increase the reserves of the member banks.
Mr. D irksen . I think this morning, or yesterday, you made the
observation that the relationship of income to the deposit currency
was as 3 to 1 , or substantially so?
Governor E ccles. In 1928, and 1929 it was 3.12. That was about
the average, as I recall, of the deposits and currency to the national
income. In 1933 the relationship, or what is spoken of as the income
velocity, was about 2%. At the present time, it would be substantiallv less than that. That increase of money, deposits plus cur
rency, has been much more rapid than the increase in income, and
hence, the velocity has been reduced.
Mr. D irksen . lias that relationship of 3-to-l between the income
and deposit currency existed for a longer period than since 1929?
Governor E ccles. No; it has been steadily going down.
Mr. D irksen . It has been going down since that time, but I mean
anterior to that period. I do not know where I got that figure,
U
j^fr. G oldsborough. Does income mean the same as production?
292
BANKING ACT OF 1 9 3 5
Governor E ccles. Yes; it is spoken of as the national income. Dr.
Currie says the figure was very stable from 1923 to 1929.
Mr. D irksen . At 3-to-l ?
Governor E ccles. Yes.
Mr. D irksen . And before that time, what was it ?
Governor E ccles. I do not have the figure on it. Of course, during
the war period and during the period of depression in 1920 and 1921,
I imagine there would be some changes in ratio.
Mr. H ancock. May I ask a question ?
Mr. D irksen . Yes.
Mr. H ancock. Governor, what do you mean by “ national income?”
Governor E ccles. What I understand to be the basis for figuring
the national income is the price of all goods, whether consumer’s
goods or capital goods, that are produced in any one year.
Mr. H ollister. For ultimate sale?
Governor E ccles. Would that be sale?
Dr. C urrie. It is the wages, profits, dividends, of all the money
actually received by the income receivers.
Governor E ccles. It is supposed to represent all the goods bought
and sold.
Mr. H ollister. That is, the ultimate sales?
Governor E ccles. The ultimate sales, yes; otherwise you get dupli
cation. That is right, the ultimate sales.
Air. H ollister. Dr. Townsend refers to $1,200,000,000,000, and I
wanted to be sure about it.
Governor E ccles. N o, you have $900,000,000,000 to $1,000,000,0 0 0 , 0 0 0 of bank debits, which, based upon the amount of demand
deposits would possibly give a velocity of deposit currency turn-over
of over 50 times in the period of 1928 and 1929.
Mr. H ancock. At what rate is the national income running today?
Governor E ccles. Well, I do not know. I do not know that there
are any figures at all on it.
Mr. H ancock. What was the national income in 1934, as defined
by you ?
Governor E ccles. D o you have the figures of the Department of
Commerce ?
Dr. C urrie. No ; not for 1934.
Governor E ccles. I have heard it variously estimated from $50,0 0 0 ,0 0 0 , 0 0 0 to $50,000,000,000, but you would really have to have the
complete figures for 1934.
Mr. D irksen . At any event, that ratio is invariable and goes back
to 1923?
Governor E ccles. It was relatively constant.
Mr. D irksen . And for any increase o f $1,000,000,000 in deposit cur
rency, you would get an increase of $3,000,000,000 in national income?
Governor E ccles. Well, theoretically, but that has not been the
case from 1929 to 1934.
Mr. D irksen . But if it were invariable, there would be a great
incentive then to increase the amount of deposit currency, in the hope
of increasing the national income by just exactly three times that
amount and all the good that we could do with that amount of money?
Governor E ccles. It would be fine—there is no question about
that—if we could do that by an increase of our volume of money,
wdthout regard to who owns the money, and thus regulate our
BANKING ACT OF 1 9 3 5
293
national income. I do not believe that is possible. I do feel, as I
have said before, that of course the volume of money is an important
factor; and, certainly, with high interest rates and shortage of
reserves today, you could expect no credit expansion, and such a
situation would be very deflationary. Excess reserves, such as we
have todaj’, which bring down the rate of interest, should ultimately
'
lead toward creating credit expansion—whether we can do that
and recover time alone can tell. That is one of the factors and one
of the elements that will help make for recovery, if private credit
expansion can induce recovery.
Mr. D riscoll. Governor, I am not entirely clear in my mind as to
the expression “ national income ” ; does that mean the price of
every taxable article that is produced in the United States per year?
Governor E ccles. It is the income received from the production
of all goods.
Mr. D riscoll. We w ill say all of the hay, tobacco, textiles, wool
th at is sold ?
Governor E ccles. N o ; you would get duplication then.
Mr. D riscoll. Not if you sell it only once?
Governor E ccles. That is right. For instance, you would sell
wheat to the miller, and the miller would sell the flour to the whole
saler and so on, and you would get, of course, a duplication, because
that would be the flour sold to the consumer----Mr. D riscoll. And not the wheat sold by the farmer?
Governor E ccles. N o.
Mr. S isson . In other words, there is a great distinction between
the national income and the total turnover of business.
Governor E ccles. A very great distinction.
Mr. S isson . Many times?
Governor E ccles. A very great distinction, but the national in
come determines the actual wealth produced, which determines the
we11 u—
'----- * Jl
1
-------- ’y distributed.
interpretation of “ national
income ”, is all wages, interest, dividends, ultimate sale prices of
goods. Does not that fairly well cover it?
Governor E ccles. I think that is the rule.
Mr. S is so n . That would not include the lawyers’ income, who are
not productive members of society, as a part of the national income?
Governor E ccles. Yes; it includes a lawyers’ income.
Mr. W il l ia m s . H ow ab ou t w a g es?
(Tovernor E ccles. The same th in g applies.
Mr. H ollister. Would not the real test be not the national income
in dollars, but the units of articles sold in respect to these other
particular years? If your prices are quite different, your national
income may look different, but it is the units of things that happen
to be sold in a particular year, with reference to the other year?
Governor E ccles. Yes, the production; that is right.
Mr. D riscoll. Governor. I see that section 209 of this bill con
fers upon the Reserve Board the authority by regulation to change
the requirement as to the reserves to be maintained against demand
or time deposits. As I understand the percentage on demand is now
13 for Chicago and New York, and 1 0 for other eastern cities, and
7 for the country banks, and 3 percent on time deposits?
Governor E ccles. T hat is right.
294
BANKING ACT OF 19 3 5
Mr. D irksen . N ow, at one time, I think when the Federal Reserve
was raising prices, it was up to 25, 18, and 15, was it not? Was it
not much higher, and mounting higher when the Federal Reserve
was first enacted?
Governor E ccles. It was higher than it was in 1925; it was 18 and
down below 18.
Mr. D irksen . I t has been reduced?
Governor E ccles. Yes. Dr. Goldenweiser, I wonder if you know
the reason for the drop in the Reserve requirements, from those
higher percentages to the percentage that applies at the present
time ?
Dr. G oldenweiser. The reason requirements were reduced at the
time was that it was the theory that the cash held in the bank
vaults amounted to about that much. When this cash in the vaults
held by the banks was excluded from the legal reserve, there was an
allowance made for it.
Mr. D irksen . Y ou do not require any cash in vault now, do you?
Dr. G oldenweiser. No. When they would not let it count as
reserves any longer they reduced the requirement.
Mr. D irksen . N o ; actually, there is no cash in the vault at the
present time, only of course these reserves against the deposits that
are deposited with the Federal Reserve bank?
Governor E ccles. There is cash in the vault, and these reserve
requirements of 7, 10, and 13, as I understand Dr. Goldenweiser, were
reduced because previously the cash held was considered as a part
of the reserve requirements, and the cash now held bv the banks is
not considered a part of the reserve. There is no legal cash require
ment, but banks have to hold sufficient cash to be able to meet the
cash requirements of their customers, and those requirements fluc
tuate from day to day.
They have to ship money, from the Reserve bank to their bank and
the amount of cash required by a bank that is not in a Reserve
center, that is, in centers where there is no Reserve bank or branch
of a Reserve bank, is- relatively higher than the percentage of cash
that is carried in a bank where there is a Federal Reserve branch
bank or Reserve bank.
Mr. D irksen . What reserves do the Bank o f England and the
Bank of France require, as compared to these requirements here?
Governor E ccles. I am unable to say.
Mr. D irksen . Dr. Goldenweiser, what can you say about that?
Dr. G oldenweiser . There are no legal requirem ents about the
reserves of commercial banks.
Mr. D irksen . In practice, what do they maintain?
Governor E ccles. Well, in England, somewhere around 10 per
cent, as a rule.
1
Mr. D irksen . Yes; both the demand and tim e deposits?
Dr. G oldenweiser. Yes; against their deposits.
Mr. D irksen . Against all deposits?
Dr. G oldenweiser. Yes; and in France I do not know because in
France they hold so much of it in actual notes and the ratio varies
but it is not very greatly different from the English system.
jVIr. D irksen . Y ell, now Governor, section 209, of course would
confer upon the Federal Reserve Board the power to raise or lower
BANKING ACT OF 1 9 3 5
295
those reserve requirements; in other words, instead of 13, 10, and 7,
you could reduce them to 10, 7, and 3, and you might reduce the
reserve against the time deposits to 2 percent or even 1 percent. In
practice, how much of that reserve deposit do the Reserve banks, as
a general thing, carry?
G o v ern o r E ccles . Y ou m ean th e m em b er b an k s?
Mr. D irksen . N o ; o f the deposits that are carried by member
banks in the Federal Reserve bank, do they keep all of the 13 percent
or 10 percent or 7 percent on hand, or do they use it ?
Governor. E ccles . The Reserve banks.
Mr. D irksen . Yes.
Governor E ccles. The Reserve banks do not invest their money—
that is, their deposit money—from the standpoint of keeping their
money operating at a profit. I t is their business to invest their money
in open-market purchases as a regulatory measure of the monetary
system.
Mr. D irksen . Well, the purpose, apparently, of that section is to
give greater flexibility and give the Federal Reserve Board the
authority to raise or lower their reserve requirements, and----Governor E ccles. That provision with reference to the reserve re
quirement is now in the law. The Thomas amendment to the act of
May 12,1933, added to the Federal Reserve Act a provision giving the
Federal Reserve Board the power, by declaring an emergency, to raise
the reserve requirements, with the consent of the President. That
was put in there as a supplemental monetary control to open-market
operations. It is a control against inflation.
Mr. D irksen . Against inflation?
Governor E ccles. Yes; that would be the purpose of that—a con
trol against inflation. For instance, assuming that the excess reserves
of member banks greatly exceeded the amount of Government bonds
which the Reserve banks held and the bills which they held, there
would be no way of controlling through open-market operations an
inflationary credit expansion on the part of member banks. There
would be no way of reducing or wiping out their excess reserves upon
which credit inflation is built. For instance, if the authority now'
granted to issue $3 ,0 0 0 ,0 0 0 , 0 0 0 of greenback currency was exercised,
and if the $2 ,0 0 0 ,0 0 0 , 0 0 0 of gold profit now in the stabilization fund
W\ f Un ^ ’ $5,000,0 0 0 , 0 0 0 additional bank deposits would be created.
G
Mr. G oldsborouoh. Right there, if that money were used to retire
Government bonds, the deposits would not be increased but the
reserves would be increased ?
Governor E ccles. That is right. In that case it would increase the
reserves by that amount, but it would increase deposits to the extent
that it retired Government bonds not held by the banks. If the
money was used to retire Government bonds held by individuals, it
would increase deposits and increase reserves; to the extent that it
was used to buy Government bonds held onlv by the bankers, to that
extent it would increase the reserves alone without increasing
deposits.
It is possible with the use, we will say, of the $5 ,0 0 0 ,0 0 0 , 0 0 0 referred
to, to increase the reserves by that amount. Additional gold may con
tinue to come into the country, which would also tend to increase the
reserves. So that the banking system could build up excess reserves
296
BANKING A O 1935
CT F
from the $2,300,000,000, approximately, that they hold now to $7,300,000,000 plus any increased gold that comes in. You would have a
potential agency for bank-credit inflation that would simply be ter
rific and no open-market operation could control it. An increase of
reserve requirements would have the same effect in extinguishing the
excess reserves as a sale of securities, and that is why this proposal is
made.
Mr. D irksen . That is the sense of the 20 percent in this bill?
Governor E ccles. Yes.
.Air. D irksen . Ultimately to extinguish the reserve requirements, if
necessary ?
Governor E ccles. Yes.
Mr. D irksen . I think I have only one more question, and that is
with reference to section 2 1 0 , dealing with real-estate loans. I was
much interested in the discussion this morning, and I wondered
whether, after all, we could not keep the banks on a commercial
basis and keep them liquid by letting the building and loan associa
tions handle the amortized real-estate mortgages up to 2 0 years, and
pursue tiie policy of greater leniency with respect to bank loans, to
such thrift agencies that now operate. I say that for this reason—
the building and loan associations are equipped to handle the amor
tized loans, and if the banks were going to handle them in any
quantity, they would have to set up separate establishments and take
on additional personnel to do that.
Mr. Cavicchia. May I say this, Mr. Dirksen?
Mr. D irksen . Yes.
Mr. Cavicchia. The great trouble was that many building and
loan associations were running businesses in opposition to the banks.
They got in the habit of going to the banks to borrow money on
notes and pay, say, 5 percent on the money that they borrowed from
the national bank or trust company; and they would proceed to lend
it to me, or the man who wanted to buy himself a home; and they
would get 3 percent or 4 percent or 5 percent bonus; and if they
started to sell preferred shares to depositors and some of these com
panies borrowed—they did not borrow, but they took on deposit
money on which they guaranteed as much as 7 percent per annum
which no bank could afford to pay. If the building and loans had'
not gone to that field, they would not have suffered as much as thev
did when the crash came in 1929.
Mr. D irksen . Well, let me say there are probably 700 or 800 Fed
eral savings and loan associations that have been established now:
and, of course, their sole mission is to deal in amortized loans
’
Governor E ccles. Well, I may answer that by statin^ that the
Federal savings and loan associations are members of the home-loan
banks.
Mr. D irksen. And those are rediscount institutions?
Governoi E ccles. ^.es, and those institutions can borrow monev
from the home-loan banks at 3 percent. Therefore I do not know
how commercial banks owning substantial savings funds upon which
they pay 2 i/ 2 percent could compete with the home-loan banks in
providing funds to savings and loan associations.
1
Mr. D i r k s e n . It could, but for one thing, and do y o u know what
it is? It is the bank examiners. There are lots of buildings and
loans that would go to the banks and make their notes signed by
all of the directors, get the money, and pour it into the development
of building and construction in their communities; but I doubt very
much whether the examiners would permit that at the present time.
Governor E ccles. The only thing is that a bank, in order to pay
2 1 4 -percent interest on time funds, which it will likely have to pay
to hold the funds against the competition of the 3- and 3 !/2 -percent
rates paid by savings and loan associations, must lend those time
funds on a basis to yield them not less than 5 percent.
A building and loan association, as a member of the home-loan
bank, would not be willing and could not afford to pay the banks
5 percent for funds which they in turn would have to loan out at
8 percent; and in borrowing from the banks, they would borrow on
a short-term basis and would be loaning in the community on homes
on a long-term basis. Therefore I do not think it is practicable to
expect the building and loan companies to borrow from the savings
or time funds of commercial banks.
Mr. D irksen . There is one statement in here, one proviso in the
section dealing with real-estate loans, section 2 1 0 , that says:
Nothing contained in this section shall prevent any national hanking associa
tion from acquiring, as additional security for loans, previously made in good
faith, second or subsequent liens on real estate or shares or participations in
such liens.
Those are junior liens, or they would not be second mortgages?
Governor E ccles. That is right.
Mr. D irksen . There would not be anything to prevent a bank from
taking a $2 , 0 0 0 first mortgage on a $ 1 0 , 0 0 0 property, and then step
ping in a little bit later and taking another junior mortgage for
$1 ,0 0 0 , and making a junior lien against the first mortgage against
the property, if they so desired. I believe you stated this morning
you thought that was rather poor financing to even indulge in junior
liens, if it could be avoided.
Mr. E ccles. A bank should be prohibited, in the first instance,
from taking a junior lien—from making a loan secured by a junior
lien; but if a bank has a loan, and even though it may be an unse
cured commercial loan or a collateral secured loan, the bank is justi
fied in taking a second lien, for additional securit}", if conditions de
velop where the loan, which was adequately and properly secured,
or a loan which was made to a concern which had ample resources,
gets into a position where it becomes a doubtful loan. In such cases
the bank may take a second mortgage or take any other securit3r
that it can get; and banks have always done that, in fact. They
have always been doing that.
Mr. D irksen . 1 he only requirement, however, in that language, is
the faith of the bank, “ previously made in good faith.”
Governor E ccles. I think possibly the only reason for that lan
guage there is this: The banks, we know, have always taken, and
there has been no prohibition upon banks taking, for debts previ
ously contracted, second mortgages or any other collateral.
298
BACKING ACT OF 1 9 3 5
Mr. D irksex . Have they that authority now?
Governor E ccles. Yes.
Mr. D irksex . T o take second mortgages?
Governor E ccles. Yes; they have always done that.
Mr. C avicchia. I s there not some confusion here, Mr. Dirksen?
I think you mentioned about a bank lending their $1 0 ,0 0 0 , and sub
sequently he wants to borrow another $1 , 0 0 0 on the same piece of
real estate. That is perfectly legitimate, because it is considered
practically one mortgage loan—is it not—whether it is made in one
loan or two loans; am I correct, Governor ?
Governor E ccles. I t would seem to me that it would be consid
ered a first and second mortgage, because the first mortgage might
be sold without recourse, and certainly the $ 1 , 0 0 0 mortgage would
then be a second mortgage. So long as both pieces of paper are held
by the same institution, they would be, for all practical purposes, the
equivalent of a first mortgage.
Mr. Cavicchia. I had in mind the building and loan practice,
where a man has $5,000 mortgage, and a year or two later wants
another $1 ,0 0 0 ; in all respects, that is considered as one mortgage.
Now, a second mortgage is never taken by a building and loan—by a
member bank unless it wants to secure some loan that it had already
made; is that correct?
Governor E ccles. That is right.
Mr. H axcock. Mr. Dirksen, may I ask one question?
Mr. D irksex . Yes.
Mr. H ancock. In addition to the fact that there is such a small
amount o f eligible commercial paper available for rediscount, did I
understand you to say the other day that one of the reasons why you
were suggesting that 20-vear amortized real-estate mortgages should
be made eligible for borrowing was the fact that unless the banks
did handle this type of paper, these loans would continue to gravitate
to the hom e-building and th rift institutions?
Governor E ccles. We are not proposing that 20-year mortgages,
as such, be eligible for rediscount. The proposal is that the banks
be permitted to make amortized real-estate loans on improved prop
erty up to the maximum period of 2 0 years, up to a certain percentage
of their time funds.
Mr. H ancock. Sixty percent, is it not?
Governor E ccles. Yes. Now, with reference to the question of
eligibility, there is nothing said at all about the right to rediscount
those mortgages. The wording of the eligibility provision is to the
effect that the Federal Reserve Act would be amended to authorize
the Federal Reserve banks, subject to regulations of the Board, to
discount for member banks any commercial, agricultural, or indus
trial paper, and to make advances to member banks on nrnmi^nrv
notes, secured by any sound asset.
Mr. H ancock. I understand. This is something that was recog
nized in the Emergency Banking Act, that the member bank* be permitted, on their bills payable or promissory notes, secured bv sound
assets, to borrow from a Reserve bank, and the credit department of
each Reserve bank would determine the terms upon which the mem
ber bank could borrow.
BANKING ACT OF 19 35
299
Let us see if we understand each other right there for a minute.
Under that provision, would the member bank be able to endorse,
without recourse, a first-mortgage note to a Federal Reserve bank?
Governor E ccles. A member bank now cannot endorse without
recourse any paper to a Reserve bank. All borrowing from the Fed
eral Reserve bank is done on eligible paper, on the discount basis,
with recourse, and all the bill does is to broaden the borrowing privi
lege so as to give to the Reserve banks the power to lend to member
banks on the member bank’s note for a period of 3, G or 9 months,
,
according to the regulations that the Board may make, those notes to
be secured by bonds, mortgages, or loans secured by collateral, with
such margin as the Reserve banks may consider adequate to make the
loans safe and sound to the Reserve bank.
Mr. H ancock. I think I understand that now; you see if I do.
In other words, the member banks, under this provision, would not
be able to rediscount a 2 0 -year amortized mortgage with the Federal
Reserve System, but use the mortgage as collateral for a loan.
Governor E ccles. That’s correct.
Mr. H ancock. But it could give its own note, secured by the 20year amortized mortgage, and secure a loan from the Federal Reserve
bank, if that was a sound asset?
Governor E ccles. The Reserve bank would determine what mar
gin might be required, and would also determine whether the loan
would be made for 3 months or 6 months, or a longer period.
Mr. H ancock. But that would enable the member bank to be in a
position, in time of emergency, to take that paper and use it for the
purpose of liquidity ?
Governor E ccles. The same as it could with eligible paper; that
is right.
Mr. H ancock. In other words, you mean put real-estate mort
gages on parity, as they should always have been, so far as eligibil
ity is concerned, with bonds?
Governor E ccles. Government bonds, you mean?
Mr. H ancock . Yes; Government bonds?
Governor E ccles. Yes; so far as being able to borrow money from
the Reserve bank is concerned.
Mr. Cavicchia. I s this inflation, Governor?
Governor E ccles. This is not inflation, because no member bank
is going to borrow from the Reserve bank as long as it has excess
reserves. Now, when the borrowings of member banks reach the
point where you can get credit inflation, just as we have had in this
country in the past, it was said to be the duty of the Reserve Board
and the Reserve banks to raise the discount rates and to discourage
future credit expansion.
Inflation can only be brought about by the willingness of the
people and corporations to borrow money, and that is one thing we
are trying to get; we are trying to induce the borrowing and lend
ing of money upon which recovery is based. We are talking about
the fear of inflation or reflation, when, as a matter of fact, that is
what we want.
Mr. D irksen . Governor, I have one more question, and that is
predicated on the question asked by the chairman of the committee
300
BANKING ACT OF 1 9 3 5
last week, when, off the record, he observed something about the
condition of one of the Federal Reserve banks. Was that earlv
in 1933?
J
The Chairman. I am not sure that I remember the remark you
refer to.
Mr. D i r k s e n . Well, I got the impression at that time that it was
the Federal Reserve banks that had lost their liquidity; is that
possible ?
Governor E ccles. The Reserve bank lose its liquidity?
Mr. D irksen . Yes.
Governor E ccles. I never heard of that.
Mr. D irksen . I got that impression at the time, but that is neither
here nor there. I am just wondering if, carried to its logical con
clusion, there is plenty of demand for this money; and, a?you say.
the assets can still be sound and still not be liquid, but if those were
infiltrated to the Federal Reserve banks, you may have another
flurry similar to the one we went through.
Governor E ccles. An asset that may be considered sound and
liquid with business activity and a high rate of employment and
national income becomes frozen and unsound when the national
income diminishes. Soundness is not determined only by the sub
stance of a loan or asset at the time the asset is purchased or the loan
is made; it depends upon the_ state of trade and business which fol
lows, and it is up to the banking system to maintain a state of trade
and business that will preserve soundness, if soundness existed when
the credit was created, in so far as it is possible.
When certain foreign bonds were purchased, German bonds, prior
to the war, we considered those the best in the world, and they were
sound assets. When wheat was selling at $2 a bushel, it would have
been considered perfectly sound, and the paper would have been
eligible to have been loaned upon, and it would have been proper to
have loaned upon that wheat with a 25-percent margin, on the ware
house-receipt basis. The same thing is ti ue in any other commodity.
I remember when sugar was selling at around $ 2 1 a bag, and
within a 6 -month period it fell below $5 a bag. I am not arguing
that a loan of 80 percent of the value of $ 2 1 sugar would have been
sound.
^
I remember when sheep were selling at $16 a head, when within
a 6 -month period you could not sell them at $4 a head, yet a loan
made on sheep at $16 for 9 months that is, on the basis of 50 per
cent of $16—say, $ 8 a head for 6 months was eligible; whereas be
fore that loan came due that security was not selling for one-half
of the amount of the loan.
The point I am trying to make is that the question of liquidity and
the question of soundness depends upon the state of trade and the
state of business; and to the extent that forced deflation through
forced credit contraction is obviated through making available the
rediscount facilities of the Reserve banks—to that extent you pro
vide liquidity. The only liquidity that really exists in a serious de
pression is the liquidity that is provided through the money-issuing
agency, the Reserve System. Even Government bonds cease to have
BANKING ACT OF 19 3 5
301
liquidity at the price at which corporations can sell them without
going bankrupt.
The price of Government bonds in 1932 was down, the 3 s, 1 think,
to $83. A bank holding any substantial amount of those bonds—
to have sold them at that market—and if any substantial amount
had been sold, the market possibly would have gone to $50, and the
bank would have been ruined. The banks, however, could go to the
Federal Reserve banks and borrow on those Government bonds, and
that was a protection to the market, and also a protection to the
banks, which would not have existed if the banks had been forced
to sell those bonds to get money to meet the demands, instead of
going to the Reserve bank and getting the money.
Mr. H ancock. Mr. Dirksen, may I ask one other question?
Mr. D irksen . Yes.
Mr. H ancock. Now, deposits you have already written off.
Mr. D irksen . I think if the Governor wanted to, in the light of
the fact that it was related to the bonus, he might make a further
observation.
Governor E ccles. I do not care to express an opinion on matters
of that kind, because I feel it is entirely outside of my official posi
tion. I have my personal opinion, but I think it is outside of my
official position.
Mr. Dirksen. I have just one observation to make with refer
ence to this last section of title II, and it is this: Whether or not
the time deposits will be drained off in the form of real estate
amortized loans to any appreciable extent, will depend entirely upon
the public demand?
Governor E ccles. Entirely.
Mr. D irksen . The public demand must necessarily be occasioned
upon the purchasing power?
Governor E ccles. There is no question about that.
Mr. D irksen . If you have not got the purchasing power, they
might demand until they are blue m the face, and it would not do
any good; and that, in turn, is conditioned upon the state of employ
ment in the country?
Governor E ccles. That is correct.
Mr. D irksen . The question that comes up to us is: Which is the
first, the hen or the egg? And I question whether it is going to do
any good.
Governor E ccles. If you get demand for long-term credit for home
construction or for other construction, and the facilities for providing
it do not exist, that would be most unfortunate.
Now, I feel that, with low interest, and abundance of excess funds,
that the need and desire of institutions with those funds should be
to put them to work, and that may tend to create some construc
tion. I do not believe that the demand, today, throughout the
country as a whole, for long-term, amortized loans is entirely being
met. What you say about the hen and the egg is true, and I am not
claiming for the eligibility feature of this legislation and the realestate feature, one of which is the corollary to the other, that it will
bring about recovery; but it would create the machinery upon which
recovery can be brought about.
127297— 35------ 20
302
BANKING ACT OF 19 3 5
I might say this: That the increase in private expenditures for
equipment and construction await upon the increased demands for
products of industry. The increased demand depends upon the in
creased incomes, as a whole. Increased incomes await upon in
creased expenditures in construction. There is your circle.
Now, the impasse can be broken in the first instance, I believe, only
by the various Government activities, and if the impasse is broken,
then you have created here the machinery with which to help carry
forward, just as you are creating in the case of the Home Owners’
Loan Act and providing funds for your home-loan banks to loan to
the members of the home-loan banks. That is the agency that will
help in the mortgage field as well.
Mr. H ancock. That is what you said in 1933, is it not?
Governor E ccles. Something like that.
Mr. D irksen . That is all I have to ask, Mr. Chairman.
The C hairman . All right. Mr. Wolcott, have you any questions ?
Mr. H ancock. Let us adjourn now until in the morning, Mr. Chair
man.
Mr. F ord. May I make one observation before we adjourn?
The C hairman . Pardon me just a minute. Let this be off the
record.
(Here follows discussion off the record.)
Mr. S isson. A s I understand it, this bill makes no change in the
law with respect to the liability of the banks that are members of the
permanent insurance fund for assessment; that is, in other words,
the assessment is still based upon the total amount of the deposits;
that is correct, is it not, whether insured or not ?
The C hairman . That will be the situation under the new law. but
it is not the basis on which the assessments are made under the law as
is stands now’.
Mr. S isson. I know, but it was contemplated as a permanent fund ?
The C hairman . Well, under the permanent plan, there would be
an assessment of one-fourth of 1 percent, to be repeated in case of
necessity. The necessity depends upon whether or not the total fund
on hand equals one-fourth of 1 percent of the amount of the total
deposits of insured banks.
Mr. S isson. Well, what I am getting at, Mr. Chairman, is this:
You all know that was one of the points at issue last year, and that
is going to be one of the points in controversy this year. We are
getting some letters from certain banks to the effect that that is
inequitable; that is, when the total amount of the deposits that are
insured are a relatively small percentage of their total deposits, as
compared with their uninsured deposits, they are making the claim
that there should be a change made.
I am not taking any position. In fact, if I were to take any posi
tion now, I would be opposed to that contention.
The C hairman . I think you will find, Mr. Sisson, in Mr. Crowley’s
testimony, and in Mr. O’Connors’ testimony that that phase of the
legislation is fully covered, not only as to the changes made and the
systems being employed, but all fields that enter into the calculation
are covered.
Mr. H ancock. Mr. Chairman, may I respond to my good friend
from New York?
BANKING ACT OF 19 3 5
303
I had occasion, today, Mr. Sisson, to go into a case affecting an
institution in my own State. I received a letter recently criticizing
the method proposed under title I of the new bill, whereby the pro
posed assessment of not more than one-twelfth of 1 percent would
be levied against the total deposits in any one institution, annually.
This institution that I have in mind, under the present law, insured
$20,700,000 of its total deposit liability of $58,000,000, and the present
cost to that institution is approximately $51,000 a year. Under the
provisions of the new act, whereby the assessments apply to the total
deposits of $58,000,000—on the basis of not in excess of one-twelfth
of 1 percent, the cost of insurance to this institution is actually re
duced $3,000, to $48,000 a year; and 13,000 institutions that are in
sured today would carry this insurance at a lesser amount under the
new act than they do under the temporary plan at the present time.
Mr. W illiams. The fact is, there is no insuring under the perma
nent system and-----Mr. H ancock. No ; I say, under the temporary plan.
The C hairman . Well, gentlemen, have we decided to adjourn for
the afternoon? We will meet at 10:30 in the morning, and I hope
we shall finish with Governor Eccles tomorrow.
(Thereupon, a recess was taken in the hearing until 10:30 a. m.,
Friday, Mar. 15, 1935.)
BANKING ACT OF 1935
F R ID A Y , M ARCH 15, 1935
H ouse of R epresentatives,
C ommittee on B anking and C urrency,
W ashington , D. C.
The committe met at 10:30 a. m., Hon. Henry C. Steagall (chair
man) presiding.
The Chairm an . All right, gentlemen, there is nothing in the
House to interfere with our meeting today.
We will resume with Governor Eccles. Mr. Ford, have you some
thing?
Mr. F ord. Mr. Spence is next.
The Chairman . That is all right. Mr. Spence, if you have any
questions, you may proceed.
Mr. S pence. Governor Eccles, what will be the practical effect of
waiving the collateral requirements for the issuing of Federal Re
serve notes? In other words, is there any limitation, or will there
be any limitation on the issuance of notes?
Governor E ccles. There is no limitation now, for all practical
purposes. What determines the use of currency is not the Federal
Reserve banks, nor the member banks, but the people of the country
who have claims on the deposits in the banks. They have the right
to request a bank to pay them in currency. The bank, in order to
be able to pay them such currency as they request, goes to the Fed
eral Reserve bank to get the currency. The bank, in order to get
the currency from the Federal Reserve, must have a balance with
the Federal Reserve, just as an individual depositor with a bank
must have a balance with the bank. Therefore, the only limitation
upon the issuance of currency is the demand for currency by the
people of the country that have bank deposits, and the collateral
requirements in no way affect or change the amount of the currency.
Mr. S pence. What was the philosophy of the original act which
so meticulously made the requirements for collateral ?
Governor E ccles. I do not know that I can say. I could only
surmise what was in the minds of the framers of the act at that
time. The theory apparently was that the demand for currency
would fluctuate directly with the volume of activity of business, and
as business increased in activity, it would increase its borrowings
on eligible paper, which, together with the gold, would supply the
necessary collateral for the Federal Reserve notes; and, as business
activity slackened or decreased, the volume of eligible paper held by
the banks would be reduced, and hence the volume of currency would
be reduced.
305
306
BANKING ACT OF 19 3 5
It lias been found, however, that there is nothing in the history
of the Federal Reserve System, to warrant such a conclusion. This is
the only country where there is a central banking system, outside of
Great Britain, which requires collateral to be held back of the note
issue of the central bank. All of the new central banks which have
been established in recent years recognize that, in essentially a check
using country, there is no necessary relationship between the use of
currency and the volume of business.
We heard a great deal of talk about issuing currency with the
idea that, if that currency is issued in greater quantity than is now
outstanding, it would improve or help business. The direct spend
ing by the Government of currency, from the standpoint of the actual
money in circulation, and the business activity created thereby, would
be no different than the same amount of money spent by the Govern
ment as the result of its present method of financing; because you
cannot keep out in circulation more currency than is required by the
country to meet its convenience in doing business. The currency
comes right back to the banks and from the banks goes to the Fed
eral Reserve banks and is destroyed. We have noticed that, from
the time of the bank holiday up until the present time, the amount
of currency in circulation has been reduced by about $2 ,0 0 0 ,0 0 0 ,0 0 0 .
Mr. S pence. What is the total amount of gold held by the Federal
Reserve, Governor?
Governor E ccles. I do not recall the figures. Do you have that,.
Dr. Goldenweiser ?
Dr. G oldenweiser. Gold certificates held by the Reserve banks
amount to $5,400,000,000.
Mr. F ord. $7,866,000,000 in 1934.
Governor E ccees. That would probably include the gold held by
the Treasury as well. The Federal Reserve would not have that.
Mr. S pence. The amount of gold reserves upon which the circu
lation is based; what would that be?
Governor E ccles. The law requires a 40-percent reserve against
Federal Reserve notes in circulation. Those gold certificates, plus
the Government bonds or commercial jiaper, or both, are held by the
Federal Reserve agent as collateral. In the absence of commercial
paper, it was necessary to accept Government bonds to make up the
60-percent difference between the 40-percent gold and the total of
notes outstanding.
Mr. S pence. And this act is that 40 percent of the gold reserve
is the sole basis o f the circulation?
Governor E ccles. Yes; 40-percent gold reserve is the only limita
tion. There is also a reserve required against the deposits of the
Reserve banks, which is 35 percent in gold or lawful money.
Mr. S pence. And the circulation, based upon the gold now held,
would be two and one-half times that?
Governor E ccles. S o far as gold is concerned----Mr. S pence. S o far as gold is concerned?
Governor E ccles. Yes; there is almost sufficient gold now to back
up the outstanding currency 1 0 0 percent.
Mr. S pence. A s I understand, the Federal agent was the agent of
the Federal Reserve Board in its dealings with the Federal Reserve
banks?
BANKING ACT OF 1 9 3 5
307
Governor E ccles. The Federal Reserve agent is the chairman of
the board of directors, and is appointed by the Federal Reserve
Board and not by the banks, and he is the person at the bank through
whom the Federal Reserve Board deals.
Mr. S pence. He, in a sense, represents the Federal Reserve Board
in dealings with the Federal Reserve bank; is not that the philosophy
of it?
Governor E ccles. That is right.
Mr. S pence. And he saw that the Federal Reserve banks complied
with the requirements of the Federal Reserve Board. How will
those functions be performed now?
Governor E ccles. Through the Governor and the chairman, who
will be one and the same. Instead of having a dual organization,
which creates cleavage and which is bad administration, it is pro
posed to combine the two offices. That is one proposal in the bill
to which there has been practically no opposition from any source.
The bill will save, in the operation of the Federal Reserve System,
about $400,000 a year.
Mr. S pence. But the functions that were performed by the Fed
eral Reserve agent are still being performed, but the Board will
select the person to perform them?
Governor E ccles. One of the principal functions of the agent was
to hold the collateral as a sort of trustee against the notes which were
issued. He was responsible at all times to see to it that these gold
certificates and these Government bonds or commercial paper were
deposited with him in sufficient amount to meet the legal require
ments for the issue of notes.
Mr. S pence. Under the law, one Federal Reserve bank may redis
count—it says under the orders of the Board and regulations pre
scribed by the Board, may rediscount its paper in other Federal
Reserve banks. To what extent has that been taken advantage o f ?
Mr. E ccles. I could not tell you just to what extent. I under
stand, however, that in 1920 and 1921 there was some of that done,
when the reserves of the Reserve banks got down to practically the
legal limit and they were unable to extend further accommodations
and, at the same time, have sufficient gold to meet the legal require
ments for deposit and note-coverage. Do you remember to what
extent that was, Dr. Goldenweiser ?
Dr. G oldenweiser. In 1920, from memory, about $250,000,000.
Mr. E ccles. H ow many banks were involved in the rediscount?
Dr. G oldenweiser. There were 11.
Mr. S pence. That provision, really, in effect, makes the Federal
Reserve bank a central bank, does it not ?
Governor E ccles. I t does so only to the extent of making the re
sources of the system available for the benefit of all the member
banks, and that is all.
Mr. S pence. There is one other thing: I believe you said that you
thought that some policy ought to be prescribed with reference to
the administration of the bill, and you made a suggestion, or you
suggested an amendment. Will you tell us what that amendment
was, again ?
Governor E ccles. I suggested that I thought that fixing the price
level as an objective would not be desirable, and as an alternative
308
BANKING ACT OF 19 3 5
I su g g e ste d th a t so m e th in g lik e th is m ig h t be b etter as a d efin itio n
o f o b je ctiv e:
It shall be the duty of the Federal Reserve Board to exercise such powers
as it possesses to promote conditions making for business stability and to miti
gate, by its influence, unstabilizing fluctuations in the general level of produc
tion, trade, prices, and employment, so far as may be possible within the scope
of monetary action.
That is better, I feel.
Mr. W illiams. That would be their duty even if you did not put
it in there, would it not ?
Governor E ccles. The present law does not give them such a duty,
at all. The present law only provides for----Mr. W illiams. Ought it not to be their duty?
Governor E ccles. I do not know. The law has looked upon the
Federal Reserve banks as agencies to provide credit for agriculture,
commerce, and industry. The original act never contemplated the
Federal Reserve bank as a monetary factor, as I understand it.
Mr. Cross. May I interject right there, that the testimony of the
members of the Reserve Board and some of the governors—they
testified that it was not their duty and they did not consider they
had anything to do with it.
Governor E ccles. I think it was thought that, if credit was pro
vided for commerce, agriculture, and industry, that is all that could
be done toward creating business stability.
M r. W illiams . Y ou th in k th e v m a d e no effo rt a lo n g th a t lin e, at
a ll?
Governor E ccles. What is that?
M r. W illiams . Y ou th in k th e y h a v e p a id no a tte n tio n to th e ob jec
tiv e th a t y o u set ou t th ere, h e re to fo r e ?
Governor E ccles. I would not say that. Of course, the powers
of the Board have been limited, their authority and their duties----Mr. W illiams. And they made no effort, at all, to stabilize business
conditions and mitigate the evil effect of fluctuating prices and
unemployment, and things of that kind?
Governor E ccles. I have only been on the Board, as you know,
for a very short time, and what the Board may have done is a matter
of record, and it would appear in the record, from the condition of
unemployment, the fluctuations of business activity, that whatever
may have been done was a long way from creating stable conditions.
Whether a condition of business stability can be brought about by
monetary policy, only time can determine; and, as I stated the other
day, monetary action has its limitations and has to be considered in
connection with the tax program and Government expenditures.
Mr. W illiams. I do not mean to be understood to be opposed to
the suggestion you made here. I had had the impression that was
their duty all right, and I still think, if it has not been their duty,
we ought to make it their duty.
Governor E ccles. I do not believe that under the existing law they
are required to carry out or to perform that function.
The C hairman . Well, the fact is, is it not, Governor Eccles, that
there was an attempt to incorporate specific directions of that type
in the original Federal Reserve Act, and finally, it was left out of
the bill.
Mr. F arley. Mr. Chairman, may I have an opportunity-----
BANKING ACT OF 193 5
309
T h e C h a ir m a n . Mr. Spence, w ill you y ie ld to Mr. Farlej^?
Mr. S pence. I just want to ask a question. Governor Eccles, do
you consider that this bill, if passed, will be an attempt by the Con
gress to exercise its constitutional legislative function to regulate
the value of money?
Mr. E ccles. I should say that it would be a case of Congress dele
gating to a body that power and that responsibility, as defined in this
statement that I just read. We often think of regulating the value
of money as having reference to gold.
Mr. S pence. Well, as a corollary to that, that would be regulating
the price levels, too, would it not ?
Governor E ccles. It would be an attempt to regulate the price
level. If these instructions or requirements are prescribed for the Fed
eral Reserve Board the price level will be one of the objectives, but
not the only objective. Others will be stable production and employ
ment.
Mr. S pence. Well, how far do you think you could go in obtaining
some definite objective as to the regulation of price levels?
Governor E ccles. The controlling of production and the fixation
of prices can tend to create whatever price level is desired.
By the operation of the National Recovery Act and the Agricul
tural Adjustment Administration you can restrict production and
bring about a rise in prices; but it seems to me that the thing
that we are most interested in is to get a maximum of production in
the country as a whole and a maximum of consumption. That is far
more important than the price level.
In order to be able to get a maximum of production, it is necessary
to get a proper distribution, and the question of price naturally has
to enter into the problem. I do not know that I could add anything
to what I said when Mr. Cross was examining me with reference tothe problem of prices.
Mr. C ross. May I ask a question ?
Mr. S pence. Go right ahead.
Mr. Cross. Governor, you said that three factors come in there:
The question of price and production and employment. If you
check the price level when the country was prosperous and when its
indebtedness was created, much of it fixed by bonds and taxes, and
the cheap dollar compared to the present dollar that existed—if you
get a price level that is comparable to the price level then in that
period, is not that the very thing upon which depends both produc
tion and employment? In other words, to get employment you
have got to get the price to where the producer makes a profit—a
probable profit, because not everybody makes a profit, of course, but
under good management, he can make a profit, and when he can do
that, he employs labor and in turn labor is given a purchasing
power and the country can function as a result of that, and you get
rid of your unemployment and you keep a stable product and you
keep a stable price level on the standard you take of some prosperous
year.
Governor E ccles. Y ou know, from 1923 up to about 1929, we had
a fairly stable price level. Now, why was it that that stable price
level became an unstable price level and we got into the depression
we did ?
1
310
BANKING ACT OF 1 9 3 5
Mr. Ckoss. If you will let me answer that, if you put that as a
question----Governor E ccles. I think maybe asking- a question is the best way
for me to answer it.
Mr. Cross. I would say the Federal Reserve Board fell down in
its duty, or fell down under the law as it existed—I could not say
it was a duty. But in addition to that, we did not have then the
securities act to control the wild speculative gambling that took
place throughout the country on the stock exchanges. Now, we have
controlled it largely through the laws enacted in the Seventy-second
Congress.
Governor E ccles. Y ou assume that, if the volume of money in
relation to total production is kept at a certain ratio, you would
thereby maintain a uniform or fixed price.
Mr. Cross. Not a fixed price of anything?
Governor E ccles. N o, I know; 1 mean a fixed index, uniform
prices according to some index. And you overlook, it seems to me,
the income velocity, which is an element as important in our economy
as is the quantity of money. As I indicated the other day in reading
the quotations from the Brookings Institution report on our ca
pacity to consume, there must be a more equitable distribution of
income than existed in 1928 and 1929, in order to keep up income
velocity and to prevent production capacity getting all out of bal
ance or relationship with consumer buying power.
Mr. F ord. In other words, Governor, if you have a national in
come of $100,000,000,000, but if it was confined to a small percentage
of the people in the country, it would not accomplish the result of
wide-spread purchasing power, would it?
Governor E ccles. I t would only so long as those receiving this
income continued to spend or invest those funds, but you reach a
point where----Mr. F ord. A saturation point, in other words?
Governor E ccles. They no longer invest.
Mr. F arley. Mr. Chairman, may I ask the Governor a few ques
tions about the bill itself?
Mr. S pence. When I get through; yes.
The C hairman . When Mr. Spence gets through, I will recognize
you immediately, Mr. Farley.
Mr. S pence. Governor, the maintenance of a stable dollar is some
thing that is very greatly to be desired, is it not, because if the
dollar would raise 10 percent in value and buying power, the wealth
of the Nation would be raised that much. For instance, if there
was $400,000,000,000 of wealth in the Nation and the dollar raised
its buying power, or was increased 10 percent, that would reduce the
money value of the wealth of the Nation $40,000,000,000, would it
not?
Governor E ccles. A stable price level is very desirable. If I
knew of some way to maintain stable prices, and at the same time
maximum production, naturally I would be very much in favor
of pursuing that method. But prices are influenced by so many
factors, crop failures, for instance, prices of imported goods as they
are influenced by the variation in the exchanges—those are two
factors that we may have very little or no control over, and they all
enter into the price structure.
BANKING ACT OF 193 5
311
Mr. S pence. N ow, in this bill we state a new policy, or new
standards, or new criterions, or new objectives to be attained. The
provision here in regard to the open-market committee says it shall
set forth policies that, in the judgment of the committee, should
be followed with respect to the open-market operation of the Federal
Reserve bank. Now, if this is a delegation of constituted legislative
power to regulate money, would it not be necessary for the Congress,
in making that delegation to state some objective to be attained?
I have not gone into that, but I want to read a paragraph from a
decision of the Supreme Court in Panama Refining Company et al.
v. R yan et al.—one of the “ hot-oil5 cases:
5
The Constitution provides that “ all legislative powers herein granted shall
he vested in a Congress of the United States, which shall consist of a Senate
and House of Representatives” (art. I, sec. 1). And the Congress is em
powered “ to make all laws which shall be necessary and proper to carry into
execution” it general powers art. I, sec. 8, par. IS). The Congress mani
festly is not permited to abdicate, or to transfer to others, the essential legis
lative functions with which it is thus vested. Undoubtedly legislation must
■often be adapted to complex conditions involving a host of details with which
the national legislative cannot deal directly. The Constitution has never been
regarded as denying to the Congress the necessary resources of flexibility and
practicality, which will enable it to perform its function in laying down
policies and establishing standards, while leaving to selected instrumentalities
the making of subordinate rules within prescribed limits and the determination
of facts to which the policy as declared by the legislature is to apply. Without
capacity to give authorizations of that sort we should have the anomaly of a
legislative power when in many circumstances calling for its exertion would be
but a futility. But the constant recognition of the necessity and validity of
such provisions, and the wide range of administi’ative authority which has been
developed by means of them, cannot be allowed to obscure the limitations of the
authority to delegate, if our constitutional system is to be maintained.
I have not gone into that question, but do you not think there
ought to be some objective, definite objective placed in the law?
Governor E c c i .e s . Y ou mean as to price?
Mr. S pence. A s to price level, the purchasing power of the
dollar?
Governor E ccles. By purchasing power of the dollar you mean
the price level?
Mr. S pence. The price level; yes.
Governor E ccl.es. If the price level is placed in the law’ as an
objective for the Board to reach as a result of monetary action, and
the other factors are left out, we may get the result of having a
stable price level and not getting any of the other factors which we
want. I believe that the price level is less important than employ
ment. I think the most important element, after all, is total pro
duction, because that is the real measure of wealth. I do not
know7 what monetary policy could possibly be pursued to bring
about, a fixed price level and. maintain it; I do not know how that
would be possible.
Mr. S pence. Well, the price level does have a very great relation
to the production, does it not?
Governor E ccles. I t may or may not. The thing that, after all,
lias relation to production is the buying power of the people of the
country as a whole. When the national income is increasing faster
than production, prices rise and production is stimulated thereby;
and w
rhen the national income is diminishing, prices decline, and
production is diminished thereby.
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BANKING ACT OF 19 3 5
Therefore, it seems to me that the problem of the national income
is a determining factor with reference to prices and production. So,,
rather than an arbitrary fixation of prices, if we could get an in
crease in the national income, we would get an increase in pro
duction and an increase in prices; and that is why in 1929, after
we had had a period from 1923 to 1929 of stable prices—because
we had had reasonably full employment during that period—and
then our national income started to diminish and we got into a
cyclical depression, prices went down and production went down.
M r. S pence. D o y o u th in k th e c h a n g in g p ric e le v el com es fr o m
c o n d itio n s o ver w h ic h w e h a v e n o con tro l?
Governor E ccles. Over which we do not have anything like
complete control. We possibly can exercise some control through
monetary action; but I do not think that we can exercise absolute
control, unless we undertake to fix prices, by legislation, and attempt
to regulate production accordingly. Even then, I doubt that we
could maintain stability of the price structure as a whole.
Mr. S pence. The power given to the Congress, in the Constitu
tion, to regulate the value of money is a power you do not think
can be exercised?
Governor E ccles. I do not think it can be exercised to the extent
of maintaining a uniform price level, and at the same time keeping
up maximum production.
Mr. S pence. Well, a good many of our ills have resulted from
changing the value of the dollar and the fluctuating price level.
Governor E ccles. Oh, yes; but the changing value, as I say, has
been brought about primarily through the decrease in the national
income, which was brought about through the inequitable distribu
tion of income. That is where the trouble commenced very largely.
Mr. S pence. How far do you think legislation can go to stabilize
the value of the dollar ? Suppose we set the objective that we might
not hit, but could we come anywhere near it?
Governor E ccles. I do not know how. Certainly, interest rates
could not be very much lower than they are now. The volume of
money that is not in use is very great, and to increase it, it seems to
me, would accomplish nothing toward either price raising or increas
ing business activity.
We have a potential increase of $20,000,000,000 in the supply of
money. The excess reserves provide that. True, if Government
spending were greatly increased, you would get an increase in the
price level, because you would get an increase in the national income,
and you would get an inflationary or reflationary effect as the result
of that increased spending.
Mr. S pence. That would be an artificial condition?
Governor E ccles. It would bring about the same result as an
equal volume of spending by our people of their own funds, or their
being willing to borrow and spend a like amount. That would in
ject into the circulation an increased amount of money and increase
the velocity of money and raise the price level, and the buying power
of the people would increase through that spending, and production
would then have to increase to meet the increased buying power, and
with the general increases, prices should tend upward.
Mr. C ross. May I ask a question ?
The C hairman . Mr. Farley is next.
BANKING ACT OF 19 3 5
313
Mr. S pence. There is one question more. I have gotten so many
letters from State banks—there is a provision in the law that you
•can waive the capital requirements of the State banks and then give
them such additional time to conform to the requirements as the
Board may, by regulations, prescribe. A good many of them feel
that they ought to know just how long they have to comply with
these requirements, when they become members of the Federal Re
serve System, with the ultimate purpose of remaining in.
Governor E ccles. I suggested an amendment to that the other
day that would give the Board the power not only to waive the capi
tal requirements, but all other requirements, and also to permit banks
to continue with less than $50,000 capital, if it is adequate in rela
tion to their liabilities. So there would be no time limit if a bank
with $25,000 capital did not need a greater capital in relation to its
deposit liability.
Mr. S pence. Well, I suppose it works both ways.
Governor E ccles. That was the suggested amendment to liberal
ize that section.
The C hairman . All right, Mr. Farley.
Mr. F arley. That is right in line, gentlemen, with what I had in
mind. In section 202 you provide----Governor E ccles. Where?
Mr. F arley. Section 202, that the time in which this shall become
effective is July 1, 1937. But why is there any objection to writing
into the law 1940, for instance?
Governor E ccles. That is not in the banking bill of 1935. As I
understand it, that is in the banking act which was passed in 1933.
Personally, I see no reason for an extension of time in lieu of the
provisions that are being made, in order to make it possible to admit
all the State nonmember banks which are insured. I believe that it
would be in the interest of those banks and the System as a whole to
be members of the Federal Reserve System, if this legislation broad
ening the eligibility features is passed.
Mr. F arley. I wanted to ask this, because in the State of Indiana we
have, in round numbers, 420 banks, and only six now are in the Federal
Reserve, and I have the fear that, if they are compelled to qualify by
July 1, 1937, there will be many of them left out. Do you not think
that, if the insurance feature is withdrawn from these banks, because
they have not qualified, it is just the same as closing the banks?
Governor E ccles. Why do you think they cannot qualify ?
Mr. F arley. Well, they might be able to qualify in a little addi
tional time, but if the rules governing the examination of these banks
continue as rigid as they have been for some months past, they prob
ably would not be able to qualify, because they have a lot of frozen
assets yet.
Governor E ccles. I am sure that, so far as the present Federal Re
serve Board is concerned, they realize fully that situation, and it is
their expectation to take into the System all. or practically all, banks
which are insured. It is for that reason that we are proposing this
amendment to the Federal Reserve Act.
It is true that, as a condition of admission to membership, the Fed
eral Reserve Board has rather rigid regulations, which are not require
ments of law. They require banks to charge off all paper that is
classified as a loss, by the reserve examiners, and all depreciation on
314
BANKING ACT OF 193 5
bonds except those in the four highest classifications. However, the
Federal Reserve Board, under this provision, would be expected to
give the same consideration to the bond accounts of these banks that
is now.given to the bond accounts of existing member banks both by
the Reserve Board and by the Comptroller’s office.
Mr. F arley. Well, the inference, then, is that you mean to under
take to liberalize them; and I do not mind saying that, from the
impression I have of you and your public work, I should not be much
afraid that would not be done.
Why object to writing it into the law and making it 1940? I have
in mind a case where I tried, a year and a half ago, to get a bank into
the Federal Reserve System, and they were declined, because they had
something like $360,000 of what they counted doubtful paper. Now,
even in these hard times, that bank has been able to reduce that now
over $200,000, and collect----Governor E ccles. When was that, you say?
Mr. F arley. About a year and a half ago.
Governor E ccles. With the guaranteeing of bank deposits by the
Federal Deposit Insurance Corporation and with help from the Re
construction Finance Corporation, with reference to capital struc
tures, providing funds at 3¥2 percent for preferred stock, the banking
problem is very different than it was. As a practical matter, it seems
to me that the banks which are insured by the Deposit Insurance Cor
poration should be admitted to membership in the Reserve System.
There would be no point in making requirements upon those banks
which would exclude them from the Reserve System, and thus exclude
them from the benefits of the Deposit Insurance Corporation, and
possibly close them. That would be a foolhardy thing to do.
So long as the depositor is protected by the Federal Deposit Insur
ance, there should be an effort made to get all of the banks into the
System, so as to have unification of the banking system and thus be
able more effectively to carry out a monetary policy; and by that
means, also, greatly to assist in dealing with deflation as well as
inflation.
It is true that by far the greatest decline, both as to the percentages
of deposits and as to total deposits, was in nonmember State banks,
practically twice as great as it was in the member banks.
Mr. G oldsborough. I did not catch that.
Governor E ccles. I said the shrinkage in deposits of nonmember
banks, the deflation in nonmembers banks from the peak of their
highest deposits down to their lowest deposits—in other words, the
deflation of nonmember State banks—was almost twice as great as
the deflation in the deposits of member banks.
That was a very great hardship on the communities which those
T
banks served, and the bank failures were far greater in the case of
nonmember State banks than in the case of member banks, both State
and national, and that of course----Mr. G oldsborough. I would like to inject that that was not the
condition in the State of Maryland; it was the failure of the large
member banks in the important cities which carried the reserves of
the country banks which burst the nonmember country banks.
Governor E ccles. I think there are exceptions all over the United
States; but what I am speaking of is the United States as a whole.
I am taking the entire country.
BANKING ACT OF 19 3 5
315
The C hairman . Somebody in the Senate, Governor Eccies, and I
believe it was Senator Norb'eck—I never ran it down like I should
possibly have done—gave the figures, as I remember, for the year
1931, which show that the deposits, the casting up of accounts, showed
that there were as many deposits tied up in the failed national banks
as there were in the State banks; that I think the figures would show
that, in 1931, there were more deposits tied up in failed national
banks in the State of New York and in the State of Pennsylvania
than there were in the State banks. I would not say that I could not
be mistaken in those figures, because I am not an authority, but that
is my recollection.
But let me ask you this question: What happened was that the
failures first took place among the smaller banks; and of course that
involved, at least in number, the State banks more than the national
banks, and the nomnember banks probably more than the member
banks; but when the fire spread from the back alleys and side streets
to the mansion on the front and to the important centers, and began
to involve the large banks, they were not helpless; they did not stand
by and let the fire ruin them, but they came to Congress and had us
open the Treasury of the United States to them.
So that it seenis to me that an appraisal of that situation should
be taken in the light of the fact that the processes were started by
resort to the Federal Treasury, and never allowed to reach that end.
So we do not know what the complete picture might have shown.
Mr. G oldsborough. I think it ought to be stated here, as well as
any other time, that another direct cause of the failure of the small
banks was the fact that the large national member banks in the great
centers, through the years immediately preceding 1929, unloaded se
curities on those banks, practically all of which securities afterward
were shown to be sour.
Governor E ccles. I have pointed out the effect of the bond acount
when I was upholding the real-estate loan provision.
With reference to the chairman’s remarks, I am not here making
any odious comparisons between member and nonmember banks, for
the purpose of putting the nonmember banks to any disadvantage. I
am only trying to argue for the need of all banks to be members of
the Reserve System and have available to them borrowing and redis
count facilities of that System, as well as of deposit insurance, so
that we may avoid fires starting in the back alleys, et cetera; because,
after all. the net result of the conflagration of the bank failures is
finally to burn down the System, if it is not stopped; and in the
process it is not only the bankers and the stockholders of the banks
that we are directly or particularly interested in, but it seems to me
we are interested in this problem as the duty of Congress and as the
duty of officials who are responsible for our money situation.
Mr. G oldsborough. Mr. Eccies, right there. Yesterday, I think,
3T
ou stated that the stockholders in the Federal Reserve System
receive 6 percent on their investments?
Governor E ccles. That is right.
Mr. G oldsborough. But the Federal Reserve System, in turn does
not redeposit those funds in those little country banks; so that, in
case of an investment which they make in the Federal Reserve
System, they only get interest once; whereas on the ordinary in
316
BANKING ACT OF 19 3 5
vestment, where they get a redeposit, they may lend the same
money 10 times. Is not that the reason why they object to coming
into the Federal Reserve System, because they do not get the ben
efit of the deposits which they can reloan ?
Governor E ccles. A s I understand it, most State laws provide
that State banks—whether members or nomnembers they are sub
ject to State laws—are required to maintain reserves, either in
money or in balances with other banks, or both, of a certain per
centage of their deposits. Now, I know the requirement for State
banks in two of the Western States that I am familiar with is 15
percent of demand deposits and 10 percent of time deposits, which
must be carried in cash or with other banks.
Mr. G oldsborougii. Yes; but that does not answer my question.
I do not know whether you want to direct your attention to my ques
tion, but what I asked was, whether or not, as a matter of fact,
when one of these small country banks enters the Federal Reserve
System and gets its 6 percent, that is all the interest it gets on
that particular investment. The investment is not redeposited with
them so they can loan it over again, as the ordinary investment is
which they make.
For instance, if they loan me $5,000, they expect me to simply
take a bank book from them, so they can reloan that same mone}r.
Governor E ccles. When you buy a Government bond, the pro
ceeds are not reinvested, or when they buy other bonds that are
marketable, we will say, or listed on the New York Exchange, or
when they buy Canadian bonds or other bonds, those funds are not
redeposited with them.
Mr. G oldsborougli. They are not redeposited with the country
bank, but they are redeposited with some bank ?
Governor E ccles. That is correct.
Mr. G oldsborougii. But the small banks are not loaded up with
Government bonds.
Governor E ccles. Their percentage of Government bonds is pretty
high; it is much higher than it was, because there was no other
place----Mr. G oldsborougii. When one of these national banks buys
$100,000 worth of bonds, all the Government gets is an entry bv
some $25-a-week clerk to the effect that the Government has depos
ited or has a deposit in that bank of $100,000. That is what
happens.
The C hairman . Just one moment, in connection with what has
been said, I think it might be well to call attention to the situation:
It means more to the small bank, the bank of small capital, to tie
up 6 percent of its stock in the Federal Reserve bank than it does
for the large institution to carry that burden, it would seem to me.
The little banks, under the old order, were permitted to carry their
reserves in a correspondent bank, upon which they were accustomed
to draw interest, which was no little thing to small banks. That
operated in this way: In the South, for instance, or in the West,
the demand for credit is seasonal. When marketing time came and
collections came in, the bank had a plan by which it could use its
surplus funds, to put them to earning, by carrying them to the
city bank; and that, in turn, gave them a large borrowing privi
BANKING ACT OF 19 35
317
lege during seasons when the demand for loans was accentuated.
So that was an advantage that they enjoyed.
In addition to that, the small banks, members of the system, had
to surrender their right to charge for the services rendered in re
mitting checks, and that is, of course, a big item to any small bank
where the problem of overhead is great, and where the volume of
business is small, and, of course, that requirement kept many banks
from joining the Federal Reserve System. And those banks that
were automatically taken into the Federal Reserve System—the na
tional banks—conducted a war against the efforts of the Federal
Reserve Board to take away such earnings, as long as they were able
to carry on the fight. They finally lost through legislative action and
processes that I will not take the time now to review, but which were
not altogether justifiable, in my view of the matter.
You may resume, Mr. Spence.
Mr. S pence. I want to address----Mr. F arley. There is one other question I want to ask, in connec
tion with your statement of the wide difference between the assets
of the nonmember banks and the member banks. Was that arrived
at by the same committee’s examination ?
Governor E ccles. I do not just understand your question.
Mr. F arley. Y ou said, a few moments ago, that the nonmember
banks had a much larger amount of worthless assets than the member
banks. Did the same group examine the nonmember banks, or arrive
at the same conclusion ?
Governor E ccles. Y ou must have misunderstood me. I did n o t
make a comparison between the assets of the member and nonmember
banks.
Mr. F arley. Then I misunderstood you.
Mr. E ccles. I made no comparison between the assets, because I
am not familiar with the condition of the assets of the nonmember
banks.
Mr. F arley. I thought you said that the losses were greater in the
nonmember banks than in the member banks, or their portfolios were
not so good.
Governor E ccles. N o ; what I said was, that the shrinkage in de
posits and the liquidation at nonmember banks was far greater than
that at member banks; that the deposit deflation, as the result of
bank closings and credit contraction in the nonmember banks----Mr. F arley. I get the idea.
Governor E ccles. Was about twice as great as that in the member
banks, in proportion to the total deposits of each group of banks.
Mr. F arley. I have a letter in which the Indiana Bankers’ Asso
ciation makes this very emphatic statement:
The Indiana Bankers’ Association is unalterably opposed to central banking
in any form, and especially to a central banking system in which credit grant
ing and management will be vested in any political body.
That gets back to the question of control. You thought, the other
day, there was no danger of anything of that kind happening.
Governor E ccles. I see no reason to expect the Federal Reserve
System, under this bill, to be any more subject to political control
than has been the case in the past under existing legislation.
Mr. F arley. I remember your answer. There is another item I
would like to get a little information on. I have read your speech
127297— 35 ------ 21
318
BANKING ACT OF 1 9 3 5
at Columbus over several times, and it is a very excellent presentation
of the subject.
I personally think you never can have a price level until you con
trol all products of every kind and description, from the farmer to
the market, or to the consumer. I do not ask you to say whether you
do or not concur in that suggestion. But now, about this provision by
which you are going out and loan on all types of real estate, making
provision for the rediscount of those securities at the Fecleral Reserve
bank, and then permit the Federal Reserve itself to issue currency
against all securities. I t seems to me that the wildest inflationist in
the w
rorld could not have had a better term than that. When you
take on anything and issue securities—and issue currency against
those securities, it seems to me it is just like Germany did at the end
of the war. Is there anything in that?
Governor E ccles. I though I had answered that point. That
question has been asked a number of times. I will try to answer it
very briefly and cover the subject. Three phases of this legislation
have a bearing on this matter: Changing eligibility requirements,
permitting long-term real-estate loans, and eliminating collateral
requirements for Federal Reserve notes.
In the first place, I think that you will probably agree that the
amount of Federal Reserve notes that go into circulation has no
relationship to the collateral requirements. I attempted this morn
ing, and yesterday, and I think the day before yesterday, to explain
why that is the case.
Mr. F arley. If that is already in the record, Governor, it is not
necessary to repeat it.
Governor E ccles. With reference to the question of eligibility,
what we are proposing is to permit the banks, subject to rules and
regulations by the Board, not only to discount eligible paper, but
also to make advances to member banks on notes of the member
banks, secured by any of their sound assets. That does not mean
that the Reserve bank would have the power to discount a 20-year
mortgage. What it does mean is this: That the Board could, by
regulation, permit the Reserve banks to loan to member banks on
bills payable of the member banks, for such---- Mr. G oldsborough. A promissory note; that is what you mean ?
Governor E ccles. That is right, a promissory note, secured by
bonds, mortgages, collateral loans, on a basis to be determined by
each Reserve bank to be a sound basis for the loan.
Those loans would be made for periods of 90 days or 6 months,
according to the regulations that the Reserve Board may make wflth
reference to maturities. The member banks in the aggregate do not
borrow for the purpose of reloaning. What is usually done is that
the banks borrow to meet a shrinkage of deposits, the shifting of
funds back and forth, which ahvays happens seasonally under normal
conditions, and it is usually seasonal borrowing.
If an emergency situation developed, the only way that the fire
of deflation and bank closing can be stopped is by the banks being
able to meet the demands of their depositors, and when they are able
to do that, the depositors do not want their money. But when the
depositors find banks are unable to meet the demands and banks
start to close, it is a progressive condition of deflation that develops;
and, therefore, this eligibility feature becomes effective.
BANKING ACT OF 19 3 5
319
By the way, I believe that the governors of the Federal Reserve
banks and most of the member banks favor that requirement and
recognize the advantage of it in protecting the banking system. The
banking system, as a whole, would have to expand its credit by
$2 0 ,0 0 0 ,0 0 0 , 0 0 0 before there would be any occasion to do any borrow
ing from the Reserve System, on the basis of present excess reserves.
The amount of real-estate loans to be made is not determined by
the member bank’s ability to borrow from the Federal Reserve bank,
but by the percentage of time deposits, which, in itself, puts a limi
tation upon the expansion of real-estate loans.
I do not know that I answered your question----Mr. F arley. Well, I have 2 or 3 other little questions I want
to get a little light on. Does the practice still prevail of buying
foreign bonds?
Governor E ccles. I do not know to what extent. I would think,
however, that if experience is any teacher, there would not be any
great traffic today in foreign bonds. There are, however, certain
foreign bonds, such as the Canadian issues, if that could be consid
ered foreign, and Australian issues, and British bonds, and I think
the bonds of Finland, and Poland, and Scandinavian bonds, which
maintain their strength, their marketability, and have a very much
better record than many domestic bonds of our cities, and counties,
and States.
Generally speaking, foreign bond accounts of banks have been
disastrous to them, particularly some of the South American issues
and some of the European issues.
Mr. F arley. Would you care to state whether they need the Postal
Savings System now, Governor?
Governor E ccles. You mean is it a necessity?
Mr. F arley. Well, is it a good business proposition?
Governor E ccles. For the Government?
Mr. F arley. Yes; for the Government?
Governor E ccles. I t is a good business proposition to the extent
that they have been able to get money for 2 percent. I do not think
that it is necessary for the Government for its own interests. I think
the Postal Savings System has operated for the convenience and
benefit and security of citizens who prefer to deposit up to $2,500
with the Government through the Postal System.
Mr. F arley. Well, would the guaranteed bank-deposit proposi
tion—
Mr. E ccles. I t is less needed.
Mr. F arley. I think it is obsolete and ought to be put in the place
where the interest that would be collected would be so low that
nobody would even try it.
Governor E ccles. I know that bankers, generally speaking, feel
that there is a competitive relationship, and I think many of them
would like to see the Postal Savings System eliminated, and feel
that it is unnecessary in view of the Federal Deposit Insurance Cor
poration insuring $5,000 accounts. I do not believe it is very im
portant, however, because the total funds in the Postal Savings Sys
tem I think are somewhere around $1 ,0 0 0 ,0 0 0 ,0 0 0 , and that is a com
paratively small percentage of the total deposits of the banking
system.
i
320
BANKING ACT OF 1 9 3 5
Mr. F arley. On page 69 of this act, in paragraph (g), we wrote
into the law in 1933 that bank directors could not borrow from their
own banks. Has any good purpose been served by that act ? In
other words, do you not think that it is time that we liberalized
that?
Governor E ccles. I t is not bank directors, it is bank officers.
Mr. F arley. Well, bank officers.
Mr. E ccles. Yes. I think it is a very constructive piece of legis
lation. There is not any question that, in principle, officers of a
bank should not be in position to loan to themselves funds of the
bank. It may be very difficult for an officer to be impartial in deal
ing with himself.
However, to the extent that officers of banks have loans in banks,
which were made prior to the passage of the legislation, those loans
should be treated, it seems to me, with due regard to the ability of
the borrower to meet the obligations. There is a time limitation
provided in the law, which I think is July 1935.
Mr. F arley. June 16, 1935.
Governor E ccles. June 16, 1935, and, of course, there are many
officers’ loans in banks that it has been impossible, during this period
of depression, shrinkage of values, and lack of market for securities
to meet by June 16, and it is proposed in section 3 of this bill that
that time be extended for 3 years.
Mr. F arley. Three years from June 16, 1935?
Governor E ccles. Yes.
Mr. F arley. N ow, would it not be infinitesimally better to pro
hibit bank officers from borrowing outside of their own bank, and
thus compel an officer to do his borrowing from the bank with which
he is connected, and if desirable and with the approval of the
majority of the board, to the end that his board may be able at all
times to know what he is doing, and also place some responsibility
on the board. Is not there this danger, that to permit the executive
officers to borrow outside of their own banks could prove very dan
gerous ? There is nothing to prevent an officer from an inland bank
to borrow excessively from a large and distant city bank, for which
he may furnish proper security, but which might involve him beyond
the point where his directors would consider it safe for him to go?
Governor E ccles. There is in the law a provision that requires
officers who borrow outside of their own banks to report those loans
to the chairman of the board, or the president of the bank; and if it
happens to be the president or chairman himself, he is required to
report to the board of directors.
I feel that officers should be prohibited from borrowing from their
own banks, and I feel that they should also be required, if they
borrow outside, to report their borrowings, as now provided in
the law.
Bank officers in the past have always been required to report their
loans wuthin their own bank to the board of directors, because it is
the duty of the board of directors of a bank to approve all loans,
and, therefore, officers’ loans in their own banks have been reported
to the boards of directors; but we have found that not only officers’
loans but many loans to directors have, in instances, created real
banking difficulties, and I cannot help but feel that, in view of the rec
ord of the past, the prohibition now imposed should be continued,
BACKING ACT OF 1 9 3 5
321
with the extension of 3 years for those officers’ loans which cannot be
paid at the expiration of the period on June 16 of this year.
Mr. F arley. Have you already put in the record whether you
think w have money enough in circulation or not ?
re
Governor E ccles. If I have not, I am willing to.
Mr. F arley. In your speech at Columbus, you stated there were
$24,000,000,000 in circulation. Do you think it would be a good
thing if we increased that circulation ?
Governor E ccles. H ow is it possible to increase it ?
Mr. F arley. Why do we not use the authority we gave the execu
tive department to issue $3,000,000,000, to take up some of these
bonds bearing interest?
Governor E ccles. H ow would that increase circulation?
Mr. F arley. Well, it would give these banks the actual cash
instead of bonds.
Governor E ccles. What would they do with the cash? They
would immediately send it back to the Federal Reserve bank and
it would be in the Reserve banks as their excess reserves, and actual
circulation would not change. The banks would have, in lieu of
Government bonds, $3,000,000,000 additional excess reserves.
Mr. F arley. I was in a bank not so long ago and the banker made
this statement, and he said he wanted to sell $50,000 worth of. bonds,
and he could get immediate credit without any trouble if he called
Chicago and New York, but he could not dispose of them. He
wanted the money on the bonds he had in his safe----Governor E ccles. Y ou mean Government bonds?
Mr. F arley. Yes.
Governor E ccles. Y ou mean he could not sell Government bonds?
Mr. F arley. That is the statement that he made—that is, without
a little sacrifice at that time.
Governor E ccles. He is misaken. He could have gone to the
Federal Reserve bank and borrowed par on those bonds and possibly
at a discount rate of 2 percent. If they were 3-percent bonds he
would have gotton more than the interest on his loan. He could
have borrowed the funds at par from the Reserve bank.
Mr. F arley. In your judgment, we do not need any more circulat
ing medium right now?
Governor E ccles. In my judgment, you cannot possibly force out
and keep in circulation more currency than you have now. You
may substitute----Mr. Cross. Right there, may I ask a question?
Governor, if that be true that this money would go right back—
if that be true—and if you were to take the $3,000,000,000 that he
refers to and buys bonds with it and you could not keep that money
in circulation, it would go right back out of circulation?
Governor E ccles. That is right.
Mr. Cross. That is unquestionably true, is it?
Governor E ccles. There is no question about it.
Mr. Cross. Why not pay off all of the Government bonds and get
rid of paying any interest—because that would be inflation itself?
Governor E ccles. Here is what would happen: We have out
standing some twenty-odd billions of dollars and Mr. Cross asked
the question, why do we not do that, and I think I should explain
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BANKING ACT OF 1 9 3 5
that such action would simply increase the reserves of the banking
system by the amount of Government bonds which were purchased
with currency. The currency would go out, if it was $10,000,000,0 0 0 or $2 0 ,0 0 0 ,0 0 0 , 0 0 0 or $3,000,000,000, whatever amount the Govern
ment paid out in currency to retire its bonds; but the currency would
immediately go into the banks and from the banks into the Federal
Reserve banks and be destroyed, and you would just have additional
reserves, additional excess reserves.
The C hairman . D o you not think this bill rests upon the theory
that it is necessary to control the excess reserves, because of the
fact that it would have a bearing on the circulation ?
Governor E ccles. Yes. You get to the point of increasing the
reserve requirements a sufficient amount to extinguish the excess
reserves created by the amount of the Government bonds retired.
Mr. G oldsborough. T hat is when the banks really begin to light,
is it not ?
Governor E ccles. N ow, let me follow that point through and see
what the situation would be. In the first place----Mr. G oldsborough. Can I just carry out the question so you can
answer this too? Have we not actually given the banks over
$13,000,000,000, and if we undertake to pay the bonds off in the way
indicated by Mr. Cross we would simply be taking away from them
what we have already given them?
Governor E ccles. The thought is that you are giving the banks
an interest payment that is unnecessary and is therefore a subsidy;
and that, by the Government paying its bonds in currency and thus
increasing the reserves of the banks by the amount of Government
bonds retired, it would be necessary to increase the reserve require
ments by that amount in order to extinguish the reserves; otherwise
this operation could carry possibility of credit inflation to almost
unknown heights.
The C hairman . Y ou mean by that that the release of that cur
rency would tend to bring about inflation, but there would be under
this bill the power in the Board to control that tendency or defeat it ?
Governor E ccles. It would have to get started first. Of course,
the $2 ,0 0 0 ,0 0 0 , 0 0 0 that we now have in the excess reserves should
tend to do that, and it has not done it. But following out the ex
tinguishing of these reserves, that would close thousands of banks
for this reason: About 39 percent of the total loans and investments
of banks is represented by Government bonds. Therefore, if the
bonds, we will say, which are held by the banks are retired, it would
mean that the reserve requirements would be increased by the amount
of Government bonds that are retired. Some banks have only 1 0
percent, and that is particularly true of nonmember State banks;
and, of course, if this only applied to the member banks, you would
destroy the Reserve System, because they would all leave it and
become nonmember State banks. That is one thing that it would do.
If all the banks were members of the Reserve System, and the
principle of increasing the reserve requirements by the amount of
total bonds that were retired through currency were put into effect,
a bank that had 1 0 percent of its assets in Government bonds would
be required to increase its reserve requirements, we will say, by 39
percent. That would mean that that bank would have to liquidate
the difference between the 39 percent and its Government bonds,
BANKING ACT OF 19 3 5
323
unless you simply would say to the bank that its reserve requirement
increases only by the amount of the Government bonds taken up with
currency; in that case the bank that had the largest amount of Gov
ernment bonds would suffer the greatest loss of earning^ assets and
would have the largest increase in reserve requirements. This would
be thoroughly unworkable.
For the time being, it does not seem to me that is the alternative
at all, because it would create a condition that would do anything
but make for recovery. It would create a condition that would be
terribly deflationary. I t would put the banking system in the posi
tion that you do not want to put it in. After all, whether we like
the system or not, we have it today; and to make a change of this
sort would be so revolutionary that it would bring about, as I said,
a condition of great deflation.
Mr. H ollister. Would it not, incidentally, scare every sound busi
ness man to death ?
Governor E ccles. I say, without question, that it would bring
about a condition that would be almost as bad as the bank holiday.
Mr. H ollister. Which would be reflected immediately in decreas
ing employment, would it not?
Governor E ccles. It would close up thousands of banks, because
there is not any question that you cannot take away from the banking
system 39 percent of its present investments, when we all know that
they are not operating today very profitably----Mr. C ross. Governor, if that should happen----Mr. H ollister. Let him finish, please.
Governor E ccles. We have not taken a most important feature
into account, and that is the service which the bank renders. If a
bank has to carry reserves equal to its demand deposits, why on
earth would a bank take demand deposits and become the book
keeper for the community funds, for every individual that carries an
account, and act as a collection agency for the purpose of clearing
and facilitating individual business transactions from all over the
Nation, unless that institution made up by service charges, what it
lost through having to carry increased reserves by the amount of
Government bonds retired with currency ? This would be anything
but popular with the people of this country.
Mr. G oldsborough. The service charge would be assumed by so
ciety, of course. The Government would assume the service charge?
Governor E ccles. Of course, and that is exactly what is being
done today through the Government paying this interest on its
bonds. That means that the service charge is being assumed by
society.
Mr. G oldsborotjgii. In other words, you agree that bonds—it is
not necessary for the Government to issue bonds; in other words, to
borrow money, it is just the same as the Government issuing a circu
lation medium, is it not?
Governor E ccles. A s a mechanical proposition, yes. But after
all, we have established a method of financing, not only in this
country, but in every other country—Russia is the only excep
tion—
Mr. G oldsborough. Well, we do not have to do things that are
wrong simply because somebody else does it.
324
BANKING A.CT OF 19 35
Governor E ccles. Whether it is wrong or not, is a question. I am
pointing out what are the customs, what are the practices, and to
make a change, as proposed, which is revolutionary, would destroy
confidence and so delay and retard recovery that I do not think it is
desirable, and I do not believe that there are any particular advan
tages or arguments for the retirement of Government bonds by the
issuing of currency.
It may be interesting to see just what the Government is paying
the banks. There have been some very exaggerated statements
made with reference to this subject, and it has been claimed that
the banks were getting as much as $1 ,0 0 0 ,0 0 0 , 0 0 0 a year subsidy in
the form of bond interest.
Mr. G oldsborough. Y ou are the only one that ever has called that
by its true name, subsidy. We have never heard that before. You
cannot find a metropolitan daily in the country that has the guts
to call it a subsidy. You are the only one who has ever had nerve
enough to call it by its right name.
Governor E ccles. Society, then, is paying the banking system
for a service—and you admitted that it was necessary that society
should pay for the service which the banking system renders the
people and communities----Mr. G oldsborough. Yes; but they should pay it directly and not
by the banking system. That is the bunk, and if the public under
stood what the banking system was, if the public knew that the
banks were allowed to loan the same money 1 0 times, they would
not exist 24 hours, because Congress would be forced to change
the law.
Governor E ccles. I do not know that the banking business has
been the most desirable or profitable, even with all of the subsidies
and privileges you claim it gets.
Mr. G oldsborough. Your reasoning is that, when deflation starts
there is no way on earth to stop it?
Governor E ccles. I would not go that far.
Mr. G oldsborough. If you are on a 100-percent basis, you could
not have deflation, because the money would always be in existence.
Governor E ccles. I think that, mechanically, inflation is far more
easy to control than is deflation.
Mr. Goldsborough. Y ou cannot control deflation under our system,
and you cannot do it for this reason: That the creation of money
amounts simply to the extension of credit, and whenever the banks
start—when the banking system starts to collect its debts, it imme
diately decreases the circulation medium, it immediately causes a
fall in all values, and it immediately causes the calling in of other
debts. You just cannot stop it when you once start it under our
system of fractional reserves.
Can I illustrate that in this way? In 1920 a very distinguished
Member of this House, who is now on one of the boards down town,
came to speak for me in my district. He said he had just had a
talk with Mr. W. P. G. Harding, who was then Governor of the
Federal Reserve Board. Cotton was then 30 cents a pound. He
said Harding had told him they were going to bring the price of
cotton down to 25 cents and stabilize it. I said, “ My God! If you
/
BANKING ACT OF 19 35
325
ever start that, you can’t stop it.” And cotton did not stop until it
got down to 5 cents a pound. That is what happened.
Mr. F ord. Mr. Chairman, the Governor was going to read some
thing' that I am very much interested in----The C hairman . Yes; we are all interested in that.
Governor E ccles. I had a memorandum on this subject, because I
had anticipated that that question might be discussed. With refer
ence to the general opinion that banks are being paid $1 ,0 0 0 ,0 0 0 , 0 0 0
a year by the Government in interest, that is a greatly exaggerated
statement. The total interest paid on the national debt during the
calendar year 1934 was $817,000,000. Xow, the banks, under the
most generous estimate that von can figure, taking the bonds that
they had, received about $260,000,000. And these are member banks.
Figuring all banks, $320,000,000 is the maximum.
If the refunding operations of the Government continued until
the holdings of the banks were converted into securities, bearing
the current average vields, the interest received would fall to
$180,000,000.
Xow, it must be remembered that there are expenses in connection
with the issuance of currency and keeping it in circulation; and it
may be interesting to note that the cost of keeping the greenbacks
and notes of the United States in circulation today is more per
annum than the present rate that the Government is paying on its
180-day bills.
Mr. G oldsborougit. If they are entitled to some further consider
ation, do you not think it is a shame that we are refunding and
giving them less interest?
Governor E ccles. I am not arguing for consideration. I am
pointing out the difficulties with no advantages of making the ad
justments which you propose and which would be revolutionary, of
the whole banking and monetary system, and I think, at this time,
it would be disastrous.
Mr. H ancock. Will the cost of keeping the greenbacks out com
pare with the cost of issuing the 180-day bills?
Governor E ccles. It is estimated here about fifteen-hundredths of
1 percent per annum on the greenbacks, and the 180-day bills were
on the basis of eleven-hundredths of 1 percent, about one-tenth of
1 percent, which is less than the cost of keeping the greenbacks out.
Mr. H ancock. Where is the cost in keeping the greenbacks out?
Governor E ccles. The destruction is rather rapid and they have
to be reprinted, and the cost of shipping them out and shipping
them back is something. Then there are insurance charges and ex
press charges and there is personnel accounting, and other expenses.
Mr. H ancock. Does that same cost ratio apply to the Federal
Reserve notes?
Governor E ccles. I do not know what that cost ratio is. Do you,
Doctor ?
Mr. G oldenweiser. I t is less than that, because of the fact that
the denominations are large. In the Federal Reserve notes there
are no $ 1 bills.
Mr. F arley. Mr. Chairman, I read into the record a while ago a
rather emphatic protest from the State Bankers Association of In
diana, and just for the Governor’s benefit I want to read just a little
326
BANKING ACT OF 1 9 3 5
paragraph from the second largest national bank in the State of
Indiana, and which, by your grace, survived all of the storms and
is still a wonderful institution:
We might say we have given the whole bill very careful consideration. In
fact, we discussed it for nearly 2 hours in our directors’ meeting yesterday,
and we believe that the bill, on the whole, is pretty good and meets the
present needs.
That is a national bank’s attitude.
Governor E ccles. I am interested, of course, to get that reaction,
and I have found, whenever I have had an opportunity to sit down
and meet the arguments and questions with reference to the legisla
tion, invariably the bankers feel that this bill is not what it has
been reported to be by many of our financial writers and economists.
Most of the criticism directed at the bill could be directed toward
the act that we have been operating under for the last 2 0 years.
The C hairman . Mr. Williams, did you say you have a question
to ask?
Mr. W illiams. Yes. Governor, in connection with the interest
that is being paid by the Government to the banks—there has been
a good deal said about the interest that has been paid on bonds
in the national banks and Federal Reserve System, and keeping or
using those same bonds as the basis for issuing and lending out
money which they get on account of that issue, and getting interest
on it. Of course, in other words, that would be double interest, in
terest on the bonds which they deposit, or which they sell for the
purpose of securing the issue, and the currency which they lend out,
so they would get double interest on it, would they not?
Governor E ccles. Y ou are speaking of national bank notes?
Mr. W illiams. National and Federal Reserve notes.
Governor E ccles. The Federal Reserve member banks, of course,
do not deposit bonds and issue Federal Reserve notes, but the na
tional banks have the privilege of issuing national bank notes,
which right has now been eliminated.
Mr. W illiams. Here is the question. How much, in number of
bonds, is used as the basis of the currency issue?
Governor E ccles. There is about $800,000,000 of national-bank
notes outstanding. They are the only cases where the bonds are
used by banks for the purpose of issuing currency.
Mr. W illiams. What about the Federal Reserve bank notes?
Governor E ccles. The Federal Reserve banks have paid off their
liability on Federal Reserve bank notes.
Mr. W illiams. That is right recently, is it not?
Governor E ccles. Yes; recently. There was never more than
about $150,000,000 issued, and that was issued right after the bank
holiday; and those Federal Reserve bank notes were put out on the
basis of sound assets other than Government bonds and other than
gold.
Mr. W illiams. Well, now, I see a statement that the Treasury pro
poses also to retire bonds upon which the national banks issue notes.
Governor E ccles. That is right.
Mr. W illiams. When that is done, that activity w ill be removed
from the picture?
Governor E ccles. That is right.
Mr. W illiams. In other words, there w ill be no cost of Govern
ment interest upon its bonds?
Mr. E ccles. There are greenbacks which, of course, have been
out for a good many years, about $300,000,000----Dr. G oldenweiser. $346,000,000.
Governor E ccles. $346,000,000, with a certain amount of gold held
back of those greenbacks.
Mr. W illiams. And there is the argument that is being made by
a great many people, that the Government has favored the banks
by permitting them to deposit bonds----Governor E ccles. And issuing currency.
Mr. W illiams. And] issuing currency, receiving currency, and
lending it out and securing interest on it, and at the same time secur
ing interest on the bonds which they deposit for that purpose. Now,
as I understand, that is a thing of the past?
Governor E ccles. The Treasury last Monday announced that they
were calling the 2-percent consols and 2-percent Panama’s as of
July 1 , approximately $675,000,000 in total, and on July 1 the cir
culation privilege which was given to other Government bonds ex
pires.
Mr. W illiams. Have there been none of them used for the pur
pose of Federal Reserve note issue?
Governor E ccles. N o ; not used by the Reserve banks. The Fed
eral Reserve banks are required to deposit with the Federal Reserve
agent gold equivalent to 40 percent of the notes outstanding, and
the balance of 60 percent may be made up of eligible paper or
Government bonds.
Mr. W illiams. That is what I am getting at. Those bonds have
been deposited, have they?
Governor E ccles. Only by the Federal Reserve banks, from one
department of the bank to another. In other words, the bank has
been required to deposit with the Federal Reserve agent, who is the
chairman, gold certificates and bonds, or gold certificates, bonds, and
eligible paper.
We are proposing to eliminate the collateral requirement for the
Federal Reserve notes; because it serves no purpose, it only adds
additional expense, and has no relationship to the amount of cur
rency in circulation, and is not required in any other central bank
that has been recently set up anywhere in the world.
Mr. W illiams. In other words, you propose to abolish the prin
ciple that has heretofore been followed of issuing currency based
upon Government bonds?
Governor E ccles. Yes.
Mr. S pence. Have all of the banks that had that privilege that
availed themselves of it been national banks?
Governor E ccles. Yes; no other banks had that privilege.
The C hairman . They are using about $150,000,000 extended under
the relief act and----- '
Dr. G oldenweiser. That was in the Home Loan Act of 1932.
Mr. S pence. What proportion of them have not availed them
selves of the privilege? Have you any figures on that subject,
Governor ?
Governor E ccles. Mr. Smead could get that. What percentage
of the national banks have not availed themselves of that privilege?
1
328
BANKING ACT OF 1 9 3 5
Mr. S mead. Of the 5,422 reporting licensed national banks on
June 30, 1934, there were 4,600 banks issuing circulating notes, and
822 banks which did not exercise the circulation privilege.
The C hairman . Well, there will be no more notes issued by the
national banks, based upon Government bonds?
Governor E ccles. That is right.
Mr. Cross. Governor, I want to go back to where we were awhile
ago, when I asked you about the $3,000,000,000. As I understood
your first statement, it was that if you were to take that $3,000,0 0 0 , 0 0 0 and buy bonds with it, call it in or buy that much bonds,
it would not cause any inflation to come back; but, as a secondary
proposition, there would be inflation through the banks, because they
would have more business; is that correct?
Governor E ccles. There would be a possibility of inflation
through the banks, by reason of the increased reserves from-----Mr. Cross. The $3,000,000,000?
Governor E ccles. Y ou have a potential inflation, but you would
have to use the existing $2 ,0 0 0 ,0 0 0 , 0 0 0 of excess reserves before the
$3,000,000,000 would have any effect.
Mr. Cross. N ow, we realize one thing, and this is what is disturb
ing me: As I get your attitude, we cannot get a measure of value—
that is, we cannot make the dollar the measure of value, and I do
not know why the atmosphere seems to be so surcharged with the
T
idea of expanding the currency. Everybody is talking about infla
tion, yet we have inflation until we are as flat as a flounder in the
mud.
Now, we certainly cannot come back until -w reflate, and I should
e
say that, if we started reflating, we can get back to the normal situa
tion; that we are helpless, or we must go ahead and start on a wild
T
spree of inflation until we explode and plunge back and down into
the mud again.
Governor E ccles. I do not think that is necessary.
Mr. Cross. That is what I am contending, that it is not necessary.
My idea is that, with the levers you have, you ought to be able to
agree on a price level that would give you a measure of value in dol
lars, but if we have these things recurring and are helpless, that is
a tremendous indictment of our intelligence.
My idea is that we should certainly be able to get a measure of
value. In other words, just to illustrate the proposition, that A
borrows from B a certain amount of money, and the present price
of the dollar, we will say, is money covering one particle of all of the
things that are necessary to feed and clothe and supply the comforts
and luxuries of life. Now, the next year, when he wishes to pay it
off, because there is no value in the dollar, he has got to pay back
two particles of that commodity that will buy the necessities and
comforts of life, and it appears to me it is just as much within the
law robbing the poor devil as if I had loaned you $ 1 0 0 and I met
you on the street next year, when it was due, and took out a 6 -shooter
and said, “ Give me that $ 2 0 0 you have in your pocket ”, because I
am taking it from you, and it will supply me with twice the things
that the $100 I let you have would supply me with. In other words,
if $ 1 will take care of me all of my life, I do not need but $1 .
Governor E ccles. Yes; what you say is true, that it is an injustice
for a debtor to have to pay back debts in goods and services that have
BANKING ACT OF 1 9 3 5
329
substantially less value when he pays his loan than it had when he
received it.
Assuming that a dollar a bushel is fixed for the price of wheat,
and the total wheat production at $1 is 400,000,000 bushels, are the
farmers, as a whole, any better off than they would be with 800,000,000 bushels of wheat selling at 75 cents a bushel? In one case the
income from the wheat would probably be $600,000,000 and in the
other case it would be $400,000,000.
Mr. Cross. I do not think you can take any one commodity.
Governor E ccles. The point I am making is, it is production we
are interested in. No one can pay his debts in terms of the price
level. Higher prices do not help a business that only has one-half
of the volume of business with which to pay its debts. You need
to maintain not only the price level but also production.
Mr. C ross. I understand. You said that a number of times; but
do you think it is possible to get a measure of value or have the
dollar come to where it would be the true measure of value ?
Governor E ccles. I do not think that is possible.
Mr. Cross. Then we are helpless.
Governor E ccles. N o ; I do not think we are helpless.
Mr. S pence. The Federal Reserve can exercise their power to
regulate the rate of interest paid by banks to depositors on time
deposits and savings deposits?
Governor E ccles. That is right.
Mr. S pence. I think that is a very beneficial thing, because they
have been the victims of competition or of the depression. Now,
there is no authority in any national agency to regulate the rates
paid by State banks, is there, at this time ?
Governor E ccles. Nonmember?
Mr. S pence. Yes.
Governor E ccles. There is no authority, unless the Federal Deposit
Insurance Corporation has it.
Mr. S pence. I do not think the Federal Deposit Insurance Cor
poration ought to have that power.
Governor E ccles. That is taken care of in the Banking Act of
1935.
Mr. S pence. I think that would be welcomed by the banks, because
they are the victims of their own competition.
Governor E cci.es. I t is absolutely essential that member banks
should not be subject to competition of nonmember banks by a limita
tion of the maximum interest that the member banks can pay and
have the nonmember banks benefited and protected by the Deposit
Insurance, and at the same time permitted to pay any rate of interest,
whether it is a sound rate or not, that they wish to pay.
Mr. S pence. I t would be very much better, if they could all do
that and-----Governor E ccles. The Banking Act of 1935 provides for that in
section 323 (c), page 67, lines 1 to 7.
Mr. S pence. Have they exercised that power?
Governor E ccles. The act has not been passed.
Mr. S pence. This act, you mean ?
Governor E ccles. Yes.
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BANKING ACT OF 1 9 3 5
Mr. F ord . Let me make an observation there. The banks are
fixing the amount of interest that they can pay for deposits, are they
not?
Governor E ccles. We fix the maximum only. There are a great
many cases where they pay much less.
*
Mr. F ord. Would there not be a good deal—there is no attempt
made to fix the maximum interest they might charge when they
loan that money ?
Governor E ccles. Most States have usury laws.
Mr. F ord. I understand, but they are pretty liberal. We make
the price, we will say, to the miller, of wheat at $ 1 a bushel, but
he can charge $ 1 0 a barrel for the flour, if he can get it, and that
is a competitive matter and I do not think can be fixed. You
could not say any maximum rate of interest that the bank would
charge, because it was getting money from its depositors at 2 percent,
T
because the demand for that money and the volume of it would
determine what rate it would get ?
Governor E ccles. I t will bring the rates down, and it is bringing
the rates down.
Mr. F ord. But it is a fixed thing, is it not?
Governor E ccles. Fixing the maximum rate of interest on de
posits tends to bring down the rate on loans. That is the effect.
Mr. W illiams. Governor, in order that we might have this clear,
did I understand you to say that there is in the proposed law a
provision which authorizes the Insurance Corporation to fix rates
that could be paid by any member bank?
Governor E ccles. Requires them to fix the rate? It is fixed by
the Reserve Board for the member banks.
Mr. W illiams. Where is that?
Governor E ccles. Pages 66 and 67. We have not gone into that,
because that is in title I I I of the bill. That is in title III.
Mr. F o rd . What page?
Governor E ccles. Pages 6 6 and 67.
Mr. W illiams. Does that apply to the nonmember banks?
Governor E ccles. Yes, that is what it does apply to.
The C hairman . The purpose of that is to prevent one bank inside
of the Federal Deposit Insurance Corporation fighting against an
other bank?
Governor E ccles. That is right.
The C hairman . And taking an undue advantage of it?
Governor E ccles. That is right.
The C hairman . Gentlemen, may we not quit until 3 o’clock? I
think we had better adjourn until 3 o’clock.
(Thereupon, a recess was taken in the hearing until 3 p. m.)
AFTERNOON SESSION
The C hairman . Governor Eccles, I believe Mr. Ford desires to
make some inquiries.
Mr. F ord. Governor, I am not going to take you into the backalley finance in my statement. I am just simply going to say, in a
very short statement, that it is my reasoned conviction that the pres
ent bill, while not perfect as to all of its details, and undoubtedly
BANKING ACT OF 1 9 3 5
331
requiring some minor technical amendments, seeks, on the whole, to
accomplish the following desirable results:
First, by broadening the eligibility requirements of the Federal
Reserve bank discounts, to uncover a great reservoir of potential
credit, which will be made available. Is that true ?
Governor E ccles. There is ample credit today, but, without change
in the eligibility features, there will be great hesitancy on the part of
the banks to loan on other than short-term commercial paper or
Government bonds.
Mr. F ord. All right. We will change that to make it “ available
so far as the borrower is concerned.”
Governor E ccles. I t makes it available, not because they need to
borrow funds to do it, but it makes it available because they would
be willing to loan existing funds, if they could get borrowers, on
longer time loans, that, otherwise, they would feel unsafe in making.
Mr. F ord. My second point is that, by placing in the hands of the
Federal Reserve Board the authority to initiate open-market opera
tions, we give them the power to regulate in a material degree or to
stabilize in a material degree business operations. Would it do that?
Governor E ccles. The three powers of monetary control—open
market, discount rate, and reserve requirements—put into the hands
of the Federal Reserve Board a power to control inflation. And
they also put into their hands the power to prevent deflation, so far
as can be done by the creation of excess reserves and by the reduction
of interest rates.
There is no action that the Board itself can take that will induce
people to borrow, induce corporations to borrow, the excess funds
which the banks may have as a result of the Board’ action in creat
s
ing excess funds.
Mr. F ord. But it is an effective check on the impulse for inflation,
on the one hand, and credit deflation, on the other hand, is it not?
Governor E ccles. I think so. I think the eligibility changes and
the control over the supply of money would certainly tend toward a
prevention of deflation.
Mr. F ord. In addition to that, in the third place, does it not add two
other desirable things: By broadening the eligibility requirements of
the Federal Reserve Board, each member bank with sound but long
term paper could, under emergency conditions, take this paper to the
Federal Reserve bank and get currency and thus better serve the needs
of its community or meet a sudden emergency ? Would that be a clear
statement?
Governor E ccles. The Reserve banks will have the power to loan
to member banks on sound assets, which would enable the member
banks to meet the demands of their depositors.
Mr. F ord. Certainly.
Governor E ccles. Which otherwise they might be able to meet only
by forcing a contraction of credit or by selling securities; or it might
be that they would be unable to meet the demand and thus be forced to
close.
Mr. F ord. N ow, if I understood you correctly when you were mak
ing your various statements, you said that the Federal Reserve banks
today had at least $1 0 ,0 0 0 ,0 0 0 , 0 0 0 that seeks profitable investment.
Governor E ccles. N o, sir. I said that the commercial banks had
$10,000,000,000 of time deposits.
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BANKING ACT OF 1 9 3 5
Mr. F ord. I mean the member banks of the banking system had
excess funds.
Governor E ccles. N o. The banking system has excess funds seek
ing investment of over $2 ,0 0 0 ,0 0 0 ,0 0 0 .
Mr. F ord. What was that 10-billion-dollar figure that you used:
Governor E ccles. I said that the time funds or saving funds held
by the commercial banks amounted to more than $1 0 ,0 0 0 ,0 0 0 ,0 0 0 .
Mr. F ord. But that would be seeking profitable investment, would
it not ?
Governor E ccles. A good deal of those funds are loaned already
in various types of loans. A great deal of those funds are no doubt
invested in Government bonds and other securities and bonds guaran
teed by the Government. The excess reserves of the banks, which are
in excess of $2 ,0 0 0 ,0 0 0 ,0 0 0 , are sufficient in amount to enable the bank
ing system as a whole to extend new loans or to purchase additional
bonds to the extent of more than $2 0 ,0 0 0 ,0 0 0 , 0 0 0 without the banking
system as a whole being required to borrow from the Federal Reserve
System.
The banking system creates money through its loans and invest
ments. A bank making a loan of $1,000 to a customer creates $1,000
of deposits. However, for every $1,000 increase in the deposits of
the bank the excess reserve decreases by 1 0 percent of the amount
of that deposit increase, so that a loan of $1 , 0 0 0 increases the assets
of the bank by $1 , 0 0 0 and the liabilities, in the form of deposits, by
a thousand, and the reserve requirement by $1 0 0 , approximately.
You see, this increase in deposits would increase reserve require
ments by 1 0 percent of ^hat amount.
Therefore, 2 billion dollars of reserves in the System as a whole
are a sufficient amount to enable the banks, on the basis of 1 0 for 1 ,
to extend credit to the extent of 2 0 billion dollars, without having to
go to the Reserve banks and discount or borrow money.
Excess reserve can be increased or decreased by open-market oper
ations or by a change of reserve requirements? That is where you
get your monetary control.
Mr. F ord. N ow, then, at the present time we have a potential
credit reservoir of about 20 billion dollars.
Governor E ccles. That is right.
Mr. F ord. If paper eligible for rediscount came along, the banks
would be free to make those loans, wouldn’t they, knowing that they
could take that paper, in an emergency, to the Federal Reserve banks,
if they got into trouble?
Governor E ccles. They -would be. It would be very profitable to
make those loans if they were available.
Mr. F ord. In comparison with the 2% percent to the banks on
long-term Government bonds, you are holding out an inducement
to the banks, through this bill, to exercise their functions as banks
and make every possible loan that they can----Governor E ccles (interposing). With safety.
Mr. F ord. I did not mean that they should go out and go crazy.
But, when people come in wanting money, they would be in a posi
tion to loan it to them.
That is a thing that has always bothered me. I do not know
whether I have got the explanation of it or not.
BANKING ACT OF 1 9 3 5
333
Now, I note that since 1922 the volume of commercial paper in
the United States—the normal commercial paper, under the old law,
the 90-day paper, has been greatly diminished. Now, my under
standing or my belief is that the reason for that diminution in that
commercial paper was that many corporations, both large and small,
instead of going, as they used to do, to their banks and getting their
short-term requirements, have found that, through the investment
bankers, they could issue securities and get that money all in a lump.
And in many cases much of that money, after they had gotten it,
did not go to their own bank, but went to New York, to be used for
other loans, for speculation. Is not that true?
Governor E ccles. Partly. I t seems to me that the transition that
has taken place in our business and banking systems during the
life of the Federal lteserve System has been that our business sys
tem has become more concentrated, into larger and larger units;
and that there is today a greater concentration of corporate opera
tions in the country, in fewer companies, than we have ever had
before. The trend is in that direction, as evidenced by the chainstore development and the developments in almost every field of
manufacturing activity.
Mr. F ord. Steel and all others.
Governor E ccles. We see a drift toward consolidation and merg
ers, making for bigness and a greater concentration of control.
That has tended to concentrate commercial deposits to a greater
extent than formerly in the centers where the headquarters of the
various companies are located; and it has also, in cases where there
has been borrowing, largely concentrated all borrowing, at very low
rates, on the commercial-paper basis, in the money market; so that
the average small bank, or the banks in the towns of 1 0 , 0 0 0 people
or even 25,000 people, and less, have not had the demand, and have
not had even during the period of our great activity, in the twen
ties, the commercial loans to their local business concerns that they
had prior to the developments to which I have referred.
I t is true that many of the consolidations and mergers were
brought about through flotations of securities, bonds, and stocks,
and the effect of those flotations was that the banks that formerly
carried commercial loans and short-term loans for the carrying on
of business transactions, furnished the money through the pur
chase of bonds, or through loaning to customers, who purchased bonds
or stock. So that there was a substitution, to, no doubt, quite an
extent, of bonds and collateral loans in banks; whereas, formerly,
particularly before the war, commercial paper was used to a far
greater extent.
And, of course, in the case of farmer financing, that has been taken
away from the local banks to quite an extent through the Produc
tion Credit Corporation. The Production Credit Corporations,
which are a part of the Farm Credit Administration, get most of
their funds by the sale of 6 -month and 9-month debentures, outside
of their capital, which has been furnished to them by the Gov
ernment.
These debentures are sold in the market and the present rate is
somewhere on the basis of iy 2 percent per annum. The big banks,
in the centers, with the surplus funds, are the purchasers, largely, of
127297— 35------ 22
334
BANKING ACT OF 1 9 3 5
these debentures, thus providing the funds to the Production Credit
Corporation, and the Production Credit Corporation supplies the
funds to the farmers, through the local communities. So, it means
that the banks in the centers, through the Production Credit Corpora
tion, are financing agricultural production; and that, of course, takes
away from the banks in the agricultural areas the eligible agricultural
paper.
Mr. F ord. I note that in 1929 the commercial paper; that is, the
commercial loans made by banks, were only $4,396,000,000, and that
was at the peak of our so-called “ prosperity ”, and that in 1934 that
sum had dropped to $2,144,000,000; so that there has been a gradual
diminution or gradual disappearance of commercial paper as a source
of business to these banks, and there is very little likelihood of any
substantial increase in that.
Governor E ccles. For the reason that, if you will examine the
statements of most of our business concerns, it will be found that they
have an excessive working capital. One of the difficulties today is
that they are the owners of huge pools of deposit money now in the
banking system, which they are not using and are not able to utilize;
so that, even with an improvement of business the most that could be
expected from many of our business concerns would be that they would
put into use the funds that they now have, and under no circumstance
wmild they be required to borrow.
Now, I am speaking of our business concerns in very general terms.
In number there may be, and no doubt are, a great many business con
cerns that would be required to borrow; but, measured in the volume
of the business which they do, which, of course, is the important ele
ment, there would be a small percentage.
Mr. F ord. Well now, that being the case, if the reason for the exist
ence of our banks is continued, then we have got to afford them some
additional opportunity, where their funds can be employed; and it
seems to me that the long-term real-estate loan is about the only out
let that appears on the horizon at the present time to any great
volume.
Is that an admissible statement?
Governor E ccles . There is no prohibition now against banks
making collateral loans which are not eligible; and there is no prohibi
tion against banks buying long-term bonds. So long, then, as there
is no prohibition now against the banks investing depositors’ money
in those fields, which are likely, in the event of depression, to be just
as frozen as real-estate loans, there should be some liberalization with
reference to the power of the member banks to make long-term realestate loans. To what extent that will be utilized bv borrowers it is
impossible to say.
Mr. F ord. Oh, I realize that. But we all know, if we read our
correspondence, and I know from my particular experience, that it
is almost impossible, or it has been up to quite recently, to get a
real-estate loan from any bank. Now, the reason the banks gave
for that was that that was an unliquid paper, and if they put their
money in there it would stay there, and they would have no way of
getting it out if they had a call.
Governor E ccles . They had been made to feel that a real-estate
loan is a slow and an undesirable asset to have. And inasmuch as
BANKING ACT OF 1935
335
the banks have most of the loanable funds, and mortgage companies
and the savings and loan associations, as a whole, have very little,
and in most of the communities have no funds to loan, but are in the
process of reducing and bringing pressure to bear, it would seem
that the situation would be helped and relieved by permitting and
encouraging the banks to make long-term, sound, real-estate loans.
Mr. F ord. Not with the idea, Governor Eccles, of making the loan
today and taking it to the bank tomorrow and getting a discount,
getting the money and coming back to make another loan; but with
the idea of making a loan that was a profitable loan—and in our
country the rate is 7 percent, which is quite different from 2% per
cent—they could put that money into that market. Then, should
there be a sudden demand on them for more money, they could
always take those securities to the Federal Reserve bank and get the
money for them, could they not, under this law ?
Governor E ccles . The Federal Reserve banks would have the
power legally to loan to member banks on the notes of the member
banks, secured by mortgages or other collateral, with such margin
as they thought was advisable to make the loan sound. Certainly
member banks would not loan money on mortgages and then borrow
from the Reserve banks so long as the member banks had excess
funds to loan. It could be expected that the member banks would
be willing to pay interest on borrowed money from the Federal
Reserve banks only when a condition was reached by any member
bank that made it necessary for it to borrow to meet its shrinking
deposits.
I t has never been a policy of the Federal Reserve System to per
mit its member banks to borrow continuously or to borrow for the
purpose of reloaning because there was a profit between the discount
rate at the Reserve banks and the loaning rate of the member banks.
Mr. F ord. They were only there for the purpose of the bank get
ting the money when it actually had to have it and for a proper
purpose ?
Governor E ccles. T o meet the current demand.
Mr. F ord. N ow , Governor Eccles, there is just one other observa
tion I want to make.
There seems to be some apprehension in the minds of some of
my correspondents as to this bill being an inflationary measure.
We have had that out here before, but I just want to make an
observation on it. We discussed this morning the question of fixing
a price level.
Now, my conception of the possibilities lying dormant in this
bill, and which can be developed if it is passed, for credit, is this:
It will make available—and when I say available I do not mean
that it does not now exist—but it will make it a little easier and
more attractive for the banks to go into the business of loaning
money, for the purpose of bringing our production up to a maxi
mum. If we could do that we would bring our unemployment down
to a minimum. The result would be a large pool of money poured
out over the country and that would give purchasing power to the
consumers of the country generally, and that would tend not only
to stabilize business but to bring a gradual increase in the price
level, up to some point where there might be an attempt made to
l
336
BANKING ACT OF 1 9 3 5
peg it, within certain limits. Would not that be one of the ways of
doing it?
Governor E ccles. I do not know that I understand what you
mean when you say, “ Would not that be one of the ways of doing
it ” ? Do you mean the bill as now drawn ?
Mr. F ord. I am talking about bringing our production up to a
maximum.
At every meeting that this committee has had there have been
people who said, “ Now, industry cannot get money; and, when in
dustry cannot get money, it cannot produce; and the reason it
cannot get money is that the banks are afraid to loan/’
Now, the loaning of money of real estate might conceivably have
a tremendous influence on industry, because it would put men to
work. Now, if you could create conditions so that money could
be easily gotten by industry, with a prospect of getting it back and
getting a profit, that would immediately create a wage pool, and
it would give an increase of income to the country and, with the
increase of income to the country—and the wide-spread of the
purchasing power that goes to the men that do the work is one of
the factors—it would naturally put purchasing power in the country,
and, with an increased demand for goods, the price level of all
goods would come up, would it not?
Governor E ccles . Yes.
Mr. F ord. And if there was a tendency on the part of prices to
go up wildly, could not the Reserve Board, under this bill, put
an appreciable brake or check on that?
Governor E ccles . Yes; a general increase means an inflation;
and that can be, in my opinion, controlled through the powers that
this bill provides to be given to the Federal Reserve Board.
Mr. F ord. Well now, taking the questions that I have asked and
the picture that I have painted, I ask if this bill tends to make that
possible? Do you think it does?
Governor E ccles . I do.
Mr. F ord. All right. That is why I say in the beginning, that I
believe this is the measure that the country needs and that I am
going to feel very comfortable in supporting this bill in the House.
The C h a ir m a n . All right.
Does anybody else on this side have any questions?
Mr. C l a r k . I t will take only a minute for my questions, Mr.
Chairman.
I do not think that Mr. Cross, Governor, is very much satisfied
with our helplessness in this situation.
In the amendment that you have proposed three objectives are
tentatively stated: First, stable business conditions; second, full em
ployment; and, third, a more or less stable price level.
I believe that you stated that, if this bill were passed, it would
give the Federal Reserve Board a control over the volume of money.
That is right, is it not?
Governor E ccles . I think it gives the Board a control of the vol
ume of money on the up side. I t does not give it such a complete
control of the volume of money on the down side.
Mr. C l a r k . No ; but it tends to give the Board a more nearly
complete control of the volume of money than it has had heretofore.
BA N K IN G ACT OF 1 9 3 5
337
Governor E ccles . Oh, yes; through monetary control plus the
eligibility features.
Mr. C l a r k . But you stated, however, that in order to achieve
these desirable results—stable business conditions, full employment,
and a more or less stable price level—that in addition to the con
trol of the volume of money, there would necessarily have to be more
control of the velocity of money—by the velocity of money meaning
the ratio between the volume and the national income.
That is right, is it not?
Governor E ccles . That is right.
Mr. C lark . And you stated—I believe this is of fair inference from
your testimony—that monetary action alone could control only re
motely the velocity of the money; that is, by making the money
available ?
Governor E ccles. That is, to the extent that low interest rates and
abundant supply will induce its use; only to that extent.
Mr. C l a r k . Then that is where Mr. Cross, I believe, stopped; that
is to say. that is where the matter was let drop. However, I believe
that, earlier in your testimony, you stated that there were two other
factors which, if added to the control of the volume of money, might
tend, in your opinion, to have a control over the velocity of money,
namely, a tax system and a program of Government spending. Am I
correct in that?
Governor E ccles . Those are the other two elements which, it seems
to me, in our capitalistic economy, must be taken into account to bring
about a sufficiently equitable distribution of the national income, to
keep up a full employment, full production, and keep the productive
facilities adjusted in relationship to the buying power of the Nation.
Mr. C l a r k . Yes; that is right. In other words, we h a v e got, in
your opinion, a three-legged stool; and this bill is one leg of the stool.
Governor E ccles . T h a t is r ig h t.
Mr. C l a r k . This bill is designed to give control over the volume of
money.
Governor E ccles . That is right.
Mr. C l a r k . N ow , in order to make our stool stand up and in order
to get out of that helpless condition in which Mr. Cross assumed we
are—as we are—it is desirable, in your judgment, not only to pass a
bill of this kind, or something of this kind, in order to build up this
leg. but we should do more. Let us take the second leg of the stool—
and I do not want to lead you astray. Governor Eccles. but it ties in.
We are going to try to get somewhere and we want to get to a stable
basis. Mr. Cross thinks it is an indictment of the human intelligence
if we do not get somewhere, and I agree with him.
You say we need a tax system, and by that, I assume, you mean
regulation of income taxes to the extent that when times are getting
better and the price level is increasing and the full employment is
reached the income taxes would be raised, as, I believe, you said they
should have been raised in 1928, instead of having been lowered. So
that is the second leg of the stool.
And then your third leg is a fixed national policy of Government
spending, which would be controllable as conditions fluctuated.
By using those three things: first, monetary control, as proposed
by this bill; secondly, shifting the income-tax rates; and, thirdly,
increasing and diminishing the Government expenditures, not °s an
1
338
BANKING ACT OF 1 9 3 5
emergency proposition only, but as a fixed national policy; those
factors would tend, in your opinion, to achieve this desirable state of
stable business conditions, full employment, and reasonably stable
prices, within limits.
Does that state it thoroughly?
Governor E ccles. Y ou have stated the case, I think, very com
pletely.
Capitalism, sooner or later, has got to pay whatever it may cost,
through the tax bill, to provide employment for people who are
employable, and to provide an adequate, decent living for those w
rho
are unemployable, when the private employer fails to give employ
ment on a sufficient scale to utilize our available labor.
That is the cost that we have to pay for capitalism; and the sooner
we begin to recognize it when unemployment develops, the less the
cost will be.
We have never questioned the duty of the Government to protect
its citizens, no matter what the cost, against the encroachment of a
foreign enemy. We have no more reason to question the obligation
of the Government to protect the citizens, through insuring them
employment, when private capitalism fails to insure that.
Mr. F ord. That is it.
Mr. C l a r k . I th in k th a t is a ll. I r e a lly w a n ted to g e t th a t p ictu r e,
b ecau se th is is th e first step a lo n g th o se lin es.
Mr. S is so n . By Government spending, Governor
Eccles, the th ir d
leg of the stool of wffiich Mr. Clark spoke, am I right in assuming
that what you mean is what might be called and what has been
termed a long-range or long-term plan of public works, to be car
ried on when employment shows signs of becoming slack; and that
kind of public work or that kind of Government spending to be car
ried on largely----Governor E ccles (interposing). To keep up the national income.
Mr. Sisson. Yes; and such as will least come into competition with
private industry, with private business.
Governor E ccles . I believe that, under capitalism, Government
cannot compete with private business without the socialization of
whatever field of private business it undertakes to compete in; and
that Government spending should be in the fields of socially bene
ficial, public, noncompetitive activities, either directly or through
grants to cities, counties, and States, for use in the same field.
I have no brief to offer against Government entering those fields
which may be better handled in the public interest if owned and
operated by the Government than if operated privately. But I
do believe that wffien the Government steps in beyond the exercise
of its regulatory powers, as a competitor, the natural effect is that
all investment in that field, all private investment, stops; and that the
field then must be absorbed and monopolized, sooner or later, by the
Government.
Does that answer 3’our question?
Mr. S isso n . Yes.
Mr. H anc oc k . Governor Eccles. is there any way of intelligently
estimating what percent of short-time paper is usually renewed?
Governor E ccles . Y ou mean commercial or business paper held
by the banks?
Mr. H ancock . Yes.
BANKING ACT OF 19 3 5
339
Governor E ccles. I think it would be practically impossible to
do that.
The loan is paid in one bank out of the proceeds of a loan gotten
in another bank. That is the way commercial paper is usually
handled.
We will take, for instance, a concern is borrowing $1 0 ,0 0 0 , 0 0 0 on
90-day commercial paper. A number of banks buy that paper and,
at the expiration of the 90-day period, the loans are paid. You will
find that the borrower on that paper has possibly only reduced the
amount outstanding, or may even have increased it, by borrowing,
by offering paper in the market, and another group of banks, or
the same banks, will purchase their 90-day bills, just as the Gov
ernment now does in its short-time financing. It is offering 182day bills; and the purchasers of that paper have short-time paper;
but it is only paid by a refunding operation for 182 days, or for two
hundred-and-some-odd days by selling new bills—maybe not to the
same institutions, but in the market.
Mr. H a n c o c k . Well, the reason that is permitted, and the bankers
up to now have been seeking short-term paper, has been due to the
fact that, if it ran beyond a certain period, it would not be eligible
for rediscount.
Governor E ccles . Under the law, it would not be eligible except
as 90-day commercial paper or 9-month agricultural or livestock
paper.
Mr. H a n c o c k . But, under this bill, there is no time limit with
respect to the eligible paper?
Governor E ccles . Y ou mean there is no time limit as to maturity
of the paper that is used to secure advances ?
Mr. H a n c o c k . Yes.
Governor E ccles . N o ; there is no time limit.
Mr. H anc oc k . That would be left to the rules and regulations of
the Federal Reserve Board or to the rules and regulations of ihe
individual Federal Reserve banks?
Governor E ccles. I t would be left to the rules and regulations of
the Reserve Board, yes, sir; as to the terms upon which advances
could be made by Reserve banks to members on sound assets.
Mr. H a n c o c k . Governor, there is n o limit to the maturity of the
paper that could be discounted, is there, under the bill ?
Governor E ccles. What?
Mr. H a n c o c k . There is no limit as to the maturity paper which
could be rediscounted, is there?
Governor E ccles. Except as the Board may make rules and regu
lations.
Mr. H anc oc k . I mean under the proposed law.
Governor E ccles. N o.
Mr. H a n c oc k . I s it not a fact, Governor Eccles, that the banks
have usually made most of their profits and earnings on so-called
“slow paper” ?
Governor E ccles. I think that, without question, the greatest part
of the banks’ income would be on paper that is not eligible, because
over 80 percent of all the paper of the banks, even in 1929, was not
eligible.
Mr. H ancock. N ow, Governor, just one or two other questions.
340
BACKING ACT OF 19 35
This morning, you made a comparison as to the cost, between keep
ing greenbacks out and the cost on 182-day paper. With respect
to the 182-daybills, is there any actual money passed in that trans
action? Is it not just a sheer bookkeeping transaction? Is it not
as I asked just a matter of bookkeeping? No real money is passed
or put out.
Governor E ccles. That is true of any loan, any loan a bank makes.
I t is a bookkeeping entry, and the money does not pass until the
borrower wants to draw it out in currency or check against i t ; and
the check has the same effect as currency. The money is passed then
as the account is checked against or as currency is drawn out and
used. And the same is true with the Government borrowing. The
banks take the bills or bonds and they credit the account of the Treas
ury and they debit the assets account of their loans and investments;
and the Treasury draws against those funds as and when it desires to,
just like any other depositor.
Mr. H anc oc k . H ow much money does the Government carry on
deposit with the banks today ?
Governor E ccles . I do not know exactly. I would say around a
billion and a half.
Mr. H a n c o c k . And what interest do they receive on those deposits?
Governor E ccles . They do not receive any.
Mr. H anc oc k . N o interest return whatever?
Governor E ccles . N o, sir.
Mr. H anc oc k . Of course, the banks that carry those large deposits
would naturally buy this short-term paper at a very low rate of
interest. Its really the Government’s money they are lending to the
owner.
Governor E ccles . The deposits that they have are of absolutely
no value to them, because they carry those deposits to the Federal
Reserve at no interest. So there is really a loss in the handling
of them under the present circumstances.
As a matter of fact the Government deposits of a billion and a
half, upon which the banks pay no interest to the Government, and
which the banks must secure by Government bonds, are not profit
able for the banks at this time when they have large excess reserves.
Taking the banking system as a whole, it carries with the Federal
Reserve banks more deposits in excess of what is required than the
Government carries with the banks. Therefore, the entire Govern
ment deposits could be moved to the Reserve banks; and thereby the
excess reserves of the member banks would be reduced from some
thing over $2 ,0 0 0 ,0 0 0 ,0 0 0 —whatever it is today—by the amount of
the transfer of those Government funds. For that reason, so long
as the banks have excess reserves larger than their Government de
posits, the Government deposits are of no value; there is no profit
to the banks.
Mr. H a n c oc k . Governor, let me get this straight in my mind.
Did I understand you to say this morning that the policy of this
administration and the Government from now on would be not to
issue any more currency against Government bonds?
Governor E ccles . I have no way of knowing what the future
policy may be. All I know is that the action which was taken by
the Treasury to call, as of July 1, the bonds which were used to
BANKING ACT OF 19 3 5
341
secure circulation, means that it eliminates from the national banks
the right to issue national bank notes. Now, unless legislation is
passed which again permits the national banks to issue currency
against bonds which they deposit with the Treasury, that privilege
will not exist.
Mr. H a n c o c k . I may be misinformed about it; but I was under
the impression that, under the present act, the President had the
right to extend the time within which that process could be carried
on; and that he had recently extended that time for another 2 -year
period.
Governor E ccles . N o. I t may be that you are referring to the
extension of the right of the Federal Reserve banks to issue Federal
Reserve notes, secured by Government bonds, in lieu of commercial
paper.
Mr. H a n c o c k . I was probably confused about that. That right
still exists?
Governor E ccles. That was extended a short time ago.
Mr. H anc oc k . Were any other bonds originally issued to the
national banks to support their circulation other than the Consols
and Panamas?
Governor E ccles . All of the bonds yielding 3% percent or less.
That right expires some time in July, and it cannot be extended
without legislation, which means that any currency of the national
T
banks that has been issued on a basis of the 3%-percent bonds, or
bonds yielding a lesser amount, will have to be taken up.
Mr. H a n c o c k . Well, I am glad to get that information from you,
because I had wondered, in my own mind, why the Treasury was
calling in the 2-percent Consols and 2-percent Panamas while leav
ing out the 3%-percent bonds if the purpose was to lighten the
interest burden on the people.
Governor E ccles . They are not calling in the bonds, but the bonds
lose their circulation privilege, which was conferred upon them for
3 years----Mr. H ancock (interposing). The circulating privilege?
Governor E ccles . The circulation privilege, which will make it
necessary for the banks which have used that circulation privilege to
pay to the Treasury the amount of money representing the notes
which they have used.
Mr. W olcott. Governor Eccles, I have a very few questions to
ask. I think all the questions that I had have been quite fully cov
ered, with the exception of one or two.
There has been a feeling on the part of many economists that there
should be very little affiliation between the currency of the country
and the national debt. I presume that they have in mind that if we
are called upon to manipulate the currency as our national debt in
creases or decreases, that that tends to an unstable currency.
In reading this bill I can see some affiliation between the action
of the Federal Reserve Board and the national debt, inasmuch as
they have the right, in the open-market operations, to help the Gov
ernment in maintaining its credit, by at least retiring that part of
the national debt which matures within the current year. Do you
think that is rather a dangerous practice?
Governor E ccles. It seems to me that the Government spends
only those funds which the Congress appropriates. The Congress
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BANKING ACT OF 1 9 3 5
that has the power to appropriate money also has the power to cre
ate a means of providing that money, if it is not done through the
existing banking system. Therefore, I do not feel that to make it
impossible for the Government to finance the appropriations which
Congress makes is necessarily going to defer what the Government
spends, but it is likely to jeopardize the existing banking and credit
structure. For that reason, it is desirable and necessary that there
should be a relationship existing between the banking system and
the Government in the interest, it seems to me, of the preservation
of the existing banking system.
Mr. W olcott. And would you say, also, the maintenance of th e
national credit by the use of the banking system of the country?
Governor E ccles . The national credit is not dependent upon the
willingness of the banks to supply it.
Mr. W olcott. N ow , in that connection, I assume that those openmarket operations—that the Federal Reserve Board can, by adopt
ing a policy which I understand to be mandatory in its operations
upon the member banks, compel the member banks to invest in Gov
ernment securities, so that, if we came to a time when, as I under
stand now, a great deal of our Government indebtedness is in the
form of short-term paper?
Governor E ccles. About $13,000,000,000.
Mr. W olcott. About half of our national debt is in the fo r m o f
short-term paper?
Governor E ccles. Under 5 years.
Mr. W o l c o t t . And there was an endeavor on the part of the banks
to unload that for the purpose of making more remunerative invest
ments in industry, then, the Federal Reserve Board, through its
open-market committee, could control that situation. So I see a
direct relationship between the national debt and the possible amount
of currency which is in circulation and the volume of currency which
is in circulation.
Governor E ccles . D o you mean by currency, deposit money as
well?
Mr. W olcott. I think we can confine it to Federal Reserve notes,
because, if I understand this bill, together with the policy of the
administration, our trend is toward a single currency.
Governor E ccles. Yes; but I think there is absolutely no relation
ship between the Government debt and the amount of Federal Re
serve notes in circulation. There may be absolutely no Government
debt, and there still may be, and likely would be, the same amount
of currency in circulation. There is no relationship between the two.
And it was interesting to note, in looking over some charts of other
countries, where the debts have greatly increased—in Japan, partic
ularly, I noticed the amount of its currency did not vary 5 percent.
And the same thing would show here, that, as a matter of fact, our
debt has increased during the last 2 years, and the amount of cur
rency outstanding has come down as the debt has gone up.
Mr. W olcott. Surely it has not increased in proportion to the
debt?
Governor E ccles . I t has decreased.
Mr. W olcott. When the debt w as about $20,000,000,000, we had
$4,250,000,000 of currency, or something like that, and at the present
time we have $5,600,000,000.
BANKING ACT OF 193 5
343
Governor E ccles. Something like $5,500,000,000 in currency at the
present time.
Mr. W olcott. When you say that it has decreased----Governor E ccles (interposing). Decreased in comparison with
what it was 2 years ago.
Mr. W olcott. I t has increased about $1 ,0 0 0 ,0 0 0 , 0 0 0 in the last
4 years. It has not increased in the last 2 years, but in the last 4
years.
Governor E ccles . Yes, I think that is right; and that is due to two
causes largely: One is the decreased use of checking accounts, due
to the service charges and check tax, and also due to reduced in
comes of people, which caused many of them to carry currency
instead of using the checking account. There has also been a reduc
tion in the number of small banks throughout the country, and thus
there are many small communities which formerly supported banks
and which today do not and cannot possibly support banks, thus
requiring the use of currency in those communities. I think that is
largely responsible for the increased use of currency. There is also
some hoarding, I suppose, but I do not know how much of a factor
that is now.
Mr. W olcott. In other words, instead of a man who owed several
people an aggregate of $1 0 0 , drawing as many checks as he has
debtors, he would either draw one check or go to the bank and draw
it out in cash, and, for that reason, there has been more demand for
cash.
Governor E ccles. That is right. There have been less checks and
more currency in circulation.
Mr. W olcott. S o that you claim there is no relativity between the
amount of the national debt and the amount of currency in circula
tion?
Governor E ccles. That is right.
Mr. W olcott. Getting back to the question which was asked a
few minutes ago, about the use of some, of this gold profit to retire
these Consols, upon which the national banks based their circulation,
I assume from that and from this bill that it is the policy of the
Government to eventually create a situation where we have a single
currency, which will be whatever silver is needed for change and the
Federal Reserve bank notes.
Governor E ccles. This action will reduce the currency to the silver
certificates which, from all present indications, may be a permanent
part of our currency, and the greenbacks, which are $346,000,000.
Outside of those two currencies, the Federal Reserve notes will be
the only other currency in use; and, of course, the Federal Reserve
currency will represent the great percentage of the currency in use.
Mr. W olcott. S o that the Congress, in the adoption of that policy,
by passing this bill, would further contribute to the criticism of the
Congress as having delegated its authority to coin money. I am
not criticizing that policy. I am merely asking for the information.
If there has been criticism of our having delegated heretofore to
the Federal Reserve banks the prerogative of Congress to regulate
the currency, there is a likelihood of a further criticism of our
having centered the control of the volume of money in the Federal
Reserve System, is there not?
l
344
BANKING ACT OF 1 9 3 5
Governor E ccles. Reaction of Congress in taking away from the
national banks this right to create money does not seem to me that it
should subject Congress to criticism. I t has not deprived the Con
gress of any of its power to regulate money.
Mr. W olcott. Well, it surely cannot be considered as a recapture
of any of the prerogatives of Congress, which they have under the
Constitution, to issue currency, can it?
Governor E ccles . I do not think that it either takes away from
or gives to the Congress any powers.
Mr. W olcott. Well, I listened with a great deal o f interest to a
radio address by Father Coughlin, whom you have no doubt heard.
Governor E ccles. I have not. I have never heard Father Cough
lin. I have heard of him a plenty.
Mr. W olcott. I will not attempt to quote him exactly, of course,
but, in the course of his discussion, which was, I believe, the night
that it was announced that $642,000,000 of the gold profits would be
used for the purpose of retiring these consols, he at least expressed
some pleasure at the fact that, at last, the administration was using
some part of this fund as a base for the issuance of currency. Now,
if I understand that operation correctly, we merely retired national
bank currency and substituted therefor Federal Reserve notes. Is
that right?
Governor E ccles . That is right. The calling of the consols,
$675,000,000, by the use of the gold profit, resulted in reducing the
national debt out of the profits that were created through devalua
tion, to the extent of $675,000,000.
Mr. G oldsborough . It was a deflationary gesture, too, wasn’t it?
Governor E ccles. The national-bank notes outstanding, which
were secured by the consols which were called, were naturally re
tired.
Mr. W olcott. Well, then, by retiring the consols, the Panama con
sols and these other consols—and there is another consol. What is
the other?
Governor E ccles . The Panamas and the consols.
Mr. W olcott. By reason of having retired those consols, of course,
it is necessary to retire a like amount of the currency that was
started by those consols.
Governor E ccles . That is r ig h t.
Mr. W olcott. S o that, unless we issued Federal Reserve notes to
replace them, the volume of money we have outstanding will be
$642,000,000 less, provided that was the money out against the con
sols?
Governor E ccles . That is right.
Mr. W olcott. S o that, instead of being inflationary, instead of
using any part of the gold profit for the purpose of increasing the
amount of money outstanding, it takes out of circulation the
national-bank currency in that amount?
Governor E ccles . No. There is no difference in the amount of
money. Federal Reserve notes will be substituted for the nationalbank currency; and it will be done unconsciously, because people
holding national-bank notes will use them in the course of business,
just the same as they would use Federal Reserve notes or silver cer
tificates. There is no distinction made in the use of the currency.
Now, as the national-bank notes become mutilated, the banks will
BANKING ACT OF 1 9 3 5
345
send in the currency, as it comes in through the deposit windows and
is sorted—and, as the old notes are sent in to the Reserve banks, new
Federal Reserve notes will be sent to the member banks in place of
those notes, to meet the demands of the customers. The Federal
Reserve banks will send in these mutilated national-bank notes to the
Treasury and the Treasury will destroy them; whereas, in the past,
they would issue new notes, keeping up the flow.
Now, the national-bank notes will just gradually pass out of exis
tence as they become mutilated and, as they pass out of existence.
Federal Reserve notes will take their place. I t might take a year
before the whole process is worked out.
Mr. W olcott. I t was on that that I predicated my previous ques
tion concerning the concentration of the circulating medium in the—
or the regulation of the volume of the currency* in the Federal
Reserve System, taking from the national banks the money outstand
ing against these consols, and the Federal Reserve System issuing
in place Federal Reserve notes.
Governor E ccles . That is right.
Mr. W olcott. There are two provisions in the bill on which I have
had a great deal of correspondence. I do not know whether you are
acquainted with one of them, Governor; that is, the provision with
respect to the examination of private banks. Now, in the bill which
we passed in 1933, we provided that within 1 year after the operation
of the act all private banks which were not inspected by a State
examiner, must, in order to continue to receive deposits, submit to
examination by either a Federal Reserve examiner or a national-bank
examiner. Thejr had their choice as to which they would elect to
be examined by.
Now, I notice that in this bill the law is to be amended some
what ; and I wondered what the reason for that was. I t is amended
in subsection (b) of section 303, page 52 of the bill. It is an amend
ment to paragraph 2 of subsection (a) of section 21 of the Banking
Act of 1933 and it provides th a t:
The expense of the examinations required hereunder shall be assessed against
and paid by, the institution subject to examination in the manner and with
the same effect as provided by section 5240 of the Revised Statutes, as
amended.
What would you say was the purpose of that?
Governor E ccles . That is under title I I I of the bill; and th ere
are, of course, a good many phases that the Federal Reserve are in
terested in under title III, that have not come up or been discussed
here. I t was my understanding that the discussion at this time
would be confined to title I I of the bill.
Mr. W olcott. Well, this directly affects the Federal Reserve Sys
tem.
Governor E ccles . Well, there are quite a number of----Mr. W olcott (interposing). I do not quite understand it. I am
not very well acquainted with this and it is something that you might
not be acquainted with, because it is a matter of detail, and these
are a few isolated cases.
Governor E ccles. Title I I I is composed largely of the legislation
that was in the omnibus banking bill of the last Congress. There
are some additions and some modifications and the particular section
346
BANKING ACT OF 19 35
referred to is a section that is recommended by the Comptroller of
the Currency. Under title I I I there are, I think, some 32 provisions.
Thirteen of the provisions, of the total of 32, are provisions that the
Federal Reserve System recommended and was interested in. The
other sections were proposed by the Comptroller of the Currency
and the Federal Deposit Insurance Corporation. They are largely
of a technical nature.
Mr. W olcott. Then, you are not in a position, as coming from
the Federal Reserve Board, to say what the purpose of those was?
Governor E ccles . No ; I am not; because that was developed by
the Comptroller of the Currency.
Mr. W olcott. Would that be true also of the prohibition against
bank officers and executives borrowing from their banks ?
Governor E ccles . That prohibition is already in the e x is tin g law.
Mr. W olcott. But, there is a change. I have introduced a bill,
at the suggestion of the Treasury, and Senator Copeland introduced
the bill. It was suggested that I introduce it in the House; and I
understand that they have used the language of it here in this bill.
I wanted to ask some questions on that. This bill gives bank officers
and executives 2 years in which to retire their investments.
Governor E ccles . Three more years in which to retire loans made
before the enactment of the Banking Act of 1933.
Mr. W olcott. I wondered if any thought had been given to plac
ing a limit upon the amount that they could borrow after that or
at the present time.
Governor E ccles. There was no consideration given to that by the
officials of the administration who considered that particular legisla
tion. And the Federal Reserve Board and, also, the Office of the
Comptroller of the Currency have felt, as I stated here this morning,
that bank officers should be prohibited from borrowing from their
own institutions; and that, in cases where they have loans, they
should be given an extension of 3 years.
M r. W olcott. I was interested in the matter only to the extent
that several have written me about it; and it seems to me that the
prohibition would work an injustice in small cities, where there is
only one bank. And they think that they should be permitted to
make emergency loans, up to $1,000 or $1,500, or something like that.
I am not particularly interested in the section, but I am inquiring.
Governor E ccles . We are not recommending that bank officers be
permitted to borrow from their own banks under any circumstances;
and it is my personal view that it would be a mistake to permit bank
officials to borrow under any conditions from their own institutions.
Mr. W olcott. I appreciate the purposes of this legislation. Yes
terday, I think, Congressman Gilford was questioning you, and you
remarked that the British national debt is only 7 percent of the
national income.
Governor E ccles . That the servicing, the interest, on the British
debt is a little over 5 percent of the national income.
Mr. W olcott. And that the interest on the United States national
debt is about 1 percent of the national income.
Governor E ccles . That is right.
Mr. W olcott. In arriving at that conclusion did you take in to
consideration the internal, municipal debt of the United States?
BANKING ACT OF 1 9 3 5
347
Governor E ccles. N o ; only the national debt. I think I have the
figures on the other debt in my mind. The British municipal debt
is, of course, much smaller in proportion than the American debt.
Mr. W olcott. They have a more centralized government?
Governor E ccles. That is right. I think that the total public
debt of Great Britain, so far as the figures are available—and it is
difficult to get very accurate figures—is about $48,000,000,000. That,
of course, is figuring the pound on the old parity basis of $4.85, and
the American debt—in considering the Federal debt, as I said yes
terday, the question of what we deduct from it by way of assets
which are held in the form of loans that are made by the Recon
struction Finance Corporation, or other loans that are made by other
Government agencies, should be given consideration.
Mr. W olcott. After those deductions were made, I believe you
said it was about $25,000,000,000 ?
Governor E ccles. I said it was less than $25,000,000,000, without
deducting the gold profit, which now makes up the stabilization
fund—say, $22,000,000,000. I think the municipal debt would be
around $17,000,000,000 to $18,000,000,000. _
Mr. W olcott. S o that our total public debt would be in the
neighborhood of $40,000,000,000?
Governor E ccles. That is right, as against the British debt of
about $40,000,000,000, whereas our national income----Mr. W olcott (interposing). Governor, for my purposes, probably
we can shorten this up by saying that the public debt of the United
States, based upon your previous statement, is something less than
2 percent of the national income?
Governor E ccles. N o. The public debt of the United States, in
total, would be about 50 percent of the annual national income—the
normal national income.
Mr. W olcott. I should not have said that. I should say the
carrying charges—the interest—for the total public debt.
Governor E ccles. The ratio between interest on the public debt
and national income depends, of course, upon what income you
figure—whether you figure on the present income or whether you
figure on what you term a normal national income.
Mr. Cross. What is a normal national income?
Mr. W olcott. Based on the normal national income.
Governor E ccles. It would be less than 2 percent of the normal
national income. Our normal national income, if we can figure
1927, 1928, and 1929 as normal, was about $83,000,000,000.
Mr. W olcott. D o you know what the normal national income of
Great Britain has been ?
Governor E ccles. Last year it was about $18,000,000,000, and $20,000,000,000 is about as high as it has been.
Mr. W olcott. Does public debt, in the sense that you are using it,
include the debts of municipalities, counties, towns, and villages?
Governor E ccles. That is right. It is between $17,000,000,000 and
$18,000,000,000, in addition to the Federal public debt, making a
total of around, say, $46,000,000,000 of public debt.
Mr. S isson. D o you use the term u national d e b t i n the same
sense ?
Governor E ccles. N o.
348
BANKING ACT OF 1 9 3 5
Mr. Wolcott. N o. At least I am distinguishing between the na
tional debt of the United States Government itself and the internal
public debt of the States, counties, cities, townships, and so forth.
And that public debt, other than the national debt, is between
$17,000,000,000 and $18,000,000,000; and the national debt of the
United States Government, according to the testimony, is, in round
figures, $22,000,000,000.
Governor E ccles. The national debt, as I stated, depends on what
you deduct by way of the gold profit and the assets.
Mr. Sisson. The guaranteed obligations of the Home Owners’
Loan Corporation was not included in the national debt?
Governor E ccles. N o.
Mr. S isson. They are not a direct part of the debt, are they ?
Governor E ccles. No. I am not including those as a direct part
of the debt.
Mr. Cross. When you said a little less than 2 percent, you meant
that the national debt, plus the other debts of the municipalities, and
so forth, required a little less than 2 percent to service the interest
charges?
Governor E ccles. Yes.
Mr. Cross. D o you include in public debts, national debts, munici
pal, State, and other local governmental debts?
Governor E ccles. The questions of Congressman Wolcott called
for making a comparison between the total public debt, which in
cluded the State, county, and city debts, plus the Federal debt, as
between the United States and Great Britain.
Mr. C ross. Yes; I understand that; but I wanted to get it stated
in the record so that those statements would show clearly that when
you said public debt you meant by that the public debts, Federal,
State, county, municipal, and so forth.
Governor E ccles. That is right.
Mr. Wolcott. Then, inasmuch as we have not taken into consid
eration the contingent debt of Great Britain, but have taken into
consideration the contingent debt of the United States Government,
our total national debt at the present time, without making these
deductions, is $31,000,000,000, and our State, county, and municipal
debts are $17,000,000,000. That would make a gross public debt of
$48,000,000,000, would it not?
Governor E ccles. That is right.
Mr. W olcott. Or within $1,000,000,000 or $2,000,000,000 of the
total British debt?
Governor E ccles. I think the gross national debt now is $27,000,000,000 plus. It is not $31,000,000,000. It would be $45,000,000,000,
if we included State and municipal debts without deducting the
balances on hand or the advances which will be repaid, or the gold
profits.
Mr. F ord. Governor, do the obligations include any of the obliga
tions of the Reconstruction Finance Corporation?
Governor E ccles. Yes; that is included.
Mr. F ord. That includes their obligations?
Governor E ccles. Yes.
Mr. F ord. And from that should be deducted their assets?
Governor E ccles. Most of the increase in the Government debt is
not due to spending but to lending. For instance, $1,000,000,000 of
BANKING ACT OF 19 3 5
349
the increase in the Government debt went to the purchase of pre
ferred stock and debentures of the banks and $800,000,000 have gone
to the receivers of closed banks as loans against their assets, in order
to hasten their liquidation. There are other loans which have gone
to the insurance companies, the railroad companies, the mortgage
companies, and so forth. In fact, the entire Reconstruction Finance
Corporation operation is a huge credit-expending operation, and
the amounts will largely be recoverable.
Mr. S isson . Are you taking into consideration at all the matter
which Mr. Ford referred to? I would assume that what be meant
by the assets of the Reconstruction Finance Corporation was the re
payments. You cannot tell exactly what those repayments are
going to be.
Governor E ccles. That is right.
Mr. S isson. Y ou are not deducting, then, from the national debt
the probable repajunents, are you?
Governor E ccles. Not in figuring the $27,000,000,000. There was
no deduction. That was the total outstanding debt; and, from that
you would have to deduct the balances on hand, which were over
$1,500,000,000, as well as all of these assets; and, of course, there
are also the commodity credit loans that have been made, running
up to $600,000,000 or $700,000,000. There is also, as I say, the
$2,000,000,000 in the stabilization fund. That is not taken into
account.
Mr. S isson. In this comparison which was made between the na
tional debt of this country and the national debt of Great Britain,
did your figures contain any comparison which would show what
the debt of this country is per capita, as compared with the British
debt per capita and what our income is per capita as compared with
the British income per capita?
Governor E ccles. I do not recall just what those figures are. Of
course, it would be a very easy matter to get those figures.
Mr. S isson . I remember reading them, getting them from other
sources; but I thought that, before basing any conclusions on those
figures, we ought to have them authoritatively. I know that our
debt is very much less in proportion than the British debt and that
our debt is very much less per capita than the British debt.
Governor E ccles. Oh, yes. If the committee is willing, I think it
may be well, in this connection, and I would like to insert in the
record a coordinated, connected statement covering this comparison.
1 he C hairman . There is no objection to that. We shall be glad to
have it.
S a e e t b Gvr o E c e o th Pu l Db s o th U it d S a e
t t mn y o e n r c l s n e b ic e t f e n e t t s
a dt e U it dK g o
n h n e in d m
The hind of comparison most frequently made between public debts of two
countries is in terms of debt per capita. The most recent authoritative figures
of this kind were prepared by the Treasury for the Joint Committee on Internal
Revenue Taxation. For national debt per capita—that is, the debt of the cen
tral government alone—the figures originating from that source are $850 for
the United Kingdom and $215 for the United States. The debt per capita for
all public bodies, including central governments, counties, municipalities, school
districts, etc., is $991 in the United Kingdom and $370 in the United States, or
about two and a half times as much in the United Kingdom as in the United
States. Only very tentative estimates can be made of the national income in
127297— 35------ 23
1
350
BANKING ACT OF 1 9 3 5
the two countries for the year 1934, but such information as we possess indi
cates that the national income in the United Kingdom was about $430 per
capita as against $400 per capita in the United States. In all these compari
sons the rate used to convert the British into the American monetary unit is
$5 to the pound.
Because of the very difficult questions connected with selecting the proper
rate of exchange between two currencies in making comparisons of this kind,
and because the income of a country is more important than its population in
considering questions as to the burden of its public debts, per capita figures of
the kind just given may be misleading. For this reason the figures below on
the relation of interest on public debt, public debt, and national income are
presented. National income as used here means the total money incomes ac
tually paid to all the inhabitants of a country.
Net central government debt, after deduction of Treasury balances, stabiliza
tion funds and other assets, is 38 percent of national income in the United
States and 15S percent in the United Kingdom, or about four times as much
of the national income in the United Kingdom as in the United States.
The debt of all public bodies—that is, the net central government debt plus
the debts of all other civil divisions—is 74 percent of national income in the
United States and 194 percent in the United Kingdom, or about two and onehalf times as much of the national income in the United Kingdom as in the
United States. In round numbers, the net debt of all public bodies in the
United States is $37,000,000,000. If it was as large in relation to our national
income as the British public debt, it would be $97,000,000,000.
Interest on the central government debt is 1.6 percent of the national income
in the United States and 5.4 percent in the United Kingdom. Interest on the
debt of all public bodies is 3.3 percent of the national income in the United
States and 8 percent in the United Kingdom.
The following are the figures on which these comparisons are based:
As of 1934
Gross central government debt_________________________ _______ ________
Net central government debt (after deduction of treasury balances, stabilization
United
States
United
Kingdom
Billions of
dollars
27.9
Billions of
pounds
i 6.9
19. 4
17.6
45.5
37.0
50.0
6.3
1.4
8.4
7.7
4.0
Millions of Millions of
dollars
pounds
817
215
844
105
1,661
320
» Excluding war debt.
The C h a ir m a n . Governor Eccles, I want to suggest to you that it
would be instructive if you would at some place in the record explain
what eligible paper is, or what may be eligible paper under the exist
ing law. I will not ask you to do that now. Just put it in the record.
Governor E ccles. All right.
The C h a ir m a n . If there is no objection, the committee will meet
again Monday morning at 10:30. Governor Eccles, we want you
T
back here at that time, please.
Thereupon the committee adjourned until Monday, Mar 18 1935,
at 10:30 a. m.)
B A N K IN G
ACT
OF
1935
M O N D AY , M ARCH 18, 1935
H
C o m m it t e e
o u s e of
on
B
R
e p r e s e n t a t iv e s ,
a n k in g
and
C urrency,
W ashing ton, D. C.
The committee met at 10: 30 a. m., Hon. Henry B. Steagall (chair
man) presiding.
The C h a i r m a n . Gentlemen, we are ready to resume the discussion
with Governor Eccles. Mr. Hollister, if you wish, you may have
the discussion this morning.
Mr. H o l l is t e r . Governor Eccles, I would like to ask you a few
preliminary questions before going into the actual gist of the bill
itself.
Would you mind telling the committee—and these questions are
with respect to title II, because with respect to title I and title III,
I think there will be very little discussion. Would you mind telling
the committee how this title II was prepared, who wrote it chiefly,
and how it was drafted?
Governor E c c l e s . The members of the legal, economic, and oper
ating staff of the Federal Board, together with myself, were ap
pointed a committee by the board, to prepare Federal Reserve
legislation to be considered by what is known as the “ Interdepart
mental Loan Committee ”, which the President had asked to con
sider all legislation dealing with financial matters. That in general
is the way the legislation was prepared. Of course, it was----Mr. H o l l is t e r (interposing). That was initiated by the Federal
Reserve Board?
Governor E c c l e s . What is that?
Mr. H o l l is t e r . Was that initialed bjr the Federal Reserve Board,
did I understand you to say?
Governor E c c l e s . The Federal Reserve Board appointed, at my
request, a committee to develop this legislation.
Mr. H o l l is t e r . And w ho was that committee?
Governor E c c l e s . The committee were members of the staff. I
was the chairman of the committee. The other members of the com
mittee were Dr. Goldenweiser, who has been with the Federal Re
serve Board for about 15 years, Mr. Wyatt, general counsel, who
has been with the Board for nearly 18 years, Mr. Morrill, the secre
tary, who has been with the Federal Reserve Board for 4 or 5 years
and prior to that was with the Federal Farm Loan Board, and Dr.
Currie, who is Dr. Goldenweiser’s assistant. That was the immedi
ate committee.
They were assisted, of course, by other members of the staff, such
as Mr. Smead, chief of the Division of Bank Operations, and Mr.
351
352
BANKING ACT OF 1 9 3 5
Paulger, chief of the Division of Examinations. Those men have
been with the Federal Reserve Board for a good many years.
This committee worked with me in the development of legislation
which was considered necessary and advisable. The proposed legis
lation was, in turn, cleared with a subcommittee of the Interdepart
mental Loan Committee, which reviewed it and suggested modifica
tions and changes. Mr. Morgenthau was appointed by the Presi
dent as chairman of the Interdepartmental Loan Committee.
Mr. H ollister. May I ask you there, was not that Interdepart
mental Loan Committee appointed some time ago as a clearing house
for the various departments’ financial requirements?
Governor E c c l e s . No; not altogether. It was appointed to clear
any legislation that was coming up from certain departments. All
legislation that was to come up from nine departments, including
the Federal Deposit Insurance Corporation, the Federal Reserve
Board, the Reconstruction Finance Corporation, the Home Owners
Loan Corporation, and the Farm Credit Administration, was to be
cleared through this committee or a subcommittee. That commit
tee was to----Mr. H ollister (interposing). It was to clear legislation as well as
to coordinate finance?
Governor E c c l e s . Largely to clear legislation.
Mr. H ollister. This draft went before a subcommittee for con
sideration ?
Governor E c c l e s . Yes, sir.
M r. L I o l l is t e r . W h o were the members of that subcommittee, if
you remember?
Governor E c c l e s . Yes. There was Mr. Coolidge, the Under Sec
retary of the Treasury, Mr. Oliphant, general counsel of the Treas
ury, Mr. Jesse H. Jones, Mr. Lynn P. Talley, who was formerly
governor of the Federal Reserve Bank of Dallas and is now assistant
to the directors of the Reconstruction Finance Corporation, and
Mr. Leo T. Crowley. I think, Mr. J. F. T. O’Connor, Comptroller of
the Currency, was in at one or two meetings, at the last. But most
of the work on title II was gone over and discussed by Mr. Coolidge,
Mr. Oliphant, and myself, and——
Mr. H ollister (interposing). Title II, then, as it was drafted and
presented in this bill, was the result of the preliminary draft which
the committee appointed by the Federal Reserve Board had pre
pared, after it had been checked over by the subcommittee of the
Interdepartmental Loan Committee?
Governor E c c l e s . That is right.
Mr. H ollister. Was that discussed at all with, or was the benefit
of the advice received of, any of the governors or the directors or
officers of any of the Federal Reserve banks ?
Governor E c c l e s . No ; not the governors. The matter was not
discussed with them.
Mr. H ollister. This was a presentation, it might be said, from
the point of view of the present Federal Reserve Board?
Governor E c c l e s . That is right.
Mr. H ollister. Was this draft, before being presented to Congress,
approved by the Federal Reserve Board?
Governor E c c l e s . N o . The Board was not asked to approve it.
The Board was kept advised of the legislation.
BANKING ACT OF 19 3 5
353
Mr. H o l l is t e r . The Board did not give any final approval of the
legislation ?
Governor E c c l e s . In fact, they felt that it would be better to take
no official action in the matter; but they were constanly advised as
to the development of the legislation, and individually they were
invited to express themselves about it, which they did.
Mr. H o l l is t e r . But, prior to the introduction of this bill, there
was no consultation whatsoever with any of the individual bankers
of the country?
Governor E c c l e s . Oh, yes.
Mr. H o l l is t e r . Federal Reserve or otherwise?
Governor E c c l e s . Officials of the American Bankers Association.
Mr. Rudolph S. Hecht, president, Mr. Robert V. Fleming, first vice
president, and Mr. Tom K. Smith, second vice president, of the
American Bankers Association, were advised with—particularly Mr.
Smith.
Mr. H o l l is t e r . While the bill was being drafted?
Governor E c c l e s . Yes; and the report in the press as to the atti
tude of the American Bankers Association is entirely untrue. I
think that, as a matter of fact, they have been cooperative and
constructive.
Mr. H ollister. I do not know what that report in the press is
that you refer to.
Governor E c c l e s . I just saw a report that represented the Amer
ican Bankers Association as being opposed to title II of the bill. I
think it appeared along with an account of the Liberty League’s
opposition, which, of course, was not----Mr. H o l l is t e r (interposing). There was consultation, then, with
some of the officers of the American Bankers Association?
Governor E c c l e s . Oh, yes.
Mr. H o l l is t e r . But not with any of the governors of the Federal
Reserve banks?
Governor E c c l e s . Not specifically with reference to this particular
bill; but I discussed banking legislation with Governor Harrison, in
a general way, but not the specific provisions of this bill.
The proposal to broaden the eligibility requirements has been gen
erally recognized by all the bankers as desirable for some time. The
proposed combination of the positions of chairmen and governors is
desirable to the governors. It is undesirable to the chairmen, if they
are to be eliminated, or it is undesirable to the governors if they are
to be eliminated. But the principle of the combination of those
officers----Mr. H o l l is t e r (interposing). I do not want at the present time
to go into that in detail.
Governor E c c l e s . Yes.
Mr. H o l l is t e r . What I was trying to get was the preliminary pic
ture and how much consultation there was with those who were to be
very substantially affected by the bill, if it were to go into effect in
its present form.
Governor E c c l e s . Yes.
Mr. H o l l is t e r . Y ou have submitted to us a memorandum contain
ing some eight modifications, which you suggest.
Governor E ccles. There is one of them which is not important,
and I prefer to withdraw it. That is the one that suggested-----
354
BANKING ACT OF 19 3 5
Mr. H o l l is t e r (interposing). No. 6, you mean, the suggestion as
to the authority over open-market operations being vested in the
Federal Reserve Board?
Governor E c c l e s . It is the one which suggested that two members
on the Federal Reserve Board be selected from Federal Reserve
banks, men who have had experience as officers or directors of Fed
eral Reserve banks.
Mr. H o l l is t e r . Well, I do not seem to find such a provision on this
memorandum.
Governor E c c l e s . Well, anyway, I don’t think that is very im
portant.
Mr. H o l l is t e r . Well, these modifications that you have suggested
to us, have they been checked up in the same way in which the original
bill was drafted? Were they prepared by your committee of the
Federal Reserve Board and checked with the Interdepartmental Loan
Committee ?
Governor E c c l e s . N o . They have been checked only with some of
the individual members of the committee, not as official committee
action. They were, of course, checked very thoroughly with our own
committee and were also checked with the officials of the American
Bankers Association.
Mr. H o l l is t e r . N o w , as I understand it, there is still another
change suggested—that is, the withdrawal of one of these sug
gestions ?
Governor E c c l e s . Well, I do not think it is very important one
wai7 or the other. It was not mandatory but simply a suggestion
that, in selecting the members of the Federal Reserve Board, the
President considered the advisability of including at least two mem
bers who shall have had experience as officers of the Federal Reserve
banks. The difficulty I see about that is that it is practically im
possible to get any officials from a Federal Reserve bank to go on
the Federal Reserve Board; because the compensation paid the of
ficials of the Federal Reserve banks is two or three times the com
pensation paid the members of the Federal Reserve Board.
Mr. H o l l is t e r . I s it probable that, as we go along, there will be
still further suggestions made to change the draft of the bill as
presented ?
Governor E c c l e s . Y ou mean by me?
Mr. H o l l is t e r . By you or those representing the Interdepart
mental Committee or the Federal Reserve Board.
Governor E c c l e s . I do not think there will be any. Of course, I
cannot saj7 I cannot speak for others.
.
Mr. H o l l is t e r . I realize that.
Governor E c c l e s . There m ay be.
Mr. H o l l is t e r . What I am trying to get at, of course, is to what
extent the draft of the bill presented to us is a kind of rough draft,
which is perhaps quite controversial at points, and how much it is
the well-considered judgment, as you might say, of all the financial
interests of the administration. Of course, if it is to be submitted
in one form and suggestions made for changes by, perhaps, first one
branch and then anothe. ranch, perhaps the committee would have
a little different feeling about it than if it was in one form, which
could be finally agreed upon and considered the united suggestions
o f all the financial branches of the administration.
BANKING ACT OF 1 9 3 5
355
Governor E c c l e s . All except one of these suggested changes were
very minor modifications. For instance, the approval of the ap
pointment of governors by the Board each 3 years, instead of
annually.
Mr. H o l l is t e r . That is rather a major change.
Governor E c c l e s . Some may consider it major, but, at least, it is
not fundamental. It is extending the period of approval only.
When we prepared the legislation we expected, certainly, that modi
fications would be suggested or made, as is true in all legislation.
Mr. H o l l is t e r . Perhaps we might discuss section 201, then, right
off. Of course, a Federal Reserve bank is a private bank, which is
owned by private capital, the individual banks having the capital
stock in that Federal Reserve bank.
Governor E c c l e s . I t is quite different from the ownership of most
private corporations, since the member banks are limited to a 6-per
cent return on their capital under every circumstance. The board
of directors of a Reserve bank must get the approval of the Federal
Reserve Board with reference to expenditures and so forth. I t is
quite different from the average private bank.
Mr. H o l l is t e r . It is not exactly the same, of course.
Governor E c c l e s . N o .
Mr. H o l l is t e r . But the fact is that it is the money o f private
banks which goes to buy the stock of the Federal Reserve banks;
and the theory of the Federal Reserve banks was that the private
banks, which have the stock, would control the boards.
Governor E c c l e s . Of the Federal Reserve Board ?
Mr. H o l l is t e r . Of the individual banks. Now, you have
stated----Mr. B r o w n (interposing). May I interrupt a moment?
Mr. H o l l is t e r . Yes.
Mr. B r o w n . I have not seen a discussion of it yet, but the law still
provides for the issuance of stock to the Government of the United
States. I do not think any was ever taken.
Mr. H o l l is t e r . But, at the present time, all of the stock is owned
by the private banks.
Mr. B r o w n . That is the fact, is it not, Dr. Goldenweiser ?
Dr. G o l d e n w e is e r . Mr. Wyatt says there is such a provision. I
had forgotten it.
Mr. B r o w n . I t was in the original Federal Reserve Act.
Governor E c c l e s . The purpose of that provision was to enable the
Government to provide capital for the Federal Reserve banks if the
banks failed to subscribe for sufficient stock; but they did not fail
to do so.
Mr. B r o w n . I t was not put in the alternative, like that, was it?
Governor E c c l e s . Yes; I think it was.
Mr. H o l l is t e r . It was similar to the method b v which the Gov
ernment had to establish a number of these organizations which are
private organizations; to start them by Government backing. It
was similar to the home-loan banks, for instance.
You have stated that you did not consider that the change sug
gested (as to the approval of the Governor) from 1 year to every
3 years, was a major change?
Governor E c c l e s . Nothing fundamental. It in no way changes
the operation of the system.
356
BANKING ACT OF 1 9 3 5
Mr. H o l l is t e r . I t is true, is it not, that the right of the Federal
Reserve Board to approve every year the appointment of the chief
executive officer—the governor—of the regional banks, makes it
possible, of course, for the Federal Reserve Board to insist on some
one who is absolutely satisfactory to the Board, and to do it every
year.
Governor E c c l e s . Well, of course, the right of approval w ould
make it necessary that the Governor be satisfactory to the Federal
Reserve Board.
Mr. H o l l is t e r . And if that is changed to 3 years, just to that
extent the power of the central board over the chief executive of the
regional bank is weakened.
Governor E c c l e s . I t w as intended in the original Federal Reserve
Act that the chief executives of the regional banks should be the
chairmen.
Mr. H o l l is t e r . Theoretically, but not as a matter of fact.
Governor E c c l e s . Yes; but I think they could possibly be made
to be.
Mr. H o l l is t e r . Under existing l aw?
Governor E c c l e s . Oh, yes. The law has not been changed in
regard to the chairmen at all.
Mr. H o l l is t e r . I know that. But I know of no situation, in any
corporation, where the board of directors might not designate powers
in such a way as to make either the chairman of the board or the
president chief executive officer. In some corporations the chairman
of the board is the chief executive officer and the president has very
little authority, and in some corporations the president is the chief
executive officer and the chairman of the board is merely a figure
head.
Governor E c c l e s . I t depends largely on the strength of the men
the respective offices of governor and chairman. The governors have
usually exercised more influence than the chairmen. If it was their
purpose, the board might make the chairman the chief executive of
the bank.
Mr. H o l l is t e r . But in the ordinary corporation, if it came to a
conflict between two executive officers, the one that would get the
power would be the one that the board of directors backed up, would
he not?
Governor E c c l e s . I suppose he would. That is one of the reasons,
if you are going to operate a unified Federal Reserve System; that
it is very necessary and desirable that such conflicts should not exist
and that there be cooperation throughout the entire system. Other
wise the function of a central bank cannot be successfully carried out.
Mr. H o l l is t e r . Well, there is a difference, of course, between coop
eration, coordination, and control. What I am trying to get at is
whether section 201 does not really take away the control of the
regional banks from those who are duly appointed to handle their
affairs; that is, their directors, two-thirds of whom are appointed by
the banks who own the stock, and actually vest that control in the
Federal Reserve Board.
Governor E c c l e s . Y ou are not vesting it in the Federal Reserve
Board because the Federal Reserve Board would not designate the
governor.
: |
■*
I
BA N K IN G ACT OF 1 9 3 5
357
Mr. H o l l is t e r . They can throw h im out at the end of the year i f
they do not like him . I t is rather a strong weapon to hold over h is
head.
Governor E c c l e s . They can only disapprove of the person selected
by the board of directors of the bank. The proposal is that the head
of the bank be acceptable to the Federal Reserve Board and to the
board of directors of the bank, which is certainly necessary if you
are going to have coordination. I t would not be good organization
for a local board to elect or appoint a governor who is also to be a
class C director and chairman of the board of directors, under this
provision, if that appointee were not acceptable to the Federal Reserve
Board.
Mr. H o l l is t e r . I s the governor at the present time a class C
director ?
Governor E c c l e s . N o ; he is not a class C director. He cannot be.
Under the present law the Federal Reserve Board appoints all three
class C directors and designates one of them as chairman. Under
this bill the Board is giving up its power or right to appoint one of
the class C directors and to designate a person of its own selection as
chairman.
Mr. H o l l is t e r . There is no necessity of that if this other suggestion
is not effected. There is no particular need of making the governor
a class C director.
Governor E c c l e s . If he is going to be chairman he would have to be
a class C director.
Mr. H o l l is t e r . Yes; if he is chairman he would have to be a class C
director; but could you not provide for a governor and not change the
law with respect to class C director ?
Governor E c c l e s . The legislation could be left just as it is and you
would continue to have a chairman and governor, just as you now
have.
Mr. H o l l is t e r . You could abolish the chairmanship and still leave
the governor, the chief executive officer, appointed by the board of the
bank itself.
Governor E c c l e s . And have no chairman ?
Mr. H o l l is t e r . And have no chairman.
Governor E c c l e s . The chairman of the board is always a director.
Mr. H o l l is t e r . Yes; but the governor could be appointed from one
of the class A or class B directors.
Governor E c c l e s . That would require that the banks g i v e up their
selection of one of the six directors they now select.
Mr. H o l l is t e r . I should imagine that in order to keep their control,
by having a governor who would not be removable each year, they
would be willing to give that up.
Governor E c c l e s . I find that the combination of the offices of gov
ernor and chairman is universally looked upon as desirable.
Mr. H o l l is t e r . And I agree with that. The thing I am doubtful
about, very frankly, is the increase in the control of the Federal
Reserve Board over the powers of the individual banks.
Governor E c c l e s . With this change to a 3-year period, the Ameri
can Bankers Association is very favorable to this feature. The only
opposition comes from one source, and that is New York. Every
■other place except New York agrees to that change.
1
358
BANKING ACT OF 1 9 3 5
Mr. H o l l is t e r . The question is whether the independent banks
ought not to have the right to name their own chief executive officers
without any interference by the Reserve Board.
Governor E c c l e s . They cannot do that without at the same time
depriving the Federal Reserve Board of the power of appointing or
approving of the officers. In that case you might as well do away
with the Federal Reserve Board. The Board has no purpose if you
are going to make 12 separate banks, to operate as separate banks.
Why have a Board if you do that ? I do not know what the desire of
Congress may be in that regard, but certainly if you want to have 12
independent banks, then there is no reason or no purpose for having a
Federal Reserve Board. But if you are going to have a Federal
Reserve Board, then it has to be charged with responsibility and it has
to be given some authority.
Mr. H o l l is t e r . But you have today a Federal Reserve Board that
is charged with responsibility, and no one would deny that the Fed
eral Reserve Board today has enormous power, enormous authority,
and enormous responsibility; and also that, to all intents and pur
poses, there are 12 banks which have considerable—not considerable,
but some— independence; not as much as they used to have. I am
not asking that they have more, but I just dread taking away what
that have left.
Governor E c c l e s . I do not believe that we are taking it away,
because you are giving to them the right to select a chairman and
class C director, which they do not now have; and as a consideration
for that the Federal Reserve Board would be given the right to
approve of the appointment every 3 years. You would have any
thing but a satisfactory bank situation if the executive head of each
of these 12 banks were entirely unsatisfactory to and uncooperative
with the Federal Reserve Board.
Mr. H o l l is t e r . Well, just to be more specific, at the present time,
under the present set-up, what are the unsatisfactory conditions that
arise out of the fact that governors of the regional banks are not
subject to removal each year or at the end of any specified time by
the Federal Reserve Board? I do not mean exactly removal, but
they will be in such a position that they may be unapproved at the
end of a certain specific time. What are the conditions that arise----Governor E c c l e s (interposing). You mean with the present law?
Mr. H o l l is t e r . At the present time in operation.
Governor E c c l e s . All the legal relationship of the Board with
the bank is through the chairman. The governors, as I stated a
while ago, are not directors of the banks. I t seems to me that it is
a bad organization and that no one would set up a private organiza
tion on such a basis.
Mr. H o l l is t e r . Well, I understand there are certain mechanics
that have to be ironed out, but what I am trying to get at is th is:
W hat are the objections under the present operation to having the
chief executive officer, who is appointed by the regional bank’s board
itself----Governor E c c l e s (interposing). The regional banks w ill appoint
their chief executive officers.
Mr. H o l l is t e r . Yes; I know. But he can be disapproved at the
end of a year. He could be disapproved at the time he is appointed,
and if he does not act the way-----
BANKING ACT OF 1 9 3 5
359
Governor E c c l e s (interposing). He can be disapproved at the end
jf 3 years.
Mr. H o l l is t e r . That is under the suggested changes ?
Governor E c c l e s . That is under the suggested changes. He could
be disapproved at the end of 3 years, which, I think, is very necessary
and desirable in order to avoid friction and to have cooperation and
coordination.
Mr. H o l l is t e r . Can you point out instances of where governors
of the regional banks have conducted themselves in such a way that
the Federal Reserve Board has disapproved, and to what extent
and what are the nature of such actions ? What I would like to get
before the committee, if there are such things, is what action these
governors take which the Federal Reserve Board feels it should
have the right to disapprove. If it is merely a question of making
one man both the governor and the technical chairman of the
board—that is, of course, easy to settle. What I am trying to get at
is, what is the purpose of giving the Federal Reserve Board the right
to say to a regional bank, “ You cannot appoint the man you want ”,
or, at the end of the year, “ You cannot reappoint the man you
w ant” ?
Governor E c c l e s . D o you not think that there are enough good
men so that it is possible to get a man that would be agreeable both
to the Federal Reserve Board and to the regional bank board? Do
you think it is necessary to have as the head of one of the Reserve
banks a man who is unacceptable, because of inefficiency, we may
sajq or because of incapacity, and yet have him retained because of
the personal relationship existing between the managers of these
banks, or the governors, and the local boards? There is a senti
mental relationship and friendship that is built up due to very close
contacts, and a director of a bank, who personally has no stock
ownership in a bank, and only goes to a meeting once every week or
so, or every month, is not likely to oppose the reappointment of a
governor, even though he may ieel that he could be improved upon,
or that he may not be entirely desirable.
Mr. H o l l is t e r . I can answer that very easily by saying that such
a man should not be a director.
Governor E c c l e s . That is very true. But, after all. the directors
ar^ n°f stockholders. You must realize that.
Mr- H o l l is t e r . Would not your objection be met by a suggestion
that the governor could be removed for cause, just as you pointed
out the other day that the members of the Federal Reserve Board
n m be removed for cause, or the Governor of the Federal Reserve
Board ?
Governor E c c l e s . I think they already have that power now—to
remove for cause.
Mr. H o l l is t e r . What did you say?
Governor E c c l e s . They already have that power—to remove for
cause.
Mr. H o l l is t e r . Ih e governor or one of the directors of one of the
regional banks?
Governor E c c l e s . Yes.
Mr. H o l l is t e r . Well, then, there would be no necessity for this.
If a man is inefficient or incapable, he can be removed, so that this
legislation is not needed for that purpose.
360
BANKING ACT OF 1 9 3 5
Governor E ccles. The legislation, I think, is very greatly needed.
The matter of inefficiency or inability is a very difficult thing to
prove. A man may be filling a position that somebody else could
fill more satisfactorily. Questions of ability or efficiency are mat
ters of degree and you would have a very difficult problem if you
should attempt to remove a man for cause unless there were some
glaring lack of capacity or some personal act that would justify the
removal.
Mr. H ollister. Well, it really comes down to this, then: that you
believe that, as between the relative efficiency or inefficiency of sev
eral men, the power of designating one of such men to conduct that
regional bank should be in the Federal Reserve Board rather than
in the board of directors, the majority of whom have been elected by
those whose money is invested in the stock of the regional bank.
Governor E ccles. I think that, in the interest of the System, it is
very necessary that the Federal Reserve Board have the approval
of these governors who are selected by the directors of the Reserve
banks; and, as I stated, it would seem to me that there should be a
sufficient number of able men to permit appointments that are de
sirable to both the Federal Reserve Board and the local board. The
governors are the liaison officers under this relationship between the
12 Federal Reserve banks and the Federal Reserve Board; and, for
this reason, it seems to me, the Federal Reserve Board should have
the approval. Any governor who objects and any board that objects
to this Board approving would be actuated by the desire to retain
office, even though their retention was unsatisfactory and unaccept
able to the Federal Reserve Board.
Mr. H ollister. Of course that is a question as to whom the heads
of the regional banks should be acceptable. I had understood that
the theory of the Federal Reserve organization was that high-class
bankers, of independent judgment, should have some say in the con
duct of the System. Now it would seem to me to be fairly clear
that, if the head of each regional bank must completely follow what
the Federal Reserve Board indicates at all times, he ceases to be a
banker of independent judgment. Of course, if that is the desire of
Congress, that settles it; blit that was not the original plan of the
Federal Reserve System.
Governor E ccles. There is no thought or expectation that such a
thing will happen. In practice, I am certain that the banks will be
run under this bill very largely, so far as everything except monetary
policy is concerned, by the local boards of directors and by the gov
ernors of the banks. There is nothing in this bill that provides
that the Federal Reserve Board shall select or force on a bank a
governor who is unacceptable to the board of the bank.
Mr. H ollister. N o ; they could not force anybody on the bank who
was unacceptable to them; but they could keep refusing to appoint
people who might be acceptable to the board of the regional bank,
indefinitely.
Governor E ccles. Why should not the governor be acceptable to
both boards? If you want good organization, is it not better to
have the governor acceptable to both boards?
Mr. H ollister. Y ou have had enough experience to know that if
you have a situation of that character, where something must be ac
ceptable to people, absolutely, that they would have the control.
BANKING ACT OF 1 9 3 5
361
Governor E ccles. The Farm Credit Adminstration operates in
that way, in the question of the appointment of land-bank officers.
They are appointed by the local boards, subject to the approval of
the Farm Credit Administration, and the banks are owned by the
local farm associations, which is private ownership, so that you have
an example and it has worked out very well.
Mr. H ollister. Of course their functions are somewhat different
from those of the Federal Reserve System.
Governor E ccles. Yes.
Mr. H ollister. N ow, moving to section 203, and raising again this
question of independence: In the draft of the bill at the present time
the Governor of the Federal Reserve Board cannot be very inde
pendent if he can be removed by the President at will. He cannot
be particularly independent from the Executive’s desire.
Governor E ccles. Y ou mean in the present legislation?
Mr. H ollister. The proposed legislation.
Governor E ccles. That is true in the present legislation. There
is nothing in the proposed legislation with reference to that.
Mr. H ollister. What is the exact wording of the present legisla
tion with respect to the removal of the governor?
Governor E ccles. D o you have that, Mr. Wyatt?
Mr. H ollister. What section is that?
Mr. W yatt. Section 10. page 26, of the 1933 edition of the Federal
Reserve Act.
Mr. H ollister. Would you read that into the record?
Mr. W yatt (reading:)
Of the 6 persons thus appointed, 1 shall he designated by the President as
Governor and 1 as Vice Governor of the Federal Reserve Board. The Governor
of the Federal Reserve Board, subject to its supervision, shall be its active
executive officer.
Mr. H ollister. Is that all there is?
Governor E ccles. I s that all you have on that?
Mr. H ollister. I s there anything in that which permits the Pres
ident to remove the Governor of the Federal Reserve Board?
Mr. W yatt. It has been interpreted in practice that it does.
. Mr. H ollister. I realize that it is so stated, and it has been stated
in this room a number of times. I t has been stated in the papers,
but I have never yet been able to find where the President of the
Lmted States has the power to remove the Governor of the Federal
Reserve Board.
Mr. S isson . Is it not true, Mr. Hollister, that these officers are
executive or administrative officers, and is it not true that any exec
utive or administrative officer may be removed arbitrarily by the
President?
Mr. H ollister. I think it has been settled by the United States
Supreme Court.
Governor E ccles. Yes, sir.
Mr. S isson. It has been settled, I think.
Mr. H ollister. Let us not get into a discussion of that. I do not
want to get into a discussion with any members of the committee,
although I think I can point out to Mr. Sisson that he is incorrect
in his interpretation of the decision.
Let me ask you a question right in that connection. The Comp
troller of the Currency is appointed for how many years?
362
BANKING ACT OF 19 3 5
Governor E ccles. Five years.
Mr. H ollister. Can the Comptroller of the Currency be removed
by the President?
Governor E ccles. I do not think so. The term of his office is
provided under the statute.
Mr. H ollister. I s the term of office of the Governor of the Fed
eral Reserve Board provided by the statute?
Governor E ccles. Not as Governor. His term as member is pro
vided for.
Mr. H ollister. It is a 12-year term as director?
Governor E ccles. That is right.
Mr. H ollister. Then he is appointed Governor?
Governor E ccles. Yes.
Mr. H ollister. S o, theoretically, he is Governor up until he is
removed ?
Governor E ccles. Up until the time Governor Meyer was ap
pointed the President designated the Governor each year. It had
been the custom from the beginning of the Federal Keserve System
for the President to designate the Governor from year to year.
Mr. H ollister. And the fact remains that at the present time it
is provided that the Governor shall be appointed, and there is no
statement as to how he can be removed. I t is also true that the
change from the existing statute to the proposed statute is that, in
the existing statute, there is a provision for the appointment of the
Governor, with no provision as to removing him from office; whereas
in the proposed statute it is specifically provided that he shall serve
solely at the will of the President. That is the case, is it not ?
Governor E ccles. That is correct. I t seems to me that it is a mat
ter that should be clarified and that, if it is not the wish of Congress
that the Executive shall have the right to appoint a Governor and
remove him, the term of office as Governor should be made specific,
and the interpretation that has always been placed upon it should be
clarified.
Mr. H ollister. I agree with you fully. I am merely trying to
bring out by questioning what this bill does. Naturally, the Con
gress must make the decision as to what they want. I want to make
it perfectly clear what the provision of the proposed law will bring
about; and it is also true, is it not, that if the changes which you
have suggested in your memorandum are not made effective, as I
think you have stated earlier in the hearing, it would be possible,
always assuming that an Executive desires to do it, for the President
to change completely the personnel of the Federal Reserve Board by
designating each member of the Board Governor in turn and
removing him the next day.
Governor E ccles. I do not believe that is possible.
Mr. H ollister. I think it is highly improbable, but it is possible.
Governor E ccles. If a member of the Reserve Board desired to
retain his position on the Board, he would refuse to accept the posi
tion of Governor, knowing that he would go out the next day or the
next week. If. on the other hand, he did not choose to stay on the
Board if the President desired to remove him, he very likely would
resign without going through the formality of being appointed as
Governor.
BANKING ACT OF 1 9 3 5
363
Mr. H ollister. I think that is highly probable. What I am trying
to get at is—I do not like to be influenced into legislation which
would make make possible the arising of a dangerous condition,
when some irresponsible person might be in the position of Chief
Executive, and when such legislation is not necessary. I believe,
to that extent, the suggestions for amendment which you have made
hre excellent.
Governor E ccles. The possibility of a President resorting to sharp
practice of that sort in order to change the Board, of course, did
not occur to me, or, I think, anybody else who had anything to do
with this legislation. The reason for providing that a Governor’s
term as a member shall expire when he is no longer designated
as Governor was not to give to the President additional power but
to make it possible for a Governor who was no longer designated
as “ Governor ” to resume business without waiting for a period of
2 years.
Mr. H ollister. Of course, that could be done by other phraseology.
Governor E ccles. That is what is proposed. In other words, the
same thing has been accomplished, for all practical purposes, by the
suggested change; and because of the objection that was raised,
that you mention now, the amendment was proposed.
Mr. H ollister. D o you consider it wise that the President should
have complete control over the Governor of the Federal Reserve
Board?
Governor E ccles. I think so. I t is my feeling that the President
should have the right of appointment of the Governor of the Fed
eral Reserve Board. That is true in practically every country in
the world.
Mr. H ollister. He should have the right of appointment; but I
am talking about the right of removal.
Governor E ccles. That is right. He should have, it seems to me,
the right of appointing the Governor to serve at his pleasure. I
think that is in the interest of the Federal Reserve System. I think
it is very necessary that there be a very close relationship and liaison
between the banking system and the administration in power; and
I think that the Governor of the Federal Reserve Board is the
channel through which that relationship should develop, in the inter
est of the banking business.
Mr. H ollister. Can you not conceive of a situation where political
exigencies might be in direct conflict with wise banking policy and
wise credit policy?
. Governor E ccles. All I can say is that, if you have such exigen?var ls a case in point and depression is a case in point—then
I think it would be very unfortunate if the administration was unable
to cariy out its program. I stated, I think, when I first testified,
that the responsibility of any administration in power is largely
a social and an economic one. Practically all political questions
relate to social and economic problems. An administration cannot
be charged, when it comes into power, with dealing with those
problems separately, free, apart, and divorced from the money
system.
Mr. H ollister. Y on believe that even though from the point of
view of wise banking and a wise handling of the financial business
of the country a certain policy would be desirable, that if an admin-
364
BANKING ACT OF 1 9 3 5
istration decided that it should pursue a policy which might beotherwise, it should be in a position to control the banking and credit
systems, to force it along with its policy, irrespective of what the best
minds of independent banking might think ?
Governor E ccles. Of course, we have an independent banking
system, to an extent; and I do not believe that anybody would feel
that for the system to be more independent would be in the best in
terests of the bankers----Mr. H ollister. I do not want to interrupt you. I believe there is
a great deal in what you say. I do not believe we can answer present
questions by referring to the improper actions of the past. I am
just asking the question of whether or not it is unwise to put the com
plete control into the hands of the Executive; and I am generalizing
entirely, with reference to no particular executive and no particular
condition of the country. Before you answer, let me put it a little
more specifically. In our democracy, every so often the party in
power must appeal to the country, once every 4 years for Presidential
elections and once every 2 years for congressional elections. It is a
definite time at which such things have to be done, unfortunately.
Is it not very unwise to give the power of manipulation to the Execu
tive entirely when it comes to the credit situation and the banking
situation? Would it not be probable that the greatest man imagin
able, with an election coming on, would try to take advantage of
every possible facility to see that that election is assured, and would it
not be possible for him to control the banking and credit system
of the country for that purpose ?
Governor E ccles. There is nothing in this bill that proposes that.
Mr. H ollister. But it gives the President a much greater control
over the credit and banking facilities of the country ?
Governor E ccles. In what way, except as the Federal Reserve
Board has increased power ?
Mr. H ollister. I t gives the Federal Reserve Board increased,
power.
Governor E ccles. That is right.
Mr. H ollister. I t gives the President greater power over the
Board?
Governor E ccles. N o. The President has no different power over
the Board.
Mr. H ollister. Well, the President has greater power over the
Governor, who is the Chief of the Board.
Governor E ccles. Not unless you construe the proposal to mean
that it gives the President greater power than he now has. Of
course, there has never been a legal test as to the power of the Presi
dent to remove the Governor; but as I say, in practice it has always
been accepted as giving him that power.
Mr. H ollister. If it does not give any more power than at present,
there is no need of the change.
Governor E ccles. N o ; there is no proposal to make the change,
except----Mr. H ollister (interposing). As to the ability of the Governor
to go back into business ?
Governor E ccles. That is the sole purpose of it; and there was
no purpose or expectation that this was giving to the President addi
tional power.
BANKING ACT OF 19 3 5
365
Mr. H ollister. Then you would be perfectly willing to strike out
the provision for removal?
Governor E ccles. I do not see a particle of objection to it, be
cause, in practice, that is what happens and will happen.
Mr. H ollister. Y ou say you see no objection to striking it out?
Governor E ccles. The whole purpose of getting that into the legis
lation was to make it easier to get someone to act as Governor; in
other words, to make it easier to get a man to accept.
Mr. G oldsborough. May I interrupt? In that connection, Gov
ernor Eccles, if there is in fact any legal obstacle to putting into
effect the practice that now obtains, you would favor a change in the
language which would legalize and carry forward the practice?
Governor E ccles. Yes; I think it is desirable in the interest of
banking and in the public interest that the administration in power
designate the governor and that the governor serve during the pleas
ure of that administration. That has been true in most other
countries.
Mr. H ollister. That is not true in England.
Governor E ccles. England is about the only exception. I t is
true in practically every other country. It has been recognized, in
the establishment of all the central banks, within recent years,
that it is very necessary and desirable that the administration in
power have that responsibility and that authority.
Mr. H ollister. N ow, with respect to those banks, of course, you
have one central bank, where the board is privately elected or ap
pointed, and the chief executive, governmentally appointed, who, of
course, cannot exceed what the board will let him do. The board
itself controls the executive officers, even in the Bank of France—
or in most of the great countries, outside of Italy and Kussia. In
all those cases the board itself, which ultimately controls the chief
executive officer, is privately elected or appointed.
Governor E ccles. There are differences in the various organiza
tions. The Bank of Canada is the most recent; and in Canada the
board is really an advisory board and the governor can veto an
action of his board. He does not have to follow their recommenda
tions or their authorizations, as I understand it.
Mr. H ollister. In the Canadian bank a board of seven directors
is elected from diversified occupations by the shareholders.
Governor E ccles. That is right.
Mr. H ollister. The Canadian bank has a governor, a deputy
governor, and an assistant deputy governor, who have to be appointed for 7 years by the Governor General in council.
Governor E ccles. The board does not control the governor there
to the extent----. ^ r- H ollister (interposing). But, after the first term, however,
these omcials shall be selected by the directors, subject to the ap
proval of the Governor in council.
So that still puts the control of the central bank pretty well in
the hands of the private shareholders.
Governor E ccles. I t puts it in the hands o f the Governor in Can
ada, practically. Of course, there is this difference. In every other
country except this country, the commercial banks are not the share
holders, but the public are the shareholders.
Mr. H ollister. That is so in England.
127297— 35—* 24
—
366
BANKING ACT OF 19 3 5
Governor E ccles. I t is so in Canada, too. I think it is so in
France, and it is so in practically all the countries. I believe this is
the only coutnry where the banks control the central banking system
through their stock ownership and the majority of the board of
directors.
Mr. H ollister. But the public owns the stock in the banks, which,
in turn, own the stock in the Federal Reserve banks.
Governor E ccles. There is a great difference between----Mr. H ollister (interposing). The governors----Governor E ccles (interposing). In fact, in some of the countries
the banks are directly prohibited from owning any stock whatever
in the central banks, and the bankers are prohibited from being rep
resented on central banks.
Mr. H oleister. Well, of course, under our system, with our re
gional banks, we have only half of the directors that can be appointed
by the member banks.
Governor E ccles. N o. Two-thirds of them are appointed by the
member banks.
Mr. H ollister. Yes; but half of these are drawn from industry,
and only half may be bankers.
Governor E ccles. Yes; but they are appointed by the banks. Twothirds of the board are appointed by the banks, and the stock is
owned by the banks.
Mr. H ollister. I want to bring out the change in control this bill
will make, so I will take up for a few minutes section 205, which pro
vides for the open-market committee, a committee of five, which is
to be appointed and will consist, first, of the Governor of the Federal
Reserve Board, who, in turn, serves at the pleasure of the President;
next, two members of the Federal Reserve Board; and, next, two
governors of the Federal Reserve banks, who, in turn, if the provi
sions of this bill should become effective, may fail of approval by the
Federal Reserve Board at the end of a year, in the event, we will
say, that they are unwililng to go along with what the Federal
Reserve Board desires. That, of course, places the open-market
committee and its operations entirely in the control of the Federal
Reserve Board, does it not?
Governor E ccles. Y ou are discussing the provisions of the bill
with reference to the operation of the open-market committee, as pro
vided in the bill.
In my opening statement, if you will recall, I stated that that
provision of the legislation was not satisfactory, and that openmarket operations should be placed with the same body that had the
authority to fix discount rates and reserve requirements; that they
were three functions of monetary control that should be together, in
the same body, and that I felt that the Federal Reserve Board was
the body charged with the public interest; and that it should, there
fore, have that power and authority, subject, however, to securing the
advice of a committee of 5 governors selected by the 12 banks. I
made that suggestion in my opening statement. I suggested that,
rather than having an indirect way of putting the Federal Reserve
Board in complete control.
Mr. H ollister. Your theory is that it might just as well take the
whole thing right over and have no control whatever by the regional
banks ?
BANKING ACT OF 19 3 5
367
Governor E ccles. I feel that the authority over open-market policy
must be placed in a body that is charged with the responsibility that
the present legislation gives to the governors, who are not even
directors of the banks, the right to make open-market policies. The
Board approves or disapproves of the policy, and then the 12 banks
can either participate in the adopted program or they can refuse to
do so, so that you have----Mr. H ollister (interposing). You say all of the 12 banks or each
of them?
Governor E ccles. Each or any.
Mr. H ollister. And any of them might nullify what the others
did.
Governor E ccles. And what this proposed legislation is doing is
putting the responsibility and the authority for open-market policy,
discount rates, and reserve requirements, which are three instruments
of monetary control, in the Federal -Reserve Board.
Mr. H ollister. Y ou feel, then, that, notwithstanding how clear
it might be, we will say, to practically all the bankers in one par
ticular locality of the country, Dallas, San Francisco, or wherever
it might be, they should not participate in the open-market opera
tions. The Federal Reserve Board should have complete power, and
no matter how much the bankers might disapprove they should be
compelled to take participation?
Governor E ccles. Absolutely. The question of monetary policy
is a national matter, and it cannot be dealt with regionally without
having such situations as we have had in the past. I think openmarket policy, discount rates, and reserve requirements should be
controlled by the Federal Reserve Board, while making it mandatory
that the Board advise with the committee of governors before any
action is taken with respect to any one of the three instruments of
monetary policy that the Board controls.
Mr. H ollister. That, however, is not in the draft as presented.
Governor E ccles. N o. That is the recommended provision.
Mr. H ollister. Just a few questions on the matter of the col
lateral behind the Federal Reserve notes. In discussing this ques
tion on the days you have been before us you have stated that you
(hd not see the collateral added anything to the value of the notes.
Governor E ccles. That is right.
Mr. H ollister. D o you feel that the gold provision does ?
Governor E ccles. I t certainly does not under present circum
stances. And under past circumstances, when there was not suffi
cient gold, or we felt there was not, to back up notes wdiich were
secured and issued, the requirement was suspended, as an emergency
matter. In other words, when we get into an emergency, these
rigid requirements are suspended. So long as everything goes nor
mally and there is no difficulty in carrying out the requirement, they
seem to operate all right.
Mr. H ollister. Well, of course, there are those who do not quite
agree with the wisdom of suspending such requirements, who do not
believe that the emergency justified the suspension. But I am try
ing to get at your viewpoint. You say that the collateral does not
add anything, neither does the gold. Q.uerv: Do you go the whole
way, that we should remove all provision for some kind of collateral
behind Federal Reserve notes?
368
BANKING ACT OF 1 9 3 5
Governor E ccles. N o. Personally I think it is very desirable toleave the gold-reserve requirement back of the Reserve notes, and
also back of the deposits. The law provides that 35 percent of gold
should be held back of the deposits.
Mr. H ollister. Gold or lawful money?
Governor E ccles. Gold or lawful money; and, of course, our law
ful money now is----Mr. H ollister (interposing). Not gold.
Governor E ccles. Gold certificates and other forms of currency.
The C hairman . That provision was written into the law when
the law was that the legal money was gold ?
Governor E ccles. Yes.
Mr. H ollister. What is the advantage of that gold behind the
notes? Is it the limitation on the amount of notes that might be
issued ?
Governer E ccles. That is the*effect it might have, I suppose.
Mr. H ollister. S o that there is some upstairs limit, beyond which
you cannot go ?
Governor E ccles. If you have a bank run, and banks closing, just
as we did have, and you permit demands in gold again, and you per
mit the exportation of gold freely, then, through that action you
precipitate financial troubles and bring about a suspension of the
requirement. Now, if the payment of gold against deposits and the
free exportation of gold should be suspended, and serious banking
difficulties develop again, we would possibly go off the gold standard,
and then these restrictions would be suspended.
Mr. H ollister. Oh, we are off it today, of course, aren’t we? But
I don’t want to get into a long discussion of that. Some people say
there is a gold standard, simply because we can ship gold to settle
international obligations.
The C hairman . Nobody can get gold.
Governor E ccles. We have a price for gold now.
Mr. H ollister. Y ou believe there should be a gold reserve behind
the Federal Reserve notes that should be maintained ?
Governor E ccles. I think it is desirable that it should be.
Mr. H ollister. What is the reason for it ? Is it to give confidence
to the holder of the note that there is something behind it, or what
is it?
Governor E ccles. I think that there is no necessity of making the
change. There would be nothing particularly to be gained by it.
Without that requirement of holding so much gold back of deposits
and back of currency, you would have, I suppose, no restriction of
any kind. I think, psychologically, it would have a very bad effect
upon the country, and it is unnecessary. I t would, of course, leave
our money a completely managed currency without any relationship
to gold.
Mr. H ollister. In other words, it would shake people’s confidence
in the pieces of paper that they carried around in their pockets ?
Governor E ccles. I think it would. Whether justifiable or not,
that is the effect it would have.
Mr. H ollister. And the shaking of that confidence would imme
diately be inflation of a kind, would it not?
Governor E ccles. I doubt that. It has seemed difficult to get
inflation.
BANKING ACT OF 19 3 5
369
Mr. H ollister. What I am trying to get at is, if the gold reserve
of the Federal Reserve notes were entirely removed, you say it would
have a bad psychological effect and it would shake the people’s con
fidence in some way?
Governor E ccles. Yes.
Mr. H ollister. What would be the result of that, stagnation of
business and increasing unemployment?
Governor E ccles. If you eliminate any gold requirement for Fed
eral Reserve notes and for Federal Reserve deposits, then you would
be completely divorced from gold. Your currency would be purely
and completely a managed currency, without any regard whatever
to a metallic base. I t would be a complete divorcement. Now, if
it is desirable completely to abandon gold now, to make all the gold
we have serve only as a commercial commodity, then, of course, it
would be desirable to abandon all Reserve requirements for Federal
Reserve notes. Otherwise, it is desirable to keep them, because it is
the only recognition we have of the use of gold as a base for money.
Mr. H ollister. Y ou see, what I am trying to get at is the advan
tage of collateral behind notes.
Governor E ccles. That is a very different matter, the question
of gold and that of collateral.
Mr. H ollister. Both are some assurance of value.
Governor E ccles. Why not have collateral back of deposits ? Gold
is held as a reserve against both deposits and notes. Now, other
countries have gold requirements back of their notes, but most have
no collateral requirements back of them. They have gold require
ments back of their deposits, but they do not have collateral require
ments—
Mr. H ollister. But we do not have.
Governor E ccles. Oh, yes.
Mr. H ollister. I t does not require gold.
Governor E ccles. Or lawful money.
Mr. H ollister. Yes.
Governor E ccles. But, of course, that was based upon the requirenient that lawful money was redeemable in gold.
Mr. H ollister. Y ou think that there is an advantage in retaining
that?
&
Governor E ccles. I think at this time there is, until it is determine(l what is likely to develop in the future, with reference to the
gold standard, and whether other means of stabilizing exchanges can
. developed. To divorce completely our money from gold at this
time would seem to me to be rather a. costly thing for us to do,
W Af6 ^ °wn ^ percent of the world’s gold supply.
tt
mr. H ollister. Y ou feel, as I understand you to say, that there is
some advantage in limiting the total amount of Federal Reserve
notes that may be issued by the keeping of the gold requirement?
Governor E ccles. The keeping of the gold requirement does not
put. a limit, in and of itself, on Federal Reserve notes. As I ex
plained the other day, the notes which the Federal Reserve System
issues are the notes which the customers, the depositors, of the com
mercial banks require to conduct the business of the country. Only
■when unlimited hoarding is permitted would there be any possi
bility of the need of suspending specie payments and gold exports.
370
BANKING ACT OF 1 9 3 5
The amount of gold, of course, which is held, without regard to
the gold held by the Treasury, is considerably more than 100 per
cent of the amount of notes outstanding. The amount of notes
outstanding is as great as we have ever normally used in our busi
ness operations.
Mr. H ollister. But the existence of the gold requirement does
make a decided limit, beyond which Federal Reserve notes could not
be issued?
Governor E ccles. It is a limit beyond wdiich Federal Reserve
notes could not be issued. You would have terrible inflation long
before you reached the limit.
Mr. H ollister. Unless further devaluation occurred, in which
event you would have still more?
Governor E ccles. That is right.
Mr. H ollister. Still more gold, against which you could issue
more Federal Reserve notes?
Governor E ccles. Yes.
Mr. H ollister. I would like to ask this question: Is there any
T
thing in the existing situation, or what anybody could reasonably
predict, that makes this legislation a matter of great present
urgency ?
Governor E ccles. I think it is very desirable and necessary that
it be passed. I think it is several years late. I think that if legis
lation of this sort had been passed 4 or 5 or 6 years ago we might
have avoided most of the banking difficulties that the country went
through.
Mr. H ollister. One of the chief purposes to be accomplished that
you see, is the power of checking speculation under the powers
granted by this proposed legislation?
Governor E ccles. Control of speculation is one of the important
features. Another is to make a better coordination of the system
through the changes in the relationship of the Board to the banks
and the governors, combining the governors’ positions with those
of the chairmen. The eligibility feature is a very necessary and
important change in the legislation, in order to make banks feel
more free to extend long-term credit.
Mr. H ollister. There are many of the provisions of the Federal
Reserve Act, are there not, that ought to be revamped, gone over,
and studied pretty thoroughly?
Governor E ccles. There are quite a number of provisions pro
posed in title I I I of the bill.
Mr. H ollister. I realize that.
Governor E ccles. That go quite a way toward correcting and
toward clarifying the existing Federal Reserve legislation. I do not
believe that we will ever reach a point in this country where we
will have perfection in our banking legislation. We are. of course,
in a changing economy and, looking over the past hundred years,
we have found that no one has been able to develop a perfect svstem
of money and banking: and I do not believe that this proposed
legislation means that we have reached the millenium in banking
and in dealing with our banking and money problems.
Mr. H ollister. It comes down to the individuals who are running
the thing, finally.
BANKING ACT OF 19 3 5
37 J
Governor E ccles. What is that?
Mr. H ollister. I say, it comes down to the individuals who are
running the thing, finally.
Governor E ccles. The individuals who are managing the enter
prise are certainly a very important element in any private or public
field of activity. The administration can go a long way towT
T
ard
either wrecking or making successful what is done under any
le ‘ ;lation.
r. H ollister. I asked that because there is a difference in
philosophy of government. Some people say there is no need of
checks and balances, if you can secure a race of supermen to run
things properly. But there is no indication that we are going to
have supermen running the banking system any more than in the
past, no matter in whose hands it is put.
The C hairman . Y ou mean there is no such thing as a benevolent
despotism ?
Mr. H ollister. I think that is very well put. I think that ques
tion really answers itself.
With respect to the raising of rediscount rates, the strengthening
of reserve requirements, and entering the open market, it has been
stated by you and others, with a great deal of justice, that our
trouble in the past has been that our so-called “ great bankers ” have
not been equal to the emergency and have not foreseen what was to
happen, or, if they did, they did not have the strength to take ad
vantage of the machinery which was available to stop the inflation
and boom. Realizing that these men were theoretically the best
bankers of their time, are we going to be in any better position by
placing the matter entirely in the hands of a Federal Reserve Board,
appointed by the Chief Executive? W hat is there to indicate that
the men so appointed, having these supreme powers, would be able
to handle them any better than they were handled by the so-called
“ great bankers ” of the past ?
Governor E ccles. There is a great difference between thousands
of banks acting independently and a small board charged with the
responsibility of monetary control. In the first place, the bankers
acting independently have no way of expanding money, and they
had no way of stopping the contraction of money, even had they so
desired, because they did not have control over the issuance of
money, such as is held by the Federal Reserve System. 'I n other
words, the independent, private, commercial bank is not a central
bank charged with or having central-bank functions, neither has
the Federal Reserve Board in the past been charged with the duty
of creating business stability. I feel that certainly a board, if
given the authority and charged with the responsibility for our
monetary policy, is more likely to feel personally that great re
sponsibility and to discharge its obligations and its duty in the
public interest than we have had any reason to expect in the past
of the banking system, as it has been constituted.
Mr. H ollister. D o you not fear that—and this is a repetition of
the question that I asked you a little earlier—that in the event the
situation were to create a condition of continued deficits, a time
arising when the floating of Government bonds became more and
more difficult—would it not be almost impossible for the Federal
Reserve Board, constituted as it would be under this bill, to refuse
372
BANKING ACT OF 19 35
to cooperate with the Treasury in continuing a financial policy which
independent bankers might deem was unwise ?
Governor E ccles. I think it would be extremely unfortunate for
the bankers if a situation was reached where the Government, hav
ing a continuous budgetary deficit, was unable to get the coopera
tion and support necessary from the Reserve banks and the bankers;
for the reason that it would probably mean, under those circum
stances, the issuance of currency rather than bonds to pay for the
budgetary deficits. It would mean the possibility of the Govern
ment taking over the banking system. As I stated the other day,
it seems to me that a Congress that can appropriate money to carry
out emergency needs, which create deficits, also has the power to
create the means of providing that money, in case the existing pri
vate system fails to do it. Certainly we would not question that, if
we were in war, and the private system failed to meet the demands
of Congress in the emergency, the means would be provided other
wise. I think that, in the interest of the banking system, it is im
portant and it is necessary that you have this cooperation in helping
to finance the program of the administration in power.
Mr. H ollister. Y ou have just stated that Congress, of course,
would have to use its various powers. That is admitted.
Governor E ccles. Yes.
Mr. H ollister. This bill, however, asks Congress to give to the
Federal Reserve Board these powers, which is quite a different prop
osition; and I ask you whether it is wise to give these powers to a
board which undoubtedly would have to be, to a great extent, con
trolled by the Executive. The question is whether we could afford
to give these powers to follow a certain procedure which might be
very unwise, from a banking point of view. If Congress were re
taining its power, that would be quite a different matter, but it is not.
Governor E ccles. If I understand your question, it is whether or
not I think it is desirable that the Eederal Reserve Board, or the
Federal Reserve System should be in a position where it could
finance a continuing budgetary deficit.
Mr. H ollister. N o matter how unwise it might appear.
Governor E ccles. Yes.
Mr. H ollister. That is, you understand the question?
Governor E ccles. Yes.
Mr. H ollister. Your answer to that is yes?
Governor E ccles. Yes.
Mr. H ollister. I meant to follow up the question asked you a
little while ago. If the fate of any system depends ultimately upon
men, whether or not it was not wiser to include checks and balances?
Has consideration been given to the fact that legislation might be
so drafted that, in the event of a rise of a certain percentage in
commodity prices or an expansion of deposits over and above com
mercial loans by certain proportion, or of stock prices, or of capital
exports, that then there should be, automatically, rediscount raises,
and the reserve requirements strengthened, and open market opera
tions, so that the discretion is not as broad as this bill would give—
almost unlimited discretion?
Governor E ccles. I t is not unlimited. The proposal which was
made the other day as to what should be the objective confines the
responsibilities of the Federal Reserve Board and places upon it a
BANKING ACT OF 19 3 5
373
very definite obligation. The proposal was that it should be the
duty of the Federal Reserve Board to exercise such powers as it
possesses to promote conditions making for business stability.
Mr. H ollister. Exactly. I understand that. But the very point
I am raising is that, because of the frailty of human nature, the
Board either would not perform its duty or would not be able to do
it, and is it not wiser to put some checks and balances in there?
Would the Board be gifted with such insight that they would be
able to tell----Governor E ccles (interposing). In the past, the Board had neither
the authority nor the responsibility. That has been the trouble in
the past.
Mr. H ollister. The trouble in the past was not the lack of au
thority or responsibility. The trouble in the past was that they did
not see what was coming. No one has intimated that the failure to
check the boom was due to lack of authority or responsibility.
Governor E ccles. I do not know; but certainly there were a good
many people who thought they knew what was coming.
Mr. H ollister. They were voices crying in the wilderness.
Governor E ccles. However, I personally think it would be a great
mistake to put into this bill rigid mandatory requirements that may
be impossible of accomplishment; and, even if they are possible, they
may not be desirable. Even if the attainment of certain mandatory
requirements were desirable at the moment it may be that the condi
tions and circumstances would be such in a year or in 2 years or 3
years that these automatic controls would not be desirable at all.
Mr. H ollister. I note that there has been stricken out in the pro
posed act subsection (c), section 12A of the Federal Reserve Act,
which provides that:
The time, character, and volume of all purchases and sales of paper de
scribed 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 re
gard to their bearing upon the general credit situation of the country.
What was the purpose of taking that out ?
. Governor E ccles. Because we do not think that should be the ob
jective of monetary policy. The provision that we are proposing to
substitute for it, and which I think is much more desirable, as ex
pressing what should be the objective, is the promotion of conditions
conducive to business stability and the mitigation of unstabilizing
influences in the general level of production, trade, prices, and em
ployment, so far as may be possible within the scope of monetary
action.
Mr. H ollister. That is a pretty big order.
Governor E ccles. I know. But simply to attempt to provide
credit for agriculture, commerce, and industry does not meet the
problem at all. Credit is now provided for agriculture, commerce,
and industry.
Mr. H ollister. If these powers are granted, if the bill should go
through approximately in its present form, what powers of a cen
tral bank will the Federal Reserve Board not have, outside of its
ownership of gold, or the right to change its value, of course ?
Governor E ccles. I t will exercise all the powers of a central bank,
so far as monetary policy is concerned, which is very desirable and
very necessary.
374
BANKING ACT OF 1 9 3 5
Mr. H ollister. That is what I am getting at. This bill really
makes an entirely Government-controlled central bank.
Governor E ccles. No ; not an entirely Government-controlled cen
tral bank. The Federal Reserve System is not a Government-con
trolled system.
Mr. H ollister. When this bill becomes effective, what powers are
there, which the Federal Reserve Board, which is appointed by the
President, and the Governor, who is subject to removal by the Presi
dent—what power hasn’t it got?—You say it has the power but is
not government ally controlled?
Governor E ccles. N o ; it is not governmentally controlled.
Mr. H ollister. Y ou say it is not governmentally controlled?
Governor E ccles. The members are appointed for 12 years.
Mr. H ollister. It will be more governmentally controlled than it
is at the present time.
Governor E ccles. The Board will not be more governmentally
controlled. The Board will be given more power. What I am con
tending for is not a governmentally controlled central bank at all.
What I am contending for is a central body, charged with responsi
bility for monetary control, in the public interest. Now, whether
it is the Federal Reserve Board or some other board is a thing for
Congress to decide. But what I am advocating is that the power
and the responsibility for monetary policy be placed in a central
body that is charged with the public interest, and if it is felt that
the Federal Reserve Board is a political board and will be dominated
by political expediency, let us say, rather than public interest, in
monetary policy, then, certainly, there should be some changes.
But I do not think that the Federal Reserve Board under this legis
lation should be considered a body that will act in connection with
its monetary policies, by reason of political expediency rather than
in the public interest.
Mr. H ollister. I s it not true, as a matter of fact, however, that,
as a general rule, boards with limited terms, appointed by the Execu
tive, are to a great extent under Executive control, particularly
when the chief officer can be removed at will?
Governor E ccles. I do not think that that is necessarily true.
Twelve years is rather a long period for board members. I have
suggested, in order to make the board members even more inde
pendent, that there be an increase in compensation for future ap
pointive members, and that pensions apply to all members, if they
are not reappointed. I think that would give them a degree of inde
pendence, under the provision which is suggested or provided for
in this legislation.
Mr. H ollister. That is all.
The C hairman . Well, gentlemen, it is 20 minutes to 1. I suggest
that we meet again at 3 o’clock.
Mr. G oldsborougii. Just one moment. This is not a question of
mine, but one of the members called my attention to it. On page 46
of the bill, at the bottom of the page, the second paragraph of sec
tion 16, it is said:
Every Federal Reserve bank shall maintain reserves in lawful money (other
than Federal Reserve notes or Federal Reserve bank notes) of not less than
35 percent—
And so forth.
BANKING ACT OF 1 9 3 5
375
At this time, what is that lawful money—what does it consist of?
Do you remember?
Governor E ccles. There is, first, the national-bank notes, which
have just been called; and then there are the greenbacks, $346,000,000;
and there are silver certificates. And there is coin, of course, the
silver dollar and smaller coins.
Mr. B r o w n . Gold certificates could be used also for that purpose.
Mr. G oldsborougii. D o you remember how much that amounts to—
how much that reserve could amount to ?
Governor E ccles. Well, of course, the national-bank notes will soon
be out.
Mr. G oldsborough. Yes; I know that.
Dr. Goldenweiser. I can give you an answer in a few minutes.
Mr. G oldsborough. Will you give us that later?
(Recess, 12: 45 p. in. to 3 p. m.) •
afternoon session
The committee reconvened at 3:15 p. m., Hon. Henry B. Steagall
(chairman) presiding.
The Chairman . Tell us about the amount of money in circulation.
Governor E ccles. According to Doctor Goldenweiser, the amount
•of lawful money outside of Federal notes was approximately
$2,400,000,000.
The C hairman . This language excludes Federal Reserve notes and
Federal Reserve bank notes?
Governor E ccles. With the retirement of the national-bank notes,
which have now been recalled, the amount of lawful money will be re
duced to approximately $1,500,000,000.
The C hairman . Of what would that consist ?
Governor E ccles. Silver certificates----The Chairman . H ow much?
Governor E ccles. $702,000,000 the first of the year; silver dollars,
$32,000,000; subsidiar}'- silver, $309,000,000; and minor coin, $130,€00,000; United States notes, $346,000,000. The national-bank notes,
on January 1, amounted to $888,000,000, and Federal Reserve notes
amounted to $3,520,000,000.
The C hairman . Federal Reserve notes are excluded?
Governor E ccles. Yes. After the call of the national-bank notes,
there will be $1,500,000,000 lawful money outside of Federal Reserve
notes.
Mr. S isson . I should like to clear up or correct a statement that
I made this morning which has reference to an observation of Mr.
Hollister. He made the statement, in substance, that it was well
settled by the Supreme Court of the United States that the President
has the power arbitrarily to remove any administrative or executive
officer appointed by him. I want to modify that in this way: I t is
my understanding that in every instance where the question has been
raised as to the power of the President arbitrarily to remove any
executive or administrative officer appointed by him, where that
question has been decided by the Supreme Court the Court has upheld
the power of the President so to do. Mr. Hollister, very likely with
some reason, says that is not settled. There is, of course, as we
know, a case before the United States Supreme Court involving that
376
BANKING ACT OF 1 9 3 5
question, which case has not been decided. My own opinion is that
at any time that question is decided by the United States Supreme
Court that power of the President will be upheld. In view, however,
of the fact, that it is not entirely conceded, at least it seems to me,
as the chairman this morning suggested, that it becomes of some
importance to the committee to decide whether the language recom
mended by Governor Eccles in this bill should be contained in the
bill. Therefore, that question does become of some importance
here. I t appears to me, aside from the reason that the chairman
advanced, that it becomes of some importance to have it in the act,
so that, in the light of experience, it might obviate a contest in the
future. I think that any limitation upon the power of the Presi
dent in this regard would be unconstitutional—that is, if we at
tempted to say that he shall not have the power—but for the reason
stated by the chairman and also in the interest of clarity, as Gover
nor Eccles has said, and also that it might obviate any question being
raised about it in the courts, if we believe that this should be a
national body in which there should be some unity of purpose
between the administration and the body in control of the monetary
policy, it seems to me that at least this committee should decide it
while considering the bill. I myself favor the language recom
mended by Governor Eccles.
I think that is all I have to say.
The C hairman . Mr. Brown, do you desire to ask questions?
Mr. B rown. I should like to ask Governor Eccles what the present
policy of the Federal Reserve Board is relative to open-market
operations.
Governor E ccles. The open-market committee is composed of the
12 governors. The law recognizes it as their responsibility to intiate
a policy and to submit recommendations to the Board, for its
approval, disapproval, or suggestions; so that the law as now con
stituted does not require the Federal Reserve Board as such to adopt
an open-market policy; except, as I understand it, in giving their
approval or disapproval to the policy initiated by the governors’
committee, they are required to take into account the credit needs
of agriculture, commerce, and industry.
Mr. B rown. Under the present section B of 12-A you are given
practical control of open-market operations, are you not?
Governor E ccles. In the present law ?
Mr. B rown. Under present law.
Governor E ccles. Under proposed amendments?
Mr. B rown. N o ; under present law. Section B of 12-A provides
that—
No Federal Reserve bank shall engage in open-market operations under sec
tion 14 of this Act except in accordance with regulations adopted by the
Federal Reserve Board. The Board committee from time to time shall con
stitute, adopt, and transmit to the committee and to the se'veral Federal
Reserve banks regulations relating to the open-market transactions of such
banks and the relations of the Federal Reserve System with foreign-controlled
or foreign banks.
It seems to me that the power to regulate there is the power to con
trol. I addressed my question having in mind that you are asking
us to vest complete authority which will be largely, I think to a
greater extent than at present, under the control of the Federal
BANKING ACT OF 193 5
377
Reserve Board; and I think it would be interesting to Members of
Congress, and particularly to this committee, to know what your
policy would be under present conditions. I assume it is the same
policy we have at the present time.
Governor E ccles. I cannot speak for the Federal Reserve Board
as to what the policy of the Board would be if this legislation is
enacted. That would naturally be a matter that the Board would
have to determine.
Mr. B rown. D o you not think it is fair for us to ask what you
would do if given this power under present conditions? I t seems
to me that we ought to know, that Congress ought to know your
attitude as chairman of the Board.
Governor E ccles. I can speak only for myself with reference to
the matter. I cannot speak for other members of the Board, who
would be just as independent in exercising their judgment as I
would try to be.
Mr. B rown. When I say “ your ” I am referring directly to you.
Governor E ccles. Yes; I understand. Under present circum
stances there is very little, if anything, that can be done.
Mr. G oldsborough. Y ou mean you cannot push a string.
Governor E ccles. That is a good way to put it, one cannot push
a string. We are in the depths of a depression and, as I have said
several times before this committee, beyond creating an easy money
situation through reduction of discount rates and through the crea
tion of excess reserves, there is very little, if anything that the re
serve organization can do toward bringing about recovery. I
believe that in a condition of great business activity that is develop
ing to a point of credit inflation monetary action can very effectvely
curb undue expansion.
Mr. B rown. That is a case of pulling the string.
Governor E ccles. Yes. Through reduction of discount rates, mak
ing cheap money and creating excess reserves, there is also a possibil
ity of stopping deflation, particularly if that power is used combined
with this broadening of eligibility requirement.
Mr. B rown. Does not a Federal Reserve bank have two main
functions? Eliminating the temporary loans we provided for last
year and other various forms of aid to all banks and industries, are
not the main functions of a Federal Reserve bank, first, rediscount
ing of paper turned in by the member banks ?
Governor E ccles. E ligib le paper.
Mr. B rown. And, secondly, to engage in open market transactions,
which, as I understand, relates to the buying of warehouse certifi
cates and other evidences of property back of indebtedness through
out the country as a whole and not confined to the particular Federal
Reserve district?
Governor E ccles. I t is largely the purchase of Government bonds.
Mr. B rown. D o you not engage in the purchase of warehouse cer
tificates?
Governor E ccles. Bankers’ acceptances.
Mr. B rown. Sometimes you do and sometimes you do not. Is
not that a question which the open-market committee decides
whether you shall engage or not in that line of work?
1
378
BANKING ACT OF 1 9 3 5
Governor E ccles. The open market committee determines whether
or not it shall purchase or sell Government bonds and bankers*
acceptances.
Mr. B rown. Under section D of 12-A of the present law you
cannot compel a particular Federal Reserve bank to engage through
your open-market committee or Federal Reserve Board in openmarket operations, can you?
Governor E ccles. That is right.
Mr. B rown. Under the proposed bill is it your idea that such
authority will vest in the open-market committee ?
Governor E ccles. That is right.
Mr. B rown. In other words, you feel that it is proper for the
Federal Reserve Board to say to a Federal Reserve bank that it
shall engage in the purchase of Government bonds and bankers*
acceptances ?
Governor E ccles. That is right. The way it is done is through
the system account. The holdings are largely prorated to the banks
in relation to their size and their own reserve situations.
Mr. B rown. Under the second portion of the present bill, section
12-A, it really does not seem to me that it gives you authority to
compel banks to engage in open-market operations. I do not find
anything in there requiring them to do so. I t says that “ they shall
conform open market operations to the provision hereof.” I do not
think it provides that they shall engage in open-market operations
against the wishes of their own board of directors.
Do I understand that vou have proposed an amendment to section
205?
Governor E ccles. D o you mean additional amendments to the bill
that was introduced?
Mr. B rown. Yes.
Governor E ccles. Yes.
Mr. B rown. I s there any language in your amendments that makes
it obligatory upon the Federal Reserve banks to engage in openmarket operations if they do not want to do so.
Governor E ccles. It was expected in the original legislation that,
where there was a committee of five proposed, the governor and two
other members of the board, and two governors of reserve banks, the
reserve banks would be required to participate in the purchase of
securities or bills as determined by the open-market committee.
Mr. B rown. Does your general counsel think that the language of
the act as you propose is sufficiently broad to enable the Board to so
command the Federal Reserve banks? It does not seem so to me.
If it is desirable that such an authority should be effected, I think
the language of the bill should be broader.
Governor E ccles. It was intended to be; whether it is or not I do
not know.
Mr. W yatt. The bill as introduced contains this language, on page
45, lines 3 to 9: “ The committee from time to time shall consider,
adopt, and transmit to the Federal Reserve banks resolutions setting
forth policies which, m the judgment of the committee, should be
followed with respect to open-market operations of the Federal Re
serve banks, and the Federal Reserve banks shall conform their openmarket operations to the provisions thereof.” That means that the
BANKING ACT OF 1 9 3 5
379
Federal Reserve banks must conform their open-market operations
to the provisions of the resolutions adopted by the committee.
Mr. B rown. Suppose the bank says, “ We have only sufficient
funds, in our judgment, to take care of the necessary rediscounting
of our own member banks and we do not desire to engage in openmarket operations.” Is there anything in that law to compel them
to so engage in open market operations ?
Mr. W yatt. Suppose that the committee adopts a resolution direct
ing that the banks shall purchase a billion dollars worth of Gov
ernment bonds and that each bank shall buy its pro rata share of such
bonds. How can they conform to the provisions of that resolution
without each bank buying its pro rata share?
Mr. B rown. By simply refusing to engage in open-market opera
tions and confining their business to rediscounting with its own mem
ber banks. That is a logical conclusion, I believe.
Mr. W yatt. I think the point you raise is a good one and that
the bill should be clarified so as to eliminate any doubt on the point.
Governor E ccles. The intention is to make it. mandatory, other
wise it would be impossible effectively to carry out any monetary
policy.
Mr. B rown. I do not mean to say that I approve the policy, be
cause I am inclined to agree with some things Mr. Hollister indicated
this morning, among them being that such control of Federal banks
and district banks is more than we ought to give. I want to point
out that it did not seem to me that your statement at the beginning of
these hearings said it was desirable.
Governor E ccles. I t seems to me that when we speak of central
izing control outside of the banks we fail to recognize the peculiar
structure of our Federal Reserve banking system as contrasted with
central banks elsewhere in the world. If we had here, which may
have been the more desirable arrangement, one bank with 12 branches,
or as many branches as may be necessary to serve the country, then
the board of directors would be charged with the responsibility of the
monetary policy as well as the responsibility of providing credit to
business, agriculture, and industry.
Mr. B rown. Instead of that kind of system we have 12 separate,
distinct banks.
Governor E ccles. Yes.
Mr. B rown. With 12 different capital set-ups varying in amounts
of surplus.
Governor E ccles. Capital and surplus do not determine the ability
to lend or to participate.
^Mr. B rown. It determines the amount of money they have availGovernor E ccles. N o ; they create money.
Mr. B rown. Only based upon the assets?
Governor E c c l e s . Only based upon the gold limits.
Mr. B rown. S o that you are attempting here to give such control
to the lederal Reserve Board similar in authority to that of a
board of directors over one bank with 12 branches?
Governor E ccles. But, actually, so far as open-market policy is
concerned, if we recognize the need of a monetary policy, it must
be carried out in the public interest. It cannot be left to the 12
banks, acting independently.
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BANKING ACT OF 19 3 5
Mr. B rown. I grant that. But I do not agree with you that your
control relates only to open-market operations. You are establishing
under this law, or, at least, you are given the right to establish,
general rules for the eligibility of paper for discount.
Governor E ccles. That is correct; but that does not mean that
the Federal Reserve Board has anything to do with the passing upon
the loans which are made. The Board has only the responsibility
of making rules and regulations with reference to the conditions
under which Federal Reserve banks can rediscount for or lend to
member banks; and its power is strictly limited, according to the
present statutes, to permit loans only upon certain specific types of
paper, of which there is very little in existence.
If the Board were given more discretion, the system would become
more flexible. The proposed amendment in no way gives the Board
power to compel the Reserve banks to make the loans. It is expected
that the Reserve banks will be just as independent as they have been
with reference to their autonomy in matters of regional interest.
Mr. B rown. Principally rediscounting?
Governor E ccles. Not only in rediscounting, but also in all rela
tions with member banks. The examinations are all conducted
through the Reserve banks. The Federal Reserve Board depends
upon the Reserve banks to carry on all of the relationships with the
member banks and with the communities. We are only providing
here for the placing of responsibility in a comparatively small body
that can be charged with the public interest, to deal with monetary
policy. That seems to me to be absolutely essential, if we expect to
avoid in this country the dangers inherent in a purely banker control
over the creation and the extinguishing of credit. We have had ex
perience with that, and we know that it does not work very satisfac
torily. Whether it will work any differently under the proposed ar
rangement, time alone will determine. But it does seem to me that
to deal with the monetary needs of a Nation on other than a national
basis and with any other purpose than that of serving the public
interest is to invite disaster.
Mr. B rown. In that connection, I note that by section 208 of the
pending bill, you repeal the provisions of the banking law, I think,
of 1933, by which we authorized the issuance of Federal Reserve
notes based upon the eligible paper that had been turned over to the
Federal Reserve banks by the member banks. And it was under the
authority of that section that the President recently extended the
right so to do from March 3, 1935, on for 2 years. That was done
2 or 3 weeks ago, was it not ?
Governor E ccles. That is right.
Mr. B rown. N ow you are repealing that provision of the law?
Governor E ccles. That is right.
Mr. B rown. And you propose to substitute section 16 of the law,
I presume, where the Federal Reserve Board have practically com
plete control of that matter of the issuance of new money. Is that
right?
Governor E ccles. A s I understand what you mean, the Emergency
Banking Act referred to permitted the Federal Reserve banks to
secure Federal Reserve notes with Government bonds, in addition
to commercial paper. The period of time during which that could
be done was extended, very recently, for a period of 2 years.
BANKING ACT OF 19 35
381
Mr. B rown. That is right. Governor Eccles, not only Govern
ment bonds, but notes, bills of exchange, and acceptances were eligi
ble as collateral for the issue of Federal Reserve notes, were they not?
Governor E ccles. Yes; that is right.
Mr. B rown. N ow we are repealing that section of the law.
Governor E ccles. Because we are making it unnecessary to put up
any collateral with the Federal Reserve agent for the purpose of
securing Federal Reserve notes. I t adds nothing whatever to the
value of the notes, as I have explained here on several occasions;
and it is an unnecessary requirement. No central bank requires it
except that it is still adhered to in the Bank of England; but no
other bank in the world requires it, and the amount of Federal Re
serve notes that are used has no relationship whatever to the col
lateral requirement. Federal Reserve notes may be required in great
amount when there are practically no discounts. The amount of the
rediscounts by member banks with the Reserve banks has no direct
relationship to the amount of Federal Reserve notes required. Only
the people of the country can determine the amount of currency is
required by the drawing of currency instead of checks.
Air. B rown. It seems to me that there is a considerable disagree
ment upon that matter of policy. We specified in the Banking Act
of 1933 certain types of commercial paper that were eligible as
collateral for the issue of Federal Reserve notes, the issue of new
money. Now, you repealed that, and, under section 16, you cover it
all by one sentence: “ Federal Reserve notes shall be issued and
retired under such rules and regulations as the Federal Reserve
Board may prescribe and shall be legal tender for all purposes.”
Now, is it not a fact that when people borrow money from banks
it shows that they are engaging in business, that they need credit?
Their notes are turned over to the Federal Reserve banks and money
issued.
Governor E ccles. No.
Mr. B rown. It was under the Banking Act of 1933.
Governor E ccles. No currency is issued as a result of that trans
action at all.
Mr. B rown. I am glad to hear that, because we have heard a great
deal over in the House about money being issued. You say there is
none issued?
Governor E ccles. N o. The borrowing by a member bank from
the Federal Reserve bank does not determine the amount of cur
rency that the member bank or the banks as a whole or the public
as a whole may require or use.
Mr. B rown. Well, was not that law passed for the purpose of
supplying the need of banks for currency to pay their depositors
when they demand it?
Governor E ccles. No ; 40 percent of the amount of notes outstandmg must be secured by gold certificates and 60 percent was required
to be secured by commercial paper. As a matter of fact, there was
so little commercial paper that it was impossible to provide the 60
percent; and therefore at one time there was over a billion dollars
of gold, in addition to the 40 percent gold reserve, that had to be
used as a substitute for the lacking commercial paper. In other
words, it was used to help make up the 60 percent; because there
127297— 35 ------ 25
382
BANKING ACT OF 19 35
was not sufficient commercial paper available. There is not the
quantity of commercial paper in the country upon which to----Mr. B r o w n (interposing). How about the individual banks? Let
us take a bank with a capital of a million dollars and a deposit lia
bility of 10 million dollars, and it has commercial paper that would
be eligible under this section of the Banking Act of 1933. I think
this committee supposed that if that bank wanted to convert that
commercial paper into cash it would be able to do so.
Governor E ccles. I t still can do it under this. There is no change
in the law proposed that prevents that. That bank can still go to
the Reserve bank and can take that commercial paper and can get
credit in its reserve account with the Reserve bank and can draw
down currency to the extent that it needs----Mr. B r o w n . That is, by rediscounting its notes ?
Governor E ccles. Or, as we are proposing here, if it has not the
eligible paper and it has other sound assets.
Mr. B r o w n . I may be dense on this, but it seems to me that you are
throwing out the basis for the issue of currency by issuing currency
upon the resolution of the Federal Reserve Board instead of basing
the issue upon the assets that are in the vaults of the member banks
of the country and the demand for money on the part of the depositing
public.
Governor E ccles. Let me explain that again.
The Federal Reserve banks have two kinds of liabilities—three with
their capital and surplus: Deposit liability, note liability, and the
capital and surplus liability. Loans and discounts and investments,
lawful money, and gold certificates are the assets of the Reserve banks.
The member banks which carry their reserves with the Reserve
banks ask the Reserve banks for currency only to the extent that they
have deposits with the Reserve banks. They must maintain a mini
mum reserve balance with the Federal Reserve banks, and when they
want currency they must acquire additional balances to which they
can charge the currency withdrawn. In order to get that, they may
send paper to be discounted with the Reserve banks.
The member banks supply currency to their customers, to their
depositors, when the depositors want to draw out their deposits, or a
portion of them, in currency; and if a bank reaches a position where
the customers have called upon the bank for currency and it is unable
to meet that call, that bank closes. Many of the banks in this country
were unable to meet that call, not because they were not sound but
because they did not have the eligible paper with which to go to the
Reserve bank and get credit; and therefore, because of the fact that
the banks were unable to do that, those banks were compelled to close.
As the number of banks closing increased, the demand for currency
increased, not because of the activity of business but because of hoard
ing ; and the very fact that the banks were unable to go to the Reserve
banks with sound assets to meet the demands of these depositors meant
finally a banking collapse. Had the banks been able to pay their
depositors in currency, the depositors would not have wanted the
currency, as was demonstrated after the bank holiday.
Mr. B rown. Does it not come down then to this question, or to this
situation: That the reason for the collapse of the banks that were
actually solvent, but that had so-called “ frozen assets ” or “ frozen
loans ”-----
BA N K IN G ACT OF 19 3 5
383
Governor E ccles (interposing). Deflation created a frozen con
dition.
Mr. B rown. But it was a lack of liberality in regard to the eligibil
ity of paper for rediscounting that caused a good deal of the distress.
And, by your next section, 206, you seek to liberalize those redis
counting rules ?
Governor E ccles. That is right.
Mr. B rown. N ow, that brings me to the meat of my discourse,
What are those rules going to be? That is the same question I asked
you regarding the open market operations. I think this committee
and this Congress ought to know what your own idea, Governor
Eccles, is and what those rules of eligibility are going to be. I
recognize that the law sets a standard as to real-estate loans.
Before you make your answer let me get one of my favorite objec
tions to Government practice in the past with regard to those notes
stated on the record. I am thinking of a small national bank in the
country. Now, the Comptroller’s office has a rule by which certain
collateral listed on the New York Stock Exchange, or other large ex
change, is recognized as collateral and the paper which that collateral
secures is eligible for loans. We have tens of thousands of small
manufacturing concerns, whose securities are good, but which are not
listed upon the New York Stock Exchange or the Detroit Stock
Exchange or the Chicago Stock Exchange, or any other large ex
change. Their statements show them to have plenty of cash assets
back of those securities. But, because of the rules of the Comptrol
ler’s Office—and I am not very familiar with the examination made by
the Federal Reserve banks, but I presume they are the same—the col
lateral of those small concerns does not stand nearly as well for loans
as does the stock of large concerns. Now, it seems to me that that
condition is unfortunate for the small banks and the small businesses;
and I am wondering, with respect to that situation, whether or not
there is going to be any liberalization regarding the eligibility of
that type of paper as collateral for loans rediscounted with the
Federal Reserve banks.
Governor E ccles. The matter that you refer to has reference to
the, treatment of certain types of loans in banks by the Comptroller’s
Mr. B rown. Well, and bv the Federal Reserve Board’s examiners.
, Governor E ccles. The Federal Reserve Board’s examiners accept
the Comptroller’s examinations for all national banks. They make
TI 1C ePendent examinations. That would be only a duplication.
^ ^^Gomptroller’g examinations are accepted by the Federal Reserve
Mi. B rown. That would apply to thousands of member State
banks.
rovernor E ccles. There are only 900 State banks, and these are
examined by the Reserve banks. But there is no prohibition either
under the Jaw or in the regulations, to my knowledge, against banks
making Joans secured by other than listed collateral, either stocks or
bonds.
Mr. B rown. Y ou say there is none?
Governor E ccles. There is no prohibition either in the regulations
or m the law against them.
Mr. B rown. There is in the practice.
1
384
BANKING ACT OF 19 3 5
Governor E ccles. N o ; not in practice.
Mr. B rown. I disagree with you.
Governor E ccles. There is none in practice. The question is, of
course, to establish values back of loans which are secured by un
listed collateral. Now, if collateral is listed it becomes much easier
to establish whether or not that particular loan is adequately secured
than is the case where the loan is secured by some local security that
it is very closely held and has no market ability. I t becomes diffi
cult for an examiner to determine whether or not a loan is adequately
and safely secured for that reason, but----Mr. B rown (interposing). Governor Eccles, don’t you know it to
be a fact that, with regard to the bonds of concerns throughout the
country, the Comptroller’s office has refused to approve bonds that
are not listed on the New York Exchange or some other large ex
change so as to be readily marketable ?
Governor E ccles. Refused to accept them for what?
Mr. B rown. A s loans.
Governor E ccles. T o secure loans?
Mr. B rown. Yes.
Governor E ccles. There is no prohibition in the law.
Mr. B rown. There is no prohibition in the law, but the practice
is to decline to approve such loans.
Governor E ccles. There is no such requirement.
Mr. B rown. What I am wondering is if you are going to be a
little more liberal on this?
Governor E ccles. I know that there are literally thousands of bond
issues, municipal issues, all kinds of issues, which are held by banks;
and, so long as those bonds are not in default, and their payments
are being met----Mr. B rown (interposing). I w ill except municipal bonds.
Governor E ccles. There is no restriction or prohibition against
the holding of those bonds. It is true that the examiners make an
effort to establish the value back of them, in the absence of a quoted
market, which is very desirable and necessary, in order to determine
whether or not the loan which the bonds or stocks secure, or the bonds
which are held directly, are worth what they purport to be worth.
Now, in the case of a local stock issue or local bond issue, there
is, naturally, the problem of attempting to determine the value of
that security.
I know, in my own banking experience, over a period of 20 years,
that we have had no trouble with the Comptroller’s office with refer
ence to matters of that sort; and many loans have been made on
local securities, and various bond issues have been purchased that
were not listed. The main thing is to have available and be able
to give to the examiner information with reference to the local
company whose stock is put up as collateral or whose bonds are put
up as collateral. Such information is necessary to establish the
value of the collateral which secures the note in question.
I find that most of the trouble is that in accepting local securities,
stocks or bonds, banks fail to provide sufficient information to enable
the examiners to substantiate the value of the securities which they
have taken. I t is lack of information.
Mr. B rown. I want to say to you that it is my judgment, then,
that the attitude of the Comptroller’s office has been very much more
BANKING ACT OF 19 3 5
385
severe in the Chicago district than it has been in the San Francisco
district or the Salt Lake City district, because that rule was enforced
when the banks were reorganizing in Michigan and Ohio in 1933 and
1934; and they did insist that those bonds be listed bonds.
I am glad that you have stated in the record what I think is a
more liberal policy regarding local stocks as collateral, as w ell as
local bonds.
I have two or three other questions, but I would like a little fur
ther answer to my question as to what other classes of paper, in
your judgment, the Federal Reserve Board should determine to be
eligible paper, for rediscount in the Federal Reserve banks.
Governor E ccles. I t would be my personal opinion—I cannot
speak for the Board—that very broad rules and regulations should
be made with reference to this subject and that a broad discretion
should be left to the Federal Reserve banks. I think that, in matters
of local credit concerning each Federal Reserve district, if they are
given discretionary power, the Federal Reserve banks can be relied
upon to make only sound loans; and I do not think, as a practical
matter, that there should be a lot of limitations and restrictions with
reference to what may be considered sound paper.
Mr. B rown. Well, for instance, as I understand it, 3-months’
paper has been rediscounted, one renewal allowed, and after that it
was taken out of the class of commercial paper that was eligible for
discount. That was a general rule in the Minneapolis and Chicago
districts and always enforced. Now, that was a general rule,
whereas there are a great many businesses that take a year for a turn
over; and they were limited there to 6 months’ credit. Now, would
your own personal disposition be to so liberalize the rule, if what I
say is true of that, so that paper for 9 months or 12 months could
be taken?
Governor E ccles. I would not like to say, under normal condi
tions, that paper should be taken on a bills-payable basis, for longer
than a 6-months’ period, because it is always an easy matter to renew
the paper.
Mr. B rown. Well, what would you say?
Governor E ccles. That would be up to the Reserve banks, the
question of renewal would be up to them. Certainly it would be bad
for the banking system as a whole to permit continuous borrowing
troni the Reserve banks by the member banks. Continuous borrow
ing from the Reserve banks by the member banks could only mean
that the member banks were lending money and rediscounting or
borrowing because of the difference in the rate that they paid the
Reserve banks and the rate at which they were able to loan. How
ever, I can well imagine a situation where you would have a crop
failure, drought conditions, catastrophes, and so forth, where it
would he very necessary for the Reserve banks in those areas not to
expect liquidation in that particular area; and it would be desirable
to carry the loans over for an additional time. Past experience and
the attitude of member banks toward borrowing indicate that we
can be assured that member banks are not going to borrow from the
Reserve banks except for short, seasonal periods of time, unless an
emergency develops, which may require that they borrow for longer
periods of time; and that is the purpose of this legislation.
386
BANKING ACT OF 1 9 3 5
Mr. B rown. But I am talking about the small business man now.
It happens that in my district, in one of the large resorts of Michi
gan, the practice in the merchandising business there is for a mer
chant to buy his goods in December. If he can pay for them then
he gets a substantial discount. He will not get his return on the
bulk of those goods until the following August. Now, it seems to
me that it is just as legitimate for that purpose to get a 9 months'
loan, in that type of business, as it is in certain other types of busi
ness, where the turnover is made in 3 months, as it is in the grocery
business; and that he should be accommodated for the 9 months’
period. Now, do you have in contemplation, when you lay down
these rules and regulations for eligibility, such a situation, and that
the normal course of a business of that character should be accom
modated ?
Governor E ccles. There is nothing to prevent the individual banks
from making loans of that sort today.
Mr. B rown. I am talking about rediscounts.
Governor E ccles. Of course, there is not any rediscounting today.
There are excess reserves of tremendous amounts.
Mr. B rown. There is, of course, in some banks.
Governor E ccles. That is true of the country as a whole. There
is practically no borrowing from the Reserve banks, and most banks
have excess reserves. In addition to that, if they had to borrow,
they would borrow on their Government bonds; because they would
be the easiest assets upon which to borrow.
Mr. B rown. Well, I take it that, on all these questions, you are
very much adverse to stating what, in your judgment, the policy
of the Federal Reserve Board will be in regard to the rediscounting
of paper.
Governor E ccles. I think----Mr. B rown (interposing). But, with the utmost good humor, I
do not think you have told me yet of any particular liberalization
that you propose to make in the rediscounting rules.
Governor E ccles. Rediscounting rules today are not made by the
Board.
Mr. B rown. B ut they w ill be under this bill, if it becomes a law.
Governor E ccles. Yes; but the law today states that only certain
specific types of paper, which are known now as eligible, short-term,
self-liquidating paper, are eligible. Now, this proposed legislation
broadens the power to a point where the Reserve Board is able to
make rules and regulations which will permit Reserve banks to
make advances against any sound assets.
Mr. B rown. What I am trying to find out is, what is your idea as
to what they should do?
Governor E ccles. I would leave that up to the Reserve banks. I
would favor broad enough rules to leave discretion to the Reserve
banks in passing upon credit. You might put a limitation of 6
months advances on a bills-payable basis. To make rules and regu
lations in Washington as to what would be adequate security for
advances to member banks would be rather a complicated procedure
and would certainly be inadvisable and unnecessary.
Mr. B rown. But the banks are given the authority, under the law,
to make those rules and regulations.
Governor E ccles Which banks?
BANKING ACT OF 1 9 3 5
387
Mr. B rown. The Federal Reserve banks and the Federal Reserve
Board are given that authority.
Governor E ccles. That is right.
Mr. B rown. T o determine the maturities and other matters.
Governor E ccles. That is right.
Mr. B rown. N ow, what I am trying to find out is what your pres
ent attitude is toward the eligibility of the various classes of paper.
Governor E ccles. I am just saying that I would permit the Reserve
banks to loan on any and all assets, real-estate mortgages, collateral
loans, bonds, or other assets, which they considered sound, on such a
basis as they considered sound.
Mr. B rown. And with what maturities?
Governor E ccles. My personal opinion, without giving any
thought or study particularly to the problem, would be that 6 months
advances on a bills-payable basis should be adequate. That does not
necessarily mean that a bank, at the end of 6 months, could not renew
for another 3 months or 6 months. But I do not believe that, on a
bills-payable basis, for advances, that 6 months would be working
any hardship upon the banks.
But in case of a rediscount, you would have maturity based upon
what would be considered the period of natural liquidation. For
instance, agricultural and livestock loans are 9 months, as it is con
sidered that the underlying transactions take that length of time.
Those are rediscountable now. Collateral loans, loans which are not
considered rediscountable and are not self-liquidating, through the
completion of business transactions, such as loans against mortgages
or loans against bonds, would likely only be made in cases of emer
gency, in cases of deflationary situations, and they would not be
made in the natural course of business except to a very limited extent.
Certainly, the Reserve bank should be given the power to enable a
bank that has an unusual'shrinkage of its deposits, and yet has sound
assets, to get credit on them until it can carry out a normal process of
liquidation, without closing and without bringing about an undue
deflation. That is the purpose of this legislation.
The C hairman . And you mean sound assets made within the limi
tation of the law establishing the rules under which those loans
should be made?
Governor E ccles. Yes.
1 he C hairman . In other words, if the borrowing bank had made
those loans within the law?
Governor E ccies. That is right.
Mr. B rown. N ow, getting back to commercial paper—expressed in
my poor way—should not the rule be that the discount should be
permitted for such length of time as would cover the normal period
from production to sale of the goods ?
Governor E ccles. I think that is what is contemplated under the
law now.
M r B r o w n . Personally, I would like to have you say that you
feel that way about it yourself. In other words, that you feel that
that is the kind of rediscounting that you, as a member of the Board,
would favor.
Governor E ccles. Y ou mean in case the Board is making rules
with reference to rediscounting?
Mr. B rown. Yes.
388
BANKING ACT OF 19 3 5
Governor E ccles. What do you have in mind, what particular
item?
Mr. B rown. Let us take something that you and I know something
about. Suppose we did not have the system of handling sugar by
warehouse receipt. It takes from September, generally, to August,
in Michigan, to bring about the cycle from payment to the farmer
for the production of sugar beets, to the final payment for the sugar
and collection. Now, it seems to me that the period of discounts
should be that length of time and that notes for that period should
be eligible for rediscount.
Governor E ccles. D o you mean on a straight bills-payable basis?
Mr. B rown. Straight bills-payable basis; yes.
Governor E ccles. A s a general rule, manufacturing companies,
such as sugar companies and other companies, borrowing from the
banks, seldom want to borrow for a period longer than 6 months, or,
maybe, even 90 days, because they are constantly reducing the out
standing loans.
Mr. B rown. That is right.
Governor E ccles. And they do not know exactly by what amount
they are going to be able to reduce it; and, hence, they do not want
to rediscount up to the maximum amount of the financial require
ments for a period of 9 months, because it may be that they can pay
a substantial amount in 3 months and renew the balance. I believe
that, even if a 9-month rediscount were permitted in that type of
transaction, there would be very few that would use it.
Mr. B rown. But you might find one fellow that would want to
do it.
Governor E ccles. I see no objection to that, if the condition of the
company is such that an open line of credit is desirable, and they
were willing to borrow for 9 months, and the bank should take 9
months’ paper. There would be no reason for the Reserve bank not
taking such paper as quickly as they would take livestock paper.
Mr. B rown. In other words, you feel that no such rule should be
established by the Federal Reserve Board as would prevent the tak
ing of paper having such maturity or length of time as would cover
the normal period from production to final consumption, sale, and
collection.
Governor E ccles. It would seem to me that that should be per
mitted. If a borrower wanted to borrow for that length of time and
the credit was good credit, and the member bank was willing to
accept that type of credit as being self-liquidating commercial credit,
there should lie no objection and the Reserve bank should be per
mitted to take that type of loan from the member bank.
Mr. F ord. Governor Eccles, you used the phrase there “ good
credit.” Now, is not the Federal Reserve bank in a district, when
a member bank comes to the Reserve bank with its assets, going to be
reasonably certain that the assets offered are sound ?
Governor E ccles. I think there is no question about it.
Mr. F ord. Then, I think that the question that Mr. Brown brings
up is largely a matter of local prestige, based on the actual knowl
edge of the member bank that makes the original loan, of the sound
ness of the person who makes the loan, and it can back him up if it
has to go to the Federal Reserve bank.
BANKING ACT OF 19 3 5
389
Mr. B rown. Up to the present time they have held them down to
the 3-months’ period, which I think is too short.
Governor E ccles. I think that is largely due to the member banks,
rather than to the Reserve banks. The member banks prefer 90-day
paper, because they have seen in the past the very wide fluctuation in
the value of commodities against which they loan. In loaning for
a period of 9 months on any commodity, there is room for very wide
fluctuations in prices; and it is my belief that the member bank
passing on the credit, for its own protection, will adhere to 90-day
paper, and renew; because, after all, even if it borrows from the
Reserve bank, it is responsible for the obligation, and the Reserve
bank is not making the loan directly to the original borrower.
Mr. F ord. Would there be anything wrong with this type, or
would there likely be a refusal to discount this type of paper: A
man borrows $20,000 for 90 days; at the end of 90 days he pays
$8,000 back; there is still $12,000 left. An emergency arises, where
the local bank has to go to the Federal Reserve bank to rediscount;
wouid there be anything against that remaining $12,000, if it were
sound, if it is part of the renewal note?
Governor E ccles. Not the fact that it is a renewal note.
Mr. F ord. Does it not give it the status of the original?
Governor E ccles. Yes. In fact, that is what is usually done
with commercial paper. I t is paid off by renewals.
Mr. B rown. The rule has been in the Minneapolis district, at
least, that they would allow one renewal, and at the end of 6 months
you would have to pay back.
Governor E ccles. The member banks did that.
Mr. B rown. The member banks would.
I want to discuss with you just a moment a subject that I took
up with Mr. Crowley, Chairman of the Federal Deposit Insurance
Corporation, this matter of bank examinations. I t seems to me that
we have too many governmental authorities examining banks. We
have 3 at the present time, and 4 if we include the Reconstruction
Finance Corporation, which, I grant, is a temporary organization.
We have the Federal Reserve banks, the Comptroller’s Office; the
Federal Deposit Insurance Corporation has now asked for authority,
in the present bill, to examine national and member State banks.
I want to ask first if the Federal Reserve Board has followed
the policy of appointing only such examiners as are designated by
the Comptroller of the Currency? Now, I will explain that. Under
the first section of the law on bank examinations, it appears to have
been the policy of the act to require that Federal Reserve bank
examiners should be designated by the Comptroller of the Currency.
Then, under a section or so later, it is provided that the Federal
Reserve authorities themselves may designate examiners.
Now, what I am wondering is whether the general practice has
ueen to get examiners designated by the Comptroller of the Curicncy or to use the authority conferred in the second portion of the
law, which is section 483 of the United States Code, annotated. The
hist section I referred to is section 481.
Governor E ccles. I cannot speak as to what the Reserve Board
may have done in the past. I am not familiar with it. But it is
my understanding that the Federal Reserve Board chooses its own
examiners entirely. The Examining Division of the Federal Re
390
BANKING ACT OF 1 9 3 5
serve Board deals, of course, with the member State banks. The
Comptroller’s examinations are accepted for national banks.
Mr. B rown (interposing). For the national banks?
Governor E ccles. There is no point, of course, to duplications
of examinations.
Mr. B rown. Well, am I right in assuming, then, that the Comp
troller is not examining member banks of the Federal Reserve Sys
tem who are not national banks?
Governor E ccles. That is correct. They are not examining them,
and the Federal Reserve Board is not examining the national banks.
Mr. B rown. N o.
Governor E ccles. The examination reports are available and are
given to the Federal Reserve banks, so that they can get any and
all information that they desire from the Comptroller’s office, with
reference to national banks, which, of course, are members.
Mr. B rown. The statute says that the Comptroller of the Cur
rency shall appoint examiners who shall examine every member
bank. Evidently the law is not being followed in that respect. I
do not have any objection to it.
Governor E ccles. D o you know whether that question has ever
come up, Walter?
Mr. W yatt. The original Federal Reserve Act required the Comp
troller to examine all members banks; but section 9 was amended
by the act of June 21, 1917, so as to say that State member banks
shall not be subject to examination by the Comptroller of the Cur
rency but shall be subject to examination by examiners selected or
approved by the Federal Reserve Board.
Mr. B roavn. Y ou will find, two sections later, that special exam
inations are provided for by the Federal Reserve Board, but I do
not believe that the first section was ever repealed. But that is an
academic question; I am not particularly interested in that. But
I believe that the examinations should be conducted by 1 bureau
of the Government and not by 3.
Governor E ccles. S o do I.
Mr. B rown. And I think it is a good time to change the law in
that respect. The expense of the Government examination of the
bank is borne by the bank?
Governor E ccles. I t is.
Mr. B rown. Not only the examination bv the Federal Reserve
Board but the examination by the Comptroller’s office?
Governor E ccles. That is right
Mr. B rown. Take a community having 3 banks, 1 a national bank
and 2 member State banks, and you have a great deal heavier expense
upon that bank by reason of a trip by the national bank examiner
and then a subsequent trip for the examination of the other 2 banks
by the Federal Reserve bank examiner; and it seems to me that it
is an unjust and unnecessary expense upon the banks.
Now, the Federal Deposit Insurance Corporation is the only allinclusive bureau -with respect to the examination of banks in the
Government, is it not ?
Governor E ccles. I do not understand that the Federal Deposit
Insurance Corporation was given the power to examine national
banks.
BANKING ACT OF 1 9 3 5
391
Mr. B rown. Yes; it is under this bill. They may, with the con
sent of the Comptroller of the Currency and with the consent of
the Federal Reserve Board, examine any bank.
Governor E ccles. Yes.
Mr. B rown. National banks or member State banks.
Governor E ccles. Yes.
Mr. B rown. I say “ an all-inclusive bureau ”, with respect to the
examination of banks, because of the fact that they, of course, in
clude all national banks, all member banks in the Federal Reserve
System, and a great many nonmember banks; in fact, all non
member banks which are in the Federal Deposit Insurance Corpo
ration. That is a fact, is it not—that they cPver them all ?
Governor E ccles. They cover them all.
Mr. B rown. And the only banks in the country that they do not
cover are the uninsured banks, which are very few in number?
Governor E ccles. That is correct.
Mr. B rown. I think I will close that part of the discussion by
this: I understand that you, yourself, feel that it would be best if
we could have one examining authority to examine all the banks
of the country.
Governor E ccles. Let me first state that the existing duplication is
not as serious as it appears on the face of things. The Reconstruc
tion Finance Corporation make no examinations, as a regular thing.
The examinations they made were in connection with subscriptions
to preferred stocks and debentures; and those examinations were
made only once, at the time they were determining their invest
ment in the capital stock of the particular bank.
Mr. B rown. And, to be perfectly fair, I understand now that they
are not making even that examination. They are accepting the
other examinations.
Governor E ccles. That is right; and they have always accepted
the other examinations, except in very important instances, where a
great deal of money was involved and there was a good deal of
question about the bank.
The Federal Reserve Board only examines the member State
banks. Their examinations are usually made along with the State
banking examinations, so as to avoid duplication. The Comptroller’s
office examines all national banks. No other agency examines na
tional banks. The Federal Deposit Insurance Corporation makes
no examination of national banks and makes no examination of
State member banks but examines the nonmember State banks, along
with the State banking departments, so as to avoid duplication
there, so that there is really not the duplication in actual examina.tions that would appear on the face of things.
However, there is, of course, a division of the examining author
ity between the 48 State banking departments, with reference to
State banks, and the Comptroller’s oflice with reference to the na
tional banks, and the Federal Reserve with reference to the State
mem her banks, and the Federal Deposit Insurance Corporation with
reference to all banks. There is not any question that you would
get a much more general unification of the policy in making exami
nations if the examining were all done under the direction of one
organization.
392
BANKING ACT OF 1 9 3 5
Mr. B rown. Y ou certainly would eliminate the duplication of
organizations.
Governor E ccles. That is right. You would eliminate the dupli
cation of organizations, more than duplication of examinations.
Mr. B rown. Or, we might say, triplication of organizations.
Governor E ccles. Yes, sir; you would do that; and you would
make, probably, for a greater unity of examination policy, which
has been very sadly lacking. However, there has been a great
amount of work done in the past 6 months with reference to im
proving the matter of unifying the policy as to examinations. The
Comptroller’s Office, the Federal Deposit Insurance Corporation,
and the Federal Reserve have had a great many meetings, and much
progress has been made toward the development of unification of
examinations.
The Chairman . Let me ask you a question. What is the purpose
of the examinations?
Governor E ccles. T o determine the condition of the banks.
The C hairman . What I want to develop in asking you the ques
tion is this: Is not one of the purposes of the examination of the
banks to develop and disclose bad practice and any fraud that is
being perpetrated by those in charge?
Governor E ccles. It is to see that the bank is carrying out the
provisions of the law.
The C hairman . One purpose of conducting the examination is to
make sure there is no criminal violation or mispropriation of funds?
Governor E ccles. That is one reason.
The C hairman . D o you think that one system of examination,
under one standard, is more likely to uncover or disclose fraud in
the conduct of a bank than two examinations?
Governor E ccles. A s a matter of fact, there is only one system
in effect now. As I explained, the Federal Reserve accepts the
Comptroller’s examinations of national banks. If the banks were
required to pay the examination expense of all these independent
agencies, they could be constantly harassed and bothered with two
examinations a year from each one of them; and I cannot see how
they could endure it. As it is today, the banks are pretty well
harassed with examinations and with the various reports that they
are required to make to the various agencies, which is a great
expense to them.
The C hairman . Are not the reports worse than the examinations?
Governor E ccles. They are both bad enough, but necessary.
The C hairman . From what I have heard, it would appear that
the reports are worse than the examinations.
Governor E ccles. In most countries they have no examinations.
In Canada there are no bank examinations whatever; and there
never have been any bank examinations whatever. They have never
had them.
The C hairman . Of course, they enforce criminal law in Canada,
you know.
Governor E ccles. They have reports. As I understand it, in
Canada they have complete monthly reports. That is correct, is it
not?
Dr. C urrie. Yes, sir; but they also have examinations now.
BANKING ACT OF 1 9 3 5
393
Governor E ccles. No ; not examiners going out into the banks.
What they do is this, they get the monthly reports into the head
office; and there are two examiners that go over those reports in the
head office. What I meant was that there are no examiners who go
out into the banks and carry out the examinations.
Mr. F ord. Unless they find something wrong with the report?
Governor E ccles. They make an inquiry. But, you see, those
banks have numerous branches, and the banks themselves have their
own examiners. That is the way the British banks operate, in the
same manner; they have their own examiners.
It is not expected that this proposed legislation will create a per
fect banking system by any manner of means. We will still have
plenty to consider, looking into the future.
The C hairman . Mr. Brown, have you finished ?
Mr. B rown. There is nothing in there to abolish the human equa
tion.
Mr. Cross. I was wondering how to abolish these glass eyes.
The C hairman . Well, gentlemen, we will ask Governor Eccles to
come back in the morning, at 10:30.
(Thereupon the committee adjourned until tomorrow, Tuesday.
Mar. 19, 1935, at 10: 30 a. m.)
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B A N K IN G
ACT
OF
1935
—
TUESDAY, MARCH 19, 1935
H ouse of R epresentatives,
Committee on B anking and C urrency,
W ashington , D. G.
The committee met at 10: 30 a. m., Hon. Henry B. Steagall (chair
man) presiding.
The C hairman . Governor Eccles, Mr. Goldsborough desires to ask
you some questions.
v .. ■ : .. :< > •: T - ; o; I .>"• ■
:
<.
STATEMENT OF MARRINER S. ECCLES, GOVERNOR FEDERAL
RESERVE BOARD— Resumed
Mr. G oldsborough. Governor, you have been here for some time
now and have been exceedingly patient, and I will not take very
long, I am sure.
During the discussion of this bill, and, practically every bill the
committee considers, the question of inflation is raised. I do not
want to get outside of the issue, and I do not think I am. I have
made, so far as I am able, a very careful study of so-called “ infla
tion.” I understand it means an increase in the volume of money
to the point where its value is either worthless or partially worthless.
I am unable to find in history any single instance where, under a
stable government there has ever been that sort of inflation, and I
am wondering if you are able to cite a case where there has been
any inflation under a stable government.
Governor E ccles. I am not much of an authority on the subject
of what has happened throughout the history of the world with
reference to the matter of inflation. What study I have given to it
applies more to recent developments, particularly since the war.
The conditions in this country at the present time are in no way,
to my mind, parallel with the conditions in those countries that have
had more or less inflation.
Mr. G oldsborough. Generally, the cases that are cited by those
who are sometimes called reactionaries—and I do not want to be
offensive, but that is the best I can do—the cases cited by them are
the continental money, the French assignats and the German money
after the war. Of course, the Continental money was issued at a
time when nobody knew in this country whether we were going to
be under a king or under a president, or what the government was
going to be. Conditions were almost absolutely chaotic.
The same thing existed when the assignats were issued in France,
and insofar as Germany was concerned, that inflation was deliber
ately created for the purpose of destroying the internal debts.
395
396
BANKING ACT OF 1 9 3 5
I remember not very long ago, Mr. Bernard Baruch had an article
on inflation in the Saturday Evening Post—you may have seen it—
which was propagandized by pictures, some 3 or 4 pictures or cuts
were in the article depicting the printing presses in Germany during
the immediate post-war period, which seemed to me to be so utterly
unfair and inappropriate as to make the article absolutely valueless.
In this bill which we are considering, the banking system is allowed
to remain in exactly the same position that it has been for a great
many years. We have in all the banks, State and national, capital,
surplus, and undivided profits of less than $7,000,000,000. The de
posits of those banks have been as high, I think, as $57,000,000,000
during 1929.
Governor E ccles. Including time deposits.
Mr. G oldsborough. Including time deposits. Do you care to ex
press your opinion as to that sort of a system, or do you think that
is outside the inquiry?
Governor E ccles. What was the question?
Mr. G oldsborough. I am asking you if you care to express your
opinion about a monetary system which is not the creation of society,
but is the creation of a private institution, and which is based on
debt.
As I said before, that may be, in your opinion, so far afield that
you do not care to discuss it.
Governor E ccles. I do not believe that it is practical at this time
to abandon the present system of creating money by bank credit.
Mr. G oldsborough. By bank debt.
Governor E ccles. Bank credit means a debt of somebody.
Mr. G oldsborough. I t is better to use the word debt, because that
is what you are speaking about.
Governor E ccles. I do not know that we have any alternative.
I t is my view that we should attempt through this legislation to make
the existing system of banking more responsive to the needs of the
country than it has been, and also to exercise a greater degree of
conscious control over the creation and the extinguishing of money,
and thereby attempt to create a greater degree of business stability
than we have had in the past.
Mr. G oldsborough. Y ou agree with me, do you not, that permanent
prosperity cannot be based on debt? You cannot have debt, which
is increasing all the time, and have any sort of permanent pros
perity, can you ?
Governor E ccles. I do not agree that it is not possible to have
permanent prosperity with the existing banking system, if, in con
nection with its operation, a taxing system is recognized as an ad
junct in helping to bring about a more equitable distribution of
income during periods of prosperity.
Mr. G oldsborough. We never have had any such tax system, have
we?
Governor E ccles. No ; we never have, and we have never had very
much control over the banking system.
Mr. G oldsborough. D o you or not agree with me that under the
present set-up, insofar as banking is concerned and currency is
concerned and taxation is concerned, we can only have pseudo pros
perity which will collapse from time to time—do you think that
is true?
BANKING ACT OF 1935
397
Governor E ccles. In our past history we have had periods of
prosperity by the process of building up debt and then periods of
depression by the process of bankruptcy and the extinguishing of
debt. That has been true of all capitalistic countries.
Mr. G oldsborough. That has not been the condition in France,
has it, where the banks only have about a 50-percent reserve?
France has never had these recurring periods of collapse.
Governor E ccles. I t is more or less true of every country, I think.
Possibly it may be less true in France than it has been here, and
I think it is possibly less true in Britain than it has been here
because in recent years they have exercised, I think, a better control
over their money system than we have.
The volume of money in Great Britain during the period of our
depression did not decline. I t remained very stable.
The wiping out of a third of our deposit money by bank liquida
tion of debt, and by bank closings, accentuated the depression.
Mr. G oldsborough. N ow I am old enough to remember that part
of the deflation period from 1886 to 1896, and I, of course, remember
the much better economic condition existing between 1898 and 1914.
I think it is thoroughly understood and agreed by everybody that
it was the want of money which caused the depression in 1879 and
1896, which culminated in the Bryan free-silver campaign. After
that time gold was discovered in South Africa, in the Klondike, and
in Australia—we were on the gold standard, with a continually
increasing supply of money—so that from about 1898 to the opening
of the World War this country had what can be termed, at least
relatively speaking, “ considerable prosperity.”
I t was not the banking system, or fractional reserve system, that
gave us that prosperity. I t was the fact that w were able to put
re
into the market a continuously greater supply of money. I do not
believe anybody disputes that. Let us see what happened to our
debt structure during this period about which I have just spoken,
from 1896 to 1914, and up until 1920.
After 1920 our supply of gold was of such a character that we
could not put it in the market as fast as our production wanted to
increase, so our production did not increase, but our debt increased
and our speculation increased.
Take, for instance, the period from 1913 to 1921. Our real estate,
Government, State, and local debts increased from $38,000,000,000 to
$75,000,000,000, and $15,000,000,000 of that was the war debt.
So that, as a matter of fact, our debt increased, outside of the war
debt, 60 percent, and our income increased 83 percent. Our national
wealth increased 67 percent.
In the period from 1922 to 1929 which is spoken of as a period of
prosperity—and I never could see apy prosperity during that period
and I have never been able to see any since; it was a period of
speculation—during that period our debt, that is, our real-estate
debt, our Government debt, and our State and local debts increased
from $75,000,000,000 to $126,000,000,000. The increase was 68
percent.
Our wealth only increased 20^ percent; that is, from 321 billions to
385 billions. Our income only increased 29 percent, from 66 billions
127297— 35— —26
1
398
BANKING ACT OF 1 9 3 5
to 85 billions. We liquidated during that period $4,000,000,000 of
long-term debts, and we took on $55,000,000,000 of other debts.
That was a period in which our present monetary system, as
handled by bankers, was in full sway, but a period in which our
money supply, based on the gold standard, was not increasing. It
ended up in collapse.
I have never seen anybody who could, but if you can, I wish you
would give us your view as to how, loaded up with all this debt,
we are going to get out of this depression under the present system5
,
with what amounts on the average, to a 10-percent bank reserve.
How can it possibly be done, unless we have complete deflation and
wipe out the debts by bankruptcy.
Governor E ccles. There are two ways of doing it. One is the
way you have just stated, that is; continuing a process of deflation
and wiping out a large part of existing debts through the process of
bankruptcy, because the national income at the present time is not
sufficient to support the existing debt structure.
And that is one reason we are possibly not getting recovery today
because liquidation and the pressure of debt is very, very great, and5
it acts as a millstone around the neck of the economic system.
. The other way to get recovery, the only other way I can think of
is by a process of reflation.
Mr. G oldsborough. Under our present system w cannot have any
re
reflation without an accumulation of more debts, you know.
Governor E ccles. I believe it has been very genereally recognized
certainly since March 1933, when the banking structure collapsed5
and closed, that it was not practical or possible, without involving
very great political and social upheavals, to continue the process of
deflation. The situation had reached the limit of human endurance,
beyond what the people w
rere willing to stand by way of deflation,
which creates unemployment and all of the other attendant ills, and
reflation was desired and was expected.
The only way that that can be brought about is by increasing the
means of payment, either currency or bank deposits, in the hands of
those who will spend faster than production increases.
Mr. G oldsborough. Can you spend faster than you accumulate
debt, under our present system? That is the difficulty, the debt is
always ahead of the spending.
Governor E ccles. Interest is a very important element in connec
tion with the creation of money by debt. Very low interest, it seems
to me, creates a far less dangerous situation than debt created on a
basis of very high interest.
Mr. G oldsborough. That is true, but of course the banks ordi
narily now charge the same interest as they always have been charg
ing.
Governor E ccles. Not generally. Most of the debt today is at a
much lower rate than it was. I would say the average interest in
T
come of the banks today is 40 percent less than it was in 1928 and
1929.
Mr. G oldsborough. That is because they have accumulated long
term Government obligations.
Governor E ccles. And other Government obligations.
BANKING ACT OF 1 9 3 5
399
Mr. G oldsborough. When they loan to their customers they do
charge a large rate. In our State it is 6 percent. They have not
reduced it, certainly within the range of my observation.
Governor E ccles. I think that is true more in the country banks
than in the city banks, where they are largely influenced and affected
by the money market. And the rate of .lending goes up and down
in pretty close relationship with the general supply of money, and
you get an excess of money as you have now, when the rates are at a
ridiculously low figure for certain short-term eligible paper.
Now, to get back to the question of creating prosperity out of debt.
It is true that the bulk of the means of payment under the present
system is created by an expansion of bank credit.
Mr. G oldsborough. In other words, you create more debt to pay
the present debt.
Governor E ccles. A part of the debt of the country is not bank
debt. The debt that the banks create in creating money is, in fact,
only a small part of the total debt.
Mr. G oldsborough. That is true.
Governor E ccles. And it is not by any means the burdensome part
of the total debt.
Money is created in our present system by banks loaning to cor
porations, to individuals, and to the Government. During the past
2 years there has been no increase in the supply of money as the
result of the banks lending to individuals or to corporations. As
a matter of fact, the money supply would have been actually dimin
ished since 1933 had it not been for the Government not only making
up the deficiency, but greatly exceeding it by its borrowing and
spending. Had it not been for the Government’s budgetary deficit,
I do not believe the deflationary processes would have stopped.
The credits which the banks have extended to others than the
Government are less now by several hundred millions than they
were right after the bank holiday.
The Government has been forced to supply the money deficiency
by reason of the other creditors being either unable or unwilling
to supply it. I believe I made a statement yesterday in connection
with the Government supplying money by borrowing from the banks
that might have been misunderstood. I am sure it was misunder
stood by many of the press comments that were made. That is,
the question of the Government paying the banks a subsidy.
Mr. G oldsborough. I probably made the mistake of accentuating
that too much myself. I am at fault probably more than anybody
else.
Governor E ccles. I would like, for the purpose of the record, to
make an explanation of my understanding of the question of the
Government interest paid to the banks.
In purchasing offerings of Government bonds, the banking system
as a whole creates new money, or bank deposits. When the banks
buy a billion dollars of Government bonds as they are offered—and
you have to consider the banking system as a whole, as a unit—the
banks credit the deposit account of the Treasury, with a billion
dollars. They debit their Government bond account a billion dol
lars, or they actually create, by a bookkeeping entry, a billion dollars.
Mr. G oldsborough. By a sort of magic or necromancy.
400
BANKING ACT OP 19 35
Governor E ccles. The Government in turn draws out those de
posits and disburses them in the payment of all of its obligations and
various appropriations.
Mr. G oldsborough. These payments, of course, go in the banks.
Governor E ccles. Yes; these payments of the Government, of
course, immediately go right back into the banks, and therefore the
total deposits of the banks are not changed; but the ownership of
the deposits is transferred from the Government to individuals and
corporations, who can spend it or use it to reduce their debts to
banks.
Mr. Goldsborough brought out the point that the Government,
because of its sovereign power, is able, if Congress so wills, to finance
its operations by payment of currency for its obligations, and that
it could go so far as to take up its bonds by paying out currency.
The result of that operation, insofar as the bonds were purchased
from others than banks, would be that bank deposits would increase.
Mr. G oldsborough. Bank reserves, not deposits.
Governor E ccles. Deposits. If the Government paid its bills in
currency, that currency would be disbursed, the money would come
into the banks to the credit of individuals and corporations, and thus
the deposits would be increased in exactly the same way.
Mr. G oldsborough. I wish you would speak about that for a while.
The deposit would not increase, but the reserves would increase.
Governor E ccles. Both would increase, both the reserves and the
deposits would increase. To the extent that the bonds were pur
chased from banks, reserves would increase and deposits would not.
To the extent that bonds were purchased from others both deposits
and reserves would increase.
The proposal was that, when you substituted currency for bonds,
the reserves would be greatly in excess of what they now are;
because the banks would not have the deposits invested in Govern
ment bonds, but would be carrying those deposits as excess reserves,
and to the extent that present holdings of governments by the banks
were taken up by currency, the reserves of the banks would increase
by about 11 or i2 billions of dollars. Thus, you would have excess
reserves of, say, 13 or 14 billions including the more than 2 billions
now held by simply taking up the existing holdings of Government
bonds.
That, of course, would be a means of potential inflation of a
tremendous amount.
Mr. Cross. Could you not raise the reserves of the banks so as to
check that ?
Governor E ccles. I was just going to say, it was suggested that
the reserves of the banks would be increased by the amount of the
Government bonds that were taken up, as the result of the issuance
of currency in payment for them, and the currency would come right
back into the banks as a deposit.
The point I raised was that the banks would under no circum
stance be willing to handle the deposits which would be created
without getting a return, without being able to invest them at in
terest. But, if reserve requirements were increased by the amount of
the increase in reserves, the banks would be unable to perform the
services which they do perform in the handling of the business of
the community, of their customers, of the clearing of financial trans
BANKING ACT OF 1 9 3 5
401
actions and the keeping of the individual and corporation accounts
without making service charges that would compensate them for
their loss of income or interest, as a result of depriving them of
interest on the Government obligations.
Mr. Goldsborough stated the other day that that charge could be
socialized and I stated that the best way to socialize it was to do as is
being done now, by permitting them to get interest on Government
bonds.
Instead of the interest on Government bonds being a subsidy to
the banks, it seems to me it is a payment for services which they are
rendering in handling the deposit accounts which are created as a
result of the Government deficit.
Mr. G oldsborough. N ow, Governor, it seems to me, now, and has
always seemed to me that the real way to do a thing is to do it
directly, instead of going through the pretense of issuing bonds to
the banks that have not anything to loan, except what their book
keepers can put on their books.
The banks have nothing except their capital and surplus, which
amounts to less than 7 billion dollars, and they have used that up
long ago in loaning to individuals.
Governor E ccles. Except their time-deposit funds.
Mr. G oldsborough. Except their time-deposit funds.
Governor E ccles. That represents half of the deposits of the
banking system.
Mr. G o l d s b o r o u g h . But long before that they come to the Govern
ment for help. They have used up all they have.
We go through the racket—and that is all I am able to see that it
is—of issuing to the banks, sending to the banks bonds, and they
put a money credit on their bank books in favor of the United
States Government. The United States Government by depositing
that money as it does, when it gets the money credit, lends the money
back to the banks and proceeds to pay them interest on it. That is
a racket.
If we owe the banks for that service they render, and we do,
there is no doubt about that, they render service outside of their
lending service and they should be compensated for that; they will
have to be compensated for that to live.
But there is created in the public mind the idea, and it is done
deliberately by the class which controls the money of the country—
there is created in the public mind the idea that there is some eco
nomic impropriety in the Government furnishing its own medium
of exchange, that it has to do it through borrowing money from
the banks that the banks do not have.
Society has everything; the banks have nothing, and yet we go
through this farce of borrowing mone}^ from the bank and creating
the impression that it is inflationary for society itself to issue the
necessary medium of exchange with which to conduct the country?
s
business.
What I am getting to is this. I am not suggesting any immediate
revolution. But we could pay these bonds as they are callable; we
could pay these bonds when they come due with money issued on
the credit of the Government of the United States. And if the
public knew that would be done it would have two effects, first it
402
BANKING ACT OF 19 35
would reconcile them to this debt, which is having a terribly de
pressing effect on their minds and on their psychology. It would do
that.
And the second thing it would do would be to have them under
stand, to make them understand, that society is not dependent upon
a banking system for its currency. Our currency system in this
country was not the creation of society; it was the creation of the
banks.
Last year about this time a subcommittee of this committee con
sidered what was called a monetary authority bill. The goal of that
proposed legislation—whether it could be reached or not—the goal
of the proposed legislation was to separate the profession of bank
ing from the issuing of the money of society. It placed the issuing
and the control of the money which society uses in the hands of an
independent authority, which would have no selfish interest in mak
ing the medium of exchange as scarce as possible and as high as
possible.
I am wondering if something of that same idea is not involved
in this present bill, which undertakes to take from the Federal Re
serve banks and place in the hands of the Federal Reserve Board the
control of the open-market operations of the Federal Reserve System.
Governor E ccees. Discount rates and reserve requirements.
Mr. G oldsborough. Discount rates and reserve requirements. Is
that so ?
Governor E ccles. It is contemplated to centralize the respon
sibility and the authority for control over the volume of money.
As I have stated upon several occasions, so long as most of our
money supply is created by the willingness of private citizens and
corporations to borrow from banks, the control of deflation is much
more difficult than that of inflation. If there is too much borrowing
from banks and, as a result of that operation, the creation of infla
tion, when the means of payment is increasing faster than the raising
of discount rates and the selling of securities in the market would dis
courage further expansion of private borrowing from the banks and
would act as a means of retarding the inflationary process.
On the down side, the reverse action, the reduction of rates and
the creation of excess reserves, would tend to slow up liquidation and
would tend to encourage the use of credit.
In our present money system I know of no other means within the
banking system itself of influencing or effecting a control over the
supply of money.
I have stated that we should seek to use these controls which I have
just mentioned to combat deflation, which means unemployment, and
unemployment means reduction in national income, in wealth pro
duction, and wealth consumption.
That is where the problem must be met, and it must be met. it seeni3
to me, by society as a whole, through government.
The tax system—our in ome-iax system— must be worked in and
timed with the money system. When private credit is expanding and
there is a budgetary surplus, the Government debt should be reduced.
The reduction of the Government at a time when there is a rapid
expansion of private debt tends to offset the inflationary effect of the
expansion of private debt. That is where the contraction comes, as
result of the banks reducing their holdings of Government bonds.
BANKING ACT OF 19 3 5
403
I t is very important that the problem of income taxation and the
operation of a central banking monetary policy should be coordinated
and properly timed. A substantial increase in taxes at the present
time, if they would pull into the Treasury money which would other
wise be spent and thus reduce private spending, would be of no par
ticular help in our economic as a whole. The time to increase income
taxes, of course, is Avhen incomes are such that income taxes would
produce substantial revenue; in other words, in the upswing.
I believe that there is only one way by which we will get out of
the depression, and that is through the process of budgetary deficits
until such time as private credit and private spending expands. The
expansion of private credit depends upon the will and ability of
private interests to borrow and spend. Until private borrowing and
spending expands, and puts people to work, the Government must
do the borrowing and spending.
Mr. G oldsborotjgh. Governor, going back to the subject of infla
tion, it seems to me that the fear of so-called “ inflation ” is the
thing which makes it increasingly difficult to improve our monetary
system.
I have been following this whole matter through for a great many
years, and I remember very distinctly that back in 1931—I do not
want to go too far back—but I remember that in 1931 we were told
that if we adopted the policy of buying Government bonds that would
cause violent inflation. That was when the original so-called
“ Goldsborough bill ” was passed through the House.
During that period, and before that period, if anybody had sug
gested that it was possible for the Government to raise any money
except by borrowing it from the banks, he was immediately cast
into outer darkness; he was not even thought fit to sit in the room
with intelligent people. That was the exact condition.
We went off the gold standard and nothing happened. We passed
the so-called “ inflationary bill ” in 1933 and nothing happened.
And it is the feeling, I am sure, of a great many Members of Con
gress^—it is certainly my own feeling—that one of the things we
need in this country is more real money and less false money in
circulation.
If, as a matter of fact, we could get to the point where the money
we use was real money and could not be contracted by the payment
of debt, then you could not have any violent deflation; we could not
have anjr violent inflation; you could not have either one.
Governor E c c l e s . It depends upon the distribution of that money
and the willingness of people to put it in circulation.
Mr. G oldsborough. I know that it would be very much more diffi
cult than it is now to have deflation, or inflation, either.
Governor E ccles. I agree with you that all of this inflation talk
we have heard for 3 years has been largely imaginary.
It is true that, based upon existing excess reserves of the banks,,
there is a possible means of creating a tremendous credit inflation.
That, of course, does not necessarily mean that you are going to get
that inflation.
In the first place, in order to get it, we have to get people willing
to use the bank credit. It cannot be gotten in any other way.
404
BANKING ACT OF 193 5
Then it also would be necessary that there be no control exercised
after private credit began to expand to a point where prices were
going up rapidly and production had reached a peak.
I do not believe that it is going to be so easy to get inflation.
Certainly efforts have been made now for several years to get it;
but from all indications, we are as far from it now as we were 2 or
3 years ago. There is not the slightest indication of inflation.
Unless the people in this country have money and jobs or are
put in possession of money through jobs or without jobs, so that the
means of payments increases, and unless those people and corpo
rations with money will spend the money that they have, we can
not get inflation.
I t cannot be obtained merely by changing the gold content, or
by silver legislation, unless the result of such changes will actually
put money in the hands of people to spend, and unless it induces
the holders of existing money to spend. Otherwise you do not
increase the volume of money and you do not increase the velocity
of money, both of which are necessary in order to get inflation.
Mr. K opplemann . Mr. Eccles, with reference to section 210, page
49, in regard to making loans on mortgages, you know about that?
Governor E ccles. Yes.
Mr. K opplemann . As I understand it, it authorizes commercial
banks to make loans on real estate for a period of 3 years, and
repayment is to be made in full at one time or up to 20 years to be
amortized. It puts commercial banks and investment banks in the
building and loan business.
Governor E ccles. They are already in.
Mr. K opplemann . But this bill is intended to put them into it fur
ther than ever.
Governor E ccles. N o. The bill is not for the purpose of putting
tnem into any particular business that they are not already in.
They are in the investment business and in the mortgage business
and have been to a very large extent for a great many years. They
are in the investment business in that there is no limitation as to
the amount of long-term bonds of all kinds that they are permitted
to buy. There is a limitation with respect to making first realestate mortgages on improved properties. That limitation is 50
percent of the time deposits and up to 50 percent of the appraised
value of the property, and up to a period of 5 years; and the bank
ing system today holds over $2,000000,000 of those mortgages.
Therefore, they are not being put into any business that they "are
not already in. What we are attempting to do in this case 4s to
permit them in the making of real-estate loans to make loans on an
amortized basis over the life of the loans or over a period of time
which would give to the borrowers some assurance of beino- able
to pay. The straight 5-year mortgage has proven to be a very bad
form of instrument, both for the banks and for the borrowers and
also for the building and loan companies engaged in making mort
gage loans and a few insurance companies and mutual savings
institutions engaged in that type of mortgage lending
I have said, and I repeat, that either the banks in this country will
have to give up their time deposits or they will have to be permitted
to invest or loan those deposits in the same field where the mutual
savings banks, the insurance companies, and the savings and loan
BANKING ACT OF 193 5
405
institutions, loan their deposits; because the time deposits of the
banking system are of the same type and represent the same type
of money as the funds which the mutual savings banks and the
building and loan companies loan and invest.
Mr. K opplem ann . I t was the bad practice o f the banks which
caused the debacle.
Governor E ccles. I do not agree with that.
Mr. K opplem ann . Did not the banks themselves claim that it was
their long-time loans which were the chief cause of their difficulty?
Governor E ccles. I do not think so.
Mr. K opplem ann . I s it not commonly so stated ?
Governor E ccles. I t is commonly stated; but it is not the fact.
Mr. K opplem ann . I might digress for a moment and ask you if
you can in a single statement, without taking too much time of this
committee, let me have what is your opinion of the cause of the
difficulty of the banks ?
Governor E ccles. I think the record of my answers to the ques
tions that have been asked quite a number of times shows it; but
I can state it very very briefly. One of the principal troubles or
difficulties that brought about the depression was not the shortage in
T
the supply of money altogether, but it was due in part to the in
equitable distribution of income which contributed to a speculative
situation in the security markets and to an expansion of productive
capacity out of relationship to the ability of the people of the
country to consume under the existing distribution of income.
That condition was not created by the banking system. Long-term
credits were not responsible for the depression; they only became
unsound when the national income shrank. A perfectly good credit
over a short term or a long term may become a very bad credit if
business conditions change. Short-term credit is not necessarily a
sounder loan than long-term credit. Most of the short-term bonds
which were held by the banks that became due during the depression
could not be paid but had to be refunded.
Mr. K opplem ann . Supposing that I ask you this further question.
Governor E ccles. In order to obviate that situation of forced de
flation, this bill proposes that Reserve banks be legally permitted to
make advances to member banks against sound assets. The only
place where liquidity can be created is through the Reserve System
and that would permit the Reserve System to stop forced credit de
flation and bank failures so long as banks had assets upon which
they could secure credit.
Mr. K opplem ann . In part you anticipated the question I was
about to put to you, which is: Are loans made on real estate ex
pected to be rediscounted by the Federal Reserve?
Governor E ccles. They are expected to be available as security
for advances to be made by the Reserve banks. The credit depart
ments of the Reserve banks will pass upon credit extended to member
banks in the future as they have always done in the past, except
that in the past they have been limited by statute to a certain type
of what is known as eligible paper which today is small in volume.
Mr. K opplem ann . Where in this bill does it provide that such dis
counting, or in effect rediscounting, can be done ?
Governor E ccles. I t provides in section 206 that section 18 of the
Reserve Act is to be amended so as to authorize the Federal Reserve
1
406
BANKING ACT OF 19 35
banks, subject to the regulations of the Federal Reserve Board, to
discount for member banks any commercial, agricultural, or indus
trial paper and to make advances to member banks on their promis
sory notes secured by any sound assets.
Let me say this in connection with extending credit against mort
gages. That does not mean that Reserve banks will discount a 20year mortgage for 20 years. It means that the Reserve banks can
make advances to the member banks for such periods as reasonable
banking practice permits, which would be 90 days or possibly 6
months, secured by mortgages, collateral loans, or bonds with such
margin as the credit divisions of the Reserve banks may deem
necessary to protect the Reserve banks.
Mr. K opplemann . Then it does not compel the Federal Reserve
to rediscount these loans?
Governor E ccles. N o.
Mr. K opplemann. N ow, supposing I go to you as a banker and ask
for a loan upon my property in the form of a mortgage and the
banker knows that he cannot rediscount, what will be the effect upon
your mind if I ask for a loan of you as a banker?
Governor E ccles. The banks today will not make such loans. In
the first place, they cannot make real-estate loans for more than 5
years. That precludes people from borrowing. Nobody today that
can secure a long-term, amortized loan will go to a bank and borrow
on a straight loan for a period of 5 years. They want longer-term
credit on mortgage loans.
Mr. K opplemann . I am trying vary hard not to take any more
of your time than possible. Now, if section 210 should succeed in
encouraging banks to make long-time loans, they cannot be redis
counted ?
G o v ern o r E ccles . B u t th e y can be borrow ed a g a in st.
Mr. KorPLEMANN. Yes. What becomes the bank's liquidity which,
.after all, as you and I know, is the foundation of the safety of a
commercial banking system?
Governor E ccles. The liquidity of the banking system depends
upon the Reserve System as I have indicated.
Mr. K opplemann. What I am trying to bring out is this. I am
not opposing the bill nor do I want to appear unduly critical.
What I am trying to bring out is that the effect of section 210 is
more apparent than real. It seems to me that it contains language
rather than a real and effective method of giving property owners
a chance to obtain mortgage loans.
Governor E ccles. That will depend entirely upon the willingness
of the banks themselves to extend mortgage credit. In the absence
of any field for investment of the excess funds of the banks, it seems
to me that there will be a willingness, not only a willingness but a de
sire, of bankers to invest those funds where a substantial portion of
the deposit money is represented by time money upon which they
are paying 2 to %y2 percent.
Mr. K opplemann . Right there may I ask you this question ? You
talk about time loans. Are not time deposits in reality nothing more
than demand deposits?
Governor E ccles. Only in case of bank runs. The time deposits
in a bank remain stable unless banks are permitted to fail.
BANKING ACT-OF 1 93 5
407
Mr. K o p p l e m a n n . That answers my question. Only in time of
bank runs.
Governor E c c l e s . That is right. At other times time deposits
fluctuate very little and, as a matter of fact, usually, or at least dur
ing the past, they have shown a gradual increase over a long period
of years.
Mr. K o p p l e m a n n . What effect will such loans have upon building
and loan associations and do you interpret that commercial banks
are to compete with them?
Governor E c c l e s . I think there is a field for both. It seems to me
that we might ask what effect will it have upon insurance companies
and mutual savings banks.
Mr. K o p p l e m a n n . That is right.
Governor E c c l e s . The more agencies we have for extending credit
the more likely the borrower is to get favorable terms for his credit;
and I think that, in the interest of recovery, long-term low rates are
necessary.
Mr. K o p p l e m a n n . Yet under section 210 all of this is quite im
probable of happening insofar as banks making loans due to the fact
that they cannot rediscount excepting on short time, as you say, 90
days, perhaps 6 months.
Governor E c c l e s . That is very true; but that will not deter the
banks from making long-time loans. The banks today can only bor
row on Government bonds on a 15-day basis but they can renew.
Banks are certainly not expected to make real-estate loans and sell
them to the Federal Reserve banks and then take the funds and make
additional loans, because that would create credit inflation. Banks
should not loan beyond the amount of their available funds and the
rediscounting facilities of the Reserve banks are for the purpose of
enabling the bank system to meet temporary fluctuations in their
deposits and to meet withdrawals due to unusual conditions that may
develop.
Mr. K o p p l e m a n n . I agree with you that commercial banks should
do a safe and sound business, and that under section 210 of this bill,
it would be bad business to make these mortgage loans. That is all.
Thank you.
1 he C h a i r m a n . Would you like to come back this afternoon or
tomorrow morning?
Governor E c c l e s . I would appreciate it if I could come back in
the morning.
Ih e C h a i r m a n . We will ask you to come back tom orrow morning
at 10 : 30. Mr. Goldsborough and Mr. Cross and Mr. Williams would
like to ask you some questions and with that we hope to conclude.
(Thereupon, at 12:05 p. m., the committee adjourned to meet
again at 10:30 a. m., Wednesday, Mar. 20, loss'.)
4
BANKING ACT OF 1935
W E D N E S D A Y , M ARCH 20, 1935
H o u s e of R e p r e s e n t a t iv e s ,
C o m m it t e e o n B a n k i n g a n d C u r r e n c y ,
W ashing ton, D. G.
The committee met at 10:30 a. in., Honorable Henry B. Steagall
(chairman) presiding.
The C h a i r m a n . Mr. Cross, do you desire to interrogate Mr. Eccles
at this time ?
STATEMENT OF MARRINER S. ECCLES, GOVERNOR FEDERAL
RESERVE BOARD— Resumed
Mr. C r o ss . Governor Eccles, you know, I am very much disturbed
about your testimony as it has been given. You have testified that
with the levers you have in this bill you feel that you could con
trol inflation, but that the question of deflation was another story.
In other words, you have a string with which to pull down inflation,
but you have no string with which to pull up deflation.
. And you also testified as to the depression, as I recall your tes
timony, that deflation meant depression, and as long as you have
deflation you will have depression.
What is troubling me is how to get some means by which we can
lift deflation.
Also, in your testimony you stated that you thought the incometax question would have to be worked into the monetary system
somehow.
I introduced a bill—I do not suppose you ever heard of it, or
have ever read it—in an attempt to control the whole commodity
price level through the system of the income tax. That bill pro
vided that when the wholesale commodity price level was below the
purchasing power of a dollar; say that the purchasing power was
up to twice what it was in 1926 and 1927, for the sake of argument,
that the Government, or some agency of the Congress be permitted
to lower the income tax, to pay the running expenses of the Gov
ernment, the salaries of the civil-service employees, and the Army
and the Navy, and other governmental expenses, and pay off the
bonds and other obligations as they fall due by simple currency,
having it printed, until the prices of things rise, or the purchasing
power of the dollar fell, whatever it was, taking it in the year
that you are taking as a standard.
Now, if the prices rise more than 2 percent, as was provided in
the bill, above where they were in the year taken as a standard,
you are going to be laying on income taxes and taking currency
410
BANKING ACT OF 19 3 5
out of circulation; in other words, performing the same function
as the open-market transactions, and you would take currency out
of circulation the same as you would if you were to sell bonds and
take it out, or you put currency in circulation by paying the expenses
off, doing it in one or the other way.
Do you not think that by means of the currency you could o-et
a string to lift up your depression ?
Governor E ccles. I do not know that I can add anythin^ to what
I have already said on that subject.
Mr. Cross. It is very patent that we cannot get out of this de
pression, depending upon credit, as long as the conditions remain
as they are. You can reduce the rediscount rate to nothing, and
you can put the reserves of the banks down to nil, but as long as con
ditions are such that a man cannot produce his goods and sell them
for what they cost him, as long as there is no purchasing power
among the people he cannot get a price that will enable him to pay
the expenses of operating his factory or his farm, or whatever he
is operating, because the banks could not loan him anything. If I
was a banker, or if you were a banker, you could not afford to loan
him any money; he could not borrow that money to produce the
goods and pay the money back because he has to have buyers, and
that means purchasing power, and upon that depends credit.
I do not see any way in the world to bring the country out of this
depression unless we get it out by deflation.
It is not a question of the income tax taking money out of circu
lation; it will have the same effect as if vou sold bonds and took
them out of circulation. It is the same thing, is it not?
Governor E ccles. I do not see what you mean. You say it is
not the income tax.
Mr. G oldsborough. Mr. Chairman and Mr. Cross, I was examin
ing the witness yesterday when I yielded to Mr. Kopplemann, and
now I have yielded to Mr. Cross. I had under discussion with Gov
ernor Eccles yesterday the discussion of a major subject.
Mr. Cross. Y ou go ahead; I thought you were through.
Mr. G oldsborough. Y ou have started on a major operation.
Mr. Cross. Y ou go ahead.
Mr. G oldsborough. Governor Eccles, at a meeting of economists
the other day, and also on the floor of the House, I made the state
ment that, under our present banking system, if every man in the
United States had the financial genius of the senior Morgan and
the inventive genius of an Edison or a Ford, and the energy of a
North German farmer, we could not have any permanent prosperity
in the United States because of the fact that just as soon as they
began to show their ability and pay off this load of debt it would
immediately cause another deflation, and prosperity would there
fore defeat itself.
What is your criticism of that statement?
Governor E ccles. That goes into the whole subject of the way
money is created and extinguished.
Mr. G oldsborough. I mean under our system.
Governor E ccles. I feel that it is possible to have prosperity
under our system, if we have the intelligence to manage our bank
ing and our monev svstems. and our tax system in conjunction there-
BANKING ACT OF 19 3 5
411
with, and our public spending, so as to insure employment ; that you
can have prosperity under the system whereby money is created
through bank credit, and is extinguished by the paying off of the
bank credit. Whether there are other ways of getting it or not, I
do not know that I am prepared to say. I t is difficult to make
changes; we found that out.
People are prone to change their habits, their customs, and their
belief very, very slowly; and changes largely come about as the
result of social and economic pressure.
Mr. G oldsborough. I will put it in another way.
Summer before last, at the Century of Progress Fair, a very noted
statistician made a speech in which he said that the country owed
in debts about $200,000,000,000, but that if we all got good and were
thrifty, and saved our money and kept out of saloons, and things
of that kind, we could pay off $25,000,000,000 of the debt a year,
and in 8 years we would not owe any money at all.
I knew him very well, and I wrote him a letter and asked him
what, under our system, we would use for money, when that happy
condition arose. He wrote back and said he had not thought of
that. When the debts were all paid off we would not have any
money with which to do business.
Governor E ccles. When the community begins to pay its debt
to the banks, it extinguishes money, deposits currency, and if that
process of deflation gets under way it is more or less self-generating
and it is very difficult to stop it.
You can reduce rates through the operations of the Federal Re
serve System; you can create excess reserves; you can broaden the
eligibility requirements so as to make it unnecessary for banks to
bring pressure to collect debt.
When the community’s volume of money is rapidly contracting,
it means that unemployment is developing; and the compensating
factor is the budgetary deficit, which keeps up the volume of money,
and those funds are used to give employment when unemployment
develops.
That is what I meant when I said that the money system and the
tax system, Government borrowing and paying must* be worked in
with our banking system as the compensatory agency. Otherwise,
it seems to me what you say is likely to be what will happen. It is
what has happened in the past, to a very large extent.
Mr. G oldsborough. Of course, what I have in mind—and I do not
know that you should be questioned particularly about it, in view of
the fact that it does not bear directly on any item in the bill—but
what I have in mind is that society should begin to bear in mind
the fact that our present banking system is an artificial one, built
up by the bankers themselves for the purpose of controlling money.
That society should begin immediately to endeavor to take that
control out of the hands of any one class and place it back where it
belongs, in society itself, and that one way to begin that is to inject
money into business. As an example, by reduction of Government
debt, paying off Government debt with currency.
Governor E ccles. I think that this discussion came up the other
day, and I stated m objection to paying off the Government bonds
}^
in currency, which would result in the creation of very large excess
412
BANKING ACT OF 1 9 3 5
reserves by the banking system, unless the reserve requirements were
increased accordingly.
Mr. G oldsborough. Of course, that could be done by legislation,
and that very thing is contemplated by the bill we are now discuss
ing.
I have never had in mind, and I have never introduced in Con
gress any bill which would require the national debt to be paid im
mediately. There is only about 5 billion dollars of bonds which are
callable now. I t seems to me that to start a system of teaching
society that banking is one thing, and the issuance of currency an en
tirely different thing, would not only relieve society of a tremendous
burden of interest, but would be a great educator, because in my
opinion we are never going to do anything by creating more debt
except to create a pseudo prosperity which will carry us along a
few years longer and then, as by building up capital goods and
selling on the installment plan with the use of more credit, have a
greater collapse than we have now.
Governor E ccles. I do not think the change in the system that you
propose would put money into the hands of people that do not
have it.
Mr. G oldsborough. When you reduce taxes you declare a national
discount, do you not? You are speaking of income taxes, but that
would apply to any kind of taxes, any sort of taxes?
Governor E ccles. Yes; when you reduce taxes that is true.
Mr. G oldsborough. It is fair to suppose, is it not, that society
would get the benefit of that discount?
Governor E ccles. If you reduce income taxes it should be kept in
mind that they are paid by a very small percentage of the total
population—it would mean that the funds saved by the class that
received the benefit of the reduction----Mr. G oldsborough. Y ou do not think the ultimate consumer would
get any benefit at all?
Governor E ccles. They would possibly get some benefit ; but it
would tend to go into the capital field, and get productive facilities
out of relationship to consumer buying power.
I do not like the idea, personally, of paying off the Government
debt through currency; because it seems to me that it gives to a great
many people the idea of expecting benefits that they will not get.
The paying off of the debt by currency would simply increase the
bank reserves by the amount of Government bonds that they hold.
When the reserves are increased by that amount, you have created
a very difficult problem, unless you increase the" reserves bv the
amount of the Government bonds that have been retired. Other
wise you have huge excess reserves.
If you retire the Government bonds with currency, that currency
is the property of the banks and they will immediately send it into
the Reserve banks; so it would not go into circulation at all. It
would simply become a credit to the member bank on the Reserve
bank’s books; and, as I said, would make for an increase in the
excess reserves by the amount of the bonds retired with currency.
Let us see what problems that creates. In the first place, you
would have to increase the reserve requirements then by the amount
of bonds which you retired, which would be today about 40 percent
BANKING ACT OF 19 3 5
413
of the banks’ loans and discounts. Government bonds are about 40
percent of the total loans and discounts.
Mr. G oldsborough. If you retired them all at once.
Governor E ccles. Of course; or you would increase it as you
retired them.
You have a short-term financing of about 13 billion dollars, so
that there are more short-term maturities than the total holdings
of the banks. So in the course of a year or two the whole amount
could be retired, because of the very large amount of short-term
financing.
Let us assume, then, that you increase the banks’ reserves by the
amount of the bonds which you retire, or, we will say, 40 percent.
Some banks only hold 10 percent of their resources in Government
bonds, and if a 40-percent increase in reserves were imposed upon
them they would have to reduce the credit they are now carrying
by 30 percent in order to meet the reserve.
Mr. G oldsborough. Could not that be controlled by a system of
rediscounts between the banks?
Governor E ccles. Reserves would have to be uniform among the
banks; you could not have every one of the banks with a different
reserve requirement. If you made a uniform reserve requirement
in the banking system, with a bank holding 10 percent in bonds,
when the reserve requirement is 40 percent, it would either have
to go into the Federal Reserve System and borrow 30 percent, which
was the deficiency, or it would have to collect loans and discounts
to the extent of the 30 percent, in order to build up its reserves.
Most of the banks in small communities hold Government bonds
in the small amounts, and the deflation would come in those areas.
In the reserve cities the percentage of bonds held by banks, I
think, is in excess of 40 percent, on the average. That is one problem
it creates.
Another thing is that the State nonmember banks, which would
not be influenced by the increase in the reserve requirements made
by the Reserve System----Mr. G oldsborough. Yes; they would be.
Governor E ccles. They are not members of the Reserve System.
Mr. G oldsborough. That does not make any difference, you can
put a check tax on them which will make them amenable.
Governor E ccles. And force them into the Reserve System?
Mr. G oldsborough. N o ; but force them to abide by the Reserve
Board’s dictum in the matter of raising and lowering reserves, under
penalty of having their checks taxed.
Governor E ccles. Then we get back to this problem. The retire
ment of these bonds through currency, or through giving the banks
credit on the reserve bank books, would not, of course, in any way
reduce the total deposits of the banks. It is 12 or 13 billions of
the Government bonds issued.
Mr. G oldsbobougii. Y ou said yesterday it would increase the de
posits. I agree it would not decrease them.
Governor E ccles. It would increase deposits if the Government’s
expenses and its future deficits were paid with currency. That
would increase the deposits by the amount of the deficit. But if
you simply retire the bonds now held by the banks, it would in no
wav change their deposits.
127297— 35 ------ 27
414
BANKING ACT OF 19 35
Mr. G oldsborough. That was our discussion yesterday, in refer
ence to the retiring of bonds.
Governor E ccles. That in no way would change the deposits.
Mr. G oldsborough. In other words, we agree on that.
Governor E ccles. The deposits would just remain the same.
Mr. G oldsborough. Correct.
Governor E ccles. But those deposits are not the deposits of the
Government now. Twelve or thirteen billions of Government bonds
held by the banking system represent money which the Government
has spent. I t has gone into circulation, and it has become the prop
erty of the individuals and corporations, and the banks have the re
sponsibility of managing it and serving those customers in the hand
ling of their business, m their deposit accounts. Unless they can
invest those deposits which the Government has created as the re
sult of its borrowings, at an interest return, they would have no
object at all in handling the deposits. If they had to carry reserves
equal to the amount of the deposits which are created, there would
be no interest in the banks handling the accounts. Therefore, I
think, as you stated the other day, the cost of handling that busi
ness should be socialized, and I stated that it was being socialized
through the interest which was being paid on the bonds which the
banks hold.
Mr. G oldsborough. Y ou think that is the proper way to so
cialize it?
Governor E ccles. I think it is, and I do not think it is an unjust
way to socialize it for the reason that the banking system as a whole
has never been more remunerative than the average business, and
there is no indication at the present time that it is particularly at
tractive. Bank stocks have possibly suffered as much or more than
any other kind of an investment security, and based on my own
experience in the banking business as well as in various other lines
of business, I would say that from an investment standpoint the
banking business is the least attractive.
Mr. G oldsborough. My dear sir, before the war the banks were
extremely prosperous, and there w^ere practically no bonds out a t '
that time.
Governor E ccles. Before the war we were in a rapidty growing,
new country; we were a debtor nation.
Mr. G oldsborough. Being a debtor nation does not create pros
perity.
Governor E ccles. Being a debtor nation creates a degree of pros
perity for the banks; I mean, in part, because of the shortage of
capital, and the high interest rates that were generally being paid.
The banks, like every other business, have had periods of pros
perity and profits, and then they have had reverses. But outside
of the banks in the large centers, the average banks throughout
the country have certainly not been overpaid for the services which
they render, and if any revolutionary change is made in the method
of creating money, and if we should take all the Government bonds
up from the banks, as you propose, by currency and other methods,
how would they be compensated for the very necessary and the very
valuable and the very useful services which they render the com
munity in the clearing and handling of the transactions which they
are required to handle?
BANKING ACT OF 19 3 5
415
Mr. G oldsboeough. Blit now an artificial institution, our present
banking system, creates the necessity of rediscounts, intermediate
credit banks, and the army of bank examiners, and divides the
country into simply a creditor and a debtor class.
It is this artificial system that has created all this trouble, and
you cannot cure that by making additional paper or additional col
lateral eligible for rediscount; you are simply prolonging the final
debacle.
You have to get some real money into circulation in this country,
in my opinion.
Governor E ccles. I do not know how, under capitalism, you are
going to avoid the debtor and creditor relationship. Communism or
socialism, of course, would not----Mr. G oldsboeough. I did not even suggest communism or social
ism. I did not intimate any such thing as that.
What I am suggesting is that in a country as rich as this is we
ought to be stockholders and not bondholders, and we ought to
get rid of the enormous creditor element and creditor complex and
manipulation which is going on in this country.
That is what I am talking about, and in my judgment, unless it
is done, we are ultimately destroyed; the debtor is a slave to the
creditor, and the tremendous banking forces of this country abso
lutely run the country. Either that class has got to take its normal
position in society, or else it is going to swallow us all up, and for
this reason:
In this machine age where, as a matter of fact, labor is constantly
being released from industry, you have got to get some system
whereby you can declare a national dividend, either by a direct
dividend or by a discount system. It cannot be done in any other
way, in my opinion.
I am not suggesting for one minute that we shall revolutionize the
banking system in one stroke, but it does seem to me that we are not
helping matters any to be saying, “ It is not time now; let us wait
until next week, or next month, or next year.” We have been saying
that for 200 years.
Governor E ccles. I think this bill is taking a very great step
forward, and I believe that it is as far as we should go at this time
with reference to the matter of control of our system of money.
Mr. G oldsboeough. Just along that line—and I only have one or
two more suggestions I want to throw out—let me say this: During
all of the ages the battle of the people has been for a government of
laws and not of men; and all of my investigations during a period
of 35 years have taught me the truth of a saying of one of the
Rothschilds, 4 If you give me control of the credit and money of a
4
country, I will control everything in it.”
So, it seems to me that a legislative direction ought to be directly
injected into the monetary system, and that too much discretion,
except insofar as the mechanics and the technical phases of the law
are concerned should not be left to the administrator. It seems to
me it is the duty of Congress to lay down the policy on behalf of
the people, that policy to be carried out by technical experts.
Under this bill, members of the Federal Reserve Board—that is,
under the bill as amended—who are not necessarily benevolent
despots, and who are certainly not immortal, have almost the eco-
416
BANKING ACT OF 19 35
nomic destiny of the American people under their control, without
control. Do you think that is a good thing ?
Governor E ccles. I am proposing it. The Board is in session all
of the time; Congress is in session part of the time. There is noth
ing to prevent Congress at any time it is in session giving such
instructions by congressional action as it chooses to give to the
Reserve Board, which is appointed by the President, and is required
to operate in accordance with the Federal Reserve legislation passed,
and amended from time to time, by Congress.
I cannot see how it is possible for Congress to operate a money
system except through a body such as the Federal Reserve Board, or
some other board that they may create for the purposes of carrying
out the wishes of Congress, as provided in legislation which Congress
passed.
I do not think the proposed legislation in any way takes away
from Congress the sovereign power which they have and should have
and should retain. I t is simply delegating to a body which should
represent the Nation and the interests of the Nation, the carrying
out of the mandates of Congress.
Mr. G oldsborough. Of course, if we are going to assume that
T
Congress has no wisdom in this country, I agree with you.
Governor E ccles. I am not assuming that.
Mr. G oldsborough. But if you are going to assume that Congress
has the wisdom it is supposed to have, then it certainly is fair to
say that Congress should give legislative direction to those who are
to carry out the law.
Governor E ccles. I think that is being done here.
Mr. G oldsborough. It is a declaration of policy.
Governor E ccles. Yes.
Mr. G oldsborough. Which, in the case of a cynical board, would
sim ply amount to a stump speech.
Governor E ccles. The question of how to make rigid requirements
that will better represent the best interests of the people is a ques
tion I do not know howTto answer, and I doubt if anybody else does.
Mr. G oldsborough. I am going to conclude by saying this, that
in my judgment what you have proposed is infinitely better than
anything we have ever had before.
Governor E ccles. I thank you.
Mr. Cross. Governor Eccles, what disturbs me is that it seems
that this system upon which you rest, judged by your statement, is
that debt is a good thing, and the more debts the better off we are.
I cannot figure that out.
You say you think the Budget ought not to be balanced and we
should keep going in debt.
Governor E ccles. No ; I did not say that.
Mr. C ross. In substance.
_Governor E ccles. The Budget must be balanced over a period of
time; but I think we should not look at the question of Budget bal
ancing purely on the basis of a year.
Mr. Cross. No ; the more debt you have the more money you
create; that is, the more money the banks can create.
As you said a while ago, the banks are prosperous when there are
a lot of debts, with high rates of interest. But does that make people
prosperous ?
BANKING ACT OF 1 9 3 5
417
Governor E ccles. The intimation is that all debts are created and
carried by banks, and that if we in some way can create money
without bank credit we have prevented people from getting in debt.
As a matter of fact, the money which we create as the result of
bank debt is not very much more than 10 percent of the debts of
the country.
Then, what about the insurance companies of this country? One
class of people save and pay into an insurance company, and an
other class make it possible for the sayings to return something to
their posterity, because somebody goes in debt.
The whole system of capitalism is built up on a basis of debtor
and creditor relationship, and the debt that the banks create, or the
money they create, is a very small part of the debt. You have not
taken the people out of the bondage of debt that you refer to by
simply changing the banking system and finding some other method
of creating money.
Mr. F ord. If it were possible to create money by a Government
just making the money, and if it should just go on paying its bills
and making money, would it be necessary for the Government ever to
go in debt, on the theory that it can just print the money and hand
it out?
Governor E ccles. The Government is a sovereign power, and it has
the power to create such money as the Congress appropriates. There
is no question about that. I t does not have to depend upon the
banking system, as I have stated upon several occasions, to provide
credit for it. But it is my feeling that that is the most desirable
way.
Mr. F ord. If the Government could make all the money it needed,
it would not haA^e to go into debt, would it ?
Governor E ccles. Y ou mean if it could collect in taxes what was
spent ?
Mr. F ord. N o ; I am talking about this idea of running printing
presses. If the Government could print all the money it needed,
it neA^er would need to go in debt, would it ?
Governor E ccles. It could do that, but if it did it to a sufficient
extent it would certainly make an inflationary condition which would
destroy the value of all money.
Mr. F ord. It Avould break it down some.
GoA^ernor E ccles. Of course.
Mr. Cross. Y ou have to have controlled currency, if you are not
going to stick to a metallic base.
Governor E ccles. Y ou have to haAre a managed currency, and
I believe that the present system, through the banking system, with
the public interest represented through the Federal Beserve Board,
is as desirable a way of controlling the value of money as has been
devised in capitalistic economies.
Mr. C ross. The proposition is to devise something more than has
been devised, if possible, because under the very system Ave are talk
ing about you may create debt and prices may rise and you create
more debt, and it is inevitable that the crash will come directly,
and we go right back into the condition in which Ave find ourselves
now.
418
BANKING ACT OF 19 3 5
Suppose we have a severe crisis, and people commit suicide, or
go into bankruptcy, and then finally come out again. Then the
same cycle starts over, and you keep going and coming back.
It seems to me we ought to have, if possible, more of what might
be called backbone money, or development money or credit-creating
money. If we can, we ought to get something that is more sub^
T
stantial than currency, or money that will fade out over night
poeketbook money.
It seems to me our trouble is that when prices begin to fall, this
credit money, or check-book money, all vanishes and leaves us help
less, and ruins us.
Governor E ccles. It would be very fine if we could find some
method of avoiding these cyclical changes and always have com
plete and full employment and business stability. But I do not
know of any rule whereby we can accomplish that. We can make
that an objective.
Mr. Cross. Y ou will agree with me on this, will you not? Sup
pose there was no money; as long as crops were good and people
raised plenty, it would be a golden era, would it not?
And if you had currency that would reflect the real exchange
values of those things which society needs; if you could get a cur
rency that would reflect the real values of those things in response
to the law of supply and demand, we still ought to be in the heyday
of prosperity, ought we not?
Governor E ccles. I t depends on whether or not the currency is
distributed so that people could spend. If you still had inequitable
distribution to the point where a great majority of the people had
no money to spend, it would not make any difference whether you
used a currency system or some other system. The buying power
has to be in the hands of people, no matter what kind of money
system you use.
Mr. Cross. When you trap a lot of people into debt and distress
them and they want to eat something, then what would be the
result?
Governor E ccles. But the banking system, as I have indicated,
is not responsible for trapping the people into debt. This system of
Government loaning agencies, the Howe Owners’ Loan Corporation,
the Farm Credit Administration, and the Reconstruction Finance
Corporation, are three of the greatest credit-extending agencies or
creators of debt that we have in the Nation today.
Mr. Cross. Really, it is just postponing the day of execution, is it
not, to shift that from private concerns to the Government? If
the Government insists on foreclosing later on it is just postponing
the day of execution, is it not?
Governor E ccles. There is not any question about it; but a debt
can be supported when the national income is sufficient to support it.
The trouble was that our national income went down in a hurry, and
it was going in that direction through the process of bankruptcy
and foreclosure. But debt was adjusting itself through that process
so that it could be supported by the national income.
Mr. Cross. What l am trying to get at is this, if it can be done, to
evolve a system that is not fatalistic. I believe that if we continue
m this helpless condition, in substance, it will get in time where it
means the end of capitalism.
BANKING ACT OF 1 9 3 5
419
Mr. F ord. Governor Eccles, is not the plan yon have in mind of
creating debt on the part of the Government for the purpose of
priming the pump, and when the pump catches and the fluid begins
to flow, then let the Government, through its taxing power, wipe
out that deficit, and therefore have self-liquidating recovery. Is
that not what you want to do ?
Governor E ccles. When you correct the causes for the deficit and
the deficit disappears, with an increase in employment and an in
crease in the national income, the Government’s revenues would in
crease and you would no longer have a deficit.
As private-bank credit expands, and the velocity of existing funds
held by corporations and people in banks increases, you would likely
have a condition of pretty full employment. At that time income
taxes should be increased and not decreased, and Government obliga
tions should be reduced as the community’s obligations are increas
ing. Thus you would be creating a compensatory condition in the
money system which would help to iron out the difficulties, if it is
done with proper timing. If it is done in that way it would help to
iron out the tremendous cyclical depressions which create booms and
collapses, which create huge armies of unemployed and the terrible
loss of national income.
Mr. F ord. We have that condition now, and we are trying to
prime the pump, and by priming the pump create increased busi
ness and increased national income, and when the income increases,
then the plan, in substance, is self-liquidating, is it not?
Governor E ccles. Yes.
Mr. W illiams. Governor, I do not know that I have anything
additional to ask you about, but there is a feeling among some people,
as has already been indicated here, that we should substitute cur
rency for Government bonds, retiring them as they become due, not
only what the banks hold, but the entire amount that the Government
has outstanding. What would be the result of that ?
Governor E ccles. In the case of the bonds that the banks have,
it would increase their reserves by that amount.
Mr. W illiams. What percentage of the bonds outstanding do the
banks own?
Governor E ccles. Oh, I think, of the total outstanding it is some
where around 44 to 45 percent.
Mr. W illiams. Almost half. What would happen to the rest of
them, to the other 55 percent?
Governor E ccles. Insurance companies are very large holders of
those bonds, and the savings banks are very large holders, and the
trusts of various kinds, hospitals, educational institutions, and chari
table organizations of various kinds, as well as private or individual
trust estates----Mr. W illiams. Would not that release their holdings in bonds and
give them currency that might be invested in other securities?
Governor E ccles. Where other securities are available for such
investment. If they were available the excess reserves of the member
banks would go into those securities; but what that would create
would be an inflation of the security markets, because the volume of
money available in relation to the volume of investment securities
would cause the bidding up of the stocks and other securities.
420
BANKING ACT OP 19 35
Mr. W illiams. Then finally the currency would all come into the
banks ?
Governor E ccles. Yes; it would go into the banks immediately.
Mr. W illiams. And in the case of these other institutions that
have no use for it for investment purposes, what would they do
with it?
Governor E ccles. They, of course, would deposit the currency in
the banks, which would increase the banks’ deposits by the amount
of the 55 percent of the Government bonds they hold.
As to the bonds held by the banks, it would increase their excess
reserves by the amount of Government bonds they held but would
not change their deposits.
( Mr. W illiams. It would possibly result in the entire amount of
Government bonds going into currency being deposited in the banks,
increasing their reserves?
Governor E ccles. That is exactly what it would do.
Mr. W illiams. That would create either one of two conditions.
It would present a situation of unlimited inflation, unless----Governor E ccles. Unless the reserve requirements were raised
by that amount.
Mr. W illiams. It would raise the reserve by that amount, but you
would not necessarily have to raise it to the full amount, would you?
Governor E ccles. Y ou have already over 2 billion excess reserves.
You have enough excess reserves now to give you a large inflation;
and, if you did not raise reserve requirements by the full amount,
you would have additional excess reserves over the 2 billion now
held.
Mr. W illiams. Would the fact that the reserves were increased,
we will say, to 5 billion, tend to create an inflationary condition?
y °uld that help to make money more easy and induce people or
institutions to borrow?
Governor E ccles. I doubt that it would have any such effect. The
rates now on bankers’ acceptances and commercial paper, and short
term, high-grade bonds, and Government bonds are almost at the
vanishing point, lower than at any time, I suppose, in the history
of the country.
But I do not believe that increased reserves, beyond the present
excess, would induce any more borrowing or any more lending.
If we begin to get recovery and private credit begins to expand,
and the banks increase their investments in securities, and the funds
go into the capital markets for building new capital facilities, bv the
time the banking system had used up their present excess reserves
of 2 billion dollars, you would have a volume of monev far in excess
of anything that the banking system has ever had, and with that
volume, with the income velocity that we had in 1927. 1928. and
1929, it seems to me you could have a great inflation, without using
any of the increase in the reserves. I mean without usimr anv of the
increase in the reserves which would be brought aboutdby retiring
Governments through issuing currency.
Mr. W illiams. In other words, the credit expansion potentialities,
at least, are as great as you think they ought to be now ?
Governor E ccles. Yes; they a re ’sufRcientlv great right now, I
think, and it would be necessary to carry out open-market"operations,
BANKING ACT OF 19 3 5
421
or to raise the reserve requirements, before the present excess require
ments were entirely used up.
Mr. W illiams. 1 would like now to get down to section 202 of this
bill, with reference to the admission of nonmember banks into the
Federal Reserve System, about which you talked a great deal.
In the first place, the bill itself as proposed here provides that
the Federal Reserve Board may waive the capital requirements for
admission, with the understanding that within the time specified by
them the bank admitted into the System makes up those require
ments.
Governor E ccles. That is right.
Mr. W illiams. That is the provision of the bill.
Governor E ccles. That is right.
Mr. W illiams. A s I understand it, the amendment offered by
you—I did not understand that you presented any definite language.
Governor E ccles. We have definite language. I did not submit
it here, but I submitted this statement before the committee, and I
will read it, if you desire.
Mr. W illiams. I did not understand that you submitted definite
language.
Governor E ccles. Not here, but we are prepared to submit to
the committee suggested language, if they desire us to do so.
Mr. W illiams. That is exactly what I wanted to ask you about.
I understood your general statement to be that they may waive
this requirement and other requirements.
Governor E ccles. This is what that meant. This provision with
reference to the admission of insured nonmember banks is very
short. It provides—
On the admission of insured nonmember banks, the Board shall have author
ity to waive not only capital requirements, hut all other requirements for
admission, and the Board shall be permitted to admit existing banks to mem
bership permanently with capital below that required for the organization
of national banks in the same places, provided that their capital is adequate,
or is built up within a reasonable time to be adequate, in relation to lia
bilities to depositors and other creditors.
Your question was in relation to capital and all other requirements
for admission.
Mr. W illiams. What is meant by the waiving of all other require
ments ?
Governor E ccles. I have in mind one particular situation. Quite
a number of banks that closed during the bank holiday and wanted
to reopen found it necessary to get waivers of a certain percentage
of their deposits from their depositors. In getting those waivers
the banks issued to the depositors certificates of claims for the
amounts of the deposits which they waived, which were, of course,
secondary to the deposits of the reopened banks, but senior to the
stockholders’ interest in the banks.
It has been construed by the counsel of the Federal Reserve Board
that, under our present Federal Reserve Act, that claim of the
depositors is a liability of the bank, and therefore that they cannot
figure they have any sound capital so long as those claims exist,
whereas those claims are secondary to the depositors’ rights.
For all practical purposes, the depositors are as fully protected
under that arrangement as they would be if the claim did not exist,
422
BANKING ACT OF 1 9 3 5
and they are given that protection. That is the only case I have
in mind at the moment; there may be others.
But we felt that we wanted the language of the bill broad enough
to give the Reserve Board the power to get nonmember banks into
the system; whereas if conditions were imposed that they could not
meet, it would be undesirable, and that was not what the reserve
organization felt should be done.
Mr. W illiams. I s it your thought that these capital requirements
should be waived permanently, or that they should be required to
make them up after they get in ?
Governor E ccles. N o, sir; it is our thought that they should be
waived permanently, if the capital and surplus which they have is
adequate in relation to the bank’s liabilities.
Mr. W illiams. And you would consider them solvent?
Governor E ccles. Yes. For instance, a bank with $40,000 of
capital and surplus combined and with a deposit liability of $250,000
has adequate protection for its deposit liability. That is as much
protection, on the average, as the deposits have throughout the
banking system, as a whole.
Mr. W illiams. The thing that has disturbed me, and has disturbed
me very much, is what we are going to do with the 8,500 nonmember
banks.
Governor E ccles. Seven thousand.
Mr. W illiams. That is, the banks which during all these years
have not seen fit to come into the Federal Reserve System, and now
compelling them to come in if they are going to enjoy any of the
benefits of the Insurance Corporation.
Governor E ccles. Of course, that is not a provision of this
legislation.
Mr. W illiams. I understand that, but we are legislating on that
subject.
Governor E ccles. We are simply making it possible to liberalize
the Federal Reserve requirements so that the legislation requiring
their membership which was passed last year can be complied with
without hardship to the nonmember banks.
Mr. W illiams. Y ou understand how it was passed?
Governor E ccles. I t was passed and is in the law ; and of course I,
personally, am very much in favor of it. I feel that this whole
banking policy cannot be successfully carried out so long as you
have a substantial part of your banking system not under the Fed
eral Reserve System. The control over your reserves and the con
trol over your money is reduced just to the extent that a substantial
part of your banking system is entirely out of the Reserve System.
And, since the nonmember State banks came to the Federal Gov
ernment in an emergency, the same as the banks under the direction
of the Reserve System Tlnd/or the Comptroller of the Currency, and
requested the benefits of the Reserve System and the Reserve System
was rquired to lend to the nonmember State banks at the time of the
bank holiday, I believe that in the interest of the nonmember State
banks the legislation passed last year, with the amendment proposed,
is very necessary and a very constructive thing to require.
I have met with a lot of nonmember State bankers, and I know
that they feel that it is against their best interests to be members
of the Federal Reserve System. That may have been true in the
BANKING ACT OP 1 9 3 5
423
past, to the extent that they could carry their reserve balances in
the city banks and get 2 percent interest, I think, or 1y2 percent
interest.
Today they get no interest whatever on their reserves in the city
banks, and they would be just as well off to have those balances in
the Reserve banks now as to carry them in the city banks, whereas
that was not true until the time of the Banking Act of 1933.
Another advantage in becoming a member of the Federal Reserve
System, that will exist if this legislation passes and that did not for
merly exist, is that by the broadening of the eligibility features, it
will give them a protection that they did not have before.
The C hairman . May I interrupt you right there? That means,
of course, with the inducements that are offered to the nonmember
banks to join the Federal Reserve System. There is not a nonmem
ber bank in the United States that will object to entering into the
Federal Reserve System that tends to induce them to come in. Some
of them do not want to be forced in, and I do not think you have
given all the reasons for it yet.
For instance, one is in connection with the matter of their right to
charge for service rendered.
Governor E c c l e s . Exchange.
The C hairman . Which, in the case of a small community bank
with a small capital, goes a long way toward meeting their overhead.
And there is another reason. Nonmember banks come in contact
with member banks, or the officials of nonmember banks come in con
tact with the officials of member banks, and they get from those
contacts, in addition to what they gather otherwise, impressions as
to the desirability of membership in the Federal Reserve System,
and there has been unfortunately an accumulation of complaints on
the part of national banks that were automatically taken into the
Federal Reserve System.
This question here, if I may say so, comes back to this proposi
tion. I t seems to me it must be considered separate and apart from
the fundamental thought that enters into the policy that should be
finally deermined as to the unification of the entire banking system;
that is, our efforts to deal with the emergency that confronts us.
If we attempt to set up requirements of nonmember banks which
they cannot meet—if such a provision is put into effect—they can
have the benefit of deposit insurance; and I think it is generally con
ceded that would result in disaster, as a general rule, to small non
member banks.
Governor E c c l e s . I t would be suicide for the Reserve Board to
set up requirements that the small nonmember State banks could not
meet, and thus force them out of the deposit insurance and force
them to close. There would be nothing constructive accomplished
by any such action as that.
The C hairman . I here and now register my complete acquittal
of you as to any fear of that kind. But we cannot have you in
control always. I wish you would live a hundred years, but you
cannot.
Governor E c c l e s . I do not wish that.
The Chairman . We do not know who will be Governor of the
Federal Reserve Board 5 years from now.
Governor E c c l e s . Or next month.
424
BANKING ACT OF 1 9 3 5
The C hairman . Or possibly next month.
What happened when we were faced with the complete collapse,
or at least the complete closing—I guess it is fair to call it a col
lapse—of the entire banking system of the Nation in 1933? The
bankers were desirous then of having Congress meet, and for once
they were willing to meet with Congressmen and confer, and we did
confer. We passed the Emergency Banking Act. You know how
it was written, I assume.
Governor E ccles. I read Huey Long’s speech after he had voted
for it.
The C hairman . Huey Long was not the only one who felt that
way. The entire administration thought that way, and what hap
pened was this—and that is what I was about to call attention to—
that the controlling voice in framing that legislation did not come
from nonmember State banks in the United States; and the result
was that when member banks found they could not get currency
enough to pay their depositors and keep their doors open, they
arranged for currency to be printed on their assets and supplied to
them.
Governor E ccles. Clearing-house certificates.
The C hairman . Under the Emergency Banking Act of 1933, as
originally passed, we provided for the issuance of Federal Reserve
bank notes to member banks, but nonmember banks were not per
mitted to have that privilege under that act.
Under that legislation, a town of 10,000 or 20,000 population might
have two banks, half of the business activity and life of the com
munity being centered in one bank on one corner and the other half
in the other bank.
With this situation affecting the Nation under that bill we pro
vided relief for half of that community and its interest and its
deposits in the member banks of the Federal Reserve System. And
we said to the member bank, “ Here is the way you may print
money or get currency to take care of your deposits” ; and we said
to the people of the community interested in nonmember banks,
“ You take care of yourselves.” Of course, that was finally cor
rected, but it took a struggle to do it.
They have that recollection before them; and there are a lot of
just such experiences, not just exactly like that but experiences of
that kind that influenced the nonmember bankers; and if we attempt
to set up arbitrary standards to force them into the Federal Reserve
System, I am not sure that we will not get into difficulties.
Governor E ccles. If we had a unified banking system at the time
you refer to, the question as to whether or not a bank could get the
benefits of advances from the Federal Reserve bank and receiving
therefor Federal Reserve bank notes would not have come up.
The question came up, because here was a system set up for mem
ber banks, and all banks had been invited to join the Reserve Sys
tem from its very beginning. An emergency developed after a
period of 20 years, and those banks that had not taken advantage
of the opportunity to join wanted in the emergency, the benefits of
a system of which they were not members.
1 recognize that it was in the public interest to do just what was
done.
BANKING ACT OF 19 3 5
425
The C hairman . What was finally done, but not what was done
so long as we were moving under the counsel of one class of bankers.
Governor E ccles. But I do think that the possibility of the re
currence of such a condition should be prevented by getting a uni
fication of the banking system. I believe you will never have in
this country a banking system that can withstand the pressure of
periods of financial distress, and we will never have a sound, de
pendable banking system until we get a unified banking system.
And neither do I think it will be possible to exercise through mone
tary policy the same control over the money system when a sub
stantial number of banks which create money just the same as the
member banks are subject in no way to the regulation or control of
the authority that is responsible for monetary action.
I have been in the banking business for a period since 1913, a
period of 22 years, up until the time I came over here a little more
than a year ago.
My first banking connection was with about a million-dollar bank
which joined the Federal Reserve System shortly after the Federal
Reserve System was organized. It is a State bank. From that
period a banking organization of over $55,000,000 was built up, op
erating over 25 banks, national and State, member and nonmember.
I found, as the result of experience, that it is in the interest of a
bank to be a member of the Federal Reserve System, whether it be a
small country bank or a substantial sized city bank; and I am
stating here my honest conviction of what, as a result of experience
and as a result of study for a period of years, I feel is in the public
interest and in the bankers’ interest.
And I believe that the great majority of the nonmember State
banks, if they understood this problem, could be induced, in their
own interest, to become members. I have found in talking, as I
have upon many occasions, to nonmember State bankers, that invari
ably they can be sold upon the idea, and the difficulty today with
very many of them is a lack of understanding and lack of informa
tion with reference to the problem.
The Chairman . I think one reason why they have not wanted to
come in was because they did understand. When a bank becomes a
member of the Federal Reserve System its other connections are
practically terminated.
Governor E ccles. Y ou mean its other banking connections.
The C hairman . Yes; its other banking connections. So far as
obtaining relief in an hour of need is concerned, those connections
are terminated, and any small bank, a member of the Federal
Reserve System, would be dependent upon its Federal Reserve bank
for relief in the hour of difficulty, as a general proposition. I think
that is undeniably true.
Governor E ccles. Not altogether, because every bank carries
usually an account or two with a city correspondent.
The C hairman . Sometimes they do, but they do not always do
that.
I can point you to instances in my own district where a bank in
a town of not over 20,000 population was allowed to close. I know
the history of it.
I know that there were criticisms and faults to be found with the
management, and its papers were not all desirable. But the bank
426
BANKING ACT OF 19 35
came very near liquidating 100 percent to its depositors during this
depression. The Federal Reserve turned them down and abandoned
them.
That very institution, if it had not been a member of the Federal
Reserve System, and had kept up the other connections that would
have existed, in all human probability would have been able some
where to have secured relief to tide them over their difficulties.
Of course, that is one instance that happened many times.
I want to say in that connection that I think the story would have
been different if we had then the experience we have gathered since
that time and had had the legislation now proposed and had it
administered with some degree of common sense.
Governor E ccles. I think that there was a lack of power for the
Federal Reserve banks to extend the relief that they should have
been able to extend; there is not any question about that.
The C hairman . In connection with what I said, I want to add
this, that I have not the slightest doubt that this legislation, if it
is administered as I think it will be, and I believe it will be in the
light of our experience, with a more liberalized view of the situation
to be reflected in the administration of the Federal Reserve System,
will induce many State nonmember banks to join the Federal Reserve
System voluntarily.
Governor E ccles. There is not any question that the Reserve banks
were extremely rigid in their credit extension, in their interpretation
of eligible paper. As the depression proceeded and as deflation con
tinued, the attitude and the action of the Reserve banks, based upon
my experience, and I know upon the experience of thousands of
other bankers, was to the effect that the Reserve banks became more
rather than less restrictive.
I think the experience of the past has been a very salutary one,
and I agree with Mr. Steagall that, if this legislation is passed and
is administered with understanding and in the spirit that has moti
vated the legislation, a repetition of the banking catastrophes that we
have had in the past would be impossible.
Mr. C avicchia. The other day, Governor, I asked you if this bill
aimed at a centralized banking system, or whether it was merely
regulatory.
I notice this morning you used the word “ unification.” As I
understand it, this bill aims at unifying the National and State
banking systems under the Federal Reserve System; am I correct?
Governor E ccles. N o ; this bill does not deal with that problem
at all. That matter was covered by the legislation which was passed
in 1933.
Mr. C avicchia. In what sense did you use the word unification?
Governor E ccles. I w^as simply stating that I thought a unifica
tion of the banking system was necessary, and according to the leg
islation that Congress passed in 1933 unification will be brought
about by 1937, when the nonmember State banks will be required to
become members of the Federal Reserve System in order to get
deposit insurance.
Mr. C avicchia. And your program is to unify the banking sys
tems?
Governor E ccles. N o ; that is the program which was passed, and
which I am favorable to.
BANKING ACT OP 1 9 3 5
427
Mr. Cavicchia. The aim of the legislation we passed and that
which we are now considering it to unify the banking systems,
whether it be National or State?
Governor E ccles. That is correct.
The C hairman . Y ou mean this legislation was not designed to
accomplish that purpose, but its purpose was of another nature, and
you merely accepted the existing law with reference to unification.
Mr. C avicchia. Y ou still have the two systems.
Governor E ccles. This legislation only facilitates the carrying
out of the legislation which has been passed, without imposing un
necessary hardships on the nonmember State banks.
The C hairman . Y ou might state your views to be that a proper
interpretation and understanding of the proposed legislation is
that it really liberalizes the requirements heretofore imposed in the
act of 1933.
Governor E ccles. Yes.
Mr. W illiams. I want to ask whether or not you think that State
legislation authorizing the creation of State banks ought to be en
tirely abolished, making it one system, sure enough.
Governor E ccles. I t is my personal belief that that may be
desirable, but it is impracticable at the present time.
In practically every other country in the world they have one
banking system; and, as the result of that, they have, I believe,
avoided many of the banking troubles which we have had. But
we are young, and I do not believe that we can make changes in
our methods and habits too rapidly. We cannot go faster than the
people of the country are willing to have us go.
Mr. W illiams. I t seems to me we are inevitably going to that, and
I have the view in reference to the general philosophy of the legis
lation that we are certainly going in that direction.
If it is desirable, as you think—and I am not controverting that
here—to have the entire system under a central control, so far as
the monetary policy is concerned----Governor E ccles. That is what this would do, without eliminating
the State banking departments.
Mr. W illiams. Undoubtedly; but it brings them into the picture,
subject to that policy.
Governor E ccles. Not so far as the examination of banks is con
cerned, and not so far as the chartering of banks is concerned; but
it does unify the System by placing State banks under the influence
of monetary policy of changes in Reserve requirements and changes
in discount rates.
Mr. W illiams. If we are going to bring them into one system, I
can see no reason at all for the further existence of State banks. I
cannot see the necessity of having a separate examination of them.
Governor E ccles. There is not any question but what there are
many improvements that can be made in the banking system that the
proposed legislation has not provided for. But I believe that bank
ing legislation must be evolutionary and not revolutionary. We can
not expect in one session of Congress to get all the banking legisla
tion we want, when we take into account the size of the country
and the habits of the country, the adverse and diverse opinions.
Therefore, what has been proposed here, it seems to me, is about
428
BANKING ACT OF 1 9 3 5
as far as we could expect to go at this time with reference to bank
ing legislation, and the question of other problems of banking legis
lation which have been discussed from time to time, such as the
matter of unification, the examining problem which you raised, Mr.
Williams, and the question of branch banking has come up a good
many times here and it has come up in many State legislatures. All
of those problems are problems which will come up from time to
time for consideration. There is not any question about that.
Mr. Clark. The Federal Reserve System as it has existed and has
been administered, as Mr. Steagall pointed out, has not been sold for
some reason or other to thousands of banks throughout the country
that did not want to join, whether they understood the facts or not.
In title II of this proposed legislation, if it is passed, I think,
personally, you have an article that will sell the System, if properly
administered.
But why do you think it is necessary to use the F. D. I. C. as a
club to force the sale of an article that ought to sell on its own
merits ?
Governor E ccles. I think that membership in the F. D. I. C.
should be confined in the future to member banks. In 1933 it was
found that the Federal Reserve System was the only agency that
could provide liquidity to the banking system and thus enable the
banks of the country both member and nonmember banks, to re
open and to make available the depositors’ money. This had to be
done at that time by the Federal Government, even though it had
nothing whatever to do with the chertering or the supervision of non
member banks. The Government had the responsibility through the
Reserve System of giving them the benefits and the protection of that
system in the same manner in which it was accorded to member banks.
Now, I do believe that, in the public interest, after a reasonable
time—and 1937 is a reasonable time—and after providing a liber
alization of the requirements of membership, any bank which is
being insured by the Federal Deposit Insurance Corporation should
be required to become a member of the Federal Reserve System for
better protection to the Federal Deposit Insurance Corporation.
Although it is a bank mutual insurance plan, at the same time the
moral obligation of the Federal Government is there; because the
public looks to the United States Government to make that insur
ance company solvent if the banks cannot or do not.
Mr. Clark. Y ou think, that the insurance features of the F. D. I. C.
are so closely involved with the entire banking system that it is good
practice in this instance, whereas ordinarily it would not be, to use
one agency as a club to force membership into another agency;
that they are so interrelated and tied up that it is a fair thing to do.
Governor E ccles. I agree with you. I do not like the use of a
club at all in dealing with human problems. The F. D. I. C. and the
Federal Reserve System are so closely interwoven that it is neces
sary in the public interest to require membership of insured banks;
but I do not like to look upon the use of the F. D. I. C. as a club.
Mr. Clark. That has been suggested several times while we were
discussing title I, and that is why I used the term. I merely wanted
to get your statement in the record because numerous State banks
have written members of the committee raising that very question,
BANKING ACT OF 1 9 3 5
429
stating, in effect, that they were being clubbed by a desirable institu
tion into joining the System, which, as presently constituted, they
do not like.
That is one reason why I wanted to get your views in the record
so that we might have the entire picture.
Mr. H ollister. With respect to section 210, which pertains to the
lending power of national banks, are you going to mention that?
Governor E ccles. That is just what I was going to refer to.
Mr. H ollister. I was just going to bring that out.
Governor E ccles. I wanted to put in the record a suggestion with
reference to section 210, which is the provision dealing with realestate loans, a section that has possibly been misunderstood as much
or more than any other section, and a section which has been dis
cussed here, possibly, as much as any other section.
I recommended before this committee that, instead of providing in
the bill a specific maximum amount based on appraisal that could
be loaned, a specific maximum period, and a maximum amount of
time funds, that there should be more flexibility, and that the Re
serve Board should be required to make rules and regulations govern
ing the making of real-estate loans by member banks.
There are many reasons for that which I do not think it is neces
sary to review here. It has been suggested that it would be desir
able, and that the proposal would be far more acceptable to the
bankers in general, if there were a limitation of 60 percent instead
of the 75-percent limitation placed in the legislation; that is, to
permit the Board to make rules and regulations with reference to
real-estate loans, with the limitation that no loan made after the
passage of this legislation or after the promulgation of the Board’s
rules and regulations could exceed 60 percent of the appraised value
of the property.
I see no objection to that. I do not believe the banks would loan
more than 60 percent on the appraised value in any case.
My purpose in suggesting the 75 percent was not with the expec
tation that the banks in the future would loan 75 percent of the
appraised value of the property; but it would enable them to carry
the more than 2 billion of real-estate loans which they have, which,
due to depreciation values, are in excess or 50 percent in many cases,
possibly as high as 65, 70, or 75 percent in some cases. I t would
permit them to carry the loans they have and extend them over a
long period with an amortized basis of payment, rather than to bring
pressure on the borrowers because the examiners bring pressure upon
the banks, to reduce these loans to the 50-percent limit, which would
force the borrowers on to the Government, through the Home
Owners’ Loan and the Farm Credit Administration.
I would like to see the banks able to carry the real-estate loans
they have, even though they are in excess of 50, or 60, or 70 percent,
and to refund those loans.
But I think a 60-percent limitation is desirable in the case of
making new loans in the future. I have no objection to it, and
would like to recommend that, in connection with giving the Federal
Reserve Board the authority to make rules and regulations, such
a limitation be put upon that authority.
127297— 35 ------ 28
430
BANKING ACT OF 19 3 5
The C h a i r m a n . We have concluded with Governor Eccles, and
I want to thank you, in behalf of the committee for your faithful
ness in attending these hearings, and for the very able presentation
you have made of this legislation. All of the committee, I am sure,
cannot agree with everything you have said, but we agree with you.
Governor E ccles. I appreciate your courtesy and the patience
which the members of the committee have accorded me.
Statement on National income, money, and income velocity, submitted by
Oov. M. S. Eccles
Income
veloc
Na
tional
ity
Na income,
based
tional Depart
on
income, ment Money* Cope
(bil
Cope
land
of
land 1 Com lions)
3
2
(1+
(bil
III)
lions) merce
(times
(bil
per
lions)
year)
1
8
60.3
68. 9
70 2
74 5
78. 8
80 9
83 3
87.0
1Q30
1Q32
1 0 33
2
3
4
82.3
75.8
63.3
49.7
46.8
21. 7
21.5
22. 6
23.1
24. 6
25. 3
26. 0
26. 4
26.4
25.4
23.8
20.5
19.9
2. 62
2.81
3.04
3.04
3.03
3. 11
3. 11
3.16
3.29
Income
veloc
ity
based
on
Depart
ment
of
Com
merce
(II*
III)
(times
per
year)
Per
cent
age
change
in in
come,
Cope
land
5
6
Per
cent
Per
Per
age
cent
cent change
age
Per
age
change cent change in in
in in
in in come
age
come. change come veloc
ity,
Depart
veloc Depart
in
ment money
ity,
ment
of
Cope
of
Com
land
Com
merce
merce
7
8
9
+7.3
+8.2
-7 .9
-16.5
-21.5
-5 .8
-43.1
-1 .2
+5.5
+1.8
+6.7
+2.9
+2.8
+1.3
+0- 1
-3 .8
-6 .3
-13.9
-2 .9
-24.6
+6.2
3.12
2.98
2.66
2.42
2.35
+1.9
+6.1
+5.8
+2. 7
+3.0
+4.4
1 9 2 Q -3 3
10
-0 .3
+2.6
+1.6
+4.1
-4 .5
-10.7
-9 .0
-2 .9
-24.7
1 Less imputed nonmonetary incomes.
2 Deposits subject to check plus cash outside banks as of June 30.
Md ic t n in th B n in B l o 1935 Pr p s db Gvr o E c e in
o if a io
e a k g il f
ooe y o e n r c l s
H T stim n B f r th H ueB n in a dC r e c C m it e
is e o y eo e e o s a k g n u r n y o m t e
1. S ec . 201. The governors and chairmen and vice governors o f the Federal
Reserve banks shall be approved by the Federal Reserve Board every three
years rather than annually, so that their terms as governors would coincide
with their terms as class C directors.
2. S ec . 202. On the admission of insured nonmember banks, the Board shall
have authority to waive not only capital requirements, but all other require
ments for admission, and that the Board be permitted to admit existing banks
to membership permanently without requiring an increase in capital, provided
their capital is adequate in relation to their liabilities.
3. S ec. 203. The pension provision shall be modified so that any member of the
Board, regardless of age, who has served as long as five years, whose term
expires and who is not reappointed, shall be entitled to a pension on the same
basis as though he were retired at seventy. That is, he is to receive a pension
of $1,000 for each year of service up to twelve.
S ec . 205. Authority over open-market operations shall be vested in the Fed
eral Reserve Board, but that there be created a committee of five governors
>f Federal Reserve banks, selected by the twelve governors of the Federal
Reserve banks, and the Board shall be required to consult this committee
BANKING ACT OF 19 3 5
431
before adopting an open-market policy, a change in discount rates, or a change
in member-bank reserve requirements.
5. S ec. 209. The Board shall not have the power to change reserve require
ments by Federal Reserve districts, but only by classes of cities. For this
purpose banks shall b e . classified into two groups: one comprising member
banks in central reserve and reserve cities, and the other all other member
banks. Changes in reserve requirements, therefore, would have to be either for
the country as a whole or for the financial centers, or for the country districts.
6. S e c . 210. The conditions on which real-estate loans may be granted by
member banks shall be left to the discretion of the Federal Reserve Board to
be determined by regulation. No real-estate loan hereafter made shall exceed
60 percentum of the appraised value of the property; but this shall not prevent
the renewal or extension of loans heretofore made.
7. It shall be the duty of the Federal Reserve Board to exercise such powers
as it possesses to promote conditions making for business stability and to miti
gate by its influence unstabilizing fluctuations in the general level of production,
trade, prices, and employment, so far as may be possible within the scope of
monetary action.
(Thereupon, the committee took a recess until 3 p. m., this day.)
AFTERNOON SESSION
The C hairman . Dr. Goldenweiser, you have heard the discussion
that has taken place in connection with this bill, H. R. 5357. The
committee would like to have you discuss the legislation, and I assume
that it is to be desired that you give us the benefit of your judgment
in the way of explanation of the legislation embodied in title II,
in its technical aspects, so that all of us may have a clearer under
standing of its mechanics.
Mr. G oldsborough. Mr. Chairman, I do not know whether this
suggestion is desired by Dr. Goldenweiser, but on various and pre
vious occasions he stated that, in view' of the fact that he was on
the staff, he preferred not to give his opinion as to matters of policy.
The C hairman . I undertook to intimate to him that it is not
desired to lead him into that field, but that he give us the benefit
of his explanations of the mechanics and the technical part of this
bill.
STATEMENT OF DR. E. A. GOLDENWEISER
Dr. G oldenweiser. Mr. Chairman, 1 would like to make a brief
statement before you ask me questions, if I may. I have not pre
pared a written statement. One reason that Governor Eccles thought
it would be desirable for me to testify was that I could make it some
what clearer how the provisions of this proposed legislation have been
developed out of the experience of the Federal Reserve System under
the provisions as they are in the law today, and it is along that line
that I should like to make my opening remarks.
I want to state for the record that anything that I say that is not
purely factual expresses my own personal opinion, and I am not
speaking for the Federal Reserve Board. In my opinion, this bill
accomplishes two important purposes: One is to clarify and fix
more definitely the responsibility involved in the administration of
the Federal Reserve System; and the other is to improve the admin
istration of the credit machinery that the System sets up.
The proposals do not involve as much change from existing law
as has been intimated, chiefly in the comments and the general im
pression in the discussion of the bill outside of this room.
432
BANKING ACT OF 1 9 3 5
I should like, with your permission, to discuss in some detail a
few of the sections of the bill on which I can, perhaps, add a little
light, and then leave it to you to ask me such questions as you may
desire.
The first section of the bill—and I am speaking entirely of title
II of this bill, H. R. 5357—the first section is one that arranges for
combining the offices of governor and chairman of the Federal Re
serve banks, and to make the appointment of the person to occupy
the position subject to the approval of the Federal Reserve Board.
It has been explained to you just why it is necessary that the Board
be consulted, and I shall not discuss that phase of it, but I would
like to say a few words about the effect of this dual organization
under which we have been functioning for 20 years, which has, in
part, not proved entirely satisfactory, either to the banks or to the
Board. In many cases it has worked very well. In the final analy
sis, it is all a question of personalities, but you are setting up a charter
for the bank, and you ought to provide against the possibility of
undesirable contingencies developing, rather than to depend on
human qualities to be such as to result in smooth administration,
even though the machinery be calculated to produce the reverse.
I do not want you to get the impression that in numerous cases
it has worked in an unsatisfactory manner, but still there have been
cases where it has worked in an unsatisfactory manner.
Under existing law and practice the Federal Reserve bank has
two heads: The chairman of the board, appointed by the Federal
Reserve Board, who is also a class C director and is also the Reserve
agent and the Federal Reserve Board’s local representative in the
banks; and then it has the governor, who is appointed by the
directors and is responsible entirely to them, except that his salary
is subject to approval by the Federal Reserve Board and he is
subject to removal for cause.
In most cases it has worked out that the governor has been the
principal executive officer of the bank, although there have been
cases where, as a matter of personal equation, the chairman has been
the principal executive officer. It has been a question of personali
ties, as to which one has been dominant. I t seems clear that it ought
to be made perfectly plain in the law just who is going to run the
banks, whether it is going to be the chairman or the governor, and
the only way to do that, without defining their duties in very great
detail, is to combine the offices.
We have had cases where the chairman and the governor did
not get along, where the chairman might have used his preroga
tives as chairman to try to keep the governor out of the meetings
of the board of directors, which seems absurd, and there ought tobe no legal possibility for such a situation. We have had cases
where of two men one was first governor and then chairman, and
then they reversed themselves and the one that had been chairman
became governor, and vice versa, and they continued to be at cross
purposes. Usually the Federal Reserve Board feels that it is de
sirable for it to communicate with the banks through the chairman
of the board of directors, who is the Federal Reserve Board’s repre
sentative on the premises. As it has worked in practice, in some
BANKING ACT OF 19 35
433
cases it has been merely a matter of routing the mail to the gov
ernor, who is the executive head of the bank, through the chairman.
In some cases, however, where the chairman happened to be jealous
of the prerogatives of the governor, it has sometimes resulted in
the Board’s addressing the chairman and the information not reach
ing the governor, who has the responsibility for the running of the
bank.
It has particularly happened in cases where the governor might
be away and the deputy governor, while actively in charge of the
bank, would not receive the information coming from the Board to
the chairman, and yet the deputy would be the man whose responsi
bility it was to run the bank.
Now, those things will happen. They are bound to happen so long
as we have a set-up where you have two heads responsible and per
forming different functions. I t cannot be expected in all exigencies
of daily life and personal equations for them always to be the kind
who will talk it over and get along smoothly in their operations.
In most cases, they have done that, but there have been cases where
they have not.
This proposal will do away with this difficulty and, at the same
time, will save the system a considerable operating expense, and will
result, I think, within the banks, in smoother operation and also in
smoother cooperation between the banks and the board.
The agent’s department or the chairman’s department in the bank
has had several functions of the bank under its charge. I t has had
the examination division, and the bank-relations division, and the
economic services, and while that has worked very well in many
cases—you will forgive me for taking a particular interest in the
economic services, with which I am connected, myself—the fact that
they are connected with the chairman, who is not the executive head
of the bank, has been an additional handicap in making those divi
sions function in a way so as to have the information that they col
lect, and the material which they assemble, finding its way into the
hands of the operating officials, who would use it in formulating
policies.
The only purpose of the economic services of the Federal Reserve
System is to give the operating officials of the banks and their boards
the kind of information that they require for their work, and any
thing in the nature of a hurdle between the economic services and
the bank officials is a handicap to the effective working of the eco
nomic services, and I think it has seen that to some extent.
Those are the reasons, as I see them, for combining the offices.
Those are the reasons that appeal to me, and the fact, as I said, that
the combined officer needs to be approved by the Federal Reserve
Board, it seems to me, almost goes without saying, because the Board
is given the power to appoint the chairman, and it must naturally
have the power of approval of the joint officer.
I have not anything to comment upon in the section that deals with
the admission of insured banks into the Federal Reserve System. It
seems to me that the Governor covered all of that, all that I can
think of on the section.
434
BANKING ACT OF 1 9 3 5
In connection with the qualifications of the Federal Reserve Board*
which this bill provides for, the principal thing in the way of their
qualifications is, that instead of having it stated that they should be
appointed with due regard to agricultural, industrial, and geographi
cal interests, there is substituted a statement that they should be per
sons, who by training or experience or both, are qualified to formulate
economic and monetary policies. It seems to me that that substitu
tion is a very good one, because it states the qualifications of the
members of the Federal Reserve Board in terms of the principal
function which they have to perform, and because it does away
with the idea that the board should consist of representatives of
different groups of the population, this man representing agricul
ture, this man banking, this man trade, and so on. I t is better that
each member of the Reserve Board, as a matter of law, should feel
that he represents the country as a w
rhole, and the interests of the
country as a whole, and his job on the Board is to be engaged in
the formulation of national credit and monetary policies.
I think that the insertion of that qualification into the text of
the law is recognition of the growing conviction on the part of the
country that the Federal Reserve System’s functions are much
broader than was clearly understood at the time the Federal Reserve
Board was organized. At that time, it was largely conceived that
the Board should be a representative Board and that it should repre
sent the different sections of the population, so that none of them
would fail to receive equal consideration. Of course, that is im
portant, and it will continue, but an explicit provision for a national,
nonpartisan board, that has the sole objection of serving the interests
of the people as a whole, with particular reference to those duties
that deal with the quantity and cost of money is an advantage.
It is along the same line as the proposal which Governor Eccles
has read to you, stating the objectives of the Federal Reserve System
in terms of maintaining the stability of various elements of the
business structure, that is, to have men on the Board who will devote
their energy to maintaining that stability insofar as it can be main
tained by monetary means, and men who should be qualified to
formulate national policies.
I would like to say, in this connection, that the idea that the Fed
eral Reserve Board has broader responsibilities than the mere accom
modation of commerce and business and the serving of agriculture,
trade, and industry, is an idea which has been forced upon the
Federal Reserve System by actual experience and which has been
gradually developed in the System.
The accommodation of commerce and business, which is the only
objective that was mentioned in the Federal Reserve Act, is a vague
phrase, and has all of the attributes of a statesmanlike pronounce
ment. It is vague, it is a glittering generality like the Declaration
of Independence, and its content can be changed as circumstances
change. It has, therefore, not served any very useful purpose, but
has not done any particular harm.
I t is now time, in the light of 20 years’ experience, to substitute a
more clearly defined objective than this vague phrase, which, to my
way of thinking, held the place for a more definite objective through
out these years.
BANKING ACT OF 1 9 3 5
435
As I say, the objective which has been suggested by Governor
Eccles and the one that you have clearly in mind, is one that has
been gradually evolving. You know, Mr. Chairman, and the other
members of the committee, that you have had a great many hearings
on various bills for a number of years, and I remember particularly
the hearings in 1928, when Congressman Strong, of Kansas, was
recommending price stability as the objective of the Federal Reserve
System.
The Federal Reserve System, at that time, opposed that particular
objective, largely on the same grounds that Governor Eccles stated
here he would oppose it as the sole objective now. At that time,
former Governor Hamlin, of the Federal Reserve Board, submitted
to the committee his alternative for that proposal, which, with your
permission, I would like to read. What he suggested was th is:
The Federal Reserve System shall use all of the powers and authority now
or hereafter possessed by it to maintain a stable gold standard and shall
furnish credit facilities commensurate with the requirements of credit stability
of agriculture, industry, employment, and the purchasing power of the dollar,
so far as such purpose can be accomplished by monetary and credit policy.
I think, with some allowance for changes in fashions as to term
inology and for the fact that, at that time, the gold standard was
taken more or less for granted, that the objective that Governor
Hamlin proposed in 1928 is very similar to the one that Governor
Eccles is proposing now.
I call this to your attention in order to indicate that the proposals
presented before you now have definite roots in the history of the
Federal Reserve System; that they have been developed as part of
the System’s experience, and, for that reason they are hoped to be
and expected to be well adapted to the more effective carrying on
of those purposes for which the Federal Reserve System was
organized.
The next section on which I should like to make a word of com
ment is the one that has to do with the open-market operations, and
that is entirely in line with what I have been saying on the other
sections.
The necessity of having a national body control changes in the cost
and volume of money is almost too obvious to require explanation, or
to need emphasis, because so far as I can gather, this committee is
convinced of the necessity of national responsibility for this national
function. The Federal Reserve Act, at the present time, provides
that the Federal Reserve Board have power over the discount rate,
and over reserve requirements, with the approval of the President,
So that two of the powers of monetary control, or monetary regula
tion, are in the Federal Reserve Board, and it seems only logical
that the third power should be vested in the same authority.
I might say a word here about the legal phase of it, on which I
feel a little reticence, because I am not a lawyer, but it appears to
me, after some consultation that the Federal Reserve Act, as origi
nally drawn, was intended to give the Federal Reserve Board the
power to initiate open-market operations. It did not say so any
where in so many words, because, at the time it was written, openmarket operations were a relatively minor m atter; there were prac
tically no Government securities outstanding, except those that were
436
BANKING ACT OF 1 9 3 5
in back of the national-bank notes, and the open-market idea had
not yet developed.
But the Board has the power to fix the discount rates. It has been
argued by counsel that under the original act the Federal Reserve
Board probably had implied power to order open market operations.
The Board’s having authority over the discount rate has been ques
tioned. The law says that the rates shall be established by the Fed
eral Reserve banks, subject to the review and determination of the
Federal Reserve Board, but the Attorney General of the United
States held in 1919 that that meant that the Federal Reserve Board
could establish the discount rate, and on one occasion, at least, the
Federal Reserve Board has done so.
Mr. H o l l i s t e r . May I interrupt? I know that is not your regu
lar way of doing it, but do I understand you to say that the counsel
of the Federal Reserve Board raised a law question as to the law
giving it the right to compel all of the regional banks to enter the
open market operations?
Dr. G o l d e n w e i s e r . I do not like to speak for the counsel. If you
will wait one second, I think I will make that clear. I meant to
say that under the original Federal Reserve Act, prior to the Bank
ing Act of 1933 it could be argued that the Board had the power.
I think that when the Banking Act of 1933 was being formulated,
the intention was to strengthen the Board’s authority, because that
is indicated in more details that you would care to take the time to
consider now. But they put in a separate section (12a), and they
put this clause there, that no Federal Reserve bank shall engage in
open market operations, except subject to the regulations "of the
Federal Reserve Board, the same language more or less which ap
peared in another section.
Similar things were done very frequently in the Banking Act of
1933, where the same powers are mentioned over again, in order to
emphasize the will of Congress that they should be exercised, and
I think it is a fair construction to say that it was intended to in
crease the powers of the Federal Reserve Board over open-market
operation. But when that act was passed there was established a
statutory open-market committee, which had previously been a vol
untary committee, without any legal sanction, and it was given spe
cial powers over the open market, and then there was put in a sepa
rate section, which says that the Federal Reserve banks shall have
authority to decide whether they shall participate or not. As a con
sequence, I think that there can lie no question whatsoever that, under
the law as it stands today, the Federal Reserve Board does not have
authority to initiate open-market operations, or to see to it that they
are carried out, even after the committee has recommended them and
the Board has approved them.
It is proposed here to go back to the original Federal Reserve Act
and to go a little further in clarifying what was probably author
ized, and putting it into perfectly clear language, and placing per
fectly clear-cut authority and responsibility on a national body,
the Federal Reserve Board.
I suggest that, if you modify that and give actual voting power
to the representatives of the Federal Reserve banks in the committee
that is going to determine the open-market policy, in my opinion,
BA N K IN G ACT OF 1 9 3 5
437
you will not be restricting new, additional powers requested by the
Board, but would be giving the regional banks more power in this
matter than they have had since the establishment of the System;
because, even under the existing law, the committee cannot move
without the approval of the Board.
If the committee makes a recommendation and the Board disap
proves it, they cannot carry it out, and the Governors have no vote
on the Board in passing on these recommendations of the committee.
So that, as a matter of fact, the committee that is actually proposed
in this bill, which the Governor has suggested to modify, would give
the Governors of the Federal Reserve banks more power in the de
termination of open-market policies than they have ever had. Rather
than the Board getting more powT by this proposal that is now
er
before you, the proposal that is nowTbefore you would only clarify
and make perfectly plain and clear the power which probably ex
isted in the Federal Reserve Act prior to the Banking Act of 1933.
Whereas a committee in which the governors participated in voting,
would give them more power than they have ever had before.
The C hairman . Give them more power in the inauguration of
policies?
Dr. G oldenweiser. Yes.
The C hairman . But that would take away from them the power
to nullify the policies that had been inaugurated and later approved
by the Board?
Dr. G oldenweiser. That is correct; yes.
Hr. H ollister. I s there such a difference between an affirmative
right and a negative rieffit?
Dr. G oldenweiser. Yes; I think so.
Mr. H olltster. This, for the first time, makes it perfectly clear
that the regional bank may be compelled willy-nilly to participate
in the open-market operations?
Dr. G oldenweiser. The clear-cut statement of the power is new;
prior to that, it was an implied power and was not clear. I think,
since 1933, the power has not existed, and I think now it is pro
posed to restore it and make it perfectly clear.
Whether you wish to do it or not is not for me to discuss, but
I was trying to make clear that the alternative suggestions are in
the nature of giving the governors more power than they have ever
had before.
Mr. H ancock. May I ask you one question right there?
Dr. G oldenweiser. Yes.
Mr. H ancock. D o I understand that your suggested amendment
to the act, as proposed by Governor Eccles, and discussed by him,
that is, the open-market committee of the governors, would have any
authority as far as formulating the policies is concerned?
Dr. G oldenweiser. The committee of the governors would be a
consultative committee----Mr. H ancock. In my understanding, from what he said, was
that, under his amendment, this committee would be an advisory
committee ?
Dr. G oldenweiser. It w
rould have no powers, other than to make
recommendations to the Board. However, the Board would, under
I
438
BANKING ACT OF 1 9 3 5
that amendment be required to obtain that advice before it took
action, either open market or----Mr. H ancock. And they would obtain advice on a policy which
they had formulated, rather to receive, in the first instance, a policy
formulated by the committee; is not that correct ?
Dr. Goldenweiser. That is correct, except there is nothing to
prevent that committee from recommending policies, if it chooses.
I t has no power to initiate them, but it has the power of recom
mendation and----Mr. H ollister. I t has not any power at all ?
Dr. G oldenweiser. The power of recommendation is the power
that anyone may have to suggest something, but it has no statutory
power other than to make recommendations.
Mr. H ollister. There is no power except the power of suggestion?
Dr. G oldenweiser. That is right. I would like, on the subject of
open-market operations, to say one or two other things in line with
what the chairman mentioned, their mechanics.
We have had this system operating in the open market on a con
siderable scale for 13 or 14 years. When the system was first organ
ized, it met the war emergency, and that was merely a matter of
supporting the Government, and it was a matter of discounting
paper secured by Government obligations in order to enable the
Government to finance its war needs.
After the early period and after the liquidation of 1920 and 1921,
the Federal Reserve banks found themselves with a very small
volume of earning assets. There was in the market a large amount
of Government securities, and so, quite naturally, in 1922, the Fed
eral Reserve banks began to buy Government securities for the
purpose of having enough earning assets to meet their expenses.
That did not last very many weeks before it began to cause diffi
culties for this reason: That the market for Government securities
and all securities, essentially, is in New York. So that when the
Federal Reserve Bank of Kansas City—I am using that as an
example—would, for instance, want to buy $10,000,000 of securities
in the New York market, what it would do would be to draw a check
in favor of a New York broker, the New York broker would deposit
the check in a New York bank, and the New York bank would then
get that much more gold through the gold settlement fund, put it
to its account at the New York Federal Reserve Bank, and this
bank would use that balance to extinguish that much of its
indebtedness.
So that the consequence of the banks in the interior buying Gov
ernment securities was to reduce the earning assets of the New York
Federal Reserve Bank which was not, of course, particularly pleasing
to the Federal Reserve Bank of New York, and which did not change
the total earning assets of the Federal Reserve System. So that one
bank would be increasing its holdings at the expense of another bank,
and the aggregate earning assets would remain constant.
Furthermore, these purchases by the banks, the uncoordinated 12
Federal Reserve banks, were creating considerable disturbance in the
Government bond market, and Parker Gilbert, who was Under
Secretary at that time, was disturbed about that. It was not long
before it was decided that open-market operations must be coordi
nated.
BANKING ACT OF 1 9 3 5
439
A committee of five Governors was appointed to coordinate those
purchases. That committee, with rather narrow and limited pur
poses, one of which was to see that purchases do not unduly upset
the Government bond market, functioned for about a year, and
during that time the Federal Reserve System did a lot of hard
thinking and saw a lot of things developing with which they had
not had experience before. They noted that the purchases of Gov
ernment securities resulted in decreased discounts and in no increase
in the total earning assets of the Federal Reserve banks. The Fed
eral Reserve Board suggested in the spring of 1923, and it was agreed,
to reorganize the committee, and to create a Federal Reserve System
Open Market Investment Committee, which would have the duty to
make recommendations in regard to open-market policies; and at
that time, the policy was established that those purchases should not
be made with a view to earnings because the Federal Reserve System
could not afford, and the country could not afford to have the
Federal Reserve System run with the view to maintaining its earn
ing capacity.
The Federal Reserve System’s duties are entirely different; they
relate to monetary control, and it is not their business to worry about
earnings; they have to disregard them as a principle of their opera
tion.
Now, in 1923, this open-market committee that was set up estab
lished the principle that the open-market policy should be on the
same principle as the discount-rate policy, which at that time was
the phrase which I referred to before, the accommodation of com
merce and business, and with ref ernce to the general credit situation.
This language clearly had in mind the exercise of the right kind of
influence on the business situation. The fact that they meant that
is entirely clear from the kind of information on which decisions
were based.
From 1923 and until 1930 or so, that committee functioned, and
during that period the Federal Reserve engaged in a large volume
of open-market operations. Those operations were undertaken in
the light of information, in the collection and compilation and or
ganization of which the Federal Reserve System had been the
pioneer, and had collected the kind of information which had not
been available anywhere before. That information was along lines
of keeping track of the physical volume of industrial production, the
movement of goods through the channels of trade to consumers, the
movement of imports and exports, employment, pay rolls, commodity
prices, retail prices, stock-market securities; all of those factors, in
addition to changes in deposits and loans and investments, and the
different kinds of loans and investments of the different banks, and
also foreign exchanges and gold movements.
In other words, the Federal Reserve System based its decisions
in open-market policies on a whole array of economic factors that
were available, and that were made available by the efforts of the
Federal Reserve System, to serve as a basis for these decisions.
The sort of information that the Federal Reserve System uses
is indicated in this book of charts, of which every member of the
Federal Reserve Board always has one on his desk, and which covers
the subjects that I have just enumerated.
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BANKING ACT OF 1 9 3 5
The reason I bring that out is to show that the policies and ob
jectives and ideas, which are now incorporated in the objective that
Governor Eccles proposed, are the same policies, the same objectives,
and based on the same general factual material as that which has
been gradually evolved in the Federal Reserve System through
actual experience. In the securing of this information, the Federal
Reserve System has played a pioneering part.
This committee functioned from 1923 to about 1930, and then in
1930 it was decided to modify it by including all of the governors
of the Federal Reserve banks rather than just five. Instead of hav
ing a committee of five representing the governors’ conference, it
was decided that the matter was of sufficient importance, and one
the repercussions of which were felt throughout the country suffi
ciently, so it would be desirable for the committee to bring together
all of the governors into a committee called the “ Open Market Pol
icy Conference” ; and that is the committee which, in the Banking
Act of 1933 was made a statutory committee, under a somewhat
changed name, “ Federal Open Market Committee ”, a committee
of 12 governors.
I t does not say, in the law, that they have to be Governors, but it
says they have to be representatives of the Federal Reserve banks.
But, as a matter of fact, the Governors were selected.
When we speak about the period from 1923, say, to 1933, during
which the Open Market Committee functioned, first, as a voluntary,
and later as a statutory committee, I should like to say to you that
the Federal Reserve System did pioneering work not only in obtain
ing the information and working out the relationships between these
different economic factors in the situation—it did pioneering work
also in the magnitude and boldness of its operations.
There has never been a banking system that did more in the way
of carrying out the objectives which it is now proposed to write into
the act than the Federal Reserve System did during that period.
The purchases which they engaged in, in 1924, were on a large
scale partly for the purpose of moderating the business recession,
but partly for the purpose of helping the establishment of stable
money conditions throughout the world.
The same thing was done in 1927. Then, in 1928, when specula
tive expansion was so great that the Federal Reserve System pro
ceeded to a policy of restraint through discount rates and openmarket operations on a larger scale than had been done before.
When business broke in 1929, the Federal Reserve System stepped in
and bought a large volume of securities—not large in the sense we
have gotten accustomed to thinking of now, but large in the light of
what appeared in 1929 to be large—then in 1930, they bought
$100,000,000 or more of securities, but they did not proceed as vig
orously as may now seem to have been desired in the light of subse
quent developments.
In 1931, the world went through a terrible contortion, with first
one country and then another being subjected to runs, and, finally,
in the autumn, England went off the gold standard. At that time,
the United States lost, in a matter of 6 weeks, $700,000,000 of gold.
We had very large foreign balances in this country which were
subject to withdrawal on demand; and the Federal Reserve System,
BANKING ACT OF 19 3 5
441
in order to protect itself against continuous drains, followed the
orthodox practice of raising its rates, and holding them at a higher
level. It seems, in retrospect, that those rates were kept high longer
than was desirable, and that is particularly true of the bill rates,
which were held above the market rates for 3 or 4 months, during
which time there was a rapid run-olf of bills.
This should be viewed, however, in the light of the fact that, at
that time, we still had a very large volume of foreign obligations
subject to withdrawal on demand, and that the legislation under
which the Federal Reserve System was functioning was such that
the amount of gold, free gold, was beginning to be low. I would
like to discuss that matter of free gold a little more, in connection
with collateral requirements.
However, when the Glass-Steagall Act was passed, on February
27, 1932, and the Federal Reserve System’s gold became available,
the system began open-market operations on a scale that is very im
pressive. First, they decided to purchase securities for awhile at a
rate of $25,000,000 a week, and then at a rate of $100,000,000 a week,
so that the system’s holdings of open-market securities increased
from $750,000,000 to $1,850,000,000 in the course of a few months and
they were held steady at that, except for seasonal fluctuations; and
then, in 1933 they purchased another $600,000,000, so their total
holdings now are more than $2,400,000,000. The chart shows this.
The reason I am emphasizing those facts is that I am a little
restive under the wide-spread allegation that the Federal Reserve
System sat supine and did nothing to combat the forces of the de
pression. It may be that the Federal Reserve System did not know,
in 1929 and 1930 and 1931, as much of the magnitude of the catas
trophe that the world was facing as it knows today; it may be that
they did not have adequate information; and it is also unquestionably
true that the system did not have the necessary legal authority which
it has since acquired and which is going to be further increased, if
this bill becomes a law. But in considering all of that----Mr. G oldsborough. And they did not ask for any increase of
authority. They did not show any knowledge that any increase
in authority was necessary.
Dr. G oldenweiser. Not until the early months of 1932, when they
asked for the Glass-Steagall Act.
Mr. G oldsborough. Up until 1932, we were told by the Secretary
of the Treasury and the Governors of the Federal Reserve Board
that they were doing everything that could be done by the Federal
Reserve System.
Dr. G oldenweiser. Yes; and I think----Mr. G oldsborough. And they insisted that we stav on a rigid gold
standard and no expansion should take place, and il it did, the coun
try would go off like Germany. There was nothing indicated
whatever that there was any vision on the part of the Secretary
of the Treasury’s office, or the Governors of the Federal Reserve
Board, as to what was going on in the world, at all.
Dr. Goldenweiser. I do not wish to contradict that, but all I wish
to say is------
Mr. G oldsborough. N o; but you did contradict it a few moments
ago.
442
BANKING ACT OF 1 9 3 5
Dr. G oldenweiser. N o ; excuse me. I did not contradict it. I
simply said it is a record of a great many things having been done:
and as soon as it obtained, under the Glass-Steagall Act, the au
thority to release our gold, the Federal Reserve System engaged in
open-market operations on an exceedingly large scale.
Mr. G o l d s b o r o u g h . I will tell you what this committee, or a great
part of it, thinks about the open-market operations that took place:
This committee thinks that the Federal Reserve System did not
want the Goldsborough bill passed, and for that reason it started
only buying $25,000,000 a week, and they proceeded; and when the
bill was about to pass the House, to increase the purchases, they
did buy $100,000,000 a week, in order to indicate that this legisla
tion was not necessary. We were told, time and time again, it was
not necessary; and then just as soon as the Glass substitute to the
Goldsborough bills was adopted by the Senate, the purchases were
immediately stopped. It looked as if the purchases were tactical,
instead of being economical.
Dr. G o l d e n w e i s e r . I think, Mr. Goldsborough, that is a matter
of opinion. My opinion is that you are all wrong about that; that
there was nothing tactical in these purchases. I was in the Federal
Reserve System in the fall of 1931, and in January and February
1932, when the question of the possibility of purchasing and reliev
ing the situation was constantly under discussion, and when we were
running up against the difficulty of the shortage of gold, and we
went to Congress and got the authority and purchased $1,100,000,000
of Government securities in 6 months.
I think that this did represent economic convictions. The GlassSteagall Act was passed on February 27, 1932, and after that the
purchases were $1,100,000,000, and the Banking Act of 1933 was not
passed until a year later.
Mr. G oldsborough. I want you to understand that what I said
is not intended as a criticism of you.
Dr. G oldenweiser. I understand that it is not personal, of course.
Mr. G o l d s b o r o u g h . Y ou w
’ere not engaged in formulating the
policies of the Federal Reserve System, so it is no criticism of you.
Dr. G o l d e n w e i s e r . I d i d not assume that. I think it simply is
not the correct interpretation of the facts of the Federal Reserve
System. If you have, on the subject, information that is not avail
able to me, that is where the matter has to rest.
Mr. G oldsborough. We have information given by the Secretary
of the Treasury and the Governor of the Federal Reserve Board,
who took the position that we should do absolutely nothing but allow
conditions to remain the same and worry through the situation.
That is what we were told.
Dr. G oldenweiser. I would like to say a few words, Mr. Chair
man, on the matter of eligibliity. I know----The C hairman . In that connection, I wish you would define to
the committee what paper is eligible under the present law, so we
may have a clearer idea of what we have been operating under here
tofore and what would be involved in the change contemplated in
the bill now under consideration.
Dr. G oldenweiser. Yes; Mr. Chairman.
BANKING ACT OF 1 9 3 5
443
Mr. H ollister. Just one question before we leave the open-market
operations.
Dr. G oldenweiser . Yes.
Mr. H o l l is t e r . N o w , if the acquisition by the Federal Reserve
banks of Government obligations are directly from the Government,
would that be a part of the open-market operations ?
Dr. G o l d e n w e is e r . That comes under section 14 of the Federal
Reserve Act, which is the open-market section.
Mr. H o l l is t e r . What I am getting at is th is: In the event that this
bill becomes a law, so that the various Federal Reserve banks may
be compelled to enter the open-market operation, may they then be
compelled, against their will, to continue buying Government obli
gations directly from the Government—if not in the open-market—
but directly from the Government?
Dr. G o l d e n w e is e r . I am not a lawyer.
Mr. H ollister. I think that is a very natural thing which the
committee ought to know.
Dr. G oldenweiser . Yes; and perhaps it would be better if you
asked the counsel of the Board that question. As a matter of fact,
that is a question which we have not discussed or considered at all.
Mr. H ollister. That is very material—I mean the opinion that
some of us have of this power, that it might be used by the Ad
ministrative Control Board to compel banks, very much against their
will, to put their resources back to the continuous acquisition of
Government bonds, even though it were clear that the Government
had gone far beyond the necessity of demands of the case in issuing
bonds.
Mr. W y a t t . I am not prepared to render a definite opinion on
this question, because it is something I have not thought about. The
question was not raised or discussed while the bill was being drafted;
but my off-hand view is that, under the bill as introduced, the OpenMarket Committee could not compel the Federal Reserve banks to
purchase bonds directly from the Government, because the commit
tee is only given power over open-market operations.
Mr. H o l l is t e r . Y ou would not consider that open market then?
Mr. W y a t t . Off hand, I would not say so; but I would like to
call your attention to the fact that, under the Thomas amendment,
there is already a specific provision for the direct purchase of $3,000,000,000 of Government bonds by the Federal Reserve banks from
the Treasury. Moreover, the Thomas amendment provides means
of coercing the banks to do so.
Mr. H o l l is t e r . Yes; I know that.
Dr. G o l d e n w e is e r . Of course, Mr. Hollister, it is true that the
Federal Reserve banks buy Government securities directly from the
Government.
Mr. H ollister. I realize that; but they are not compelled to, at
the present time, however.
Dr. G oldenweiser. No ; but they have authority, and usually they
are short-term day-to-day certificates.
Mr. H o l l is t e r . I understand that, but what worries me is the
compulsory end of it.
444
BANKING ACT O 19 3 5
JF
Dr. G o l d e n w e is e r . I say the power of purchase does exist at this
time, under the authority of section 14, which is the open-operation
section, so that would be a question of legal interpretation.
Mr. H o l l is t e r . In other words, if they are proceeding under any
vague authorization whatsoever today, if they are not exceeding
their powers in acquiring Government obligations, then the same
provision of the law which says they are not exceeding those powers
also makes it compulsory on them, in the future, to acquire Govern
ment securities, in the event that the Federal Keserve Board orders
them to ?
Dr. G o l d e n w e is e r . Yes; that would be my opinion, and I should
think it would make very little difference,‘Mr. Hollister, whether
they bought directly from the Treasury, or whether the Treasury
first had to go through the form of selling them to some individual
or some bank before passing them on to the Federal Keserve bank.
The fundamental question you are interested in would not be reallv
affected by it, substantially.
Mr. H o l l is t e r . Except as a question of amount—I mean the open
market might not provide the amounts and they would be compelled
to take directly from the Government.
Dr. G o l d e n w e is e r . There are enormous amounts on the market,
you know.
I he Chairman. Before you leave that, the purchases shown bv
the chart you have just shown the committee, do not represent ac
tion directly as a matter of Government policy, but they represent
the independent action of the different banks who are free to do as
they please, and buy where they please, and decline to buy where
they do not please?
Dr. G o l d e n w e is e r . I am very glad you brought that question up
Mr. Chairman, because I think----Mr. S p e n c e . A little louder.
Dr. G o l d e n w te is e r . I do not think that is an accurate statement,
Mr. Chairman, because they did work through the open-market com
mittee.
The C h a i r m a n . A s long as they wanted to?
Dr. G o l d e n w e is e r . And the purchases were through the openmarket committee.
"
1
The C h a i r m a n . I am not interested in how the purchases were
made. My inquiry was this: Whether or not the purchases made bv
the banks represented the free action of the banks, or whether the'v
represented the actions carried out as governmental policv?
Dr. G o l d e n w e is e r . I cannot answer that “ yes ” or “ no.”
The Chairman. The record is quite complete to the effect that the
banks were free to act as they pleased.
Dr. G o l d e n w e is e r . Yes; that is correct; but I would like to add
the statement that, while they had freedom to buy or not to buy. they
agreed to act jointly through the open-market policy conference.
The C h a i r m a n . That is the very thing I am talking about. They
agreed, and what they did represented an agreement on their part,
but none of it was necessarily the result of governmental policy?
Dr. G o l d e n w e is e r . None of it was; no.
The Chairman. Nor did any governmental authorities have the
power to direct and compel these actions?
Dr. G o l d e n w e is e r . None of it was compulsory.
BANKING ACT OF 1 93 5
445
The C h a i r m a n . And they opposed any move for governmental
authority to require such action?
Dr. G o l d e n w e is e r . That is probably true, also.
The C h a i r m a n . I think the record will show that.
Dr. G o l d e n w e is e r . But the fact is, also, that the Federal Reserve
Board, especially the governors of the Federal Reserve Board, were
in constant touch with the members of the open-market committee,,
and the policies pursued were agreed upon by all of the participants.
The C h a i r m a n . This would, of course, be true—and I did not, of
course, intend to invite you into a question of policy, but this is neces
sarily true, also, is it not: That, insofar as it affects general conditions, in putting into effect a particular policy of the Federal Re
serve banks, the psychological effect would enter into the calcula
tion, as well as the actual transaction?
Dr. G o l d e n w e is e r . That is correct.
The C h a i r m a n . And such effect would be quite different in the
case of action by banks in their independent capacity, which repre
sented simply the purposes of the banks, one at a time, putting in
effect their own judgment, and what it would be if the action taken
were known to the world to be the expression of policy on the part
of the Government, which would be followed up consistently?
Dr. G o l d e n w e is e r . I think that is correct; absolutely. By “ Gov
ernment ” you mean the Federal Reserve Board?
The C h a i r m a n . Oh, yes.
Dr. G o l d e n w e is e r . I think perhaps it is important to make the
distinction.
The C h a i r m a n . Of course, I mean that, because that is the only
authority at the time that could do it.
Dr. G o l d e n w e is e r . I th in k I have said-----The C h a i r m a n . I suggested that you define eligible paper under
the existing law, so we may have in this record a clear definition of
it, and thereby be enabled to know what we are doing by the changes
involved in this bill.
Dr. G o l d e n w e is e r . The definition of eligible paper is a complex
matter; it covers many pages of law and many pages of regulations,
but I should like to have the privilege of reading a paragraph or
two of an article that discusses that subject, which appeared in the
Bulletin of July 1930, and, if the chairman pleases, I should like
to insert these three or four pages into the record.
The C h a i r m a n . That is taken out of the law?
Dr. G o l d e n w e is e r . That is taken out of the Bulletin—the Federal
Reserve Bulletin—and it is stated in terms understandable to the
ordinary business man.
The C h a i r m a n . In other words, this will embody the information
that I suggested ?
Dr. G o l d e n w e is e r . I would like, however, if you wish, at this
time, to read a paragraph of it.
The C h a i r m a n . Certainly.
Dr. G o l d e n w e is e r (reading) :
Eligible paper is a term applied to credit instruments that are eligible for
discount at the Federal Reserve banks under the terms of the Federal Reserve
Act and the rulings of the Federal Reserve Board. The general principles of
eligibility are clearly defined by the act and the rulings, but their application
in "particular cases is not always a simple matter.
127297— 35------29
446
BANKING ACT OF 1 9 3 5
In view of the fact that the Federal Reserve System was established for the
purpose, among others, of creating an agency from which member banks can
obtain credit for seasonal or emergency needs, the Federal Reserve Act provides
in a general way that so-called “ commercial paper” be eligible for discount
with the Reserve banks.
The C h a ir m a n . I suggest you read all of it.
Dr. G oldenweiser (continuing reading) :
Paper created in the process of financing the flow of commodities in produc
tion and trade arises out of loans that are ordinarily liquidated by the
borrower with funds received in the natural course of events from the sale of
goods underlying the transaction. In the majority of cases the rules and
regulations relating to eligibility are consequently devoted to defining eligible
paper by reference to the nature of the underlying transactions. The first
question to ask, therefore, in the process of testing any piece of paper for
eligibility, is: Did it arise from, or are the proceeds to be used for the
proper sort of transaction? Other questions, which are equally essential but
comparatively easy to determine, are as follows: Is the maturity within the
mw and regulations? Does the paper meet the physical formalities prescribed?
Has the legal limit of the aggregate of paper rediscountable for the particular
obligor been reached?
In order to be eligible, paper must arise 'out of a transaction related to an
agricultural, industrial, or commercial purpose; the paper must have been
drawn or the proceeds used for producing, purchasing, carrying, or marketing
goods. Paper is not eligible if the proceeds are used to finance fixed invest
ments of any kind, or any investments of a purely speculative character, or
cariying or trading in stocks and bonds except obligations of the United States,
or to finance relending operations except relending by cooperative marketing
associations and factors.
Because of the longer maturities for which agricultural paper may be redis
counted, it needs to be distinguished from other eligible paper. Agricultural
paper arises out of activities of growers in connection with production, mar
keting, and carrying of agricultural products, including the breeding, raising
fattening, or marketing of livestock. In classifying paper, the purpose of
original negotiation is determining throughout its life.
Some special points should be kept in mind with relation to bankers’ ac
ceptances. In respect to this type of paper, the law and regulations are some
what more specific as to the purpose of negotiation or nature of transaction.
I ui poses specifically enumerated are shipment of goods, including export and
import, storage of readily marketable staples, and the creation of dollar
exchange.
Eligibility versus acceptability.—'The Federal Reserve Act, the regulations
of the Federal Reserve Board, and the rulings of the Board define the tests
that paper must meet in order to be eligible for rediscount. The Federal
Reserve banks must observe these tests when taking paper, but to them is left
the matter of passing on the desirability of paper from a credit standpoint
Paper may meet the technical tests of eligibility and yet fail to meet the credit
requirements of any particular Federal Reserve bank. Moreover each Federal
Reserve bank is charged by the act in extending accommodation to anv nor
ticular member bank to have “ due regard for the claims and demands of
other member banks.
' °
Member bank collateral notes.—Member banks, in addition to raisin" funds
from Federal Reserve banks by rediscounting, may borrow for 15 davs on their
own notes secured by obligations of the United States or for 90 days on notes
secured by paper eligible for rediscount.
Indeed, more use has been made in recent years of this method of borrowing
than of rediscounting; on December 31, 1929, for example member banks were
borrowing at the reserve banks $454,000,000 on their collateral notes and their
rediscounts at the reserve banks amounted to $193,000,000
Summary tabulation.—'The following pages give a tabular arrav of the chief
points that need to be taken into consideration in testing any particular piece
of paper as to its eligibility for rediscount. There are also included by wav
of illustration, digests of rulings in connection with the eligibilitv of paper
arising out of specific transactions.
These are the principles, and then the article proceeds to tabulate
the kind of cases that come under these rules:.
BANKING ACT OF 19 3 5
447
The C h a i r m a n . I suggest you insert that in your statement.
Dr. G o l d e n w e i s e r . Yes.
(The matter referred to is as follows:)
S m a y o E ig ility R q ir mn s f r R d c u t a Fe e a Rs r e
u m r p l ib
e u e e t o e is o n t dr l ee v
B n s, Ju y30
ak l
[Excerpt from Federal Reserve Bulletin for July 1930, pp. 401-406]
What nature of transactions give rise to notes, drafts, and bills of exchange
eligible for rediscount at a Federal Reserve bank?
Eligible paper arises if drawn for or proceeds used for producing, purchasing,
carrying, marketing goods in agriculture, industry, or commerce.1
Ineligible pape arises if drawn for or proceeds used for fixed investments or
capital purposes of any kind; 2 relending3 except for agricultural purposes by a
coperative association 4 or by a factor exclusively to producers of agricultural
products in their raw state: 6 investments of a purely speculative character; *
carrying or trading in stocks and bonds except obligations of the United States.7
Specific transactions giving rise to eligible and ineligible paper according to
published rulings of the Federal Reserve Board:
e l ig ib l e p a p e r
in e l ig ib l e p a p e r
Investmerit paper
Given by owner to contractor in
actual payment for material and
services.8
Given by motor transport corpora
tion to the seller of trucks.9
Made by owner—proceeds of which
to be used by owner to pay for work
of developing or building.8
Made by motor transport corpora
tion—proceeds to be used for purchase
of trucks.9
Given by farmer for purchase of
silo.1
2
Given by farmer for tractor—agri
cultural paper on the ground that a
tractor is used for a current agricul
tural purpose.1
0
Given by farmer—proceeds to be
used for draining farm lands when
drainage is incidental to cultivation.1
1
Given by water works company—the
Given by public-service corporation,
proceeds of which to be used for pay if cannot be liquidated within a short
roll, purchases of coal, etc., if state time out of current earnings.1
4
ment of borrower shows excess of
quick assets over current liabilities.1
8
Relending or finance paper
Drawn by factor the proceeds used
for making advances exclusively to
producers of staple agricultural prod
ucts in their raw state (maturities up
to 90 days.)1
3
Given by agricultural cooperative
marketing associations (with maturi
ties up to 9 months), when the pro-
Drawn by a finance company to fi
nance another.1
8
Given by Federal land bank or jointstock land bank, secured by farm loan
bonds—proceeds used for relending.1
8
i p . 226 (act, sec. 13) ; p. 129 (Reg. A, sec. I b ; p. 130 (Reg. A, sec. II ( a ) ) .
p. 227 (act, sec. 13) ; p. 130 (Reg. A, sec. II ( c ) ).
*P. 130 (Reg. A, sec. II (b )).
* P. 232 (act, sec. 13a) ; p. 133 (Reg. A, sec. VI ( b ) ).
»P. 226 (act, sec. 13) ; p 129 (Reg. A, sec. I (b )) ; p. 134 (Reg. A, sec. V III).
« P. 130 (Reg. A, sec. II ( d ) ) .
7 P. 227 (act. sec. 13 — see also act of June 17, 1929; p. 129 (Regt A, sec. I ( c ) ) .
»P. 40 (ruling no. 331).
» P. 44 (ruling no. 50 1 ).
P. 32 (ruling no. 211).
u p . 33 (ruling no. 214).
12 p , 44 (ruling no. 500).
i»P. 37 (ruling no. 3 14).
u p . 37 (ruling no. 318).
» P. 226 (act, sec. 13) ; p. 129 (Reg. A, sec. I (b )) ; p. 134 (Reg. A, sec. V III).
i« P. 38 (ruling no. 324).
« P. 39 (ruling no. 330).
2
448
BANKING ACT OF 1 9 3 5
ceeds are to be advanced by the asso
ciation to any of its members for an
agricultural purpose."
Made by a manufacturer of pig iron
secured by pig iron already manufac
tured, held waiting delivery under con
tract of sale. The sale has been made
and the carrying of the material is
not for speculative purposes.11
8
9
Paper draicn for investments of a
purely speculative character
Note, proceeds of which are used for
holding grain for a higher price.2
0
AR UTRLO CMEC LPPR
GICLUA R OM IA AE
R
Agricultural or livestock and eligible
Commercial and eligible
Given by a farmer for purchase of
agricultural implements (replaceable
in a comparatively short time).2
1
Drawn by a dealer on farmer in
payment for agricultural implements.2
1
Given by farmer to an irrigation
company for water used for crops.2
4
Given by a dealer for agricultural
implements to resell to a farmer.2
2
Given by a farmer to raise funds
for fattening cattle.2*
5
Made by farmer in payment for
mules.2
7
Made by agricultural cooperative
maiketing associations for the pur
pose of obtaining funds with which
to make payments to members, or to
finance marketing of agricultural
products.2
8
Given to a farmer in payment for
agricultural products grown by him.2
3
Given by an irrigation company, in
its business of furnishing water to
farmers.2
4
Given by a packing company—the
proceeds used to purchase livestock.2
*
Made by mule and cattle dealer.2
7
Covering such food products as
butter, cheese, eggs, poultry, frozen
fish in cold storage under negotiable
warehouse receipts.2
8
WA MTR YMYRDCUTBEP PRHV?
HT AUIT A EISONAL AE AE
Ninety days in general, including factors’ paper created to make advances to
certain agricultural producers.3
0
Nine months in case of agricultural paper including livestock paper.3
1
Indefinite maturities are ineligible except for sight bills which grow out of
the domestic shipment or exportation of nonperishable, readily marketable
agricultural or other staples and secured by shipping documents. Such bills
may not be held for the account of a Federal Reserve bank for more than 90
days.3
2
HWMC P PRO OEBROE MYB RDCUTDB AM BRBN
O UH AE F N ORW A E EISONE Y E E AK
R
M
WHARSREBN?
IT EEV AK
An amount not in excess of that which may be loaned by a national bank
to one person; i. e., 10 percent of such bank’s capital and surplus subject to a
number of important exceptions.3
3
17 P.
19 P.
20 P.
21 P.
22 P.
23 P.
« P.
25 P.
30 P.
27 P.
28 P.
20 P.
30 P.
11 P.
232 (act, sec. 1 3 a ); p. 133 (Reg. A, sec. VI (b )).
35 (ruling no. 302).
36 (ruling no. 312).
31 (ruling no. 20 4 ).
33 (ruling no. 2151.
27 (ruling no. 100).
40 (ruling no. 333).
32 (ruling no. 208).
32 (ruling no. 209).
31 (ruling no. 203).
232 (act, sec. 13a) ; p . 133 (Reg. A, sec. VI (b )).
38 (ruling no. 321).
227 (act, sec. 13) ; p. 129 (Reg. A, sec. I ( a ) ) ,
231 (act, sec. 13a) ; p. 129 (Reg. A, sec. I (a ))
„
27« of May i ;i' Lin
amendment. (a; :f„ sec'29, 1928. 129 (Keg' A’ sec- 1 ( a G ; P. 134 (Reg.
35Msec25200C U^S1 r V ) 6 ^
of
amendment ot sec- 13
A sec. V ; see
,
II
act of APr-
also
1930; p.
B A N K IN G ACT OF 1 9 3 5
449
WA TCN A F R AIT SMS T EP PRME?
HT EHICL OML IE UT H AE ET
Must be promissory note, draft, or bill of exchange, including bankers’ and
trade acceptances.3
1
Must be negotiable.3
5
Must be endorsed by a member bank.5
8
The name of one of the parties to underlying transaction must appear upon
it as majer, drawer, acceptor, or endorser.3
7
May be secured by the pledge of goods or collateral of any nature, provided
the paper is otherwise eligible.8
8
WA P YICLEIDNEO EIG IL YMS B S PL DB DCUT G
HT HS A V EC F L IB IT UT E UPIE Y ISONIN
M BRBN?
E E AK
M
Application for discount must certify—
Member bank’s belief in eligibility.8
9
Paper, not acquired from nonmember bank, unless member has permission to
rediscount for nonmember banks.8
9
If offering bank is a State bank, that borrower is not obligated for more
than he could be to a similar national bank.4
0
If paper is a promissory note, whether a financial statement of borrower is
on file. A Federal Reserve bank may in any case require the financial state
ment of the borrower to be filed with it. Such statement must be on file if
Ihe note was discounted for a nonmember bank or a nondepositor, and in all
other cases unless secured by warehouse receipt, prior lien on livestock, or
obligations of the United States; or the aggregate obligations of borrower
offered for discount is less than 10 percent of capital of bank and is less
than .$5,000.4
1
A draft, bill of exchange, or acceptance should be drawn so as to evidence
the character of the underlying transaction. A stamp or certificate may
accomplish this.4
2
BNES ACPACS
AKR’ CETNE
(Certain respects in which the law and the regulations governing eligibility
are more specific with reference to bankers’ acceptances than with reference
to other types of paper are detailed below.)
Nature of transactions giving rise to eligible acceptances:
Shipment of goods in foreign trade, including shipments between two foreign
countries.
Shipment of goods within the United States—shipping documents must be
attached at time of acceptance.
Storage in the United States or in any foreign country of readily marketable
staples, must be secured at time of acceptance by warehouse receipt and accep
tor must be secured through life of acceptance.
Creation of dollar exchange.4
3
Maturity of eligibile acceptances: Ninety days in general,4 6 months, if
4
drawn for agricultural purposes and if secured at time of acceptance by ware
house receipts covering readily marketable staples; 4 3 months if arising from
4
the creation of dollar exchange.4
5
Aggregate of acceptances of one customer rediscountable for a particular
member bank: Ten percent of capital and surplus of accepting bank, unless
acceptance is secured throughout life by documents growing out of same
transaction.4
0
u p , 226 (act, sec. 13) ; p. 228 (act, sec. 13).
«*P. 130 (Reg. A, sec. II (a ) ) .
38 p . 226 ( a c t,
w p . 130 (Reg. AC e c ) f l P' 231 (act’ sec- 13a) ’ p’ 129 (Reg‘ A’ SeC' ( e ) ) *
’s
88 P. 130 (Reg. A , sec. II ( e ) |;
89 P. 131 (Reg. A, sec. I I I } ) .
40 ]>. 217 (act,
« P. 131 (Reg T S .T v (b))<neg' A’ *"■ m >
< P. 132 ( Reg. A, sec. V (b )) ; p. 137 (Reg. A, sec. X III).
2
‘3 P. 135 (Reg. A, sec. X I).
« P. 228 (act, sec. 13) ; p. 137 (Reg. A, sec. X I I).
4» P. 230 (act, sec. 13) : P- 137 (Reg. A, sec. X I ).
48 P. 136 (Reg. A t SG C . a x ) .
450
BANKING ACT OF 1 9 3 5
DF IT N
EIN IO 8
N .
oe—Unconditional promise, in writing, signed by the maker, to pay in
t
the United States, at a fixed or determinable future time, a sum certain in
dollars to order or to bearer.4
7
Draft or bill of exchange.—Unconditional order, in writing, addressed by one
person to another, signed by the person giving it, requiring the person to
whom it is addressed to pay in the United States, at a fixed or determinable
future time, a sum certain in dollars to the order of a specified person.4
8
Trade accepance.—A draft or bill of exchange, drawn by the seller on the
purchaser of goods sold, and accepted by such purchaser.4
8
Bankers' acceptance.—A draft or bill of exchange, whether payable in the
United States or abroad and whether payable in dollars or some other money,
of which the acceptor is a bank or trust company, or a firm, person, company,
or corporation engaged generally in the business of granting bankers’ accept
ance credits.4
9
Agricultural paper.—Note, draft, or bill of exchange issued or drawn, or the
proceeds of which have been or are to be used for agricultural purposes, includ
ing the production of agricultural products, the marketing of agricultural prod
ucts by the growers thereof, or the carrying of agricultural products by the
growers thereof pending orderly marketing, and the breeding, raising, fattening
or marketing of livestock.8
3
Goods. Include goods, wares, merchandise, or agricultural products, includ
ing livestock.5
1
Readily marketable staple.—An article of commerce, agriculture, or industry
of such uses as to make it the subject of constant dealings in ready markets
with such frequent quotations of price as to make (a) the price easily and
definitely ascertainable and (6) the stable itself easy to realize upon by sale
at any time.
Rulings have held these to be readily marketable staples.—Cotton yarns,
flour, cotton, potatoes, cattle, sugar in bond, wool, coal, cottonseed. These have
been held not to be such marketable staples: Automobiles, automobile tires
whisky, or sacramental wine in bond.6
8
NTS
OE
The foregoing article is based on the Federal Reserve Act and on the rulings
and regulations of the Federal Reserve Board as published from time to time
in the Federal Reserve Bulletin, and summarized in the so-called “ Digest of
Rulings (described on p. 401). The numbered citations refer, except as indi
cated below, to pages of the digest, with parenthetical reference to the act
(by sections), to the regulation (by letter and section), and to the rulings
(by number, all numbers cited being those of rulings given in the digest under
the general heading XIII-C).
Mr. B r o w n of Michigan. You have just mentioned 90-day
paper----Dr. G o l d e n w e is e r . Yes.
Mr. B r o w n of Michigan. There are cases that are running 9
months, at the present time; are they eligible?
Dr. G o l d e n w e is e r . Yes; but 90 days is the limit on member banks5
collateral notes, unless they are renewed. Eligible paper, that is.
rediscounted paper, Mr. Brown, may run 9 months for agricultural*
or livestock paper, but when a bank borrows on its own promissory
note, the limit is 90 days.
47 P
48 p *
40 p ’
5° p *
B!
ip
52 p *
53 p ‘
BANKING ACT OF 1 9 3 5
451
Mr. B r o w n of Michigan. As far as time is concerned you have
your 90-day paper, your 6-months paper, and your 9-months paper,
but those are the maximums ?
Dr. G o l d e n w e is e r . Yes, sir.
Mr. B r o w n of Michigan. You do limit them to one renewal, do
jmu not?
Dr. G o l d e n w e is e r . I think that is a matter of practice. There
is no regulation about one renewal. I think that is a matter for
the individual bank-----■
The C h a i r m a n . If there is, it never was followed, I do not
suppose?
Dr. G o l d e n w e is e r . N o, sir; there is no absolute rule, Mr. Brown.
I do not think I need to say anything about eligibility, except
that it has been suggested, in discussing this bill—1 do not know
whether it is in this room or in the press—that it would result in
looseness of operation, or inflationary danger.
I think, myself, that the proposed bill introduces into the Fed
eral Reserve Act, for the first time, the term “ sound assets.” As
the law stands now, eligibility is defined by technical requirements,
maturity, the nature of the underlying transactions, and other rigid
rules, which the Federal Reserve Board had no authority to dis
regard in formulating its regulations, and the Federal Reserve banks
have no authority to disregard in making their loans or advances to
member banks. But there is nothing said in the Federal Reserve
Act about the fact that assets must be sound.
Of course, that is something that any bank understands, and I do
not mean to imply that the assets that the Federal Reserve banks
have acquired were not sound, but I mean to say that the proposed
bill substitutes for the rigid technicalities the fundamental principle
that the assets must be sound, and beyond that leaves the actual reg
ulations to the Federal Reserve Board, so that they can be adapted
to different conditions that prevail in the country, and to different
developments that arise at a time when Congress, perhaps, may not
be in session.
That is what happened in 1932. We had banks failing very
rapidly. There was a large number of banks that did not have
eligible paper to present to the Reserve banks. The banks may have
had sound assets and the Federal Reserve was unable to help them,
and the banks were unable to get help from the Federal Reserve
until the emergency bill was passed, which authorized them, under
certain restrictions, to obtain relief from the Federal Reserve banks
on other than technically eligible paper.
The C h a i r m a n . Did not that act employ the language “ sound” ?
Dr. G o l d e n w e is e r . No ; it said any securitv satisfactory to the
Federal Reserve banks.
The C h a i r m a n . And we even went to the extent of making it a
form of emergency relief available to the nonmember banks?
Dr. G o l d e n w e is e r . Yes; you did, about a year later-----The C h a i r m a n . No ; I beg your pardon. It was not a year later.
Dr. G o l d e n w e is e r . The Glass-Steagall Act was passed in Febru
ary 1932, and the other provision was in the Emergency Banking
Act passed in March 1933.
452
BANKING ACT OF 1 9 3 5
The C h a i r m a n . Yes; you are quite correct. What we did was to
amend immediately, first, the Federal Reserve Act as to the privilege
of obtaining currency.
Dr. G o l d e n w e i s e r . Yes; you did that.
The C h a i r m a n . On Federal Reserve bank notes, and then to
extend that privilege to nonmember banks.
Dr. G o l d e n w e is e r . Yes.
Mr. H ancock. In that connection, what is the total amount of
discounts held by the Reserve System today, and what are the classes
involved ?
Dr. G o l d e n w e is e r . Mr. Hancock, the total discounts of the Fed
eral Reserve^ held today, are $6,000,000, and in view’ of the fact that
it is a small figure, I do not know what it consists of.
Mr. H a n c o c k . I do not think it is very important.
Dr. G o l d e n w e is e r . Y ou see, with excess reserves of $2,000,000,000
the banks are not borrowing from the Federal Reserve banks.
The C h a i r m a n . What proportion of the present holdings of the
banks is regulated by paper that might be classed as eligible ?
Dr. G o l d e n w e is e r . Y ou mean what is held by the member banks,
themselves ?
I he C h a i r m a n . Yes, sir; that is what I mean.
Dr. G o l d e n w e is e r . About $2,000,000,000.
The C h a i r m a n . That might be classified as eligible?
Dr. G o l d e n w e is e r . That is classified as eligible, by
their own
classification.
The C h a i r m a n . What portion of their investments does that
cover ?
Dr. G o l d e n w e is e r . That is about 8 percent.
Mr. H a n c o c k . What are the total assets of the Federal Reserve
banks today, about $7,500,000?
Dr. G o l d e n w e is e r . They total $8,700,000,000.
Mr. B r o w n of Michigan. Following the chairman s question, it
seems to me that we ought to know what changes are contemplated
by the addition of the new' paragraph at the end of the present sec
tion 13, giving power to the Board to establish regulations for the
rediscounting of commercial, agricultural, and industrial paper.
What can you do under that provision that you cannot already do
under the present section 13; what classes of paper will you add?
Dr. G o l d e n w e is e r . What we will add I do not know. That is a
matter for the Board to decide. You questioned Governor Eccles
about his opinion on this subject. My opinion would not be worth
anything.
Mr. B r o w n of Michigan. I am sure this committee thinks it
would be.
Dr. G o l d e n w e is e r . The Federal Reserve Board would have au
thority to admit as collateral for member bank notes any asset that
was sound, whether it was a commercial loan or bond or stock or real
estate or farmer’s paper, for the purchase of machinery. All of
those long-term loans are completely barred, as the law stands today
here, but would be made admissible under the new law.
The C h a i r m a n . And all of those same loans, which are now ad
missible because of their maturity, would also be admissible under
the change?
D r. G o l d e n w e is e r . Yes, sir.
BANKING ACT OF 1 9 3 5
453
Mr. B r o w n of Michigan. That does not change the present status
any?
The C h a i r m a n . That is what I am talking about.
Mr. B r o w n of Michigan. The present statute remains as it is, and
there are additional paragraphs giving the Board additional powers
to make loans.
Dr. G o l d e n w e is e r . Mr. Brown, I think that is a matter of drafts
manship, and I think that the proper way to handle that is when
this law is actually being drafted by your drafting forces to repeal
all of those sections of the law and substitute this one section.
Mr. B r o w n of Michigan. Might I say that if every limitation
that we have heretofore had as to the time for which paper may be
rediscounted is still in the law----Dr. G o l d e n w e is e r . But that is repealed, Mr. Brown, b y the pro
posed amendment, but I think it would be more effective to repeal it
in so many words.
The C h a i r m a n . Well, the repeal would be conditioned upon the
rules and regulations promulgated in order to put the change into
effect ?
Dr. G o l d e n w e is e r . That is right.
The C h a i r m a n . Otherwise they would proceed as they do now?
Dr. G o l d e n w e is e r . That is right.
The C h a i r m a n . That we do not know; but, if I understand the
situation right, it is that you will continue to operate just as_ you
are operating now, and if conditions were to improve and business
got better and it was no longer deemed necessary to inaugurate new
methods of meeting the situation, we might continue to operate as
we are; but we are giving authority to liberalize ?
Dr. G o l d e n w e is e r . Yes, sir.
Mr. H a n c o c k . Under the present language of the act that we
have before us now, as I understand it, you could not—the Federal
Reserve System could not rediscount any paper with security longer
than 9 months?
Dr. G o l d e n w e is e r . Y ou mean under the proposed amendment?
Mr. H a n c o c k . Yes; that is what I mean.
Dr. G o l d e n w e is e r . I think you are mistaken about that. I think,
under the proposed amendment, the Federal Reserve banks could
discount any paper that was sound. Is that not so?
Mr. B r o w n of Michigan. I agree with Mr. Hancock to a certain
extent. I think the authority is somewhat clouded, unless section 13
was repealed, as Dr. Goldenweiser suggested, in its entirety, and
section 206 of the proposed bill substituted for section 13 of the law.
Dr. G o l d e n w e is e r . The counsel, I believe, has drafted a form by
which that will be accomplished, and my personal recommendation
would be that it should go into the law, because I know, positively,
that it is the intention of the proponents of this bill that it should,
in effect, take the place of existing section 13—I mean the parts of
it dealing with eligibility.
Mr. B r o w n of Michigan. Do you not think that the authority is
somewhat clouded if section 13 remains as it now is?
Mr. W y a t t . No; I do not think so. I think the broad authority
given by the later statute, which would be construed as repealing bv
implication the restrictions contained in the old law. Certainly,
there would be nothing in this statute that would prevent making
454
BANKING ACT OF 1 9 3 5
advances on any sound assets. That is distinct from rediscounting.
They could make advances on any sound assets, subject only to such
regulations as the Board might prescribe. As a matter of fact, that
is the way the banks would do it. They prefer to borrow on their
own promissory notes secured by collateral, because that is less
trouble than rediscounting.
Mr. H a n c o c k . Under that language, it seems to me you could
make advances on any sound assets for longer than 9 months;
whereas if you discounted the paper, you would have to limit it to
9 months.
Mr. W y a tt . That is not important, because i f this goes through,
the chances are that nearly all of the borrowing would be done on a
promissory-note basis.
Mr. B r o w n of Michigan. But your new section 206 speaks of
assets—-speaks of discounts as well as advances, and it seems to me
there will be some complication between the paragraph we added this
bill and the present law. Have you an amendment drafted to take
the place of section 206?
Mr. W y a t t , lies. You cannot repeal all of section 13, because
there are some other things in that section. What you really have
to do in order to repeal the provisions which would be made obsolete
by this amendment, is to repeal all of section 10 (a), all of section
10 (b), several paragraphs of section 13, several paragraphs of
section 13 (a), and then amend several of the other paragraphs in
sections 13 and 13 (a). We have it written out, and it takes 5y2
typewritten pages to do i t ; but we can give it to you, if you want it.
Dr. G o l d e n w e is e e . Mr. Chairman, there is only one other subject
on which I should like to have just a word to say, and that is the
proposed repeal of the collateral requirements against the Federal
Reserve notes. That is a technical subject and one that has given
rise to a good deal of misunderstanding.
I would like to say, in the first place, that there is nothing in this
proposed amendment that would, in any way, change the security
back of the Federal Reserve notes.
The Federal Reserve bank holds certain assets, and against these
assets it has its liabilities, principally the liabilities to the public in
the form of notes and deposits.
There is one reservoir of assets and there are two kinds of claims
against it. The present law provides that you take that reservoir
of assets and pick certain ones out that are' made eligible for that
specific purpose by law, and put them in another box and call it
collateral for Federal Reserve notes, and leave the rest as security
against the deposits. All this bill proposes to do is to do awav with
that separate box and call the entire box of assets security against
all of the liabilities. You are not changing the quality of the secur
ity in any way, you are simply doing away with an expensive and
unnecessary segregation; and since Federal Reserve notes, bv the
terms of law, are prior liens and continue to be prior liens, they have
as security the best part of the assets, so that the note holders'would
have to be satisfied before the claims of the deposit holders could be
satisfied.
There is absolutely nothing in this proposal that changes the
quality of Federal Reserve notes in any way whatsoever. It does
BANKING ACT OF 1 9 3 5
455
not repeal the reserve requirements; it does not change the quality
of the assets back of them; it merely does away with the segrega
tion. I think that very simple point is one that has been very
frequently overlooked.
There are just a few more things about this collateral that I would
like to say.
Mr. W i l l i a m s . Right in that connection, if I may, under the
present law, there is a certain part of the assets that are segregated;
is that correct ?
Dr. G o l d e n w e is e r . That is correct; yes.
Mr. W i l l i a m s . And back of each note issue?
Dr. G o l d e n w e is e r . N o ; against all of the notes. They are not
earmarked for any particular note issue.
Mr. W i l l i a m s . Under this law, do not the banks, in case they
need notes, make application to the Federal Reserve agent?
Dr. G o l d e n w e is e r . Yes.
Mr. W i l l i a m s . And offer certain classes of assets, and he receives
them, and they are placed in a separate box, as you say, or a sepa
rate place, as the paramount security on any notes that are issued
at that time?
Dr. G oldenweiser. The Federal Reserve agent holds all of the
assets that have been pledged with him. The Federal Reserve agent
gets collateral for all of the notes that he pays out to the Federal
Reserve bank, but I do not think he holds any particular batch
against any particular batch of notes.
Mr. W i l l i a m s . I s not there also a provision in there which au
thorizes a bank to take down and substitute other ones for ones
which have already been put up?
Dr. G o l d e n w e is e r . That is right.
Mr. W i l l i a m s . And is there not also a further provision which
permits the board to require a bank to put up additional security?
Dr. G o l d e n w e is e r . Yes; all that is correct, but all that applies to
the entire collateral that the agent holds against the entire note
issue, and not any particular note issue.
Mr. W i l l i a m s . I was under the impression it was the other way.
Dr. G o l d e n w e is e r . Excuse me. That is correct, is it not, Mr.
Smead?
Mr. S m e a d . That is correct.
Mr. W i l l i a m s . That was not my understanding of the way the
language reads.
Dr. G oldenweiser. That is the way it has always read, Mr. W il
liams. For instance, they have never taken a particular batch of
Government securities and held them against those particular notes,
because it would be almost impossible to do that. If the bank re
turns notes and wants to have a corresponding amount of collateral
released, it asks for the collateral it wants.
Mr. W i l l i a m s . In that event, that makes the assets of the bank be
prime and paramount lien as to the payment of the notes?
Dr. G o l d e n w e is e r . They continue to be under the proposed law.
Mr. W i l l i a m s . And they are now, and in that respect the law is
not changed?
Dr. G o l d e n w e is e r . That is correct.
Mr. W i l l i a m s . In other words, the redemption o f the notes would
come first, over the depositors o f the bank?
456
BANKING ACT OF 1 9 3 5
Dr. G oldenweiser. Yes.
Mr. W i l l i a m s . They are the first paramount liens?
Dr. G o l d e n w e is e r . Yes; that is right, and that is continued in
the law.
Mr. W i l l i a m s . N ow, while I am asking questions, may I con
tinue on another subject?
Dr. G o l d e n w e is e r . Yes.
Mr. W i l l i a m s . The question of reserves, as I understand, the re
serves under the present law, are fixed at a certain percent?
Dr. G o l d e n w e is e r . Which reserves do you mean, of the member
banks ?
Mr. W i l l i a m s . Yes; depending upon their locality?
Dr. G o l d e n w e is e r . That is correct.
Mr. W i l l i a m s . I also understand that is still left in the law?
Dr. G o l d e n w e is e r . Yes, sir.
Mr. W i l l i a m s . Well, in addition to that, we have this provision
in this new law, which gives the Federal Reserve Board complete
and entire authority and jurisdiction over the fixing of those
reserves ?
Dr. G o l d e n w e is e r . Yes; it gives them authority to change them.
Mr. W i l l i a m s . Well, now, if we are going to have that, why not
repeal this fixed limitation in the law?
Dr. G o l d e n w e is e r . I think the theory of that is, Mr. Williams,
that the reserves shall not be disturbed, and shall continue as they
are, but if there is danger of expansion—I do not remember exactly
what the language is—injurious expansion or contraction, and a
change becomes desirable, the Federal Reserve Board can act and
change it, but otherwise the reserve requirements continue as they
are; and the banks must continue to keep their reserves at a certain
ratio, unless action is taken by the Federal Reserve Board.
Mr. W i l l i a m s . That is the law now, is it not?
Dr. G o l d e n w e is e r . But at the present time, the Federal Reserve
Board has no authority to raise the requirements.
Mr. W i l l i a m s . That is in case of emergency?
Dr. G o l d e n w e is e r . No, sir; they cannot raise them. They may
suspend them, but they cannot raise them.
Mr. H a n c o c k . Y ou can only do that with the consent of the
President ?
Dr. G o l d e n w e is e r . Excuse me. What I meant to say is. that
under the original Federal Reserve Act they had no power’to change
reserve requirements. This particular amendment in the bill does
not do anything more than to clarify the section that was in the
so-called “ Thomas amendment ”, passed in 1933, which does give
the Board, with the President’s approval, authority to make^the
change. I was talking about the original Federal Reserve Act at
the moment. This proposed amendment simply clarifies the existing
amendment and extends it somewhat.
The C h a i r m a n . What was the language of the Thomas amend
ment ?
Dr. G o l d e n w e is e r . The language of the Thomas amendment, quot
ing from memory, is that in case of emergency----Mr. W y a t t . Would you like for me to read it?
The C h a i r m a n . Yes.
BANKING ACT OF 19 3 5
457
Mr. W y a t t . The Thomas amendment added this paragraph to sec
tion 19 of the Federal Reserve Act:
Notwithstanding the provisions of this section, the Federal Reserve Board,
upon the affirmative vote of not less than five of its members and with the
approval of the President, may declare that an emergency exists by reason of
credit expansion and may, by regulation during such emergency, increase or
decrease from time to time, in its discretion, the reserve balances required to
be maintained against either demand or time deposits.
Mr. W i l l i a m s . The power is there?
Dr. G o l d e n w e is e r . That emergency power exists, but it is quite
illogically worded, because it says the Board could either increase
or decrease the reserve requirements, if an emergency arises because
of credit expansion. Now, you would not want to decrease the
requirements if an emergency arose from credit expansion, so that,
literally, you could never decrease them, because of the way the
provision is worded. The bill proposes a clarification and extension
of that power, and removes from the President the necessity of
approval and the requirements of a vote by five members of the
Board.
Mr. W i l l i a m s . This simply gives the board power to change
when they think it is necessary?
Dr. G o l d e n w e is e r . That is right, sir.
Mr. W i l l i a m s . In order to prevent undue expansion or contrac
tion of currency, to regulate the reserve requirement?
Dr. G o l d e n w e is e r . That is true.
Mr. H a n c o c k . And under the act, it could be done, without
declaring such an emergency exists?
Dr. G o l d e n w e is e r . Without declaring there is an emergency, yes;
and it also gives them the power to do that for financial centers,
alone, or for the country districts, alone, or for the country as a
whole, depending upon the circumstances, which the present amend
ment does not give.
Mr. W i l l i a m s . I just wanted to clear that up in my mind.
Dr. G o l d e n w e is e r . I was not trying to mislead you for a mo
ment. My mind slipped.
Now, if I may make a few more remarks about the collateral
requirements, I would like that to conclude my statement.
I think I made it clear that Federal Reserve notes continue to
be prior liens, that there is nothing in the law that, in any way,
weakens the Federal Reserve note whatsoever. At the same time,
the existence of those collateral requirements is not merely a matter
of economy that we are asking you for, although it is economical,
but it also has created many complications. The fact that we re
quired that collateral made it necessary to have assistant Federal
Reserve agents, or else have a lot of issued notes in the hands of
the branches, and that created a lot of difficulty, because nobody
could issue notes except the Federal Reserve agent, or his assistant,
and you would have a large supply of issued notes and collateral,
which would not be necessary, because they were not in the home
office where there was an agent, you had to carry them as issued
notes, or else you had to have an assistant agent, and have a high
corresponding salary, to be on the job in the branch.
458
BANKING ACT OF 19 3 5
So that it has created a whole lot of unnecessary, purposeless
difficulty and expenditures. In addition to that, it has created, some
times, a very bad situation.
In the early months of 1932, a very large amount of gold had
flowed out of the country. The Federal Reserve banks had bought
a good many Government securities, because there was an awful
deflation going on and it was necessary to keep down the indebted
ness of the member banks to the Federal Reserve bank, in order to
stop the deflation. And so the eligible paper in the hands of the
Reserve banks was relatively small in amount. Since they had to
put up against their Federal Reserve notes outstanding enough
eligible paper or gold to make up 100 percent, and since the eligible
paper was in a small amount, they had to put up a whole lot of
gold, with the consequence that, at that time, the Federal Reserve
banks, though they had $1,400,000,000 of gold in excess of their
reserve requirements of 40 percent against notes, and 35 percent
against deposits, had to put up $1,000,000,000 of that $1,400,000,000
as collateral against the Federal Reserve notes, where it could not
be gotten out except by selling Government securities, and putting
the banks in debt again. And they only had about $400,000,000 of
“ free gold ” available to meet a foreign demand.
A liberal open-market policy could, therefore, not be undertaken
until Government securities could be substituted for the eligible
paper or gold with the Federal Reserve agent.
8o we came to you, gentlemen, and asked you to give us that au
thority, and that authority was given, and has since been extended,
and the President has now extended it for 2 more years.
That is the kind of thing that happened and, in logic, is apt to
happen again, because when we want to exercise immediate restraint
that is usually the time when the banks are heavily in debt, and going
further in debt, and at that time there will be plenty of collateral,
so it will not act as a restraining influence at a time when you want
to restrain, but at a time when business is going flat and contraction
is going on, if you buy Government securities in order to help out
the banks, that is the time when you are going to be short of col
lateral and you find that your collateral requirements will be
pinching.
This requirement always works against the interests of the coun
try, and against the interests of the credit policy pursued bv the
Federal Reserve System. In 1932 we were up against it, with noth
ing but $400-,000,000 available, with $1,000,000,000 or more of foreign
short-term bonds in this country that could be withdrawn on demand
in gold, when the Federal Reserve System was unable to pursue a
policy of monetary ease, which was clearly indicated by all of the
elements of the situation. Congress then passed an emergency meas
ure to relieve the situation.
Now, it is requested and proposed that you do away with this
obsolete and useless, expensive and dangerous provision altogether
There is just one other thing I would like to i y . and that has not
any direct bearing on the collateral, but it has an indirect bearing
on it, and that is, the question of demand for currency and the abilitv
of the Federal Reserve banks to issue currency without any collateral,
which question has been raised.
BANKING ACT OF 19 3 5
459
I have gone through the problem of what is back of the notes
already, and Governor Eccles has discussed that in some detail, but
I would like to make it clear that, in our banking and credit system,
currency is the small change of business. Currency is not a big
element in our means of payment.
Currency fluctuates in response to certain influences. In normal
times, it fluctuates chiefly in response to certain parts of our economy
that are still handled by cash payments, principally retail trade and
pay rolls.
During a long.period there was a trend, gradually, from year to
year, for a decline in the amount of currency, because'more and more
business corporations were adopting the policy of paying their pay
rolls by check, partly for the purpose of avoiding hold-ups, and
partly because it is more convenient, and the habit of depositing
checks was spreading throughout the country.
That particular trend has been reversed recently, because of the
tax on checks, because of the service charges, because of the fact
that communities are left without banks in many cases. But in gen
eral, the level of money, cash money, has remained reasonably steady,
except for seasonal fluctuations. Its elasticity is indicated by the
fact that it goes up $100,000,000 over the Fourth of July, and goes
up again oyer Labor Day. Whenever people go away from home,
they get a little more currency, and currency goes up for a few days,
but then goes right down again.
Mr. H a n c o c k . It goes up around Christmas time?
Dr. G o l d e n w e is e r . Yes; but it goes back down again in January.
But those are seasonal fluctuations, and the year-to-year fluctuations
are relatively minor.
The fluctuating element in our banking system is not cash but
deposits. The reason I put it that way is that the elasticity of our
currency rests on the habits of the people and the customs of the
banking system. No one carries in his pocket more money than is
needed for such small cash payments as he is in the habit of making.
Possibly he pays for his gasoline in cash, he may pay for his lunch
in cash, and carfares, and a few things like th a t People are in the
habit of keeping in cash a certain amount of money out of their
DW checks, and the rest of it they deposit in the banks.
V hen they deposit it in the banks, the banks do not keep it in
Uieir vaults, either, because it is a dead asset in their vaults and
involves unnecessary risk from burglars. So they immediately take
it to rue Federal Reserve bank, where it is added to their reserve
’' tt * lem a basis of expansion.
M r. H a n c o c k . H ow m uch money is in circulation, in pocket
change, so to speak?
.
1
• ^ r ‘ G o l d e n w e is e r . I could not tell you how much is actually
in pocket change, but I th in k the am ount that is outside o f the
ruin 000,000.
$5,000,aaaaaareaSUry’ anc* fhe Federal Reserve banks is around
Mr. H a n c o c k . I mean the amount that is outstanding usually
and not m the Federal Reserve or member banks or anv bank.
Dr. G o l d e n w e is e r . About $5,000,000,000. Now, I would like to
add this: th at is the usual relationship between the seasonal fluc
tuation in currency, with no sensational changes, and with gradual
460
BANKING ACT OF 1 9 3 5
declines occasionally. When the banking system began to crack, all
this changed, because people began to want money, cash money, not
for change but as a matter of safety. They lost their confidence in
banks. There is one other chart here that I should like to show
you, if you will bear with me. This shows the amount of money in
circulation—and that is a technical term—I mean outside of "the
Treasury and the Federal Reserve.
Mr. W illiams. Right there I want to ask a question: What do
you mean by money in circulation?
Dr. G oldenweiser. I mean all of the money issued, outside of the
Federal Reserve bank and the Treasury. That does include the
banks’ money, the money in the vaults of the member banks----Mr. H ancock. Y ou say it does include that?
Dr. G oldenweiser. It does include that; yes.
Mr. H ancock. And does it deal with money in the nonmember
banks?
Dr. G oldenweiser. This includes all of the money outside of the
Treasury and the Federal Reserve banks. I want to show you—
here is 1929, a year of great prosperity, and money in circulation is
$4,800,000,000.
Then in 1930 came along a time when the pay rolls went down
and prices went down, and currency went down a little in the early
part, a little more than seasonal; you can see it was moving below
1929, until about November, when the Bank of the United States
in New York and the Bank of Kentucky failed, and hoarding began,
and it shot up. That was the first appearance of hoarding on a
large scale.
Then in 1931, first we had the seasonal liquidation, and then
things continued fairly evenly. Then in the latter part of 1931,
when all of these events all over the world were happening—first
the run on Germany, then the one on England—and our banks were
failing, we had a tremendous increase in hoarding.
Then in 1932 that level was the same, no particular increase in
hoarding and no decrease until the middle of the year, and then
there was another lot of bank failures in the Chicago district; and
it rose again, and stayed at that level. That is the way we ended
in 1933.
Then when the panic began, the currency in circulation shot un
a couple of weeks by $2,000,000,000, to $7,500,000,000.
1
Mr. H ancock. That was in February?
Dr. G oldenweiser. That was in February, toward the verv pnd nf
February 1933 and early in March.
Mr. H ancock. We were experiencing a money boom?
Dr. G oldenweiser. Yes; you can call it that if you wish. There
was a terrible panic. And then when the President ordered the
banks reopened and said that only sound banks would reopen,
people’s confidence was restored, and as soon as the banking bill was
passed and the banks reopened, the people found they could have
their money, and they did not want it, and the money came right
back in the course of a few months, and we were getting back to the
level at the beginning of the panic. But even yet, even right now,
in 1935, there is still a whole lot more currency outstanding than
there was in 1929, because when money finds its way into hoards,
BANKING ACT OF 19 3 5
461
being hidden away under mattresses and in tin cans, it is likely to
take it some time to come back.
And while those things that Governor Eccles mentioned about
service charges, taxes on checks and communities without banks, are
all factors in the situation, there is also a very considerable amount
of hoarding, because we find that it is the very large denominations
that are held out, and large denominations are not used by people
in paying their bills.
The C hairman . I note that your chart makes no reference to
postal savings, but postal savings are exclusive of the funds in the
banks and in the Treasury?
Dr. G oldenweiser. This is exclusive of that; yes. Postal savings
also went up.
The C hairman . H ow do you classify postal savings?
Dr. G oldenweiser. That is just the cash, the currency. This is
not the deposits.
The C hairman . Y ou do not figure the postal savings in this, at
all?
Dr. G oldenweiser. N o, sir; that was another method of protect
ing themselves, and it went up from $300,000,000 to above $1,000,000,000.
Mr. H ancock. I understand it went up to almost $700,000,000.
How much money was there in existence at that time ?
Dr. G oldenweiser. The amount of money in existence does not
mean anything, because the reserve banks could print any amount
they wanted to. There was any amount printed available to pay out,
if there was any demand. The amount of money in existence----Mr. W illiams. I understood you to say this represented all the
money, except what was in the Treasury and the Federal Reserve
bank ?
Dr. G oldenweiser. Yes; but the Federal Reserve bank had many
billions of money available in case the panic continued and people
wanted more.
Mr. W illiams. But they did not issue it?
Dr. G oldenweiser. No, sir.
Mr. W illiams. What I meant was, What was the outstanding
issue of money?
Dr. G oldenweiser. That is all that was issued, because what is in
the Federal Reserve banks and the Treasury is more or less like a
book of blank checks; it does not mean anything. The only money
that means anything is in your pocket, or money that has been paid
out. The money that the Federal Reserve banks have printed is
kept in case somebody wants it—it does not become money until it is
paid out. The money that was available—I could not give you the
exact amount, but it was billions of dollars of cash money that had
been printed and was available in case it was needed.
Mr. W illiams. Undoubtedly so, but does that represent all of the
money that was issued at that time?
Dr. G oldenweiser. I do not quite get your point, Mr. Williams.
Mr. W illiams. I want to know whether it represents all of the
money there was?
127297— 35 ----- -30
462
BANKING ACT OF 1 9 3 5
Dr. G oldenweiser. It represents all of the money that had been
paid out; yes.
Mr. W illiams. When it was down here to $5,000,000,000, for in
stance, where was the balance of that money then?
Dr. G oldenweiser. Some of it may not have been printed, and
what had been printed was lying in the Treasury or Federal Reserve
T
banks. I get w
rord from the Chief of the Division of Banking Op
erations that the Federal Reserve banks at that time had $5,000,000,000 of money printed, ready to issue in case the public wanted it.
I am trying to explain exactly what the situation was.
Mr. W illiams. I am trying to find out the money that was issued
at that time.
Dr. G oldenweiser. This is all of the money that was issued at
that time.
Mr. W illiams. Does that line represent—whatever it is, whether
it is $7,000,000,000 or $5,000,000,000—the amount of money that was
issued at that time?
Dr. G oldenweiser. That is all of the money that has been issued
and has not been retired; yes.
Mr. K opplemann . If money is put in a country bank, is it retired ?
Dr. G oldenweiser. Not at that stage; but the country bank is
likely to send it to a Federal Reserve bank, and it will then be
retired. All the money outside of the Reserve banks and the Treas
ury is on this chart.
Mr. W illiams. Then it is all on there.
Dr. Goi.denwteiser. All of the money—that is, the actual cur
rency—is in there; ves.
The C hairman . H ow much was that?
Dr. G oldenweiser. $7,500,000,000.
Mr. W illiams. That represents all of it? I did not have that
impression.
Dr. G oldenweiser. That is all of it; yes.
Mr. W illiams. What is the low ebb of it?
Dr. G oldenweiser. It gets as low as $4,400,000,000.
Mr. W illiams. That represents all of the money that was issued
at that time?
Dr. G oldenweiser. All of the cash money.
Mr. W illiams. And when it got up to $7,500,000,000 it represented
all of the money that was issued at that particular time?
Dr. G oldenweiser. Yes.
Mr. F ord. And suppose the Patman bill passes, what would hap
pen to that chart?
Dr. G oldenweiser. That chart would not change, except for a
very short time. You would pay out $2,000,000,000 of currency, but
it would be immediately redeposited in the Federal Reserve banks,
and the so-called “ money ” in circulation would not change. All
of that money----Mr. H ollister. The only change would be in its purchasing value?
Dr. G oldenweiser. Well, its purchasing power—it is a complex
question whether it would change or not, The only time that money
in circulation wmuld be likely to increase very rapidly would be
when the people again lose confidence in the banks. That is the
only thing that makes it go out.
BANKING ACT OF 19 3 5
463
Mr. K opplemann . Then what is the relationship between money
and wealth?
Dr. G oldenweiser. Y ou mean cash money? If you mean cash
money, there is no relationship.
Mr. K opplemann . N o relationship?
Dr. G oldenweiser. N o relationship whatsoever. Mr. Chairman,
that is all I wish to say, on my part, and if you wish to ask ques
tions—
Mr. H ancock. On the question Mr. Hollister asked you, it does not
follow as a point of logic that the purchasing power of the dollar
would be changed, does it?
Dr. G oldenweiser. Not necessarily.
Mr. H ancock. If funds were released of currency----Dr. G oldenweiser. Not necessarily, unless that action resulted in
the people losing confidence in currency, or losing confidence in the
Government, in which case the repercussions are very difficult to deal
with.
Mr. H ancock. The obligations of the Government would be the
same?
Dr. G oldenweiser. The Government would have outstanding a
large amount of non-interest-bearing debt, instead of interest-bearing
debt.
Mr. H ancock. Which would have to be redeemed at some time?
Dr. G oldenwesier. That raises a question of redemption, which at
the present time, is in abeyance.
Mr. H ancock. Both of which would have to be paid off at some
time?
Dr. G oldenweiser. Not necessarily.
Mr. H ollister. H ow are you going to pay off the non-interestbearing paper, behind which there is nothing?
Mr. H ancock. There is only one way you can pay any obligation
of the Government, and that is through taxation, is it not?
Dr. G oldenweiser. Actually, the Government can reduce its in
debtedness by one of three ways, but your answer is really exactly
rig h t; the only real way is taxation. Another way is repudiation,
and the third way is what I recently more or less facetiously called
‘ evaporation.” That is what happened in Germany when they did
not repudiate it, and they did not raise taxes, but they made the
m Ar S° c<™pletely worthless that it just evaporated.
Mr. H ancock, t am speaking of honest obligations?
Dr. G oldenweiser. Yes; you are right.
r! 1 o illiam s- What did you call the German system, Doctor?
mi
I 6° not really think it is fit to repeat.
1 lie C hairman . All right, gentlemen, Mr. Hancock moves that
we adjourn.
We thank you very much, Dr. Goldenweiser.
We will meet again tomorrow at 10:30 o’clock.
(Ihereupon, a recess was taken in the hearing until 10:30 a. m.
Thursday, Mar. 21, 1935.)
B A N K IN G
ACT
OF
1935
T H U R S D A Y , M ARCH 21, 1935
H ouse of R epresentatives,
Committee on B anking and C urrency,
W ashington , D. C.
The committee met at 10: 30 a. m., Hon. Henry B. Steagall (chair
man) presiding.
The C hairman . Gentlemen, we have with us this morning, Mr.
Coolidge, the Under Secretary of the Treasury, who will discuss
the bill H. R. 5357.
Mr. Coolidge has prepared a brief statement which he would like
to read to the committee, after which he will be glad to answer any
questions members of the committee may desire to propound.
Mr. Coolidge, you may proceed.
STATEMENT OF T. JEFFERSON COOLIDGE, UNDER SECRETARY OF
THE TREASURY
Mr. Coolidge. Mr. Chairman, I have a brief statement covering
only title II of the bill.
The C hairman . I presume you desire to address yourself to title
II of the bill, and that is really what the committee would like to
hear you about.
Mr. C oolidge. Title I I is the part of the bill which is of most
interest to the Treasury Department, because in that portion of the
bill it is proposed to amend the Federal Reserve Act.
When the Federal Reserve System was formed conditions were
very different from those of today. There were practically no Gov
T
ernment securities in the market. The reserve requirements of the
System were based on the amount of gold that was in the country
and there was no insurance of bank deposits by any agency. The
adjustment of money rates was largely automatic and only par
tially a matter of judgment. Should gold leave the country it be
came necessary for the banks to borrow to replenish their reserves.
The same was true when there was a demand for currency or for
an extension of loans. When either of these situations arose it was
almost axiomatic to raise the rediscount rates to discourage further
borrowing or to replenish the gold stock.
Ihese conditions are very different today. The gold in the country
is in excess of any normal legal reserve requirements; Government
securities are obtainable for liquidity in large quantities, whereas
commercial paper is small in amount compared with previous times,,
and bank deposits have largely been insured by the Federal Deposit
Insurance Corporation. The proposed bill attempts to adjust the
465
466
BANKING ACT OF 1 9 3 5
banking laws so that these new conditions can be met in a suitable
manner.
In that portion of the bill covering amendments to the Federal
Reserve Act, I want to take up the proposed change in the method
of appointing the governors and vice governors of the individual
Federal Reserve banks; the proposed change in collateral require
ments for loans from the Reserve banks; the proposed change in
restrictions on real-estate loans; and the proposed method of openmarket operations together with the power of the Fedral Reserve
Board to change reserve requirements.
It seems incongruous to have a governor appointed by the directors
of the local bank and a chairman of the board by the Federal Re
serve Board at Washington. Under the bill, the directors of the
local Federal Reserve bank choose a governor who shall be chairman
of the board and a class C director, and their choice is subject to
the approval of the Reserve Board at Washington. The approval
of the Board should, I believe, make for harmonious relations be
tween the banks and the Federal Reserve Board, while at the same
time not deprive the local directors of any of their proper respon
sibility in the choice of the officers.
At present the Federal Reserve banks are restricted in their loans
to member banks, being able to loan only on specified types of assets.
This bill will permit them in their discretion to loan a member
bank on any of its sound assets when in their judgment it is a wise
thing to do. At the present time this may seem unnecessary as the
member banks have great quantities of funds; nevertheless, should
there be an unwarranted flow of funds from an individual bank or
from certain parts of the country, the banks under the bill could
be given proper support by the Federal Reserve banks should their
general condition justify it and unnecessary liquidation be prevented.
It is proposed that the existing restrictions on real-estate loans
be somewhat liberalized. I personally believe that banks should be
permitted to work out their old loans without restriction, while in
the case of new loans 60 percent of an appraised value should be high
enough. The Federal Reserve Board could properly be given further
authority to make regulations within this limit of 60 percent.
Our control of money rates has passed from the automatic stage,
because of the great amount of excess reserves, into a condition
where automatic standards cannot, I believe, be improvised which
can be expected to work under the conditions of the present or
immediate future. It would seem that this control must be en
trusted to a group of men, and, presumably, will be exercised by
open-market operations in Government securities, by a change in
the reserve requirements and in rediscount rates, or by a combina
tion of the three.
I would like to state that there are no important conflicting in
terests in regard to the proper rate for short-time money. Every
one’s interest is best served by the proper rate to help make business
stable and prosperous. There may be differences of opinion between
men or groups of men as to what is the rate most suitable under
the conditions of the time, and the best methods of obtaining the
desired results. The Treasury has, of course, great powers in influ
encing the rates for money and it is most important that it coop-
BANKING ACT OP 19 3 5
467
-erate with those to whom like powers are committed. It is not
important to choose men from any particular group to perform
this important function, but it is essential that wise men experienced
in the effect of money policies be chosen and that they not be influ
enced by unwise demands of special groups.
For this purpose the bill sets up an open-market committee, three
to be chosen by the Federal Reserve Board from their members and
two to be chosen by and from the governors of the Reserve banks.
It is contemplated that these five men have the responsibility of the
difficult and delicate job of buying and selling acceptances and
Government securities with Reserve bank money for the purpose
of furnishing to the country a proper supply of funds at proper
rates to the extent that it is advisable to use this method for the
purpose. With conditions as uncertain as they are and with the
vast amount of gold in the country this power of buying and sell
ing acceptances and Governments may be insufficient to insure
proper control and in ths bill the Federal Reserve Board is
given power to change legal reserve requirements of member banks.
A raise of legal reserves would impound the idle money of the
member banks, thus raising rates; or a reduction of reserve require
ments would give the member banks additional funds. These two
methods used in combination will equip the Federal Reserve System
with supplemental control devices to be available for use when re
quired, although it is to be expected that the need to change legal
reserves will occur very seldom.
The C hairman . Mr. Coolidge, the Treasury favors the enactment
of this bill ?
Mr. Coolidge. The Treasury favors the enactment of this bill and
the purpose for which it is intended. The question of changes that
may be made, or the methods of accomplishing the purposes is en
tirely a question for this committee, and there is no reason why the
bill should not be considerably modified to carry out the purpose for
which it is submitted, so far as the Treasury is concerned.
Mr. G oldsborougii. The Treasury is in "favor of the bill; is that
correct ?
Mr. C oolidge. That is correct.
f he C hairman . That is what I wanted to ask you.
Mr. G oldsborougii. Under the bill, the directors of the Federal
Reserve banks would still elect their governors, subject to the apProyal ° f the Federal Reserve Board, and the majority, that is, 6 of
the 9 directors are bankers?
Mr. Cooudqe. That js note quite correct. Six of the nine are
elected by the stockholders who are the banks, but only three may be
bankers. I think I am correct in that statement. " So the other
thMe T rU d I10t be bankers.
Mr. H ancock. The three appointed by the Federal Reserve Board
must be bankers, which would mean-----i i I ioldsborough. I mean the six would either be bankers or
would be members appointed by bankers, which, in my judgment
amounts to the same thing.
Mr. H ollister. \ ou have stated that the bill in its present form
is satisfactory to the Treasury. Are you aware of the suggested
changes that Mr. Eccles presented to the committee in his testimony?
468
BANKING ACT OF 1 9 3 5
Mr. Coolidge. When you say in the suggested form. I would like
to make clear that the purposes and general form of the bill are
favored by the Treasury. The exact form is not of particular con
sequence, or the particular business of the Treasury.
Mr. H ollister. Of course, inasmuch as the bill itself does not state
what is purposes are, some people might read different purposes in
the bill than others.
Mr. C oolidge. My only point is that I do not want to approve
every dot on every “ i ” and every cross on every “ t.” I do not feel
that I am in a proper position to do that, because I have not spent
the time that Governor Eccles has spent on the subject.
Mr. H ollister. Y ou have not looked over the memorandum of
several pages which Governor Eccles submitted to the committee?
Mr. C oolidge. I have seen the changes proposed, but I am not
prepared to state that the Treasury is back or is not back of those
changes. I will be glad to have you enumerate the changes and to
say what I feel about them.
Mr. H ollister. I have not that memorandum before me, but there
are several of the changes that I can remember.
One, particularly, is this. As I understand it, Mr. Eccles has
changed his views with respect to this open-market committee of
five, and suggests that it would be much better that the Federal
Reserve Board have complete control over the open-market opera
tions, with a committee consisting of the governors of the various
regional banks, with which a member would be compelled to advise
prior to taking any action.
Mr. C oolidge. I do not think I would be personally prepared to
back that particular recommendation. I think the committee should
be composed of a combination of the two.
Mr. F ord. Was that the testimony given before the committee by
Mr. Eccles? I do not remember that that -was brought up before
the committee; I thought it was suggested that it be composed of
two from the Federal Reserve banks and three from the Board.
Mr. H ollister. That is in the bill, and as I understood Mr.
Eccles’ suggestion, he thought it would be much better to have the
Federal Reserve Board have complete control.
I questioned Dr. Goldenweiser yesterday when he was before the
committee concerning the statement that the power was left in the
regional banks to control in some way the open-market operations,
and he finally admitted that the only power given -was the power to
advise; that there was absolutely no power whatsoever either to
initiate or to compel action, or to veto. The full power, under Mr.
Eccles’ suggestion, would be in the Federal Reserve Board to com
pel the Federal Reserve banks to enter upon open-market operations.
Mr. H a n c o c k . I think Mr. Coolidge should be informed about the
suggested amendment before he undertakes to answer that question.
Mr. C o o l id g e . I have seen the suggested amendment, and what I
say is-----The C h a i r m a n .
He thinks that the provision of the bill is more
desirable.
Mr. H a n c o c k . Mr. Hollister failed to state that under the Gov
ernor’s suggestion, an advisory committee would be appointed from
the governors to advise with the Federal Reserve Board before
any such power became effective.
BANKING ACT OF 19 3 5
469
Mr. C oolidge. I understand that, and I do not wish to make a
great point of it. But my personal feeling is that the money is owned
by the Reserve banks, and that some Reserve bank governors should
be on the committee investing those funds.
Mr. H ollister. There are two purposes, I suppose, for which openmarket operations can be carried on. One is the easing or tightening
of credit or money. That is the chief purpose, so far as I understand
it, of the whole theory of open-market operations.
Is it not also true that if full compulsory powers are given with
r espect to open-market operations, we will say to the Federal Reserve
Board, or even to a committee which the Federal Reserve Board
controls, that also this power might very well be used to compel the
Federal Reserve banks to acquire securities directly from the Gov
ernment, in the event that the Government has the securities it wishes
to sell, and there is no other way of selling them ?
Mr. C oolidge. I hat, presumably, would be within the power of
the proposed committee if they so wdshed to use it.
Mr. H ollister. That is something new in the law?
Mr. C oolidge. The same powers can now be exercised, only in a
more complicated manner. The committee and the Reserve Board
combined have the use of the same powers that is now proposed to
concentrate in this committee.
Mr. H ollister. But at the present time no reserve bank may be
compelled to enter open-market operations if it decides it does not
want to.
Mr. Coolidge. I think that is true.
Mr. H ollister. Whereas under this bill, if it is passed, the Fed
eral Reserve banks could be compelled by whatever body we decide
upon, whether the committee or the Federal Reserve Board, after
consultation with the advisory committee, to acquire bonds.
Mr. C oolidge. T o both buy and sell; that is the intent.
Mr. H ollister. The thing that worries me chiefly about the bill
is the compulsory feature, the fact that the credit resources of the
country might be compelled, notwithstanding what the great major
ity of good bankers might think as to the advisability of it—the
gieat credit resources might be compelled to be used in the handling
° ,or*d issues, in the event that the Government continued to pile
up deficits, and I would like to ask you whether you think that is
a wise power to put in any board which is, to some extent, if not
n unc^er administration control.
d i ’. Coolidge. I would like to answer that very directly. I think
the power is going to exist somewhere. I think it is rather unforUinate to have the power wielded by 12 separate banks.
t link the power should exist in a board, and that the board
where K V carefully selected. The power is going to be someery
l ^ j1. ^ OLLISTER- The affirmative power to compel the regional
ban vs t ° cooperate in acquiring, and you say also in selling—and
1 am won led about the acquiring end of it—in acquiring Govern
ment securities.
Mr. Coolidge. It seems to me, otherwise a regional bank may act
on its own and interfere with the action of others, and then you
have the picture of 12 regional banks, each with the power to do
what you say you do not like to see concentrated.
470
BANKING ACT OF 19 3 5
Mr. H ollister. Of course, if a majority vote of the regional banks
could settle it, that would be one thing. But here would be the
power in a board outside of the regional banks, and even if the
regional banks unanimously thought that was a mistake, under this
power they could be compelled to go into these open-market opera
tions.
Mr. Coolidge. Your suggestion would be that the regional banks
be given a veto over the open-market operations----Mr. H ollister. Yes;, or a majority of the committee.
Mr. Coolidge (continuing). Of the committee.
Mr. H ollister. What the open-market committee proposes that
might not be wise, and it seems to me there should be some way in
which the mass opinion of the bankers of the country might be able
to check what they might consider as dangerous administration
policies.
Mr. Coolidge. Y ou have there a question as to the best method to
attain the end.
Mr. H ollister. Yes.
Mr. Coolidge. I am not prepared to recommend any method as
the best possible.
The C h a ir m a n . A s a matter of fact, Mr. Coolidge, under the
present plan 11 of the banks might agree upon a policy which
might be approved by the Board, and the entire 11 banks might
desire to carry it out; but it would be in the power of one bank, if
it was sufficiently strong in resources, practically to nullify a policy
that might be desired and determined upon by all the other banks
of the System.
Mr. Coolidge. That is the present situation.
The Chairman. That is the situation now.
Mr. Coolidge. It is that situation that we desire to correct.
The C h a ir m a n . And the truth is, as the matter now stands, in
stead of having control in the 12 banks, we have control in a very
small minority of the banks in number. That is the practical situa
tion. The whole truth is, the power is in one bank to dictate the
policy of the Reserve System.
Perhaps you do not care to say that, and I will put it in the
form of a statement instead of a question. That seems to be the
situation.
Mr. H ollister. I do not consider the present situation satisfactory
at all, and I only feel we are going too far in this bill in taking ail
powers whatsoever away from the regional banks except the
advisory power.
Mr. H ancock. Mr. Coolidge, I assume that both your position and
the attitude of the Treasury Department is that, since you are to a
large degree charged with the responsibility of furnishing the
Nation with an adequate supply of money at fair cost, the present law
should be changed so that you mav have the control or power
necessary* to carry out that responsibility.
Mr. Coolidge. I see a situation which is proposed under this bill
with great powers of control vested in the open-market committee
and the Reserve Board and other types of control in the Treasury,
and I see a great need of cooperation between those two. But they
are independent parties; one is not dominated by the other.
BANKING ACT OF 19 3 5
471
Mr. H ancock. Under the open-market plan suggested in the bill,
would it not be possible, under certain circumstances, for the will of
the Federal Reserve Board to be thwarted in the event that one
member of the Federal Reserve Board out of 8 members serving on
this committee, together with 2 of the governors, also serving on this
committee, should agree on a policy contrary to the known or ex
pressed view of the entire Federal Reserve Board? I hope I make
myself clear.
Mr. Coolidge. I do not quite follow that. The Federal Reserve
Board can elect 3 members, although 1 must be the Governor. They
can choose which three members they desire to sit on the openmarket committee. I do not vision an alignment where special
parties are going to line up against other parties. I visualize them
as a group of men who meet to discuss conditions, and I do not think
there are 2 against 3 in the matter.
Mr. H ancock. I am just wondering whether that situation might
not exist, in view of the fact that there have been conflicts hereto
fore due to the lack of coordinated effort on the part of all the parties
interested. That suggestion was made by Mr. Eccles, I think, as
the basis for the suggested change in one of his amendments. He
recommended that the powers should vest in the Board as a whole
rather than in a joint committee as the bill provides.
But if you do not care to make any further expression on that
point, it is all right. I t is vitally important, however, in my
judgment.
Mr. Coolidge. I think that is a matter of opinion. I personally
feel that there should be governors of Reserve banks on the openmarket committee.
Mr. H ancock. In Mr. Eccles’ statement before the committee he
referred to certain language used by President Woodrow Wilson in
his address to the joint session of Congress on June 23, 1913. I am
wondering whether you subscribe to Mr. Wilson’s idea and con
ception of the control of banks. Here is what he said:
The control of the system of banks of issue must be vested in the Governy^ot itself so that the banks may be the instruments, not the masters, of
easiness and of individual enterprise and initiative.
Is that your conception?
, ^ r- Coolidge. I want to be rather certain; I am not quite sure of
leaning of his conception. He set up the Reserve System, and
whe her that was his idea of control by Government, thinking of
the Federal Reserve Board as exercising that control, would be a
question. I certainly feel the Reserve System is an instrument, not
a necessity, of business.
Mi. H ancock. Of course, I do not know exactly what was in his
mind; nut it is my own personal idea that he would have been dis
appointed in the operations of the Federal Reserve, based upon my
interpretation of his conception of the right kind of banking system
that would function in all conditions for the welfare of the Nation,
rather than for a few small parts of it. _
Air. Coolidge. The control has to exist somewhere, and the con
trol should exist, in my opinion, in some rather independent body
of men.
472
BANKING ACT OF 1 9 3 5
Mi1 H ancock. D o you think it would be better to vest control in
.
the Government, or vest control of the note issuing power of the
Nation in an independent body, which might be called the “ supreme
court of finance ”, that would be insulated against direct Govern
ment or political influence and commercial banking influence at the
same time?
Mr. Coolidge. I think that the banking system grows rather
slowly. I do not see, off-hand—I am not an expert on these things—
I do not see a final solution. I see this bill tending toward certain
concentration of power, and I do not feel qualified to state what is
the final solution of our banking situation, but I believe it is a long
way distant.
Mr. H ancock. Mr. Coolidge, I assume you have read in the papers
about the number of suggestions from the different organizations
that seem to oppose very vehemently title I I (and perhaps sincerely),
and as a result of their attitude they are suggesting that a compre
hensive study of banking and monetary matters by a national com
mission of appropriate character should be undertaken, rather than
for Congress to proceed further with the consideration of this bill.
Is it the attitude of the Treasury that a commission of that char
acter is necessary at this time ?
Mr. Coolidge. I do not think I can express the Treasury attitude
on that very well. I do not think the Treasury has taken any atti
tude on that question.
Mr. H ancock. But you say the Treasury does favor the main
purposes of this bill and want them enacted into law, is that correct?
Mr. Coolidge. Yes.
Mr. Gifford. Y ou have said that the Treasury favors this bill.
Is not that because of the necessities of the situation, in connection
with the financial deficits of the Government?
Mr. Coolidge. I personally favor it, to give some control over the
money market. In my opinion the control does not exist today in
proper form.
The Treasury is able to finance at very low rates, and I do not see
that we need this in order to finance the Treasury operations.
Mr. Gifford. The Treasury does not attempt to advise Congress
as to its expenditures, perhaps; but you think now that the banks
are holding an undue amount of Government securities?
Mr. Coolidge. I do not say fhat. The banks have the Govern
ment securities because they wished to have their earning power.
Mr. Gifford. I s that not a rather temporary situation ?
Mr. Coolidge. I t may be temporary; someone else may buy them
later. I feel that the whole situation is a very involved one, and it
is difficult to forecast.
Mr. Gifford. Havei you made a survey of the probable deficits
that are going to be created by this Congress ?
Mr. Coolidge. I have not.
Mr. Gifford. I s not that a matter of great concern to the Treasury,
if they have to finance those deficits ?
Mr. Coolidge. The problem of the Budget is important to the
Treasury.
Mr. Gifford. After Congress passes these measures, bringing the
deficits up to 10 or 12 billion dollars, does not it follow then that
BANKING ACT OF 1 9 3 5
473
the Treasury will be quite interested as to how they are going to
finance them?
If you were the treasurer of an organization, as a rule, you would
be glad to inform the members of the organization, and even the
president of the organization, of the situation regarding the treas
ury and the dangers, perhaps, involved in making great expendi
tures. That would be the ordinary procedure, would it not?
Mr. Coolidge. I think you have really gotten me a little bit out
of my depth. The President has submitted a Budget, and that is
before Congress.
Mr. Gifford. What I am getting at is th is: The Treasury does not
feel that they should advise the President of the dangers of the
financial situation or the financial deficits, or even advise Congress
of the danger of the financial deficits. Is it not the duty of the
Treasury to suggest that they may have difficulty in financing the
deficits, if they go over a certain amount?
Mr. Coolidge. The Treasury has expressed its views in the Budget,
and what Congress will do is a matter of your knowledge rather
than mine.
Mr. Gifford. The Treasury does not feel like even suggesting to
Congress that it is all right to spend 10 or 12 billion dollars this
year above ordinary expenses, and that you can handle it all right?
Mr. Coolidge. I think I would really rather have you ask the Sec
retary questions on matters of general policy. I trust there will be
no such deficit.
Mr. Gifford. I do not know whether you want to express any
personal opinions, but you are here representing the Treasury.
Somebody must represent the Treasury when they come here, and
I think we are entitled to the views of the Treasury Department re
lating to the dangers and difficulties of financing deficits.
You and I come from a section of the country where we once
heard a voice say this, which illustrates what I have in mind, that
if the bankers lend too much money to their Government they will
not have enough left to lend to the "people.
Under this theory of financing, there would not be any limit to
the amount that the member banks are allowed to rediscount all
the time and loan back again.
I am getting back to this point, which I would like to impress
upon you, and that is this: Do not the necessities of the times in
connection with these vast expenditures of the Government, bring
about the actual necessity of this legislation, and is not that the
Purpose of it?
Mr. Coolidge. I cannot agree with that. This legislation, in my
mind, is to control the rate for money. From the point of view
° at re^ u ry financing, we do not need this legislation in the least.
Mr. Gifford. Not if we appropriate $12,000,000,000 in Congress
this year?
Mr. Coolidge. The effect may be very bad, but from the point of
view of Treasury financing I do not feel that we need this legislation
in the least.
Air. Gifford. Temporarily, not. But suppose business should de
cide to go ahead; will not business need this money?
474
BANKING ACT OF 19 35
Mr. Coolidge. To my mind, the money available, without chang
ing the law, is of an enormous amount, amide for business as well
as for proper expenses of Government.
Mr. Gifford. That is because of the amount of gold we have in
the Treasury.
Mr. Coolidge. Yes; and from the point of view of Treasury financ
ing I can see no need for this bill.
Mr. Gifford. Y ou can take care of the $12,000,000,000 deficit this
year?
Mr. Coolidge. I am not prepared for one moment to say that.
Mr. Gifford. Y ou will have to be prepared, will you, if we pass
appropriations causing a $12,000,000,000 deficit, appropriations call
ing for that amount of money ?
Mr. Coolidge. That is a subject which is beyond this banking bill,
it seems to me, and it is a broad subject.
Mr. Gifford. It is so broad that it seems that it is desired to pass
this political bill.
Mr. Coolidge. I do not follow that.
Mr. Gifford. I s not this bill going to give the Government con
trol over the banking system of the country ?
Mr. Coolidge. I do not see that it gives it any more than it has
today.
Frankly, I do not see the need of this bill for financing the Treas
ury. There is no need of it from that point of view, in my opinion.
Mr. Gifford. Y ou encourage Congress to spend any amount of
money, and if I should follow that out I might as well vote for
the soldiers’ bonus tomorrow.
Mr. Coolidge. I am not encouraging Congress. So far as I am
concerned, the question of the Budget, to my mind, is entirely aside
from the question of this banking bill.
Mr. Gifford. It is not entirely aside from it when you have to
find the money with which to pay it.
Mr. R ussell . Would it not be appropriate to suggest that Mr.
Gifford confine his questions to the bill before us instead of going
into the question of the appropriations which Congress may make?
Mr. G ifford. Mr. Chairman, because my friend has suggested
that, I will be glad to do that. But the amount, in all probability,
will be 12 billion, and my idea was that there should be somewhere
some power that might say to Congress that it looks probable that
you will spend $12,000,000,000, and I have named $12,000,000,000 here
without anyone contending that that is not true.
I would rather protect you, Mr. Coolidge, than embarrass you, and
I will withdraw from any further questioning.
Mr. H ancock . Mr. Coolidge, in your own mind there is nothing
political about this banking bill, is there? It is designed to help
the entire country rather than any particular class or group.
Mr. Coolidge. Yes; it is designed to improve the banking situa
tion.
Mr. H ancock . It would be used for the welfare of all. regardless
of politics, would it not? And any suggestion to the contrary is
unwarranted and absurd.
Mr. Coolidge. I feel so.
Mr. B rown of Michigan. Is not the main purpose of the bill to
increase the power of the Federal Reserve banks to rediscount paper
BANKING ACT OF 1 93 5
475
for member banks in the Federal Reserve? Is not that one of the
main purposes of the bill?
Mr. Coolidge. The question of whether it is the main purpose, I
think, would be open to some argument.
Mr. B rown of Michigan. One of the main purposes?
Mr. Coolidge. Opinion would differ on that. But the bill does
enable the Federal Reserve banks to loan on any sound assets rather
than on certain specified types. The bill leaves it to the judgment
of the individual bank whether they desire to make these loans.
Mr. B rown of Michigan. But when the individual banks kr.ow
they can borrow on any sound asset, as expressed in section 13 of
the Federal Reserve Act, as amended, they are more likely to be
more liberal in their loaning attitude toward business generally,
when they know they can rediscount that paper, or borrow upon it
at the Federal Reserve bank ? When they know that they are going
to be less harsh than they have been in the past. Is not that true?
Mr. Coolidge. It prevents the past preferences for certain types of
assets that are rediscountable. All assets are on the same basis
instead of there being a preferred class for certain assets.
Mr. B rown of Michigan. But the effect of the amendment would
be to liberalize, as far as the Federal Reserve System can do it, the
loaning policy of the member banks?
Mr. Coolidge. I should think so.
Mr. B rown of Michigan. When they know they can turn over
their sound assets and get assistance from the Federal Reserve banks,
they will be more willing to loosen up and make loans: is not that a
fact?
Mr. Coolidge. I should think so. I feel it will be of use in time of
trouble, but, on the other hand, it may lead to some careless lending
in good times.
Mr. B rown of Michigan. I want to say, in commenting upon your
statement, I am pleased to find you recommend the reduction from
75 to 60 percent as the basis for real-estate loans.
Governor Eccles expressed somewhat the same attitude; and I
think, personally, that it is a little dangerous to go as high as 75 per
cent on long-term real-estate loans on the part of commercial banks,
and I want to commend your view in that respect.
Mr. H ancock. On the point about which Air. Brown questioned
y°u, as to changing the law so far as eligibility is concerned, under
the provisions of this bill an honest effort is being made to insure
hhUidity for all sound assets; is not that correct ?
r t l r'
1 think that is correct. I would rather phrase it a
little differently myself. I would rather say that the banks were
given power to borrow from the Reserve banks when the Reserve
banks desire to loan, and not just when there are certain specified
assets in their possession.
Mr. H ancock. Under the old system, do you not think that the
opinion or obsession of a great many bankers, which was perhaps
natural under the system, that everything in their bank had to be
liquid, had more to do with destroying real values than almost any
other thing? This was particularly true with reference to real estate
and local securities.
Air. Coolidge. That is a hard question for me to answer. It is a
matter of opinion.
476
BANKING ACT OF 19 3 5
Mr. H ancock. Y ou do not think, do you, that the value of an asset,
so far as its eligibility for discount alone is concerned, should depend
on its quoted value on an exchange ? Is that a fair or always honest
test?
Mr. Coolidge. I think that should be taken into account ; I will not
say “ depend I think it should be taken into account.
Of course, at the present time there is no borrowing, and the sur
plus of funds is such that that provision is of little use. It is of use
only ift times of trouble.
Mr. H ancock. D o you not think that back in the bank panic days,
the fact that bankers looked to the exchange quotations rather than
to the intrinsic value of the assets in their bank had much to do
with the failure of many banks and was in some instances a curse ?
Mr. Coolidge. It had something to do with it.
Mr. H ancock. D o you not know that that system for years and
years operated against sound real-estate assets and almost made
them worthless?
Mr. Coolidge. I think it caused a great destruction of sound assets
during the panic. I do not think it operated against them until the
depression came on.
Mr. H ancock. D o you think that values should be determined by
the price you can get for the property within 24 hours, or by the
ticker service ?
Mr. Coolidge. No ; and I agree with you entirely on that, at least
in times of great panic, but the whole problem is difficult.
Mr. F oed. Mr. Coolidge, I would like to make not so much a ques
tion as a statement, and ask you if you agree with me: Under the
Federal Reserve Act as at present constituted was it not the idea,
in a period of expansion, that it supplied money in a large measure
and made it easy to get money for going concerns for going ahead ?
Was that not true?
Mr. Coolidge. Yes; that is true.
Mr. F ord. Then we came to a period of—it was all right for ex
pansion, but when we came to a period of contraction the character
or class of assets held by a bank that were rediscounted in an emer
gency was so restrictive that it did not furnish a cushion to take
sudden reactionary or sudden dropping; is not that true?
Mr. Coolidge. That is so.
Mr. F ord. N ow, then, this measure undertakes to broaden the basis
of the assets in the banks on which loans can be made ?
Mr. Coolidge. Yes; that is correct.
Mr. F ord. S o that in a period of emergency a bank can take its
sound assets to the Federal Reserve bank and, for temporary pur
poses, get sufficient currency to meet its demands ?
Mr. Coolidge. I agree.
Mr. F ord. Therefore, by giving people the money that they are
clamoring for, you stop the clamor?
Mr. Coolidge. I agree; but the bank has to be sound, and many
were not.
Mr. F ord. There has been an attempt made in this committee by
the minority to show that the sole purpose of this measure was to
make it easier for the United States Government to borrow from
the banks. That has been the purpose of the minority right through,
BANKING ACT OF 1 9 3 5
477
and they have left out any possible good that was contained in the
bill for the purpose of using it, the banking system, as a national
institution as against a particular institution that was particularly
framed for the facility of just a limited class.
Mr. Coolidge. I stated already that I saw no possible need of this
bill from the point of the Government financing, as far as that is
concerned.
Mr. F ord. This bill does not cover that; in other words, they are
going on and doing the financing without it, and it will not even
facilitate your financing?
Mr. Coolidge. I do not see that it facilitates financing. We have
always sold our bonds to people who wanted to buy, and expect to
continue so.
Mr. F ord. And the attempt to show that this is simply a bill for
the purpose of enabling the Treasury Department to finance its needs
is pure bunk ?
Mr. Coolidge. In my opinion, there is no need for the bill for that
H ancock. Y ou are pulling your rate of interest down practi
cally every new issue, are you not ?
Mr. Coolidge. Yes; interest rates are running lower and lower and
we are selling a lot of bonds at lower rates.
Mr. H ancock. I have no other questions, Mr. Chairman.
The Chairman. Any questions by anybody?
Well, Mr. Coolidge, this is not important, but I think there was
one slight unintentional inaccuracy in your statement as to the
make-up of the committee. I understood you to say that there would
be three members of the Federal Reserve Board to be elected to the
Board. As I understand the provisions of the bill before us, it is
that the Governor would be a member and two others would be
elected; is that correct ?
Mr. Coolidge. That is correct. I was careless in that statement.
Mr. H ollister. I would like to ask one question on the theory
which is, perhaps, too broad and you would not like to answer it;
but if that is so, you are at perfect liberty to say so. As I stated
before, it is the compulsion that worries me in this bill, chiefly wornes rue. When the situation gets such that it is compulsory/in the
very nature of things, to take the bonds, that is the first step, of
C
°MSe’ * crec^ contraction. That is, I suppose, axiomatic, is it not?
n
M r - Coolidge. I do not quite follow ■ compulsion ” in it.
“
i x •» H ollister. Y ou say, of course, it would not be compulsory,
but it it were compulsory and compelling upon the banks of the
country to take Government bonds against their better judgment—
^LPP°se when that time comes, it is really compulsory, is it not?
Mr. Coolidge. That is a very bad time; yes.
Air. H ollister. In other words, when it comes to financing by any
government, the difference in financing the Government’s expendi
tures by the issue of bonds—which is, of course, borrowing from the
accumulated resources of the country—and financing by the issuing
of currency, the difference in the two is that the issue of bonds is a
voluntary m atter; it is a question of bargaining between the parties,
of the seller on the one hand and the buyer, being a willing buyer,
127297— 35------ 31
478
BANKING ACT OF 1 9 3 5
on the other hand; but when a government once reaehes a situation
where it decides to do its financing merely by running the printing
presses, the difference is that they are compelling a person who would
ordinarily be a buyer—compelling that person to take the piece of
paper, which is the promise of the government, and really against
his will—then, of course, the value of that paper goes down, because
the person does not want what he is compelled to take.
Therefore, if the situation should ever come about where bonds
must be taken, where there is a compulsion placed upon the credit
resources of the country to take the bonds, there is not much differ
ence between the sale of bonds and the issue of currency, is there?
Mr. C o o l id g e . Yes; that sounds pretty logical.
Mr. H o l l is t e r . And I simply wanted to bring that out for the
record, wherein a central board, as long as it is not constituted by the
people, or on which they might not have majority control, or at
least the veto power—that is the situation which is dealt with in this
bill.
Mr. H a n c o c k . Mr. Coolidge, apropos of what my good friend,.
Mr. Hollister, has just said, it is also true, is it not, that the Gov
ernment should have the right, at all times, to use any profit which
it might have in the Treasury for the payment of its obligations,
without resorting to he further issuance of bonds ?
Mr. C o o l id g e . Well, that seems perfectly logical.
(Here follows discussion off the record.)
Mr. C ro ss . Are you through, Mr. Hancock?
Mr. H a n c o c k . Yes.
Mr. C r o ss . Mr. Coolidge, what do you think, what is your idea
about the open-market operations, having the effect of being able to
raise or lower the wholesale commodity prices?
Mr. C o o l id g e . I do not pose as much of an economist on that sub
ject. I should say the effect w^as a slow one, and only one of many
forces affecting price levels.
Mr. C r o ss . Y ou remember—or were you with the Department in
1923 and 1924, and through there—I think it was in 1924, or 1923,
that they had an open-market committee, and their open-market com
mittee bought $510,000,000 of bonds, and almost immediately the
wholesale commodity price level rose 11 percent, and agricultural
commodities rose 20 percent. Do you remember that occurrence?
. Mr C o o l id g e . I am sorry to say I do not. I remember it, but* not
m detail sufficient to help you,
Mr. C ro ss . Anyway, the theory
is that, when you buy bonds, you
tend to lift the price leAel and when you sell bonds you take the cur
rency out of circulation and tend to lower the price level, and that
is one of the levers you expect to use along that line?
Mr. C o o l id g e . That is a lever. I feel that is one of many other
forces. If you look back to the war time, when we entered the war..
th/ ' J C
tlerai E f erve b?nks had pretty high money rates, but under
of the foi ce of spending money, and so on, prices were driven tovery high levels. So I would not feel that the rate for monev
caused bj open maiket operations is more than one of several forces
that operate on the commodity price levels.
Mr. C r o ss . H ow long have you been in the Treasurv Department*
Mr. C o o l id g e . Just under a year.
BANKING ACT OF 1 9 3 5
479
Mr. C r o ss . Have you discussed the question of there being put
in the law a goal to which the Board should seek to go, for instance,
something along the lines suggested by Governor Eccles, that you
attempt to reach the price levels, for instance, in 1926 or some such
period through there? Did you discuss that with them? What is
your idea?
Mr. C o o l id g e . I did a little, and tried to apply it to different per
iods of the past. Now, if it were applied in 1917, when we entered
the war, the Board would have been almost under a duty to stop
the Government spending money to fight the war, because that would
have been their only method of keeping the price levels where they
were. When we get to 1932, we all knew the price levels were too low,
yet that language seemed to tell the Board to keep the price levels
stable and not permit a rise.
Mr. C r o ss . Are you familiar with the system that Sweden has
put in force ?
Mr. C o o l id g e . Not sufficiently to discuss it.
Mr. C r o ss . I believe that is all.
Mr. H a n c o c k . Mr. Chairman, I would like to ask one more
question. Go ahead, however, Mr. Williams.
Mr. W i l l i a m s . I have in mind one or two questions to ask you
about this board. You have perhaps answered it while I was out,
but as I understood you, before I left, you were of the opinion
that open-market operations should be centered in one particular
board, for the reason that it was a national policy, and it should
not be interfered with, or have divided authority by each bank or
each group of banks being permitted to pursue their own course
along that line.
Now, it is desirable, is it not—that is true, I think, myself, as a
general policy—that the board should be brought in contact with,
and kept in close touch with the representatives of the various
individual banks throughout the country, in order to get a true
picture of the situation that exists at any particular time through
out the country?
Mr. C o o l id g e . I agree entirely.
Mr. W i l l i a m s . N o w , under the present set-up as it has been
from the beginning, the Secretary of the Treasury has been «
member of the Board. Has there been any thought given to setting
UP a board without him on it?
T f V i *7°olidge- I have heard that discussed by different people.
V 1 * ^rw°uld rather have him answer that question.
f1 1
; lr . W i l l i a m s . Well, no; I do not mean to be personal at all,
not because of this particular Treasurer, but what is the idea back
n tlle Treasurers being a member of the Board?
Af1 w 0LIDGE' h do not see that it is of any particular importance.
VVlH jIAlvfS. No particular importance? Well, then, what is
e idea of having the Comptroller of the Currency being a member;
\ t ren any reason at all fo r th at?
M r. C o o l id g e . I would rather leave
that to him. I do not know
his duties and-----J'Jr* W i l l i a m s . I mean to sav, any reasonC o o l id g e . T am not sufficiently familiar with the connection
° 1 8 duties with the Reserve Board, the bank examiners, and so
1
on. to answer that. I would really prefer not to go into that subject.
480
BANKING ACT OF 19 35
Mr. W i l l i a m s . I do not mind saying, myself, that I do not see
any reason for the existence of his office at all, much less for him
to be a member of the Board.
Mr. C o o l i d g e . Both of those are questions I would rather have
addressed to them, or to the particular or appropriate persons
involved.
Mr. W illiams. I thought perhaps, in framing this legislation,
the need of membership on the Board of the Comptroller of the
Currency and the Secretary of the Treasury had been considered.
Mr. C o o l id g e . It was decided not to recommend changes in the
Reserve Board.
Mr. W i l l i a m s . Well, unless there is some good reason why they
should be there, I do not know why they should be members of
the Board, and I was just inquiring as to what the reason was.
Mr. C o o l id g e . We decided not to go into the composition of the
Reserve Board.
Mr. W i l l i a m s , l o u have gone into the com position o f it, in
su b m ittin g this bill, have you not?
Mr. C o o l id g e . We did not change the
composition of the Reserve
Board.
Mr. T illiams. Of the Reserve Board, but you did change some
V
what their functions in the open-market operations.
Mr. C o o l id g e . Yes.
Mr. W i l l i a m s . I believe that is all.
Mr. H a n c o c k . Mr. Coolidge, just one further question: From the
statements made by the different members of the committee and the
discussion which has taken place here for the past 10 davs, it seems
that there is a fear being planted in the minds of some people that,
under this measure, the Government might be in position to compel
or force banks, against their will, with respect to the open-market
operations. Do you not believe that it is necessary that there should
be some central control, so far as open-market operations are con
cerned, and especially when we review what happened back in 1929 ?
In other words, do you not believe that there might come a time
when the compulsory powers contained in this bill, if you care to
call them that, would be absolutely necessary, and especially if the
country should be off again on a wild speculative “ jamboree ” • and
if you had those powers, you would be able to enforce uniformity
by all of the banks, in order to serve the country, and save the country from the sort of crash like we experienced in 1929, 1930, and
1931; and then, by the reverse use of those powers, in a period of
gieat depression and deflation and dislocation, the Government
could and should employ those powers in the interest of all of the
people, going so_ far if necessary of forcing banks to purchase Gov
ernment obligations, to sustain and protect the Government in its
duty to enable people to live and not starve ?
The C hairman . Well, have you finished ?
Mr. H a n c o c k . Let him answer that question, Mr. Chairman.
Mr. Coolidge. Excuse me. I agree with you. I think that the
power should be concentrated, and I think the open-market com
mittee should act to prevent excessive speculation and furnish money
m times of deflation.
Mr. H a n c o c k . And that is the main purpose why these changes
are put in this bill, is it not?
BANKING ACT OF 1 9 3 5
481
Mr. C o o l id g e . That is the purpose that I see in it.
Mr. H a n c o c k . That is all, Mr. Chairman.
The C h a ir m a n . Well, gentlemen, if there are no further questions,
we will excuse Mr. Coolidge. We thank you for your able and in
formative statement.
Mr. C o o l id g e . Thank you, Mr. Chairman.
The C h a ir m a n . We will adjourn and meet tomorrow at 10:30,
gentlemen.
(Thereupon a recess was taken in the hearing until 10:30 a. m..
Friday, Mar. 22, 1935.)
'
•:
■
~ .m i M
. v b I ;«
l
BANKING ACT OF 1935
F R ID A Y , M ARCH 22, 1935
H o u se of R e p r e s e n t a t iv e s ,
C o m m it t e e o n B a n k i n g a n d C u r r e n c y ,
liVashington, D. C.
The committee met at 10: 30 a. m., Hon. Henry B. Steagall (chair
man) presiding.
The C h a i r m a n . The committee w ill be in order.
We have with us this morning Mr. Robert Hemphill, who was the
first credit manager of the Atlanta Federal Reserve Bank and is well
known as an authority on money and banking and as a financial
writer contributing to the Hearst newspapers and to financial maga
zines. He will discuss this bill, and I am going to suggest that he
be permitted to make his statement without interruption, after which
members of the committee may propound any questions that they
may desire.
STATEMENT OF ROBERT H. HEMPHILL, WASHINGTON, D. C.,
REPRESENTING THE NATIONAL MONETARY CONFERENCE
Mr. H e m p h i l l . Mr. Chairman and gentlemen of the Committee
on Banking and Currency, I am not an orator; I have been in busi
ness all my life, so I am going to get down to business as rapidly
as possible.
This banking bill which is offered, in my opinion, crystallizes in
a large measure, and perpetuates and exaggerates what is today the
^orst monetary banking system in the world.
In the founding of our country the patriots who had vision enough
*° protect us from tyranny and to imagine a society composed of
intelligent individuals who would be permitted to carve their own
destinies, saw that the control of money would control the total
amount of business transactions, and that the total amount of goods
and services people can produce and exchange with each other marks
the measure of civilization.
That is all there is to civilization, creating and exchanging the
facilities for a higher standard of living. That is all there is to it.
Necessarily, in our system, we cannot directly exchange our goods
and services; we have to first convert them into money. Money is
the intermediate commodity, if you wish to call it that, into which
we have to exchange everything we produce.
. So this subject, Mr. Chairman and gentlemen, is necessarily as
important, just as important as all of the rest of the subjects which
a civilized people has to consider. I think that point is worth get
ting clearly in your minds.
483
484
BA N K IN G ACT OF 1 9 3 5
To exchange those goods and services there must necessarily be
in existence an available quantity of money which is equal to all of
the goods and services in process of exchange. That is a self-evident
proposition. We cannot exchange in any other way.
If you diminish that quantity of money, you are going to restrict
the exchange of goods and services, and restricting the exchange of
goods and services means that you lower your standard of living,
and that means that you destroy civilization to that extent.
That is a principle that has been recognized by every philosopher
of ancient and modern times. But there has been for 200 years,
since one certain man came into power as a financial genius, Mayer
Anselm Kothschild, who was born in 1790—since he came into power
there has been a constant, organized, shrewd conspiracy to convince
the people of the world that this is not true, to convince men against
their own judgment, against a thing which is self-evident. And
that conspiracy has involved the press, it has involved the pulpit,
it has involved our schools, a conspiracy to mislead people about
the importance of a very simple thing—money.
The interests who promote this confusion profit by retaining for
themselves the monopoly of manufacturing our money.
If you will pardon me a bit, I will read you a little fable at this
point which illustrates how our private banking system originated.
Sometimes these things get home the central idea a little clearer
than by technical explanation.
This is the fable of the Temple of the Thirteen Suns, a very
ancient fable.
Once upon a time to the Temple of the Thirteen Suns came the rich and
powerful chief, Oomah the Third, who said to the goldsmith of the temple,
Hansen L. Roschab, “ I have much gold and am about to depart for a far
country. Wilt keep this gold safely for me against my return a year hence?
I will pay thee well.”
The wily Hansen coughed loudly and covered his countenance with a cloth
lest the rich Oomah the Third observe his joy to have this treasure in his
possession. When he was calm and could look serious he said unto Oomah,
“ It is a very great responsibility and risk but I will undertake it for a tithe
which shall be 1 shekel in every 10.”
Then said the Chief Oomah, “ it is a deal ”, and forthwith his slaves de
livered many bags containing in all a thousand shekels of gold for which
Hansen L. Roschab, the goldsmith, gave the chief a parchment deposit writing
payable to whomsoever, and thereupon Chief Oomah departed happily upon
his journey.
As soon as he was well out of the country the shrewd Hansen called his con
fidential scribe and bade him thus, “ Go thee now to the merchants whom I
tell thee of and secretly say to each that thy master hath a little gold for hire
upon good security ”, and the servant departed swiftly.
Soon there came to him a great merchant, who said, “ Hansen, you old crook,
I am in a jam for a few shekels of gold. Wilt lend me?” and Hansen replied,
“ Money is very tight these days, but it might be so arranged. What is thy
need? ”
The merchant answered, “ Two hundred shekels.”
Then said Hansen, “ It is much money. What security couldst thou pledge
for so great a sum? ”
Then the merchant shewed Hansen a writing of his possessions of merchan
dise to the amount of a thousand shekels. Hansen said. “ It is not enough;
thou must also pledge thy dwelling and thy slaves and thy raiment ”, where
upon the merchant, after much protest, pledged all his possessions, even to his
innermost raiment.
Then said he to Hansen, “ I have no place to store so much gold—keep it
safe for me and give me a writing which I may deliver to whomsoever I will ”,
and Hansen did even so.
\
BANKING ACT OF 1 9 3 5
485
The next day came another merchant, and another, and still another, and
to each Hansen loaned a portion of the gold of Chief Oomah the Third, taking
from each as security his entire possessions, including his innermost personal
raiment, and gave to each a writing upon parchment shewing that each had on
deposit the gold he had borrowed, until upon the tenth day he had given parch
ment deposit writings for the whole of the thousand shekels; but he still had
all the gold.
Hansen reflected much upon this curious state of affairs, and said to him
self, “ These birds know not how much gold I possess. They do not want the
actual gold itself—what they really want is credit, some deposit writing which
they may pass from hand to hand as money. I have one grand idea.”
On the next day came another merchant, and another, and still another,
and to each Hansen shewed the great store of gold of Oomah the Third, and to
each he pretended to loan a portion, although he had previously loaned it all
to the first ones who came.
And it came to pass that at the end of another 10 days Hansen had pre
tended to loan to many more merchants and had given writings of deposit for
a second thousand shekels, making 2,000 shekels in all, although he had only
the 1,000 shekels of Oomah the Third.
And still he had all the gold.
Whereupon Hansen reflected to himself, “ What a leaden-pipe cinch. I
wonder I did not think of this before. I can collect just as much usury for
the phony deposit writings as for the genuine—verily I am a financial wizard.”
Thereupon Hansen caused it to be noised about that he possessed a vast
store of gold for hire, and many more merchants came to borrow, and to each
Hansen delivered writings of deposit and collected generous usury and de
manded pledges from each of all his possessions even unto his innermost per
sonal raiment, until he had issued writings of deposit for 10,000 shekels and
held mortgages on substantially the whole city.
Then went Hansen to the wise man of the city and said unto him, “ Verily
I have discovered the greatest racket of all time. I have learned the magic of
making gold out of “ baloney ” ; and if I can keep my formula secret for a
few years, I will collect a fortune that will make Solomon's treasure look like
a second-hand clothing store. Tell me how I may keep secret this bonanza for
mine own profit.”
Then said the wise man, “ Look wise and say little and only upon little known
matters afar off. Obtain the ear of the town crier. Engage him to spread the
impression that money is a mysterious subject which no one understands save
thee alone. Be friendly with the king’s councilors and grant their favors that
the king may smile upon thee.”
And Hansen did as he was bid and collected much usury from his phoney
loan deposits and built for himself a mansion, collected works of art, and
clothed his wives and concubines with fine linen and jewels, and when his
business had grown to many times its humble beginnings, he took over the
entire temple and by way of a sly joke called it the first national bank, the same
being from an obscure language and meaning “ Place of imaginary money.”
And that is the reason all banks have great marble pillars and bronze doors,
so that they may resemble outside as well as internally the “ place of imaginary
money ” which Hansen L. Roscliab builded upon the gold of Oomah the Third
lu the Temple of the Thirteen Suns.
I have read this fable because sometimes a little foolish parable
like that will give one a very much clearer idea of what we use for
money than a whole book of economics.
. When this country was founded and the Constitution was framed,
it was unquestionably the idea of the patriots who founded this
country that Congress should issue all the money necessary to ex
change the goods and services of this Nation. To get what passed
in those men’s minds we would have to go back and picture the situa
tion at the organization of the United States, the Thirteen Colonies,
who were not so sure of their own governments, and were not so sure
this federation that they were forming.
They were afraid to delegate very much authority but they did
delegate to the Congress of the United States the sole power to issue
486
BANKING ACT OF 1 9 3 5
money, and took it away from the States, prohibiting the States from
issuing it. But they failed to provide a system by which Congress
would issue the money. They failed to visualize the rate at which
the commerce and industry of this country would grow, and to pro
vide some system which would be under the direction of Congress,
which would keep pace with the growth of industry and commerce
and provide a sufficient quantity of money and keep it in circulation,
to enable the exchange of goods and services.
Private banks were formed, and the pressure for more money
than there was in circulation was so great that these banks began
issuing their own money, wildcat bank notes, we call them, and it
was an important service. I t was an unsafe and an unsound service,
but it was an important service, because that money was greatly
needed.
They say that there is in use in the United States today a very
considerable sum of counterfeit money which is passing from hand
to hand, and making it possible to exchange goods and services.
I do not know how much there is; I have heard some people esti
mate there is half a billion dollars constantly in circulation, per
forming just as important service as the money which is issued by
the United States Government.
Now, we go further and find that these banks which issued this
wildcat money, one after another failed, and created enormous dis
turbances. One bank failure back there in the early eighteen hun
dreds was a matter of very great importance in the United States.
At that time we were a country of small population and commerce,
so that one bank failure was a tremendous event and created a panic,
and we had a succession of those panics.
Finally, the Government prohibited the issuance of these private
bank notes. And again, Congress failed to supplant that mech
anism with some other adequate mechanism. Congress failed in
its duty to provide for the issuance of enough money to sustain our
rapidly expanding industry and commerce, and another disastrous
depression ensued.
The pressure for more money than Congress has ever furnished
has built up another system, which is just as wild, just as uncon
trolled, and just as uncontrollable as the wildest bank-note svstem.
and that is our present wildcat bank-credit system.
In every particular, and in every effect the issuance of bank credits
by the commercial banks today is exactly the same thing that we
prohibited back there in the sixties, and it is just as dangerous.
I have no quarrel with the bankers; the bankers are doing wonder
fully well with the most imperfect system, the most unsound system
which could possibly be devised.
There is no business man anywhere who would operate a com
mercial bank today. I know; I am talking as a banker to you, al
though I am now out of the banking business. But, there is no
business man who would operate a commercial bank.
There is no business man who would operate an institution so
inherently unsound as a commercial bank. There is no man who
would take hold of a business which had demand liabilities 10, 15, or
20 times its currency and liquid assets.
I t is a preposterous thing, when we look at it in a cold, calm, dis
passionate way. I t is the most preposterous institution in the civil
BANKING ACT OF 19 3 5
487
ized world today, and yet we are absolutely dependent upon that
unsound, preposterous institution to issue the money with which to
transact our business, our exchange of goods and services.
Congress has consistently failed, or declined to study this mone
tary question and devise some instrument wdiich would efficiently exe
cute the power that was conferred upon it in the Constitution.
Do not blame the banker; he is simply filling an essential need,
a facility which civilization must have, in the only way he can do
it. in the creation of bank credits, just as this fabulous character I
have read about this morning issued phoney deposit writings.
The banks are still doing the same thing. They are creating imag
inary money because commerce and industry has to have money of
some kind. If Congress continues to fail in its most important duty,
some private device must supply the deficiency. But I do want to
make it clear that we have got to have a quantity of money which
is absolutely, mathematically related to the amount of goods and
services wdiich we are in process of exchanging. The speed with
which they can move from one transaction to another is determined
by the facilities of our present state of civilization, facilities used
in our trade such as transportation, and that sort of thing, and the
method of clearing checks. All these elements are fixed and move
only so fast.
So. the amount of money which is in circulation, of some kind,
some usable medium of exchange, necessarily determines the total
amount of our exchange of goods and services.
That is the central proposition in this whole money question. That
is the central proposition to which we have got to give consideration;
I do not care whether you are monetary students or not, you can cer
tainly understand that one thing, that you have got to have in cir
culation a quantity of money equal to the total amount of goods and
services you are going to exchange, because you have to first convert
them into money to exchange them. They have all got to be con
verted into money first. That is the central and controlling propo
sition.
It is only in recent times that we have collected enough data to get
some fairly dependable idea of that relation; not because we could
not have collected it 50 or 100 years ago, but because there has been
a constant effort, as I told you a while ago, on the part of inter
ested parties, to talk about anything in the world except money.
Therefore, we have all grown up and accepted money as a matter
of course, and nobody makes any inquiry about it until it stops
coming in.
When it seems as if the common source of our money is drving
up, as it has been for the last 5 or 6 years, then people begin to think
about money. Then they are told, through the daily press, that it
is a mysterious subject which no one can understand. But that is
“ baloney.”
There is nothing at all about money or finance, or about banking,
that a 12-year-old boy clearly grasp and understand.
Banking is simply a private system of creating the money that
commerce and industry has got to have, because Congress has failed
to issue it. That is all there is to it.
Today, in the situation which has developed since this depression
started, we have almost completely reversed the intention of the
488
BANKING ACT OF 19 35
men who founded this Nation. It was intended then that the
Government should issue the money, all of it that we should use,
and that the banks should receive that money and care for it and
loan the idle surplus of their customers, their time deposits, and
their savings. Today the banks are creating the money and the
Government is lending it. We have the Government in the banking
business and the banks in the Government business. That is the
present situation.
This bill that is before you gentlemen is designed to make no
fundamental change in the banking business. It is designed to bring
under control of one body of men, who may be good, bad, or in
different, and who may be ethical or who may not be, and who may
be impressed with a duty to the public, or who may be impressed
with a duty to some private interest, the control of the monetary
system of the United States. And when I say that, I am going to
tell you that it puts into the hands of those men the control of your
business and mine, because those men will control the total volume
of money, and you and I can get our share, and that is all we can get,
of the total amount. If they double the amount in circulation, we
can get our share of the increase, and if we compete properly, our
share will be twice as great as it is now.
You can take the contraction in demand deposits, subject to check,
today as compared to 1928-29 and figure the gross income of your
own business, whatever business you are in, if you have a business,
and you will find that the contraction in your business is almost
identical with the contraction of demand deposits. The contraction
of the business of the Nation is almost identical. In fact, it is so
close that it is absolutely astonishing, because it is figuring on a rule
of thumb formula, and we have available for our calculations the
total amount of money represented in these demand deposits for 1
(lay only in the year, 1 day only, and we now nothing about what
the average is. Assuming that these total figures for 1 day, June
oO, is the average for the whole year, which certainly cannot possi
bly be more than an approximation, we find that the national income
is invariably about 3 to 1.
If we had some accurate figures for every day in the year and
had an actual average, I am convinced—and when I say that, o-entlemen, I want you to understand I have given this particular subject
profound study for 20 years and have made extensive researches—
I am convinced that it would always be within 10 percent of 3 to 1
of our national income, under all circumstances, in good times and
bad, that is to say that the total income of this Nation in prosperity
or depression is within 10 percent of three times the total amount of
the medium of exchange in circulation.
Mr. C r o ss . D o you include check m oney and all the backbone
money ?
Mr. H emphill . Yes; money—checking accounts and cash.
I have prepared some figures here which are rough figures; I want
that understood. I simply took them out of the Comptroller of the
Currency’s statements and took the income figures from the Depart
ment of Commerce, without any adjustment for “ float ” or without
any other adjustments, but simply compared those figures as they
run. I have done that as far back as I could get accurate figures,
489
BANKING ACT OF 1 9 3 5
and they invariably run very close to 3 to 1, showing that there is
no great difference in the velocity of our total money from one year
to another.
Billions of dollars
Demand National
deposits income
1929.
1930.
1931.
1932.
1933.
1934.
24.3
24
21.3
16.4
15.2
« 17.6
81
75.4
63.3
48.9
46.8
52.8
Ratio
3.3
3.1
3*
3
37
3 ^
1 Estimated.
Now, then, there has been some increase in the national income,
and while the figures are not yet available, the 1934 figures ought to
be about the estimated amount shown on this sheet, 52 billion, but the
general price level which has been forced up by the Government’s
artificial price-raising activities more than offsets this increase in
income. Normally increasing the amount of money in circulation
should produce a greater income through greater activity until we
reached full production before there would be any substantial rise
in the average level of prices. After that if we continued to in
crease the money in circulation prices would rise exactly in pro
portion to this increase. As long as we are operating below full
production because of a scarcity of money increasing the money in
circulation increases the volume of business but not prices. Profits
increase because costs decrease when the volume increases, and
wages also increase with the volume of business without increasing
prices. In fact, profits and wages may increase very substantially
if the volume of business increases greatly and at the same time
prices may decrease.
. A great many of our economists who talk about the wide variation
velocity of demand deposits are confused because they include in
their calculations the money employed in speculation, and at times
there is a great deal of money employed in speculation. There was
a great sum in 1929. For instance, brokers’ loans, I think, ran up
to 7 or 8 billion dollars at one time. I do not think they w*ere all
entirely employed in speculation, but there was at least $5,000,000,000
at. the peak in 1929. A large amount of deposits which should have
been classed as demand deposits in 1928 and 1929 were classed as
time deposits, and so forth.
These factors eliminate any very fine calculation for that year,
any very accurate calculation; for instance, if you wanted to get
the figures down to four or five decimal points you would have to
take the money employed in speculation into consideration. But this
sheet which I have here does not go into the matter to that extent.
1 think, however, it is dependable as a rough-and-tumble calculation.
This brings your problem, gentlemen, to a very definite objective—
t iat of putting into circulation approximately 8 billions of dollars
m such a manner that it will permanently increase our individual
demand deposits that amount—to restore the status quo ante this
depression.
490
BANKING ACT OF 1 9 3 5
Now then, the banker has the privilege today of issuing our money,
practically all of it. The amount of currency and coin in circula
tion actually transacts, I believe, less than one-half of 1 percent of
our total business. I do not believe that statement has ever been
made before.
That does not mean that the proportion of actual money to bank
credit should be one-half of 1 percent. But it does mean that you
can almost disregard money in your banking calculations, not only
because the total of transactions performed with currency are small
but also for another reason. The money that we have in our pockets
was drawn out of a bank by ourselves or somebody who had a deposit
and who drew a check for it, and we ordinarily use it for one trans
action only while it is outside the bank. That is, we buy cigars, or
pay off the grocer, or pay for some other thing, and it goes directly
back into the bank. I t does not circulate through several trans
actions as in our early history before the days of the check book.
Say there is a check for $100 on which you drew out the money
you have in your purse. This check has no direct effect on com
merce, but you spend this money in several transactions whose total
is $100 so that in your total of checks you have automatically all of
your cash transactions. But you do not have to bother with the
cash at all in your calculations.
Currency and coin in circulation has very little effect on any cal
culation in which you are trying to determine the velocity of money.
As I see it, the problem before Congress is one of refurnishing this
Nation with a sufficient quantity of money of some kind, not guess
ing at it, and not leaving it to expand or contract by accident—not
leaving it entirely to a mechanism that is operated entirely by emo
tion of two kinds, optimism and fear. Those are the two controlling
factors in the operation of the banking system today, optimism and
fear, and under this absurd system these two emotions are responsi
ble for our recurring periods of inflation and depression.
When things go along good our banks, prudently and properly,
in order to make money for their stockholders, expand this credit
money until their reserve is so thin that it looks like cellophane.
And as far as our State banking system is concerned, it can go be
yond that; it can borrow book credit from another bank and use it
as a reserve, so they have no reserve at all. And they loan some more
on that bank credit reserve, hoping to God that nothing will happen,
and the banker goes around all day in nervous apprehension hoping
that nothing will happen. He is out on a limb, clear out on the
outermost twig of a limb. And then something does happen. I t
may be in Russia, it may be at the North Pole, but the banker is
trying to operate a machine which requires such a delicate balance
of income and outgo that its preservation depends upon the succes
sion of a series of improbable accidents and when something hap
pens, real or imaginary, he gets frantic to get on a safe basis. He
begins calling every loan, destroying our active medium of exchange,
and industry and commerce are shot as innocent bystanders.
That is the picture of our monetary system today. That is the
absurd, impossible system which we, an intelligent and resourceful
Nation, are trying to create and exchange wealth with.
BANKING ACT OF 19 3 5
491
Now then, gentlemen, I calculate that since 1929 it has cost this
Nation in loss of property values and loss of income $400,000,000,000
to preserve the sensitive feelings of a few men and to preserve a
$3,000,000,000 investment in the bank stocks of this country. That
is what it has cost us. That is what it has cost this Nation, $400,000,000,000 in material loss, to say nothing of the total of human
suffering and misery and despair, to preserve a $3,000,000,000 insti
tution, and we need not necessarily have destroyed the $3,000,000,000.
New, gentlemen, really, you know, we ought to be approaching the
point in intelligence when that sort of thing is no longer possible.
We ought to be getting nearly to the place where we could under
stand this situation and where we, as a Nation, could have some
reliable medium of exchange to do business with.
We all know what the banking system is; let us be frank about
it. If we could get one week’s open honest discussion in America,
a perfectly frank discussion, unlimited or uninfluenced by prejudice
or selfish interests, we would have a monetary system through the
operation of which this country would soon rule the world. We have
the resources, and we have a surplus of inventive genius and a very
extraordinary capacity for organization in this country. The other
nations do not seem to have it. We have the natural resources, and
there is no computing, there is no imagination sufficiently active to
fully picture what this country could be if we had a sound and ade
quate monetary system which would permit us to operate at full
capacity. We have everything else. We have the resources, we have
the productive facilities, we have the machinery for distribution, but
w have not got the money to make the transfers that we ought to
re
have. That is all that matters with us today. Eight billions of our
demand bank deposits which were in active use—one-third of our
active medium of exchange, has been withdrawn from circulation.
That is the only reason all of these alphabetical monstrosities are
being created daily by people who have a cloud over their imagina
tions, who apparently cannot distinguish between cause and effect,
but who are trying to remedy, by some obscure means, a glaring
thing which is right out before us where evervbodv can see it, simply
the lack of sufficient money to effect the transfer of goods and services
we can create. That is all we lack and all we have lacked.
We do not have to promote the interests of any groups, gentlemen,
to balance production and consumption. Under the capitalistic sys
tem and with a sufficient amount of money in circulation to transfer
the things that we produce, we will continue to produce and exchange
more until we are at the limit of our producing capacity, until every
man in the country is producing all he can, to get all he can in return.
We do not have to protect labor, because when we reach that situa
tion—and I have seen that situation many times in various sections
of our country—labor is at a premium.
4
our total capacity for production depends upon the labor you can
secure, and when labor is at a premium the employer, in competition
with other employers, forces automatically and will force without an
organized labor effort a fair division of the gross income for labor.
We have had in this country, sometimes for 4 or 5 years at a time,
a condition in which we had that perfectly balanced situation. Every
time we have reached it some selfish interest strong enough to influence
492
BANKING ACT OF 1 9 3 5
Congress has opened our immigration doors, getting in a lot of cheap
labor, or something of that sort, or has shut off the money and created
a panic.
Now, then, Mr. Chairman and gentlemen, my objection to this bill
is that it does not amount to anything positive and certain. You have
not done anything definite and fixed. You have made no real prog
ress at all in monetary science. You have come no nearer supplying
this Nation with a stable, adequate, and permanent supply of money
when you have passed this bill than we have now. But you have
created the machinery, gentlemen, by which selfish interests could take
hold of this central organization and in a very short time own what
little of the country they do not already own.
I am afraid of such a device, tremendously afraid of it.
I mean to cast no reflection on Mr. Eccles or the other members of
the Federal Reserve Board. They apparently are unable to imagine
any system other than the present one. They unquestionably have
done in this bill what they could to help make usable the machinery
which they propose to control. I believe their intention to use the
power they seek for the public good is sincere. But what about future
bodies of men you are going to turn this machinery over to, who you
cannot control ? What are they going to do with it ?
Suppose Mr. Eccles passes out of the picture tomorrow and we
get somebody out of Wall Street, or some of the partners of Roths
childs in Europe—and we have some of them here in America, and
they are the most powerful influence in America today.
Ordinarily, they run our Government as certainly as though they
owned it. Suppose you give them this mechanism? That is some
thing to think about, because they are going to be in power again.
They may be out of power temporarily, but they will not be for long.
You are creating a mechanism, exactly the mechanism that they
have tried to put into operation in this country since the Declaration
of Independence. I t has no brakes on it anywhere. It just simply
creates the mechanism and the power and puts it in these men's
hands and says, do what you darn please with it and with this Na
tion. There are no safety devices; there are no mandates from this
Congress, which has the power to say, under the Constitution what
they shall do with the volume and value of our money, which con
trols our destiny.
I think it is the most dangerous piece of legislation that has been
offered in the United States Congress for many, many years.
I think it could be amended. I think the objectives of the men
who have designed this bill are all right. I think they are moving
toward giving this country enough money, but it is for this Congress
to put in this bill definite mandates which will compel these men
to attain their objectives.
Some time ago there was a call issued by one of the Senators and
some men who are devoting their lives to a study of this question for
a conference here in Washington of the representatives of a large
number of independent organizations, all of whom have made their
own independent study and concluded that our present situation is
purely a monetary phenomenon. They met here in Washington, and
it was called the National Monetary Conference.
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493
I was present at that conference as an independent monetary stu
dent, representing nobody but myself. Men were called upon to ex
press their views as I was, and I expressed my views there, and at
the conclusion of the meeting certain resolutions were drawn up.
I was appointed chairman of the committee to draft the legislation
contemplated by those resolutions.
On that committee is also former Senator Eobert L. Owen, who
designed the Federal Keserve law and, as you all know, is one of
the profound monetary students of the country, and who has devoted
the major part of a lifetime to this study.
On this committee is also Prof. Irving Fisher, who, I will say, is
unquestionably the outstanding monetary authority in this country,
and who has devoted at least 20 years to intensive monetary study
T
under circumstances which have given him the opportunity, the
extraordinary opportunity, for arriving at correct conclusions. As
I say, he was on that committee.
Mr. Eobert Bruce Brougham, who has also—in recent years at
least—devoted considerable time to this study; Mr. Ward, who is
an attorney associated with Father Coughlin, and who was quite
prominent in this discussion, and myself were on the committee.
The conclusions of this committee do not represent any personal
ideas that these men have. Three of these men are students, real
students, not for the purpose of promoting some pet idea but for
the purpose of assembling and digesting all of the knowledge that
is reliable and available anywhere in the world, and all of the con
clusions of all other outstanding men who have studied this monetary
question extensively and concentrating for their own guidance, as
clearly as possible a summary of the most enlightened thought and
investigation and conclusion upon this monetary question, in addi
tion to their own extensive experience and knowledge.
Those men also know this Nation; they know the United States,
and I believe are able to distinguish between the necessities of this
country and that of other countries in so important a movement as
improving our monetary system.
Some things which we need would not fit Europe at all. Some
things which they require would not fit us at all.
So we cannot simply take the English banking system or the
French banking system, or some other foreign system, and apply it
here, because it would not work, for a great many very simple rea
sons. But some of the foreign systems do have some good features
which are abundantly proven by long satisfactory use.
We have drawn up a bill and intended to attempt to interest some
of the Members of Congress here who have made a particular study
of this question, when this bill which you are now considering came
on from the Treasury Department. This bill, which was drawn by
Mr. Eccles and by Mr. Morgenthau, or perhaps Mr. Coolidge, the
Under Secretary of the Treasury, and the man who is at the head
of the Federal Deposit Insurance Corporation, Mr. Crowley. They
were the principal parties, as I understand it, in drawing the admin
istration bill. How much advice they took from other people, or
how much study they made of the question, I do not know.
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BANKING ACT OF 1 9 3 5
I do not think the bill is very adroitly drawn. In some respects
it seems to me to be very amateurish.
I perhaps ought not to say that, but it does not 'seem to me like a
fininshed bill, even for what they want to accomplish. However, it
is what it is.
We decided—and I am speaking now not as an independent mone
tary student, but as the representative of the monetary conference—
we decided that the cause would be more swiftly advanced if we
joined in with the progressive sentiment in Congress which was
unquestionably for monetary reform, to see if we could not get
all of our ideas together and amend this bill, instead of promoting
the measure we had prepared.
I prepared a little statement, which I have here, which presents
the concensus of our opinion as to the amendments necessary to make
the administration bill constructive, practical, and safe.
I would like to say in reference to these suggestions that there
are three proposals here, and they are to a large extent already
anticipated, perhaps in other proposed legislation, which has been
discussed for the past 3 or 4 years.
The most important proposal, it seems to me, is to create a Fed
eral Monetary Authority. This proposal was first advocated by
Mr. Frank Vanderlip, w is perhaps our ablest commercial banker
rho
with a full and useful lifetime of experience, and Mr. Goldsborough
of your committee, who is regarded as one of your outstanding
monetary students.
Mr. Sisson. D o you expect to answer questions asked by mem
bers of the committee at some point in your statements?
Mr. H emphill. Yes.
Mr. Sisson. Would it interrupt you now if I asked you one or
two questions?
Mr. H emphill. May I read this recommendation first, and then
we will have it on the fire.
Mr. S isson. Yes.
Mr. H emphill. I t is recommended that the bill now being con
sidered be amended by striking out title II and substituting there
for three paragraphs in appropriate language which will, first,
establish the Treasury of the United States and its branches as the
sole depository for all bank reserve funds.
Second, require all banking institutions in the United States and
the Territories—and the United States post offices in certain rural
districts—to carry checking-account deposits as trust funds in cash
in their vaults or deposited in the United States Treasurv, or in
vested in United States Government bonds; and all banks to main
tain a 5-percent cash reserve against all time, savings, or other than
checking-account deposits.
Third, create a politically independent Federal monetary author
ity which would exercise, under definite congressional mandates,
the constitutional monetary powers of Congress.
As to the last provision I want to say that owing to Congress
man Goldsborough’s activities you have had before you for 2 years,
I think, a monetary bill, or a bill to establish a monetarv commis
sion, which is what we have in mind here.
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495
I think it is greatly to the credit of Congress and it is a great
compliment to the intelligence and the sincerity of this House of
Representatives that you gave that bill such an enormous vote.
Mr. Goldsborough. We had a bill passed in 1932 which would
simply declare a policy, which was a different bill from the monetary
authority bill.
Mr. H emphill. But it had the same objective. You have that
principle in all the bills you have introduced here, have jou not?
Mr. Goldsborough. Yes.
Mr. H emphill. N ow, this recommendation further suggests that
the mandates should require (a) that the Federal Montary Authority
purchase for cash or credit upon the books of the Treasury of the
United States all United States bonds not held by banks as of some
past date, preferably June 30, 1934, or so many of same as may be
necessary to restore full employment at a satisfactory price level,
and thereafter to keep the price level stable by, first, the purchase or
sale of United States bonds; and, second, the issue of currency or
assessment of taxes.
( b ) That the Federal Montary Authority liquidate all Govern
ment financing organizations as rapidly as possible by transfer of
their business and assets to commercial and savings banks of the
Nation.
In other words, let us take the Federal Government out of bank
ing business entirely.
These additional recommendations are suggested: Repeal the Fed
eral Reserve Act, as amended; repeal the National Bank Act, as
amended; and let our banks go back to the supervision of the States,
all of them.
The program I have read, which is suggested, would put in circu
lation approximately 15 billions of additional currency and would
restore full employment in the Nation, and elevate prices, wages,
and property vaues to about the 1928-29 level. It would increase
the national income by 45 billions. Thereafter, the payment of
normal Federal Government expenses would be substantially the
correct amount to preserve full employment without elevation of the
price level.
Thereafter the wealth of the Nation would increase as fast as our
productive capacity increased.
Attention is called to the fact that it was no doubt the intention
of the founders of this democracy that the Government should issue
all the money necessary for our exchange of goods and services and
that the banks of the Nation should care for it and loan our savings
and surplus profits. That situation is now precisely reversed. The
private banks of the Nation are creating the money and the Govern
ment is loaning it to agriculture, commerce, and industry.
The program proposed is merely a return to the status originally
contemplated.
It is also designed to end the present period of wildcat-bankcredit issue, which in effect is but a continuation of the wildcat-bank
note period of the first half of the nineteenth century.
I do not believe, gentlemen, there ever has been a time in our his
tory when the opportunity was so favorable to create for this Nation
for the first time, and, in fact, for the first time in civilized history.
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BANKING ACT OF 1 9 3 5
a real monetary system. We have none today. We have no mone
tary system.
We have to borrow every dollar that we have in circulation, cash
or credit.
If you will examine the consolidated statements of all the banks
you will see—we took all the money that the Government issued and
bought bank stock with it, and when we finished doing that we had
neither money nor bank credit and since that time the individuals in
this Nation have been obliged to borrow from their banks every dol
lar of cash or credit there is in circulation. That may be a startling
statement to you, but that is true.
Every dollar you have in your pocket, every dollar of credit you
have in your bank account, was borrowed by somebody from some
bank. I t may have been borrowed by the man who gave you a check
for it, or it may have come to him through several different trans
actions. But if you will go back far enough you will find it was
borrowed from somebody, and you are lucky that you have it. If
someone, in the chain of transactions between the borrower and you
had been compelled to pay a note to the bank, you would not have
your bank account today. That will show you how absolutely we are
dependent upon a system which is essentially unsound. If we had
a system which did not have to destroy commerce and industry to
preserve itself, every few years, nobody would kick about it. I am
not kicking about the interest we pay; that is a small matter. It is
unnecessary, but I am not kicking about that.
But this institution, for its own preservation, has periodically to
almost destroy this Nation in order to preserve itself.
Those are the considerations which I think that this Congress of
the United States ought to think about. You gentlemen are here
representing the people of this Nation and not a few banks in Wall
Street or elsewhere; and not just a few subsidized newspapers.
You are here to pass as few laws as possible to preserve individual
freedom in this countr}'.
We are slaves today; we are the absolute slaves of an impossible,
unsound, unworkable system which creates what we call “ business
cycles.” When things are going good they will go along, but they
almost immediately get out on a limb and -when everything happens
they are compelled to contract the currency we are using to exchange
our goods and services and we have a depression and we call these
recurrent periods of bank credit expansion and contraction “ business
cycles.”
I think, Mr. Chairman, that I have said all the mean things I can
think about for a while, and I will be glad to answer any questions
the members of the committee may desire to ask.
The Chairman. Your objection, as I understand you, to the bill
before us is that it continues and emphasizes the present condition;
it does not enlarge the absolute control of any limited number of men
in charge of the Federal Reserve System or the business life of this
country ?
Mr. H emphill. Yes, sir.
The Chairman. As I understand you, the thing you advocate is
to set up a similar body with similar powers and similar authority
and similar possibilities?
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497
Mr. H emphill. N o, sir. We propose to set up a body which will
operate strictly within the lines prescribed by this Congress, who will
be nothing but office boys, nothing but clerks, with nothing to do
except to carry out the specific provisions in the law.
The Chairman. Are you sure that your statement is entirely ac
curate, in the light of the program which you have just read or the
resolutions which you have just read to the committee?
If I caught the reading of those resolutions, you would have a
monetary authority with the power, and whose duty it would be, to
establish a satisfactory price level. Could that be accomplished auto
matically ?
Mr. H emphill. Yes, sir.
The Chairman. Who would determine whether it was satisfactory?
Mr. H emphill. I think Congress should determine that—put it
in the law.
The Chairman. Y ou do not say that Congress shall determine
what the satisfactory price level shall be. You provide that Con
gress shall set up a body who shall conduct their operations and exer
cise their powers to the end that they may establish a satisfactory
price level which, of course, would be determined by them, would it
not?
Mr. H emphill. I am glad you mentioned that point, because I
want to make that very clear. Our proposal as I have read it here
is merely a statement of objectives in general terms—you understand
it is not in any way a bill.
The Chairman. I understand that you have not put it in the form
of a bill, but to the extent I have pointed out you have been specific.
Mr. Goldsborough. May I interrupt for a moment? If you will
remember, in the monetary authority bill considered in the last Con
gress by a subcommittee of this committee the powers of Congress
were not delegated except insofar as delegating to the authority as
experts the power to carry out the specific mandate contained in the
bill.
Mr. H emphill. Exactly. Let me read this recommendation again.
The Chairman. Mr. Goldsborough is quite correct in what he says
about the bill he introduced last year, which was considered in this
committee. But you are not following that bill in toto. You leave
to that Board the exercise of discretion which would be used to bring
about a satisfactory price level and restore employment. But they
would be the judges of whether or not that had been accomplished.
Mr. H emphill. Not necessarily. Let me make myself very clear.
This recommendation provides: Create a politically independent
Federal Monetary Authority which would exercise, under definite
congressional mandates, the constitutional monetary powers of Con
gress.
The Chairman. Let me make myself clear. I think that is all de
sirable and that it is a good mandate, insofar as you may give one
in generalities; that is the thing that is desired.
But that leads me to this inquiry. I have never been able to see
the difference in any machinery that might be set up under the new
suggestion of a monetary authority and the authority that we estab
lish or preserve under the bill now before us. And, just as you said
a few minutes ago, I think it is quite true that, after all, the selection
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