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TO ELIMINATE UNSOUND COMPETITION FOR SAVINGS
AND TINE DEPOSITS

HEARINGS
BEFORE THE

COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
EIGHTY-NINTH CONGBESS
SECOND SESSION
ON

Hit 14026
A BILL TO PROHIBIT INSURED BANKS FROM ISSUING
NEGOTIABLE INTEREST-BEARING OR DISCOUNTED NOTES,
CERTIFICATES OF DEPOSIT, OR OTHER EVIDENCES OF
INDEBTEDNESS
MAY 0, 10, 11, 12, 19, 24, 25, 31; JUNE 1, 2, 7, 8, 9, 16, AND 23, 1966

Printed for the use of the Committee on Banking and Currency







TO ELIMINATE UNSOUND COMPETITION FOR SAYINGS
AND TIME DEPOSITS

HEARINGS
BEFORE THE

COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
EIGHTY-NINTH CONGRESS
SECOND SESSION
ON

H.R. 14026
A BILL TO PROHIBIT INSURED BANKS FROM ISSUING
NEGOTIABLE INTEREST-BEARING OR DISCOUNTED NOTES,
CERTIFICATES OF DEPOSIT, OR OTHER EVIDENCES OF
INDEBTEDNESS
MAY 9, 10, 11, 12, 19, 24, 25, 31; JUNE 1, 2, 7, 8, 9, 16, AND 23, 1966
Printed for the use of the Committee on Banking and Currency

U.S. GOVERNMENT PRINTING OFFICE
63-496

WASHINGTON : 1966
Wot safe by tfcs Bapsrintandont of Documents, U.S. Qoftnuottit Printing Offics
Washington, D.C. 30402 - Fries $2.60




COMMITTEE ON BANKING AND CURRENCY
WRIGHT PATMAN, Texas, Chairman
WILLIAM B. WIDNALL, New Jersey
ABRAHAM J. MULTER, New York
PAUL A. FINO, New York
WILLIAM A. BARRETT, Pennsylvania
FLORENCE P. DWYER, New Jersey
LEONOR K. SULLIVAN, Missouri
SEYMOUR HALPBRN, New York
HENRY S. REUSS, Wisconsin
JAMES HARVEY, Michigan
THOMAS L. ASHLEY, Ohio
W. E. (BILL) BROCK, Tennessee
WILLIAM S. MOORHEAD, Pennsylvania
BURT L. TALCOTT, California
ROBERT G. STEPHENS, J b., Georgia
FERNAND J. ST GERMAIN, Rhode Island DEL CLAWSON, California
ALBERT W. JOHNSON, Pennsylvania
HENRY B. GONZALEZ, Texas
JOSEPH G. MINISH, New Jersey
J. WILLIAM STANTON, Ohio
CHESTER lit MIZE, Kansas
CHARLES L. WELTNER, Georgia
RICHARD T. HANNA, California
BERNARD F. GRABOWSKI, Connecticut
COMPTON I. WHITE, J b., Idaho
TOM S. GETTYS, South Carolina
PAUL H. TODD, J b., Michigan
RICHARD L. OTTINGER, New York
THOMAS C. McGRATH, Jb., New Jersey
JOHN R. HANSEN, Iowa
FRANK ANNUNZIO, nilnois
THOMAS M. REES, California
P a u l N e l s o n , Clerk and Staff Director
A lvin L e e M o b s e , Counsel
Cmans A . P b i h s , Chief Investigator
N o b i c a n L . H o l m e s , Couneel
B e n s ? D . G e l l m a n , Investigative Counsel
O r m a n S . F i n k , Minority Staff Member

n




C O N T E N TS
H.R. 14026. A bill to prohibit insured banks from issuing negotiable
interest-bearing or discounted notes, certificates of deposit, or other Page
evidences of indebtedness_________________________________________
1
Statement of—
Albig, Reed H., chairman, Federal Legislative Committee, Independ­
ent Bankers Association of America— -------- ----------------------------573
Barr, Hon. Joseph W., Under Secretary of the Treasury___________
440
Blackmon, Larry, president. National Association of Home Builders. _
263
Bliss, George L., president and managing director, Council of Mutual
Savings Institutions---------------------------------------------------------------563
Brimmer, Hon. Andrew F., member, Board of Governors, Federal
Reserve System___________________________________________ 169, 208
Carson, Deane, professor of banking, Columbia University_________
338
Daane, Hon. J. Dewey, member, Board of Governors, Federal Reserve
System___________________________________________________ 481, 507
DuBois, Pat, president, Independent Bankers Association of America.
573
Fowler, Hon. Henry H., Secretary of the Treasury; accompanied by
Peter Sternlight, Deputy Under Secretary for Monetary Affairs;
and Fred B. Smith, General Counsel__________________________
131
Horne, Hon. John E., Chairman, Federal Home Loan Bank Board;
accompanied by Dr. Harry S. Schwartz, economist, FHLBB_____ 70, 97
Kirchner, W. G., president, Richfield Bank & Trust Co., Richfield,
Minn.; accompanied by Carter H. Golembe, deputy manager,
ABA; presenting statement of Archie K. Davis, on behalf of the
American Bankers Association------------------------------------------------397
Klebaner, Benjamin J., professor of economics, the City College of the
City University of New York------------------------------------------------328
Maisel, Hon. Sherman J., member, Board of Governors, Federal
Reserve System------------------------------------------------------ 169, 208, 481, 507
Martin, Hon. William McChesney, Jr., Chairman, Board of Governors,
Federal Reserve System; accompanied by J. L. Robertson, Vice
Chairman; Charles N. Shepardson, member; George W. Mitchell,
member; J. Dewey Daane, member; and Sherman Maisel, member. 481, 532
Mitchell, Hon. George W., member, Board of Governors, Federal
Reserve System--------------------------- ------- ------------------ 169, 208, 481, 507
Olson, Hon. Alec G., a Representative in Congress from the State of
Minnesota------------- ------- ----------------------- --------------------------------573
Randall, Hon. K. A., Chairman, Federal Deposit Insurance Corpora­
tion; accompanied by W. W. Sherrill, Director, FD IC ____________
386
Robertson, Hon. J. L., Vice Chairman, Board of Governors, Federal
Reserve System___________________________________ 169, 208, 481, 507
Rousseas, Stephen W., professor of economics, New York University.
300
Saxon, Hon. James J., Comptroller of the Currency______________
258
Scanlon, Hon. Charles J., president, Federal Reserve Bank of Chicago. 169, 208
Shepardson, Hon. Charles N., member, Board of Governors, Federal
Reserve System------------------------------------------------------ 169, 208, 481, 507
Sherboume, Everett C., president, City Federal Savings & Loan
Association, Whippany, N.J.; accompanied by William J. Kerwin,
assistant executive director, and William F. McKenna, general
counsel, National League of Insured Savings Associations___ 11, 33, 56&
Slipher, Stephen, staff vice president and legislative director, United
States Savings & Loan League-------------------------------------------------57S
Strunk, Norman, executive vice president, United States Savings &
Loan League; accompanied by Stephen Slipher, staff vice president
and legislative director-------------------------------------------------------- 3, 33, 56&
Treiber, Hon. William F., first vice president, Federal Reserve Bank
erf New Y ork......... ...................... ............ ............................... ................ 169,20$



m

Additional information submitted to the committee by—
Albig, Reed H., chairman, Federal Legislative Committee, Independ­
ent Bankers Association of America:
“Swapping Savings for Stock Market,” article from the Evening page
Star, June 23, 1966------------------------------------------------------583
Annunzio, Hon. Frank:
“Continental Illinois Asserts Passage of Assets Bill Is Lesser of
Two Evils,” article from the American Banker, May 9, 1966__
105
“Legislation Regulating Bank Certificates of Deposit Introduced
by Congressman Rees,” press release dated May 19, 1966-----161
Barr, Hon. Joseph W., Under Secretary of the Treasury:
Comments on article “ ‘Operation Twist’: A Mistaken Policy?” . .
472
Number of banks closed because of financial difficulties, 1928-65,
by years_____________________________________________
447
Short-term and long-term interest rates in selected countries
479
(table)--------------- ------------------------------------------------------Blackmon, Larry, president, National Association of Home Builders:
Additional remarks of____________________________________
296
292
Additional statement of__________________________________
“Choose at Franklin National Three Different Type Savings
Bonds,” advertisement from the Wall Street Journal, May
27, 1966__________________________________________
294
“For the Smaller Saver,” article from the Washington Post,
May 31, 1966___________ __________________________
293
“Invest in 5J4 Percent Savings Bonds,” advertisement from
the Wall Street Journal, May 27, 1966________________
295
Bliss, George L., president and managing director, Council of Mutual
Savings Institutions:
Resolution of the Council of Mutual Savings Institutions, June 9,
1966_________________________________________________
565
Carson, Deane, professor of banking, Columbia University:
“Communications,” from the Journal of Finance, September
1965:
“Is the Federal Reserve System Really Necessary?” com­
ment by Harmon H. Haymes________________________
351
“Federal Reserve Membership and Discrimination,” com­
ment by James W. Leonard_________________________
353
“ Is the Federal Reserve System Really Necessary?” com­
ment by George G. Kaufman________________________
355
“ Is the Federal Reserve System Really Necessary?” reply
by Deane Carson_________________________________ 355
“ Should Federal Reserve Float Be Abolished and Its Check
Activities Curtailed?” by Irving Auerbach-____________
358
“Auerbach's Defense of Defensive Operations,” by Karl
Brunner and Allan Meltzer__________________________
366
“Should Federal Reserve Float Be Abolished and Its Check
Activities Curtailed?” reply by Deane Carson__________
368
Fowler, Hon. Henry H., Secretary of the Treasury:
Accomplishments of the Coordinating Committee_____________
131
Data concerning savings and time deposits at all commercial
banks and nonnegotiable certificates of deposit_____________
146
Commercial bank time and savings deposits (table)_______
147
Types of time and savings deposits, IPC, held by member
banks on December 22, 1965_________________________
147
Expenses relating to tax-exempt income_____________________
152
Influence of negotiable certificates of deposit on Treasury bill
rates__________________________________ ______________
130
Progress report on the joint Treasury-Federal Reserve study of the
U.S. Government securities market_______________________
131
Time certificates of deposit at insured commercial banks, April 26,
1965, by size of certificate (table)___ ____________________
164
<*ettys, Hon. Tom S.:
Telegram to Hon. Richard T. Hanna from Louis B. Lundborg,
chairman of the board, Bank of America N.T. & S.A., dated
June 3, 1966____________ ____ ___________ ; _______ ____
_
463



CONTENTS

V

Additional information submitted to the committee by—Continued
Horne, Hon. John E., Chairman, Federal Home Loan Bank Board:
Advances made by purposes, Federal Home Loan Bank of San
Francisco (table)______________________________________
Letter to Federal home loan bank presidents, dated April 20,
1966_________________________________________________
Michigan Savings & Loan Association members of Federal Home
Loan Bank System anticipated regular dividend rates for period
beginning January 1, 1966 (table)________________________
Shifts in demand and inflation, statement on_________________
Klebaner, Benjamin J., professor of economics, the City College of
the City University of New York:
Yearend total savings (table)______________________________
McGrath, Hon. Thomas C., Jr.:
“ First National City Bank Paying Interest on Its Time Deposits/*
article from the New York Times, February 21, 1961___ ____
McKenna, William F., general counsel, National League of Insured
Savings Associations:
Statement of_______________________________ .____________
Maisel, Hon. Sherman J., member, Board of Governors, Federal
Reserve System:
Statement on H.R. 14026 and related bills___________________
Martin, Hon. William McC., Jr., Chairman, Board of Governors,
Federal Reserve System:
Draft of legislation to establish a graduated system of reserve
requirements for all insured banks, to authorize Federal Reserve
banks to extend credit to all insured banks, and for other
purposes______________________________________________
Mitchell, Hon. George W., member, Board of Governors, Federal
Reserve System:
Statement of____________________________________________
Ottinger, Hon. Richard L.:
“Deming Cautions on Bid for Funds,” article from the New
York Times, May 10, 1966--------------------------------------------Letter from Harry P. Greep, president, and Rex G. Baker, vice
president, National League of Insured Savings Associations,
dated May 18, 1966_________ _______ __________________
Letter from Stephen Slipher, legislative director, United States
Savings & Loan League, dated April 28, 1966______________
Memo on certificates of deposit by Norman Strunk, executive vice
president, United States Savings & Loan League, June 8, 1966.
Patman, Hon. Wright:
“Analysts See Prime Rate Boost as ‘Bullish’ for Bank Stocks,
‘Bearish7 for Industrials,” article from the American Banker,
March 11, 1966____________ _______ ________________ ______
Announcement by Federal Home Loan Bank Board in response
to “minimal action taken by the Federal Reserve Board,”
Federal Home Loan Bank Board release dated June 28, 1966„
Announcement of increase in required reserves against time
deposits from 4 to 5 percent, Federal Reserve press release
dated June 27, 1966------------------------------------------------------Announcement of results of survey of time and savings deposits
a t member banks, Federal Reserve press release dated June 27,
1966____________________________________________________
Applicable tax rate and net operating earnings on common stock
of 7 New York City banks and 18 banks in other centers, 196065 (table)___________________ _____________ ______________
Applicable 1965 tax rate of 50 selected commercial banks, listed
in order of common capital accounts on December 31, 1965
(table).....................................................................................................
“Bank Loan Losses, Past and Present,” article from the New
England Business Review, May 1966_______________________
“Bank Profits: Another Record,” article from the Monthly
Review, April 1966----------------------------------------------------------“Banks Add $5 Billion of Tax-Exempts in 1965, Rise of 15.4
Percent,” article from the Daily Bond Buyer, May 19, 1966_
“Big New York Banks See N o Major Strain in June CD Expira


f*A m

fT ia W a l l

lit

Pafct
127
122
108
79
376
511
54
210

533
211
120
217
41
523

667

802
797
785
589
589
600
592
187
RQQ

Additional information submitted to the committee by—Continued
Patman, Hon. Wright—Continued

“CD’s a Problem for the Fed,” article from Banking, February
19§0____________________________________________ - ___
642
Correspondence between Chairman Patman and Hon. William
McC. Martin, Chairman, Board of Governors, Federal Re­
serve System, concerning issuance of short-term promissory
605
notes________________________________________________
Correspondence concerning the application of Federal securities
law to misleading bank advertisements of savings bonds (certifi­
cates of deposit)------------------- --------------- ---------------------610
Depositary liabilities to the public commercial banks, mutual
605
savings banks, and savings and loan associations (table)-------Editorial cartoon indicating Federal Reserve Board's weakness
and indecision to bring interest rate war to immediate halt,
from the Washington Star, June 29, 1966--------------------------803
Excerpt from Pratt s Letter, dated December 17, 1965------------645
“Fed Governor Would Add to Mutual Role,” article from the
Washington Post, May 18, 1966------ ----------------------- -------668
Federal Reserve press release announcing actions to reinforce
efforts to maintain price stability, and thus to foster balance in
the economy's continued growth and strength in the dollar’s
international standing, dated December 6, 1965------------------644
Federal Reserve statistics for the week ending June 15, 1966, from
the Washington Post, June 17, 1966 (table)-----------------------539
“Home’s Emergency Plan—Slump in Housing Starts Anticipated
by S. & L. Overseer Because of CD's,” article from the Wall
Street Journal, June 13, 1966____________________________
669
“How Banks Are Doing,” article from Bank Stock Quarterly,
March 1966____________ ____ _________________________
590
“Keep Your Family Out of the Crossfire,” advertisement of
the Watertown Federal Savings & Loan Association, Watertown,
Mass___- _______________ - ____________________________
638
Legal memorandum on obligations of Government agencies
eligible for purchases and as security for advances by Reserve
banks, from the Legal Division, Board of Governors, Federal
Reserve System, dated April 13, 1966_____________________
486
Legislative history of provision of Banking Act of 1933 prohibiting
651
payment of interest by banks on demand deposits__________
Legislative history of 12 CFR 217.1(e)(1), 217.135 whereby
banks which are members of the Federal Reserve System are
precluded from accepting savings deposits tendered by com­
mercial corporations operating for profit___________________
653
Letter from George Champion, president, New York Clearing
House, dated June 6, 1966______________________________
616
Letter to Hon. Edward P. Boland from Bradford R. Collins,
West Springfield, Mass., dated June 6, 1966_______________
613
Letter to Hon. Edward P. Boland from Otto A. Peterson, presi­
dent, Ludlow Savings Bank, Ludlow, Mass., dated June 20,
1966_____ ____ _________ _______ _____________________
614
Letter to Hon. Thomas P. O'Neill, Jr., from Lawrence H. Martin,
president, National Shawmut Bank of Boston, dated June 9,
1966___________________________________________ _____
614
Letter to Hon. William McC. Martin, Jr., Chairman, Board of
Governors, Federal Reserve System, from Grover W. Ensley,
executive vice president, National Association of Mutual Sav­
ings Banks, dated May 10, 1966, with a bulletin from the
611
NAMSB on industry deposit trends, April 1966____ _______
Maximum interest rates payable on time and savings deposits
(table)_____ - ______ __________ _______ _____ 139
Maximum rates payable on CD's under regulation Q (chart)*__
146
“Negotiable Time Certificates of Deposit,” article from the Fed­
eral Reserve Bulletin, April 1963.________ ________ ______
620
Outstanding negotiable certificates of deposit in denominations of
$100,000 or greater issued by weekly reporting member banks
(
t
a
b
l
e
)
.
___
137
- Outstanding negotiable time certificates of deoosit* anmiahv.
■




CONTENTS

VII

Additional information submitted to the committee by—Continued
Patman, Hon. Wright—Continued
Press release of the New York State Banking Department con- **ag«
cerning the illegality of issuance of negotiable promissory notes
by national banks in New York State_____________________
609
Replies to questions submitted to various agencies and organiza­
tions by committee letter dated May 31, 1966:
Ackley, Hon. Gardner, Chairman, Council of Economic Ad­
visers, dated June 2, 1966___________________________
428
Davis, Archie K., president, American Bankers Association,
dated June 3, 1966_________________________________
435
Fowler, Hon. Henry H., Secretary of the Treasury, dated
June 2, 1966______________________________________
430
Greep, Harry P., president, National League of Insured Sav­
ings Associations, dated June 2, 1966_________________
434
Horne, Hon. John E., Chairman, Federal Home Loan Bank
Board, dated June 3, 1966__________________________
433
Randall, Hon. K. A., Chairman, Federal Deposit Insurance
430
Corporation, dated June 2, 1966_____________________
Saxon, Hon. James J., Comptroller of the Currency, dated
June 2, 1966______________________________________
432
Strunk, Norman, executive vice president, United States Sav­
ings & Loan League, dated June 1, 1966_______________
437
Resolution approved June 23 by Committee on Banking and
Currency expressing sense of the committee that the Federal
Reserve Board act within 30 days to end excessive interest rate
785
competition_____________________ ._____________________
*‘Savings Accounts Fall by $1 Billion—Survey Points to Shortage
of Homebuilding Credit,” article from the New York Times,
May 9, 1966__________________________________________
20
Savings by individuals in the United States, 1963-65 (table).. 139, 648
“Should Negotiable CD’s Be Outlawed?” articles from Finance
magazine, May 1966:
“ Yes,” by Hon. Wright Patman, chairman, Committee on
Banking and Currency_____________________________
639
“No,” by Dr. Carter Golembe, Washington economic consul­
tant, American Bankers Association__________________
641
“Significance of the 1966 Business Outlook for the Savings and
Loan Industry,” address by Dr. Gordon W. McKinley, vice
president-economics, McGraw-Hill, Inc____________________
654
“Some Reflections on Interest Rates and Their Economic Impli­
cations,” by Warren L. Smith, professor of economics, Univer­
sity of Michigan_______________________________________
659
Telegram from American Bankers Association to Mr. Pat DuBois,
president, Independent Bankers Association, criticizing posi­
tion of IB A in support of measures to end rate war; witn reply
of Independent Bankers Association to ABA criticism______ 1
784
Telegram from Pat DuBois, president, and Reed H. Albig, chair­
man, Federal legislative committee, Independent Bankers
Association of America, favoring 4}£-percent ceiling on time
deposits______________________________________________
613
Telegram to Hon. George P. Miller from the board of directors,
Alameda First National Bank, Alameda, Calif., dated June 20,
1966_________________________________________________
615
“The Increase in the Discount Rate: Timing, Motivations, Eco­
nomic Effects,” article from the Conference Board Record,
January 1966--------------------------------------------------------------631
“The Savings War,” editorial from the New York Times, June 15,
1966________________- ________________________________
615
“ Time Deposit Reserve Requirements Raised To Restrain
Issuance of CD’s—But Boost by Reserve Board to 5 Percent
From 4 Percent Is Termed Too Mild for Much Impact,”
article from the Wall Street Journal, June 28, 1966_________
799
“Volume and Composition of Individuals’ Saving in 1965,” SEC
release No. 2117, dated April 14, 1966__ ____ - ____________
646
“ Working Capital of U.S. Corporations, December 31, 1965,”
SEC release No. 2118, dated April 15, 1966------------------------649



VIII

CONTENTS

Additional information submitted to the committee by—
-Continued
Randall, Hon. K. A., Chairman, Federal Deposit Insurance Corpora­
tion:
.
,
.
Maximum interest rates payable on time and savings deposits m
commercial banks prescribed by State laws or State banking
authorities (table)--------------------------------------------------------Rees, Hon. Thomas M.:
#
“Block to Building—Big Outflow of Savings From S. & L /s Forces
Cut in Mortgage Loans—Some Halt Lending for Now; Banks’
5y2 Percent Rate on Time Deposits Attracts Funds—Dis­
appointed Homebuyers,” article from the Wall Street Journal,
May 25, 1966_________________________________________
Statement of J. L. Robertson, Vice Chairman, Board of Governors,
Federal Reserve System, on H.R. 15173----------------------------Reuss, Hon. Henry S.:
Letter from John E. Home, Chairman, Federal Home Loan Bank
Board, dated June 15, 1966, with an attachment-----------------Letter from Stephen Slipher, legislative director, United States
Savings & Loan League, dated June 16, 1966, with a memo­
randum on CD situation------------------------------------------------Robertson, Hon. J. L., Vice Chairman, Board of Governors, Federal
Reserve System:
Activity in time deposits----------- --------- -------- ------------- ------Distribution of time certificates of deposit by size of certificate
and size of bank, with table_____________________________
Liquid asset flows________________________________________
Negotiable CD’s, 1960-66 (chart)---------------------------------------Outstanding negotiable time certificates of deposit at weekly
reporting member banks on selected dates (table)------------ —
Passbook savings accounts in commercial banks, mutual savings
banks, and savings and loan associations (table)-----------------Personal savings-type deposits—Commercial banks, selected areas,
Seventh Federal Reserve District (table)---------------------------Reply on behalf of all Board members to questions submitted to
each member of the Board of Governors, Federal Reserve
System, by Hon. Burt L. Talcott_________________________
Statement on H.R. 15173_________________________________
“Time and Savings Deposits, Late 1965 and Early 1966,” article
from the Federal Reserve Bulletin, April 1966______________
Time deposits—Balances at commercial banks, selected areas,
Seventh Federal Reserve District (table)__________________
Rousseas, Stephen W., professor of economics, New York University:
“Eurodollars: An Emerging International Money Market,” by
Ernest Bloch____________________ _____________________
“Eurodollar Certificates of Deposit,” by Stephen W. Rousseas
and Robert G. Hawkins, professors of economics, New York
University____________________________________________
Growth, economic stability, and short-run changes in the income
velocity of money______________________________________
1
Telocity Changes and the Effectiveness of Monetary Policy,
1951-57,” article from the Review of Economics and Statistics,
February 1960; and “Rejoinder,” from the Review of
Economics and Statistics, November 1960___ _____________
St Germain, Hon. Fernand J.:
Letter from Robert B. Perry, president, Washington Trust Co.,
Westerly, R.I., dated May 26, 1966_______________________
Telegram from Charles A. Post, secretary, Mutual Savings Banks
Association of Rhode Island, dated May 31, 1966___________
Telegram from Clarence H. Gifford, Jr., president, Rhode Island
Hospital Trust, dated June 3, 1966_______________________
Telegram from Kay Bowen, president, Old Colony Cooperative
Bank, Providence, E .I., dated June 1, 1966______ _____ ____
Saxon, Hon. James J., Comptroller of the Currency:
Outstanding negotiable certificates of deposit, by size of bank,
May 18, 1966 (table)......................... .............................................
Real estate loans, insured commercial banks (table).__ - - ____
_



Page

425

249
209
557
558
515
219
513
172
173
247
518
192
209
220
517
677
348
320

307
671
415
530
415
284

278

CONTENTS

IX

Additional information submitted to the committee by—Continued
Scanlon, Charles J., president, Federal Reserve Bank of Chicago:
Comment concerning access to Federal Open Market Committee Page
deliberations__________________________________________
670
Stanton, Hon. J. William:
“Here’s What People Say They Do About Saving and Investing
Money,” advertisement from the Columbus (Ohio) CitizenJournal, May 24, 1966__________________________________
288
Strunk, Norman, executive vice president, United States Savings &
Loan League:
“Housing Market Pinch Will Continue: Strunk/’ article from the
American Banker, May 26, 1966_________________________
674
Letter to Hon. William McC. Martin, Jr., Chairman, Board of
35
Governors, Federal Reserve System, dated April 11, 1966____
Memo to members of House Banking and Currency Committee on
certificates of deposit, dated June 8, 1966__________________
674
Sullivan, Hon. Leonor K.:
“Bankers Must Accept Major Responsibility for Future of
Present Financial System,” article from the American Banker,
May 19, 1966_________________________________________
492
“Bankers Warned To Use Caution in Promotion of CD’s,”
article from the American Banker, May 13, 1966___________
497
“Chicago Bank’s Ads H it 'Rate Race/ CD's,” article from the
American Banker, May 31, 1966_________________________
499
“Deming Cautions on Bid for Funds—Aggressive Bank Behavior
in Fight for Time Deposits Assailed by U.S. Aid—Warning
Flag Is Raised—Some Institutions Are Seen Overextending
and Taking on Excessive Risks/’ article from the New York
Times, May 10, 1966___________________________________
498
“Deming Concerned Over CD Rates, Sees Patman Rx Too
Strong/’ article from the American Banker, April 15, 1966;
with Treasury Department’s comments to the article________
143
“Plummer Urges More Restraint on CD R ates/’ article from the
American Banker, March 29, 1966________________________
495
“Treiber Warns NJBA on CD Dependence,” article from the
American Banker, May 20, 1966_________________________
496
Talcott, Hon. Burt L.:
Comments by the Federal Reserve Board staff on a paper by
Myron H. Ross entitled “Operation Twist: A Mistaken
Policy/’ with comment by Mr. Todd______________________
783
Questions submitted to each member of the Board of Governors,
Federal Reserve System, with Mr. Robertson’s reply on behalf
of all Board members___________________________________
192
Statement of____________________________________________
189
Todd, Hon. Paul H., Jr.:
“ ‘Operation Twist’: A Mistaken Policy?” article by Myron H.
Ross, from the Journal of Political Economy, April 1966------467
Report of the Committee on Financial Institutions to the Presi­
711
dent of the United States, April 1963_____________________
Widnall, Hon. William B.:
Letter from William F. Treiber, first vice president, Federal
Reserve Bank of New York, dated May 25, 1966----------------243




x

CONTENTS

APPENDIX
“Analysts See Prime Rate Boost as ‘Bullish’ for Bank Stocks, ‘Bearish’ for Page
667
Industrials,” article from the American Banker, March 11, 1966-.- —
Announcement by Federal Home Loan Bank Board in response to “minimal
action taken by the Federal Reserve Board,” Federal Home Loan Bank
802
Board release dated June 28, 1966-------------------------------------------------Announcement of increase in required reserves against time deposits from
797
4 to 5 percent, Federal Reserve press release dated June 27, 1966-------Announcement of results of survey of time and savings deposits at member
785
banks, Federal Reserve press release dated June 27, 1966--------------------Applicable tax rate and net operating earnings on common stock of 7 New
589
York City banks and 18 banks in other centers, 1960-65 (table)--------Applicable 1965 tax rate of 50 selected commercial banks, listed in order of
589
common capital accounts on December 31, 1965 (table)-------------------“Bank Loan Losses, Past and Present,” article from the New England Busi­
600
ness Review, May 1966________________________________________
“Bank Profits: Another Record,” article from the Monthly Review,
592
April 1966___________________________________________________
642
“CD’s a Problem for the Fed,” article from Banking, February 1966Comment concerning access to Federal Open Market Committee delib­
670
erations_____________________________________________________
Comments by the Federal Reserve Board staff on a paper by Myron H.
Ross entitled “ ‘Operation Twist’: A Mistaken Policy?” with comment
783
by Hon. Paul H. Todd, J r______________________________________
Correspondence between Chairman Patman and Hon. William McC.
Martin, Chairman, Board of Governors, Federal Reserve System, con­
605
cerning issuance of short-term promissory notes____________________
Correspondence concerning the application of Federal securities law to
misleading bank advertisements of savings bonds (certificates of deposit) _ 610
Depositary liabilities to the public commercial banks, mutual savings
605
banks, and savings and loan associations (table)_____ ___ __________
Editorial cartoon indicating Federal Reserve Board’s weakness and in­
decision to bring interest rate war to immediate halt, from the Washing­
803
ton Star, June 29, 1966____________________________ ____________
“Eurodollars: An Emerging International Money Market,” by Ernest
Bloch______________________________ ________________ _____ ___
677
645
Excerpt from Pratt’s Letter, dated December 17, 1965________________
“Fed Governor Would Add to Mutual Role,” article from the Washington
668
Post, May 18, 1966____________________________________________
Federal Reserve press release announcing actions to reinforce efforts to
maintain price stability, and thus to foster balance in the economy’s
continued growth and strength in the dollar's international standing,
644
dated December 6, 1965________________________________________
“Home's Emergency Ran—Slump in Housing Starts Anticipated by S. & L.
Overseer Because of CD’s,” article from the Wall Street Journal, June
13, 1966____________ ________________________________________
669
“Housing Market Pinch Will Continue: Strunk,” article from the Ameri­
674
can Banker, May 26, 1966____________________________ *________
“How Banks Are Doing,” article from Bank Stock Quarterly, March
1966________________________________________________________
590
“Keep Your Family Out of the Crossfire,” advertisement of the Watertown
Federal Savings & Loan Association, Watertown, Mass________ _____
638
Legislative history of provision of Banking Act of 1933 prohibiting payment
of interest by banks on demand deposits_______________
___
651
Legislative history of 12 CFR 217.1(e)(1), 217.135 whereby banks which
are members of the Federal Reserve System are precluded from accepting
SaVfit^B
tendered by commercial corporations operating for
653
Letter from George Champion, president, New York Clearing House, to
Hon. Wright Patman, dated June 6, 1966.___________________ _____
616
Letter from Robert B. Perry, president, Washington Trust Co., Westerly,
R.I., dated May 26, 1966......................... .
671
Letter to Hon. Edward P. Boland from Bradford R. Collins, West Spring­
field, Mass., dated June 6, 1966__________________________________
613




CONTEXTS

Letter to Ron. Edward P. Boland from Otto A. Peterson, president, Ludlow
Savings Bank, Ludlow, Mass., dated June 20, 1966_________________
Letter to Hon. Thomas P. O’Neill, Jr., from Lawrence H. Martin, presi­
dent, National Shawmut Bank of Boston, dated June 9, 1966________
Letter to Hon. William McC. Martin, Jr., Chairman, Board of Governors,
Federal Reserve System, from Grover W. Ensley, executive vice presi­
dent, National Association of Mutual Savings Banks, dated May 10,
1966, with a bulletin from the NAMSB on industry deposit trends,
April 1966____________________________________________________
Letter to Hon. William McC. Martin, Jr., Chairman, Board of Governors,
Federal Reserve System, from Norman Strunk, executive vice president,
United States Savings & Loan League, dated April 11, 1966_________
Memo to members of House Banking and Currency Committee on certifi­
cates of deposit, by Norman Strunk, executive vice president, United
States Savings & Loan League, dated June 8, 1966__'________________
“Negotiable Time Certificates of Deposit,” article from the Federal Re­
serve Bulletin, April 1963_______________________________________
Press release of the New York State Banking Department concerning
the illegality of issuance of negotiable promissory notes by national
banks in New York State_______________________________________
Report of the Committee on Financial Institutions to the President of
the United States, April 1963___________________________________
Resolution approved June 23 by Committee on Banking and Currency
expressing sense of the committee that the Federal Reserve Board act
within 30 days to end excessive interest rate competition_____________
“Should Negotiable CD’s Be Outlawed?” articles from Finance magazine,
May 1966:
“ Yes,” by Hon. Wright Patman, chairman, Committee on Banking
and Currency_____________________________________________
“No,” by Dr. Carter Golembe, Washington economic consultant,
American Bankers Association___ ___________________________
“Significance of the 1966 Business Outlook for the Savings and Loan
Industry,” address by Dr. Gordon W. McKinley, vice presidenteconomics, McGraw-JHill, Inc___________________________________
“Some Reflections on Interest Rates and Their Economic Implications,”
by Warren L. Smith, professor of economics, University of Michigan__
Telegram from American Bankers Association to Pat DuBois, president,
Independent Bankers Association, criticizing position of IBA in support
of measures to end rate war; with reply of Independent Bankers Associa­
tion to ABA criticism__________________________________________
Telegram from Pat DuBois, president, and Reed H. Albig, chairman,
Federal Legislative Committee, Independent Bankers Association of
America, favoring 4^-percent ceiling on time deposits_______________
Telegram to Hon. George P. Miller from the board of directors, Alameda
First National Bank, Alameda, Calif., dated June 20, 1966__________
“The Increase in the Discount Rate: Timing, Motivations, Economic
Effects,” article from the Conference Board Record, January 1966____
“The Savings War,” editorial from the New York Times, June 15, 1966_^
“Time Deposit Reserve Requirements Raised To Restrain Issuance of
CD’s—But Boost by Reserve Board to 5 Percent From 4 Percent Is
Termed Too Mild for Much Impact,” article from the Wall Street
Journal, June 28, 1966--------------------------------------------------------------“Volume and Composition of Individuals’ Saving in 1965,” SEC release
No. 2117, dated April 14, 1966___________________________________
“ Working Capital of U.S. Corporations, December 31, 1965,” SEC release
No. 2118, dated April 15, 1966-----------------------------------------------------




XI

614
614

611
672
674
620
609
711
785

639
641
654
659

784
613
615
631
615

799
646
659




TO ELIMINATE UNSOUND COMPETITION FOR SAVINGS
AND TIME DEPOSITS
MONDAY, MAY 9, 1966
H
C

ouse of

o m m it t e e o n

B

R

e p r e s e n t a t iv e s ,

a n k in g an d

C

urren cy

,

Washington, D.G.
The committee met, pursuant to notice, at 10:10 a.m., in room 2128,

Rayburn House Office Building, Hon* Wright Patman (chairman)
presiding.
Present: Representatives Patman, Barrett, Ashley, Moorhead,
Stephens, Gonzalez, Weltner, Gettys, Todd, Ottinger, McGrath, Han­
sen, Annunzio, Rees, Widnall, Harvey, Clawson, Stanton, and Mize.
The C h a i r m a n . The committee will please come to order.
We are meeting this morning for the purpose of considering H.R.
14026, concerning certificates of deposit and related matters.
(The bill, H.R. 14026, follows:)
[H.R. 14026, 89th Cong., 2d sess.Jf
A BILL To prohibit insured banks from issuing negotiable interest-bearing or discounted
notes, certificates of deposit, or other evidences of indebtedness

Be it enacted ly the Senate and House of Representatives of the United States
of America in Congress assembled,
S e c t i o n 1. Section 18 of the Federal Deposit Insurance Act (12 U .S .C . 1828)
is amended by adding at the end thereof the following new subsection:
“ (j) The Board of Directors shall by regulation prohibit insured banks from
making or issuing any negotiable certificate of deposit, note, debenture, or other
negotiable obligation which is issued at a discount, or is interest bearing, or other­
wise yields any return.”
S e c . 2. The amendment made by section 1 of this Act shall apply only with
respect to obligations of insured banks incurred or issued after March 31, 1966.

The C h a i r m a n . The term “negotiable certificates of deposit” is
a fancy label for a piece of paper which many suspect is a vehicle for
the most ordinary type of misuse and abuses. Technically speaking,
a negotiable certificate of deposit is a debt security evidencing a de­
posit liability of the issuing bank. It is a form of time deposit and is
subject to the Federal Reserve Board’s regulation Q as well as ap­
plicable reserve requirements. Maturities are as short as 30 days.
CD’s are insured up to the $10,000 FDIC limit and in negotiable form
may be quickly disposed of by the original depositor. A secondary
market has developed in CD’s and CD’s trade in this market at prices
reflecting the reputation of the issuing bank, maturity schedules, and,
most of all, prevailing interest rates.
One hundred years ago the banks were authorized to issue their own
money and many of them did issue their own money. That money
was very similar in purpose and effect to the CD’s of today. How


1

2

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

ever, today’s version is interest-bearing currency and could be just
as prevalent over the country as the money that was issued by the
banks before the War Between the States many years ago.
Negotiable CD’s are a very recent innovation, having grown from
virtually nothing in 1961 to over $17 billion of outstanding liabilities
as of May 1966. Typically, a negotiable CD represents a large deposit
by a business corporation of hundreds of thousands of dollars with a
maturity of 1 year.
Current posted interest rates exceed 5 percent. Smaller CD’s, both
in negotiable and nonnegotiable form, are currently being promoted
by commercial banks very aggressively and are being offered to savers
and consumers in the form of certificates often called savings bonds.
While the CD must be considered innocent until proven guilty to the
satisfaction of the Congress, substantial evidence gathered over the
past year or so compels us at this time to drop other important matters
and consider whether or not remedial legislation is necessary.
My bill, H.R. 14026, would prohibit the issuance by a federally in­
sured bank of any negotiable certificate of deposit, note, debenture,
or other negotiable obligation yielding a return. The purpose of this
bill is to curb specific abuses that may be found and not to hamper
or impair the use of financial instruments for legitimate purposes. I
will welcome suggestions for modification as the testimony progresses.
H.R. 14026 is thus a vehicle for discussion and testimony should not be
limited to its precise terms.
It is not the only bill on this subject pending before the committee,
and I am informed that members plan to introduce several additional
bills this week.
This series of hearings represents the first full-scale public airing
of a new problem—the CD problem—and will necessarily be extensive
with all sides and points of view to be heard. We may run 2 weeks
or more.
Some of the questions we will want to investigate involve the rela­
tionship between CD’s and—
1. Monetary policy;
2. High interest rates:
3. The thrift industry:
4. Homebuilding and the mortgage market;
«> The Government securities market:
*.'
6. Bank safety and liquidity; and
7. Unlawful activities.
This morning our witnesses represent an important segment of the
thrift industry. We will hear first Mr. Norman Strunk, of Chicago,
111., executive vice president of the United States Savings & Loan
League, and then Mr. Everett C. Sherbourne, representing the National
League of Insured Savings Associations.
The committee will seek information from these witnesses whether
the well-established public policy to encourage thrift and home©wnership is being jeopardized or in any way impaired by the phe­
nomenal growth of CD’s in recent years. That the thrift industry
has long been recognizeiias Congress’ primary tool in mobilizing
savings for home financing and home building is beyond dispute.
Beginning with the act creating the Federal Home Loan Bank System
in 1932, the Home Owner’s Loan Act of 1933 establishing a system of




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

3

federally chartered associations, and legislation in 1934 providing
share account insurance, the savings and loan industry has carried
out this congressional policy in a most satisfactory manner, and the
industry has grown in assets to over $130 billion. The vast majority
of associations are small, independent, locally owned institutions and
it seems to me that Congress has a particular responsibility to make
certain that these thrift institutions continue to effectively meet the
housing needs of heir communities.
Thrifty people with savings accounts are better citizens and home­
owners are better citizens. So we must be sure that the great goals
of our thrift industry are not threatened by CD’s.
Mr. Strunk, we are glad to have you, sir, and you may proceed as
you wish.
You may identify yourself and identify the gentleman accompanying
you for the record.
STATEMENT OF NORMAN STRUNK, EXECUTIVE VICE PRESIDENT,
UNITED STATES SAVINGS AND LOAN LEAGUE; ACCOMPANIED
BY STEPHEN SLIPHER, STAFF VICE PRESIDENT AND LEGISLA­
TIVE DIRECTOR, UNITED STATES SAVINGS & LOAN LEAGUE

Mr. S t r u n k . Thank you, Mr. Chairman.
I am Norman Strunk, of Chicago, 111., and I am executive vice presi­
dent of the Savings & Loan League and I have with me, Mr. Stephen.
Slipher, of Washington, our legislative director.
We welcome this opportunity to express our views on the general
subject of certificates of deposit and to discuss generally our views on
the current situation in the savings market and the availability of
money for homebuying and homebuilding.
We consider it most constructive that the distinguished chairman
of the House Banking and Currency Committee has introduced H.R.
14026 and has called these hearings which will provide a much-needed
spotlight on the spreading use of certificates of deposit within the
commercial banking system—a development which appropriately may
be viewed with considerable concern by the American people. It cer­
tainly deserves a searching inquiry by the committee of the Congress
that has responsibility for legislation in the field of finance.
The United States Savings & Loan League represents more than
5,000 individual savings and loan associations. We are very familiar
with the flows of savings, real-estate financing, and the needs of the
country with respect to mortgage credit for homebuilding and homebuying. We do not claim to be experts in monetary theory and the
money markets, but we can see the effect of the increasing use of certifi­
cates of deposit on savings flows and the effect on the amount and cost
of money available to ordinary people who buy homes.
Our interest in certificates of deposit, however, is broader than the
effect upon the cost of credit to individuals. This country needs a
strong commercial banking system and we believe that any new devel­
opment in the banking field which might in any way impair the useful­
ness, and particularly the soundness and liquidity of commercial
banking is a m a t t e r of broad public interest and should be the subject
of careful inquiry.



4

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

We think that the sale by the large banks of negotiable certificates
of deposit and the issuance of deposit certificates with definite maturi­
ties and long-term contractual promise to pay certain rates of interest
in the ordinary savings market are practices that can threaten not
only the liquidity but also the basic soundness of the commercial bank­
ing system.
A certificate of deposit is the issuance by a commercial bank of a
receipt for funds deposited with the bank for a specific length of time
and bearing a specific rate of interest. Negotiable certificates of de­
posit began to be promoted, very actively, 5 or 6 years ago by major
New York City banks. Probably no one had any idea that these cer­
tificates would develop in such a short time to the tremendous volume
that has resulted. Certainly no one would have thought 5 or 6 years
ago that negotiable certificates of deposit held by corporations would
have produced the kind of liquidity crisis in the New York money
markets that developed last December.
In practice a negotiable certificate of deposit is very much like a
Treasury bill, like the obligations issued by the various Federal
agencies including the Federal Home Loan Bank System and the
Federal National Mortgage Association. Certificates are very similar
to commercial paper issued by finance companies and various cor­
porations. In the space of a very short period of time negotiable cer­
tificates of deposit have developed into the second most important
short-term money market instrument—exceeded in dollar volume only
by short-term obligations of the U.S. Treasury.
The use of certificates of deposit in significant volume placed the
banks, for the first time, in the contractual position of having to pay
a certain rate of interest on obligations maturing on specific dates.
While in fact demand deposits may be said to have 1-day maturities,
the issuance of demand deposits, carefully handled, does not produce
the recurring liquidity problems as can the issuance of I O U’s with
definite rates of interest and definite maturities. In contrast, the typ­
ical passbook savings business as practiced by the commercial banks
and as practiced by thrift institutions, does not impose immediate and
recurring liquidity problems as does the issuance of a large volume
of certificates of deposit with contractual rates of interest and matur­
ing on definite dates.
The payment of interest on large, short-term corporate deposits of
this type and making loans with this kind of “hot money” has in­
troduced a new element of vulnerability into the commercial banking
business.
This element of vulnerability is simply that during a period of ris­
ing interest rates, there is mounting difficulty in “rolling over” matur­
ing certificates of deposit. This element of vulnerability has been
apparent to observers of the commercial banking business and to many
bankers themselves. It also has been quite apparent to the Federal
Reserve Board, and from time to time members of the Board of Gov­
ernors expressed some concern about the potential liquidity problems
which accompanied the buildup in negotiable certificates of deposit.
On October 22, 1965, George Mitchell of the Federal Reserve Board
declared in a speech in Chicago that the money behind certificates of
deposit is the £most vulnerable” of all bank deposits because corporations and other holders of certificates are likely to respond quickly to



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

5

relatively small increases in interest rates on other short-term cer­
tificates.
The vulnerability of the commercial banking business to changes
in interest rates at a time when a large volume of certificates may be
maturing was dramatically evidenced by the certificate of deposit crisis
last December. With interest rates rising and with a large amount
of negotiable certificates of deposit coming in the Federal Reserve
Board boosted the maximum permissible ceilings on time deposits to
51/2 percent. The Board has acknowledged that the increase in time
deposit ceilings was essential if the commercial banks were to be able
to renew approximately $3^ billion in negotiable certificates of
deposit scheduled to mature in December.
The Board also admitted before the Joint Economic Committee of
Congress that if the increase had not been granted, banks would have
been forced to call many outstanding loans in order to meet these
maturing certificates of deposit .
A number of things have concerned us about the events of last
December. We believe, for example, that in view of the fact that the
commercial banking business is $400 billion in size, the apparent
inability of major banks in the United States to liquidate $3^/2 billion
in maturing obligations should be a matter of proper concern for the
Congress of the United States.
Another thing that has disturbed us is that despite the great cer­
tificate of deposit crisis of last December, nothing much seems to
have been done to avoid a repetition of this crisis. On the contrary,
the amount of negotiable certificates of deposit has increased from
$16.3 billion in November 1965 to $17.4 on April 20, 1966. It is well
known that several commercial banks in this country have failed in
great part as the result of excessive and unwarranted use of certificates
of deposit.
With short-term interest rates again pushing upward and with some
of the largest commercial banks already paying 5y 2 on certificates
of deposit, a question that must be faced is: What happens if interest
rates continue to move up? Will some banks find even a 5y 2 ra^
inadequate to keep their certificates ? Will the Federal Reserve Board
find itself under renewed pressure to boost these ceilings even further
in order to permit the major banks to secure renewals in the coming
months ?
We hope that during these hearings this committee will inquire
into what the regulatory bank agencies are doing to police the issuance
of certificates of deposit and what steps they are taking to avert
another “CD crisis.”
Again, I am not a specialist in central banking or in monetary
policy, but it does occur to me that the widespread use of certificates
of deposit might force the Board of Governors and the Open Market
Committee to do certain things just to ease the banks through maturity
periods—things that the Board of Governors would not otherwise
want to do or have to do.
It also occurs to me that the hands of the Board of Governors
should not be forced in certain directions as a result of excessive use
of certificates of deposit.
We have the feeling in the savings and loan business that this is
a new money market instrument the effects of which are not yet fully



6

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

understood, that a new type of banking lias developed to a point where
it is far greater than anyone expected it to develop and we are con­
cerned that deposit certificates, while viewed with some concern by
the bank regulatory authorities, have not been subjected to any known
controls.
Possibly the banking agencies have begun to enforce some informal
and unwritten rules with respect to the use of the certificates—their
amount in proportion to total deposits of the bank, the spacing of
various maturities, and the payment of “bounties” of this money.
However, we have seen no published guidelines or regulations and we
fear this new phase of commercial banking is still largely an unregu­
lated and unsupervised operation.
While the problem of negotiable certificates is an important one and
deserving of thorough study, we believe that the spread of certificates
of deposit into the savings market can be equally significant. The fact
that the new time deposit ceilings of 5i/2 percent are being used ex­
tensively by commercial banks to recruit savings-type money—the
kind that always has been in the passbook type of account in the com­
mercial banks—may in the long run be substantially more important.
Many thousands of small banks in our country appear to be just as
concerned as savings and loan people. The concern on the part of
many small banks was reflected in the speech of the president of the
American Bankers Association on January 31 in which he warned
that the “unrealistic generous rates paid on certificates of deposit
threaten to siphon funds out of smaller banks and, therefore, disrupt
Credit in many of ^ communities of the country.”
The Federal Reserve has, in effect, lifted ceilings off of the savings
market and opened the way for unrestrained competition in the savings
market on the part of the commercial banks. The history is clear of
what happened the last time we had competition of this type. The
promotional-minded banks begin to pay unusually high rates and then
m order to protect themselves, more conservative banks are forced to
increase their rates to prevent their deposits from being siphoned
away. Ihrough this process, the price paid for savings money has
skyrocketed even though the overall pool of savings may not have
increase . Then to meet these higher costs, banks are forced to reach
*
■ ™ *or loans in order to secure the earnings and high
™ ier
kT
r
c?™
Pe?fate f°r the higher deposit costs.
We believe that the Board of Governors wanted to avoid rate wars
m p S T Wlth SaT £ s ?f the ¥ nd that has been lodged in comstitntmr»cann Sar!n^S
and
the savings accounts of our intho
? eCeni^
^ year *n ^ scussing the increase in
™te
^ in c r e a s e in the time deposit ceiling the
Sent™
Federal Reserve Board made the following staterate*fo^sa^imfs ^eDos?t<TS T ?h asrPosely refrained from raising the maximum
competitive relaHonSiin*
80 m or<3er to minimize the impact on

savings-type money. We expressed the view at that time that



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

7

regardless of this statement of intent, unless tlie Federal Reserve took
some action to restrict the use of the new time deposit ceilings to very
large denomination amounts, it was inevitable that the new rates
would be used extensively for savings money.
The action of the Board of Governors in permitting the 5^-percent
rate on CD’s may have been necessary to prevent the major corpora­
tions and investors from withdrawing massive sums from CD’s on
maturity dates. The manner in which this problem was solved, how­
ever, has created a whole set of new problems.
In spite of the December optimism that relatively few banks would
raise rates and only in modest increments, and that other savings in­
stitutions would not be materially affected, we find the following ac­
tual developments:
(1) Large numbers of banks have increased their interest rates
substantially with aggressive promotion.
(2) The certificate of deposit has been made to resemble an or­
dinary savings account by reducing the required deposit to $1,000,
$100, or even less; by shortening the maturity, and by providing for
automatic renewal.
(3) The adverse effect on the flow of savings into savings and loan
associations and savings banks has been severe and the situation is
worsening monthly. Those commercial banks unable or unwilling to
compete at the new rates are equally affected.
It is pointless to debate where the fault lies and it is not our inten­
tion to dwell on who, why, or what caused things to go astray. We
just recommend that everyone involved recognize the facts as they
now exist and proceed to take steps that will restore balance and pre­
vent a recurrence of the problems of last December.
At the time of the change in regulation Q last December, the United
States Saving & Loan League and others predicted that the result
would be an acute tightening in mortgage credit. We are rapidly
arriving at this point. As this committee knows, the great bulk of
funds for home mortgage lending comes from two types of institutions
primarily—savings and loan associations and savings banks. Savings
and loan associations located in communities throughout the country
traditionally have provided from 40 to 50 percent of all the funds
for home mortgage lending. Mortgage interest rates do not fluctuate
widely as do the rates on Government bonds and short-term loans.
For many of our institutions, rates in tlie range of 5 to 6 percent
are charged year in and year out regardless of conditions in the money
market. Beyond this, many State laws prohibit charging more than
6 percent or sometimes 7 percent for a mortgage loan on a home.
Rates beyond this under many State laws are usurious.
The earnings of savings and loan associations today and our ability
to pay high rates of interest for funds of the public are limited by the
fact that our money is invested in mortgage loans made when interest
rates were lower—last year, 2 years ago, 5 years ago, or 10 years ago.
The earnings from a long-term portfolio of mortgage loans do not
increase very rapidly when money tightens and interest rates go up
in the money market. It is partly to provide some offset to this in­
flexibility that the United States League has submitted to your Hous­
ing Subcommittee legislation that would permit savings and loan as­



8

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

sociations to make limited investments in loans on household furnish­
ings and loans on mobile homes.
The commercial banks, as short-term lenders with their funds in­
vested in short-term business loans and high-interest-rate consumer
loans, are able to charge more in periods of high interest rates, and
commercial bank loans can be adjusted to higher interest rates more
readily. Bank earnings, thus, can increase very rapidly in periods of
rising short-term interest rates and they can pay higher rates on
savings.
In many instances today, commercial banks can afford to pay inter­
est rates of 5 and 5% percent for the savings of the public much more
easily than can savings and loan associations and savings banks.
In great part because the commercial banks are bidding actively
for sayings funds at rates beyond those which can be paid by institu­
tions investing in mortgage loans—and trying to provide economical
home financing: as is our mandate from Congress—today we are not
attracting savings funds for mortgage lending in a satisfactory vol­
ume. The first 3 months of this year our net increase in savings was
about $1,300 million compared to $1,900 million last year and as high
as $3 billion in the first quarter of 1963.
Adverse savings flows, together with new restrictions on the avail­
ability of Federal home loan bank funds for mortgage lending and
some decrease in loan repayments, suggests that in the last 8 months
of this year our institutions will do well to make $11 billion in mort­
gage loans compared to $17 billion in mortgage loans in the last 8
months of 1956. At $20,000 per loan, the $6 billion drop represents
300,000 home loans that will not be made during the remainder of this
year, as compared to loan value last year.
This will mean for the year as a whole an overall loan volume of $18
billion as compared to a volume of $23.9 billion during 1965. The 1966
loan volume represents a huge sum of course, and means that savings
and loan associations will be continuing a substantial participation in
the mortgage market.
Nevertheless, the lending capacity of the business will fall far short
of the demands of American home buyers. This means more and more
careful screening of borrowers. If you are a superb credit risk, credit
will be available; however, many American families who would ordi1066
mortgage loans will probably not make the grade in
Not all of this decline in the availability of funds for mortalo-e lendmg is due to the very aggressive promotion by commercial banks of 5
percent CD s packaged in denominations for easy sale to the public
and m a manner designed to attract money of the kind that typically
goes into passbook savings accounts. We are, naturally, suffering from
s

t he a ir ’ and that

At this point let me make it perfectly clear that a loss in s a v i n g , or
a reduction m the growth of savings, does not per se have any Averse
effect on the financial condition of our business. Financial institutions
go into default because of bad loans and investments, not because Z
pie withdraw savings. The savings and loan business today is n a
strong, safe, financial condition. The ratio of our reserves to our s a v ­
ings is increasing; loan delinquencies and foreclosures are dropping



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

9

appraisal practices have been tightened; and associations are main­
taining much more complete records on the condition of their loan
portfolios. Furthermore, as a result of legislation enacted in 1961, the
reserve ratio of the Federal Savings and Loan Insurance Corporation
has more than doubled in 5 years. The Corporation has far greater
funds, absolutely and relatively, than ever before. The tiny number of
savings and loans and other financial institutions which have been in
difficulty has, of course, been well publicized. But there are over 6,000
strongly, well-managed savings and loan associations doing business.
In short, there is nothing in the picture to cause concern to the Ameri­
can saver. It is the home buyer who faces problems.
While savings and loan associations have been forced to reduce their
mortgage lending, the fact remains that we have been more actively
in the mortgage market longer this year than other lenders. The com­
mercial banks that made such great promises a few years ago about
getting into the mortgage loan field have, in fact, virtually ignored it
in the past year.
The commercial banker never has been very enthusiastic about mak­
ing mortgage loans and he certainly does not make mortgage loans
when there is a large demand for short-term, high-interest-rate loans
from business and then the bank can put more and more money into
loans on automobiles.
A severe drought in mortgage funds will very definitely reduce the
volume of homebuilding the latter part of this year. We think that
not only will there be a great reduction in the volume of loans for
homebuilding, but there will even be a shortage of money for the pur­
chase of existing homes.
In all frankness, it has appeared to me that the policies of the bank­
ing authorities in letting the certificate of deposit business at the
banks grow bigger and bigger and spread throughout the banking
community seem to ignore completely the welfare of specialized sav­
ings institutions and the vital role of these institutions in providing
a steady flow of home mortgage credit. There must be an understand­
ing of the fact that the typical buyer of a home and the typical
homebuilder generally has weaker credit and fewer opportunities to
borrow money than corporations and the sponsors of large apartment
projects.
Savings and loan associations were created to assure a steady source
of credit for typical families for whom homeownership is a dream
and, we hope, a realizable dream. The country needs a type of in­
stitution where home buyers can go and have their needs taken care
of in a convenient manner, where interest rates are not excessive, by
people who understand the home mortgage loan transaction; a place
where typical home buyers can go and not have to compete for money
against big corporations and business borrowers.
While we share the concern of many about the practice of com­
mercial banks in the issuance of large negotiable certificates of de­
posit, our main problem is the effect on the typical home buyer aris­
ing from the practice of commercial banks using the certificate de­
vice to attract the small savers and the money that typically has gone
into passbook accounts in banks ^and savings and loan associations.
This relatively new development in the growth of savings certificates
obviously was not anticipated when certificates of deposit first de­



10

UNBOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

veloped a few years ago and it obviously was not anticipated last
December when the Federal Reserve perm itted the commercial banks
to pay as high as 5% percent on CD’s.
Instead of the typical $50,000 or $100,000 certificates negotiated
with a corporation, these new certificates are now aimed at the pass­
book savings market. Their increasing use “runs around the end 7 of
the Federal Reserve’s prudent decision not to raise the ceiling on or­
dinary savings. Banks are promoting these new certificates with full
page ads, with m aturities as short as 90 days, and with minimum
amounts as low as a few dollars. Even those with $1,000 or $2,500
minimums are exactly in the bracket that constitutes the heart of
our savings funds.
This use of certificates of deposit for ordinary savings was not
predicted by the Federal Reserve. In fact, the Federal Reserve Board
has publicly cautioned the banks against this disruptive competition.
So has the Federal Deposit Insurance Corporation. The hectic com­
petition has also been criticized by many leading bankers. But it
continues.
As a minimum program of action, we make the following recom­
mendations to this committee—I emphasize this is a m inim um :
(1) Certificates of deposit must have a single m aturity. I t is the
practice now to allow the saver to sign up for one m aturity and then
permit him to take a shorter m aturity at a lower rate. This, in ef­
fect, gives him the best of all worlds.
The fixed m aturity would emphasize th at a certificate of deposit is
a distinct banking instrument and not an ordinary savings account.
(2) The practice of automatic renewals of certificates of deposit be
eliminated. The automatic renewable feature makes this certificate
more closely resemble ordinary savings. I t puts the bank in a bind,
committing it for a given rate over a longer period of time. It also
contributes to some very misleading advert ising.
(3) Amend the banking laws to prohibit misleading advertising and
provide the Federal Reserve, the F D IC , and the Comptroller of the
Currency with specific authority to require th at advertisements c a n y
a true story of the services being offered. I believe the committee has
in its files numerous examples of ads featuring “25-percent interest7
’
which is, of course, for a 5-year period. I t is very confusing because
interest rates traditionally are expressed on an annual basis. We
would expect that with appropriate encouragement from this com­
mittee the banking agencies could eliminate most of these abuses with­
out new laws.
I f these relatively minor changes can be made, the certificate of
deposit will resume more of its traditional function and there will be
much less disturbance in the savings market. A t the same time, it
would not be such a precipitous change as to inject new problems for
commercial banks. We do not consider these as antibanking sugges­
tions. We feel they are consistent with the recent and urgent pleas
fo r moderation in banking called for by Mr. Archie Davis, the presi­
dent of the American Bankers Association.

Unless something is done to ease this hectic rate war, savings and
loan associations face retrenchment in home lending which could
trigger a major recession in housing.



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

11

In conclusion, let me say that the savings and loan business of over
$130 billion in assets—I suspect it is a little less after the month of
A pril—is and will continue to be, a vital segment of the financial
community, and an important factor in the national economy. O ur
leaders are responsible men. We fully recognize th at the savings and
loan business does not operate in a vacuum; that it must conform to
national policy; that it must be subordinated to national needs. We
are not against competition for savings and mortgages. O ur con­
cern is th at the chain of events may have led to “over reaction” and
that the pinch applied to the housing m arket may be unintendedly
severe.
We appreciate this opportunity to present our views and we are
confident that this committee will approve appropriate and construc­
tive legislation.
The C h a i r m a n . Thank you, Mr. Strunk.
Now, if it is all right with the members of the committee, we will
hear the representative of the other savings and loan associations and
interrogate the two together.
So without objection, you may proceed, Mr. Sherboume. You may
identify yourself for the record and also identify the gentlemen who
are accompanying you.
STATEMENT OF EVERETT C. SHERROURNE, PRESIDENT, CITY FED­
ERAL SAVINGS & LOAN ASSOCIATION, WHIPPANY, N.J.; ACCOM­
PANIED BY WILLIAM J. KERWIN, ASSISTANT EXECUTIVE
DIRECTOR, AND WILLIAM F. McKENNA, GENERAL COUNSEL,
NATIONAL LEAGUE OF INSURED SAVINGS ASSOCIATIONS
Mr. S h e r b o u r n e . My name is Everett C. Sherbourne and I am
president of the City Federal Savings & Loan Association of W hippany, N. J., with 10 ofeces in 3 adjoining counties.
I have with me here Mr. W illiam J . Kerwin, assistant executive di­
rector of the National League of Insured Savings Associations and
Mr. W illiam F. McKenna, general counsel of that organization.
Mr. Chairman, I want to express the appreciation of the National
le a g u e for this opportunity to appear l>efore this distinguished com­
mittee of the Congress. In the past, you have done much to develop
the Nation’s system of private financial institutions and, in particular,
the th rift and home financing industry of the Nation. I would also
like to commend the committee for this current series of hearings which
we hope will lead to legislation th at will halt the widespread misuse
by commercial banks of negotiable certificates of deposit and other
time deposit instruments.
The carte blanche given commercial banks bv the Federal Reserve
Board over the last several years to buy money from every conceivable
source at ever-increasing interest rates—climaxed by the increase in
the permissible rate ceiKng on time deposits to 5.5 percent last De­
cember—has already caused unduly harsh effects on savings associa­
tions and the housing and mortgage m arkets of this country. To per­
m it continued uncontrolled use of these destabilizing money instru­
ments by commercial banks w ith the encouragement of the Federal
Reserve B oard will, unless checked by legislation, result in a chaotic



12

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

impact upon the Nation’s thrift institutions and the entire housing
market.
The wisdom of your committee’s consideration of this subject at
this time and the severe and rapid changes that are occurring in the
savings and housing markets as a result of the December change in
regulation Q is confirmed by the fact that although the Federal Re­
serve Board itself just released a survey of post-December rate ad­
justments made by commercial banks, it announced this morning a new
survey because “the market for savings has been undergoing rapid
change in recent months.5 I can testify that is certainly the case in
’
the State of New Jersey. It may be more than coincidence that the
new survey announced today reaches the news media at the same time
that this committee begins its hearings.
The volume of negotiable certificates of deposit has grown, with the
consent of the Federal Reserve Board, from a negligible amount in
1961 to the enormous sum of over $17.5 billion. The use of this in­
strument to purchase bank deposits of short duration at high rates
has caused continuous liquidity crises in the commercial banking sys­
tem almost every 3 months because of the maturity concentrations in
the quarterly periods in which corporations pay dividends and taxes.
There appears to be little doubt that the volume of outstanding ne­
gotiable certificates of deposit constitutes a money market force which
the Federal Reserve Board is unable to cope with except by increas­
ing the rates banks may pay for these deposits. An analysis of the
Board vote in December on the discount rate increase indicated that
with one exception even those members voting against the discount
rate increase voted in favor of increasing regulation Q from 4.5 to
5.5 percent. The volume of maturing December negotiable certificates
of deposit and the liquidity crises facing the banks using them ap­
parently left the Reserve Board with no other choice. That is a
statement made to me bv presidents of banks in New Jersey.
This situation was again repeated in March and April of this year
according to the financial journals, and as a result many banks, spear­
headed by the largest banks in the country, went to the 5.5-percent
maximum.
The December action of the Federal Reserve Board not only per­
mitted banks to boost their rates sharply on time deposits and cer­
tificates of deposit but also greatly shortened the time period in which
such a deposit would be eligible for the new higher rates. Prior to
December 6, banks were authorized to pay up to 4 percent for time
deposits and certificates of 30 to 90 days and 4.5 percent on those of
90 days or more. The December order, however, increased the rate
ceiling to a flat 5.5 percent and permitted this rate on any time deposit
or certificate with a maturity of 30 days or more. Thus, time deposits
by the Board’s action came exceedingly close to becoming demand de­
posits. The pervasive influence of high interest rate and short dura­
tion spread to nonnegotiable deposit instruments such as savings cer­
tificates, savings bonds, and these are now being offered to the public
by banks in most of the larger metropolitan areas of the country.
Comparisons of the composition of the increase in time deposits
of weekly reporting member banks for the first 4 months of 1964,
1965, and the current year illustrates dramatically the Federal Re­
serve Board statement in its press release today that “the market for
savings has been undergoing rapid change in recent months.”



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

13

This table summarizes the composition of the increase in time de­
posits in the first 4 months of each year for the years 1964, 1965,
and 1966:
Time deposits of weekly reporting member "bcmks—Individuals, partnerships, and
corporations
[Dollar amounts in billions]
Year

Increase

Amount
1964..................... ........................
1965............................................. .
1966...............................................

$1.640
2.626
4.760

Other time deposits

Negotiable CD's

$1,441
2.158
1.405

Percent
87.9
82.2
29.5

Amount
$0.199
.468
3.355

Percent

1 .1
2

17.8
70.5

There are two substantive matters involved in this committee’s
current consideration of the Federal Reserve Board’s administration
of regulation Q and the annual increases in permissible interest rate
ceilings paid on time deposits which the Board has authorized in each
of the last 4 years. One deals directly with the liquidity of the bank­
ing system arising from the concentration of huge volumes of time
deposits in ever-shortening maturities at the same time that bank
loan-deposit ratios approach or surpass alltime highs.
The second is the unduly severe and potentially chaotic impact these
Board-authorized increases in interest rates have on savings institu­
tions and the residential housing market.
The effect of these developments upon savings institutions and hous­
ing markets is not an exercise in theoretical possibilities; they exist
right now. I attended a meeting in Atlantic Citv a few days ago and
the possibility in July of withdrawals that may be created by the CD
market is one which is causing such great concern that the institutions
find it difficult to determine w^hat their lending programs can be for
the next 6 months or even for that matter, for the next 3 months.
Both savings and loan associations and savings banks experienced
substantial losses in savings last month. These losses are not being
recouped. And further substantial reductions in existing savings held
by these institutions accompanied by massive distortions in housing
credit are a certainty unless some relief is given by this committee
and the Congress.
In my own institution, in December, we were making some loans at
5.25 percent, a substantial portion at 5.5 and an equally substantial
proportion at 5.75 and some at 6. Our institution has about $137
million in assets and is the second largest savings and loan association
in the State.
In the last 3 months we raised the rates progressively with the hope
of cutting down on the volume of loans, the ever-increasing number
of loan applications that we were receiving and at the present time
we are at 6 percent flat. Never in the entire 25 years that I have been
in this institution have we had such a rapid rate of increase in such a
short period of time.
Funds available for residential mortgage lending are the tightest
in the history of my long association with the savings and loan business. Mortgage interest rates have risen abruptly as a result of the
high interest rates authorized by the Federal Reserve Board, and in




14

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

my judgment will go even higher. The raid on existing savings
balances held by savings institutions resulting from the rechanneling
of savings funds to the commercial banks has forced most savings
and loan associations to reduce sharply forward loan commitments
and marshal their resources to combat an unknown and imprudent
and unsound spiraling interest rate competition for a limited supply
of savings funds.
The Federal Reserve Board’s policy of increasing interest rates has
not produced additional savings. Net additions to savings in savings
and loan associations, savings banks, and commercial banks are less
for the first quarter of this year than any similar period since 1961.
They should have had reason to anticipate this would result because
of the economic markets and economic authority that the interest rate
does not have much of an effect upon the increase in additional savings.
While it is recognized that the demand for credit accommodations in
many sectors of the economy is strong, such demand does not warrant a
deliberate policy designed to prevent savings institutions from compet­
ing for new savings or even holding balances they already have.
The savings and loan business provides a unique service to the
American public—encouraging thrift in order to provide funds on a
long-term basis for housing our citizens. We are proud of our
contributions to the American people, the American economy, and the
American way of life. We have done this with small institutions of
less than $50 million. By necessity, our mortgage loans are long-term
extending over 20- and 30-year periods so that the average citizen can
enjoy the benefits of homeownership when he needs the space to raise
his family. Our mortgage portfolios turn over slowly, and we can­
not adjust earnings rapidly enough to meet the interest rate competi­
tion from commercial banks that enjoy lower money costs principally
because they do not pay anything for demand deposits, nor are we
able to compete with them because we can’t issue that kind of instru­
ment. Savings and loan associations are vitally interested in stable
and rewarding dividends to all savers as well as stable mortgage
interest rates to homebuyers. We have a great respect for the com­
petitive American economy and free enterprise, since we are dedicated
to providing two of its major bulwarks. However, we do not believe
that the rewards for our services should take the form of an abandoned
ship buffeted by the churning, uncontrolled, higli-interest-rate waves
produced by the money managers.
I have a great deal of respect for the manner in which the Federal
Reserve Board has throughout the past 5 or 6 years exercised control
over the money market to give us a progressive and sound economy.
But frankly, I am astounded at this particular development and in all
frankness, when it was issued I didn’t have any reason to anticipate
the results here today and the problem is one that requires early action.
During the last period of “tight money” in 1959 it is interesting to
note that the Federal Reserve Board did not change the interest rates
commercial banks could pay on savings deposits. From January, 1,
1957, to January 1,1962, permissible interest rate ceilings under regu­
lation Q were 3 percent for savings deposits and 3 percent for time
deposits of 6 months or more, 2.5 percent for deposits of 90 days to 6
months, and 1 percent for deposits of 30 to 89 days. Evidently, the



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

15

Board believed then that there was no economic sense in changing
regulation Q to permit an unsound competitive interest rate war for
the then limited supply of savings.
Since 1962, however, the policy pursued by the Board via regulation
Q has changed considerably. Permissive interest rates have been ad­
justed upward four times. Moreover, the period of time a deposit
had to be held to qualify for higher rates was progressively shortened.
The distinction between 30-day money and term money of 6 months
and longer disappeared, and it would appear that the Board consist­
ently condoned and furthered the concept that money of any duration
was suitable to support a banking business that was constantly making
longer term loans and investments. As late as November 23, 1964,
time deposits of 30 to 89 days were limited to an interest rate of 1
percent. Now, such short deposits can be paid 5.5 percent. It would
appear that these changes in the regulation were directly related to
the growth in negotiable certificates of deposit. Bates were consist­
ently increased to permit the volume of these certificates to increase.
As the volume grew, the liquidity exposure increased. Now, the unstabilizing effects of this policy by the Board have spread to almost
all forms of nonnegotiable time deposits as well.
Until the rate change of last December, most of the four upward
rate adjustments in regulation Q were attributed to adjustments re­
quired by our international balance-of-payments position; i.e., to
maintain interest rate levels which would keep domestic funds at home
and attract foreign investments. Nonetheless, commercial banks in­
creased their foreign loans and investments $1 billion in each of the
years 1961-63, and m 1964, the year in which regulation Q was changed
to permit banks to increase interest rates from 1 to 4 percent on 30- to
89-day deposits, and from 4 to 4.5 percent on over-90-day time de­
posits, the banks increased foreign loans and investments by $2.4 bil­
lion. The logic of increasing interest rates payable on time deposits
domestically for the stated purpose of curtailing the flight of funds
abroad, and then to have that money channeled into the commercial
banking system which proceeded to lend it in the very same foreign
markets is contradictory on its face.
The record of the Federal Reserve Board’s administration of regu­
lation Q speaks for itself. The essence of the discretionary authority
vested in the Board by the Congress is the maintenance of a sound
banking system and the prevention of uncontrollable upward, spiraling interest rates whose inevitable aftermath is distorted and chaotic
credit markets and massive dislocations in housing and other major
industries.
During the last several years, the savings and loan business has been
the subject of tight regulation by the Federal Home Loan Bank
Board. Among these restrictions is a Board ruling adopted August
16, 1964, sharply restricting the use of certificates of deposit by sav­
ings institutions for liquidity purposes, an indication of the concern
that has developed in Government over the CD instrument.
The Congress now has the opportunity to act to prevent further
misuse of regulation Q. We would urge that consideration be given
to a redefinition o f a “time deposit” t 6 give recognition to the fact
that “demand” and “time” deposits are different and require a time
differential o f m o r e than 30 dfcyS. A 6- to 9-month differential would



16

UNSOUND COMPETITION FOE SAVINGS AND TIME DEPOSITS

be desirable. The issuance of “savings bonds” or “savings certificates”
at rates higher than the rate ceiling on savings accounts should be
terminated.
Finally, the National League would urge this committee to take
whatever action is necessary to prevent regulation Q from being used
to create chaotic destructive competition in the Nation’s money mar­
kets and the accompanying adverse impact on home financing opera­
tions.
We also believe that the CD problem is just one facet of a competi­
tive struggle between banks on one side and financial intermediaries
such as thrift institutions on the other. We observe that commercial
banks have been recipients of many favorable actions by Government
agencies and Congress to facilitate their growth and development in
recent years, while similar treatment has not been accorded the finan­
cial intermediaries. We believe this committee could render a major
service by a well-considered study of competition between various
financial institutions and ways in which these institutions—both
banks and thrift institutions—can broaden their services to the Amer­
ican people.
Thank you.
The C h a i r m a n . Thank you very much.
You gentlemen have each given us a good paper on the subject and
we thank you very much. It has been very helpful to our committee.
The basic trends behind the CD from the commercial bank stand­
point are not fully discussed by either one of you in your statements
before the committee. I just have been wondering whether or not,
under the law, they are permissible for commercial banks. Commer­
cial banks, of course, have a great privilege—they have the exclusive
sole privilege of accepting deposits for checking account purposes.
No other financial institution may offer checking accounts. They
have an exclusive in that respect, which gives them a great advan­
tage. It is a wonderful opportunity for them to create goodwill for
themselves, and they take full advantage of it, as they should.
But if a person were to go to the Comptroller of the Currency and
ask for a charter for a new bank on the representation that he wanted
to establish a bank in a town that is already well supplied with banks,
the Comptroller of the Currency would probably say, well, now, we
usually establish banks where there is a need, a demand for services
for banks that are not being filled at the present time. And, where
are you going to get your deposits? These other banks seem to take
care of all of the deposit needs of the people in the community and
this person who is an applicant for the charter would state, well, we
will get our money by outbidding other people all over the Nation,
New York, Chicago, Detroit, Dallas, and elsewhere, and we will run
our bank by outbidding all others. I do not think that would be a
very good reason for a charter and I am sure that the application
would be turned down.
In this particular case that we are discussing, we find a similar or
comparable situation. But, although they are not using this as a
reason or argument to get a new charter, they are using the establish­
ment, having been created already, the charter issued, for just that
same purpose. I just do not believe it was ever contemplated or
intended under the law that CD’s would be used by commercial banks



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

17

in that way, and I think the committee would be interested in a good
legal presentation along that line, and if you gentlemen, representing
the savings and loan industry, which we are all very proud of, over
$120 billion, and one of the greatest financial institutions in our
country—if you would prepare such a paper and give legal arguments,
I think our committee would like to see it.
Would you give some consideration to that, Mr. Sherbourne and
Mr. Strunk ?
Mr. S t r u n k . Yes, sir; that is a very good idea. That particular
line of approach has not been considered by us.
The C h a i r m a n . The way I see this, this is a critical time. In 1932
I was here when banks would not encourage homebuilding. Their
terms were too particular and interest rates too high. And Mr.
Hoover at that time, representing his party, now the minority party,
he thought it was so serious, he asked for passage of the Federal Home
Loan Bank Act which caused the creation of all these Federal savings
and loan associations. Before that time they were referred to as homebuilding associations, and building and loans and many other different
kinds of names, but this concentrated the name in one phrase, savings
and loan associations.
Now, since that time, you people in that business have done a won­
derful job, just a wonderful job. You take California, for instance,
it has become the State with the greatest population of any State in
the Union, I think solely because of home construction in a State
which was provided by the savings and loans. So I look with great
disfavor on anything that is done that would retard the savings and
loan associations, because they have done such a wonderful job and
because they have been built up by necessity.
We just had to have them. Now, then, the banks—we need banks—
they are wonderful—we are greatly obligated and entitled to them for
the very fine service they have rendered in time of war and in time of
peace. We are not trying to destroy the banks. We want them to
move ahead. But I, personally, feel that there is a place in our econ­
omy for both the savings and loans, the thrift institutions, and the
commercial banks, without one being permitted to destroy the other.
If I am any judge of this, if this goes on, something has got to give.
Both of them will not go indefinitely this way. I do not see how they
could do it. I am going to do my best to try and find out the answer.
We have no prior commitments about it. We do not know enough
about it at this time, but we know there should be an answer. I am
going to try to find it in these hearings.
Mr. Ashley ?
Mr. A s h l e y . To what extent, in your opinion, are certificates of
deposit responsible for the rising interest rates that we find through­
out our financial structure?
Mr. S h e r b o u r n e . The table that I read during the course of my
remarks indicated the extent to which the competition from these high
rate CD’s has caused a tremendous increase in the time deposits of
commercial banks. You remember, the rates reversed themselves and
the major part of the increase in the last 4 months was other than
negotiable CD’s.
Now, that money came largely from savings and loan associations
and savings banks. I mentioned that at this convention I attended.



18

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

There was one manager after another who spoke about tracing $50,000
and $ 100,000 deposits that a particular bank absorbed, which happens
to be concentrated on advertising the high rate on these certificates
of deposit. It has been a major factor in the distortion of the savings
trends in the last 3 or 4 months.
Mr. A s h l e y . I s the impact of CD’s on the savings and loan industry
measurable?
First of all, can you tell the extent to which depositors, shareholders,
as the case may be, might be withdrawing funds for deposit in return
for CD’s in commercial banks and to what extent do savings and loans
themselves make use of CD’s ? To what extent do they put their funds
into commercial banks in return for certificates of deposit ?
Mr. S t r u n k . Mr. Congressman, we have some of our institutions
that place their liquid funds in commercial bank CD’s in preference
to buying Treasury bills, for example. I don’t have any dollar figures
on that, but it is fairly small. Now, the effect of all this commercial
CD competition—I think this is fairly well measured by the savings
flows we had in the last 3 or 4 months—by the flows of savings in and
out of our institutions. We are taking in less than we are paying out
in withdrawals, more. In the first 3 months of 1965, we had a net
gain in savings of $1.9 billion and in the first 3 months of this year,
a net gain of $1.3 billion.
Mr. A s h l e y . 1.9 in 1965 ?
Mr. S t r u n k . Yes, sir; in the first 3 months. In the month of April,
when this really hit us, in April of last year we had a net decrease in
savings of $94 million. This year, in April we have a net decrease in
savings in excess of $500 million. We don’t have any final figures yet.
Now, about half of our associations pay their dividends quarterly
and the other half pay them semiannually. Those that are paid in
quarterly were not in the red in April, so this $500 million net savings
loss in the month of April was felt by about half of our institutions,
half in terms of dollar volume and we are looking forward to what
we call a very red July unless something happens, when all of our
institutions will pay a dividend and when all of our business will be
subjected to the full brunt of high rate commercial bank CD com­
petition.
As a result of these savings losses by half of our business in April,
as a result of all the concern about July, and as a result of a lesser gain
in savings in the first 3 months of this year, we are substantially re­
ducing our loan commitments and volume of loans that we can make.
There will be quite a bit of lending going on in the next several
months because we have a lot of loans in the pipeline. But our
people are putting nothing new in the pipeline, which means you are
going to get a drastic reduction in the amount of loans, not only for
homebuilding, but also for home buying, because our people don’t
know how to make any commitments as to funds available in the next
4 or 5 months.
The most important thing for us, of course, is to keep meeting with­
drawal requests. If we have major demands on our institutions in
July, we will honor those demands and we will honor loan commit­
ments that have been made. But we are being a little leery about
making future commitments in the face of a very dismal savings
picture.



UNSOUND COMPETITION FOE SAVINGS AND TIME DEPOSITS

19

Mr. S t e p h e n s . Would the gentleman yield? I would like to ask
you this question. Is it not true that the Federal Home Loan Bank
Board has directed the boards in the regions not to make any loans
before taking a careful look at commitments after that date ?
Mr. S t r u n k . Yes, sir.
Mr. S t e p h e n s . Am I correct in that ?
Mr. S t r u n k . You are absolutely correct and this, again, has pro­
duced major changes in the attitudes of our people with respect to the
kinds of loans they are willing to commit—now we will be able to
commit for loans only amounts in relation to savings flows and loan
repayments and we are, frankly, quite pessimistic about that. When­
ever a lender is pessimistic about his sources of cash, you can be sure
he tightens up on his loans.
You asked about the effect on interest rates----The C h a ir m a n . Will the gentleman yield for one suggestion, Mr.
Ashley ?
In this morning’s New York Times, Monday, May 9, 1966, on the
front page there is an article, “Savings Accounts Fall by $1 Billion.
Survey Points to Shortage of Home Building Credit.” April was the
“Worst Month in History.”
I ask unanimous consent to put this in the record at this point.
Mr. A s h l e y . Could it be following this ? He is right in the middle
of a sentence.
The C h a ir m a n . At the end of your time. Without objection, so
ordered.
Mr. S t r u n k . Whenever lenders are short of funds, they tighten u p .
Mr. A s h l e y . Obviously, the increased use of CD’s is a factor in the
increasing cost of money. What you have been discussing is the dis­
mal picture that confronts your industry with respect to decrease in
amounts of savings; is that not so ? This is not totally attributable to
the increasing use of certificates of deposit—the action taken by the
Federal Reserve Board with respect to increase of rediscount rates is
a factor, and any number of factors that contribute to this picture;
is that not correct ?
Mr. S h e r b o u r n e . Well, Congressman, I think the primary impact
comes from these high-rate CD’s. The level at 5% percent, many of
us began to ask the question, which they didn’t answer, is that what
the Board thinks is a permissible money rate ? Is it what it should be ?
Will the banks go up to it? Well, gradually they did.
Let me cite what happens and why we believe the impact of CD’s
is primarily responsible for the substantial withdrawal and which has
cut down, our net increase to a point where we are no longer able to
take care of the mortgage volume that has been coming to our doors.
Most of our customers are plagued—are attracted by these adver­
tisements that state that you can get a CD for 3 months, or 6 months,
or 9 months, with a rate of 5% percent, and if you withdraw within
that period, perhaps on not more than 30 days’ notice, sometimes no
notice at all, you will get a basic rate of 4 percent—somewhat under
what we are paying as a current rate on all our savings.
Now, actually, you can see this is going to be very attractive be­
cause the most that they stand to lose is perhaps, a quarter of a per­
cent, but they may gain as much as 1 percent if they last and stay in
for the full SO 60-, or 90-day periods and since most of our savings
-,



20

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

and loan savers are long-term savers, they are not concerned with hav­
ing to withdraw before this time.
I cited to you earlier the increase in time deposits during the first
4 months of 1964, and our customers would naturally go into a nonnegotiable certificate of deposit and not into a negotiable CD. They
are not acquainted with that market anyway, too much. The increase
in other time deposits where our money would go, if they went to a
CD, was in the first 4 months of 1964, $199 million, and in the first 4
months of 1965, $468 million, and in the first 4 months of 1966, $3,055
million. The difference is so great that I submit, Congressman, it is
reasonable proof of the statement we are making to you.
Mr. A s h l e y . Thank you very much.
(The article from the New York Times previously referred to fol­
lows:)
[From the New York Times, May 9, 1966]
S a v in g s A c c o u n ts F a l l b y

$1

B i l l i o n —S u r v e y P o i n t s t o S h o r t a g e o f H o m e ­
b u ild in g C re d it

(By H. Erich Heinemann)
An estimated decline of $1 billion in savings accounts at savings banks and
savings and loan associations has accentuated the fear that a shortage of credit
for homebuilding may develop during 1966, a survey of government and trade
association economists indicated yesterday.
The billion-dollar outflow in April of savings accounts from such institutions
compares with an outflow of only about one-tenth as much in April 1965.
The savings banks and savings and loan associations—often referred to col­
lectively as the thrift industry—are the principal suppliers of funds for home
mortgages.
WORST MONTH IN HISTORY

Official statistics will not be ready for several weeks, but on the basis of initial
tabulations and estimates by usually well-informed economists, it seems likely
tnat the thrift industry has just weathered its worst month in history.
The $1 billion drop was not taken by economic experts as any sign of lack of
confidence in the thrift institutions, but rather as evidence—among several fac­
tors—of the impact of the upward spiral in interest rates that has gripped the
economy m recent months.
Paradoxically, however, major commercial banks in big cities, which have
been aggressive in bidding for individual savings recently, do not appear to have
been particularly successful In improving their share of the savings market.
*
commercial banks gains in time deposits (on which interest rates of up
n ° .« h in r ree-t ar! allT e?> have been j™* about offset by S e s in their
4 pereent j
deposlts <on which commercial banks may not pay more than
fixtdtM r iil^ A ^ iv ,W r t ^ iC«-,the d?F°si!?r af rees t0 leave with the bank for a
Period. A savings deposit, on the other hand, can generally be withdrawn
at any time on presentation of the passbook
s
y 06 wunara" n

a s is ssafirawftssS?Hi S r 5'“Fr

consumer durable goods.
purcnase of major appliances and other
For all its massive size, the national declin* nf <ti miu™ *
was heavily concentrated in two arpnZTthf
bllj ion in savings accounts
savings banks in New York lost Sttm
i
-a
west COasts* Mutual
and Jlvings and loaT J S 5 . K J S
^
a net loss of $400 million in their savings accounts tor
recorded

la r ^ V S : ^
The 15
month, for a total drop since March 29 (the first o f l “gra«days“ a ? ftf eni



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

21

of the first quarter when deposits could be withdrawn without loss of earnings)
of $312 million.
It seems highly unlikely that anything like this rate of decline will continue
for long. Major mutual savings banks in New York City are expecting a fairly
.substantial net inflow of funds during May. And in California—where there has
been something of a “crisis of confidence” because of widely publicized financial
troubles at a few savings and loan associations—the forecast for May is for a
net inflow of funds.
NOT A NORMAL OUTFLOW

There is no question but that the April outflow was far beyond anything that
could be attributed to “normal” withdrawals to pay taxes or of accumulated
earnings.
The April outflow was clearly the consequence of the broad escalation of in­
terest rates that has occurred in the economy in recent months.
The thrift institutions, which get their income largely from investments in
home mortgages, have been, in many cases, simply priced out of the market.
Their mortgage portfolios turn over slowly, and when interest rates rise rapidly,
as they have lately, the income of the savings banks and savings and loan as­
sociations cannot keep pace.
This, in turn, limits their ability to compete for funds with other, alternative
opportunities for investment.
Federal regulatory agencies are considering changes in their policies that
would allow savings and loan associations more freedom in raising dividend rates
in order to meet competition. But it is lack of earnings, far more than regula­
tory shackles, that is likely to limit the actual dividend increases that take place.
Commercial banks, for their part, generally have far greater ability to adjust
their lending rates to changing market conditions, and also to adjust the rates
that they pay in order to attract the money that they lend.
The commercial banks have taken advantage of this flexibility, in some cases
increasing the rates they pay on time deposits to 5% percent, the highest now
permitted by law. Very few savings banks pay more than 4y2 percent, and 5
percent is generally the top rate at savings and loan associations, except for
special, long-term accounts.
Yet it is a paradox of the present situation that the big-city commercial banks
which have been the most aggressive in raising rates in order to bring in new
deposits, have not been particularly successful.
BIG LOSS FOB BANKS

During the crucial month of April, the 380-odd commercial banks that report
figures to the Federal Reserve on a weekly basis—this includes the vast majority
of banks with assets of more than $100 million—lost $1.7 billion in passbook
savings accounts, which under the law may not yield more than 4 percent.
But in the same period, these same banks gained almost $1.9 billion in time
deposits, which under the law may yield up to 5% percent. Only $309 million
of this $1.9 billion increase was in the form of the large-denomination ($100,000
and up) negotiable certificates of deposit that major money-market banks sell to
large corporations.
To many observers, this juxtaposition of loss and gain is undeniable evidence
that large commercial banks, at least, have simply been shifting deposits from
4 percent passbook savings accounts to time accounts yielding 5 percent or more.
Interestingly, smaller commercial banks seem to have been somewhat more
successful in attracting funds than their big-city cousins. The Federal Reserve
estimates that total time and savings deposits of all commercial banks increased
about $2 billion during April, with about 60 percent of the increase coming in
banks with assets of less than $100 million.
The chances are that the bulk of the small-bank increase has been generated
in local communities, rather than being pulled, en masse, from competing thrift
institutions.
But if major commercial hanks are just barely breaking even in their quest
for funds—and smaller ones aren’t acting as a major force in the money market—
then to whom, or to what, did the thrift institutions lose $1 billion during April?
There are no clear-cut answers, but it is likely that many factors are involved.
Personal spending is high, and people are spending an exceptionally large propor­
tion of their disposable income, while saving correspondingly less.
63-496—66------3



22

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

For example, the Commerce Department figures that only 4.8 percent of after­
tax income was saved during the first quarter, the lowest level since early 1%3,
and down from 5.6 percent in the last quarter of 1965.
Then, too, yields on corporate and municipal bonds are at historically high
levels, and interest on U.S. Government savings bonds—on which income taxes
can be deferred—has just been raised to 4.15 percent.
Beyond this, mutual fund sales—including the almost $400 million raised by
the Manhattan Fund—have been soaring, and some of this money has come from
savings banks and savings and loans.
All of these factors have undoubtedly combined to pull funds out of the thrift
institutions, the traditional mainstay of finance for housing.
As C. A. Duncan, Jr., president of the United States Savings & Loan League,
put it earlier this week, “The housing industry could become the ‘Appalachia’ of
the American economy later this year.”

The C h a i r m a n . Mr. Widnall?
Mr. W i d n a l l . Thank you, Mr. Chairman.
Mr. Strunk, Mr. Sherbourne, we certainly welcome you before the
committee today and I think you have made some very strong con­
structive suggestions as to how to handle certificates of deposit in the
future. They unquestionably have had a very severe impact, not just
on the whole building market, but on many of the other forms of
activity within the economy. It behooves us to really understand what
is going on, what is affected. The complete magnitude of it and what
will eventually happen if allowed to go on in a similar manner in the
future, unchallenged and without any form of direction by the Con­
gress or any other agency of the Government, is something we are in­
terested in.
I know that the builders are terribly bothered about existing money
rates. Some conversations that I had over the weekend, they ^vere
worried about the fact that a lot of builders were going to go into
T
bankruptcy one of these days. They said that it is not just a question
of loans, the terms of loans, but they also have been affected more and
more by unreasonableness on the part of communities with respect to
restrictions on the builders as they come in to make their developments
and require so many things of them that it is almost impossible to go
ahead with a building program. I think it would be very, very wise for
our own committee, the Subcommittee on Housing, to go into this as
well as the effects of the CD which we are now doing through the full
committee.
We had some testimony the other day on the participation sales
program as contemplated for FNMA and Mr. Barr, who was testify­
ing for the Treasury, stated that they now have $33 billion in Govemment-held assets. By the end of this year, if this program did not
go through, he mentioned it would be $39 billion, and within a couple
of years $50 billion, and then, a few years, later, about $100 billion.
It is contemplated that if this program goes into effect, that $8 billion
in Government-held assets would be sold through the trustee and is­
suing them through sales participation to buyers throughout the
country.
What effect do you think FNMA extended activity in the partici­
pation sales at the 5%-percent yield rate, will have on your business?
Mr. Sherbournb. I don’t know where the money is coming from
to take care of all these demands and requirements^ Because if they
sell $8 billion, they are going to dry up that much more-“-that much in
funds at a time when, as we are testifying here this mornittg, we have



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

23

doubts, because of the CD competition, that our institutions can han­
dle the volume of loan applications that are developing at the present
time.
Mr.

W id n a ll.

Mr. Strunk, would you comment on that, please ?

Mr. S t r u n k . I have been concerned that these certificates will pro­
vide a new kind of competition for the savings of people, particularly
if they package them and market them in units of $500 to $1,000. It
can provide another kind of CD competition for thrift institutions.
That is my major area of concern.
Mr. W i d n a l l . Is it not true that the short-term Treasury’s some­
times have had an impact ?
Mr. S t r u n k . Yes, sir; during, particularly, 1959, I believe, when
the so-called magic fives were issued, our institutions didn’t feel that
as much as the savings banks did, but the savings bank people tell me
that they had a lot of money withdrawn for investment into the socalled magic fives. Any time any kind of money market rate goes up
and where people can buy them in convenient units, it has disrupted
forces again in the savings market.
Mr. W i d n a l l . Are you not bothered by the fact that a multibillion
Federal long-term instrument such as FNMA’s participations is above
the 414-percent statutory bond limit and will, therefore, permanently
take things in a direction that will be opposed to the building industry %
Mr. S t r u n k . We are concerned about it, and hope it doesn’t de­
velop excessively.

Mr. W i d n a l l . Thank y o u .
The C h a ir m a n . We want to go around first on the 5-minute rule.
I feel that all members should have the privilege of asking all the
questions they desire to ask about this and we are doing a lot of pi­
oneering here.
It is an unexplored field and I think we ought to give them plenty
of time. We will first take 5 minutes around.
Mr. Moorhead?
Mr. M o o r h e a d . Thank you, Mr. Chairman. I would like to ask you
gentlemen, are there such things as nonnegotiable certificates" of
deposit ?
Mr. S t r u n k . Yes, sir; the typical certificate issued is a nonnegoti­
able CD.
Mr. M o o r h e a d . What you are concerned about is the negotiable
CD’s ? Is that correct ?
Mr. S t r u n k . We are concerned about both of them. The n o ilnegotiable CD is the one that has the most direct effect upon the
savings and loan business, but the negotiable CD is a new money
market instrument, and we are concerned about the effect of that
upon banking in general, and the liquidity of the banking business
in general. We are concerned that it will produce another kind of
CD crisis such as we had last December. That was the crisis of
negotiable CD’s. But so far as we feel it in our institutions through­
out the country, that is a problem of nonnegotiable CD’s.
Mr. S h e r b o u r n e . Congressman, if I might add something to that
point. I believe the reason that the rate was raised to 5y2 percent and
the reason that the banks have been coming out with nonnegotiable
CD’s in $25, $50, and $100 denominations is because the negotiable
CD market became a problem to them.



24

UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

They anticipated that billions were maturing and the corporations
would probably use them for expansion purposes, inasmuch as the
tight money market was making it difficult for them to get the money
they might need for the expansion programs. So, really, what is hap­
pening at this point, is that the nonnegotiable market is getting down
to the level of the little saver and the billions produced thereby are
taking care of the problem that is developing in the negotiable market.
Mr. M o o r h e a d . The point that I am making is that H.R. 14026 only
covers negotiable CD's. Is this sufficient in your judgment, or should
the bill be broadened ?
Mr. S h e r b o u r n e . In my own opinion, the bill might well b e
broadened.
But, may I say that when it comes to matters of this kind, this is
the first time that I have ever testified in a matter relating to com­
mercial bank practice. As an industry, we like to take care of our
own problems and simply ask your powers from Congress. Where
someone goes too far you do this to another type of institution—at
this point, the negotiable CD market is, in the opinion of so many
money market authorities, a problem that we can safely say regulate
it. But. if you want our additional opinion, it would be that you
ought, at the same time, to redefine time deposits and redefine the
amount of issuance for these nonnegotiable certificates, so that, in
eltect, you don’t have a conflict within regulation Q, itself, where they
say that the rate can be a certain amount on savings accounts, and
they permit a nonnegotiable CD bearing a higher rate of interest to be
issued in such small denominations that it is, in effect, another type of
savings account.
We think that is an area that your committee ought to consider.
Mr. M o o r h e a d . I would like to ask Mr. Strunk this: I notice on
page 13 of your testimony, you give us three recommendations. Is it
my understanding of your testimony that you would favor legislation
that enacted these three things, rather than—or in place of H.R.
14026?
Mr. S tru n k . No, Mr. Congressman, we support H.R. 14026. We
are really concerned about CD’s and this would solve a problem. We
would prefer the word “nonnegotiable” come out and the CD’s in
general be prohibited. This, certainly would solve the problem. If
less sweeping measures are proposed, we would support them, too. In
any case, we think that steps need to be taken to deal with the con­
sumer CD’s. These particular steps outlined in my testimony, we
think, do not require legislation.
Mr. M oorhead. I see.
Mr. S tru n k . We would hope that the Board of Governors would
put these into effect right away. I f the Board of Governors doesn’t,
then, legislation could be enacted in this direction. These are mini­
mum steps as against dealing with the problem head on. as does
H.R. 14026.
Mr. M oorhead. Referring to page 12 of your testimony you talk
about the typical $50,000 or $ 100,000 certificates. Suppose we enacted
legislation which put a floor on the CD’s, let us say, $50,000 or $ 100,000.
Would this either solve the problem or go a long way toward solving
the problem?
Mr. S tru n k . It would make the savings and loan man very happy
Digitized for and go a long way to solving the problem of the savings market It
FRASER


UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

25

wouldn’t necessarily solve the basic problem of this new instrument,
but it would go a long way to solving the problem with respect to
some flows of savings.
M r . M o o r h e a d . You use this term, “runs around the end” of the
Federal Reserve’s decision. It seems to me that it could be very well
argued that where the CD is negotiable, or where you can turn it in
without notice for a lower interest rate, that it is an end run aroundthe provision prohibiting interest on demand deposits.
M r . S t r u n k . And an end run around the prohibition against pay­
ing more than 4 percent on the passbook accounts. These certificates
are very much like a passbook account. The Federal Reserve wisely
prohibited bank competition in that area, but the way the banks have
used the certificates, they are getting passbook money into the higher
rate savings certificates, savings bonds; the variety of new instru­
ments that the bankers are creating.
Mr. S h e r b o u r n e . Congressman, I think you must note, too, that
the small savings CD is not generally issued in commercial banks in
our area. In most States, I believe, the CD, the negotiable CD’s, are
issued by one or two or half a dozen of the largest banks. They have
not generally been used yet by the small banks—the small banks, by
that, I mean $200 million, $100 million.
Mr. M o o r h e a d . Thank you both very much.
The C h a i r m a n . Mr. Stephens.
Mr. S t e p h e n s . Thank you, Mr. Chairman. I would like to ask
your opinion—both of you—of this: In 1961, when the liberalization
was made of regulation Q, there was a billion dollars, estimated, to
be in the certificates of deposit. About a year ago when the Bank­
ing and Currency Committee made a visit to Philadelphia, I think—
a little over a year ago—I saw in the Wall Street Journal where the
certificates of deposit- amounted to $14 billion. Now, I have observed
since that time that it is somewhere between $16 billion and $18 billion.
In a 5-year period, then, we have seen the deposits go from a bil­
lion to $17 billion. Now, all of that money had to come from some­
where. It has not come from savings and loans, where has it come
from ?
Mr. S t r u n k . I think most of this money—it comes from corpo­
rations.
Mr. S t e p h e n s . Their earnings?
Mr. S t r u n k . Their liquid funds. It may be retained earnings, it
may be temporary proceeds of the sale of securities, it may be cash
built up in anticipation of a dividend payment. These are liquid funds
of corporations. Before the CD practice started, these funds were
invested in Treasury bills, invested in obligations of the Federal
Home Loan Bank System, intermediate credit banks and in commercial
paper, and much of it used to be in checking accounts of commer­
cial banks. The commercial banks have, in effect, developed a new
money market instrument in competition with the U.S. Treasuiy and
with the Federal agencies and with other corporations that issued
commercial paper.
Mr. S t e p h e n s . In other words, I do not know whether it is still in
effect now, but a corporation could not have a regular savings ac­
count. Has this been relaxed \
Mr. S t r u n k . It may be a little bit to get around that. The corpo­
ration cannot invest in a passbook account in a commercial bank.




26

UNSOUND COMPETITION FOR SAYINGS AND TIME DEPOSITS

Smaller corporations put money into our institutions, but savings in­
stitutions like ourselves, frankly, don’t like to take large sums that
may be quickly withdrawn. Savings institution people look with con­
siderable concern when you get to $50,000 or $100,000 deposits. It is
not our kind of money.
The negotiable CD started out with maturities of $500,000 and $1
million. This is short-term corporate liquidity. That is where the
$15 billion, $16 billion buildup came. Since last December, we have
a buildup in consumer CD’s, as we call it, sold to people as against
the corporate treasurer.
Mr. S t e p h e n s . That is where the squeeze has come in ?
Mr. S t r u n k . That is right; where it is happening to us. I am
satisfied that the issuance of some $15 billion of competition for U.S.
Treasury obligations had something to do with squeezing the U.S.
Treasury a bit. You put $15 billion of something in the short-term
money market in competition with short-term Treasury obligations
and in competition with Federal home loan bank obligations and it
increases the short-term interest rates just as now it is increasing in­
terest rates in our field, which is increasing the cost to homebuyers.
As Mr. Sherbourne said, we just don’t have as much money for new
loans. What we do is, instead of making 85-percent loans, we make
75- or 70-percent loans. When you have less money, you not only
raise the rates, but stiffen your requirements considerably.
Mr. S h e r b o u r n e . Congressman, may I add one small fact to put
this in focus ? In 1961, when negotiable CD’s first came out, the total
amount of certificates of deposit—the total amount of time deposits,
at that point, was something like $13 billion. In the intervening 6
years, the negotiable CD has gone from zero to about $17 billion,
whereas, the other time deposits, the nonnegotiable type of instrument,
has increased only $1 billion or $2 billion.
So that you see, therefore, the negotiable CD’s are the instrument
that is causing the problem today.
Mr. M c K e n n a . Mr. Congressman, may I respond to your particu­
lar question by reading, I would say, from a neutral witness in this
case? I am reading from an article in the Banking Law Journal of
November 1965, which you will note was before the increase in rate
ceilings in December of that year.
The article is entitled “Time Deposit Banking” and it is by Herbert
Prochnow, Jr., attorney, the First National Bank of Chicago.
On page 951, he said:
In February of 1961 commercial banks, utilizing a longstanding provision of
regulation Q, began to offer time certificates of deposit to their customers. At
first, these certificates were for large denominations, $1 million or more, and
carried maturities ranging between 6 months and 1 year.
These certificates, issued in negotiable form, attracted corporate funds which
could not be accepted as “savings deposits” under the provisions of regulation
Q. Competitive pressures then forced the banks to issue certificates in smaller
denominations and for varying maturities. A market for these negotiable cer­
tificates of deposit has developed so that they can be readily sold by the holder,
prior to maturity.
The growth of this market has been of great significance in making time de­
posits an attractive liquid asset to corporations and other large investors.
Recently, banks have also been increasing quantity of nonnegotiable certifi­
cates of deposit to individual savers, who are willing to commit their funds for
long periods of time in return for the somewhat higher rates which banks are
willing to pay on nonnegotiable certificates. It is entirely possible that nonnego


UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

27

tiable savings certificates will, in the years to come, drastically alter individual
savings account relationships as negotiable certificates of deposit have already
changed and greatly expanded corporate time deposits.

The C h a ir m a n . We are glad to have this information for the record.
You know, in 1960, the short-term interest rate was rather low.
These huge corporate funds were in the market every week for short­
term Government securities. I do not know who devised the plan or
who was the author of it, but some person, I guess thought they could
raise the interest rates on the short-term U.S. Government securities.
They wanted these short-term rates raised. Well, if they could get
the CD’s in a race, really, an inflationary race, as to rates, why, they
would get their objective. They would get the short-term rate raised.
So, these managers of huge corporate funds were induced to invest
them in CD’s at 3 and 4 percent. At that time it was a big windfall
to them, a big bonus. It is much more than they could get on a short­
term rate, ana naturally they went there awfully fast. And in the next
6 years they went to over $17 billion. They went up very rapidly
and left the short-term Government market entirely. That market
started up and last December there was a crisis. You know, a lot of
CD’s were coming due and there was no way for the banks to renew
them. They could not pay them enough interest. That was the crisis
in December that caused the Federal Reserve Board to react and they
had to do something and they had to do it fast. They could not
increase their interest rates enough to let them keep these time de­
posits, these CD’s, so that is the reason they increased the rate from
4 percent to 5% percent, thus 371 percent. I f somebody else had
/£
raised prices &7y2 percent, if a manufacturer of automobiles raised his
rates, his prices, 37% percent, he could not sell them. But they got
by in raising those CD rates 37 ^ percent.
That was a race between the short-term securities, the rate there,
and the CD’s that got us into this inflationary condition, and it has
caused all this trouble.
There was a hearing before the Joint Economic Committee, during
the month of December, last year, to draw out all these points. It is
not disputed that the reason they had to raise those rates so high
was to take care of these few banks, and a relatively few of them,
just a handful that had all these CD’s outstanding against them.
They were hurting and they had to do it. Anyone who is interested
can call the Joint Economic Committee and ask them to give you a
copy of that hearing for your purpose and you will get it, I guarantee
you that.
Mr. Harvey ?
Mr. H a r v e y . Thank you, Mr. Chairman. Mr. Strunk, as I under­
stand what you have been telling us, is that actually the savings and
loans that have been living with CD’s for a good long period of time—
this is not new—and actually, you are not interested in getting cor­
porate funds. What you are* really interested in, is the abuse of these
CD markets which has come about recently; is that correct?
Mr. S t r u n k . Yes, sir; I would say that is correct. We have been
living with CD’s some time. We have been living with CD’s since
1961,1960, when they first developed in volume. The consumer CD’s,
that is. We have been living with them since then. I distinguish them
between negotiable and nonnegotiable. I call the negotiable ones cor­
porate CD’s.




28

UNSOUND COMPETITION FOK SAYINGS AND TIME DEPOSITS

Mr. H a r v e y . What is the lowest limitation of the CD that savings
and loans could live with ? $5,000 ?
Mr. S t r u n k . The higher, the better.
Mr. H a r v e y . Obviously.
Mr. S t r u n k . $15,000 to $20,000.
Mr. H a r v e y . Y o u are saying, $15,000 to $20,000. Could you supply
the committee with any breakdown of information, for example, as
to what percentage of the CD’s that are issued today that are in the
$15,000 to $20,000—what percentage are in the $15,000 to $20,000
bracket? This would be very useful information, I would think.
Mr. S t r u n k . One handicap we have is that the FDIC and the
Comptroller do not collect much information in this area. The Fed­
eral Reserve collects information about negotiable CD’s. In Decem­
ber, the Fed sent out a questionnaire as to the practice in issuing CD’s.
The results were published in the Federal Reserve Bulletin in the
month of April or May. The Fed has now announced a new survey of
practice in the CD area and we would hope the information the Fed
is getting now will tell us how much of the money is in CD ’s of, say,
over $15,000 and how much of the money is in the CD’s of under
$15,000. My guess is that 90 percent of the money in CD’s is
in amounts—in $15,000 and over. The total dollars they are attract­
ing in the smaller CD’s is not significant in terms of banking
resources.
But it is terribly significant in terms of shift of money out of the
mortgage market. Do you follow me ?
Mr. H a r v e y . I follow you; yes. What you are saying is that 90
percent of the CD’s consist of corporate money that you are not in­
terested in—in the past anyway—but the 10 percent, the $15,000 to
$20,000 is money that comes in by the shift. What you are further
saying is that that complete information is not readily available at the
present time ?
Mr. S t r u n k . It has never been available until the Fed made the
December survey. I am not positive whether the Fed’s December
survey gives this information. I understand that the Fed’s May
survey probably will give this information.
Mr. H a r v e y . On page 13 of your statement, you made several
recommendations but you omitted a minimum limitation for CD’s.
Could I ask why, or your reason ?
Mr. S t r u n k . We were suggesting a minimum program that would
not necessarily require legislation.
Mr. H a r v e y . But you are telling the committee here, today, such
legislation is wise; is that correct ?
Mr. S t r u n k . It will be very, very helpful. I would say it would
be wise; yes, sir.

Mr. S h e r b o u r n e . May I add something to why we are being affected
today and we weren’t back 6 or 7 months ago ? It was the practice of
commercial banks in our area, and this was all banks, to issue CD’s,
nonnegotiable CD’s, slightly above our savings rate. We were hit at
that point, but to a manageable degree. But the shocking nature, if
you want to call it, a large nature of the increase that has taken place
literally, when the saver, a fellow with $ 5,000 and $10,000 ----Mr. H a r v e y . I have only 5 minutes. My point to you, Mr. Strunk,
was that neither one of you as I understand it, is actually, asking this




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

29

committee to prohibit the issuance of CD’s. Now, you are asking for
certain reforms, but you are not asking that they be prohibited entirely,
are you, as H.R. 14026 would reportedly do, according to the way I
read it?
Mr. S h e r b o u r n e . We are not asking that, Congressman, because the
amount of CD’s is so large in billions of dollars, so many billions, that
we think you cannot cure the problem by shutting it off.
Mr. H a r v e y . It would cause absolute chaos in the financial market
if you were to, overnight, prohibit the sale of CD’s? I would think
that would be commonsense.
Mr. S h e r b o u r n e . It wouldn’t have that influence if you were to
provide legislation that these nonnegotiable CD’s cannot be issued for
amounts less than $10,000.
Mr. H a r v e y . That is exactly the point that I was trying to make
a few minutes ago. Neither one of you are asking that they be pro­
hibited entirely, as this bill would reportedly do.
I would like to direct a question to our chairman. I wonder if the
Secretary of the Treasury, Mr. Fowler, is going to appear at these
hearings ?
The C h a ir m a n . We expect him to ; yes.
Mr. H a r v e y . Is there any time schedule ?
The C h a ir m a n . Not right now. We have these witnesses, the
Treasury Department—Mr. Fowler will be the one, the Federal Home
Loan Bank Board, Federal Reserve Board, Federal Deposit Insurance
Corporation, American Bankers Association, and others. On Wednes­
day, we will hear Chairman John Home of the Federal Home Loan
Bank Board. Tomorrow is the Open Market Committee meeting at
the Federal Reserve and they wanted a day or two after that before
they came up. But they will be here.
Mr. H a r v e y . Thank you, Mr. Chairman. I have no further ques­
tions.
The C h a ir m a n . May I suggest this, Mr. Harvey. This lower in­
terest rate on smaller accounts—that bothers me a lot. I feel strongly
about this. This is going to ruin the industry if we do not do some­
thing about it. We must protect the savings and loans in their efforts
to build homes at reasonable prices for the long term.
Mr. H a r v e y . I want to do that, too, Mr. Chairman.
The C h a ir m a n . I f we pass a law here to say that all accounts under
$15,000 may be paid lower rates of interest/why that would be dis­
criminatory against the small saver. I just cannot imagine a Con­
gressman voting for a bill to permit a high rate of 5i/o-percent interest
onlv on large accounts.
Now, I know that the object of it is good. But if you put yourself
in the position of two fellows who come up to the window, one has
a million dollars and yon say, “Well, we will pay you 5y2 percent,”
and the little fellow with just a few dollars gets only 4 percent.
Mr. H a r v e y . That is what we are doing under the participations
sales bill. You have a $5,000 limitation there.

The C h a ir m a n . That is different.
Mr. H a r v e y . I do not see anything different there at all.
The C h a ir m a n . Two wrongs do not make a right.
I do not say that I would be against this if it could be done some
way that would not put you in the position of telling the little man



30

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

we have fixed it so you can have only a small amount of interest.
That is the part that bothers me.
Mr. H a r v e y . I f the chairman will let me respond to wliat you said.
My point before was that I think we have to be very practical in find­
ing a solution to this very serious problem and I do not think that
the chairman, in this bill, which would seek to prohibit all CD's—
I think this is impractical.
The C h a ir m a n . My bill would prohibit only negotiable CD?
s.
Mr. H a r v e y . I do not think it is a practical solution, and I think
what we have been talking about are much more practical steps to
be taken and what the witnesses have suggested here.
The C h a ir m a n . All right, would you like to procced, Mr. Gonzalez ?
Mr. G o n z a le z . Yes, Mr. Chairman.
My questions are brief, but I am intensely interested.
First, may I point out to the good chairman that I endorsed this
bill by introducing it myself. I introduced the same identical bill
and I have a question of Mr. Sherbourne.
You say in your statement, “mortgage interests rates have risen
abruptly as a result of the high interest rates authorized by the Fed­
eral Reserve Board. In my judgment, it will go even higher.”
Well, now, they are at 6 percent now, Mr. Sherbourne. How high
do you think they would go f
Mr. S h e r b o u r n e . In New Jersey, we have a statutory requirement—
a statutory limit of 6 percent, and the next development involves
charging a point. A t this stage, I think 1 point is being charged on
most loan applications.
Mr. G o n z a l e z . There is no limitation on points?
Mr. S h e r b o u r n e . N o , sir.
Mr. G o n z a l e z . I s it n o t a fa c t th a t up to som etim e in th e 1950*s,
th ere was a s ta tu to ry lim ita tio n ?
Mr. S h e r b o u r n e . On points? This is an FH A and G I loan.
Mr. G o n z a l e z . Right.
Mr. S h e r b o u r n e . I am talking, primarily, of conventional

loans,
which is the major part of our market in New Jersey, and in most
States.
Mr. G o n z a l e z . It is now, but it is coupled with the same questions
I have been asking of Mr. Brownstein and others every chance we have
when they appear here. That is, that the FH A area of activity has
shrunk, where in my opinion the intent of Congress in its inception;
that is, in the inception of the program, was that it would be an
instrumentality by virtue of which any American family that desired
to purchase a home would have a chance to do so on the assumption
there would be something more attractive on tlie basis of an
FHA-arranged mortgage and conventional mortgage arrangement.
But that is completely reversed.
Only 16 percent—and that is not even new housing, that is existing
housing, and that FHA. And the reason is, that, well, you know the
reason better than I do. But what I am getting at, should we not go
back to the congressional limitations that we had in the fifties and up
until the fifties m the Eisenhower administration? I think what
Congress did then, it left the floodgate eventually open for what we
are now passing through,

Mr. S h e rb o u rk * . My understanding of the ordination of F H A
and (tI loans was that they were intended to meet specific needs that



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

31

weren’t otherwise being met by local institutions. For example, in
some States, savings and loan associations were not too active and their
FH A and GI mortgage was the principal instrument. Also, shortiv
after the war, in order to encourage no-down-payment loans, which
no institution would normally make on its own portfolio, the GI
instrument came out.
I always felt that the Congress properly provided through FH A and
GI loans, a medium by which needs could be met or an area could be
ointed to and we could be encouraged—and, by and large, home
nancing has operated primarily through the conventional mortgage
and, may I say frankly, there are certain advantages to that. We can
move much faster, take care of builders and the individuals much
faster than when you are involved in a secondary guarantee operation.
So I think it is the merger of the two that is the best. I f you say, let
us then go back to provide FH A and GI loans, if there is no market
for them, nobody will take them. Then, you get into direct lending
in tremendous volume and at that point you face the problem of pro­
viding credit in a period in which governmental policy is to reduce
credit, to control credit. And, also, to minimize the impact of the
Government. That is another problem.

E

Mr. G o n z a l e z . If you did not have these limitations, the 6 -percent
limitation, for example, how high do you think it would go ?
Mr. S ii e r b o u r n e . In New Jersey, I don’t think it would go above
6*4 percent. In California and other areas, where money is needed,
the rates are already at 6 ^ and 7, headed higher.
May I say for our friends in California that it is still a fact that the
mortgage needs of the expanding population in that State would not
have been met if savings and loan associations were not able to pay
a rate which attracted money into that area and enabled them to meet
the needs.
Many of our confreres in New Jersey don't like that, but I frankly
feel that those institutions ought to be commended for making those
kinds of loans with low downpayment to new and young families, and
the lending pattern there has been quite different. What I am trying
to do is to explain now that the California associations are not charg­
ing a higher rate because they want to, but because they have to in
order to get the money to meet the mortgage demands that exist.
Mr. G o n z a l e z . TheCalifomia situation is very similar to the Texas
situation. As you know, the two States have been, for a few years,
suffering the greatest impact from this tight money situation. From
my observation and experience, frankly speaking, I feel that some of
these programs, such as FH A , for the good they are doing on the basis
of original intention of Congress, can easily go out of business and I
do not think too many people would be hurt in the purchase of homes
that need the homes and should be getting the homes, and should have
the credit to give them and are not giving them unless they pay ex­
orbitant points and go in there to the market and get this.
Any time you pay 4 points, which means $500, $600, just for the
pleasure of getting somebody to handle the mortgage—I say that is
highway robbery that has been legalized in this country. And some­
thing ought to be done about it at the State level or Congress, wherever
it ought to be. And in many cases, it is at the State level, the interest
of the people have been sold out to the special interests, and I think
this is exactly what is happening nationally right now.




32

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

I think the trend started on this other level of governmental sub­
sidizing the loans when the risks unwisely removed the limitation on
these points. It played right into the hands of the people who are
now profiting. They are making plenty of money. They could care
less whether the average American family gets a home or not.
Mr. S h e r b o u r n e . Mr. Congressman, may I respectfully point out
that only 6 months ago, there were not too many complaints about the
availability of mortgage funds and now interest rates in our own in­
stitution and in most institutions were at a very low rate, and there­
fore, from my point of view, the condition would be met, the average
American family was getting its loans at the lowest rate in recent
years.
All of this has changed in the last 3 or 4 months, to a major extent,
because of the problem we are discussing this morning and that is
the only reason we are appearing before you on what might appear
to be an interbank or interfinancial institutional competitive matter,
because the problem has become so severe that consideration should
be given as to how to cure it.
Mr. G o n z a l e z . This has not been my experience at all in my area.
I have been having complaints for years, since I was in the State sen­
ate, and this may be unusual, abnormal, or what-have-you, or it may
be that those of us who have to go in and deal from another angle,
see a different picture. Of course, people who are buying—most fami­
lies who want a home will sacrifice a great deal and they have no
defense—there is nothing they can do. They are over a barrel. If
the elected representatives on either the State level or the national level
sell out the people’s basic interests, there is not a thing the people
can do.
The C h a ir m a n . We will stand in recess until 10 o’clock in the morn­
ing and ask these gentlemen to be back with us. We want every
member of our committee to have the privilege of interrogating you.
(Whereupon, at 12 o’clock noon, the committee adjourned, to recon­
vene at 10 a.m., Tuesday, May 10,1966.)




TO ELIMINATE UNSOUND COMPETITION FOR SAVINGS
AND TIME DEPOSITS
TUESDAY, MAT 10, 1866
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.O.
The committee met, pursuant to notice, at 10:10 ajn., in room 2128,
Rayburn House Office Building, Hon. Wright Patman (chairman)
presiding.
Present: Representatives Patman, Multer, Barrett, Reuss, Ashley,
Moorhead, St Germain, Gonzalez, Weltner, Hanna, Gettys, Todd,
Ottinger, McGrath, Hansen, Annunzio, Rees, Widnall, Mrs. Dwyer,
Clawson, Johnson, Stanton, and Mize.
The C h a ir m a n . The committee will please come to order. Yester­
day we had gotten down to Mr. Gettys, I believe. H e is not here so
I believe that Mr. McGrath is next.
STATEMENT OF NORMAN STRUNK, EXECUTIVE VICE PRESIDENT,
UNITED STATES SAVINGS & LOAN LEAGUE, AND EVERETT C.
SHERBOURNE, PRESIDENT, CITY EEDERAL SAVINGS & LOAN
ASSOCIATION; ACCOMPANIED BY WILLIAM F. McKENNA, GEN­
ERAL COUNSEL, NATIONAL LEAGUE OF INSURED SAVINGS ASSO­
CIATIONS—Resumed

Thank you, M r . Chairman.
I want to welcome Mr. Sherbourne, a fellow New Jerseyite.
I have a question concerning the CD’s.
Suppose a citizen walks into a bank and deposits $10,000 and re­
ceives a certificate of deposit. Is that transaction covered by FDIC
insurance?
Mr. S h e r b o u r n e . To the extent of $10,000.
M r . M cG r a t h .

M r . M c G r a t h . I t m akes no d ifferen ce w h eth er i t is a n ego tiab le
o r n onnegotiable c e rtific a te o f d epo sit, th e insurance aspects?
Mr. S h e r b o u r n e . I don’t believe so. I don’t believe i t makes any

difference.
M r . M cG r a t h . I s th ere an y p lace in th e c o u n try w here an in d iv id u a l
can w a lk in to a savings and lo an association and receive a c e rtific a te
o f deposit?
Mr. S h e r b o u r n e . We are not permitted to issue any instrument

that guarantees a definite rate for a period of time, therefore we can­
not issue CD’s.
Mr. M c G r a t h . That is all I have.
The C h a ir m a n . Mr. Mize?
Mr. M iz e . Thank you, Mr. Chairman.



34

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

What percentage of this $17 billion plus in CD's now outstanding
is in negotiable and what percentage is in nonnegotiable?
Mr. S h e r b o u r n e . The total amount of CD's is about $35 billion
and of that $17 billion is negotiable and the other is nonnegotiable.
M r. M iz e . It is about 50-50 ?
Mr. S h e r b o u r n e . I th in k it is. I th in k a l i t t l e m o re th a n 50 p er­
c e n t is n o n n e g o tia b le .
Mr. M tze. Did I understand

you yesterday to say that only about
10 percent of the outstanding CD's are of concern to you; that is,
the small denominations affect your area ?
Mr. S h e r b o u r n e . I don? have any figure.
t
Mr. S t r u n k . I f I mentioned them, then I was not fully conversant
with all the facts. We are concerned with the nonnegotiable CD's.
M r. M iz e . Only?
Mr. S t r u n k . Primarily.
M r. M tze. Only 10 percent a re in denominations that affect you
people ?
Mr. S t r u n k . I would not say that. I really don’t have the figures.
I think most of the nonnegotiable CD’s are in units of $10,000 or
less. Of course, any time you get in units of $10,000 or less it is a
new high rate bind of competition for your accounts.
M r. M iz e . These smaller denomination CD’s are the kind that you
are all disturbed about have come into existence, so to speak, only in
the last 2 or 3 years. You did not anticipate that kind of thing
when it got started back in 1960?
Mr. S t r u n k . I think that’s correct.

That is all, M r . Chairman. Thank you very much.
The C h a ir m a n . Mr.Gettys.
Mr. G e t t y s . Mr. Chairman. Mr. Strunk, Mr. Sherbourne, I would
like first to congratulate and commend the savings and loan industry
for the magnificent job that is done in helping so many individual
Americans realize the dream of homeownership. I do not know of
any agency that has contributed more to the stability of the family
and the realization of the American Dream in that connection than
the savings and loan industry. I am very concerned about the over­
lapping of functions that are proposed between the banking industry
and the savings and loan industry, if we can call it an industry. I
believe that there is a place for each of the services without over­
lapping.
Now, did I understand, Mr. Strunk, you to say yesterday in your
formal statement that interest rates do not have much effect on the
amount of savings?
Mr. S h e r b o u r n e . I think I said that, Mr. Congressman. That
increase in the interest rate does not generally have much effect on
total savings. My understanding is that most economists agree with
tliat statement that an increase has some impact, but not s i g n i f i c a n t .
M r. G e t t y s . I f t h a t i s a f a c t , a n d I a ssu m e i t is , m o s t la y m e n have
M r . M iz e .

a d iffe r e n t o p in io n .
Mr. S h e r b o u r n e .

Well, if I could just finish. When I s a y that
economists make the statement that an increase in the interest rat®
does not generally increase savings, I mean that the total savings held
b y individuals is related to their consumptive habit, their desire to
spend for things and services rather than to the interest rate. How­



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

35

ever, the interest rate has this function, that the interest rate which
savings and loans pay on their savings deposits, the commercial banks
do on theirs, the rate our finance companies pay for the certificates and
instruments they issue, all with respect to the total amount of savings,
the rate paid in any particular field determines the extent and propor­
tion of total savings that shifts into that field.
Mr. G e tty s . I understand. In the savings and loan field an in­
crease in the interest rate may affect it, but overall it may not.
Mr. S h e r b o u r n e . The effect is that it affects the distribution of
total savings, but the high interest rate in any particular field is not
going to make much significant impact on the amount of total savings
by all individuals in the country.
Mr. G e tty s . Thank you, Mr. Sherbourne. Mr. Strunk, did I un­
derstand you correctly when I got the impression that so far as the CD
problem is concerned now, as it relates to the savings and loan in­
dustry, it could be cured without legislation, that is, by administrative
action by the Fed ?
Mr. S t r u n k . Mr. Congressman, the suggestions that we have offered
both to the Federal Reserve and to the committee yesterday we be­
lieve can be effected without legislation as we have looked at the law
ourselves. And those two suggestions are, that the Fed prohibit banks
from issuing CD’s which are automatically renewable, and also pro­
hibit banks from issuing certificates which have more than one ma­
turity date.
For example, a typical savings bond issued by a bank has a 5-year
maturity. But the saver can cash that bond in after 30 or 90 days,
which is what I mean by dual maturity dates.
So, if the banks issued certificates which were not automatically re­
newable, and had only one maturity date, this would make the cer­
tificate like the money market instrument I believe it was first in­
tended to be. It was to take on the characteristics of a Treasury bill
and we believe then that this would take the certificates generally out
of the savings market and put the savings business back where it
always was; namely, into the passbook area. We believe that those
two things can be done without legislation.
Mr. G e tty s . D o you recommend that ?
Mr. S t r u n k . Yes, sir, yes, sir ; we do recommend it.
Mr. G e tty s . Have you had any evidence from the Federal Reserve,
any clue as to its position on the subject?
Mr. S t r u n k . We have no clue. We wrote a letter to Mr. Martin,
Chairman of the Board of Governors last month and we had a very
nice acknowledgment of our communication, but no clue as to whether
the Fed would take action along this line.
(The letter referred to follows:)
U n it e d S t a t e s S a v in g s a n d L o a n L e a g u e ,

Chicago, II I, April 11, 1966.
Hon. W i l l i a m M cC h e s n e y M a r t i n , Jr.,
Chairman, Board, of Governors,
Federal Reserve Board, Washington, D.C.
Deab C h a i r m a n M a r t i n : My last letter to you, dated December 13, 1965.
followed receipt of the news of the change in the discount rate and the change
in regulation Q. We were primarily concerned at that time, as we are now,
with the change in regulation Q.
In view of developments since last December, we are convinced our concern
a t that time was more than justified. The decision of the Board of Governors



36

TJNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

to raise the permissible rate on commercial bank time deposits to 5y2 percent
opened a Pandora’s box in the savings marketplace and has provoked a “rate
war” for savings in which the financial institutions in the country are now
engaged. In our view, this price war in the savings market is most regrettable
and can only result in a weakening effect upon financial institutions generally.
We recognize full well that decisions and policies of the Board of Governors
were made in the belief that increased rates and tighter money were necessary
to inhibit the development of inflationary pressures in the United States. Thus,
the program of monetary restraint in high interest rates inaugurated by the
Federal Reserve Board evidently has been inadequate to prevent a serious in­
flation threat. The threat of inflation is, in our judgment, considerably more
serious today than it was early last December.
On behalf of the savings and loan business, the United States Savings and
Loan League is urging President Johnson and Members of Congress to take
measures in the fiscal area designed to curb the inflation threat. We believe that
you should be aware of these efforts and we would hope that in the interest
of promoting stability in the economy the Board of Governors of the Federal
Reserve Board would express itself to the White House and to the Congress
on the same subject. Perhaps it is time for the Federal Reserve Board itself
to acknowledge, as many now acknowledge, that heavy dependence on monetary
policy in fighting inflation cannot be regarded as a complete success.
As you recall, our original concern over the change of regulation Q was that
it foreshadowed a serious diversion of funds away from housing and home
ownership. Our forecast has been validated in recent weeks; housing starts
in February were 17 percent below the same month a year ago and we would
be surprised if this decline does not continue over at least the next few months.
Recent monetary policy decisions have meant, in other words, that the housing
industry has been affected more adversely than any other major industry. Cer­
tainly the Board recognizes that the housing industry has been in a depressed
state for several years and has not contributed to the inflationary pressures
of recent years.
We urge, therefore, that the Board undertake a reconsideration of recent
decisions with a view of determining whether these decisions have not imposed
an unduly and unfairly heavy burden and hardship upon the homebuilding
industry and the real estate business.
The second part of our objection to the change in regulation Q was that the
change would mean a substantial shift in funds from smaller banks and special­
ized financial institutions into large-money-market banks which would be able
to pay the highest rates on certificates of deposit. We realize that you per­
sonally called for “prudence’* in the use of the new ceilings. Day by day, how­
ever, the evidence mounts that your warning has been disregarded by many
banks.
In all frankness we are not reassured by the March 21 publication of your
survey of use of new time deposit ceilings as of December 22, 1965. A survey
of that date must be regarded as very much out of date since many hundreds
of banks have been moved to high rates since December 22. Furthermore and
of even greater importance, your survey was based on the number of Federal
Reserve member banks offering high-rate statistics. A more accurate analysis
of the extent to which the banking business of the country has taken advan­
tage of the new ceilings would be gained by a survey of the extent to which
the major banks of the country have undertaken promotion of these small de­
nomination certificates of deposit.
We have undertaken such a survey of the hundred largest banks in the
country which hold nearly 50 percent of all deposits of the commercial bank­
ing business. Our survey reported that more than three-fourths of the hun­
dred largest banks offer “consumer CD’s.” These 78 banks hold over 40 per­
cent of all commercial bank resources in the country. Very clearly, the offer­
ing of these consumer CD’s at rates approaching and exceeding 5 percent by
the banking business is considerably greater than the survey reported by the
Federal Reserve Board on March 21,1966.
We urge, therefore, the Board of Governors to make a new survey to find out
exactly what the banks—and particularly the large-money-market banks—are
doing in promoting saving certificates. We suggest th at a survey today would
reveal a substantially different picture than was reported in your survey on
December 22.
The change in regulation Q last December was restricted to time deposits,
which indicated a hope or belief on the part of the Federal Reserve Board



UNSOUND COMPETITION FOR SAYINGS AND TIME DEPOSITS

37

that the new time deposit ceilings would not be used primarily in competition
for personal savings. Of course, the tremendous volume of newspaper adver­
tising announcing the availability of small denomination certificates of deposit
and savings certificates makes it clear that the new ceilings are being used to
an ever-increasing extent in the solicitation of personal savings. Unless some
new restrictions are imposed on time deposits, therefore, there promises to be
increasing disruption of the savings market.
Two possible and constructive restrictions on time deposits immediately avail­
able to the Federal Reserve Board are (1) to prohibit the issuance of certificates
with more than one maturity date, and (2) to eliminate the automatic renewability feature on certificates issued in the future.
Perhaps the most ironic and bitter twist of the hectic events in the savings
market since early December is that the “rate w ar” in the savings market has
done so little to promote savings in financial institutions. The growth of time
deposits and savings in commercial banks during the first quarter of 1960 was
much lower than in the corresponding quarter in 19G5. The growth in savings
accounts in mutual savings banks was lower in the first quarter of 19C6 than
it was last year. The growth in savings balances at savings and loan associa­
tions was considerably lower in the first quarter of this year than in the first 3
months of last year. Thus, banks and financial institutions over the country
are paying more for savings and time deposits and are attracting less. By any
measure, this must be reckoned as a hollow and expensive victory even for the
few big banks that have grown in recent months.
Changing the rules under which certificates of deposit are issued, as outlined
above, with respect to dual maturities and automatic renewability would be
consistent, we believe, with the Board’s objectives as to savings deposits out­
lined in your speech in December to the Life Insurance Association of America.
At that time you indicated that the Board desired to minimize the impact on
competitive relationships between commercial banks and savings banks and sav­
ings and loan associations, which depend for their resources mainly on funds
deposited by individual savers rather than by corporations.
In closing, we cannot urge you too strongly to pursue with the greatest vigor
at your command your efforts to police the volume and nature of commercial
bank lending because this is the heart of the matter. Commercial bank loan-todeposit ratios are higher than they have been in virtually any other period in
our economic history. A good part of the inflationary pressures could be checked
by greater selectivity in commercial bank lending.
In connection with some restraint in commercial bank lending, the Board of
Governors might appropriately, we believe, ask for some voluntary restraint or
reduction in the total amount of credit extended by the commercial banking
system in the consumer credit area. This would urge some reduction both in
the total amount of consumer credit extended by the commercial banks directly
and also the extent of commercial bank financing of sales finance and other con­
sumer credit companies.
We congratulate you most heartily on the fact that you have urged restraint
and caution in commercial bank lending, and we urge further and renewed efforts
along these lines.
Sincerely,
N orm an S tru n k ,

E x e c u tiv e Vice P r e s i d e n t .

Mr. S t r t j n k . Now, we do know that the Fed and the FDIC are
making new survey to get new facts with respect to commercial bank
usages of certificates, rates paid, denominations and so forth.
Now, the Fed made such a survey as of December 1 8 ,1 believe, and
the results of that survey were released sometime in March or April.
At the time the Fed released the results of its December survey, it was
obvious those facts were completely out of date and it is quite ap­
propriate that the Fed get new facts, get current facts as to com­
mercial banking practices in this area.
It may be that this survej is made somewhat in anticipation of
making changes in commercial bank CD practices.
Mr. G e tty s . Thank you, Mr. Strunk. It would seem to me that in
matters of these kinds that if the existing agencies could take corrective
63-496—66------ i



38

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

action it would be better than having to obtain legislation because
it takes so long.
Mr. S h e r b o u r n e . May I add to that statement ?
M r . G e t t y s . I b e lie v e m y tim e h a s e x p ir e d .
The C h a ir m a n . Mr. Todd?
Mr. T odd. Thank you, Mr. Chairman.
Mr. Strunk and Mr. Sherbourne, I would like to associate myself
with Mr. Gettys’ remarks concerning the importance of savings and
loan associations. One of my close and dear friends in Kalamazoo,
Mr. Paul Gray, is with the First Federal Savings and many times he
has told me of die great satisfaction he has gotten out of his association
with that firm because he has helped many, many people buy homes in
that community. I am concerned that the savings and loans as an insti­
tution should not be weakened by actions of Federal agencies or other
agencies and that their competitive position be maintained.
Mr. Sherbourne, in your statement yesterday you submitted a table
on page 4, and I am not entirely clear as to the significance of that
table. In 1966 you indicate that other time deposits have amounted
to 70 percent and negotiable CD’s to 9 percent of the time deposits in
weekly reporting member banks. The other time deposits—are they
equivalent of nonnegotiable CD’s?
Mr. S h e r b o u r n e . Yes.
Mr. T odd. These are not what we think of as savings deposits ?
Mr. S h e r b o u r n e . These will not include savings deposits.
Mr. T odd. The two together are really the ones that represent the
CP'
n Mby banks?
Mr. T odd. The other time deposits would be the time deposits which
in a sense would be those taken out of savings and loans in response
to high interest rates paid by commercial banks ? Would that be an
analysis of the situation?
Mr. S h e r b o u r n e . Yes, although it is possible that the negotiable
CD’s also have some deposits.
Now, may I point out that these are increases that occur, not the
total amount that exists.
Mr. T odd . But the significance of that 70 percent then would be
really, that this year there has been a great change in the savings pat­
tern and particularly among the smaller savers; is that correct?
Mr. S h e r b o u r n e . Yes.
Mr. T od d . This is precisely the area in which you are worried and
where the impact in savings and loans has been felt ?
Mr. S h e r b o u r n e . Yes, sir.
Mr. T od d . F in e; that explains that to me, then.
Yesterday, Mr. Strunk, in your statement you indicated that the
regulation Q was changed in December by the Fed in response to a
potential liquidity crisis when CD’s were coming due. A s I under­
stand that, there would have been a withdrawal of this money from
the banks and the money would have been placed in other paper, pre­
sumably ; is that correct?
Mr. S t r u n k . That is correct.
Mr. T od d . What would the other credit instruments have been?
In other words, what were the alternatives open to the corporations
that had the CD’s on deposit?



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

39

Mr. S t r u n k . Treasury bills, obligations of various Federal agen­
cies, commercial paper issued by finance companies, and other corpora­
tions.
Mr. T od d. At that time the interest rates on these other types of
paper were higher than those which the banks were paying in CD’s ;
is that correct?
Mr. S t r u n k . I am not positive they were higher, but the margin
was such that there would have been switches out into other money
market instruments. I am not positive the Treasury bills in Decem­
ber were more than 4y 2 percent. When the rediscount rate went up
to 41/2 percent it was inevitable that these short-term money market
instruments would go to higher levels which meant that banks could
not have persuaded the corporations to keep their money in these
CD's, but they would have to go into other instruments.
Mr. T od d . Could not the Fed have achieved the same goal through
open market purchases of Government bonds ? That would have put
money back into the market.
Mr. S t r u n k . Yes, sir, the Fed can, of course, generally keep levels
of interests at about what it wants to keep them. The particular
policy being pursued at that time, however, was to raise interest rates
or permit interest rates to go up in response to increasing demands
for funds, and the Fed was pursuing a deliberate policy of taking it
by means of higher interest rates and that is one reason they raised
the discount rate. They were deliberately pursuing a high interest
rate policy.
Mr. T odd. Yes, and I think, of course, in terms of at least conven­
tional economic thinking there would be justification of that period
of inflation, but that would not necessarily coincide with the liquidity
prices on CD’s. It seems to me anyway.
Mr. S t r u n k . Liquidity prices in CD’s resulted as a result of pursuantly high interest rates. Again, the negotiable CD is a money
market instrument and corporate money goes in and out of these as
corporate treasurers decide where the best place is for the short-term
investment of their funds.
Mr. T odd. A negotiable CD is almost the same as a debenture
maturing in a year?
Mr. S t r u n k . It is precisely that—a debenture connotes a longer
term such as 5 or 10 years, but it is precisely the same as a Treasury
bill. Short-term promise to pay. It may not be short term. It may
run as long as a year. But the practice of the New York banks in first
offering these certificates, negotiable certificates, was to offer them for
about 6 months or a year maturity and then a market was created in a
negotiable market and over-the-counter market so that the corpora­
tions who held them could get out of them by sale to someone else.
Since the CD’s have begun to be issued for shorter time periods, 30 and
90 days, the negotiability and the making of a market for these instru­
ments has become less important.
Now, the corporations are buying shorter maturities to coincide with
the demand or the need of the corporation for cash. So, a lot of corpo­
rations purchase CD’s to mature on March 15 and again to mature on
April 15, because they were the dates the corporations needed cash for
taxes and dividend payments and so forth.
Now, corporations could have put the money in the checking ac­
counts and have left them there, but it wouldn’t nave earned anything




40

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

on that idle cash, or they could have put it in Treasury bills to mature
on those dates, or other kinds of short-term paper, including obliga­
tions of the FNMA and the Federal Home Loan Bank System and so
forth.
Mr. T od d . Thank you, my time has expired.
The C h a ir m a n . Mr. Johnson?
Mr. J o h n s o n . Thank you, Mr. Chairman.
I notice, sir, in your testimony that there might have been a virtual
crisis in December—you say the banks were faced with the necessity of
liquidating $3.5 billion in maturing obligations and that is the reason
that the discount rate was raised. I f there was that type of a crisis,
what can you conceive of a crisis occurring if this bill were passed?
Supposing this bill were to pass and the banks were denied the right
to issue negotiable certificates of deposits or other evidence of indebted­
ness? What would the banks do with these CD’s that they have now ?
Would there not be another virtual crash of our banking system?
Mr. S h e r b o u r n e . Mr. Congressman, I am not an expert on central
banking theory, but obviously, if the banks were not able to continue
to pay a good rate on those negotiable CD’s they would be withdrawn
by corporations and it would create liquidity problems for commercial
banks. Therefore, I am not sure any prohibition can be made immedi­
ately mandatory. However, it is clear that we have a problem that
developed over the course of 4 or 5 years because these negotiable CD’s
which are really short-term money, began to require by Federal Board
action a rate of return that in previous years had been restricted by
the reserve bank to longer term investments of 6 months or more. So
that, therefore, from a long-range point of view, the real problem rests
before this committee as to whether these negotiable CD’s should not
be eliminated or restricted to a certain proportion of banking deposits.
But that is an area in which the committee, I think, would have to get
the opinions of better experts on central banking theory than myself.
Mr. S t r u n k . May I suggest, I think obviously there would have
to be some phaseout period to phase out over a period of several years,
maybe.
Mr. J o h n s o n . Another question, sir.
Your support of this type of legislation seems to be predicated on
the fact that there is a remarkable and striking and worrisome decline
in the availability of funds for mortgage lending which of course
affect you people. I f you were here today, let us say, to testify with
respect to the sale by FNMA of $5 billion worth of participation
certificates which is the bill that the Senate passed, would you, by
reason of the fact that this would be a drying up of money available,
be against that type of financing?

Mr. S h e r b o u r n e . I t would have an impact, Congressman, but if it
is necessary for the U .S . Government to carry on that type of opera­
tion, then the private institutions must adjust themselves as well as
they can to that problem.
Mr. J o h n s o n . Y o u would live with that type of a practice, but you
cannot see how you can live with the practice of issuing certificates
of deposits, is that right ?
Mr. S h e r b o u r n e . The reason for that is that we submit that for
years, by action of the Federal Reserve Board itself, they provided
for a low interest rate on this type of short-term money—you can call
it hot money or it almost comes close to demand deposit.




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

41

May I point out that until 1962 the rate permitted on deposits—
time deposits over 30 days was only 1 percent and by 1964, even in
1964, it was only 1 percent and at that point was increased from 1 to
4 percent. The reason for that must be because the negotiable CD’s
market had developed to such a degree and in such a volume, that in
short-term interest rates and the Treasury market and in the financ­
ing market generally they were beginning to touch and exceed the
rates paid on all CD’s in order to prevent the shift of bills from these
CD's into other phases of the market and then the Federal Reserve
Board authorized a high rate on the short-term negotiable CD’s.
It therefore seems to us that the onus is not on us to establish why
this should be changed, but actually, I think it is up to the Federal
Reserve Board to explain why they took this action—why such a
sharp departure in the course of just the last 3 or 4 years and particu­
larly why, in December of last year did they permit a CD rate which
is so high above the rate they permitted in their own savings deposits—
why did they permit such a sharp differential? They could have
realized that the net result of that was going to be the cause of diver­
sion of substantial amounts of sums from commercial bank deposits as
well as from savings and loan accounts.
Mr. J o h n s o n . Did you put a figure into the record as to what the
total amount of these certificates of deposits are now, nationwide?
Is it a large sum of money ?
Mr. S h e r b o u r n e . I have a current figure on negotiable CD’s which
I think is $17.5 billion and my understanding is that the nonnegotiable
CD’s amount to $15 billion or $16 billion.
Mr. J o h n s o n . That is all. Thank you.
The C h a ir m a n . Mr. Ottinger ?
Mr. OnrxoER. Thank you, Mr. Chairman.
I would like to congratulate both of the witnesses on their excellent
testimony outlining the problems that have been created by the ex­
pansion of these negotiable and nonnegotiable CD's. I know all over
the country I have been hearing from builders and savings banks
people and savings and loan institutions that this is a very real prob­
lem. I would like to explore with you a little bit the solutions.
I have a bill that is related to this subject, H.R. 14422, which the
chairman has very kindly consented to consider as a germane amend­
ment to the pending legislation. My bill would limit these time de­
posits to $15,000 and higher.
I would like to read from a letter wiiich I received, dated April 29,
1966, from Stephen Slipher, legislative director of the United States
Savings & Loan League with respect to this legislation. With your
permission I would like to have the letter included in the record.
The C h a ir m a n . Without objection, so ordered.
(The letter referred to follows:)
U n it e d S t a t e s S a v i n g s a n d L o a n L e a g u e ,

Washington, D.C., April 28,1966.
Hon. R i c h a r d L. O t t in g e k ,
Souse of Representatives,
Long worth Building,

Washington, D.C.
D e a r C o n g r e s s m a n O t t in g e e : I appreciated your letter of April 25, regarding
your bill, H.R. 14422, to prohibit time deposits in banks in amounts less than
$15,000.




42

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

The United States Savings and Loan League unqualifiedly endorses this meas­
ure. I would imagine that every savings and loan association, every savings
bank, and even a majority of the commercial banks would favor the bill.
In December we wrote Chairman William McChesney Martin recommending
that a $25,000 or $50,000 "floor” be established for certificates of deposit. The
response was that it wasn’t legally possible to make such a distinction by
regulation.
We have never quarreled with the necessity of commercial banks paying an
attractive rate on the huge certificates of deposit purchased by major corpora­
tions, but we have bitterly resented the use of CD’s for the passbook-type savings
in amounts of a few hundred or a few thousand dollars. Furthermore, much
of the advertising creates the impression that such certificates of deposit are
ordinary savings accounts.
We hope that the Congress will give early consideration to your bill and we
would be happy to testify in person in support of the measure.
Sincerely,
S t e p h e n S l i p h e b , Legislative Director.
Mr. O t ti n g e r . One possible solution to this problem has been recom­

mended to me by a number of commercial bankers to give the Federal
Reserve bank the authority to set limits on the denomination of CD’s.
We heard from Mr. Sherbourne, however, testimony in his statement
that was highly and I think justly critical of the Federal Reserve
Board in this matter.
It would appear that the Fed has been responsible for creating this
problem in large part through its permitting a 514-percent rate on
the certificates of deposit. Would you be sanguine with a measure
which merely gave the Federal Reserve Board the power to set such
a floor? Do you think the Board could be counted on to act and act
adequately ?
Mr. S t r u n k . We would be very happy to have the Fed have the
power. Then at least it wouldn’t have the excuse that they can’t
legally do it. I don’t know whether the Fed would set a floor if it
could, but at least, if legislation were passed permitting the Fed to
do it, they could not retreat to a legal opinion that they can’t do it.
It would be better to direct the Fed—maybe direct the Fed to set a
floor or permit the Fed to set a floor no lower than $15,000 or $20,000.
Mr. O t t i n g e r . Mr. Sherbourne ?
Mr. S h e r b o u r n e . The situation at this point seems to be serious
enough to have the Congress establish the lower limit and give the
Federal Reserve Board the right to make it higher if they wish.
Mr. O t t i n g e r . Y ou have no objections, I take it, to large denomina­
tion certificates of deposit as far as your industry is concerned ?
Mr. S h e r b o u r n e . We do not, sir, because we believe most of our
savings are in amounts under $10,000 and therefore the impact on us
would be minimal—something that we could support, and something
that wouldn’t affect the home-financing market too greatly.
Mr. O t t i n g e r . I suppose one of the justifications the Federal Re­
serve will give, and we will be hearing them, I take it, in the course of
these hearings, for raising the rates on the certificates of deposit is
that it was an anti-inflationary measure. As I understand it, and cor­
rect me if I am wrong, the effect of the increased interest on the cer­
tificates of deposit has not been to restrict credit generally, but only
to discriminatorily restrict credit in the field of home financing, mort­
gage financing. It takes money away from the savings institutions
which performs that function and makes credit more readily available
in the industrial sector.



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

43

Mr. S h e k b o u rn e . Mr. Congressman, I want to make it clear that
I am not critical of the Federal Reserve Board as I think I mentioned
in my testimony. I have a great deal of respect for the manner in
which they have controlled the money market in recent years.
I think what happened here is that under pressure and demon­
strated evidence from large commercial banks, a negotiable CD market
was built up and then because of the necessity of maintaining deposits
here and preventing a drift of deposits abroad, the short-term rate in
the Treasury market got higher and higher and finally in December
the Federal Reserve Board was faced with a problem and they had
to take some action. The question from this point forward is whether
that problem is of such magnitude and whether there is a possibility
of a recurrence such that the Congress shouldn’t help by imposing a
limitation, and I hope that perhaps there would be some limitation
resulting from their own volition.
Mr. O t t i n g e r . Thank you very much. My time has expired.
The C h a ir m a n . Mr. Stanton.
Mr. S t a n t o n . Mr. Hansen.
Mr. I I a n s e n . Mr. Chairman, I ’m sorry to be late. I do not want
you men to get the notion that I am negative toward your position,
but we are talking about a problem which I think is somewhat more
deepseated and has a little history behind it that I would like to draw
to the surface.
I live in the Middle West and competition for money started 5 or 6
or 7 years ago and the aggressors in the case were the members of
your association from the west coast. I think the things that have
been going on among the banking fraternity in our area, at least, were
defensive moves.
Now, we are talking about the validity of these negotiable cer­
tificates. I understand that you have indicated, that you are ame­
nable to the idea of limiting these to a minimal figure thus getting
them out of the category of the saver item. Well, this of course was
objected to by our chairman, Mr. Patman, and I think advisedly so
because this would in turn create a situation where the little fellow
could not get the benefit of the higher rate. The higher rate would
be made exclusively for the monied men. We are small money people
in the Middle West. We do not think in the same terms that you
do back in this part of the country. I am all for the little fellow,
because I am one of them and I think we need the little fellows in
the country to carry on the whole total load with which we are faced.
Therefore, I would think that you men would, instead of fighting this
thing, propose that we fix it so that the banking fraternity could share
with you the same position on, we will say, in the passbook savings
field, by suggesting that the rate permissible to the banks on pass­
book accounts be put more at a level with what you men in your in­
dustry are paying, and advertising, as your interest rate.
I would like to have your comments on that suggestion, please.
Mr. S h e k b o u rn e . The record of the Federal Reserve Board on rates
that they permit on savings accounts is clear that in recent years they
permitted commercial banks to be competitive on the rate, because the
rate that most of them were allowed to pay was fairly close to the
highest rate the savings and loan associations were then paying.
It is clear, Mr. Congressman* that so long as commercial banks are
advertising one-stop banking, all-service banking, and private, per-




44

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

sonal loans, equipment loans, automobile loans among everything else
with which to attract customers to themselves, they also get their
savings deposits and commercial deposits along with it, but the savings
institutions are going to have a problem if they are not permitted to
have a slightly competitive advantage—maybe like a quarter of a
percent.
Now, therefore, it is that area to which the Federal Reserve has
effectively manipulated and controlled and permitted our institutions
to get proper amount of savings. But in these negotiable CD markets
and in the high rates they are permitted recently, it obviously has
created great distortions and the Congress of the United States I
always understood is concerned with the availability of credit and
home financing.
I asked my Congresswoman, Mrs. Dwyer, in my district one time
why this committee and the House was so slow and cautious in per­
mitting us to have additional lending powers, even to the extent of
permitting loans for equipment in homes, and she said to me that the
Congress is most concerned that there be sufficient credit for housing.
So I think by this demonstrated record of Congress, they are as much
concerned with this objective as we are.
Mr. O t h n g e r . Will the gentleman yield ? Is it not the small fel­
low who is being hurt by these CD’s because he cannot get a loan to
buy his house ?
Mr. S t r u n k . That will be the record; yes, sir. Come late summer
and early fall he will find—the typical family man that wants to buy
a house will find—he will find himself unable to get the credit for it
as a result of the draining away of money out of our institutions into
the CD market.
Mr. O t t t n g e r . Thank you.
Mr. H a n s e n . The whole point that I want to draw out here is that
we cannot take a meat ax approach to this thing. On the other hand,
it is a fact that in every competitive situation, in every business, one
or the other of the other competitors finds himself at a tactical dis­
advantage he is going to back into his office, sit down and figure out
all the steps necessary to cope with the situation.
My notion of what happened in this case is that the banking insti­
tutions have done just that by developing this negotiable CD propo­
sition on an energetic basis.
My time has expired. I f you would like to make any further com­
ments on this point, I ’d appreciate seeing it in the record. Thank you.
Mr. S h e r b o u r n e . Mr. Chairman, may I be permitted to make a
comment and charge it against my time.
I want to make sure that the members of the committee understand
that our testimony comes not from the sense that we want the com­
mittee to take this away—we would not be here if that were the case.
We would submit that there are two problems of international sig­
nificance that exist. One is that the negotiable CD market has be­
come so large and so great that it represents an interference with the
Treasury market and the bill market and the short-term market and
to that extent has an impact on Treasury financing operation.
The second is that the enormous—the torrential increase th at devel­
oped last December has created such a transfer problem in savings
from our institutions that it now limits and inhibits our capacity to



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

45

take care of the existing volume of home financing applications that
we are receiving. You find no problem in those. You find no prob­
lem in those two areas, then take no action.
The C h a ir m a n . Mr. Stanton.
Mr. S t a n t o n . Mr. Strunk, I wonder if you can clarify one point
for me, please. In answer to a question from Mr. Harvey yesterday,
did I understand you to say that your big problem is consumer CD?
s
and that this practice of consumer CD's in small amounts are primar­
ily issued by the large banks only ?
Mr. S t r u n k . If I understand your question, we are mostly con­
cerned with the consumer CD. As we have seen this develop, it has
developed primarily in the larger banks, in the larger cities, but it
is rapidly spreading to the smaller banks throughout the country and
in the small communities.
Smaller banks are having to do this as a defensive matter against
the big banks and you will find bank promotion of CD's now spread
out over the country where in the few days after the selling went up to
51/2 percent it was primarily a phenomenon of big banks, plus some
aggressive newTsmall banks, but in the main, the older, smaller banks
did not get into this until recently.
Mr. S t a n t o n . I want to clarify that point because it was my under­
standing that the practice was spreading throughout the bank in­
dustry.
Secondly, I had the occasion over the weekend to spend some time
with a commercial banker and I W
’ould presume that when they testify
on this bill their big complaint will be the same as yours. It is tight
money and they were crying equally as hard and as eloquently as you
people have presented your case here today. I f that is the case, both
the commercial banks and savings and loan institutions are in this
tight money situation. Would you have any particular suggestions, if
you agree with that premise, what this committee might do to help
alleviate that situation ?
Mr. S t r u n k . There are several ways to attack the inflation problem
and I think we have tight money because of the inflation problem.
If the economy is overexpanding, there are shortages of everything.
Inflation problems and the problem of an overexpanded economy
straining at the leash can be attacked in two ways, through monetary
policy through Federal Reserve action in connection with the amount
of credit available and the other is through the fiscal area—fiscal tools.
There are two general types, one the general areas, the general
level of Federal spending and the other area is tax policy and tax in­
creases have been recommended, recommended by the United States
Savings & Loan League and many groups, of course, have urged an
attack on the inflation problem through the other fiscal means; namely,
a reduction, some reduction in Government spending.
Given a reluctance to use fiscal measures, then you have tighter and
tighter money and you have a greater and greater demand for money
and for credit on the part of businesses who find the opportunities
to make things and sell things so great.
Mr. S h e r b o u r n e . May I point out that the Federal Reserve Board
announcement, when they changed the interest rate ceilings in Decem­
ber, had two interesting sentences which indicate the nature of the
problem.



46

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

They said, with respect to the action on the rediscount rate, that
it is intended not to cut back on the present pace of credit flows, but
to dampen mounting demands on banks for still further credit ex­
tensions that might add to inflationary pressures. Later on they said
that the increase in the rates that member banks are permitted to pay
their depositors is intended to enable the banks to attract and retain
deposits of businesses and individuals and thus to make more effective
the savings funds already available in the economy to finance their
loan expansion.
As far as inflation in a given field by corporate building is con­
cerned, it doesn’t make much difference where the savings comes from,
or where the money comes from, whether it is created by demand
deposits by a loan from the bank, or whether it is created by deposits
that come into the bank and then are reloaned by the bank. The
pressure on prices in that field depends only upon the loan extension.
It seems to me that within the extension of the Federal Reserve Board
in December, you see a little contradiction.
Mr. S t a n t o n . Thank you very much.
The C h a ir m a n . Mr. Annunzio.
Mr. A n n u n z io . Mr. Chairman. Mr. Strunk, what rate are the
Chicago banks paying on their CD’s ?
Mr. S t r u n k . The larger banks are paying 4X/o percent on so-called
consumer CD’s.
On negotiable CD’s, they are paying considerably higher rates that
would have to be competitive with the rates paid by New York City
banks.
As far as the consumer area, 4V2 percent with a few banks paying 5.
Mr. A n n u n z io . I have talked to many of the bankers in Chicago
and I was informed that they were paying 4y2 percent. Yesterday, I
noted in the Wall Street Journal that the Morgan Guaranty Trust Co.
is raising its rates to 5y2 percent and if that happens, do you think a
lot of the Chicago money will go into New York unless the Chicago
banks raise their rates? You are going to have a real tight-money
situation in Chicago as far as our savings and loans are concerned.
Mr. S t r u n k . Again, the 5y2 percent rate, I believe, announced by
the Morgan Guaranty relates to the so-called corporate depositor—
the negotiable CD. I have not yet heard in the consumer area that
the New York* City banks are paying 5y2 percent for the CD’s. But
so far as the New York City banks raising their rates, and CD’s
generallv, it takes money out of the Chicago banks and it takes money
out of the banks in Keokuk, Cedar Rapids and everywhere into the
big city banks.
Mr. A n n u n z io . Well, in your opinion, the crisis is here arid some­
thing must give or something must be done, whether it is by this com­
mittee or by administrative actions of the Federal Reserve Board.
Mr. S t r u n k . Precisely.
Mr. A n n u n z io . I want to read back your statement on page 12:
This use of certificates of deposit for ordinary savings was not predicted by
the Federal Reserve. In fact, the Federal Reserve Board has publicly cautioned
the banks against this disruptive competition.

I am concerned about a statement such as that. The Federal
Reserve Board is a board composed of seven men. When it voted to
increase the discount rates, the vote was 4 to 3. These are seven out>



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

47

standing economic authorities. For the Board to issue a statement
cautioning banks against disruptive competition and, at the same time,
not be able to predict or to forecast that this very situation was going
to happen is strange indeed to me. Why were they not in a position
to see that 6 months later they would be cautioning people about the
very condition they created ?
Mr. S t r u n k . A s a matter of fact, Mr. Congressman, Mr. Martin,
the Chairman, cautioned the banks in December, 2 w^eeks after the
action was taken.
Xow3 whether he could have, or should have seen that many banks
would immediately jump to 5U2 percent, or the 5-percent certificate,
I don’t know. I would have thought that he could. But within 2
weeks he felt it appropriate to caution the banks about the use of
higher rate certificates.
Mr. A n n u n z io . It seems to me that he, as Chairman of the Federal
Reserve Board—and he has appeared before this committee, I have a
great deal of respect for his ability—could have forecast the very
situation that he cautioned against. I am concerned about the Federal
Reserve Board—I think the responsibility lies with them. In other
words, they could have forecast this thing and have promulgated the
very rules that you brought before us so that we would not be in the
condition that we are in today. Do you agree with that ?
Mr. S t r u n k . I heartily agree with this. In connection with these
flows of funds, other lenders, in connection with mortgages, other
mortgage lending institutions, the commercial banks and the insurance
companies dropped out of the mortgage market at the beginning of
last year and now as a result of unrestrained commercial bank competi­
tion for savings, it really hurts the mortgage market. We have always
been in the mortgage market, year in and year out.
We kept, our lending volume up in the first 3 or 4 months of this
year, but now with money being drained away from us and invested
by commercial banks in short-term business loans, consumer loans,
buying tax-exempt securities, I think it is a question Congress has
to establish some kind of priorities in the use of funds and not let
it just go to whomever can pay the highest rate.
Mr. A n n u n z io . Y ou do not have to be an expert in economics to
understand that when young people go out to buy a home, and they
have the downpayment, and if they cannot make a loan, that this is
going to hurt the savings and loan. It is going to hurt the building
industry, it is going to hurt many of the people who are employed
in the building industry and this situation will spiral, the ball begins
to get larger and larger and all of us are aware of the fact that we
are in a very tight money market.
I want to ask this question, pursuing the responsibilities of the
Federal Reserve Board. I feel that they are the key to this particular
crisis for the simple reason that they created it and having had the
power to create it, it seems to me, that under the regulations they
can solve it. Since they are separate from us in the Congress, they
ought to be able, if 2 weeks after they issue the order they were cau­
tioning the bankers and now it is 5 months later, I think the Chairman
of that Board should call a meeting as soon as possible to do something
about alleviating the situation. They caused it, they ought to do
something about solving it.



48

UNSOUND COMPETITION FOB SAVINGS AND TIME DEPOSITS

Mr* S t r u n k . I am certain within their law they can.
Mr. A n n u n z io . Thank you, Mr. Strunk.
The C h a ir m a n . Mr. Rees.
Mr. R ees. Mr. Chairman, before I ask some questions, I would
like to read from a memorandum from a leading savings and loan
institution in Los Angeles, to give you an idea of what we are talking
about, in terms of competition, and who is investing in savings and
loan accounts and who is investing in CD’s. In this institution,
which approaches a billion dollars in deposits, we find that 53.7 per­
cent of their deposits are in deposits of $9,000 and over. This is to
emphasize that the great majority of money that is in savings and
loan accounts is investor-type money, of people who use this type
of investment and use a fair amount of money in terms of the invest­
ment. This institution, in the last quarter ‘lost something like $10
million deposits and $15 million was in accounts at the $10,000 level.
So we are not talking about people that have $200 or $300 accounts,
we are talking about those who are invested up to $10,000 insurance
levels.
There were several questions that I wanted to ask. One thing that
shocked me is in your testimony, Mr. Sherbourne, where you said that
the banks had increased their foreign loans from an average of $1
billion to $2.4 billion, during this period.
Mr. S h e r b o u r n e . That is correct. They increased them during
each of the years 1961 to 1963 by a billion dollars and in 1964, the year
in which regulation Q was changed, the banks increased foreign loans
and investments by about $2.4 billion.
Mr. R ees. I think that is shocking. We have been losing some­
thing like $3.4 billion a year in terms of our gold reserves. Much of
that has been lost because of investments and expenditures we make
in other countries. Because of that we have had to send families
home that have been, in say, Europe with NATO forces. We have
had to curtail a lot of things in other countries and here we find that
the banks are now loaning $2.4 billion which is a direct call on our
gold reserves and therefore have a direct relationship to the amount
of currency in our economy. I think something should be done about
that. This money is being taken out of the building market in some
of our States and is being put in direct foreign investments.
Does the Federal Reserve Board under the law today set limits on
all CD’s in terms of the amount of CD’s? For example, could the
Federal Reserve Board by rule say that all CD’s have to be, say, at
least $10,000 and must have a fixed date of maturity and fixed in­
terest rate?
Mr. S h e r b o u r n e . The general counsel informs me that he doesn't
think they have that legal power, to set a minimum amount.
Mr. M c K e n n a . There is a difference of opinion apparently among
lawyers on this, so I don’t want to say it as a categorical answer.
My own opinion is that they would need the blessing of some further
statutory provisions before they could set a floor under the amount
of CD’s.

Mr. R ees. So we really can help the Fed if we wanted to by giving
them this power?
M r. M c K e n n a . Yes, you could.
Mr. R ees. Have we asked for the power, Mr. Chairman ?



UNSOUND COMPETITION FOR SAYINGS AND TIME DEPOSITS

49

The C h a ir m a n . No; we haven’t asked for the power. I do not
believe that the CD’s are legal anyway. I would not be in a position
to discuss that part of it, personally.
They had a secret meeting this morning. We have two Govern­
ments here in Washington, one run secretly, involving all credit,
money, interest rates, and the Congress has the rest. We think they
had such a meeting. We are not even sure of that.
Mr. R ees. Do you not think there is a danger in the use of CD's ?
We found that in California, and I think in other parts of the country
this last year or so, some banks—these are primarily new and small
banks—have had to go into a forced merger because they had too many
outstanding CD's and all of them matured just about the same time
and therefore they were not able to pay the people that wanted to
draw their savings. I think San Francisco National, Mr. Silverthorne's bank, was an example of this. Do you think it might be
prudent to help the banks " I think we want to help them as much
i
as anybody else, that we put in a provision as to what percentage of
their full deposits can be invested in CD’s.
Mr. S h e r b o u r n e . I certainly do, Mr. Congressman. With respect
to our business, the Congress generally can, upon the recommendation
of the Federal Home Loan Bank Board. Frequently whenever you
permit us to go into a new area of lending, for example, you have the
requirements of not more than 2 or 3 percent in a given area. So that
the CongressJiad an opportunity therefore to test the impact of that
new power and precisely that is what should have happened in this
area.
May I emphasize again this point, that when you are paying 5*4
percent or 5 percent on 30-day money, that 30-day money is so close to
demand deposits on which by law the commercial banks can pay no
interest, in effect you are almost getting close to infringing a principle
established by the Congress that it is unsound to permit this. But
when you are paying 5Vi percent on 30-day money, you are almost
doing just that. And the thing that has made it so volatile and so
dangerous is that in effect corporations are getting a long-term interest
rate on negotiable certificates which is almost like currency, because it
is so mobile. This is an acute problem.
Mr. M c K e n n a . In answer to your request, Congressman, I quoted
yesterday from an article by Mr. Herbert Prochnow, Jr., attorney for
the First National Bank of Chicago. It seems he has been anticipating
some of the questions to be asked by this committee and he was writing
in November 1065.
On page 058 of the “Banking Law Journal” for November 1965, he
said, “Traditional regulatory tests for capital adequacy may also be
outmoded by bank issuance of capital debentures and promissory notes.
The failure of some U.S. banks in part because of overreliance on
certificates of deposit may indicate a need for a study of the maximum
of percentage of deposits of an individual bank which should be de­
rived from the issuance of time certificates.”
Mr. R ees. Thank you.

The C h a ir m a n . Mr. Hanna.
Mr. H a n n a . I was not here at the time my name was called.
The C h a ir m a n . We are coming back to you right now. Mrs.
Dwyer is entitled to recognition. She was not here the other day,



50

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

yesterday, and then we will start right here with Mr. Reuss and Mr.
St Germain and others who have not interrogated the witnesses.
Mrs. Dwyer ?
Mrs. D w ter. Thank you, Mr. Chairman* I am sorry I was not
here yesterday because I would have liked to have had the privilege
of introducing Mr. Sherbourne to the committee. He happens to live
in my district and is one of the most outstanding men in the savings
and loan industry.
I read your statement last night, Mr. Sherbourne, and I congratulate
you on it being a very, very constructive statement.
Thank you. I have no questions.
The C h a ir m a n . Mr. Reuss.
Mr. R eu ss. Mr. St Germain and I will yield to Mr. Hanna.
Mr. H a n n a . I want to thank my colleagues. I want to thank the
chairman for his courtesy.
Gentlemen, I wanted to go back to a point that was made by Mr.
Rees about the distinction in the money that we are talking about when
we are talking about the thrift savings and when we talk about the
investors’ deposits.
Now, I think this is a very important distinction to be made, par­
ticularly as a Californian, there is a distinction to be made and I would
like to make it in the light of an understanding of what- you said. Mr.
Sherbourne, about the comnetitive position ordinarily as it has been
historically—the banks and savings and loan institutions required
that since the savings and loan does not srive all the services that the
bnnk does, that it has to have some spread in what it gives depositors.
That has been examined into and and has been agreed.
I would like to point out one other point of spread. Tn California,
because we were a State in which there was a greater demand for capi­
tal needs than there was capital in the State for this expansion, we
became a capital importing State, therefore we had to give a little bit
more than one-quarter in order to serve what our needs were and that
was understood.
Tn addition to that we had a very aggressive group of savings and
lonr* people. So they were able to take the two percentages, the one for
the bank competition, the one for the importation of capital, allowing
them to aggressively advertise for deposits. They are not now looking
for local money to build local neighborhood buildings. They are now
nroin£ out into the money market and they have become participants
in the money market of the United States.
California has $26 billion of $130 billion of business and therefore
"bout 20 percent of it. But during the period of time in which this
importation of money was acquired, they did every year between H
pud 15 percent of the building that was being done in the United
States. A business that ran from $45 to $60 or $65 billion a year. We
doing that in California and we needed the money to do it.

Now. any financial institution, be it bank, saving and loan or any­
thing else, operates on liquidity for growth and if it is aroing to have
new loans it has got to have new money input%Where does it get that
money? It gets that money from its borrowing, from loans already
made, it gets that money from its new deposits, and it gets that money
from the returns from loans previously made, the paybacks.
Now, this is what happened in California. We got our first—we
got ours
 with the large, the greatest market and we got the flow of


UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

51

funds in order to take care of tlie demands that were made for new
loans out of all of this and we went rocking along fairly well with a
few stumbling blocks in places like in 1954 and 1957 until wT readied
e
a period of time in which this all began and it was not in December
of 1965, but it was when the insurance companies started pulling out
of this picture in 1964. The red flag, as far as I was concerned, went
up then. What happened there was everything had been made so
fluid, that the money availability determined the building of homes
and not the market needs, and so there was some overbuilding. That
started the pullout. Now, at the same time, our national policy
demanded for an expansion of our industrial capacity. Now, there
began to be a slack off because of overbuilding in certain areas, there
began to be a buildup of need for expansion of industrial potential
and so a new pressure on the money market was developed and I
understand that this last year, that something like $60 to $80 billion
in business and industry expansion occurred. So it is understand­
able with this pressure on, it did not take very long to build in our
country a flow of funds to banks. When the interest rate went up,
this again contributed to the lack of inflow of funds. We found out
in California that the demand for building is hedged upon the guy
who is already in a new house—it is the moveup man that really makes
the market. It is the man who is moving up in housing, and when the
interest rate took his equity and ran it down again, he decided he
would not sell.
So the raising of the interest rate changed the payoff. The 30-year
loans had an average life of 7 years. And that meant there was some­
body selling the house they were in to buy another house. Now, that
has stopped. That has stopped. Because the man who had the house
to sell found out if he sold under these new interest rates he had to
take a discount on his mortgage that operated to be about a thousand
to $1,200 on a $20,000 house. He decided he couldn’t afford to put
that much equity down the drain and he would not sell, he would
hold on to it.
Now, what happens to the liquidity which was in this money that
we were importing? There were no loyalties in that money. No
loyalties whatsoever. This was investment money and it is looking
for yield and returns. So when they found that the pressure had
set up the interest rates, and the Fed with raising regulation Q opened
the valve for the business expansion and provided the conduits, the
CD through which that can flow, the money hit the conduits toward
the banks. Then something else hit the fan for the savings and loans.
And that is where we are right now and the CD’s position in this
thing is that it was a conduit through which this money could flow
to meet the yield and the pressure that built the yield for construction
loans. That is the way I see the picture and that is the way I see the
CD operating in it.

I think that you can always have too much of a good thing and that
is what we got in a CD, It was a good thing and we got too much of
a good thing because instead of handling a reasonable relationship be­
tween the function it was supposed to fulfill and the fact that it starts
hitting even down into the thrift level, it is even destroying the loyalty
depositors, not only housing, not only lousingup the liquidity, and if
I am not wrong, that is a good part of the picture as far as my own
State is concerned.



52

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

Mr. S t r u n k . I might say, Mr. Congressman, you have painted a
brilliant and accurate picture as far as I can tell.
The C h a ir m a n . Mr. Eeuss ?
M r. R eu ss. There has been much testimony both from you gentle­
men and from many of us here stating the effects of the Fed’s per­
formance on CD’s on home loans and homebuilding generally, which
is the function of our savings and loan institutions.
At the hearings of the Joint Economic Committee right after the
December action by the Fed on regulation Q, I asked Chairman Mar­
tin whether prior to the drastic change in regulation Q, which the
Board instituted, he had consulted with or conferred with the Federal
Home Loan Bank Board and his answer was no, he had not. Do you
have any judgment, Mr. Strunk, as to whether that was in the interest
of good and orderly Government, to effect this kind of change in the
rate of our savings institutions without such consultation ?
Mr. S t r u n k . Mr. Congressman, I was quite amazed when I learned
on the record that the Federal Reserve people had not talked with or
consulted the Federal Home Loan Bank people and I would hope that
they have opened up avenues of constant communication in the mean­
time because the Fed, I don’t think should be taking actions, affect­
ing something so vitally—something so vitally affecting the savings
and loan business without talking to those people in Government who
are responsible for the orderly conduct of the savings and loan
business.
Mr. R e u s s . Both in your testimony, Mr. Strunk, and that of Mr.
Sherbourne, you have made specific suggestions for action with respect
to certificates of deposit. Neither of you have, in terms, endorsed the
bill, H .R . 14026, which would make illegal negotiable certificates of
deposit, but both of you suggested changes be made. I myself have
been greatly concerned with an aspect of CD’s which has not been
touched on this morning, namely, that they bear a 4-percent reserve
requirement on the bank system as opposed to the 16-percent reserve
requirement for demand deposits. A negotiable CD is about as close
to a demand deposit as can be imagined. Do any of you have an
opinion as to whether a raising of the reserve requirements from its
present 4 percent would not take some of the gloss and bloom off of
CD's and make them less irresistible to the large banks, an irresisti­
bility which has contributed to the fact that we have now $17.5 billion
worth of these pieces of paper ?
Mr. S h e r b o u r n e . I think your comments are much to the point. I
don’t believe that setting a reserve requirement on the short-term
CD’s to be the same as on the demand deposits would cure the major
problem. It would have a desirable impact because at the present
time if a commercial bank were willing to let a proportion of these
time deposits and negotiable certificates drift away, by remaining
perhaps or taking a chance on their being converted to demand de­
posits, then thev are put in the position of adding 8 percent to their
reserve balance in the Reserve bank and that would be a little tough
on them.
Mr. R e u ss. So it is your judgment that no action should be taken
to increase the reserve requirements on CD’s, negotiable CD’s?
Mr. S h e r b o u r n e . I don’t think it would solve the problem, but I
think it would be a desirable act.



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

53

Mr. S t r u n k . I would not say that the Fed should not take such
action. I would hope that the Fed would. I would agree with you
that this is something that—another thing that can be done about
this problem.
Mr. S h e r b o u r n e . It wouldn’t solve the problem as far as we are
concerned.
Mr. S t r u n k . N o , i t w o u ld n o t.
Mr. R e u s s . Would it not, by damping down the attractiveness of
CD’s contribute to the solution of your problems ?
Mr. S t r u n k . It would I think contribute to the solution of it. It
would not necessarily solve it.
Mr. R e u s s . D o you agree, Mr. Sherbourne ?
Mr. S h e r b o u r n e . The difficulty I face in answering that problem—
it would affect it, but I think primarily the problem is this—if a com­
mercial bank is enabled to pay a very high rate on a short-term de­
posit, it perhaps is willing to take the chance, even if they had to put
up a 12-percent reserve instead of 8—they still have a substantial
amount of additional deposits which they would use.

Mr. R e u s s . What you are saying is that while it would not cure
the problem, it might ameliorate it somewhat ?
Mr. S h e r b o u r n e . It might ameliorate it, but not sufficiently for me
to say there would be no residual problem of substantial magnitude
left, I think the problem would still be there, but it would be a smaller
problem, but still serious.
Mr. S t r u n k . The CD problem might be approached in this manner,
but it also needs to be attacked head on.
M r. R e u s s . C o u ld i t b e a tta c k e d in b o th w a y s ?

Mr. S h e r b o u r n e . Yes.
Mr* S t r u n k . It could.
Mr. R e u s s . During these same hearings in December, and again in
a floor speech I made last January, I urged the Federal Reserve in its
annual report, which I hoped to have in my hand by February 1 in
the joint committee hearings, to give us its philosophical explanation
of its performance on its regulation Q and CD’s generally. Unfor­
tunately, the Federal Reserve’s report was not delivered to the House
until 4 months after the start of the year, so that it was of no use in
the Joint Economic Committee hearings this year.
I have had an opportunity to look through the report and I find in
it, unfortunately, no real discussion of the certificate of deposit. Have
any of you gentlemen had a chance to look at it?

Mr. S h e r b o u r n e . No, sir.
Mr. S t r u n k . N o , I haven’t, sir. The certificate of deposit area has
been so new that I think the Fed or other banking agencies have not
really done much in the way of study in collection of statistics. We
are handicapped constantly in looking at banks because of the in­
adequacy of them—in completeness of them. The Fed publishes data
with respect to reporting member banks in leading cities, but that
is only part of the banking system.

Now, the Fed in December for the first time got some facts. Those
facts were released a few weeks ago and I thmk we were in—they
were in the latest Federal Reserve Bulletin. This is the only area.
I don’t think the Fed has gotten enough data nor have they done
enough—nor have they done much real thinking, I think, in this brand
new banking area.

63-496—66------5


54

TJNSOOND COMPETITION FOR SAVINGS AND TIME DEPOSITS

Mr R e c s s I would like to address a question to my colleagues in
the lower tier, indicating that they are closer to the people than some
of us older members. Have any of y o u gentlemen received the an­
nual report of the Federal Reserve System {
Mr. fesa. Yes.
* j
Mr. T odd. I just got it. I r eceiv ed it y e ster d a y .
Mr. O t t in g e r . I h a v e n o t r eceiv ed it.
.
Mr, E e u s s . I w o u ld lik e to ask — I h a v e n o t receiv ed it e ith e r , so
this is not confined to you.
The C h a ir m a n . It w ill b e fu r n ish e d to a ll th e m em b ers.
Mr. E e u s s . If I may address my remarks to our friend, Bob Cardon, I think it would be a good idea if the Fed made available to
each member of the Banking and Currency Committee a copy of this.
The C h a irm a n . They should send each member a copy. They sent
the chairman one.
Mr. Bees. They send one to the chairman and the lowest member
of the committee.
Mr. E e u ss. Thank you, Mr. Chairman.
The C h a ir m a n . Mr. St Germain.
Mr. St G erm a in . I have a question for Mr. McKenna whom we all
have a good deal of respect for.
In your opinion, does the committee have the power to legislate in
the area that Mr. Rees brought up as to the amount of CD’s that a
bank can issue, in other words, to restrict the percentage of CD’s as
against deposits that the banks can issue?
M r. M c K e n n a . A s to the Federal Reserve Board’s existing power,
we have not researched that and I would have to draw on my general
knowledge of the Federal Reserve Act. It seems to me that this is in
an area that would be within the cognizance of the Federal Reserve
Board. It is a. matter of supervisory importance and I would think
that they would have, in that area, a field they could regulate if they
chose to do so. However, I would appreciate the privilege of supple­
menting my opinion in the record.
(The following information was submitted for the record:)
S t a t e m e n t o r W il l i a m F . M cK e n n a

Representative St Geraain raised the question of regulatory action to control

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UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

55

may restrain, by suitable enactments, the circulation as money of any notes not
issued under its own authority. Without this power, indeed, its attempts to
secure a sound and uniform currency for the country must be futile.” 75 t\S.
;>48-f>49.
Commenting on the statute designed to force the withdrawal of State bank
notes from circulation, Senator John Sherman gave voice to the truism that the
volume of currency affects the price of commodities. Consequently in order to
regulate the value of coin, it is appropriate for the Congress to control the volume
and use of currency.
Certificates of dei>osit issued by banks likewise have a relationship to the value
of money that warrants Congressional control of the terms upon and amounts
in which such certificates may be issued. The kinship of such certificates to
money is particularly close if they are issued in negotiable form, so that they
can pass from hand to hand in lieu of the deposit of money they evidence.
The entire outstandings of certificates of deposit, whether negotiable or non­
negotiable, exert influence on the value of coin from another direction. Such
certificates constitute an obligation on the issuing bank to pay the amount due
on them at specified maturity dates. In our present financial system, the avail­
ability of deposits in financial institutions affects the supply of funds available
for financial transactions through bank loans. This in turn affects the price of
commodities, goods and services in the same manner as the volume of State bank
notes affected the price of commodities. In extremes?, unwise overissuance of
certificates of deposit could result in the inability of the issuing bank to pay the
obligation incurred at maturity, leading to failure of the bank due to insolvency.
While it may be a matter of degree* one need only recall the economic situation
in the United States in the early 1930’s to realize that bank failures in turn affect
the value of money.
In 1924, Mr. Justice Holmes speaking for the U.S. Supreme Court in the case
of State of Missouri v. Duncan, 265 U.S. 17, upheld the authority of the Congress
to sustain the competitive ability of its creature, the national bank, vis-a-vis
State-chartered financial institutions. That case overturned a Missouri probate
court’s refusal to appoint a national bank as an executor under a will, even
though the bank met the qualifications of a Federal law that authorized national
banks to act as trust companies if like activity is carried on by State-chartered
banks and trust companies. The question at issue is whether a State could
impose a safeguard such as the deposit of securities to protect beneficiaries that
a national bank could not meet under its enabling statute. In his decision,
J ustice Holmes stated:
“the State cannot lay hold of its general administration to deprive national banks
of their power to compete that Congress is authorized to sustain.” 205 U.S. 24.
Seven years earlier, in First National Bank v. Union Trust Company, 244 U.S.
410, the Supreme Court relied on the argument th at business practice provided
a connection between banking and trust business, thus sustaining Congressional
authority to permit national banks to engage in trust activity if no contravention
of local law was involved.
Thus the principle seems well established that the Congress can use the bridge
of business practice to justify action to enable its financial creatures to remain
competitive. This principle would seem easily to allay any doubt that the Con­
gress can take similar appropriate action to sustain the competitive ability of its
creatures th at are Federal savings and loan associations, where competitive
ability is drawn into the picture through the business practice of banks in issuing
certificates of deposit.
The foregoing brief analysis has not dipped into the possibility of using the
power of the Congress to regulate commerce with foreign nations and among the
several States as a foundation for appropriate Congressional action controlling
the terms and amount of issuance of certificates of deposits by banks. However,
the Constitutional grant of power to the Congress to regulate commerce, as it ap­
pears in Article I, Section 8, Clause 3, may well supply an added basis for Con­
gressional action with reference to certificates of deposit. In modern business
practice, the actual transaction of making a bank deposit often flows across State
lines, as does subsequent negotiation and transfer of a certificate of deposit is­
sued by a bank as the result of the deposit transaction.
Let us turn now to the Question as to whether the Federal Reserve System
already possesses authority to regulate the percentage of total deposits in a
member bank of th at System that can be represented by certificates of deposit
The Chairman of the Board o f Governors of the Federal Reserve System
strongly intimated th at the System already has such authority. In his appearance




56

TJtfSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

before the Permanent Subcommittee on Investigations of the U. S. Senate Com­
mittee on Government Operations on March 16, 1965 in connection with an in­
vestigation into Federally insured banks, Chairman William McC. Martin, Jr.,
stated that the proportion of a bank’s certificates of deposit to its total deposits is
something that the System watches all the time. (Hearings Part I, page 224).
In a colloquy with Chairman McClellan of the Subcommittee, Mr. Martin
described “volatile” certificates of deposit as those taken by a corporation seek­
ing an interest return on funds expected to be used for some corporate purpose
within a short time. At the given time, the corporation either withdraws its de­
posit or sells its certificate of deposit if it is negotiable in form. Senator McClel­
lan drew a distinction between a certificate of deposit likely to be withdrawn at
maturity and a savings account likely to grow in size.
Mr. Martin noted that the hazards in issuing certificates of deposit are intensi­
fied if the issuing bank ds relatively small or newly chartered. He stated that
such a bank may have a ready market for its certificates of deposit one day
and none whatever the next, and unless it has maintained proper liquidity and
soundness on its assets, it cannot pay its “volatile CD’s” as they fall due.
Senator McClellan then stated:
“If you are concerned or interested in the soundness of a bank, particularly
a new one just starting, you would not take $10 million deposits for face value as
sonind growth. You would go back and examine to see how many of its
deposits were similar to those volatile CD’s ?”
Chairman Martin replied: “Exactly.”
Senator McClellan continued:
haJve
mim°n of
deposits in that kind of deposits, and
w„ d .not m?icate " " “ A growth up to the $10 million rate?”
a

and the Senator then agreed th a t such
^
. draim staaces might indicate a lack of a healthy situation.”
Senator Curtis joined the discussion to comment ■
. J ™ 110 he quite trank about i t the CD has gotten to be almost evidence of

88C
°ntmted t0thebaDk« ■ * the™stodia" o'
Chairman Martin agreed with Senator Curtis’ analysis, and added t h a t w ith

This is the kind of analysfcthS
skills of SUch banksresponsibility of the examination dep artm m ti^ftv .i3^ ^ 7; tJ 1 18 8 continuing
most of the i i i r t u i c e e T w S r a ? ? ™ ^
? Fe<Jeral Beserve banks. In
symptomatic of generally now unsound
^
the Practice ha« been
bank with CD p r o b l ^ hTs n ^ v E S F S L " 1 0,6 5?nk' In other words, the
lending practices. * * * When an eYaminat?mIeri,P
m*' incl,ldinK unsound
Stnte member bank, the Reserve bank
ti.
unsound conditions in a
and if necessary, the d i r S
^ Cts to the ^ e c u tiv e officers
bank recognize and carry out its
e the M na,!em™ t of the
Solution of CD problems in such casesusnaliv
^ oper?te 010 bank soundly,
lems. Besides avoiding further e x m u u t a ^ n f ut i on of reIated probmust stop making unsound loans, and
olatile CD s, the bank’s manageJ^ n g then any such tains S v ^ e
T ^ th J ^ l ng
to co llecto r
bank must collect, sell, or borrow on i « L
Uest extent Practicable, the
CD s. in troublesome situations the Ttrnr
i Deces8ary to pay off m aturing

SSSI^srSSSSS5ssssrss
*



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

57

“Our experience to date does not dem onstrate any clear need in my judgment
for legislation providing stricter controls over th e m arketing of certificates of
deposit or over transfers of bank stock. I share your concern, however, over
the potentialities for trouble in these areas. The Federal Reserve System
stands ready to cooperate w ith your committee and w ith the oth er bank super­
visory agencies in making sure th a t adequate safeguards are maintained to
protect the public against unsound banking practices.” (Hearings, P a rt I,
pages 228-230)
I t should be kept in mind th a t since Chairm an M artin’s testimony in March
1965, certificate of deposit problems have increased, particularly in view of the
December 1965 increase in permissible interest rates under Regulation Q.
From the foregoing testimony, it appears th a t the Chairm an of the Federal
Reserve Board views any trouble w ith certificates of deposit as a phase of
unsound banking operation. He readily concedes th a t unwise activity by a bank
in issuing certificates of deposit can lead to unsound operation. The proportion
of a bank’s total deposits represented by certificates of deposit is an item the
Federal Reserve System constantly watches, according to Chairman M artin.
He agrees th a t too high a percentage may indicate unhealthy operation of the
issuing bank. To date, the System seems to have relied upon the persuasive
power of exam iners to convince management in any affected bank to take
remedial measures w ith reference to overissuance of certificates of deposit.
Chairm an M artin stated th a t as of March 16, 1963 (the date of his testim ony),
the System had not found it necessary to use its “drastic remedies” of term inating
a bank’s Federal Reserve System membership or term inating a bank’s deposit
insurance or removing a bank's officers or directors.
Chairman M artin’s discussion indicates th a t a t th a t tim e he viewed the certifi­
cate of deposit problem as containable under Federal Reserve watchdog pro­
cedures concerning unsound banking practice. He would then apparently have
seen no need for singling out the certificate of deposit as the subject of a. specific
regulation by the Federal Reserve Board th a t would control the dollar percentage
of total deposit in a given bank th a t could be represented by certificates of
deposit.
Admittedly authority for such a regulation would not be well-based were it
to rely on th e power granted to the Federal Reserve Board in 12 U.S.C. 371b.
T hat section of the Federal Reserve Act addresses itself principally to the per­
missible interest rate to be borne by time and savings deposits, conditions upon
payment of a tim e deposit before m aturity and w aiver of any requirem ent of
notice of w ithdraw al of savings deposits.
B ut the broad power of the Federal Reserve Board to tak e precautionary
action to safeguard against unsound banking practices would seem to include
th e authority to regulate the deposit mix represented by certificates of deposit.
W hile the certificate of deposit as an instrum ent may not be evil per se, Chair­
man M artin’s testimony before the Senate Perm anent Subcommittee on Investi­
gations indicates th a t its presence in large percentages in a bank may well lead
to hazards of unsound operation.
The breadth of the Federal Reserve System’s general regulatory authority
is borne out by the following comments of Mr. Justice Brennan in delivering the
opinion of the U.S. Supreme Court in U.S. v. Philadelphia N ational Bank, 374
U.S. 321,329 (1963):
“B ut perhaps the most effective weapon of federal regulation of banking is the
broad visitatorial power of federal bank examiners. W henever the agencies
deem it necessary, they may order ‘a thorough examination of all the affairs of
the bank’, w hether it be a member of th e FRS or a nonmember insured bank.
12 U.S.C. §§ 325,481,483,1820(b) ; 12 CFR $ 42. Such exam inations are frequent
and intensive. In addition, the banks are required to furnish detailed periodic
reports of th e ir operations to the supervisory agencies. 12 U.S.C. §§ 161. 324,
1820(e). In this way th e agencies m aintain virtually a day-to-day surveillance
of th e American banking system. And should they discover unsound banking
practices, they are equipped w ith a form idable arra y of sanctions. As a result
of the existence of this panoply of sanctions, recommendations by the agencies
concerning banking practices tend to be followed by bankers w ithout th e necessity
of form al compliance proceedings. 1 Davis, A dm inistrative Law (1958), £ 4.04.”
To date, the System seems to rely on exam ination as a tool to discover and
persuade correction of unsound banking involving issuance of certificates of
deposit. The power o f th e Federal Reserve Board to seek to prevent unsound
banking by adopting a suitable regulation controlling the percentage of deposits
a particular bank may have in certificates of deposit would appear to be w ithin




58

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

the Board’s possession. Bnt

the

to meet the problems caused by certificates of deposit in some ban

*

M S t G erm ain . Can the committee, Banking and Currency Com­
r*
mittee, legislate in this area?
i
Mr. M c K e n n a . The Congress has the power to regulate the value
of and to coin money. I think you have plenary power m that respect.
Mr. St G erm ain . The banks are actually coming money, so to speak.
In going over the testimony, one point was brought out, the fact that
it is difficult for the savings and loan people and savings bank people
to compete with this high interest rate because a great deal of our
money is being repaid, as Mr. Hanna brought out, based on much lower
rates of interest returned on mortgages outstanding. Now, I wonder
if you gentlemen will agree, that it is very possible that this change
over this rate made back in December and the change in regulation Q
could well be reversed downward or changed downward at any time
by the Federal Reserve Board within 6 months, a year or 2 years if
conditions so warranted. That being the case and it seems to me that
this is almost inevitable within a few years are we not, in essence,
hurting the young family man with one or two children who cannot
find an apartment to live in and is forced at this time to go out and
buy a house and take out a mortgage at whatever rate of interest that
is being demanded of him ? Are not these the people, in the long run,
who are going to be hurt by the action taken back in December 1965 ?
I ask you to comment on that one.
Mr. S t r u n k . Yes, higher interest rates have a major impact on a
family buying a home and these people are hurt. We have always
felt that it is one thing to raise the interest rates on major corpora-

tions, who borrow for shorter periods of time, and another th in s to
raise the interest rates on people who buy automobiles, and that loan
is only there a short period of time. I t is quite different from the
interest rate on a mortgage loan that is there for 25 years and you raise
that rate, say 5 percent to 6 percent or 5% percent to 6 percent, then
he pays that extra percentage point on a lot of money over a longer
period of time. These are the people who are hurt the most by in­
creases m interest rates on home loans.
M r. S herbourne . T h ere is a n o th er fa c to r . T h e in te r e st r a t* is
mor* ^ * p s t0(l a y b ecau se w e are t r y in g t o c u t d o w n th e
m
o
a - P°Lnt VV* w e c a n h a n d le w ith a v a ila b le
!Q th a t
<>* «H H *et i s th a t th e a sso c ia S ?a
hi«hr d o w n p a y m e n t a n d a
E
t h e 0116
i8 h u r t th e m o s t is
paym ent o n th e loan
a
8® d e p o sit t o p u t a s a d o w n th e greatest e x ten t. ‘
e w th e one a ffected th e m o s t d ir e c tly a n d to

£?A

F e d in^TW a m K ^ T




o

t

h

e

fa c t th a t th e a c tio n ta k e n b y th e

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

59

Looking at this action taken by the Fed, would it not seem justifiable
that these gentlemen also be put in a position where more than a one
vote majority is required on a step that is of such significance to the
economy and perhaps a two-thirds plural vote, be necessary for such
drastic action ?
Mr. S h e r b o u r n e . That sounds like a very logical suggestion.
On the other hand, there may be occasions where the failure to act
could be serious.
Mr. S t G e rm a in . Nothing further, Mr. Chairman.
Mr. C h a ir m a n . I believe we have all had the privilege of a first
go around. How many members now would like to interrogate the
witnesses further. Let us go off the record.
(Discussion off the record.)
The C h a ir m a n . May I please call your attention to the fact that
after this decision by the Federal Reserve last December in defiance of
the President of the United States to increase rates 37y2 percent, the
most meaningfully effective, rediscount rate from 4 to 4i/£ percent, and
the time deposit interest rate from 4y2 percent to 5y2 percent. As
chairman of the Joint Economic Committee, composed of Members
of both the House and Senate, I called a hearing for December 13 to
look into that and asked the members of the Federal Reserve Board to
appear. We interrogated them, all the members of our committee.
For the first time in my recollection, and I have only been around 38
years, we printed a cartoon in these hearings. It was Herblock’s
cartoon that appeared in the paper that morning, showing the Presi­
dent on a bicycle with Chairman Martin of the Federal Reserve Board
on the same bicycle, one pumping in one direction and the other pump­
ing in the opposite direction. That is the situation we faced at that
time. In these hearings I think it was very conclusively shown that
the reason these rates were raised was not for the purpose of helping
the economy of the Ncttion at the time by fighting inflation real or
imagined. Raising the rediscount rate one-half of 1 percent did not
amount to much, although it is a signal for high interest rates all over
the country. The Federal Reserve was hurting because a few banks
were hurting. This sounds like a sordid story because it is a sordid
story.
#You know, when the monetary authorities decided that they wanted
high interest rates back in 1960 and 1961, they decided that the best
way to do that job would be to get these large sums held by corporate
managers out of the weekly auction market for short-term Govern­
ment securities. The corporations were keeping the rate down. They
were in there every week buying billions in Government securities and
that kept the interest rate down.
Well, of course, we passed a law about that time making the aver­
age rate on treasuries the rate that the agencies of the Government
would have to pay. Well, of course, some of the money lenders did
not like that because the short-term rate was low. These corporate
funds bidding on the short-term securities kept the rate down. Now,
if they could get them out of this bidding, then the short-term rates
would have to go up. So the big banks devised the CD with the help
of the Federal Reserve and started a race between short-term Gov­
ernment securities and CD’s. CD’s, negotiable CD’s, are nothing more
than interest-tearing currency. That is all it is. O f course, whenever



60

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

they got them, they had an opportunity to buy CD'S at 4 percent with
these corporate funds and if they needed to pay taxes in the near
future or distant future they could always get their money out of this.
And they would get this enormous amount at 4 percent at that time.
It was a great windfall. It was a bonus. They gladly ran in at 4^/o
percent. But their leaving the auction market caused the rate on the
short-term Government securities to go up and they went up so fast
that in December, when over $3 billion worth of CD’s were coming
due in December, and probably twice that much in January and Feb­
ruary, they were hurting. They could see they could not renew the
CD’s because the Treasury securities were more attractive. They
would be ruined.
Then of course, the banks said: “You’ve got to get us out of this.
We cannot keep these CD’s at 4y2 percent,” and they had a meeting.
They defied the President down at Johnson City, Tex., when they
went down and told him, we have decided anyway, although you are
against us, to raise the CD rate from 4 percent to oy2 and they went
ahead and did it.
Now, here is the trouble, folks. We are just spinning our wheels
around here. We are letting the Federal Reserve run over Congress
and run over the country. They are running the major part of our
Government. They have taken it over. They have seized it just like
Castro seized Cuba. They have taken it over. They do not have the
power to do it, but they have done it anyway. And the reason they
could do it is because they do not have to come to Congress for ap­
propriations. You see, all other important agencies of Government
have to come to Congress to get their appropriations to run their or­
ganization. And in getting that they must make certain disclosures.
What are you going to do with this money ? How are you going to
handle it? In that way the Constitution contemplated that Congress
elected by the people would have charge of all agencies. And of
course the Federal Reserve got away from Congress because they were
able to take the Federal Reserve currency and trade it for Govern­
ment obligations.
Now, remember, they are fiscal agents of the Government and they
are supposed to look after the Government’s business. I f you had a
mortgage on your home of a thousand dollars and you gave your
agent—we will call him a fiscal agent—a thousand-dollar check to
pay that mortgage and he takes it, pays the mortgage off all right,
but he has the mortgage transferred to him instead of you, and the
mortgage is not canceled—he wants you to pay interest every time
there is an interest payment and when it comes due he would want you
to pay it again—you would not think that he was a very good fiscal
agent. That is what the Federal Reserve has been doing for years.
They have been taking the people’s money, trading for U.S. Govern­
ment bonds, keeping the bonds and requiring the U.S. Treasury to
require the taxpayers to pay interest on those same bonds. They
are getting a billion and a half dollars a year interest and they can
spend that money any way they want to. As evidence of it they
are actually joining the Ainerican Bankers Association every year.
They pay tens of thousands of dollars as dues and donations to the
American Bankers Association and State bankers association, ag­
gregating a hundred thousand dollars a year. That is public money.



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

61

They are taking our public money, becoming dues paying and card
carrying members of the American Bankers Association. That is
what they are doing. That shows they can spend money for any pur­
pose. That is right. I can bring up illustrations just as ridiculous.
It shows they have defied the Congress. They say they will use any
part of this billion and a half dollars for any purpose, any purpose
they want to and it would really shock you if I told you what they
used this money for.

They have defied the Congress and defied the country. They have
use of this billion and a half dollars any way they want, and what
is left goes into the U.S. Treasury. Any of it tliat is paid out for these
purposes would otherwise go into the Treasury. I t shows that they
are not looking to Congress because they do not have to get their
money from Congress.
Another thing, they are not audited by the General Accounting
Office like other Federal agencies. So what are you goin£ to do with
a bunch like that who shake their fist saying we defy the President of
the United States and the Congress? How can our Government
last when the elected representatives have such limited responsibility
and such limited powers compared to the greatest powers exercised by
a few people in the banking system who absolutely control the Federal
Reserve. The Federal Reserve has a meeting down there this morn­
ing on Constitution Avenue. I t is a secret meeting. They have their
guards around it. Hitler never guarded a building in his life as well
as they guard that building down there. They keep everybody out.
They do not want anybody around there except the ones they want.
The truth is the Federal Reserve Open Market Committee is com­
posed of 12 members by law. The law says that. Seven public mem­
bers are supposed to be on it and five are the presidents of the Federal
Reserve banks. Of course, those presidents of the 12 Federal Reserve
banks are elected by the private banks. Because the private bankers
select a majority of the bank directors, they are right in there and not
only do the seven members of the Board come in this secret room down
there so highly guarded this morning that I doubt if the U.S. Army
could get in there, but they also let the five presidents come in and
then they let the other seven presidents come in. When they do that
they operate in violation of the law.
Down in the Southwest when people operate outside of the law, we
call them outlaws. I would not want to call them outlaws because
I know they do not intend to go to that extent, they are not the type.
They are not revolutionaries or anything like that. But in effect they
are violating the law. They have some 20 to 30 or 40 staff people there
and then they go back and make these decisions. You will not know
their decision for 5 or 6 years. It will be 5 or 6 years before that in­
formation will be out. They want to keep it secret. But they go back
and report to their respective Federal Reserve banks, each one has a
board of directors, six of nine directors elected by private bankers
with different connections over their respective districts. I estimate
that at least 500 people know instantly what is happening in the secret
session over the Nation. They know how to cut through this. What
chance have tha others got ? They use loaded dice. They know what
the score is. So that is going on right here in the United States of
America in broad daylight. You would never think it would happen,



62

UNSOUND COMPETITION FOR SAYINGS AND TIME DEPOSITS

but it is happening here; yet, we do not deal with it. Why will not
Congress deal with it? They look upon monetary values as sort of
sacrosanct, hallowed ground, leave it alone, let the bankers do it be­
cause they know all about money, when they really do not. All they
do is to go out and make loans and how to collect it back, and this is
necessary for the economy. But they do not know the science of money
and do not claim to know.
They are not looking after the public interest as you would expect
them to look after their own interests. We all do it. It is perfectly
natural.
But as long as we are permitting this to go on, we in Congress are
just spinning our wheels. We do not have the main powers. We have
let them take them away from us. They are not right in this inde­
pendence. Because the Constitution is too plain on it. We do not
have four branches of the Government. They are claiming to be the
fourth branch of the Government—the legislative, executive, judicial,
and Federal Reserve. Well, we do not have that in the Constitution.
It is an agency just like any other agency, subject to the will of the
elected representatives of the people. That is what they are.
Now, how long are we going to put up with this? It is a serious
question. They have the advantage of us. They got all this money,
they’ve got $40 billion in the Federal Reserve Bank in New York and
the people know that. It is in U.S. Government bonds, interest
bearing. They belong to the people. Yet the Federal Reserve claims
it belongs to them. They can do anything with this money just like
they pay dues to the American Bankers Association. They spend
this money any way they want to. Would that not be a huge campaign
fund? That is exactly what they are doing. You could not stop
them. They defy us. They are not responsive to us. They are un­
elected representatives of the large Wall Street banks.

Now, if the elected representatives of the people were doing that
they could be defeated. They could be punished. That is what the
Constitution contemplates, if somebody in responsibility does this.
It has gotten out of hand. What are we going to do about that?
Mr. A n n u n z i o . Would the Chairman yield? You have illustrated
the meeting in Johnson City, Tex., when they went down to meet the
President of the United States and after the meeting with the Presi­
dent of the United States they still went ahead and raised the discount
rate to 4% percent. So they have proven your case.
The C hairm an*. To bail out a half dozen banks. I want to invite
your attention to these hearing's and you can get them from the clerk.
We have 200 copies. I knew this was coming up.
This volume here has the testimony of all the Federal Reserve Board
members and it bears out what I have said. Nobody disputes what I
have said. Nobody disputes it. Volume No. 2 contains valuable in­
formation, too. So every one of you who wants a copv of these hear­
ings, just ask the clerk to let you have them. You will be astounded
to know some of the things that are absolutely undisputed. Every­
body knows.
It is like this $40 billion in bonds. We could reduce the national
debt $40 billion. Why should we pay our debts twice? Nobody can
answer that. I have asked Mr. Martin that, I have asked Mr. Eccles
when he was Chairman—I asked the others, but I cannot get any atten­



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

63

tion on things like that. But we have reached a crisis here. We have
reached an impasse. We have reached a point where they are using
this power to destroy the institutions that have built more homes in
America than any other financial institution on earth. They are put­
ting you out of business. You cannot possibly survive if the Federal
Reserve has its way. Now, if they have the power at all to permit
CD’s, they should certainly limit them.
But, in the first place, they do not have the power to do it. They
know that. Therefore, they are not limiting the CD’s. They are strict­
ly illegal, it is wrong and something should be done about the Federal
Reserve. Our Government cannot continue on indefinitely that way.
Because the Wall Street bankers have charge of a principal part of our
Government—the amount of money we have in circulation and the
interest rates.
There is a book, “Primer on Money” that shows interest rates on
long-term U.S. Government bonds for 75 years. There was a period
of 12 years of the roughest time in American history, from the early
part of 1939 to the early part of 1951, month by month, when interest
on United States bonds never went above 2y2 percent and if people
wanted their money, they could get their money quickly with accrued
interest and at par, no doubt about that.
Now, if the Federal Reserve acting then as public servants, and I
will say this for Mr. Eccles, Mr. Eccles’ monetary beliefs were very
much the other way, but when he was on the Federal Reserve Board,
he felt his duty as a good patriot, a good patriotic citizen to cooperate
with the people’s elected officials. And he did cooperate. And during
that 12 years we had unemployment up to 10, 15 million people, we
had breadlines for blocks, breadlines in the principal cities of America
and we would have people trying to sell homes and farms and the
sheriff would be stopped by mobs saying you cannot do that to our
neighbor, we had food stores being raided all over the United States,
we had terrible times then. But then the war came and we had employ*
ment, people saved money, they wanted to buy something with it.
They could not buy automobiles, appliances, or scarce materials like
that. So they had a lot of money, a lot of money pursuing a small
amount of goods. That was tailormade for inflation.
We were shooting a quarter of a billion dollars away on the battle­
fields. The most potentially inflationary time in all history. Yet,
during the 12 years with all those bad debts and inflationary situa­
tion, the Federal Reserve Board kept the interest rate less than 2y2
percent on long-term bonds and they did it for more years than 12
and I will not go into that. I f they could do it at that time they
could do it any time. I f they had done that ever since, wT would
e
be in a much tletter position. So we have got to do something about
the Federal Reserve Board. I f interest rates had been kept at 1952
levels, instead of going up since that time, we would have saved $60
billion in interest alone and our national debt would be way down.
We are in an awful mess here with two Governments in the United
States, one elected and responsible to the people—but limited with
powers—and with another Government run by the New York banks,
unelected, responsible to no one, paying no attention to anyone, sell­
ing mortgages on all the property of all the people every day at
their will, earning interest on it—just footloose and fancy free. How



64

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

long are we going to do that? We cannot do much about this until
we do something about the Federal Reserve.
Shall we have these gentlemen back in the morning to pursue the
matter ?

Mr. Moorhead, did you have any questions ?
Mr. M o o r h e a d . I notice the testimony had to do with the liquidity
crisis in December. Is there something in our economy that makes
December a particularly vulnerable month ? I remember in years past
it used to occur earlier in the fall about the time of the harvest. Is
there something about December that we should be concerned about?
Mr. S t r u n k . December is always a time of huge demand for cash.
I don’t think there is anything unusual about December last year
except that this was the time when the interest rates went up. The
Fed did raise the rediscount rate and raising interest rates generally
caused the so-called CD crisis because the banks had $3.5 billion of
CD’s maturing in December. But I think the banks have billions of
CD’s maturing every month.
Mr. M o o r h e a d . Thank you, Mr. Chairman.
The C h a ir m a n . Who is next? Mr. Todd?
Mr. T odd. Thank you, Mr. Chairman. Mr. Strunk, the chairman
has pointed out that negotiable CD’s are almost equivalent to interestbearing money. This bill would really stop that practice, but I do
not see that it would affect your position, because your position is af­
fected apparently by savings deposits which are converted not into the
nesrotiable, but into the nonnegotiable CD’s. I was wondering if you
had any comments relevant to this problem, because it would appear
that although this bill would perhaps correct one situation we should
not allow to continue, it would not solve the situation with which you
are faced.
Mr. S t r u n k . That is correct. As we pointed out in these hear­
ings, there are two kinds of CD problems. One relating: to thrift
institutions and one relating to the money market and banking in
general. We are more directly concerned with the nonnegotiable or
what we call the consumer CD.
Mr. T od d . Mr. Ottinger’s proposal would address itself to a solu­
tion of your problem, but it would do so by really separating money
into two different markets, one market for the small depositor and
the other market for the large depositor who would still be able to
buy the CD and you would set up essentially two different interest
rates.
Mr. S t r u n k . You are correct.
Mr. T odd . S o we would be doing what you mentioned earlier, we
would^ be passing judgement on tTie competitive positions of the
financial institutions which we prefer to avoid, but under the circum­
stances I do not see how we can avoid it.
Mr. S t r u n k . You have got to be concerned with the flows of funds
in the various phases of the economy and I think there will be a great
shortage of funds of mortgage money. It is in this area that you
must be concerned.
Mr. S h e r b o u r n e . The only concern that I have with the situation
that I point out is that it was the tremendous buildup in negotiable
certificates that created this problem that finally led the banks to
burst over into the consumer type of CD at rates that were higher,




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

65

much higher than were paid on savings. So that if you simply con­
trolled the consumer CD as Mr. Ottinger suggested and did nothing
about the negotiable CD, I think you would still have that problem
spill over into some other area that would create a condition for our
industry and problems for our industry.
Mr. S t r u n k . These things are never simple.
Mr. Todd. We can change the Reserve requirements against CD’s
or something like this. Thank you.

The C h a ir m a n . Mr. Ottinger.
Mr. O t t i n g e r . Mr. Chairman, I would like to address myself to
the problem that the chairman has raised, that if we put a $15,000
or some other limit on all CD’s rather than outlawing them complete­
ly, we would be discriminating against the small investor. He could
get presumably only 4 percent, which is the limit on present passbook
savings rather than the 5% percent the larger corporations are getting
through CD’s.

Cannot the big investor get 5y2 percent elsewhere on his money ?
Mr. S h e r b o u r n e . Yes, he can.

Mr. O t t i n g e r . So there will still be that discrimination regardless
of the regulations that we might place on the CD’s. The large fellow
with the tremendous drawing power that he has can always invest
in quite a variety of different markets with different kinds of paper
and get high interest rates.
Mr. S t r u n k . The large investor always has advantages over the
small investors for a large variety of reasons.
Mr. O t t i n g e r . I s there a way of resolving this problem by either
requiring the interest rate to be reduced on CD’s or requiring that
the 4 percent be raised on passbook accounts ? It is feasible to estab­
lish a regulation that would increase the passbook accounts of 5y2Percent? Could your institutions afford to pay that kind of interest?
Mr. S t r u n k . Not today, sir. After all, our money is invested in
mortgages that pay a little more than 5y2 percent. You cannot get
more interest out of existing mortgages. I am not sure what this
would do to the financial integrity of the banking system and savings
and loan system to be constantly paying higher interest rates for
money. I f that were to happen we would have to charge considerably
more on our new loans, you see. S o I think you have to consider just
how much financial institutions can afford to pay and what are pru­
dent rates of interest to pay for other’s money which you invest in
mortgage loans, you see.
Mr. S h e r b o u r n e . I f the rate on savings accounts, the permissible
rate under regulation Q, were raised to 5 or by2 percent, the drain
would be even worse than we are now experiencing from the con­
sumer CD’s.
Mr. O t t i n g e r . That is what I wanted to make clear that this was
not an available solution at all. Also, that we are not discriminating
against the small investor by putting a limitation on the consumer
CD’s, but we are merely reflecting a situation that already exists,
regardless of anything that we do. This large investor has the power
in the present market to pull down his 5y2 percent regardless of
whether it is in CD’s or other types of finance. By putting a floor
on CD’s we would be just eliminating a particular market in which



66

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

the large investor is doing a great deal of damage. But we are not
going to be creating any discrimination. That already exists.
Mr. S h e r b o u r n e . May I point out that the small men with $2,000
or $3,000 can now put that money into California savings and loans
and receive a return of 4.8 and 5 percent so that therefore an im­
mediate vehicle is already provided to take care of the small men. But
you are now referring to the fact that perhaps this situation doesn’t
permit commercial banks to do it, because they can only pa^ 4 percent
on regular savings and this rate on negotiable CD’s, this high rate is
available only to the large man. From Congress’ point of view, sav­
ings and loan associations provide that function, therefore you are
not operating against the small man. I f you were to restrict the com­
mercial banks solely in the area of CD’s you wouldn’t restrict the po­
tential return on savings for small investors.
Mr. W e l t n e r . Would the gentleman yield? Is California the only
State wherein the associations are permitted to issue certificates of deposit?
Mr. S t r u n k . Our institutions are permitted to issue a certificate,
but it is not a certificate of deposit as practiced in commercial banking.
Mr. W e l t n e r . It is the same thing, though ?
Mr. S t r u n k . We promise to p a y a quarter or a half percent more
than the regular rate a n d it takes on some of the characteristics of a
ce r tific a te .
Mr. W e l t n e r . D o you not call them CD’s ?
Mr. S t r u n k . Our p e o p le d o n o t c a ll th e m

CD’s. T h e y c a ll th em
savings certificates.
Mr. W e l t n e r . SC’s ?
Mr. S t r u n k . The Federal Home Loan Bank Board in December,
in response, in great part to action by the Federal Reserve Board in
regulation Q, the Board permitted federally chartered associations
to issue a certificate. It is what we call a long-term fixed balance bonus
account which is the technical term.
Now, in California, the Federal Home Loan Bank Board permits
the associations there to pay as high as 5 percent on such certificates.
In other parts of the country the Board’s limit is 4% percent. The
savings and loan associations all over the country can offer a 1-year
certificate with a rate one-quarter point or half point above the base
rate, but in no event more than 4% percent, but in California, because
of the higher rates there and the problem of the banks there going to
5 percent, the Board in April permitted those institutions to pay as
high as 5 percent, combined rate.
Mr. W e l t n e r . Are not the associations in other parts of the country
petitioning the Board for authorization to issue certificates as high
as 5 percent on $2,500 for 6 months ?
Mr. S t r u n k . You are correct.
Mr. W e l t n e r . Is not that the same thing as a CD? There is really
no difference, in the mind of the public, or otherwise
Mr. S h e r b o u r n e . There is one difference in the impact. A corpora­
tion is not going to put up $500,000 in that type of certificate. It
is not going to put that kind of money in a $150 million organization,
but it will put it into a $2 o r $3 billion bank because they realize
the size of that institution is such that they don’t have to be co n c er n e d
about the fact that only $10,000 of that is insured.



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

67

Mr. W e l t n e r . But your problem is with consumer CD’s?
Mr. S t r u n k . Yes, these certificates that the Federal Home Loan
Bank Board has authorized to help us compete with the so-called
consumer bank’s CD.
Mr. W
. That is the basis of the associations seeking authori­
zation to compete with the consumer CD’s authorized by banks?
Mr. S t r u n k . Yes.
Mr. S h e r b o u r n e . That is being used mainly in California because
of the problem, Congressman, described and pointed out earlier.
Mr. W
. Thank you for yielding.
The C h a ir m a n . I think I should let it be known that we will expect
the Chairman of the Federal Reserve Board to appear before our
committee at a time that is satisfactory. I mentioned that to Mr.
Multer and he suggested that we also have the other six members of
the Board and I share his view. I think we should also alert the
Presidents of the Federal Reserve banks who are in charge of the 12
district banks throughout the country that they will probably be
needed, too, and to be ready to testify. Do you know of any others ?
Mr. W e l t n e r . Mr. Chairman, what about asking Mr. Horne?
The C h a ir m a n . Yes, he will be here tomorrow. I think we should
have Mr. Saxon and Mr. Randall because they also have a respon­
sibility. We will also hear Secretary Fowler. Any other witnesses?
Mr. O
. The home builders are coming in.
They are already
scheduled.
The C h a ir m a n . Yes, they are. I am talking about the ones related
to the CD’s in a governmental capacity.
Mr. T od d . Mr. Chairman, I would just like to compliment the
witnesses on the excellent testimony they have given. I think it is
some of the best I have witnessed during my period of service on the
committee.
Mr. O t t i n g e r . I agree with that, Mr. Chairman. I would like to
say, also, that I agree with your concern over the way the Federal
Reserve handled this matter and your concern over the whole certifi­
cate of deposit situation, but I think we have to exercise due caution
not to disrupt the entire economy.
The C h a ir m a n . Certainly, we must. We do not want to do any­
thing that would upset things. But CD’s have had such a tremendous
impact on the public that we must go into the matter thoroughly.
Mr. O t t i n g e r . I think in the longer course we are going to have to
do something to see that the monetary policies of the various regulatory
agencies are coordinated. While we may take a more limited action
with respect to the immediate CD situation, I believe the larger issues
you raise are of great long-term concern.
The C h a ir m a n . Who else ? Mr. Annunzio ?
Mr. Rees?
Mr. R e e s . I have enjoyed this testimony very much. I h o p e that
this committee can do what Mr. Ottinger suggested. I think we have
to eventually develop some type of coordination between these two
types of institutions. This competition where at one time one institu­
tion is on top and then the other is on top can be destructive to our
economy.
e l t

n

e r

e l t

n

e r

t t i n

g

e r




68

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

The C h a ir m a n . We will recess until 10 o’clock tomorrow morning
at which time we will have Mr. Home.
(Whereupon, at 12:05 p.m. the committee adjourned, to reconvene
at 10 a.m., Wednesday, May 11,1966.)




TO ELIMINATE UNSOUND COMPETITION FOR SAVINGS
AND TIME DEPOSITS
WEDNESDAY, MAY 11, 1966

H ouse of R epresen ta tiv es ,
C om m ittee on B a n k in g and C u rr en c y ,

Washington, D.C.
The committee met, pursuant to notice, at 10:10 a.m., in room 2128,
Rayburn House Office Building, Hon. Wright Patman (chairman)
presiding.
Present: Representatives Patman, Reuss, Ashley, Moorhead, Ste­
phens, St Germain, Gonzalez, Minish, Weltner, Hanna, Grabowski,
Gettys, Todd, McGrath, Hansen, Annunzio, Rees, Widnall, Fino, Mrs.
Dwyer, Halpern, Harvey, Clawson, and Mize.
The C h a ir m a n . The committee will please come to order.
This morning the committee continues hearings on H.R. 14026 and
related proposals concerning certificates of deposit.
Our witness is the Honorable John E. Horne, Chairman of the
Federal Home Loan Bank Board. The Federal Home Loan Bank
System was established by Congress in 1932 to provide reserve credits
for savings and home-financing organizations. There are 12 regional
Federal home loan banks located throughout the Nation in an organi­
zation similar to that of the Federal Reserve System. I might add his
agency is a true arm of the Congress in that it is subject not only to
a regular General Accounting Office audit, but also to congressional
appropriation procedures. Another difference is that the Federal Re­
serve creates its own money while the home loan banks must go to the
capital markets for their money just like a private borrower and pay
whatever interest rate the market requires.
The Home Owners’ Loan Act of 1933 provided for the establish­
ment of a system of federally chartered savings and loan associations.
And in 1934, in order to further encourage and stimulate savings
and investments in local thrift and home-financing institutions, Con­
gress created the Federal Savings and Loan Insurance Corporation.
This is a wholly owned instrumentality of the Government which in­
sures savings in all Federal savings and loan associations and in quali­
fying State-chartered savings and loan associations up to $10,000 for
each account. The purpose of Congress was to insure the safety of
investment in these thrift and home-financing institutions and thus
encourage a flow of funds for sound and economical home loans to fit
the needs of the local community.
The Nation’s insured savings and loan institutions must by law and
regulation invest primarily all their assets in first mortgages on real
estate. The people who have $130 billion invested in these thrift in­
stitutions thus depend upon a sound and prosperous housing market
63-496— 66------ 6



0
9

70

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

for their dividends. By the same token, homebuyers, homebuilders,
and the entire housing and construction industry depend upon thrift
institutions as a primary source of financing for them.
Our witness this morning is not only the top Government adminis­
trator of the thrift industry, but as we have seen he is a top housing
man also, because it is his responsibility that we have an effective flow
of funds into a sound savings and loan industry and into homebuilding. John Horne is an able and dedicated public servant and we know
he can help the committee in assessing the impact of CD's on the thrift
industry from the standpoint of the responsible Government official.
Mr. Plorne, we are glad to have you and you may proceed in your
own way. You may identify for the record the gentleman accompany­
ing you.
STATEMENT OF HON. JOHN E. HORNE, CHAIRMAN, FEDERAL
HOME LOAN BANK BOARD; ACCOMPANIED BY DR. HARRY S.
SCHWARTZ, ECONOMIST, FEDERAL HOME LOAN BANK BOARD

Mr. H o r n e . Thank vou very much, Mr. Chairman.
I do have with me for. Harry Schwartz who is the economist for
the Federal Home Loan Bank Board.
The C h a irm a n . Glad to have you, Dr. Schwartz.
Mr. H o r n e . Mr. Chairman and members of the committee, I ap­
preciate the opportunity to appear to testify on H.R. 14026 and H.R.
14422. I will try to answer any questions you may have after I finish
my testimony. Dur view of the certificate of deposit question reflects
to a large extent our experience.
As we understand the certificate of deposit, it is one of two general
types of instruments which banks may issue in addition to savings pass­
books. Passbooks are limited to individuals and certain nonprofit
charitable corporations. Typically, certificates of deposit and time
deposits open account, the other nonsavings passbook instrument, were
issued in large denominations to large depositors who did not qualify
for a passbook. It has been reported that historically in the Midwest,
some banks issued certificates in small denominations.
Sometimes the certificates were issued at the savings passbook rate
and at other times a little higher rate to hold medium-size deposits
when the savings passbook rate was below the regulatory ceiling.
Time deposits at commercial banks, that is certificates and" time de­
posits open account, have been in an upward trend since the close
of World War II, with fluctuation in volume which were in the op­
posite direction from the change in rates on market instruments.
Since 1061, the increase in negotiable certificates of deposit has
been quite large. Banks which report weekly have had an increase
in negotiable CD’s of $15 billion since the end of 1961 accounting for
about 55 percent of the growth in time deposits other than savings.
The widespread adoption in 1961 of negotiable certificates contributed
to this upswing. The advantage of the negotiable certificate lies in
the fact that the holder of the certificate can sell it. For example,
a 1-year or 6-month certificate becomes, in effect, a very short-term
instrument from the point of view of the depositor. Banks thought
that this would permit them to compete more closely with commer­
cial paper, Treasury bills, and other money market securities. We



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

71

cannot tell the degree to which the growth in CD's reflects this type
of development ana the extent to which it may represent a shift from
demand deposits within banks or from investment in time deposits
open account.
In an}- event, with present rates that can be paid on nonnegotiable
CD*s and time deposits open account, banks might still be able to
attract a very large amount of money without issuing negotiable € D :s.
In fact, this is a problem which has confronted the savings institu­
tions since early 1965. Because of the change in regulation Q in late
1964, it became possible for banks to pay more on CD’s than they
could pay on passbook savings. Some banks began issuing nonne­
gotiable CD's with multiple maturity dates, that is, a 5-year CD with
maturity date every 90 days. These were called savings bonds or
investment certificates. They were issued to yield 4% percent while
the savings passbook rate was 4 percent, and they were offered in
denominations as small as $25 or even less.
Almost immediately, in areas where associations and savings banks
were paying less than 414 percent, there was a marked shift in the
flow of savings when banks in the area offered this kind of instrument.
Since last December, the problem has become particularly acute. In­
creasingly, in one area after another, banks have adopted either the
savings bond device or a fairly short CD with automatic renewal in
small denominations at rates above what thrift institutions are pav­
ing. We do not object to competition, but we do have some concern
that the use of the certificate of deposit or even the time deposit open
account device to circumvent the savings passbook rate ceilings can
cause large shifts of funds from thrift institutions to banks in a way
that was not intended.
As a matter of fact, if I recall correctly, Chairman Martin before
the Joint Economic Committee stated that the Federal Reserve Board
did not raise the 4 percent on passbook savings because it did not want
to disturb unduly the savings in thrift institutions, but the point that
I am making is that the CD? are being used in a manner which, in a
s
way that circumvents the 4-percent passbook savings limit that is
present and which is presently imposed on passbook savings in com­
mercial banks.
In the first quarter, for example, net savings gained by savings and
loan associations were off about 30 percent from the first quarter of
1965. In April, associations lost about $550 million in savings against
a net outflow in April 1965 of less than $100 million. Interestingly
enough, banks had about the same relative experience for total time
and savings deposits in the first quarter as did savings associations.
But in April, weekly reporting banks had a gain in time and savings
deposits of $800 million, only $100 million less than April 1965. It is
evident, too, that the losses experienced bv savings and loan associa­
tions were greatest where banks were offering CD? in denominations
s
of from $10,000 down to $25 with most banks engaging in these prac­
tices being below the $5,000 level and many at the $100 level or less.
We can only assume that a good part of the loss in savings from thrift
institutions in April went to banks.

This year, so far, the portion of time deposits excluding negotiable
CD’s of more than $100,000 has increased by more than $4 billion at
weekly reporting member banks compared with a growth in large



72

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

negotiable CD’s of $1.4 billion. The nonnegotiable instruments grew
more than 2.5 times as rapidly this year as last year and more than
5 times as rapidly as in 1964.
Again, we are not complaining about competition. We recognize,
too, that if a shift in funds is desired by the marketplace, it should
be accommodated, but we cannot help wondering whether we do not
have an artificial device on our hands. The CD is permitting banks
to pay a high rate on a portion of their savings in the disguised form
of a time deposit, while paying a relatively low rate on regular savings.
In effect, the CD which, apparently, was not intended for this pur­
pose is being used to alter quite radically the structural relationship
between thrift institutions and commercial banks. Mr. Guy Noyes,
senior vice president of Morgan Guaranty Trust Co. and a former
adviser to the Board of Governors of the Federal Reserve System,
was quoted in last Friday’s New York Times, as saying that if interest
rates continue to rise, savings and loan associations and mutual sav­
ings banks may face a very sharply reduced savings inflow or may be
unable to hold the savings they have. This latter condition seems
to be in process already.
Some may argue that if banks are not permitted to pursue savings
through the CD or time deposits open account device that they might be
no better off than savings and loan or mutual savings banks. There­
fore, it may be said, all a restriction on bank issuance of CD’s would do
is to reduce bank access to liquid funds and all financial institutions
as a group would be no better off.
This argument seems to be a bit disingenuous. First, it appears to
say that if there is a liquidity squeeze on banks they should be able to
correct this squeeze by drawing funds by any devices from thrift insti­
tutions, and that it may be better for one set of institutions to take the
pressure rather than passing it around. Since thrift institution port­
folios liquidate fairly slowly, this places them in a very tight position
and requires them to cut back very sharply on their lending with very
severe effects on the mortgage market.
Second, banks being short- and medium-term lenders to a very great
degree, they can adjust more quickly. Indeed, they need not increase
their lending quite as sharply as they could if they drain very large
blocks of funds from the thrift institutions.
In effect, banks are likely to cause thrift institutions to shrink so that
they can expand their lending. This may not be inappropriate, if the
process is clearly justified and does not threaten the structure of finan­
cial markets. But the instruments now being used to cause this shift
raise some serious questions about justification and structural disturb­
ance.
We, therefore, recommend that Congress grant authority to the
appropriate bank regulatory agencies to set a minimum amount on
certificates and on time deposits open account and we would like to
emphasize both types or else a major loophole would exist.
Insofar as negotiability of CD’s is involved, we think this is part of
a broader question about CD’s and time deposits open account in gen­
eral. For example, nonnegotiable CD’s and time deposits open ac­
count amount to about 75 percent of the increase in time deposits held
by banks so far this year compared with less than 20 percent last year.
We commend the committee for opening up this area to inquiry.



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

73

The CD time deposit issue has several facets. First, by use of these
devices banks attract very highly interest-sensitive money. They are
building a liquidity squeeze for themselves if they pursue this too far.
Second, these instruments could bring about a misdirection in the
flow of funds and resources. I f banks continue to attract very short­
term, highly volatile funds, and then generate an increased volume of
credit, borrowers who typically deal with banks, such as corporations
and users of consumer credit, may expand their spending exceedingly
rapidly. While some resources can be transferred from sectors not
receiving funds, we know very well that resources are not fully or
always readily transferable. Severe bottlenecks could be generated be­
cause of purely temporary and perhaps speculative demand shifts,
particularly in inventory accumulation and perhaps even plant and
equipment.
Third, the present use of certificates of quite small denomination
seems to be causing a very rapid structural shift among financial
institutions which could have a highly unfavorable impact on the
mortgage market. We are not arguing here that the mortgage market
is sacrosanct and that it should not experience any reduction in avail­
able funds, but a cut of 50 percent or more for the remainder of this
year, which now seems likely, is not justified and may, indeed, be
disturbing to our economic structure. In other words, a shift in funds
can proceed too rapidly for all concerned and may contribute to sub­
sequent instability.
We would suggest examining the extent, in relation to total de­
posits, to which banks may use any of these instruments, negotiable
CD’s, nonnegotiable CD’s, and time deposit open account. A mini­
mum size limit for all these instruments and the appropriateness of
multiple maturities and automatic renewal should also receive the
committee’s attention.
In closing I should like to make it clear that the concern we have
is with the effect of the present situation on the structure of financial
markets. TVTiile savings and loan associations dislike losing savings
just as businessmen dislike losing sales, their soundness need not be
affected thereby. The industry as a whole is sound.
It is not the saver in an insured savings and loan association who
needs to be concerned. He can rest easy. I want to stress this be­
cause sometimes the savings public may misunderstand, and I think
that a difficulty in one area impairs the safety of our savings accounts.
This is not the case. Those accounts that are insured by the Federal
Savings Insurance Corporation are safe and the saver can go to bed
at night and rest in peace as far as whether or not his money is ade­
quately protected. However, the present situation in savings flows
promises to cut mortgage availability to perhaps intolerably low
levels. Consequently, we believe that the issues before this commit­
tee should be explored thoroughly.
The C h a ir m a n . Thank you, Mr. Horne. You have presented a
very interesting statement. Are you contending that this inflow of
funds from thrift institutions to commercial banks is not only harm­
ful to the mortgage market but that it is also inflationary?
Mr. H o r n e . Well, so far as the mortgage market is concerned, Mr.
Chairman, we know that during recent years the amount of homes
financed by private thrift institutions, we mean primarily when we



74

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

talk about thrift institutions the savings and loan associations and
the mutual savings banks. But so far as savings and loan associations
themselves are concerned, they have in recent years financed in excess
of 40 percent of the residential construction.
Now, if the money does not flow into these associations as it has in
the past, or if the money that is there flows out, then unquestionably
it is going to affect the availability of money available for homebuilding purposes, unless the gap is made up by other sources. And we
see no evidence today that other sources are making up the gap which
inevitably has to take place under existing developments within the
savings and loan industry.
Insofar as inflation is concerned, if there is a rapid shift of funds
from one sector to another it could cause inflation, and in the present
situation, I think this is a real problem.
The C h a irm a n . The fact that the Federal Reserve took this action
on December 6, 1965, to raise these rates really 37*4 percent from
4 percent to 5y2 percent under the law, the Employment Act of 1946,
it is the duty of the Federal Reserve to coordinate these actions with
the other agencies effectively.
Were you consulted prior to that announcement of the increase in
rates on December 6,1965 ?
Mr. H o rn e . N o, sir; I was not and the Chairman of the Federal
Reserve Board as I recall, when he was asked the same question before
the Joint Economic Committee, gave the same answer that I have
given, that we were not consulted.
The C h a irm a n . It appears to me that there is something badly
wrong in our economy, particularly in our institutions, our financial
institutions, when one has so much power, the power of life and death
over thrift institutions to iust arbitrarily take an action, that although
it will considerably benefit the commercial banks for obvious reasons,
it will absolutely, it will destroy thrift institutions. Do you not think
the action of the Federal Reserve really jeopardizes the security of the
savings and loans and other thrift institutions of this country, M r.
Home?
Mr. H o r n e . Mr. Chairman, there is no question but what if the
present development continues and grows in intensity, that there is
definitelv going to be a danger here that I think no one wants.
I would like to say, if I mav, sir, in connection with the lack of co­
ordination or consulation. if that is a good word to use, that was true
up to the 1965 action. Since that time, a committee has been estab­
lished in which either the Chairman of the Federal Reserve Board
participates, or the Vice Chairman participates. I don’t think that
what happened in 1965 would happen again. O f course, we would
have no control as evervone here knows, over whether or not the Fed­
eral Reserve Board raised CD ’s or did something else. But we do
have now a verv close working relationship as far as keeping each
other advised and informed is concerned.
The C h a ir m a n . That is locking the bam door after the horse is
stolen. The damage in December 1965 will be with us a long time
as you know and I know that the Federal Reserve is having the
Council of Economic Advisers down at the Federal Reserve Board to
meet every now and then. But, of course, they are not giving up
any of what they call their independence, which I think they just
seized. They do not have it as a matter of law. Nobody ever gave




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

75

them independence. You will not find anything in the statute indicat­
ing independence. And certainly, they do not have their independ­
ence and they are not the fourth branch of the Government that they
claim to be. They are just not. But they are going their own way
and they defy the President of the United States and other agencies
of the Government as well as Congress.
If you will notice, when they have these meetings down at the
Federal Reserve Board, they never let you stay there while they
have the Open Market Committee meetings. They run you out.
There is nobody there as far as the fellows who are interested in high
interest rates and they are running the things like they want it and
it is in secret, like yesterday. They had a secret meeting yesterday
down there. There are 500 people in the United States who know
exactly what happened. Nobody else knows. Of course, that gives
the 500 of those people a great advantage in operating their businesses
in a more profitable way because of that knowledge. That is some­
thing that is rather obnoxious to a democratic form of Government—
a democracy or republic—that we have and it is going on right here
in broad daylight m the United States of America.
Do you not think, Mr. Horne, the practices that have been built up
are a violation of the law about paying interest on demand deposits?
Mr. H o r n e . I am not quite sure I understand your question.
The C h a ir m a n . Y o u see, when Congress established the FDIC,
the banks were going to have to pay insurance fees of about one-half
of 1 percent. So the bankers wanted some advantage to compensate
for that and it was finally agreed that we would write into the law
prohibiting commercial banks from paying interest on demand
deposits.
Now, that immediately saved the banks billions of dollars by just
paying a small sum into the FDIC fund every year. But it was put
in the law and it is there right now. Since they are issuing these
negotiable CD’s, although they may run for 5 years, possibly, or 1
year, they are immediately cashable because they are equal to inter­
est-bearing currency. They can be sold in the open market. They
can get their money back quickly whereas you could not do that on true
time deposits.
Has it occurred to you that this would be in violation of at least the
spirit, if not the letter of the law to pay interest on demand deposits?
Mr. H o r n e . I should think after your explanation o f it, it is some­
thing that could very well be questioned. It may be a very technical
difference in interpretation here and I am not a lawyer and I don’t
feel qualified to answer your questions specifically that'it is a violation.
But, from your citation of the law, it would indicate to me that
this is a practice that if it is continued this committee has every right
to look into it thoroughly and take corrective action that it deems
advisable.
The C h a ir m a n . I f the Federal Reserve has ever attempted to en­
force that act against anybody, I do not know about it. In this case
it is so open and flagrant that they should be certainly called upon
to explain it and why they did it and I think we shall do that.
The Joint Economic Committee hearings on December 13 and 14,
those hearings are available and anyone who is interested may have
them. Xassume you have seen them.

Mr, H o
 r n e . Yes,


sir. (-

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UNSOUND COMPETITION FOR SAYINGS AND TIME DEPOSITS

The C h a ir m a n . I think they are very interesting and bring out
some very important points.
For instance, when Mr. Martin said that he did not raise the sav­
ings rate, I believe it was 4 percent, if you will notice I asked him
some questions there, what would keep people from taking the sav­
ings out and put it in CD’s and he never could explain. I assume
you noticed that.
Mr. H o r n e . Yes, sir. This, Mr. Chairman—this is one point that
we have raised and in my testimony made clear, I think. We still
raise that question.
The C h a ir m a n . Yes, sir. Now, the new tax withholding law re­
quires holders of large corporate funds to make a report about every
2 weeks, does it not ?
Mr. H o r n e . I am not sure.
The C h a ir m a n . They make payments into the Treasury.
Mr. H o r n e . Yes, sir.
The C h a ir m a n . Would that affect in any way these certificates of
deposit accounts that they carry or would they not have less money ?
Mr. H o r n e . Well, if I understand the question correctly, Mr. Chair­
man, I should think they would have less money.
The C h a ir m a n . Like the large corporate funds. You know that
when the corporations turn to CD’s, that affected seriously and quickly
the short-term Government securities market.
Mr. H o r n e . Yes, sir.
The C h a ir m a n . For the obvious reasons. The corporations had
been using these huge funds to bid on the short-term security of­
ferings every Monday and that kept it down. By reducing them to
leave that short-term auction every Monday and going to CD’s, they
immediately got a big windfall or bonus by increased interest, but it
caused a race between short-term security rates and the CD rate. This
is a race which could cause inflation. In fact, we are paying today
for the same amount of money, $30 in interest charges for every $i
interest we paid during World War II. That is the most inflationary
thing of all times.
Mr. Reuss ?
Mr. H o r n e . Mr. Chairman, would you and the committee object
if I)r. Schwartz made a comment ?
The C h a ir m a n . Be glad to have Dr. Schwartz’ comments.
Dr. S c h w a r tz . All I was going to say, Mr. Chairman, is that I rec­
ognize the merits of the position you are taking, but we have a little
bit of difficulty supporting it statistically. If you look at the short­
term interest rates at the end of 1959 when they were at their peak at
that time, they were slightly lower than short-term interest rates are
now. I am talking about 3-month paper—3-month bills.
If you look at the 6-month bills and the 9-month issues, they were
a little higher than they are now. So the figures don’t help us very
much to determine whether these CD’s are really causing the kind of
pressure on the money market that I think your remarks suggested
and which may indeed have occurred. Interest rates may have been
lower without these negotiable CD’s. But we can’t demonstrate this
statistically.
The C h a ir m a n . May I comment just briefly on that.
I do not think anyone can dispute that when you take $16 billion or
$17 billion out of the market, the auction market that is depending



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

77

on short-term securities all the time, take that away entirely and put
it in something else like CD’s and in a few banks, that would not seri­
ously affect on the upward side interest rates on short-term Govern­
ment market ?
Dr. S c h w a r tz . Well, I think there is a lot of merit to what you
say as I indicated before* Running CD funds through another circuit
can cause market frictions which put pressure on interest rates. But
the argument that is made against it to us when wtb raise the same
question is, well, that money is lent out to people who w ould other­
wise have to go to the market and compete against securities by issuing
their own paper. So we end up in the argument going around a circle
and in order to try to support the point we made we went to the data
and the data didn’t help us very much. That is all I am trying to say.
The C h a ir m a n . I do not care what they say, the facts are evident
and undisputed and can be documented and that it did seriously affect
interest rates.
Mr. Reuss ?
Mr. R e u s s . Thank you, Mr. Chairman.
On page 1 of your statement, Mr. Horne, you say:
Since 1961, the increase in negotiable certificates of deposit has been quite
large.

Now, Webster defines “quite” in two ways—one is “rather large”
and the other is “extremely large.” In fact, since 1961 negotiable
CD’s have gone up in volume from practically nothing to some $17.5
billion; is that not a fast ?
Mr. H o r n e . Y e s , sir .
Mr. R e u s s . Therefore, you meant extremely large ?
Mr. H o r n e . Extremely could very appropriately be substituted for
the word “quite.”
Mr. R e u s s . I w a n te d to h a v e y o u t e ll m e w h ic h o f th e tw o m e a n in g s
y o u m e a n t.

What this whole thing boils down to, it seems to me from your very
excellent testimony, is that a large part of the Nation’s savings which,
had they remained in the savings and loan associations would have
gone to build homes and are instead going to banks and as you said, on
page 4 of your testimony, because of the nature of bank lending, it
may mean that they go into inventory loans for business and in some
cases into plant expansion.
Mr. H o r n e . Yes, sir.
Mr. R e u s s . Now, this committee is very concerned with inflation.
What do you say about the ability of the economy to respond to a
demand for more homebuilding in contrast to the wisdom of the
economy’s building up inventories, let us say ?
Mr. H o r n e * Well, sir-----Mr. R e u s s . I want you to p u t on the hat of say the President or the
Chairman of the Council of Economic Advisers rather than just your
Home Loan Bank Board hat.
Mr. H o r n e . Well, I want to g iv e a responsive answer to your ques­
tion.
In some parts of the country there is presently a surplus of homes.
And unquestionably there is a slack of homebuilding to some degree.
I t is not necessarily harmful. We are concerned, though, about the
most recent figures which I pointed out in my testimony, that from




78

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

here on out for the remainder of the year, we may have a very sharp-—
too sharp in our opinion—drop in the availability of money for homes.
Now, if there is a shortage of money, then this within itself could
contribute to the inflationary process. With the relatively small
amount that will be available far lending purposes, it is just natural
that the lender, whoever he may be, is going to charge a higher price
to the borrower of the money with which to buy a home. And this
can also be argued as contributing to inflation. I am not an econ­
omist and I am not a lawyer, but I guess part of inflation is a total
cost of everything that the consumer has to have and if the consumer
is buying the home and he is paying more for the money he is borrow­
ing, this is adding to the cost of living and this is in a way inflation
as far as he is concerned.
Mr. R e u s s . I was looking at it in simpler terms, perhaps. If, in
considerable sections of America today there are building tradesmen
available to build homes, and building materials available as material,
which are not now being used because of lack of mortgage money and
the high price of mortgage money, and if at the same time business­
men are building up inventories in excess of that necessary for the
reasonable flow of the economic process, then the Government, or the
Banking and Currency Committee which has overall jurisdiction, is
being improvident.
Now, is that the situation? If, for example, inventories in business
were at too low a level and if there were no more capacity to build
homes than are now being built, then I would say about the only
objection one could make to the Fed’s CD action was to say that it
is somewhat socially inequitable to the homeowner. But, if, as I sus­
pect is the case, and I hope you will tell me, there is a capacity in
this country to build more homes than are now being built at the cur­
rent short rate of mortgage money, and if business inventories are at
an adequate level, then the Fed is really entering this inflationary
area and this committee should come in and stop it.
Mr. H o rn e . Well, I am not—I don’t have the information as to in­
ventories with me, but I think your analysis, Congressman, is entirely
correct and we do know that there is more capacity to build homes
than is presently being used. I am not so concerned about this at
the immediate time, but I am concerned as we go later down the
months of this year, because there can be a much greater oversupply
of capacity than we presently have and there can be an undersupply
of homes, even though as I have indicated in some areas, we could very
well afford a slackening in homebuilding. This is a spotty situation.
And so, it is true that if we are drawing money from one source, that
is a very important part of our economy, we are affecting that par­
ticular source. I f we aren’t compensating for it someplace else, this
is important. I have my doubts that without inflation if the funds
can be absorbed elsewhere right now. We can, therefore, be creating
difficult v in the economy as a whole.
Mr. R e u s s . You see, we of the Banking and Currency C o m m itte e
in a sense, and nobody else seems to b e doing it , have t o act as u m p ir e s
here. We have to try to determine where the Nation’s savings can
best be channeled and accordingly, file for us a n analysis by you, o f
present and potential capacity in the homebuilding industry, both
what it is now and what it will be later o n t h i s y e a r a n d in t h e m o n th s



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

79

to come, and also your judgment and that of your economists, and I
know you have them, on whether the Nation’s inventory situation is
such that businessmen desperately need the bank lending power which
has been purloined from your institutions to the banks by the raising
of CD interest rates.
Is that not an answer to a question that we need to know ?
Mr. H o r n e . Yes, sir; I think it is.
As far as the inventory situation is concerned, outside the home­
building area you probably can get more expert information from
the bank agencies themselves. However, if you should like for us
to prepare a resume of our own opinion, to submit to this committee,
I would be very glad to do so.
Mr. R e u s s . I would like it because the banking agencies tend to be
special pleaders for their clients and obviously the Federal Reserve,
although we cannot gather this from their very cryptic statements,
must have thought that further inventory loans were in the national
interest or they would not have put banks in the possession of the
power to make these loans.
Mr. H o r n e . It is a tremendous problem with which the committee
is struggling. I am sure, too, that people who are not on the com­
mittee are also struggling with the problem. What to do about the
fact that there is a shortage of money is a crucial issue. What kind
of process can be used, if any, to say who gets this money and then for
what the money is loaned once the institution has it is another ques­
tion. And also, under what terms^ and conditions the institutions—
banks, savings banks, and credit unions are tied in—are going to lend.
How we handle this problem of allocating or using and determining
where the money that is available is going to be spent is not easy.
(The information referred to follows:)
S t a t e m e n t o n S h if t s i n D e m a n d a n d I n f l a t io n

The following statement Is made pursuant to the request of Congressman
Reuss for comments on the effect of shifts in savings and credit flows which shift
demand from construction to other industries. Congressman Reuss asked
whether this could have an inflationary effect. Our answer is yes, and explana­
tion follows.
The housing industry is undoubtedly operating below capacity at the present
time. During the current period of economic expansion, nonfarm private hous­
ing starts have come close to an ahnual rate of 1.8 million units at the peak.
In contrast to this, housing starts are now down to 1.5 million units. Unemploy­
ment in the construction industry in March 1966 was 9.9 percent, the highest of
any of the major industry groups. It should be noted, however, that unemploy­
ment in this category has been high for some years.
Nevertheless, on the basis of these facts, we believe that the capacity of the
housing industry is a t least 1.8 miUion units. This is not to say that such a
rate of housing activity would be desirable at the present time in terms of
underlying demand. In the past few years, even at a level below 1.8 million
units, housing production has resulted in the emergence of surpluses and a sub­
sequent reduction of housing production. The recent level of 1.5 million units
is probably somewhat above a sustainable level of production, although the
reduction of credit into the housing sector could well reduce housing starts signifi­
cantly below this and far below what is sustainable.
Any estimate of the capacity of the housing industry must obviously be de­
pendent upon many factors. Housing does use some materials and labor utilized
by other sectors of the economy. Recent increases in demands upon these have
probably reduced the ability of the housing industry to expand much without
resulting in somfc degree of price increases. However, the capacity to produce
is above recent levels and well above prospective* levels.



80

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

On the other hand a shift in demand toward inventories or plant and equipment
expenditures has contributed and is likely to continue to contribute to inflationary
pressures. The reason for this lies in the very large increases in demand that
have occurred in the nonhousing industries and the resulting production close
to or at capacity. T hus:
1. Plant and equipment spending is expected to rise 16 percent this year.
2. The buildup in inventories by businesses continues to be rather substantial.
During the first quarter there was an $8.3 billion expansion in inventories, close
to the very substantial rate in 1965 and well above the rate of other recent years.
3. Manufacturers’ new orders continue to reach new peaks and are in excess
of shipments. The result has been an almost continuous rise in backlogs of un­
filled orders. These backlogs in the durable goods industries reached $66.2 billion
in March, up from $55.5 billion just a year before.
4. Overall unemployment is down to 3.7 percent as compared to a level of 4
percent normally associated with full employment and price stability.
5. Capacity utilization has risen significantly since last fall, according to data
gathered by McGraw-Hill, and a number of industries are operating at levels
above their preferred rates.
It should be noted that not all of the resources in the construction industries
are readily transferable to other sectors. Witness the high rate of unemployment
in the construction industries. Thus a demand shift from construction to other
industries is not fully offset by a shift in resources. The speed of increasing
demand in other industries is an inflationary factor.
Mr. R eu ss. One final question. Before Chairman Martin and his

Board adopted their CD action early in December of 1965, did he
confer or consult with you about the effects of such action on our homebuilding industry and on the Home Loan Bank Board ?

Mr. H o r n e . You say, did they consult with us? No, sir; they did
not. As I explained to the chairman a few moments ago, they have
been meeting with us and the Comptroller and the FDIC since then
very regularly, but they did not prior to taking the action of December
6 ,1D65.
Mr. R euss. Thank you.
The C h a irm a n . Mr. Widnall.
Mr. W id n a u j . Thank you, Mr. Chairman.
Mr. Horne, we certainly welcome you before the committee and we
know your testimony will be very valuable.
Mr. H o r n e . Thank you.
Mr. W i d n a l l . As you know, I made a suggestion that the Chairman
of the Federal Home Loan Bank Board be added as a member to the
quadriad. I wrote to the White House in that respect and asked for
serious consideration of that proposal. I have not yet received any
response from the White House on that and I wondered whether or
not you were aware of any response or reaction by the White House
to that suggestion ?
Mr. H o r n e . N o , sir; I am not, except, I believe that the Secretary
of the Treasury before one of the committees was asked the question—
I don’t remember on which occasion, but this is the only response of
which I am aware.
Mr. W i d n a l l . I still think that with the importance of the savings
and loan industry and the tremendous amount of influence in the
development of homes in America, that it is extremely important that
a full voice be heard at the present time*
Mr. H o r n e . Of course, that could be done—that could be one de­
vice for this to be done. It could be done other ways. I do want to
say, and I believe in the long run it will be helpful, that there is
more consultation, more exchange of information now.



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

81

Mr. W i d n a l l . Than there has been?
Mr. H o r n e . Yes, sir; by far. I think, too, sir, unquestionably, you
are right when you imply that the savings and loan industry is now
so large in the amount of savings involved, and the impact that it
can have in the economy of the country, that it no longer can be con­
sidered a relatively insignificant influence as was the case perhaps
15 or 20 years ago. It is now very large and it is appropriate that
action that would affect it be discussed with the Federal Home Loan
Bank Board before such action is taken.
Mr. W i d n a l l . On page 5 of your testimony you sa y :
A minimum size limit for all these instruments and the appropriateness of
multiple maturities and automatic renewal should also receive the committee’s
attention.

Do you have in mind any minimum size amount?
Mr. H o r n e . I th in k here, Congressman, that you might want to
indicate, if the legislation should be passed, giving the appropriate
agencies the authority to do this, that either m the legislation or in
your report, you might want to indicate some guidelines. I don’t
have anything to suggest except that—off the top of my head, I
would suggest $25,000.
Mr. W i d n a l l . $25,000 as a m in im u m ?
Mr. H o r n e . Yes, sir; as my testimony, I think indicated, there is
evidence in here that the smaller the CD’s the more likely is the shift
from thrift institutions.
Mr. W i d n a l l * Mr. Horne, the House will probably vote tomorrow
on the Participation Sales Act. In that we are talking about the sale
of $8 billion of participation certificates in 2 years. This is with the
very likelihood that the annual rate of sales could reach $5 to
$6 billion per year within a few years. I f the Congress or FNMA
saw fit to sell these certificates in denominations as low as $100, what
impact might that have on savings and loans in view of the fact that
yield to investors is likely to be in the 5%-percent range ?
Mr. H o r n e . Well, frankly, Congressman, I haven^ analyzed this
particular situation. I am sure that the people who recommended it
have good reason for doing so. It is part of the administration’s pro­
gram, as the committee knows. I think in all frankness, I should say
that I have not made an effort to study what impacts it might have on
thrift institutions, but I am not aware of a $100 participation unit.
M r. W i d n a l l . I h a v e a v e r y s t r o n g f e e l in g t h a t i f t h is p r o g r a m g o e s
th r o u g h , t h a t i t is g o in g to f u r t h e r d a m a g e t h e m o r t g a g e m a r k e t, th e
g e n e r a l m o r t g a g e m a r k e t a n d m a k e it a g r e a t d e a l m o r e d iffic u lt f o r
th e tr u e m o r t g a g e b a n k e r s a n d th e s a v in g s a n d lo a n in s t it u t io n s to per*
fo r m t h e ir f u n c t io n , th e ir tr u e fu n c t io n w it h r e sp e c t t o le n d in g to th e
b u ild in g in d u s t r y a n d m a k e t h e ir g r e a t c o n tr ib u tio n in th e w a y th e y
h a v e in t h e p a s t , in th e n e x t f e w y e a r s.

It seems to me, too, that this is being used as a device to get around
the 4^-percent ceiling on Government bonds to bring everything up to
51/2 percent. The impact in many segments of our economy can be
great and I do not think it can be sloughed off as just putting it in the
hand of private investors—assets that are held at the present time. I
think that is a fiction, too, because all we are doing is transferring it
into a trust and selling participation in it and the Government is still
holding the assets. I do believe that it is incumbent upon you as head



82

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

of the Home Loan Bank Board and others in doing so well in trying to
guide the savings and loan institutions, that you be fully aware of
what it might do to the mortgage market in the future by providing an
entirely new means of financing with a great deal of appeal, because
of a guarantee, and it can go higher. There is absolutely no guarantee
that it would not go higher.
Mr. H o r n e . I must confess I have not made a study in depth of it.
I realize one thing, the administration—the administration is making
it possible for the private sector of the economy to take over these
loans that are presently held by the Government. Now, if managed
properly, the possible adverse effects on other entities could be at least
considerably reduced or prevented. I think it would depend to some
degree, and I am just talking in answer to your question, that if it is
managed carefully and handled properly, much of the possible danger,
if not all of it, might be alleviated.
M r.W iDNALL. That is all. Thank y o u .
The C h a ir m a n . Mr. Stephens.
Mr. S t e p h e n s . Mr. Home, I am glad to have you again before our
committee. It is a pleasure to have you here.
Mr. H o r n e . Thank you, sir.
Mr. S t e p h e n s . I want to know if I gather correctly the impression
from you that so far as the negotiable certificates of deposit are con­
cerned, that you are not quite so concerned as far as savings and loans
are concerned about whether they are negotiable or not negotiable,
but what you are primarily concerned about is the smaller denomina­
tions that people get at the $10,000 insured level down to $25.
Mr. H o r n e . Yes, sir; that is right.
Mr. S t e p h e n s . As far as your testimony is concerned, that is where
your chief concern is as far as your particular field is concerned ?
Mr. H o r n e . Yes, sir; that is correct.
Mr. S t e p h e n s . I would like to ask one or two questions in respect to
some statements that you have made in answer to some questions.
I am very much interested as you are and all others as far as infla­
tion is concerned. We would like not to have inflation. What con­
cerns me is the other side of the coin, and that is, a depression. We do
not want that, either. Recently, the Regional Home Loan Bank
Board sent to each savings and loan a letter from you saying that after
the next interest is payable after the first of July, that when a savings
and loan institution comes to the Board for the purpose of borrowing—
which it is entitled to do and one of the greatest, assets of the system—
that the Board will look very carefully at what commitments they
have made and as I read it, it is going to be a little bit difficult for them
to borrow money—for the institutions to borrow money—if it does
not have any in the institution itself. It will have more of a difficult
time borrowing the money through the savings and loan facilities.

Now, that will have an effect in my section where we have a shortage
of homes of cutting out a lot of building and it would not be a question
of inflation as far as the building industry is concerned. But it may
cause a real depression in the building sector. You are going to find
no housing starts and when that happens you have got all kinds of
things. People who work in those trades, like carpenters, brickmasons,
and plasterers and people who have small construction o r g a n iz a t io n s
and cannot hold them together, while hoping things will be alleviated,



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

83

are going to be in a depression in that kind of situation if you cannot
start any homes in any reasonable amount of starts.
The shortage of homes and money will make people go to other
financial institutions or other places to get money where it costs them
more money and all that sort of thing will not add up to inflation, it
seems to me. It seems to me it is going to add up to depression because
in my personal opinion, if I do not have any income and I cannot
get any credit, then I cannot spend anything. Under that circum­
stance, it is just plain depression and that is why I am afraid of that
more than the other because we might go too far.
Would you like to comment on that ?
Mr. H o r n e . I should be glad to. Unquestionably, if there is a
drastic drop in any large and influential part or sector of our total
economy, it can have an anti-inflationary effect, but it can lead to
deflation, particularly in that area, if not overall.
Now, no one knows at this particular time just how great the drop
in homebuilding is going to be so far as total availability of funds
from the savings and loan industry is concerned. It seems now to
be shaping up to a decrease of some 20 to 25 percent from what it was
last year, 1965.
As I said a few moments ago, there are some parts of the country
where this is not necessarily bad. As a matter of fact, there are some
spotty areas where they might be good. But if the slack that is being
experienced insofar as financing by the savings and loan industry is
concerned is not absorbed by other sources, and presently we see no
evidence that it is going to be absorbed by other sources, then you
can have a situation in which there is too little investment or too
little money available for the homebuilding part of the economy.
Now, the purpose of our April 20 letter to which you referred, is
to make certain that what is available would go to homes. As you
know, Congress from time to time has given to the savings and loan
industry an additional lending authority, and we want to make certain
that as far as the money they borrow from each of our 12 banks is
concerned, but this is one thing we have in mind, that we know some­
what for the purpose it is being borrowed. We also want to make
certain that they use their own funds as wisely as possible without
relying on funds from the 12 banks except in areas that are needy
areas. We make loans for expansion purposes under certain condi­
tions, but we are primarily concerned about meeting liquidity require­
ments, meeting seasonal advantages and seasonal needs and things of
this sort. These generally are what we had in mind in this April 20
letter.
Mr. S t e p h e n s . I appreciate that explanation. Of course, I agree
with what you just said, that if there is going to be anything that is
going to have to be curtailed, then the savings and loans should em­
phasize what I think is the primary purpose and for what it was
created and that is homebuilding.

Mr. H o r n e . I do think Congress in the past has acted wisely in
granting some additional authority to the savings and loan industry.
The Federal Home Loan Bank Board is on record that there are
certain other areas which we think also would be appropriate places
m which to grant lending authority, so that in times when there may
be an excess of money for strictly homebuilding purposes, they might



84

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

very well diversify their portfolio, and incidentally might be better
able to stand strains and stresses that come in the life of any financial
institution.
Mr. S te p h e n s . Thank you. My time is up.
The C h a ir m a n . Mr. S t Germain.
Mr. S t G ek m ain . We are glad to have you with us. It occurs to
me, I do not think there is any cause that is attributable to your
action. The SB A ’s run out of money.
Mr. H o r n e . I g u e s s I am a b a d o m en .
Mr. S t G e rm a in . The experience that we have in the northeast
area, the wells are just drying up in the savings and loan people and
the savings bank people as far as available funds to lend out to
homebuilders are concerned. You suggested some changes, Mr. Chairman, that may be made as far as the Board is concerned and the Con­
gress might cooperate in. However, do you not feel that the true
solution here is the certificates of deposit and the drain that they
are causing 011 the available and ready money ?
Mr. H o rn e . Y ou are talking about certificates of deposit within
banks now. You are not talking about S. & L. certificates. Well,
certainly, as evidenced in my testimony, this is one area in which the
small CD's are quite evidently, when they begin to pay 5,
percent,
drawing money from thrift institutions. I think, though, and I am
sure the Federal Reserve Board would do this much better than I
am prepared to do it, I think we have to keep in mind, though, that
this is not the only source that is competing for funds and this is
not the only source that is causing less inflow of funds into the thrift
institutions than was the case a year or 2 years ago.
It might also be of interest to the committee to have these figures,
because they are in some degree a response to your question about
money drying up in the Northeast.
In 1965 the repayments into the savings and loan industry from
people who had borrowed money for building and other purposes
amounted to about $15,300 million. We estimate the repayments for
1966 will be about $14 billion. Net savings in 1965, and this included
dividends credited to savings, amounted to $8.2 billion. The estim ate
for 1966 is about $4.4 billion.
This means that from these two sources the savings and loan in­
dustry at the present outlook will have available about $5 billion less
than it had in 1965. This gets back to another figure that I used in
my testimony, that seemingly, the savings and loan industry is going
to have for lending purposes between 20 and 2-5 percent less than they
had in 1965. This is not only evident in the Northeast, but also in
other parts of the country, there is going to be less money available
from the savings and loan industry than there was available in 1965.
Now, this is also related to Congressman Stephens’ question as to
how they make up this deficit. They can’t hope to make up this deficit
by coming to the windows of the 12 district banks to borrow. They
will be able to come to the banks and get what is needed so far as
their own liquidity is concerned, but there will be a shortage of funds
even at the bank so far as expansion is concerned.
Mr. S t G e rm a in . So, to capsulize, Mr. Chairman, the time has come
for very definite and effective steps to be taken in an attempt to allevi­
ate the situation if we intend to see to it that people who need the



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

85

fluids to buy homes and build homes can find these funds at a reason­
able rate of interest ?
Mr. H o r n e . If some mechanism can be found whereby you can con­
trol to what savings institutions people’s savings go and then you
could determine where this money is loaned once it gets into these in­
stitutions, I would say you were at the crux of the difficulty. Other­
wise, with the free market and also with the many other things, as I
indicated a few moments ago, that people are doing with their money,
other than just CD’s, it is a very difficult situation right now to deter­
mine exactly the manner in which to best handle it.
Mr. S t G e rm a in . Thank you for your thoughts on the subiect.
The C h a ir m a n . Mr. Fho?
Mr. F i n o . Thank you, Mr. Chairman.
Mr. Horne, do I understand from your testimony here this morning
that it is your feeling that if money continues to flow out of the savings
and thrift accounts into commercial banks that this would affect the
mortgage market ?
Mr. H o r n e . It is bound to affect the amount of money, Congress­
man, that is available for investment in the mortgage market unless
as I say, this cutback, this necessary cutback on the part of S. & L.’s
is made up elsewhere and I don’t think it is going to be made up else­
where.
Now, we cannot tell at this particular time how severe this cutback
across the board in the market, in the mortgage market will be. As
I have said, there are some areas where a cutback will be healthy.
But if the cutback is too great across the Nation as a whole, then peo­
ple are simply going to be able to buy fewer homes than they’ve bought
in the past. This may not in itself create for the economy a wholly un­
usual, severe situation that can’t be weathered. I think the whole thing
depends on how steep the cutback is. Certainly if the cutback is ex­
tremely deep then the people who are engaged today in the home­
building process, whether actually putting the bricks and lumber
together or whether they are manufacturing items to go into the mak­
ing of the home, it will necessarily cause cutbacks in their activities
which may or may not be absorbed in other parts of the economy.
But all of these things are interrelated as you know. One is not
separated from the other.
Mr. F in o . We have two giant banks in New York: First National
City Bank and the Manufacturer’s Hanover, and I assume that they
are issuing CD’s. These two big banks are competing with each other
and certainly against all of the savings and loan banks for mortgage
money and they are giving the best interest rate and are attracting
mortgage money in New York City.
Now, I think the fear is not so much the loss of money from the
mortgage money market than the loss of money to these banks through
the issuance of CD’s.
You testified recently before the Senate on some legislation affect­
ing savings and loans. Mr. Home, could you tell us, are the savings
banks, the savings and loan associations throughout this country in
serious trouble ?
Mr. H o r n e . To give you the correct answer and the appropriate
answer, if you take the picture as a whole, the answer is “No.” I
wouldn’t want to— —
Mr. F in o . I asked the question seriously.

63-496—66------ 7


86

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

Mr. H o rn e . N o, sir; as a whole there are a few that are. But the
thrust of my testimony before the Senate committee and which 1 hope
eventually to present to this committee has to do with 2 or 3 percent
of the problem cases in which there is either incompetent management
or in some cases dishonest management. This is a very, very small
part of this industry. Unfortunately, when this is talked about, some­
times the news stories don’t stress that 97 or 98 percent of our man­
agers are well-intentioned, good, honest people. They stress some­
times more the 2 or 3 percent. I think it is very urgent and very
important that we get this legislation to get at this 2 or 3 percent be­
cause they are unnecessarily impairing the public image of the 97 or
98 percent that are good. But this is another problem.
As far as liquidity goes I think we can weather this particular
storm. But I think it has to be watched. I think presently money
is flowing out of S. & L.’s into banks because of CD’s in some cases.
As I indicated, this is not the only competition for funds so far as the
S. &L.’s are concerned.
There are other things that are competing for funds, too, which
are having an effect on the amount of money that flows into S. & L.’s.
We may have to advance money from the 12 Federal home loan banks
to the savings and loan industry to enable them to meet that liquidity
problem. We may have to cut down the funds available for them to
use for lending purposes. But as I also indicated, we have money
flowing into the savings and loans through repayments which is going
to be a great deal of help.
A problem we have in the savings and loan industry is, that the
moneys are invested in long-term mortgages, they can’t turn the money
over the way banks turn the money over. They don’t have the flexi­
bility as the English system has, that when things get tight the interest
that they charge on loans outstanding is immediately raised accord­
ingly. We don’t have that in this country. The Federal a ss o c ia tio n s
have the right to put it in the contract when they loan money, but it
is not exercised because of competition that is so keen from other
sources, (retting back to trying to answer candidly your basic ques­
tion, Is the savings and loan industry as a whole in trouble *” I
would say not in any trouble that we can’t meet. Not in any trouble
that would cause panic. But the situation is pressing enough that we
imist explore things that this committee is exploring and the Board
itself must explore ways and means not only within the Board, but
with other Government agencies as to how we can meet any problem

that might come down the road in the weeks and months ahead.
Mr. H o r n e . From issuing CD’s ?
COmpetit. o1 with the commercial banks? There are
i n,
t
the'money?

SSmngS ^

loan associations is®«e CD’s and keep

with'th^e savings and^oan^S^cTu^ath ^ dotnotS
c(Mne^n^'r'^S “ 1
vision and jurisdiction. As
a "
State laws apply to them rather than Federal W
C and
S



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

87

The answer to your question, “Can they not do the same thing?”
This is somewhat a yes-and-no answer. The one thing we have to keep
in mind, and it is a fact that I made reference to a while ago in my
statement, that money is tied up in long-term mortgages. The interest
rates they can charge are fixed by contracts. This means that they
are restrained in how much they can earn. And if they are restrained
on how much they are earning they are also restrained on how much
they can pay their savers. The situation is, that if the savings and
loan industry took on the commercial banks in a rate war, because of
the condition of their portfolio as I have explained, they simply would
be the loser. And so both on their part and on our part at the Board,
we have tried to practice restraint in this area. We have given them
flexibility. We now have under study the granting of even more
flexibility which I think we will announce either this week or the early
part of next week.
We have to bear in mind what they actually can afford. This
might interest you to some degree—during the past 3 or 4 weeks I
have, by going to what we call stockholder’s meetings in the banks,
I have asked the savings and loan managers, several hundred in each
case, to raise his hand who would like to have a 5-percent certificate.
In one bank district five people raised their hands and in another
bank district six raised their hands. In another one three or four
raised their hands, and in the State of New Jersey just last week,
not a single person raised his hand.
One thing that they recognize is what I just said, there is a limit
on how much they can earn. And consequently how much they can
pay for savings. Also, they know whatever they might go to today,
that banks at the 5%-percent present authority can outbid them and
they simply cannot meet it. They want to get by if they can, and I
think we should, without engaging in a rate war.
Mr. A n n u n z io . Will the gentleman from New York yield?
Mr. F in o . My time has expired.
The C h a ir m a n . Mr. Gonzalez.
Mr. G o n z a le z . Mr. Horne, our colleague from New York has raised
an interesting point here. I am just wondering, though, he suggested
New York banks are finding it possible to invest their money in
mortgages at a higher rate, say 5 ^ percent. I f so, this is the most
unusual situation. I did not think this was prevalent in the rest
of the country. Is this the case ?
Mr. H o r n e . Our evidence is, Congressman, and I think we have
some figures on it for the committee—;I don’t know if we have it at
our fingertips. Our evidence is that this is not the case in the country,
nationally speaking. The banks did in 1964 and 1965; I think I am
right about 1964. They did go into the mortgage market more than
they had done previously and held that rate in 1965. But evidence
that we have now shows that they are dropping out of the mortgage
market as compared to last year. This is true in New York as well.
I can’t answer on an individual-bank basis.

Mr. G o n z a le z . It seems to me, what has really happened in our
country is that we are federalizing the loan sharks.
Mr. H o r n e . Doing w h a t, sir?
Mr. G o n z a le z . We are federalizing the loan shark. On the State
level we have this like a cancer. Back in Texas, as we say, our State



88

UNSOUND COMPETITION FOE SAVINGS AND TIME DEPOSITS

is the “Loan Shark State/’—loan shark capital of the Nation and it
has been very interesting to watch some of the gyrations, for instance
in the last session of the legislature, both the banks as well as the
savings and loan institutions pushed for approval of a law that
would legalize 17%-percent interest on loans up to about $1,500 or
better. Fortunately for us, the Governor vetoed that bill. Of course,
a lot of us had to do a lot of pleading, asking him to do that. The
reason is also quite obvious—the reason is quite obvious and
that is, since the adoption of the regulatory law in Texas, a
lot of loans that the banks were losing were going to the
finance companies other than banks and other established institu­
tions. We have the U.S. Comptroller of the Currency announc­
ing that it is his interpretation of the law that the national banks
are empowered to charge the highest rates of interest permissible
under State regulatory heads. That would mean in Texas that the
national bank could charge on certain types of loans up to 300 percent
per annum which in certain cases is legalized in Texas.
It seems to me—coming out from the boondocks in Texas, as I have,
serving on the State legislative level in the senate, and then coming
up here to Washington—that I readily identify the animal by his
tracks. I think we have been taken over by the loan sharks whether
it is in CD s—not to be confused with theDT’s.
I just wonder if there is anything you can see from the standpoint
of congressional action that could be done to forestall this apparently—
to stop these unconscionable interest charges ?
Mr. H o rn e . Well, that is such a big task, I really don’t feel ade­
quately competent to elaborate on it. I don’t know that, I have the
information to elaborate on it. We are torn here on the one hand
between a shortage of money and naturally when there is a shortage
there is going to be higher charges for it.
Personally, my sympathy is on your side. I wish there were some
way that, the person who has to borrow money, but particularly the
person who desperately needs it and can’t get along without it w o u l d n ’t
have to pay exorbitant rates for it. But there is such a difference of
opinion here. Some people, as everyone here knows, armie that you
have to charge higher rates to cut down on the amount—people who
control ling inflat hm t0 borrow and consequently through their process
There is another argument on the other side that, is just as strong.
W l . l u ’ n ™ 01' J anl “i s?mPil% Twith the lower charges. But.
]ust how Congress or anybody can get at that particular situation that
talking about, now, I frankly don’t qualify to give all the
answers to it. I do think that what I have suggested about the CD

have

- - a * so



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

89

Mr. G o n z a l e z . It just seems to me, and I could be wrong, but it
just seems to me that one thing feeds on the other. I have seen this
process, as I say, on a more localized basis and I have seen things
happen here on the national level. I would hate to see the Texas tech­
nique nationalized.
Mr. H o r n e . I certainly would agree with the Congressman on that
point.
Mr. G o n z a l e z . My time h a s expired.
The C h a ir m a n . Mr. Minish.
M r. M i n i s h . Thank you, M r. Chairman. I want to commend M r .
Horne on a very fine statement.
Who is affected by the abrupt outflow of funds from the thrift
institutions ?
Mr. H o r n e . Who w o u ld b e a ffe c te d ?
M r. M i n i s h . W h o is a ffe c te d b y th e o u tflo w o f f u n d s f r o m th e
t h r i f t in s tit u tio n s ?
Mr. H o r n e . I guess the person who would be most immediately

affected would be the home borrower, the person who wants to buy
a home, and if the construction level falls to the extent that it isn’t
available, which is likely, he would be affected and then the fellow
who wants to borrow money on homes that are available is also going
to be affected, because as you have to pay more to get money in sav­
ings, you are going to have to—you are going to have to charge more
for it. Plus, the added fact, just the natural law of life in this
country, if there is a shortage of money you are going to charge a
little bit more than what you have available to lend than otherwise
would be the case.
The C h a ir m a n . Mr. Halpem.
Mr. H a l f e r n . Yes, Mr. Chairman.
Mr. Home, you talked about money being taken out of savings and
loan associations. Now, under the proposed Sales Participation Act,
banks will be buying these certificates at 5% percent. As it is now,
this is clean money, although all they have to do is cut coupons. Is
not this money being withdrawn from the mortgage market ?
Mr. H o r n e . I suppose m y response here, Congressman, has to b e
perhaps twofold.
One is, I have not made a careful study myself and the Board
has not made a careful study but does not believe there would be
adverse effect on thrift institutions as regards this program.
Another point is that it is primarily, at least to a great degree, a
question of how it is managed. I should think that those who are in
charge of managing this program, if it should be approved and if
they do operate under it, are knowledgeable people and that they
would keep in mind, if it is managed improperly, it could cause some
difficulty.
Frankly, I have confidence in the people who would manage it, and
I think they would try to handle it in a way that would not cause
adverse effects on other parts of the economy. I would hope and
expect they would do a similar thing to what we do at the Board, for
example. On occasions when we take over the assets of a disappearingsavingsatfd loan association to liquidate those assets, we keep in
mind what the market conditions are in that area and not unload in
a manner that would impose ft handicap on the savings and loan



90

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

associations or even on other people who deal in the mortgage market
situation. The record shows that the participation program has been
tailored to security buyers and not to savings account holders.
Mr. F in o . Will the gentleman yield ?
Mr. H a lp e r n . Yes; I yield.
Mr. F in o . Mr. Horne, you are the representative of a fiscal agency
of Government.
Mr. H o r n e . Yes, sir.
Mr. F in o . Does not the Budget Dirctor and the Treasury Depart­
ment call in all of the agencies concerned with the one problem and
discuss it before they come out with a bill such as the Sales Participa­
tion Act? This bill could very well affect your part of the problem
and yet you say you know nothing about it, you have not studied it.
Mr. H o r n e . Let me say that I have not studied it in close detail.
I am generally familiar with it and while in this case there was not a
meeting held-----

M F in o . You were not consulted?
r.
Mr. H o r n e . We were consulted through the process of the Bureau
of the Budget, to inquire of appropriate agencies. To this extent we
were consulted.
Mr. F in o . You were consulted by the Treasury Department and
the Budget Director. What was the position of the Home Loan Bank
Board ?
Mr. H o r n e . We raised no objection to the legislation.
Mr. F in o . Y o u do not see any fear of money being taken out of the
m^tgage market by these participation certificates?
Mr. H o r n e . I wouldn’t want to go so far as to say that this pro­
gram, if not administered properly, could not take money that might
not otherwise go to savings institutions, whether they be banks,
fc. & L s, or thrift institutions. I am saying that this is one of the
several factors and one of the several programs that in mv opinion
has some merit and it would depend on how this is managed as to
whether or not it would have that effect.

M F in o . You express deep concern about the CD’s—
r.
money flow1
and yet express no concern about $4.7
billion beingtaken out of the consumer credit market ?

to
,

th afall
t l l w

w

' Congressman,that th at necessarily is so,
* billion is the kind of money that would flow into

pl“ * B is — * ■ * “■« ™ ,d
“
M F ino. It is m the thrift institutions already.
r.
Mr

Is- s h o r t , I ask for regular order.
D } aV
e,
*ime’M r- Chairman.
the c h a £ )ian
an left 1116 he»r «ig room and Mr. Ashley assumed
t t p £ a n y ™ t . AS *
°* aCtual fact’ y°u r 5 “ inutes are about
Mr. H alfern. Thank you.

Mr. A s h l e y . Mr.Hanna?
t«
J0 1 r:Chairman.
1 ’M




P ^ l a r i y . f o r the high quality
is given at a tim e of

u n s o u n d c o m p e titio n f o r s a v in g s a n d tim e d e p o s its

91

It reminds me of the story told about the proper and purely innocent
Englishman who got caught in a demonstration that was started by
the students in the streets of Djakarta. The police had been fore­
warned about the demonstration and so were ready with a very large
water hose. When they saw the students coming they let loose with
the water hose. The Englishman was unhappily placed in front of
the demonstration and caught the full brunt of it right in the brisket.
He got up with the most composure that he could summon and made
the following complaint to the man who was in charge of the hose.
v
He said, “Old boy, can’t you swing that thing about a bit? I seem
to be getting the brunt of it.”
It seems to me that the situation that we see here, Mr. Horne, is
that we do have a crisis in liquidity and that the objection that you
seem to be raising here is the fact that the brunt of the effect of the
crisis of liquidity demonstrably appears to be hitting in the mortgage
market and it is being affected adversely by the flow of funds to a
degree that is unjustifiable. Is that not correct?
Mr, H o r n e . We are concerned about the point, sir, you have ex­
pressed. I would want to emphasize, though, that while we are
concerned about it, we think that there is going to be no real problem
in meeting it.
Mr. H a x n a . I hope you are correct about that. If I understand
the liquidity need of savings and loans, they fall into five fields: First,
the savings and loans hope to have liquidity to make new loans. Sec­
ond, it certainly needs liquidity to repay any advances made by the
Home Loan Bank Board. Third, it needs money to meet the with­
drawals in the situation in which withdrawals are occurring and they
are occurring at the present time, are they not, Mr. Horne?
Mr. H o r n e . Yes, sir; but on that point, I think it might be helpful
to the committee to point out that as far as the total inflow is con­
cerned, and the total outflow is concerned, the industry nationwide is
about even now with what it was at the opening of the year.
Mr. H a n n a . I want to talk to you about this nationwide average
and then talk about the regions of the United States, because I think
it is very important that we distinguish the sections.
Mr. H o r n e . Yes, sir.
Mr. H a n n a . If there are withdrawals that are in excess of deposits,
then there is liquidity needs to meet those withdrawals, obviously.
Mr. H o r n e . Y e s.
Mr. H a n n a . Fourth, there is needed money for operational expense
every day that the shops are open, it seems to me, and fifth, there is
money needed to pay interest rates if they are claimed by the de­
positors, right?
Mr. H o r n e . Y e s .
M r. H a n n a . All right. Where does the savings and loan get its
liquidity to meet the demands? No. 1, is one of the sources the
payment on loans ?
Mr. H o r n e . One o f the sources would be that; yes, sir.
M r. H a n n a . Y o u h a v e in d ic a t e d t h a t t h a t r e p a y m e n t is g o in g to
b e d o w n $ 1 .3 b illio n t h i s y e a r .
Mr. H o r n e . The way things are shaping up, that is o u r estimate

now.




92

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

Mr. H a n n a . N o . 2 , is another source of liquidity the sale of mort­
gages in the secondary market—is there any decline in the source of
liquidity there, the sale of mortgages in the secondary market ?
Mr. H o r n e . There is a decline there; yes, sir.
Mr. H a n n a . Would you s a y a portion of decline is reflected in the
FNMA decision yesterday to move from $35,000 mortgages to $15,000
mortgage purchases?
Mr. H o r n e . I am trying to think that through, Congressman, to
give you an appropriate answer. You see, we are mostly in the con­
ventional side ox lending.
Mr. H a n n a . I think you know the effects of the secondary m a r k e t
on the liquidity of savings and loans. It certainly has a strong effect,
does it not?
Mr. H o r n e . I would think it has some effect.
Mr. H a n n a . Let me ask you this. Would you not agree with me
that the secondary market is less salable today than it was a year ago?
Mr. H o r n e . Yes, sir.
Mr. H a n n a . So that is another thing?
Mr. H o r n e . Yes, sir.
Mr. H a n n a . No. 3 , let me ask you again, there is a source of liquidity
in new deposits, is there not ?
Mr. H o r n e . Yes, sir.
(Mr. Patman resumed the chair.)
Mr. H a n n a . If y o u looked at statistics you would find there is a
net withdrawal position in 1965 up to now ? Are there sections of the
country where this would be true?
Mr. H o r n e . I don’t know of any. I don’t know of any. There may
be. In your section, for example, the situation is about on par with
what it is nationwide, that is the whole State of California.
Mr. H a n n a . Y o u would be impressed by figures from any substan­
tial source that indicated that there was a net slide in position?
Mr. H o r n e . Yes, sir, I would and I might also point out, Con­
gressman, and this I think buttresses the point that you are making,
that during the month of April as I indicated in my testimony, we did
have withdrawals that caused some concern.
Mr. H a n n a . It seems to me another source of liquidity would be
the fees and service charges connected with new loans. Now, if they
are making less new loans than they were making a year ago, they
got less liquidity from that source.
*
^ are
money from service charges; yes,
sir. This is flexible. In some parts of the country thev are paid
more charged more fees, higher fees than in other parts.
Mr. H a n n a . Let us take a look at the country as a whole. Is it
not true that we cannot afford to simply be satisfied with the a v e r a g e
statistics when we have so many demonstrable distinctions in the
region which the savings and loan industry serves? Do you not have
some responsibility for statistical analysis as to what the average is?
. M r- H o r n e . I agree with the Congressman that you couldn’t—that
m detenninmg all policy, that you have to look at more than just the
national statistics, national figures.
,?
the action of the Board would indicate that it has taken
this into consideration in times past and most likely will continue
to do so.
J



UNSOUND COMPETITION FOE SAVINGS AND TIME DEPOSITS

93

Mr. H a n n a . One final question. Are you anticipating going to
the -money market yourself to raise funds to operate the Home Loan
Bank Board?
Mr. H o r n e . We anticipate going to the market for whatever our
money needs may be. For the information of the committee, no doubt
you already know this, that when we and other Government agencies
go to the market, we sort of operate through a traffic director, in this
case, the Secretary of the Treasury. We have discussed our needs with
the Secretary of the Treasury and are going to do so again in the next
few days.
Mr. H a n n a . In the event that you do have t o go to the market and
I believe you and I both agree that you will have to go----Mr. H o r n e . Yes, sir.
Mr. H a n n a . Y o u are going to have to pay the market price for
money.

Mr. H o r n e . This is right.
Mr. H a n n a . And if I read it correctly in the Wall Street Journal
yesterday, FNMA in its issue yesterday put out an issue at 5.45 percent
interest and up 99.95 discount which ngures at about 5.55 overall.
Dr. S c h w a r t z . That is what we expect to pay on the next issue, a
coupon of about 5.5 is what we are thinking of now. A few days can
make a change, but we don’t think the change will be in the downward,
though.
Mr. H a n n a . I am in 100-percent agreement with you. I think also
this has something to bear upon the questions that Mr. Widnall, Mr..
Fino was asking, because I think that if we agree that the present
programs have to be carried out, and certainly the function of the
Federal Home Loan Bank Board has to be carried out to protect the
$130 billion business that is involved here, you have to go somewhere
for the money. And the price of the money is going to be a reality,
whether it is in deposits or whether it is in borrowing, from the money
market. It seems to me that it is true for all of these other programs
we are talking about. If we are going to do it on the basis of direct
loans, then we have to go to the money market to get the money for
the Treasury to pay. I f it is going to be by sales of participation, then
we are going to have to go to the same money market and we are going
to have to pay whatever the realities of that market dictate. Is that
not correct?
M r . H o r n e . Y o u a r e c o r r e c t, sir .
Mr. H a n n a . I th a n k y o u .
The C h a ir m a n . Mr. Hanna, do

not overlook the fact that it would
be possible for our Congress to compel the Federal Reserve to make
money available to the Federal Home Loan Bank Board at a rate of
interest that Congress felt was reasonable. Do not overlook that
possibility.

Mr. Gettys?
Mr. H o r n e . May I also make one further response in connection
with the concern that Congressman Fino expressed and Congressman
Hanna also touched on ?
I think we bear in mind also, and I am not trying to be evasive
in answering your question, Mr. Congressman. I am part of the
administration as I am sure you recognize, sir. But I do want to
emphasize the importance of management of this and I also want to




94

UNSOUND COM PETITION FOR SAVINGS AND TIM E DEPOSITS

emphasize th at the amount of money th a t is affected here, I think in
the first go-round is only about $4.5 billion and it will come from all
sources, whereas the CD has presented a much larger figure than this
p articular participation program would and I just wanted to get that
point in ; th a t personally, I believe I am right, Mr. Chairm an, it
would be $4.5 billion involved and before any more would be involved,
the adm inistration would have to return to Congress.

The C h a ir m a n . 4.7
Mr. Gettys?
Mr. G e t t y s . It is a pleasure to welcome an old Capitol Hill employee
who has gone downtown and made good.
Mr. H o r n e . Thank y o u , sir.
Mr. G e t t y s . This whole subject has to do with competition for
money; does it not ?
Mr. H o r n e . Y es, sir; to a great degree.
Mr. G e t t y s . The fact that worries me somewhat is that the savings
and loan industry is asking for authority, as I understand it, to go into
other fields in addition to home loans. I f there is a shortage in the
home loan field, why would it be necessary—the shortage of money
for the purpose that the savings and loan industry was created, why
should it go into other fields which are now reserved to the banks on
appliances, mobile homes, and that sort of thing? Is this a related
subject?
Mr. H o r n e . Y es, I think it is. Perhaps I should answer it this way:
While Congress has by law made the savings and loan industry pretty
much of a specialty in what it can do, it did not at the same time see
fit to say to the commercial banking industry, for example, that it
stay out of the mortgage market area. So the banks have complete
freedom to go into almost anything whereas the S. & L.’s are restricted.
Now, as far as the immediate situation is concerned, you make a
very good point. And this is a point that I was making to one of the
members, Congressman Stephens, when he was commenting on the
fact that we are looking very closely at money we are making avail­
able to some of the savings and loans through our central banking
setup. We want to make certain that this money would be used for
home purposes. But in the long run, I should think that it is entirely
appropriate to permit the savings and loan associations, at least, to
loan money on those things that go to make up a complete home and
this is one of the things they are asking for.
As far as mobile homes are concerned, it so happens that now,
about one out of every nine people that buys what he calls a home
buys a mobile home. This within itself is a home and it can justifiably,
I think, be argued that if they help finance the mobile home pur­
chases, they are still in the home financing area.
I don’t want to take all of your time, but there is one other c o m m e n t
that may be appropriate.
^ I don’t know where the future is going to lead in this or any other
industry, but I am rather of opinion that if Congress is going to insist
that the savings and loan industry remain mortgage investment spe­
cialists, that Congress may very well have to provide other means for
them to compete for savings. If Congress isn’t going to do that, then
Congress may very well have to permit—if the industry is to remain
strong and viable—a more diversified portfolio than is now the case-




UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

95

Mr. G e t t y s . Thank you, sir. Although it is an old-fashioned phi­
losophy, are we not here asking again, either by law or by administra­
tive action that the Federal Government should get more into the
allocation or distribution among the competitive factors in the econ­
omy, private enterprise, dictating to them—are we not again in this
legislation asked for here, going more into the private sector, putting
the tentacles of the Federal Government into business and that sort
of thing ? Is that not another step in that direction ?
Mr. H o r n e . To enable the S. & L.’s t o have a wider lending
authority.
Mr. G e t t y s . By legislative or by administrative decree, to say that
this money has got to go here and this money has got to go there—
that is interferring with competitive factors.
Mr. H o r n e . This is a problem, Congressman. I frankly feel that
Congress has already done so to a degree. It is something that can
very well be defended, whichever point of view a person might have.
Mr. G e t t y s . In the Old South where you and I are from, maybe
the free-enterprise system is a little old fashioned, but I think we
ought to consider it once in a while.
Mr. T od d . Would my distinguished, old-fashioned colleague yield ?
It seems to me you raised a very important point here and one which
we should concern ourselves with. I wonder if what we are now
discussing here is potential legislative action to offset administrative
action which has already interferred in what Chairman Horne calls
competitive allocation of funds. Is not this something that has al­
ready happened via an independent administrative agency which is
charged with the responsibility of maintaining all monetary policy,
the Federal Reserve Board, and are we not at this meeting simply
discussing whether or not their action was wise and whether or not it
took into consideration the impacts of that action on other financial
agencies which Congress has established ? So that we are now reallj
at this committee deciding how funds should be allocated. We are de­
ciding whether a decision of an independent administrative agency,
wisely allocated funds in the money market. Would that be valid?
Mr. H o r n e . This is certainly part o f the picture, Congressman, n o
question about it.
Mr. T o d d . I t h a n k th e g e n tle m a n .
The C h a ir m a n . Obviously, we are not going to be able to finish
today. Can you come back tomorrow, Mr. Horne ?
Mr. H o r n e . I will be back whenever the chairman wants me to.
The C h a ir m a n . We will commence then with the gentleman next to
Mr. Halpern.
We hope to finish with you tomorrow.
Thank you very much. We will be in recess until 10 o’clock tomor­
row morning.
(Whereupon at 11:58 a.m., the committee adjourned, to reconvene
at 10 a.m., Thursday, May 12,1966.)







TO ELIMINATE UNSOUND COMPETITION FOR SAVINGS
AND TIME DEPOSITS
THURSDAY, MAY 12, 1966
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, B.C.
The committee met, pursuant to notice, at 10:05 a.m., in room 2128,
Rayburn House Office Building, Hon. Wright Patman (chairman)
presiding.
Present: Representatives Patman, Reuss, Stephens, Gonzalez, Weltner, Hanna, Grabowski, Todd, Ottinger, McGrath, Hansen, Annunzio,
Rees, Fino, Mrs. Dwyer, Harvey, Brock, and Clawson.
STATEMENT OP HON. JOHN E. HORNE, CHAIRMAN, FEDERAL
HOME LOAN BANK BOARD; ACCOMPANIED BY DR. HARRY S.
SCHWARTZ, ECONOMIST, FEDERAL HOME LOAN BANK BOARD—
Resumed

The C h a ir m a n . The committee will please come to order.
We will resume questioning of Mr. Home. Mr. Horne has kindly
consented to come back this morning so all members would have an
opportunity to ask questions. It is possible, Mr. Home, we will not
use over an hour’s time, something like that. I am just estimating.
I know that would be pleasing to you because you are very busy and
I thought we might be imposing on you, asking you to come back but
we must give all our members a chance to interrogate.
Mr. H o r n e . I understand, Mr. Chairman, and I appreciate your
consideration and I will stay here as long as the committee wants to
question me.
The C h a ir m a n . Mr. Brock?
M r. B ro ck . N o q u e stio n s.
The C h a ir m a n . Mr. Rees?

Mr. Annunzio? Mr. Ottinger, have you
interrogated Mr. Home ?
Mr. O t t i n g e r . No; I have not, Mr. Chairman. But I read this
testimony.
The C h a ir m a n . You may go ahead, sir .
Mr. O t t i n g e r . I read your very fine testimony and want to con­
gratulate you, Mr. Home.
Mr. H o r n e . Thank you, sir.
Mr. O t t i n g e r . Of the various approaches for resolving this prob­
lem, what seems the most promising from your point of view ? I sup­
pose you testified yesterday that you thought that the limitation of
perhaps $25,000 as a floor on the deposits might be advisable. Are



97

98

UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

there any other steps that you feel would be advisable to rectify the
problem ?
Mr. H o r n e . Congressman, on the top of page 5 o f my testimony
I alluded to other possible solutions. If I may, sir, I would just like
to read that brief paragraph.
We would suggest examining the extent, in relation to total deposits,
to which banks may use any of these instruments, negotiable CD’s,
nonnegotiable CD’s, and time deposit open account. A minimum size
limit for all these instruments and the appropriateness of multiple
maturities and automatic renewal should also receive the commit­
tee’s attention.
There are several points in addition to the size limit which I sug­
gested and which also is suggested in your bill. Although my sugges­
tion and yours are different, I should say that yours would certainly be
helpful, even if you stop at $15,000 instead of $25,000.
Mr. O t t i n g e r . What degree of impact would there be between the
$15,000 and $25,000 level? Do you have any idea of the amount of
money that is involved in that range ?
Mr. H o r n e . N o , sir ; I do not have—I have not made an estimate
as to the amount that would be involved. I should think----Dr. S c h w a r t z . I think that estimate ought to come from the Fed­
eral Reserve because they are collecting data on this right now.
Mr. H o r n e . I was going to suggest that the Federal Reserve Board
could probably give you a better lead as to the amount of money
that might be involved than we could. But I must say again that
I think your estimate would be helpful, extremely so.
Mr. O t t i n g e r . How did you arrive then at the $ 2 5 ,0 0 0 figure rather
than $ 1 0 ,0 0 0 , which is the present insured limit, or the $ 1 5 ,0 0 0 figure
which I selected because it is the one that is proposed as the limit for
insured deposits?
Mr. H o r n e . I must admit that I had no magic formula. It is just
evident to us in our experience that the lower the figure is in CD’s,
the more effect it has on the thrift institutions. It just seemed to me
that $25,000 or $20,000 or even $15,000 would alleviate to a great de­
gree the pressure that is presenty on S. & L.’s and thrift institutions
because of the current lack of any size of restriction.
Mr. O t t i n g e r . Y o u indicate that you would like to see a r e s tr ic ­
tion as to the percent of the total deposits of any institution which
may be held in certificates of deposit. Do you have any idea what
kind of percentage that would be and if there would be great diffi"
culties in trying to administer that for all different kinds of banking
institutions?
Mr. H o r n e . I have not tried to inventory or research what might
be an appropriate figure here. I suppose that it could be a r r iv e d at
by the Federal Reserve Board. The Federal Reserve Board or the
FDIC would be the appropriate sources to examine the banks as to
what percentages presently exist in banks, and in cases where they
think it is exceedingly heavy, it could be very well reduced and some
maximum set. We have done similar things in the savings and loan
industry as regards, for example, the amount of CD’s that an S. & L.
could hold m a commercial bank for which it would be given credit as
cash We ascertained by making a study in this particular area what
we thought would be an appropriate amount, looking forward to the



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

99

time of phasing it out all together. I think the Federal Reserve Board
with the information that it would have on each individual bank and
to what degree this practice is being carried on in each individual bank
could without a great deal of difficulty come up with an appropriate
suggestion.
Mr. O t t i n g e r . Would y o u be sanguine about giving the Federal
Reserve Board discretion in both this regard and in regard to the
amount of the floor that would be set, whether it would be $15,000,
$10,000, $25,000 ?
The C h a ir m a n . Would you yield? Would you include in that the
interest rate, too, that they would be payable ?
Mr. O t t i n g e r . Yes.
The C h a ir m a n . Unless you fix it so that those under $25,000 would
get as much as those above it, I think we would be placed in a position
of discriminating against these small people and you would entice
them into a situation that developed in the San Francisco bank where
they were pooling their money and bringing it in there and they had
a question raised as to whether or not insurance coverage was there.
I f we had something like a $25,000 floor, understand, I am all in sym­
pathy with these savings and loans but at the same time we do not want
to place them in a discriminatory position. I f you say that below
$25,000 that there would be a certain rate and that rate were below
the rate on deposits over $25,000 that would help the thrift associations
and the man with a lot of money, but it would be unfair to the ordinary
citizen. I hope you give consideration to that in approaching this
problem.
Mr. O t t i n g e r . I recognize that as a problem, Mr. Chairman, though
I think it is rather more reflective of the situation that actually exists
in the market rather than any discrimination that we would be per­
petrating. I myself feel that the Federal Reserve caused this problem
by permitting the CD’s to come into being and to flourish so by chang­
ing regulation Q and permitting 51 percent to be charged on it. I
/2
have some question about giving the Federal Reserve the discretionary
power to resolve the problem. I am not sure they would properly
exercise that discretion.
Mr. H o r n e . I f you should give them such power, as I indicated yes­
terday, you might very well wish at the same time to provide guide­
lines, either in the legislation or preferably in the report that the com­
mittee would make when it reported the bill.
I must say if I may, sir, that I have a great deal of sympathy myself
with the position just expressed by the chairman. The committee
might very well decide though that while this would be an evil in a
way, Mr. Chairman, that there might be a worse evil if some restraint
is not imposed here. I do not know the answer to it. I do say, again,
that I am in sympathy with the thought that a person with a small
amount of savings should draw as much as a person with a large
amount of savings and yet there may be on a temporary basis some
overriding reason that would cause the committee to w ant to put up
T
with this sort of thing at least for a while.
Mr. O t t i n g e r . I think there is a much larger question here o f im­
balance between the regulatory agencies and the policies with respect
to deposits that we will have to get at. But I am not sure, Mr. Chair­
man, that we should not solve this immediate threatening problem in



1 0 0 UNSOUND COM PETITION FOR SAVINGS AND TIM E DEPOSITS

a tem porary way. M r. Chairm an, can I ask one more question, even
though my time is up ?
The C h a ir m a n . M r. M cGrath.
M r . M c G r a t h . I w ant to compliment Chairm an H orne also for his
fine testimony. I t is always a pleasure for me to see him here.
M r. H o r n e . T hank y o u , sir.
M r . M c G r a t h . I am curious to find out, if it is readily available,
w hat percentage of depositors in the savings and loan associations are
also borrowers ? Is th a t statistic kept ?
Dr. S c h w a r t z . N o , s i r ; t h e s t a t is t ic is n o t k e p t.
M r. M c G r a t h . We will forget about it, then. Mr. H om e, is there
any doubt in your m ind th at the Federal Home Loan B ank B oard and
other Government agencies have sufficient resources and statutory tools
to keep things on an even keel and to deal w ith all contingencies in the
savings and loan industry and other financial branches of our
economy ?
M r. H o r n e . I am very pleased th a t you ask th at question, because
I should like to try to dispel any doubt about it in the mind of anyone.
There is no question in my m ind but th a t w ith the resources of the
Federal home loan banks, w ith the resources of other agencies on
which we by law have the rig h t to go to for assistance if need be,
w ith the sympathetic understanding and concern th at has been ex­
pressed to the Federal Home Loan B ank B oard by appropriate of*
ficials of other agencies, the help th at is being generated in case it is
needed I just do not believe th a t there is any reason fo r anyone to
push a panic button and fear th a t we are about to suffer a real catastrophe. W e have some try in g times th a t we are going through; yes,
sir. W e have done so in the past and I am confident th a t w ith the
sympathetic understanding and the proper w orking together of the
congressional and executive branches of Government th a t we are
going through this, too. I am pleased to say th a t I hope nobody will
m istakm gly take the position th a t the savings and loan industry is
not going to be able to ^weather the difficulties th a t we are in now and
am SUre
continue fo r some months ahead.
M r. M c G r a t h . T h a n k y o u v e r y m u c h .

I h a v e n o f u r t h e r q u e stio n s.

The C h a ir m a n . M r. Clawson ?
Mr. C l a w s o n . T hank you, M r. Chairm an. M r. H om e, in answer
to a question yesterday, you indicated there was no prohibition on
certificates of deposit in connection w ith the savings and loans. How­
ever, they have exercised, apparently under your direction, extreme
caution m the use of this instrum ent as p a rt of th eir procedure. I s
th at about the way you p u t it ?
M r. H o r n e . We have, Congressman, w hat is called not a certificate
of deposit but a certificate. W e think th a t on the whole, the savings
and loans have exercised this authority w ith prudence. As a m a tter
o f f a c t , i t h a s o n ly b e e n in r e c e n t m o n th s — r e la t iv e l y r e c e n t m o n th s
J ™ 8 , came to the Board, since I became Chairm an, as a m atter o f

fact th at we worked out a certificate program th a t would be made
available to the savings and loan industry. W e have presently under
study fu rth e r steps in this direction. W e hope t o have it fo r m a liz e d
in a very few days.
This is fo r the modification o f certificate program s th a t can be used
t y the savings and loan industry. I f I understand y o u r question cor­
 is a responsive answer.
rectly, this


UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 0 1

Mr. C l a w s o n . To the extent that you have explained the certificate.
You indicated that they do use something comparable to the CD in the
S. & L. industry.
Mr. H o r n e . Yes, there are some differences. There are differences
in the legislation and regulation under which banks operate and under
which S. & L.’s operate. There is some difference between these two
instruments. But we have felt for some time that there was a neces­
sity for savings and loans having, at least as a defensive measure, some
such device. Several months ago, we developed such devices and as
I have just said, we are now in the process of even revising these
devices.
Mr. C la w s o n . I recall that some 5 years ago or longer, I deposited
with a savings and loan, something comparable to CD. What would
that have been at that time ?
Mr. H o r n e . I f r a n k ly d o n o t k n o w , sir .
Mr. C l a w s o n . This was a certificate. It was not a passbook.
Mr. H o r n e . I do not know that it would have been the old bonus
plan that has been part of the regulations for some time. There is
a bonus plan wherein S. & L /s may pay a bonus if the money is held
for a period of 3 years of up to 1 percent. We modified that a few
months ago because some did not want to have to pay the full half
percent and we gave them flexibility so they could take an eighth, a
fourth, or a half. That is what von may have in mind as far as
Federal is concerned. As far as States are concerned, as you know,
we have the dual system and sometimes the State permission is not
exactly what the Federal regulation may be. I believe Dr. Schwartz
may comment on this.
Mr. C l a w s o n . I think mine was a State association certificate.
Dr. S c h w a r t z . I f it was a State-chartered association, you may
have a special situation.
The Board does approve each certificate that is issued if it is for a
fixed term or has a fixed rate. Now, there is authority in the Federal
regulations and there may be in certain State regulations to issue a
certificate in lieu of a passbook. There is no difference in that case.
Mr. C l a w s o x . I did not know the bonuses that I received were for
that purpose.
Dr. S c h w a r t z . I think you got that for opening of the account.
Air. R e e s . W ill the gentleman yield? I had a bill on giveaways
and premiums. There are no more giveaways.
Mr. C l a w s o n . In your statement on page 4, you also indicated that
with the use of CD’s, by banks, they are building a liquidity squeeze
for themselves if they pursue this too far.
Would you want to enlarge upon that comment ?
Mr. H o r n e . Well, my own reaction is that these CD's of course
mature and when they mature there is a question whether they are
going to be held or whether they are going to move out into other chan­
nels. I f too much of the bank holdings is involved in this kind of
savings or deposit, it can of course, create a greater problem.
I do not know, because I am not privy to all the problems that the
Federal Beserve Board may have experienced last December. But my
assumption is that this was part of the difficulty that the Federal
Reserve Board faced even at that time. As the amount of holdings of
CD ’s in a bank increases, this problem can continue to expand.
63—
496—66— —
8



1 0 2 UNSOUND COM PETITION FOR SAVINGS AND TIM E DEPOSITS

M r. C l a w s o n . I wanted to ask one more question. M ay I indulge
just fo r a moment? There have been statem ents made th a t the liberal
and expansive attitude of the Federal Home Loan B ank B oard in the
past, 5 years ago, together w ith the. dram atic grow th and expansion
of the sayings and loan industry, contributed to some extent to the
present situation by encouraging their liberal loaning activities. Do
you w ant to comment at all on th a t ?

Mr. H o r n e . I would be very glad to, Congressman. I read a story
some time ago which said that the hindsight of an elementary school
graduate was superior to the foresight of a Ph. D, and to some degree
this perhaps is right.
I would not, doubt on some occasions we may have been a little bit
too generous in perm itting savings and loan associations to borrow
from th eir respective Federal home loan banks.
This is a problem th at we constantly face. M any of the associations
think on the one hand, and perhaps erroneously so, th at they have the
risrht to go to the window and borrow whatever they think they need.
W e have in several very im portant ways imposed some restrictions
during the past year or 18 months, and frankly it has made some of
the members unhappy. B ut I think we have done wisely in imposing
some restrictions. A nd it would be my intention, if I am still on the
Board, to look a t this thins: even more carefullv in the months and
years ahead once we get through the present situation.
On the other hand. X must—in answer to your question—tell you
of a bit of correspondence th at took place between the B oard and a
State supervisor a few weeks ago. The State supervisor said th a t the
problems of the State associations in his p articular State, th a t is
their problems having to do with the scheduled items and foreclosures
and delinquencies and overbuilding should really rest on the shoulders
of the Federal Home Loan B ank Board because these associations
have not only advertised excessively for out-of-State money w ith high
rates, but that^ we have in addition perm itted them to borrow money
from the district bank. And I responded by telling him th a t he may
be p artially risrht in his criticism of the Board, but I should like to
point out th a t he is also saying, as regards associations under his super­
vision. th at they are not to be trusted to determine how much money
thev should get from different sources and th a t they do not know how
to invest wisely the money that, they do get and this m ieht be some­
what of a reflection on the State supervisory functions "as well as a
possible reflection on the Federal Home Loan B ank Board.

Mr. C l a w s o n . Thank you. My time is up.
The C t ia t r m a n . Mr. Hansen ?
Mr. H a n s f .n . Thank y o u , Mr. Chairman.

Mr. Horne, what percentage of the holdings in the savings and
loan business are comprised of the federally insured items such as
Federal housing and F H A loans?
Mr. H o r n e . I will supply the exact figure on th a t just, to be
certain. I believe I am rig h t in saying th a t it is around 96 or 98
percent.. Now th is is tru e savingswise. I t is not tru e numberwise.
There are quite a few savings and loan associations th a t do not have
th eir accounts insured, but they are usually small associations. Not
always, but usually they are small associations. So between 96 and
98 percent., and I would like to—when I read my response pu t in the

exact figure so as to answer your question correctly.


TJNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 1 0 3
M r. H a n s e n . Are you talking about the mortgages they hold?
M r. H o r n e . N o , s ir ; I a m t a lk in g a b o u t th e s a v in g s .
Mr. H a n s e n . I am talking about mortgages in their portfolio.
M r. H o r n e . Y o u a re t a lk in g a b o u t VA a n d FH A. T h is is o n ly
10 o r 11 p e r c e n t, sir .
Mr. H a n s e n . Ten or eleven percent ?
Mr. H o r n e . Yes, sir.
Mr. H a n s e n . Someplace along the line you were drawn into some

discussion about the participation sales bill in the testimony that took
place yesterday, and the allegation was made, I believe, by someone,
I am not sure whom, that the sale of participation certificates compete
for mortgage money and therefore withdraw this money from the
market. In the Wall Street Journal on May 6 there was a long article
about increased activity on the part of FNMA, picking up insured
mortgages from the industry. In it there is a sentence which reads
as follows: “When Fannie Mae buys mortgages it provides lenders
with fresh cash to reinvest in other mortgages or in new construct ion.”
Now presumably these mortgages that are being sold to Fannie Mae
are those that were bought or taken at a lower interest rate. To the
extent that they are buying these insured mortgage loans from the
private institutions and institutions such as the savings and loans
they are doing some subsidizing in taking care of the difference in
interest. Fannie Mae is reported to have sold $400 million worth of
their debentures at 5.45 rate basis. Now, wherein is the difference
between this procedure and permitting the Federal agencies to move
their paper through the same route ? I know that this is not germane
to the bill that we are discussing here today, but it is a question w^hich
was raised. Therefore, I think, the matter should be pursued a little
further.
Mr. H o r n e . Well, I suppose, if I understood the mechanism cor­
rectly, Congressman, there is no real difference. Ever since I have
been in Washington, since 1947 to be exact, Congress from time to time
has enabled Fannie Mae to carry out some functions to give assistance
to the homebuilding industry. I should like, if I may, sir, and I think
this would be a partial response at least to your question, comment
somewhat further on the participation program that Congressman
Fino asked me about also yesterday. I frankly admitted that I had
not studied the situation in depth, although I was generally familiar
with it, But since lie asked me that question I checked further into the
program and there are some comments I think that might be appro­
priate both to your question and to one that Congressman Hansen has
just asked. After I looked more carefully into it, the participation
program is not one that would greatly affect the flow of savings into
the savings and loan industry or into thrift institutions. My conclu­
sion for this is related to the fact that the sales by the Government
would amount, under existing proposals, to about $4.5 or $4. ( billion.
The certificates which have been sold heretofore have been in units
of not less than $5,000. I believe the Treasury in testimony has
indicated, they would be willing for the amount to be higher.
These sales would substitute private credit for public credit and if
the Government did not sell the participation certificates it would
have to sell Treasury obligations. These would have at least a sim ilar
effect on the m arket th a t the participation program would have. The




1 0 4 UNSOUND COM PETITION FOR SAVINGS AND TIM E DEPOSITS

Government sale of participation goes across the entire investor field,
as I pointed out yesterday, w ith emphasis on large investors, and
this is quite different from the great amount of money th a t is going
on in small C D ’s. Investors who buy the participation instruments
would be more likely to be using them as a substitute for other types
o f m arket securities rath er than as a substitute for savings accounts.
A nd so I have not concluded in my own m ind th a t either the par­
ticipation program or the Fannie Mae p a rt of it, as presently being
adm inistered, would constitute any great additional strain, if any at
all, on the flow of money into the savings and loan associations or the
m ortgage m arket. There m ight be some, of course. I do not think
anybody could say there would be nothing whatsoever. B ut I think
the effect, if any, would be minimum.
M r. H a n s e n . T hank you very much fo r clearing up th a t point,
M r. H om e.
The C h a ir m a n . M r. Annunzio ?
Mr. A n n u n z i o . T hank you, M r. Chairm an, Mr. H om e, I , too, along
w ith m y other colleagues, would like to commend you on your excel­
lent presentation.
Mr. H o r n e . I appreciate that.
Mr. A n n u n z i o . I would like to express our thanks for your con­
tribution in helping us to solve the CD problem before the committee.
I would like to get back to the participation pool, because it is, as
fa r as I am concerned, germane to the question before us, for the
simple reason th a t we are discussing liquidity on the p a rt of our bank­
ing institutions and w hat effect it would have on the effect of the
liquidity of the banking industry.
Mr. H orne, would you not agree that, first, the shares sold in the
participation pool need not cost the Government 5y2 percent since
the rate depends on a num ber of factors which generally change?
Mr. H o r n e . This is true, sir.
Mr. A n n u n z i o . I f the pool taps funds from a num ber of sources,
such as pension funds, large investors, insurance companies, and
others, it need not compete w ith availability of funds fo r housing.
Mr. H o r n e . Yes, sir.
Mr. A n n u n z i o . W ould you say yes to th a t ?
Mr. H o r n e . Yes.
Mr. A n n u n z i o . W ould you not agree, just as w ith this issue of
CD’s, th a t the issue before us is how CD ’s affect the savings and loan
industry, depending on the size of the denominations issued by the
pool ? In other words, the denominations issued by the pool m ay not
m any way compete w ith flow of funds into th rift institutions.
Mr. H o r n e . I agree, sir, and I also made a sim ilar point in the com­
ments th a t I just made with regard to your question.
Mr. A n n u n z i o . I would also, M r. Chairm an, like to read one para­
graph of an article th a t appeared in the Am erican B anker on May 9>
and then ask unanimous consent th a t it be inserted into the record.
The C h a ir m a n . W ithout objection, so ordered.
Mr. A n n u n z i o . I t deals w ith the Continental Illinois National
Bank & T rust Co., in Chicago, which a week ago suggested th a t pas­
sage of the bill to sell Federal loan assets m ight unsettle the financial
m arkets and over the weekend said th a t failure to pass the bill would
increase the size of the budget deficit and impose even greater pressures
for fiscal
 restraint.


UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 0 5

I would like to have this included in the record at this point.
(The article referred to follows:)
[From the American Banker, May 9, 1966]
C o n t in e n t a l I l l in o is A ss e r t s P a ssa g e

of

A s s e t s B il l I s L e s s e e

of

T wo E v il s

C hicag o .—Continental Illinois National Bank and Trust Co., which a week
ago suggested that passage of the bill to sell Federal loan assets might unsettle
the financial markets, said over the weekend that failure to pass the bill would
increase the size of the budget deficit and impose even greater pressures for fiscal
restraint.
The measure, known as the Loan Participation Act of 1966. calls for sale of
$8 billion of Federally-owned assets by June 30,1967. The bill cleared the Senate
Thursday and a companion measure has been approved by the House Banking
and Currency Committee.
The bank pointed out in its government bond department’s weekly publication,
Continental Comment, that sale of the assets is reflected on the government’s .books
as a net reduction in e x p e n d it u r e s , rather than as an increase to receipts.
If the bill should fail to pass, says Continental, “then pressures would develop
to increase direct Treasury borrowings, raise taxes or reduce other expenditures/*
Direct Treasury borrowings would be restricted to the shorter range of the
market because of the 4% percent ceiling on long-term governments, the publica­
tion states.
The tax increase alternative continues to be played down by Administration
officials, while a reduction in spending faces stiff political opposition, Continental
adds.
“Perhaps most vulnerable to spending reduction are those programs related to
the Great Society where expenditures are rising rapidly,” the bank declares.
“Yet each specific area of this program already has its advocates disappointed
that the cost of the war has held back funds which otherwise might have been
available to them. In fact, Congress recently has restored funds to many areas
where proposed reduction had been suggested.
“Perhaps the simplest solution would be to have an across-the-board reduction
in nondefense spending.”
The bank concludes that the proposed sale of assets “has important implications
for the future course of the economy,” with particular impact on the budget.

Mr. A n n u n z i o . Mr. Home, also in your testimony, I recall that
when the discount rate was increased, you said there was no consul­
tation between the Federal Reserve Board and any of the supervisory
agencies in the Government like the Comptroller of the Currency and
yourself?
Mr. H o r n e . I do not know, Congressman, to what degree they may
have consulted with other agencies of Government. But as I an­
swered the question yesterday, they did not consult in advance with
the Federal Home Loan Bank Board.
Mr. A n n u n z i o . Thank you, Mr. Horne. I also recall you stating
that on January 6 a committee was formed for the purpose of
discussion.
Mr. H o r n e . Yes, sir. I would like to stress this point if I may.
I am sure the committee members remember that in the closing
months of President Kennedy’s sojourn as President, he suggested
the formation of such a committee. Well, shortly after President
Johnson became President he instructed the Secretary of the Treas­
ury to make certain that such a committee was formed. Such a com­
mittee has been formed. It is functioning. We do not announce to
the press or give any publicity to the fact that we meet, but we meet
fairly regularly. TTiere is, in my opinion more exchange of infor­
mation now between the regulatory Government agencies in the
field of financial institutions than there has ever been in the past.
In addition to fairly regular meetings of the Chairman of the Fed­



1 0 6 UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

eral Reserve Board or the Vice Chairman, the Chairman of the
Federal Home Loan Bank Board, the Chairman of FD IC and the
Comptroller of the Currency, there are special meetings on topics
that would be of interest to all of us between times. So there is now
consultation going on, close consultation.
Mr. A n n u n z i o . Would you say this consultation has increased
since December of 1965 ?
Mr. H o r n e . Yes, sir; it has. I was going to say-----Mr. A n n u n z i o . I am very happy that after the horse has left the
bam some of our people in the supervisory agencies have decided
to talk to each other. Thank you, Mr. Chairman.
The C h a ir m a n . May I suggest, Mr. Horne, that sounds mighty
good, but if the President himself organized this coordinating group,
then they would all be obligated to the President to make sure they did
a good job and he would be the overseer. But now, then, you have a
coordinating committee composed of members all in a comparable
position, no one above the other, and I think that is the weakness in
it. I hope the President would organize a coordinating committee
himself. Do you not think that would be more effective ?
Mr. H o r n e . This may partially be what you have in mind, that the
President has, in effect, done this through the Secretary of the
Treasury.
The C h a ir m a n . I do not agree with you at all, Mr. Home.
Mr. H o r n e . You may be right, Mr. Chairman.
The C h a ir m a n . I f the President did it is one thing, but for him
to suggest one who is in a comparable position to get everybody to­
gether, I think that is entirely different. I would like to see the Presi­
dent in charge of it. He is elected by the people and I think we should
have some way of him being in charge of it.
Mr. H o r n e . My only intention was, Mr. Chairman, I do not know
whether or not the committee recognized that while the President has
not done exactly what you are suggesting, he did ask the Secretary
of the Treasury to put it together and to stay on top of it and we report
regularly to the Secretary of the Treasury.
The C h a ir m a n . But you still have no power and authority to
oppose the Federal Reserve. They have determined to be a fourth
branch of the Government. You cannot do a thing about it.
Mr. H o r n e . T o give a candid answer to your question, sir, we do not
have the authority to override the Chairman of the Federal Reserve
Board.
The C h a ir m a n . Mr. Harvey?
Mr. H a r v e y . Mr. Horne, I am sorry I had to leave yesterday after
your statement. You certainly have had a very distinguished career
in Government and we welcome you here as a witness.
Mr. H o r n e . Thank you very much.
Mr. H a r v e y . I have just a couple of questions here.
First of all, do you support this bill, H.R. 14026? That is the
chairman’s bill which would in effect prohibit the issuance of nego­
tiable certificates of deposit.
Mr. H o r n e . May I make two comments in response to your question,
I forgot yesterday to point out that I am testifying largely on my
own m that we did not have time for what I have said to be checked



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 1 0 7

with the Bureau of the Budget which is the customary channel for
Government agencies to use. I did want to clarify that since I forgot
to do so yesterday.
Now as to this bill, H.R. 14026, I tried to make clear in my testi­
mony that, while I am not in opposition at all to H.R. 14026, it is not
the negotiable CD’s alone that are causing us difficulty in the savings
and loan industry. The nonnegotiable CD’s are also a problem that
gives us some concern and that in very recent months, the nonnegoti­
able CD’s have, in quantity, outgrown the negotiable CD’s.
Mr. H a r v e y . Let me ask you this next question. Would you sup­
port flat prohibition of negotiable certificates of deposit?
Mr. H o r n e . Before giving a direct answer to that question, I would
want to give a little bit more thought. I think I can say again, I
have no objection to it, but I do not think it would solve the entire
problem we are driving at.
Mr. H a r v e y . My reason for asking that, Mr. Horne, is that I am
sure some of us feel that is a very drastic approach to the problem
and on page 5 of your statement you did not outline any course
similar to that. My offhand reaction to it, when I saw the bill the
other day is that it would cause chaos in the market.
Mr. H o r n e . In deference to the Chairman—I have not discussed
this with him previously—I am not convinced that this would cause
chaos or that this alone would solve the problem. I think to get at
the problem that is giving us difficulty now, Congress would have to
go further than just deal with the negotiable CD’s.
Mr. H a r v e y . Let me ask you another question in another area,
which shows my ignorance ox the savings and loan industry rather
than anything else. In my area in the State of Michigan, the home
loans from the savings and loans are going at very high rates of
interest, 6y2 and 7 percent is what they charging a home loaner for
a loan. Yet, the interest being paid on deposits very frankly is still
4, 4% percent which leaves a very substantial spread between the
interest paid on deposits and the interest paid by the borrower. I
used to think that something like a li/2-percent spread or something
like that* certainly 1% is enough to allow an ample profit. But ap­
parently the spread here is as much as 2y2 percent or more, 2% per­
cent. Does this enter into the picture at all, what the charges in the
market will bear? Would vou have any comment on that?
M r. H o r n e . Yes, sir. I think there are several comments that would
be appropriate.
In the first place, generally speaking, 1% or 1% or 2-percent spread
should be adequate with a well-run savings and loan association.
I do not have the latest figures as to what is happening in the State
of Michigan, and if it would be of interest for you, sir, for us to get
the figures as to what the savings and loans pay to savers, I would
be very glad to supply them for you because we could get that in­
formation. I think you would find that the actions by the Board of
Governors in November 1964 have to be kept in mind. I believe the
1964 action caused some upward pressures on the rates S. & L.’s
pay savers. And these two steps put together, particularly that in
January 1966, I believe would show that the S. & L.’s in the State
of Michigan are paying more for their savings than they were paying.
I think you will find that perhaps some of them now are paying 4y2



1 0 8 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

percent. You would also probably find that some of them—perhaps
not a great number—but some of them are using the certificate plan
we have in which they would pay 4.75 percent. So these are two fac­
tors that come into it.
(The information referred to follows:)
M ic h ig a n S a v in g s
L o a n A s s o c ia tio n m e m b e rs o f F e d e r a l H o m e L o a n B a n k
S y s t e m a n t i c i p a t e d r e g u l a r d iv i d e n d r a t e s f o r p e r i o d b e g in n in g J a n . 1 , 1 9 6 6

Num ber of

Anticipated dividend rate:
associations
4.50 percent_______________________________________________ _____ 4
4.26 to 4.49 percent_____________________________________________ 2
4.25 percent____________________________________________________ 39
4.01 to 4.24 percent______________________________________________ 3
4.00 percent-------------------------------------------------------------------------------17
3.50 percent______________________________________ ______________ 1
No information_________________________________________________ 2
Total________________________________________________________ 68

Mr. H a r v e y . One other question, a simple one: In your career have
you ever known a rollback in interest rates? This is what frightens
me about this 6y2 and 7 percent. In my memory I cannot remember
these interest rates going back, rolling backward.
Mr. H o r n e . Yes, sir, they have gone back. Here is what can hap­
pen. I was going to make one more comment, if I may. There is a
shortage of money today. The S. & L.’s are under a squeeze to pay
more money if they are to protect even the savings they have. In
anticipation of having to increase rates again that they pay to their
savers they are probably taking advantage of the fact that money
is short. Consequently, they are picking and choosing carefully the
loans they do make, and are charging a higher rate because they may
themselves have to pay a higher rate for money in the future unless
we can control the matter some other way.
Now, there has been a rollback and this has happened time and time
again. This will work very well in Michigan or any other place if
they get out of line. Once money starts flowing into thrift institu­
tions and business demand for credit declines, lenders won’t be able
to get what they can today. The people who are now being charged
6,6%, or 7 percent can very well come m and refinance their loans and
et the lower rate, whatever the low rate at that time may be. This
as been done quite frequently in this industry. So if they get much
out of line, once the cost of money is less, they will be brought back
into line.
Incidentally, there is one thing that would be of interest to the
committee. Federal associations actually have the authority today,
when they make a loan, to put in the contract that they could raise
their charges to the borrower along the way if they wanted to. But
very seldom does one include this in the contract because there has
been such competition in the home mortgage market that he hasn’t
been able to impose it. If he tries to impose it the borrower can go to
an insurance company or a bank or some other source and get his loan
that would not have such a mathematical clause that would enable
the lender to charge him a higher rate on his loan.
Mr. H a r v e y . Thank you very much, Mr. Horne.
The C h a ir m a n , Mr. Rees?

g




UNSOUND COMPETITION l O l i SAVINGS AND TIME DEPOSITS 1 0 9

Mr. R e e s . Mr. Home, I would like to look at this instrument that
we call a certificate of deposit. The original use of the CD was for
an investment where a corporation could use its excess funds, they
would go into a CD for a specific period of time and earn interest on
their excess funds which they could not do in a savings account in a
bank. Was not the original CD for about a 1-year period? What
worries me is not so much putting a floor on the certificate of deposit
but trying to analyze what a certificate of deposit is and then deciding,
is this good or bad for the banking industry? In California we have
^
had probably more trouble with banks than savings and loan institu­
tions. One of the problems in California, especially with newer
banks, is that in an effort to build the deposits up to new records,
and we like to do that in California, they went through money brokers
and purchased a lot of CD’s and unfortunately these CD’s came up
for payment at the same time. The bank found itself in the difficulty
in terms of liquidity. We had quite a few mergers because of this.
You find the CD in a way is a very dangerous instrument. They say
the CD crisis in New York in December was what led to the increase
by the Fed to rediscount rate and increasing the interest rate for
the CD’s.
I see that you have authorized the same type of gimmick, or what­
ever you want to call a CD, for savings and loans and so now we find
two different types of concepts, one is the passbook concept and the
other is the certificate of deposit. They are really the same except a
few internal changes; they are really the same. Do you not think it
would be better to eliminate the certificate in the savings and loan
and go back to passbook and then to regulate perhaps the bank CD
in terms of the use by the banks so that the CD does what it was sup­
posed to do originally, which was to give an interest-making haven for
large funds of corporate money* therefore you would not have the
suicidal competition between the banking systems? What about the
approach of not outlawing them or not building a dollar limit on them
but saying a bank CD must be an instrument held for at least say 1
year and the interest paid can be no higher than the interest paid, for
example, on a passbook. In this way I think you would cool down
this competitive race for this type of money and you would leave
the CD where it was supposed to be and at the same time you could
get rid, of these certificates which really are not going over very well
in California. What do you think about this approach? Do you
think this would have the tendency to cool this whole situation down?
Mr. H o r n e . If it can be done-^as a matter of fact, the suggestion
appeals to me very much, Congressman, and this may be a very good
way to do it. I think you would have to weigh how long you took
and under what condition you could shift into the kind of program
you are talking about. Of course, possible overloading of CD s in
banks is one of the reasons that in my testimony I suggest the com­
mittee give some consideration to the proportion of bank savings that
could be in the form of CD’s. Because the problem could get out of
hand ju st as you have indicated. Your solution might be a very good
>
solution to it.
. ^
So far as the certificates in the savings and loan industry is con­
cerned, there is only a small similarity to what has been done and what
is being done in banks. The savings and loans are much more con­
servative
 under our restraints.


1 1 0 UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

It should be pointed out—I am sure they can point it out better than
I, that the Federal Reserve Board is concerned about the difficulty.
They have expressed concern as to what effect it might be having on
thrift institutions. I have been very pleased that some of the bankers
themselves are concerned about the situation. I know that the presi­
dent of the American Bankers Association, Mr. Davis, from North
Carolina, has been very outspoken in this regard and has expressed
grave concern that the present use of CD’s in unlimited quantities and
unlimited denominations can cause difficulties not only to the banks
but also to the thrift institutions.
Mr. R e e s . They are so concerned, they are ready to cry all the way
to the funeral, are they not? I think there are very serious problems
in California and unfortunately it is wholly the fault of the industry
as they are generally in a very sound condition in California. In terms
of a long-term viewpoint, we see this problem where the decisions of
another Board directly affects your industry. The direct problems
that the savings and loan industry is having today, especially where
there is a need for new money for mortgages is directly attributable
to the December action of the Federal Reserve Board. Do you think
that one of these days we might be able to look at the overall problem
of the money market in the United States and have some coordination ?
Why could we not make you an ex-officio member of the Board and
let you veto anything that the Board comes up with and that might
affect your industry and Mr. Martin could be on your Board ex officio
and do the same thing? There is no use for you to swallow the ball
when it is another Board that is affecting you and directly affecting
you and putting you probably in the worst crisis you have had in a
great many years.
Mr. H o r n e . I hardly know, Congressman, how to respond to your
suggestion except to say something I said yesterday. This industry
has become of such magnitude and of such importance that unques­
tionably it is going to rightfully receive more attention than was the
case 15 or 20 years ago when what might happen to it did not—could
not have the impact on the economy it could today. So, some device,
whether it is voluntary or otherwise, has to be used to make certain
that whatever is done as regards one structure of financial entities
is done in a way and in a manner that does not visit great harm on the
other.
Mr. Rees. Mr. Horne, my last question. The situation in California,
and I do not know it in other States, and I think we would tend to
jxave the same situation—in California the person who keeps money in
me livings and loan institutions is primarily an investor. It is not
Joe Doakes around the comer who has a couple of hundred dollars.
And looking at the larger associations, and this probably is the same in
the smaller ones, the average account tends to be around $9,000. If
we look at the type of account that has been withdrawn and put into
s or ynmwapal or other competing types of paper, we find that the
^ $10\°?° leve1’ the l^el to which you are
insured. We find that this is directly affecting the homebuilding
market m California. The homebuilding construction is perhaps the
largest industry we have and we are already having layoffs. We find
that it is a serious situation in terms of real estate as people cannot sell
their houses or buy new houses because of the problems of trying to



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 1 1 1

find mortgage money and this is through no fault of the financial insti­
tutions themselves. You are the Chairman of the Board. What do
you plan to do about this situation that I think is a serious one for
the overall California economy ?
Mr. H o r n e . Congressman, as I have indicated earlier in my remarks,
we have been studying this for some weeks. I believe either tomorrow
or before the end of this week, or certainly next week, we will make our
announcement of some of the things we are going to do.
I would not want to mislead you into believing, and I know you
are not attempting to get me to do so, that through the bank window,
so to speak, we are going to be able to supply money to the California
associations for all homebuilding purposes.
Mr. R e e s . What if they do not want to be supplied money ? What
if they would like to have the competitive tools and go out in the
free market? Why should they have to go back to your bank and
draw down the funds? Why should the Government go out and float
more loans to build up these reserves if really the whole solution
might be the use of the free market in allowing these institutions to
compete just the way the banks are competing today. The banks are
paying five and a half percent now in California for CD’s, as little
as 30-day terms, and in CD’s for less than $100. Now, you know that
is not a CD. I know it is not a CD, but that is what they are doing
and the Federal Reserve Board seems to say it is OK. Are you
going to give the banks, the savings and loan institutions in my State
and throughout this Nation the right to compete in the open market
for funds?

Mr. H o r x e . Let me perhaps try to respond in about two or three
different ways. To alleviate in some degree the problem that you
describe, Congressman, I am not sure that one needs to go as far as
you have indicated.
Secondly, we still have, and this is not necessarily true only of
California, but we do have in certain places in California a surplus
of housing. Two other things that bother me frankly, and I indicated
this also yesterday, is that the S. & L.’s have their money tied up in
long-term loans and there is a limit to how much they can pay across
the board for their savings and at the same time earn enough money
to meet all their requirements. Then we do have this situation which
I think is to some degree a supervisory or regulatory agency has to
keep someone in mind, and that is, whenever one association takes a
move, just brings pressure on every other association to do a similar
thing. It is true that some of the larger, more powerful associations
can do a little more in the way of ratepaying than some of the smaller
ones can. The argument can be made both ways.
On the one hand, there is the argument that each association be
allowed to pay whatever he desires without any regard for the adverse
effect it might cause on his neighbor. On the other hand, we are
sitting here with a limited amount of money in the Insurance Corpora­
tion—and we have to give some consideration to the adverse effect that
may be visited upon a somewhat weaker, somewhat newer, a some­
what, younger association.
Mr. R e e s . It sounds as if you wanted to use the insurance instru­
mentality as the main shoring up of the market in California. Do
you not think what California needs is more mortgage money, and




112

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

do you not think they need some kind of competitive tool? What
about some kind of competitive tool allowing them to go in the open
market and do some bidding? They are 0.65'percentage point behind
the banks now in terms of competition.
Mr. H o r x e . I made clear one of the things we will do, will give
some relief in the situation—I should point out, and I have too much
respect for you, Congressman, to disagree with you----Mr. R e e s . Please.
The C h a t r m a x . We have some other members who have not inter­
rogated the witness at all. Would you mind withholding until they
have?
May I make this suggestion ? I am afraid we are overlooking one
important point.
\ ou know, the Government has often restricted the use of money
for different things like savings bonds. They used to have to restrict
that to $10,000, certain types of bonds, which is perfectly all right. It
is in the public interest. It protects the public. In this case, and
you know, it was not permissible for corporate funds to be used on
savings accounts in banks. That was a good idea, because that induced
the corporate funds to be in competition with all the others and keep
interest rates down for the public. A specific example of this is
interest rates on short-term Treasury securities. When they were
using those funds in bidding for short-term Treasury bills, the short­
term interest rates were held way down. But when they left that
market and went into the CD’s, then the short-term rates went up
and they are still way up there now. And then by inventing this CD
device and letting these corporate funds be used this way, that is really
like an evasion of the old policy of not permitting corporate funds
to be used m savings. This money is just too volatile, too sensitive
to interest rate changes. They are used in time deposits, but they
had to make another step in order to be effective. They had to make
them negotiable, then they had to create a market for them. That
*. u
1
interest on demand deposits and it was a revolution in
the banking world to the extent that it gives a few people an oppor­
tunity to create higher and higher interest rates for themselves because
be^rT’t
are °U
^
Treasury
market when they ought to
I am afraid that we have ignored that particular point in our own
looking at the CD problem.
It is a revolutionary change in the entire banking system imposing
upon the public hierher and higher interest rates. Do you not see
something of that, Mr. Home?
Horne. I think unquestionably some of the things you have
en P
^ace’ ^ r*Chairman, in the way CD’s have begun
tJ m6

C h^?rs^ n -, M r*W eltner has not interrogated, neither has Mr.
Todd nor M r. Grabowski. These three gentlemen have not. W e will
yield to them now.
Mr. W e l t n e r . T hank you, M r. Chairm an.
1
fam iliar w ith the situation in the
area of A tlanta. Since the first of th e year* savings and
ii^oM ^acTO m fts1
1
area
suffered a loss o f about $30 million



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 1 1 3

This has resulted in the drying up of mortgage money and as I
understand your statement on page 5, a continuation of that would
bring mortgage availability to “intolerably low levels.” Does that
situation hold pretty true throughout the country ?
Mr. H o r n e . To a great degree; yes, sir. I want to point out some­
thing that I pointed out yesterday which has a bearing on this ques­
tion, Congressman.
Taking the industry as a whole, comparing what it was on January
1, 1966, and what it is today, the net inflow and outflow of savings,
that is the total amount of inflow and outflow is about even. Now,
this may interest Congressman Rees. Taking the State of California
as a whole, comparing what the situation was on January 1, 1966,
through April 1966, the S. & L. industry is down in California by
$24.5 million.
(The chairman, Mr. Patman, left the hearing room and Mr. Reuss
assumed the chair.)
Mr. H o r n e (continuing). So we have not had quite the reduction
in the flow of money within the industry since the first of the year
that sometimes we think.
Mr. W e l t n e r . The situation in Atlanta then is substantially more
drastic than the situation elsewhere; is that correct?
Mr. H o r n e . More drastic than in some places, no more than in
some others.
Mr. W e l t n e r . The availability o f mortgage funds are substantially
adversely affected by the widespread use of certificates of deposit; are
they not?
Mr. H o r n e . In Atlanta, yes, sir; this is true.
Mr. W e l t n e r . Those CD’s which are causing the great trouble to
the availability of mortgage money are what are sometimes called
consumer CD’s, $2,500, $5,000, $7,500 ?
Mr. H o r n e . Yes, sir.
Mr. W e l t n e r . In California you have authorized Federal savings
and loans out there to issue some kind of savings certificate or some
kind of instrument similar to negotiable CD, and I assume that thai
was done in an effort to permit a greater degree of competition with
the CD’s offered by banks.
Mr. H o r n e . Yes, sir.
Mr. W e l t n e r . I understand also that there is under consideration
by the Home Loan Bank Board the requests from several area associa­
tions for similar authorization on the part of the Home Loan Bank
Board.
Mr. H o r n e . That is correct, sir.
Mr. W e l t n e r . I think you said you had this under consideration
and possibly this question could not be properly answered at this point,
but would seem to be a perfectly reasonable thing as a step of equaliz­
ing competitive opportunity—not quite so far as a step as eliminating
the issuance of CD’s by banks.
Mr. H o r n e . First, we have in the past, Congressman, given the
S. & L.’s defensive measures to enable them to do this. We have
under consideration other defensive measures that would enable them
to do this. I think the people in Atlanta will probably be satisfied
once we come out with what we have in mind.
I Should also like to go a step further with the fear of Congress­
man Hanna and Congressman Rees may be having something to say



1 1 4 UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

about it and point out that it has been traditionally so that in the
State of California and one or two other places in the Far West,
adjacent to California, that they have always advertised in eastern
markets and otherwise advertised higher rates and used more devices
to draw in money.
I must say in all honesty I have not always been in accord with
some of the things they have done and this is part of the difficulty—
this accounts for some of the difficulty that we experienced today.
But even so, there is less differential between what is available in
California and what is available in other parts of the country today
than there was 18 months or 2 years ago. But I think for some period
of time we will have to make some special allowance for the situation
that has developed in the State of California as compared to the situa­
tion or the difference that exists in California as compared to the
rest of the country. I did want to get this point in because I think
it is pertinent to the entire situation. But again, specifically, as to
Atlanta, I have had a great deal of correspondence as you can imagine
from different sources as regards the situation in Georgia and the
practices of one or two of the commercial banks—one in particular—
and we have taken this into consideration in the defensive measures
that we are advocating, and I think, we in effect, are proposing some­
T
thing that will be even a little bit more defensive, more effective than
your associations have recommended.
Mr. W e l t n e r . Thank y o u , Mr. Horne. Thank y o u , Mr. Chairman.
Mr. R e u s s . Mr. Todd?
Mr. T od d . Thank you, Mr. Chairman.
Mr. Horne, I appreciate your comments and we welcome them.
On page 2 of your testimony yesterday you indicated that there
has been a loss of about $550 million in savings from S . &L.’s against
a net outflow in April 1965 of less than $100 million last year. This
is an increase in the net loss this year of $450 million which I take it
you attribute to the CD practices of the banks.
Mr. H o r n e . T o some degree; yes, sir.
Mr. T od d . T o some degree. Would 50 percent be accountable to
the CD?
s?
Mr. H o r n e . I should think at least that.
Mr. T od d . My next question— this does not appear to follow at the
moment—if I deposit $100 in an S. &L., how much of that can they
loan ^ ? Can they loan out $90 or $100 ? Do they have a reserve
out
requirement against that ?
Mr. H o r n e . We have a reserve requirement in the savings and loan
industry that varies from association to association, depending on
certain factors. But in answer to your question, I should think you
could loan the entire amount or most of the entire amount.
Mr. T o d d . But they could not, as the banking system could do—the
banking system as a whole could do. If I put $100 in a savings de­
posit, they could loan out 25 times that or $2,500.
Dr. S c h w a r t z . I think you got too big a multiplier.
Mr. T o d d . There is 4 percent reserve ratio required.
Dr. S c h w a r t z . That is not quite the way it works.
Mr. T o d d . This is an oversimplification, but as a matter of principle
this would be the case in the banking system, would it not?
Then my next question is, if there actually had been a $450 million
withdrawal or transfer of funds from S. & L.’s to CD’s, which also



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 1 1 5

have a 4-percent reserve requirement, you could have an extension
of roughly $11 billion in the money supply, 25 times multiplier, you
see. And this could have a severe inflationary impact because you
would make this much money available. Over the course of a year
you could have a $44 billion expansion in your money supply by the
banks if there was no leakage outside of the banking system. It would
seem to me the action of the Federal Reserve would be self-defeating.
They raised the interest rates as a tight money instrument, but be­
cause they are able to attract funds from the S. &L.’s to the banking
system they actually expanded the money supply, if in this case it is
50 percent, it would be $22 billion expansion of the money supply.
This expansion has an impact on the economy equivalent to a Federal
deficit, so actually, their procedure instead of being deflationary was
inflationary. Do you think there is substance to this argument %
Mr. H o r n e . Certainly there can be, as I indicated yesterday, some
very strong argument made on the side you have presented. And
certainly, I do not think anyone can say there is not some substance
to what you have said though there are some technical points to be
cleared up.
Mr. T o d d . Thank you. You would not want to estimate whether
or not the high rate interest on CD’s actually is inflationary or defla­
tionary, would you ?
M r. H o r n e , I think it could be, Congressman, depending on sev­
eral factors, some of which you have indicated.
Mr. T o d d . I would just like to suggest to the committee that we
have a problem here of some magnitude and I think we should look at
it in this context, and that is, perhaps the financial institutions are
competing among themselves for money. They are establishing their
policies in a competitive fashion with each other rather than working
together in the establishment of policies. As a newcomer to this com­
mittee, it reminds me of Governor Robertson’s phrase of competition
in laxity, applied to the regulatory functions of the banking agencies,
where they establish different rules for the banks under their juris­
diction. Do you think there is any of this competition existing be­
tween the financial agencies at the Federal level to secure funds one
from the other?
Mr. H o r n e . I think today, Congressman, there is competition, not
only between banks and S. &L.’s and vice versa, mutual savings banks
and S. &L.’s and vice versa, but also competition among the S. &L.’s
themselves with one another and among the banks with one another.
Now, on the one hand, I realize as a person who believes in private
enterprise, that it can be argued that this is good—based on the law
of supply and demand—let the management decide for itself.
On the other hand, I must say I am concerned about a rate war, I
am concerned about the possible adverse effects on the whole financial
structure that an unlimited rate war can inflict on the economy as a
whole. As much as I believe in private industry, I think the Govern­
ment, when it is insuring deposit and savings accounts, and when it
is trying to preserve the safety of people’s funds, the safety of banks
and other financial institutions, has to exercise certain functions.
Mr. T o d d . Thank you very much. Thank you, Mr. Chairman.
Mr. R e u s s . We will now have an opportunity for members to pursue
questions on the second go around. Mr. Fino ?
Mr. F i n
 o . Thank you, Mr. Chairman.


1 1 6 UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

Mr. Horne, you have expressed great concern and great interest
about the liquidity of our savings and loan banks. You have also ex­
pressed great fear that the issuance of CD’s might hurt or further
threaten the liquidity of our savings and loans. Yet you feel, from
the testimony here today and yesterday, that the enactment of the
Participation Sales Act will not have much effect on the liquidity of
our savings and loan banks. Now, is it not logical to assume that all
depositors or most of the depositors in the savings and loan banks will
withdraw their money which pays about 4i/£ percent and buy partici­
pation certificates which will pay 5y2 percent ?
Mr. H o r n e . Well, Congressman, for the reason that I gave a few
moments ago, I am candid in saying that I do not share the fear in
this area that I believe you feel.
One reason is that the size of purchases under the participation
program is already limited and the Treasurer has indicated it will
be even more limited.
Mr. F i n o . Wait a minute, you are talking about the denominations.
Mr. H o r n e . Yes, sir.
Mr. F i n o . If the Congress, more particularly, the House will fol­
low my suggestion on Monday, I will offer an amendment to cut
down on the denominations so that the poor people, the little people*
the small guy can participate in this financing.
Mr. H o r n e . That gets back to a point that I think is quite similar
in position to what the chairman expressed a few moments ago, and
as I indicated at that time, my inclination is to be in sympathv with
the small investor.
But on the other hand, I think there are times when the small in­
vestor can be hurt by other considerations. In addition, as far as
the 5%-percent rate is concerned, I rather doubt that very many of
the small investors—some of them no doubt would, if your amend­
ment carries-*-would go into the participation program than would
be the case if ^it is kept at 5,000 or even increased. There are
other savings institutions, particularly banks with CD’s that are
paying a similar rate. So for a multiplicity of reasons, I do not
anticipate that, so far as the $4.7 billion that gjoes across the entire
soectrum, much outflow will result from any savings and loan associa­
tions per se. I could be wrong.
Mr. F i n o . It is anticipated that there will be participation sales to
the extent of $8 billion within 2 years.
*
telieve that if the amount should be increased
the $4.7 billion figure congressional approval would have to be ob­
tained. I think I am right on that.
^ m ° m^
assume yes. How much longer do vou think
i>i*e^fury
^e able to sell 4.5 percent Treasury bonds to the
public that will have an opportunity to make 5.5 Treasurv bank
participations?
J^9RNE- I suppose the Treasury would be more of an authority
wv
1 1™ no,t ^ y in g to evade your question.
f, f - '
T lunkm g of the little guy, the little fellow, who is on
the savings bond program , having a certain amount deducted every
Jn
< ^ p a y c h e c k ™ order to buy savings bonds,
mdo you thm k th at it is fa ir th a t he should be straddled—if he is pa


UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 1 7

Mr. H o r n e . A s I said?Congressman, I think that there are certain
circumstances under which this will not necessarily be an unreason­
able situation.
Now, the man who is getting 4.15 for his bonds, he can turn them
in if he wants to and already he can go to a savings and loan association
or to a bank and get a higher return than the 4.15. I realize a lot of us,
including myself and no doubt many, many other people buy the sav­
ings bonds because of patriotism. I just do not see myself, and I am
admitting that I can be wrong, that under the program as it is pres­
ently constituted and presently being explained, that there is going to
be any sizable outflow in this particular area from savings and loan
associations. There has not been so far.
Mr. Fino. It is hard to follow your logic and reasoning because it
is happening with the CD’s. Everybody is getting excited because
we have an opportunity to make more money on these.
Mr. H o r n e . Well, there is a fundamental difference in practice. I
know that within time the participation program, if Congress should
approve it, would become more widely known. It would become more
widely accepted. I think it is the great amount of advertising, just
every day in newspapers, radio, television, and other sources that has
resulted in so many people being rate conscious between one savings
and loan association and another and between savings and loan associ­
ations and the ability to go to banks and to buy CD’s.
That is another reason then that I believe that there will not be any
great influx into the participation program from the savings you are
now talking about because the saver just does not have the familiarity
and understanding and acquaintanceship with it. Furthermore, the
typical security buyer goes into this area.
Mr. F i n o . Y o u are telling us then that it is not the little guy but
the fat cat that is going to benefit from all this interest rate rise?
Mr. R e u s s . I would ask his question, Mr. Horne. I believe your
proposed remedy for the disequilibrium we now have in banks and sav­
ings and loan associations, as a result of the certificates of deposit, is
to make illegal or give the Federal Reserve power to make illegal, the
smaller amount certificates of deposit so that those presumably would
tend to stay in the savings and loan system, is that correct ?
Mr. H o r n e . Yes, sir.
Mr. R e u s s . I have been concerned at the extra inducement to banks
to issue negotiable certificates of deposit contained in the fact that
they only have a 4-percent reserve requirement as opposed to the 16percent reserve requirement generally for demand deposits.
Would it be useful either by itself or as a supplement to the amend­
ment you suggest, to increase or direct the Federal Reserve to increase
the reserve requirement of negotiable CD’s? Would this not make
them less irresistibly attractive to banks, since the banks would not
want to pay as high an interest rate as they now are paying, and thus
leave more of the money in the savings and loans ?
Mr. H o r n e . I was quite intrigued, Congressman, with that thought
when you first suggested it I believe, several weeks ago. It does seem
to me offhand, it would have all the effect that you anticipate it would
have.
Mr. R e u s s . Can you see anything wrong with that ?
Mr. H o r n e . From my understanding of it, no, I do not.
63-496— 66------- 9



1 1 8 UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

Mr. O t t i n g e r . Will the gentleman yield ?
Mr. R e u s s . I will yield.
Mr. H a n n a . I w a s a s k in g y o u t o y ie ld o n t h a t p o in t .
Mr. R e u s s . I will yield to Mr. Hanna.
Mr. H a n n a . I think if we bring into focus then the colloquy you
just had with the gentleman and with his comments previously and
then relate it to the bill, I would ask, is it not true, then, that insofar as
this legislation is concerned that you would be much more readily
in support of a bill which directed itself to both negotiable and non­
negotiable CD’s, No. 1?
Mr. H o r n e . Yes, sir.
Mr. H a n n a . That addressed itself to the size of those CD’s and,
No. 2, in that regard, would you not say that we would be on his­
torically firm ground if we struck a $10,000 figure in recognition of
the deposit situation and then if your answer is affirmative to that,
would not No. 3 be the matter of the time of the CD’s, because if we
are concerned—this may not be your concern—but if we are concerned
about the point you made which was the rollover requirement of these
CD’s, that the banks should not make these short term. They should
not be 30 days because then that is when they have to be rolled over.
That brings us to the fourth point which Mr. Reuss makes, and
that is, that the reserves behind these ought to be part of our considera­
tion. So I think we have four points here, Mr. Chairman, that you
have brought out in this hearing.
That is, that w e n e e d t o consider both negotiable and n o n n e g o tia b le .
We should consider the size, time, and finally, the reserves b e h in d
them. Is that a fair assessment of it, or do you think—where do you
think the legislation on it reasonably ought to go?
Mr. H o r n e . In my opinion there is. I say this with due regard and
much sympathy with the point of view that has been expressed by the
chairman of this committee and by Congressman Fino.
Also, I would say that what one saver or investor can or is willing
to do may justify his getting more than someone who will do less.
I say it reluctantly, but I also say it candidly. I should also like to
suggest that if this committee should come up with such legislation,
that they include in it the time deposit open account, otherwise there
would be a loophole that you would not intend to permit.
Mr. R e u s s . I will yield also to Mr. Ottinger.
Mr. O t t i n g e r . I would like to express my agreement, Mr. Chairman,
with your approach to requiring reserves behind these CD’s that are
somewhat comparable to demand deposits. They are comparable to
deposit mansize.
I would like to ask the witness whether, if we put such a r e q u ir e ­
ment for reserves he thinks it would be necessary, as Mr. Hanna points
out, to require a time for maturity of these deposits and if so, what
time he would recommend ?
Mr. H o r n e . Again, I am not trying to avoid answering your q u es­
tion. It seems to me it could be 6 months, it could be a year. Cer­
tainly, it is my opinion that 30 days is too short a time. Ninety days
would be questionable. Six months or a year it seems to me would be
more appropriate.
Mr. O t i t n g e r . I f you have a reserve requirem ent is it necessary as
well to have a tim e lim itation f



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 1 9

Mr. H o r n e . The reserve would mitigate it to a degree but you may
still want to impose other requirements; yes, sir.
Mr. O t t i n g e r . Thank y o u , Mr. Chairman.
Mr.R e u s s . Mr. Gonzalez?
Mr. G o n z a l e z . I have some questions that are not exactly in point
here, but they are related. They have to do with information that I
would like to obtain.
T hat is the picture with respect to the savings and loan movement ?
V
Is it growing or is it fairly static ? Has it stabilized ?
Mr. H o r n e . Perhaps some figures, if I recall correctly, would an­
swer your question, sir. At about 1947 the savings shares, savings
accounts in savings and loan associations amounted to about $8 bil­
lion. Today these savings amount to about $110 or $111 billion. The
growth has come most rapidly, and I should be very pleased to supply
this committee with the year-by-year growth in any period of time
you might want it. I just do not recall them offhand. The growth
has come most rapidly in the 1950’s and late 1950’s and early 1960’s
and even in 1965 the net growth, if I recall correctly amounted to about
$8.4 billion. It is true that so far in 1966, again, making a comparison
between what the size of the industry is in January 1,1966, and today,
it is just about even. So for all practical purposes in 1966 it is not
growing much.
We are hopeful and believe that later on this year, and particularly
if there is some restraint in CD’s—I want to point out again that CD’s
are not the only source competing funds as far as S. &L.’s or other
thrift institutions are concerned—they will grow at a reasonable rate.
Mr. G o n z a l e z . What about the number of institutions? Are new
ones getting chartered ? I mean on the Federal level ?
Mr. H o r n e . Here again I do not recall the exact figures, but gen­
erally speaking, the growth in the number of new institutions, both
State and Federal I think has been quite moderate, quite conservative,
and while we continue to get some applications we do not get an over­
whelming number and we look very carefully at the ones we do get,
both as to insured accounts of newly chartered State associations and
as to chartering Federal associations.
Mr. G o n z a l e z . I s i t r e la t iv e ly e a s y o r m o r e d iffic u lt to c h a r te r a
n e w o r g a n iz a t io n ?
Mr. H o r n e . I would say

it is more difficult today than it was a few
years ago.
Mr. G o n z a l e z . In other words, they are getting like banks. What
about your advisory groups? I notice when I pick up a newspaper
and find out that somebody from a district has been appointed to the
Little Rock board or something—would you mind explaining the pro­
cedure there ? Who picks these citizens $ How do you arrive at who
is going to be an adviser?
Mr. H o r n e . I believe, Congressman, that you are referring to
perhaps two areas. One has to do with the fact that each of the 12
banks has a board of directors. In each of these 12 banks, two-thirds
of the board of directors are chosen by the savings and loan associa­
tions themselves and one-third, what we call public interest directors,
are appointed by the Federal Home Loan Bank Board here in Wash­
ington,



120

UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

In making our choices we carefully try to choose people who are
outstanding citizens, either in the business world or in the academic
world or in the professional world and we carefully try to choose
people who have no conflict of interests whatsoever with the savings
and loan industry. Our system in this regard is a little bit different
from that of the Federal Reserve Board. In the Federal Reserve
Board of Directors in each of the 12 banks, about two-thirds are non­
industry members. Whereas in our system about two-thirds are
industry members. But this I believe answers your question in one
area of advisory assistance.
Now, in addition to that, we have what is by statute, what we call
a National Advisory Council. On tine Council each of the 12 boards
of the 12 banks select 1 member and then the Federal Home Loan
Bank Board appoints 6 members. In addition to that, we get advice
in every mail. Sometimes almost by the wheelbarrow loads from
industry members themselves which we try to read and try to weigh
carefully.
Then we constantly meet with members of the industry, either at
the State level or at the district bank level and then in addition to
that there are trade associations and the trade associations frequently
request, and are always granted an opportunity to forward to the
Board and to talk with the Board and advise the Board about problems
within the industry.
So I think I could honestly say there is no operation in the Federal
Government that gets more advice from more different sources than
the Federal Home Loan Bank Board gets.
Mr. G o n z a l e z . Thank you.
Mr. R e tjs s . I see our distinguished colleague, the gentleman from
California, Mr. Holifield, is in the hearing room and knowing of his
interest in monetary policy in general ana savings and loan associa­
tions, we will welcome his sitting here with us and directing any ques­
tions he may have as a witness.
Mr. H o l i f i e u ) . No questions.
Mr. R e u s s . Mr. Ottinger?
Mr. O t t i n g e r . I would like to insert in the record a lead article on
the financial page of the New York Times, May 10,1966, concerning
the warning issued by Frederick L. Deming, Under Secretary of the
Treasury for Monetary Affairs about the seriousness of the situation
confronting the savings and loan industry by the use of these certifi'
cates of deposit.
Mr. R e u s s . Without objection, it will be admitted.
(The article referred to follows:)
[From the New York Times, May 10, 1966]
D e m in g Ca u t i o n s o n Bn* fob F u n d s — A g g ressiv e B a n k B e h a v io r i n F i g s ?
fob T im e D e p o s it s A s s a il e d b y U.S. A m — W a r n in g F lag I s R a is e d — S ome
I n s t it u t io n s A be S e e n O vere x t en d in g a n d T a k i n g o n E x c e s siv e R i s k s

(By Edwin Ii. Dale, Jr.)
May 9.—Frederick L. Deming, Under Secretary of the Treasury
for Monetary Affairs, warned today against “overly aggressive behavior on the
part of some banks in competing for time deposits/'
Mr. Deming raised the warning flag in a speech to the Society of American
Business W riters in Minneapolis. The text was made available here
W a s h in g t o n ,




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 1 2 1

He said the aggressive bidding for time deposits “may tend to distort the im­
pact of monetary policy, impairing the stability of particular institutions and
even of some sectors of the economy.”
It could also “induce some banks to overextend themselves and take on ex­
cessive risks” in their lending, he added.
Pointing out that the “increased cost of time deposits has placed many banks
under pressure to seek higher yields and more loans,” Mr. Deming continued:
“Even where loans are sound, banks may get burned in their bidding for time
deposits. If funds can be bid away from other institutions by a particular bank,
that same bank may find itself losing deposits a t a later date to a still more
aggressive institution.
POSSIBLE RESULT

“The result may be a bidding up of time rates—not because funds can be em­
ployed profitably, but because funds are needed to meet current demands or to
replace funds that were bid away by other institutions. In tight financial mar­
kets even the liquidation of good assets can be painfully expensive,” he said.
Mr. Deming also said that “other financial institutions may be more vulnerable
than banks to a sudden loss of funds.”
He warned banks paying high rates on time certificates of deposit running 9
months or more into the future that “interest rates on loans can go both ways,
and the commitment to pay high rates for a long period may prove to be risky
and unprofitable.”
A “more cautious” lending policy by banks “will not only be in the public
interest but in the interest of the individual banks in question,” Mr. Deming
said.
He cautioned also that “when financial market pressures diminish, then time
deposit rates—particularly those on savings accounts—may prove to have some
downside rigidity.” It may be difficult, he said, “for individual institutions to
lower rates unless they have some confidence th at others are similarly mo­
tivated.”
Mr. Deming's warning came a day after the Federal Reserve and the Federal
Deposit Insurance Corporation announced a joint survey of the “rates and terms”
that commerical banks are offering to pay on time and savings deposits, and on
changes In the flow of savings funds.
The Federal Reserve made a similar study earlier in the year, which came to
the conclusion that banks have made only “moderate” use of their present ability
to pay up to 5% percent interest on savings deposits.
In a wide-ranging speech the Under Secretary also touched on the outlook for
Treasury debt management in the period ahead. He said, “We expect to get by
with a minimum of cash borrowing over the next 14 months.”
Allowing for increased sales of Federal assets through “participation” and
for the regular sales of securities of Federal agencies other than the Treasury,
and also allowing for offsetting absorption of some Treasury securities by the
Federal Reserve System and Government investment accounts, Mr. Deming said
the net demand of the Federal sector on the private credit market “should be
under $3 million during the present fiscal year and approach zero during fiscal
1967.**

Mr. O t t i n g e r . I would like to ask y o u a few questions on a slightly
di fferent tack, Mr. Chairman.
You recently issued a regulation to your banks which I understand
restricts very much the advance commitments which they can make.
I believe it was for 4-month repayments. Is that correct f
Mr. H o r n e . Y o u mean—I think you have reference to the April 20
letter in which we called attention through the bank presidents to the
individual savings and loan associations that after—we try to help
them take care of through the cash window, the commitments they
have already made and the withdrawals they may experience, that
they should go very carefully—should act very cautiously on future
commitments.
Mr. O t t i n g e r . Y o u suggest specific restrictions on forward commit­
ments.
Mr. H o r n e . Yes, sir .




122

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

Mr. O t t i n g e r . Would you supply that for the record, please?
Mr. H o r n e . Be g la d to .
(The letter referred to follows:)
F ed er a l H o m e L oan

B a n k

B oard,

W a s h in g t o n , B .C ., A p r i l 2 0 , 1 9 6 6 .
T o th e F e d e r a l H o m e L o a n B a n k P r e s id e n ts :

You are all weU aware of conditions prevailing in the economy and the savings
and credit markets. These conditions dictate policy responses by both the
Federal Home Loan Bank System and all its member institutions. The objec­
tives of the System obviously remain unchanged, and the capacity of the System
to achieve those objectives remains unquestioned. Nevertheless the objectives
do require changes in procedures as economic conditions change.
In the light of the current situation we call to your immediate attention, and
request that you point out to your respective regional boards of directors, and
to all your member institutions, the following major policy item s:
1. Current policies governing withdrawal advances should remain unchanged.
2. Member institutions should carefully regulate and control their outstand­
ing commitments, including undisbursed loan proceeds, to levels not exceeding
the total of the previous calendar 4 months loan repayments plus or minus
their realized savings gains or losses for the same past 4 months. Moreover, if
the judgment of the board of directors of an individual member institution indi­
cates a probable reduction in the coming period of loan repayments, or a reduc­
tion in savings inflow, such judgments should promptly be reflected in a working
down of such outstanding commitments. For all future commitments executed
from this date forward management cannot expect the advance window to be
ever open if management itself has failed to gear its commitment level at its
actual cash flows.
3. Expansion advances are not to be used as permanent additions to capital.
Such advances are to be utilized only for seasonal needs and to cover commit­
ment requirements that have been maintained a t realistic levels but where
unexpected, adverse, reduced cash flows have developed.
of all regional banks are expected to examine each advance
application m prudent detail. Previously estabUshed lines of credit certainly do
not preclude such examination, nor acceptance, rejection or modification of the
, ™ s is especially true of expansion advances. ParS tL w
?
glven t0 the Precise purposes of the proposed advance
pflnni)nll
5 properties and transactions for which the funds are sought
*
vpnt^roH
v®
nc€s should not be employed to finance highly speculative
^h would co:ntnbute to excesses in the housing inventory; to f in a n c e
morteaees onallU^ i Af other.re?Idential Property; or to refinance existing
? all types of property m substantial volume.
e x D a n s io n
+.Utt a rePortlng Procedure to test t h e c o n f o r m a n c e of
>
e x p a n s i o n advances to t h e f o r e g o i n g p r i n c i D l e s
Sincerely,
'
Jo h n E. Hobne, C h a i r m a n .

i f u r t h e r
aggravate the situation with
of fm+W rLf™ ?
mortgage money, because a great deal
Li
restraint on, the building industry’s ability to proceed,
hence? ' ^ eS
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building market some 6 or 9 months
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£ b ai? s t h a t c ? m p o s e t h e b a n k s y s te m . B u t I
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n e w d illo J h S 'u T ld ta J * 4* 8068 further * “■ i»*
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UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 2 3

have now where the savings and loan institutions in my area say
that they cannot make any new commitments at all with the combina­
tion of restraints imposed on them by the shortage of funds caused
by the deposits and your new regulation.
They say they are just out of business----Mr. H orne, I am just being perfectly candid in saying that I think
we would be making a mistake for several reasons which perhaps you
might want me to talk with you privately about, if we attempted to
meet all the demands through the windows.
The 4 months’ repayment is a normal level—Dr. Schwartz may want
to speak more specifically on this.
Mr. O t t i n g e r . I do not say that this ought to be unlimited, but I
wonder if the combination of these two things together, the complete
shortage of funds through the draining that is taking place as a
result of these certificates of deposit, and this regulation coming on
top of that, if you were not iust calling building to a halt all over
the United States.
Mr. H o r n e . We are weighing this and keeping in touch with it as
much as we can. I am sure that you also recognize that there are
other people going to the market for money, also, including the U.S.
Treasury. Then, as I pointed out also-^—
Mr, O t t i n g e r . Why should the building industry take the total
brunt of this ? Why should not that be equitably distributed through­
out the economy ?
Mr. H o r n e . I think it is; I think we are being treated fairly gen­
erously as to what we are allowed to go to the market for. Where
the squeeze comes, the flow of savings is not going to the S. & L.’s
themselves and this gets back to the CD problem which is one of
the problems this committee is looking at and other sources that
compete for funds.
Sir. O t t i n g e r . H o w long a period do you contemplate that this reg­
ulation would remain in effect ?
Mr. H o r n e . I think it will depend to some degree on how long this
present tight money market continues. I think it would also depend
to some degree on what the Treasury’s needs have to be. I am sure
everyone recognizes that all of us, to go to the market, have a co­
ordinating mechanism that is used because if each of us went to the
market separately and independently and willy-nilly, we can produce
chaos.
Mr. O t t i n g e r . I would like to express m y concern over the degree
to which the building industry is required to bear the brunt for the
tight money situation. I would like to see the Board reconsider the
situation.
Perhaps we can alleviate it through the regulation of certificates
of deposit. In the meantime, the building industry itself is asked to
share the burdens of tight money to a greatly disproportionate degree
and that you as the supervisor over the savings and loan institutions
which supply the majority of the building money ought to be partic­
ularly concerned about this and not get walked over.
Mr. H o r n e . I a m in sympathy with what you are saying.
May I make a brief remark about it? I am sure you realize it is
not our policy, the Federal Home Loan Bank Board, that has brought



1 2 4 UNSOUND COMPETITION FOR SAYINGS AND TIME DEPOSITS

about the squeeze. We are in sympathy with the associations in the
industry and we want to be as helpful as we c a n .
In trying to be helpful we also have to weigh the fact that there are
other things that may have to take priorities over expansion of build­
ing. Then also, I think I should point out again as I pointed out
yesterday, that individually, savings and loan associations are getting
a quite substantial number of dollars through repayments and interest
on loans outstanding. So it is not that they have no money at all.
They have much less than they used to have, this is true.
Just because an association—this is another point that I would like
to emphasize—an association does not have money to commit for the
future does not reflect on its soundness. If an association does not
have the money to commit far into the future, it can be just as sound
as any of Uncle Sam’s dollars. Erroneously, some people have thought
that because some of the associations cannot make a commitment down
the road they are in extreme financial difficulty as far as safety and
security is concerned, and this is not the case at all. I know you did
not ask me the question on this point, but I wanted to add this while
I am answering.
Mr. O t t i n g e r . The nature of the building industry, though, re­
quires that they have to be able to anticipate the mortgage money
that is available and well in advance of the time the actual building
takes place.
I have had two large associations in my area say they are finished
as far as the future is concerned because of the tightness of the regu­
lation.
Mr H o r n e . Unquestionably this is one of the difficulties that the
homebuildmg industry always has and that is, the peaks and valleys
as to the availability of funds and this is one reason why Congress on
many occasions to provide some help in t h i s area has a p p r o p r i a t e d
funds to FNMA.
r
Mr. O t t i n g e r . I would hope that you w
’ould take a look at this be­
cause I do not think that the building industry should be made to
disproportionately bear the burdens of the tight money policy or the
requirement of the Federal Government to go out for money on the
market. I think it is going to be definitely aggravated by the Par­
ticipation bales Act we are embarking on. That is going to make the
situation more difficult for the building industry.
Mr. H o r n e . Let me say again------O t t i n g e r . I do not see why we should be unreasonable about
is. Ihere should be some balance there and you are the logical
person to protect your area against the opportunism of the T r e a s u r y
Tx
administration or whatever it may be.
Mr. H o r n e . I want to say finally again, we do not have the unlmited power to make up this gap and I w
’ould not want to m is le a d
the committee into thinking we do have it.
Mr. O t t i n g e r . I appreciate that and perhaps the real force of my
comments is not directed against or toward you, Mr. Horne, but rather
the people who are setting these policies. I do think a really se r io u s
situation m the balance has been created here. I would hope that you
would do what you can to see that this is rectified.



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 2 5

Mr. H o r n e . I shall, because I spent a lot of my life doing things
that I thought and I think would enable people to own their own
homes. That is still my wish.
Dr. S c h w a r t z . Congressman, I think the Chairman covered the
point rather well when he said the Board or he did not have the final
authority in any of these issues. We are confronted by the money and
capital market which has just become very, very tight. The Board’s
role in this is marginal. The Board does not control the flow of sav­
ings which has created the situation that has led many institutions to
withdraw from the market—not just the savings and loan associations,
but insurance companies and banks are moving away from the market,
too. You have everybody moving away from the market simultane­
ously.
In past periods, when this has happened, the market has not been
so tight that the Board could not step in and lend some assistance.
But in this situation, it is so tight that combined with the change in
the flow of savings, the impact on the Board for funds is such that
there has to be some restriction on the lending though not complete
restriction. I think the letter is being misinterpreted.
The basic point is that we are in a market economy and the market
does impose constraints.
The other side of the coin—I think it was Mr. Harvey who raised
the question about mortgage rates coming down. From 1961 to most
of 1965 mortgage interest rates did come down, and actually builders
were in a very favorable position as far as getting commitments were
concerned. Savings and loan associations, commercial banks, insur­
ance companies, and mutual savings banks were all flooded with liquid
funds and there was not enough demand from other sectors to absorb
it and the mortgage market was heavily favored.
Now, we have a reversal of this situation. I would like to be able
to say that it is temporary, but I think it would be a little imprudent
to go that far out on a limb.
Mr. O t t i n g e r . Thank y o u , Mr. Chairman.
Mr. R e u s s . Mr. Annunzio ?
Mr. A n n u n z i o . I yield to Mr. Rees.
Mr. R e e s . Just one question, Mr. Chairman.
We have a problem m California and I think in most States where
savings and loan institutions are losing money. People are walking
in, giving them the passbooks and say, “Please let me draw on my
account,” and they get five and a half percent. In about 3 or 4 weeks
they are going to buy some of the Federal Home Loan Bank deben­
ture notes to take care of withdrawals of institutions that are re­
stricted to 4.85 percent.
If you issue this security you are going to have to issue a lot of
them to shore up all the savings and loans throughout the Nation
so that they could meet their withdrawals if they are limited to 4.85.
You are going to have to go out in the open market and compete
for that money.

bWould it not be a lot easier to allow the savings and loan institu­
tions to do some competition of their own to allow them a higher
interest rate? Would it not be easier to tell the institutions, you can
go to 51/2 percent if you want ? Then the FHLB will not have to go



1 2 6 UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS
o u t in th e o p e n m a r k e t a n d s e ll se c u r itie s. O u r n a tio n a l d e b t d o e s not
g o u p b y th a t a m o u n t a n d th e n y o u a re n o t c o m p e t in g a g a in s t other
ty p e s o f G o v e r n m e n t se c u r itie s w h ic h see m to b e in t h e m a r k e t to d a y .

Would it be a lot easier to allow a kind of restrictive free market
where a lot of savings and loans go up to hy2 percent just as the
banks are doing in terms of CD’s? There would be less pressure
on you and you would reverse the withdrawal trend. Not only would
they not be going to you for more money, but they would find that
they would have more money in terms of savings coming in and there­
fore they would be able to save some money on the mortgages. Do
you not think it would be a lot easier this way than going through
all this rigamarole issuing new Government paper?

M H o r n e . Let me make, if I may?sir, very respectfully, three or
r.
four comments to your very good question.

No, 1—this is repetitious—if you compare the savings deposits in
California associations at the end of April with what they were around
the beginning of January, there is a $24 million decline.
No. 2, W the Board did early in the year to enable them to meet
’hat
the competition that the increase by banks, particularly when the
Bank of America went to 5 percent, was based primarily on what
many of the California associations at that time recommended. They
were not in agreement as to wiiat they thought the Board should do,
as to what kind of defensive mechanism they thought the Board
should grant.
&

No. 3, since we took that move and with further exploration down
the line we are now on the verge of providing more leeway than they
presently enjoy.
J
I want to reiterate that we have to bear in mind that we must take
a responsible position. Looking at the industry as a whole, that when
wb allow for differences among areas we have to keep in mind what
adverse effect it might possibly have-not only on some other Caliornia associations, but across the country as a whole. I am sure
that Congressman Weltner’s comments did not escape your obser­
vations a few moments ago, and I might say in complete honesty, that
•is and world!5 of criticism heaped on the Board of what
Calif?™a as compared to other parts of the country.
at most of the money that comes from
u i r m l fi011? ^ m i ,system, goes to California associations.
f! P01” ^
is not a C alifornia association today that
^
■
l m V ? suggested, provided th at he undermonev fnr
80
couW not go to the cash window and get
H W n if
?n Pu rP?ses- He can still get money to meet with­
h e ld
^ simply would not be able to get his money to go out and
52 h
e
^
^
40 What he is
by Paying whatever

T

^

•? coimecte.d with what another Congressman—
forgotten who it was—said that we were being criticized he-

“ w to ^
th' B°ard
“ “ rtain P,,CCSl*
+, a rA H ^ K.A- W ould the gentleman yield fo r a moment? I think
^
th a t the Chairm an answered very honestly in term s of this p r o b le m ,



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 2 7

but I should like to put in the record at this point to make your answer
more, I think true, of the situation—the answer to this question:
How much money was asked in advances to meet withdrawals in the
first quarter?
Mr. H o r n e . Dr. Schwartz will give you the answer to that.
Dr. S c h w a r t z . For the month of April, I will answer that where
we have solid figures and where my memory is better.
Mr. H a n n a . Does $500 million appear to be it ?
Dr. S c h w a r t z . From March 28 through the other day we have put
out about $900-some-odd million. Some of that is expansion money
to take care of commitments that were on the books.
Mr. H a n n a . A large portion is withdrawals ?
Dr. S c h w a r t z . A large portion is withdrawals.
I would say two-thirds to 75 percent of that is withdrawals. We
do not ask the banks to give us a purpose analysis of the advances.
But we do get some indication from them when we have this size with­
drawal and we ask them just to give a rough summary and this is
what the summary indicates.
For the year as a whole, advances are up sharply. I would say
they are up considerably more than they were last year at this time,
and this is due to the fact that the savings inflow in the first quarter,
particularly outside of California was unfavorable. In fact in Jan­
uary and February, the California associations, particularly in Jan­
uary, the California associations looked pretty good against tlie rest
of the country.
Mr. H a n n a . A s an a v e r a g e ?
Dr. S c h w a r t z . Altogether, and I think individually with some few
rare exceptions.
Mr. H a n n a . Would you provide for the record the actual with­
drawals. the advances from withdrawals in the State of California?
Dr. S c h w a r t z . We would have to get a special analysis on that.
Mr. H a n n a . I want to find where it really is here. If you figure
on the average it is like talking about a pool that has a 10-foot depth,
but if you talk about the average you figure there is safety, sure, be­
cause nobody is going to drown in 6 inches of water.
Dr. S c h w a r t z . Until March 28 I do not think there w a s a with­
drawal problem in California.
Mr. H a n n a . These are figures we need to have along with the
averages.
Dr. S c h w a r t z . We will supply the information you request.
(The information requested follows:)
A d v a n c e s m a d e b y p u r p o s e s , F e d e r a l H o m e L o a n B a n lc o f S a n F r a n c i s c o

Month
January............. .
„
.................................................
February......... ..........................................................................
March. ..
April....................
..........................
Total......... .............. ....................................................
Percent of to ta l..............




.............................................. .

Withdrawals

Other
purposes

$ 3 3 ,3 5 2 ,6 0 0

$ 6 1 ,3 2 3 ,0 0 0

$ 9 4 ,6 7 5 ,6 0 0

6 ,0 8 7 ,5 2 8
1 0 ,1 0 5 ,0 0 0
4 7 0 ,0 2 4 ,2 0 0

5 4 ,7 8 7 ,3 5 7
1 0 6 ,9 9 2 ,0 0 0
1 0 1 ,7 1 8 , 0 0 0

6 0 ,8 7 4 ,8 8 5
1 1 7 ,0 9 7 ,0 0 0
5 7 1 , 7 4 2 ,2 0 0

5 1 9 ,5 6 9 ,3 2 8

3 2 4 ,8 2 0 ,3 5 7

8 4 4 ,3 8 9 ,6 8 5

6 1 .5

3 8 .5

1 0 0 .0

Total

1 2 8 UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS
M r. R e u s s . If th e r e a re n o fu r t h e r q u e stio n s w e w a n t t o t h a n k ou r
w itn e s s e s f o r t h e ir p a tie n c e f o r b e in g w it h u s 2 d a y s.

We will not stand in adjournment until the call of the Chair.
It is anticipated there will be heard witnesses from the Treasury,
the Comptroller of the Currency, Federal Deposit Insurance Corpo­
ration, Federal Reserve Board, National Association of Home Build­
ers, and the American Bankers Association.
We will now stand adjourned.
(Whereupon, at 12:10 p.m., the committee adjourned, to reconvene
subject to the call of the Chair.)




TO ELIMINATE UNSOUND COMPETITION FOR SAVINGS
AND TIME DEPOSITS
THURSDAY, MAY 19, 1966
H o u s e o r 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, pursuant to notice, at 10:05 a.m., in room 2128,
Rayburn House Office Building, Hon. Wright Patman (chairman)
presiding.
Present: Representatives Patman, Multer, Mrs. Sullivan, Ashley,
Moorhead, St Germain, Gonzalez, Minish, Weltner, Grabowski, Todd,
Ottinger, McGrath, Hansen, Annunzio, Rees, Widnall, Mrs. Dwyer,
Halpern, Harvey, Brock, Clawson, Johnson, Stanton, and Mize.
The C h a i r m a n . The committee will please come to order.
Today the committee is privileged to hear the Secretary of the
Treasury, Hon. Henry H. Fowler, testify on H.R. 14026 and other
measures to control the use of certificates of deposit.
As the chief financial officer of the executive branch of the Govern­
ment, Secretary Fowler has a special responsibility for assessing new
financial developments such as the negotiable certificate of deposit.
This is particularly the case where there are strong reasons to conclude
that the negotiable CD is adversely affecting the Treasury bill market,
making more costly to the taxpayers the carrying charges on the na­
tional debt. Economical debt management is, of course, a primary
responsibility of the Treasury Department. Only recently, the ad­
ministration was forced to seek an unexpected appropriation of threequarters of a billion dollars just to meet extra interest costs for fiscal
1967 over 1966. Interest rates on both long-term and short-term
Treasury obligations are at near-record highs.
We have a graph prepared on the basis of information furnished
by Treasury which indicates a definite relationship between the ceiling
that member banks may pay on time deposits—including the nego­
tiable CD—and the Treasury bill rate. Perhaps the Secretary will
also elaborate upon a memorandum furnished the chairman by Treas­
ury staff last February which only indirectly answers the question of
the influence of CD’s on Treasury bill rates. In this connection, it
should be noted, .according to a recent Securities and Exchange Com­
mission report as well as from many, many unofficial sources, that
there has been a substantial shift of corporate cash out of the Treasury
bill market and into the negotiable CD market in New York—over
$2 billion just last year.

We would also appreciate a progress report on the joint TreasuryFederal Reserve study of the U.S. Government securities market, I



129

1 3 0 UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

understand that one of the main purposes of this study is to investi­
gate the competitive impact of CD’s on Treasury securities.
We are aware that very recently the interest rate on Treasury U
E”
bonds was increased to 4.15 percent. While deploring the rise in
the cost of debt management, we are glad to know that the Depart­
ment has taken steps to reduce differences in rates between marketable
and nonmarketable Treasury bonds which discriminate against the
small saver.
We are also interested in a report from the Secretary of the Treas­
ury on the accomplishments of the Coordinating Committee on Bank
Regulation, for which Mr. Fowler is responsible to the President—
the members being Chairman Martin of the Federal Reserve Board,
Chairman Home of the Federal Home Loan Bank Board, Chairman
Randall of the Federal Deposit Insurance Corporation, and Comp­
troller of the Currency Saxon. The purpose of the Coordinating
Committee is to avoid serious disagreements among the various finan­
cial supervisory agencies. As regulation Q is essentially a bank super­
visory instrument, we would appreciate hearing what the role, if any,
the Coordinating Committee played in the amendment raising regula­
tion Q last December 6.
(The following material was submitted by the Treasury Depart­
ment:)
J 1
T h e I nfl u enc e

of

N egotiable C e e t ific a t e s

of

D e p o s it

on

T r e a s u r y B il l R ates

As Chairman Patman has indicated, the Treasury staff memorandum pre­
pared on an earlier occasion for the House Banking and Currency Committee
did not reach definite, quantitative conclusions as to the effect on Treasury
raI> development in recent years of the negotiable
^
certificate of deposit.
The Treasury agrees that Chairman Patman's question is an important one,
but it is also a very difficult one to answer in precise terms. For that reason,
the staff memorandum was largely limited in its scope to a review of the hisn^°tiable certificate of deposit a s a m o n e y -m a rk e t
instrument. Further study of this and other influences on Treasury borrowing
ai t? ougl? U is doubtful that the exact influence of the
i
negotiable certificate of deposit can ever be isolated with great accuracy.
np^ H .hir0U f*«P?ear^ * * *eason t0 thieve that the rapid growth of the
negotiable certificate of deposit may have exerted some upward pressure on
S T T biU
“
of tbe current expansion In the
absent* of the development of the negotiable certificate of deposit corporate and
rfv^w ie^ip?rarily in exc?ss of current requirements would probably have
m lar?e* ?“ ?unts m t 0 short-term Treasury obligations, as well
as other money-market instruments. This in turn, might have contributed to
some easing of short-term Treasury rates in the absence of offsetting monetary
or debt management action. In addition, more U.S. funds would probably have
fr ^ th e
r m?rket. which r e iv e d much of its initial impetus
vw S
n o I i°W * deposlt rates Payable in this country. Indeed, in
v i e w of the U.S. balance-of-payments situation, short-term interest r a t e s — on
Treasury bills and competing market instruments—have orobablv hp*m no higher
during most of the current expansion than would taveb len ^ u ired U n I S S 2 .
very^w e^uU ^w it^other'flM 0 J 8. asf.I,st^ commercial banks in competing
1®
enabled^anks tn
^
l?S
ft‘tutl<ins for short-term funds and has
-£L
*
^ W t. i g
o* these funds into loncer term uses In

>w* ’ ,a s M r a
derfrable r e S
desirable results.

“

rat! S°mpetition “ ““ S the commercial
^
of deposlt would necessarily lead to
Recent experiences-partlcularly since about the middle of




UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 3 1

196o—suggests that overly aggressive competition for a limited pool of short­
term funds can carry rates sharply higher. This not only tends to pull up
Treasury short-term borrowing costs; it may also narrow or erase the margin
that banks have made use of in borowing short and lending long, thus removing
the influence of CD growth as a factor tending to hold down long rates, and
possibly contributing instead to an upward influence on long rates.

P rogress R eport

on

J o in t T r e a su r y -F ederal R eserve
G o v e r n m e n t S e c u r it ie s M a r k e t

the

U.S.

S tudy

of

the

This study was launched on March 1, 1966, with the broad purpose of ascer­
taining how the dealer market for U.S. Government securities has evolved and
performed in the 1960’s in light of economic developments during this period.
Part of this picture involved certain innovations affecting the financial processes.
They would include certificates of deposit and the greatly enlarged Federal funds
market.
The joint study is being carried out by staff analyses, several of which are
underway and are expected to be in first draft by midsummer; through question­
naires to U.S. Government security dealers, which have been distributed; through
questionnaires to various investors in the market, which are being prepared;
and through conferences with active market participants which are to be
scheduled around midyear.
The steering committee for this study will draft a report analyzing this
material when it bcomes available.
A c c o m p l is h m e n t s

of t h e

C oordinating C o m m it t ee
M a y 25, 1966.

The Coordinating Committee, composed of the Comptroller of the Currency
and the Chairman of the FDIC, FHLBB, and Federal Reserve System, has pro­
vided a valuable forum for discussion of supervisory problems and other matters
affecting financial institutions. Meetings have been held at approximately
monthly intervals since the group was established last July. Formation of the
Committee followed through on the suggestions made by President Kennedy’s
Committee on Financial Institutions in April 1963 and President Johnson's
suggestion in March 1964 for additional exchanges of information among bank
regulatory agencies.
While the Coordinating Committee did not play a role in the decision to
change Federal Reserve’s regulation Q last December—this was the decision of
the Board of Governors of the Federal Reserve System—several meetings of the
Committee have been held since the December change in regulation Q in order
to appraise the effects of that change on the competition for savings and to dis­
cuss further actions that might be desirable in light of those developments.

The C h a ir m a n . Mr. Secretary, we are very pleased to have you as
our witness today and you may proceed in your own way.
Do you have a prepared statement?
Secretary Fotor. I do, Mr. Chairman.
STATEMENT OF HON. HENRY H. FOWLER, SECRETARY OF THE
TREASURY; ACCOMPANIED BY PETER STERNLIGHT, DEPUTY
UNDER SECRETARY FOR MONETARY AFFAIRS; AND FRED B.
SMITH, GENERAL COUNSEL

Secretary F o w l e r . Mr. Chairman, in my prepared statement I have
addressed myself rather narrowly to the bills before this committee
which in different ways would affect the acceptance or issuance of
time deposits by insured commercial banks. I will not cover in my
prepared statement today other matters which are of a broader na­
ture or which you solicited some comment in your opening statement.



132

UNSOUND COMPETITION FOR SAYINGS AND TIM E DEPOSITS

However, I would like to have the opportunity to address myself to
them for the record.
The C h a ir m a n . Y o u may do that. We hope all the questions will
be answered for the record.
Secretary F o w l e r . They will, for the record, and promptly, M
r.
Chairman.
(Material submitted in response to the questions raised by Chair­
man Patman in his opening remarks will be found on pp. 130-131.)
The C h a ir m a n . I hope you deal with the illegality of n e g o tia b le
CD’s. Are yon dealing with that in your statement?
Secretary F o w l e r . Yes; I think my comments will embrace that
subject, although not in a technical way.
Mr. Chairman and members of the committee, I have been asked
to comment today on two bills before your committee—H.R. 14026
and H.R. 14422—which in different ways would affect the acceptance
or issuance of time deposits by insured commercial banks. Before
addressing myself to these two bills and making certain specific sug­
gestions of my own, I would like to offer a general comment on recent
developments regarding the competition for time deposits.
I should point out, first of all, that the Treasury does not have a
direct supervisory interest regarding the rates and other terms offered
on bank time deposits and on competing investment forms offered by
other financial institutions. However, because of our general con­
cern about the state of the economy, and our particular concern with
the management of Government finances, we have a continuing inter­
est in the maintenance of stable financial markets. Moreover, in
bringing together, as your opening statement made reference to, at
the request of the President, a Coordinating Committee on Bank
Supervision—which includes the Comptroller of the Currency and
the Chairmen of the Federal Deposit Insurance Corporation, the Fed­
eral Home Loan Bank Board, and the Federal Reserve Board—the
Treasury has been actively interested in this question.
Recent developments in the competition for savings may be traced
conveniently back to 1961, when a combination of more aggressive com­
petitive behavior by commercial banks and a series of revisions in the
Federal Reserve’s regulation Q and the FDIC’s regulation 329 resulted
in a substantial increase in commercial bank time deposits and in im­
portant changes in the portfolio policies of banks. Between yearend
1961 and yearend 1965 commercial bank time deposits increased by
about $64 billion—or more than 75 percent. This is a compounded
growth rate of 15.5 percent yearly—achieved on a base that
already substantial.
A portion of the accelerated grow th in bank tim e deposits came from
funds th a t m ight otherwise Jhave gone to savings and loan a ss o c ia tio n s
and m utual savings banks; in some instances, th is m ay have r e fle c te d a
return flow of funds t h a t had previously been shifted away fro m
banks—fo r savings and loan associations, in particular, h a d e n jo y e d
an extraordinarily rap id grow th rate in the earlier postw ar yea rs.
Some of the growth in commercial bank tim e deposits reflected s h ifts
by corporations and public treasurers away from competing money
m arket instrum ents including T reasury bills. A nd some or t h e in­
crease m tune deposits probably reflected shifts from bank dem and
deposits.



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 3 3

More recently many banks have offered so-called savings certificates
or “savings bonds,” generally in nonnegotiable form, which have made
higher time deposit rates available to individual savers with accounts
largely in the $2,500 to $100,000 range. In some cases, the higher rates
have been made available on savings instruments ranging even smaller
in size—all the way down to about $20 or even less. In contrast, nego­
tiable certificates of deposit—or CD’s—are typically issued and traded
in size units of $100,0(X or more, serving as a liquid money market in­
)
strument rather than as a savings medium.
The rapid inflow of funds into banks spurred more aggressive lend­
ing policies by banks and encouraged many banks to move into areas
of lending that had received less attention earlier. Mortgage lending,
consumer credit lending, and investments in obligations o f State and
local governments showed particular increases among bank assets.
On the whole, these shifts in bank lending and investing"practices have
been desirable, contributing importantly to the unprecedented growth
of credit and economic activity that we have experienced in recent
years. Banking has certainly become more competitive. The mar­
gins between what banks pay for funds and what they earn on loans
and investments has narrowed and the public has benefited.
It is true that a few banks have used certificates of deposit unwisely
to finance unsound loan portfolios. But such practices are not inherent
to CD’s or increased time deposit competition. Bank failures during
the past few years have alerted supervisory agencies to potential prob­
lems and alerted the general public to potential risks.
As market interest rates have advanced during the past year banks
have been under pressure to raise rates paid on time deposits, particu­
larly in order to attract and retain rate-sensitive funds. The Board
of Governors of the Federal Reserve System decided last December
to raise the rate ceiling on time deposits from 4% percent to 5l/o Per_
cent, enabling banks to compete at higher levels. At the same time,
the Board elected to keep the 4-percent ceiling on savings deposits, in
order to limit the impact of rate competition among banks and between
banks and other financial institutions.
In recent years many economists have favored eliminating, or plac­
ing on a standby basis, any interest rate ceiling on time and savings
deposits. Both the Commission on Money and Credit, in 1961, and
President Kennedy’s Committee on Financial Institutions, in 1963,
recommended placing on a standby basis interest rate ceilings that
would apply both to banks and other thrift institutions. This recog­
nizes that, m principle, it is hard to defend a policy that insulates
banks and other financial institutions from competing among them­
selves.
While acknowledging this point of principle, I believe the present
period demonstrates that there is a need at times for the guidance that
regulatory agencies can provide. I might say parenthetically that, of
course, was the inference in the report of the President^ Committee on
Financial Institutions in recommending that this authority be placed
on a standby basis, because there was recognition at particular times
that authority might be useful and desirable.
At the very least, ceilings are needed in transitional periods, when
financial institutions are making adjustments to a changing competi­
tive environment. Moreover, it is important that the authority of the
fta-49*—
66----10




134

TIN SOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

supervisory agencies with respect to ceiling rates and other pertinent
factors relating to time and savings deposits be available with some
flexibility to distinguish among different types of deposits. Regard­
less of what ceiling rates or other conditions may currently exist or be
proposed, the present experience should stimulate some hard thinking
by all of us—in the financial markets as well as in Government—about
the pros and cons of bidding for “hot money.”
In seeking legislation in this area, I believe an important principle
to keep in mind is the undesirability of taking an approach that would
permanently inhibit healthy competition among financial institutions.
It would be equally undesirable, however, to remain aloof to the point
that destructive competition dealt permanent injury to our financial
institutions and the sectors of our population and our economy that
depend on those institutions.
One of the bills before you, H.R. 14026, would prohibit banks from
issuing negotiable deposits or notes. This would substantially lessen
the attractiveness to investors of large denomination certificates of
deposit, although it probably would not eliminate their use entirely.
The possible effects of a sharp reduction in the volume of certificates
of deposit are difficult to contemplate. Based on the funds they have
obtained in this manner, banks have built up enormous additions to
their assets—representing useful credits to many segments of the
economy. It is not easy to say “where the money would go” if nego­
tiable certificates of deposit could not be renewed as they matured.
At the least, there would very likely be severe transition problems for
particular institutions and segments of borrowers that found credit
flows cut off.
T o so m e e x te n t , b a n k s p r o b a b ly c o u ld c o n tin u e t o o b ta in f u n d s by
is s u in g n o n n e g o tia b le c e r tific a te s o f d e p o s it, b u t t h i s m i g h t req u ire
h ig h e r in te r e s t r a te s th a n a r e p a id n o w . A lm o s t c e r t a in ly , b an k s
w o u ld h a v e t o is su e s u c h c e r tific a te s in s h o r t e r m a t u r it ie s t h a n is the
c u r r e n t p r a c tic e , t h u s f o r e s h o r t e n in g th e t im e w h e n p e r io d ic re n e w a ls
m u st be arran ged .

H.R. 14026 would also prohibit banks from selling negotiable deben­
tures. During the past few years banks have added more than $1.5
billion to their capital through the sale of debentures. If banks were
able to sell debentures only in nonnegotiable form they would probably
hayeto pay higher interest rates, if indeed they could sell them at all.
While I would not favor H.R. 14026,1 do not mean to say that we
see no problems at all in the CD area, or that we have no concern about
thecurrent role CD’s seem to be playing in the interest rate structure.
As beneficial as CD’s have been over the past several years, I must say
^?^ress^ bank competition to obtain these short-term funds—
Te
which has been the counterpart of the aggressive bank competition to
extend credit in channels that benefited the economy—has worked at
times to move short-term interest rates higher. When this process
succeeded in generating a larger pool of funds than the banks c o u ld
use m extending longer term credits, this additional pressure at the
short end was tolerable. ^ Indeed it was welcome in the early years of
the 1960 s m order to raise our short-term interest rates in relation to
r^vs abroad, thereby averting or retarding outflows that would
add to the deficits in our balance of payments. But when we rea ch



UNSOUND COMPETITION FOB SAVINGS AND TIM E DEPOSITS

135

a situation where, to a considerable extent, banks are bidding against
one another, or against others who m ust use the short-term money
m arket, to secure more of a rather lim ited total supply of available
funds, a question may be raised as to whether this useful device is
perhaps being pushed too far.
As I said in a speech in Phoenix, in early A p ril:
I would hope, also, that there will be an accompanying disengagement from
unreasoning competition for time and savings deposits that ignores the need for
caution and the harm that kind of competition can do to our banking and
financial system.

This is a question that has been under study within the Government,
particularly in the last 5 months. We do not have simple answers to
offer here. I cannot conclude that a flat ban on negotiable certificates
of deposit would be desirable. If, in the judgment of the committee,
some action is deemed desirable, a better approach might lie in the
direction of providing the appropriate monetary authorities with
greater discretion to set levels of reserve requirements on large nego­
tiable certificates of deposit that might exceed those on other time and
savings deposits. Of course, you will want to consider carefully the
views of those much closer to the problem of day-to-day bank super­
vision on this matter.
Another bill before you—H.R. 14422—would prohibit insured
banks from accepting time deposits in an amount less than $15,000.
This bill, along with the present regulation Q ceilings, would in effect
restrict banks to the 4-percent ceilings on savings deposits for accounts
of less than $15,000.
While I have considerable sympathy with the apparent objectives
of H.R. 14422, it does seem to me that its approach is unnecessarily
rigid, and that it is unnecessarily discriminatory against smaller
savers at commercial banks under the present interest rate spread.
A t the same time, many of us are concerned about the considerable
evidence th a t something should be done prom ptly to retard the outflow
and threatened outflow of savings funds from savings and loan asso­
ciations and m utual savings banks.
W hile none of us is in a position to evaluate just how serious this
threat may be as a long-term m atter affecting these institutions, there
is a genuine current concern in the Congress, in the Federal Home
Loan B ank Board, and in the private economy, th at a continued sav­
ings outflow could place undue stress on some of these financial insti­
tutions, and undue constraints on the flow of money into the m ortgage
m arket and homebuilding.

Under the circumstances, the prudent course would seem to be to
provide some simple form of insurance that could be put in effect
speedily, that wouM tend to avoid drastic dislocations, and that would
provide our savings institutions with an opportunity to make an
orderly adjustment to new competitive situations. By placing a tem­
porary restraint on excessive competition in this area, it should be
possible both to protect the structure of the thrift institutions and to
bolster the flow of funds to the homebuilding industry.
I n acting prom ptly to provide tem porary relief from the problems
of excessive rate competition, I do not believe we should commit our­
selves to perm anent arrangements th a t would impede and com part­




1 3 6 UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

mentalize our financial markets. R ather the present purpose is to
find agreement, along simple lines, on means fo r dealing w ith this
tem porary transitional problem.
W ith this background in m ind, I would like to m ake certain af­
firmative proposals th a t I would urge this committee to consider
and act on prom ptly. Specifically, I believe it would be desirable
to provide the m onetary authorities, on a tem porary basis designed to
cover this transition period, w ith discretion to set a different rate
ceiling on tim e deposits up to the maximum amount covered by Fed­
eral deposit insurance. U nder present circumstances, th is would mean
th a t a maximum rate of, say, 5 percent could—and I m ight say
should—be set on time deposits up to $10,000. F o r larger time de­
posits, the first $10,000 would be covered by a maximum rate which
could be set at 5 percent, while the balance could pay interest a t rates up
to those now specified in the Federal Reserve’s regulation Q.
The choice of an appropriate size lim it on which to set different
maximum rate levels is not an easy question to resolve in view of all
the equity considerations and competitive factors involved. W e sug­
gest $10,000 as an appropriate lim it for tw o im portant reasons:
First, tying this lim it to the maximum insurance lim it makes
sense in view of the Government’s contingent liabilities on deposits up
to this size. Assuming the necessity for establishing a lim it, and I
believe there is such a necessity, it is logical th a t those who have the
protection of Government insurance should be prepared to receive
a slightly lower rate on the insured amounts.
Second, based on our inform ation about the current situation,
we believe th at this lim it represents a m iddle course which should
alleviate the impact of destructive competition fo r savings, without
seriously im pairing the ability of banks to engage in constructive in­
termediation. A Em it of this nature, w ith the rate set in current
circumstances at a 5-percent level, should be of significant help in
deterring further large drains of funds from the specialized savings
institutions. Timely protective measures; undertaken now, will help
in relieving the liquidity strain on these institutions, and in tu rn re­
lieving the strain on im portant sectors o f the economy th a t depend
on an availability of funds from these institutions—notably the m ort­
gage m arket and the homebuilding industry.
Taken overall, I believe th a t the $10,000 dividing point, tied to
the present insurance lim it, makes sense from the standpoint of
prudent economic policy. A higher lim it—w ith discretion fo r setting
the figure given to the appropriate supervisory authorities, b u t per­
haps somewhere in the range of $25,000 to $100,000—m ight also m a k e
good economic sense in present circumstances. I would not be o p p o se d
to such a lim it, provided on a tem porary basis, and this is a point that
the Congress should consider carefully, but my own preference in
this tem porary authority would be fo r a link to the maximum insured
account size. A gainst the background of current policies as reflected
in the recent announcement of the Federal Home Loan B ank Board
on Tuesday, I believe this approach could be p a rt o f a framework
for sustainable competition among th rift institutions.




UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 3 7

F o r the foregoing reasons, I sincerely urge the committee to give
serious consideration to this proposal as an alternative to other legis­
lative proposals before it. I have available copies o f a d ra ft of a bill
which would provide tem porary authority for a 2-year period to the
Federal Reserve Board and the Federal i)eposit Insurance C orpora­
tion to institute different rate ceilings for th at portion of tim e deposits
up to the maximum amount th at may be covered by Government
insurance.
Finally, I would like to emphasize just as firmly as I can th a t these
proposals are not a cure-all or a perm anent attem pt to deal -with the
problem of competition in the financial area, Certainly, they are not
intended to permanently im pair competition—which is the vital force
of our economy. R ather, they would provide a measure of insurance
during a period of transition.
Thank you, Mr. Chairman.
The C h a ir m a n . Mr. Secretary, I notice on page 2 you said these
negotiable certificates of deposit V en t back to 1961. Are you not mis­
taken, did not CD’s commence in 1960?
Secretary F o w l e r . Well, the larger sizes emerged in 1961. I think
they did appear earlier in smaller proportions.
I accept your statement. My impression was th at the really rapid
growth caught on in 1961.
The C h a ir m a n . I will place in the record a t this point the history
of them from 1960 down through 1965.
(The history referred to follows:)
Outstanding negotiable certificates of deposit in denominations of $100,000 or
greater issued by weekly reporting member banks
[In millions of dollars]
New
York
City

Chicago San Fran­ Cleve­
land
cisco
district
district district

Dallas
district

Allother

Total

Dec. 31,1960................................
Dec. 30,1961...............................
Dec. 5,1962.................................
Dec. 31,1963....................... ........

5
935
1,650
3,434

21
318
794
1,234

219
420
598
851

41
238
480
860

247
318
486
796

263
553
1,434
2,402

796
2,782
5,442
9,579

1964
Apr. 1................. ! ................... .
July 1 „ _____ ______________
Sept. 30.......................................
Dec. 30— ....... ............. ...............

3,707
4,006
4,273
4,556

1,331
1,464
1,464
1,672

1,081
1,250
1,273
1,328

905
866
820
906

903
921
923
944

2,705
3,158

H
SS
3,177

10,632
11,665
11,949
12,583

1965
Mar. 31...................................
June 30.........................................
Sept. 29.........
....... ..............
Dec. 29.........................................

5,355
6,438
6,680
6,865

1,738
1,703
1,772
1,915

1,418
1,521
1,483
1,617

1,055
1,136
1,167
1,255

974
1,010
1,061
974

3.422
3,468
3,751
3,471

13,962
15,276
15,914
16,097

1966
Apr. 20___ _______ ____ ____

7,352

2,149

1,937

1,306

1,085

3,549

17,378

Source: Office of Debt Analysis, Jan. 25,1966.




1 3 8 UNSOUND COM PETITION FOR SAVINGS AND TIM E DEPOSITS

OUTSTANDING NEGOTIABLE TIME CERTIFICATES
OF DEPOSIT, ANNUALLY. 1960-1965
Billions of Dollars

Scurct: Basic date tmm Fedtrof Rtservt Board




UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 3 9

Maximum interest rates payable on time and savings deposits
[Percent per annum]
Effective date
Type of deposit

Savings deposits held for:
1 year or more.............................
Less than 1 year....... ...................
Other time deposits payable in: 1
1 year or more.......................... .
6 months to 1 year.......................
90 days to 6 months____ ______
Less than 90 days........................

Nov. 1. Feb. 1, Jan. 1, Jan. 1, Jan. 1, July 17, Nov. 24, Dec. 6,
1933
1935
1936
1957
1962
1963
1964
1965
3
3

2H
2H

2M

3
3

3
3
3
3

2M
2H
2H
2H

2H
2'A
2
1

3
3
2n
i

4
m
4
3H
2H
1

4
3M

4
4

4
4

4
4
4
1

4M
4

ft

514

1 For exceptions with respect to foreign time deposits, see “Annual Reports" for 1962, p. 129, and 1965,
N o t e .— Maximum rates that may be paid by member banks as established by the Board of Governors
under provisions of regulation Q. Under this regulation the rate payable by a member bank may not in any
event exceed the maximum rate payable by State banks or trust companies on like deposits under the laws
of the State in which the member bank is located. Effective Feb. 1, 1936, maximum rates that may be
paid by insured nonmember commercial banks, as established by the FDIC, have been the same as those
m effect for member banks.

Savings *y individual* in the United S ta te s 1 1963-65
—
[Billions of dollars]
Type of saving
1. Currency and defnand deposits_____ _______________
2. Time and saving deposits____________________________
3. Savings shares *........... ........................ ................. .............. .

1963

1964

6.8
11.6
11.7

7.0
12.3
11.3

1965
8.8
15.2
9.2

1 Securities and Exchange Commission Statistical Series Release 2118, Apr. 15,1966.

2Includes shares in savings and loan associations and shares and deposits in credit unions.
o t e .— The SEC also reported that during 1965 cash and deposits of all U.S. corporations rose $2,100,000,000,
but that there was an equivalent drop in their holdings of U.S. Government securities. On July 17,1963, the
Federal Reserve Board reduced the minimum maturity on CD's bearing the highest rate permissible under
regulation Q from 1 year to just 90 days.

N

The C h a i r m a n . The point th at troubles me on this m atter is the
fact th at your approach is not vigorous enough and rather tim id and
weak. T his is my p erso n a l opinion. I was hoping th at you would
realize th a t this CD m arket has grown up here in the last- few years—
negotiable CD’s only since 1960; 75—90 years ago the Congress passed
a law th a t no national banking association—no national bank shall
issue post notes or any other notes to be circulated.
O f course, th a t was done then because banks were issuing their
own money. A bank would go broke and everybody would have this
money but there would be nobody to redeem it. So the law was
justified.
_I t occurs to me th a t we are perm itting exactly the same thing in a
different way today. I n other words, we are perm itting the issuance
of interest-bearing circulating notes. W henever you issue a CD, th at
can be sold a t any time, and the money obtained on it, is th a t not very
much like a circulating note, M r. Secretary ?
Secretary F o w l e r . There are some similarities, M r. Chairm an.
The C h a i r m a n . I f you had the responsibility in view of this stat­
ute, would you perm it CDs’ to be issued ?



1 4 0 UNSOXJND COMPETITION FOR SAVINGS AND TIME DEPOSITS

Secretary F o w l e r . I would not give a quick or an unqualified an­
swer to th a t question. Since I do not have the responsibility, I have
not studied it in depth on the legal question th a t you raise. I have
indicated in my statement th a t I think this is som ething th a t exists,
it is p a rt of our system today. You may characterize the absence of
a drastic approach as tim id. I would characterize a drastic approach
as being unwise.
The C h a i r m a n . W ell, I notice you state here th a t the Federal
Reserve B oard and the Federal Deposit Insurance C orporation should
be given authority to do these things. I think, M r. Fow ler, in dealing
with the Federal Reserve you are going to have to make it manda­
tory.
Secretary F o w l e r . Mr. Chairm an, it is im plicit in my statement,
and in the proposal for this g ran t of authority in this kind of sit­
uation, th a t the legislation history of such a proposal would certainly,
and should, include a clear intention on the p a rt of the Congress and
the regulatory authorities th at, given the statutory authority, they
would impose the 5-percent lim it.
The C h a i r m a n . I think they would do it.
Secretary F o w l e r . I would hope th a t in the process of exchanges
that m ight occur some understanding could be arrived at.
The C h a i r m a n . W e have been hoping w ith them fo r a long time,
Mr. Fowler. D uring th a t tim e in piling more and more Govern­
ment bonds they buy and pay for them w ith F ederal Reserve notes;
they now have over $40 billion in the New Y ork F ederal Reserve
Bank. I believe th a t this is absolutely ridiculous. I t is a reflection
on Congress. I t is a reflection on anybody who represents the people,
th at we have $40 billion up there. A nd they claim they can use that
money fo r any purpose they w ant to. As evidence o f the fact they
pay dues to the American Bankers’ Association, nearly $100,000 a
year. I t is scandalous and shameful th a t they use Government
lT kA nair r / \ n

n J-

rr lv

_ _ _____
_1
____________

•

.1

*

.

— campaign *______________ ___
one could stop them because they do not come to th e Government for
funds to operate. They have gotten out from under th e General Acconnting Office, they are not audited and they are going so f a r that I
think it is tune fo r the T reasury to take some stand on this.
U f course, possibly, not having the responsibility, I would want
you to look over it very carefully, but I th in k all the facts in this situ­
ation should receive the attention of the T reasury D ep a rtm en t.
i m 19.6? \
hug® corporate funds th a t now make up
most of the negotiable CD m arket aggregating about $17 billion were

K le ? 1
i

m

W y Treasui7 bil1 auction market, M
eeW
r.

F o w le r . A s m y statem ent indicated, the funds accum u-

ca«ie from various sources. Some of them were
certainly in the bill m arket. Some of them would have been fu n *
th a t would have ultim ately flowed into other th r if t in stitu tio n s,
feome of them are funds th a t are reclaimed in a sense from the thrift
institutions, and so on.
th
^ lis is .not new to me- W e h ad a h e a r i n g before
the J o in t Economic Committee on it and I am convinced, M r. Fowler,




UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 4 1

that right here in broad daylight an awful scandal has gone on.
These CD’s were commenced in 1960 by just a few banks, a handful
of big banks. They say, “you come to us.” They say to the man­
agers, “you come to us and we will issue CD’s at 4 percent.” That
was quite a bonus and windfall because the short-term securities were
much less than that. But they were overlooking the fact that there
was a race between interest rates on short-term Government securi­
ties and CD's so that when December 1965 came around, the rates
had gone up so high on Government short-term securities because
big bidders had been enticed out of the bill market and went to the
banks that were issuing these CD’s.
I think that was an awful scandal and I think it was a great
detriment to the public interest that it happened. Nobody seemed
to say anything about it. They just let it go. But it happened right
here and we could all see it.
Now, then, in December 1965, all the billions of dollars of CD’s
were coming due and the banks could not get any agreement out of
the Federal Reserve to make them any loans or to do anything to
assist in “rolling over” their CD portfolio. So they were hurting
and they got on the Federal Reserve Board right quick. You know
about that. You know- that they were pressing to do something and
the Federal Reserve Board finally raised the rate, not only the dis­
count rate—that did not mean much here—but raised the CD rate
from 414 percent to 5^ percent. They defied the President of the
United States who did not want it done, defied the Secretary of the
Treasury who did not want it done.
In other words, the Federal Reserve, being the fourth branch of
Government, acting on its own because it does not come to Congress
to get its expenses, because it has a billion and a half dollars interest
a year on those bonds to spend any way they wanted to and because
they are not audited by the General Accounting Office. They just
did an arbitrary act which I think was a terrible disservice to our
country.
Do you not think it was a disservice at the lime, December 6, Mr.
Fowler?
Secretary F o w l e r . My views on that incident are so well spread
over the public prints and in the hearings of congressional commit­
tees, including the Joint Economic Committee, I think I would be
taking the time of this committee to voice them here. I will be glad
to say----The C h a ir m a n . All right.
Secretary F o w l e r . I will refer you to m y most recent comment
on this, when addressing the Reserve city bankers in Phoenix in
April, I restated my views on this particular question to that
audience. My views would be the same here today.
The C h a ir m a n . Are you saying, Mr. Fowler, that you are o p p o s e d
to the action? I know that you were at the time, until January, but
do you believe that the Federal Reserve should have a right ‘to go
contrary to the administration on matters of policy like that ? Do
you not think that the Federal Reserve should be brought back under
the jurisdiction of the U.S. Government?
Secretary F o w l e r . I think it is very important, Mr. Chairman,
that fiscal, monetary, and debt management policies be coordinated.



1 4 2 TJNSOTJND COMPETITION FOR SAVINGS AND TIME DEPOSITS

I think the question of the m ethod and form of th a t coordination is
a question which is one between the Congress and the Federal Re­
serve B oard.
T he C h a i r m a n . You mean the executive?
Secretary F o w l e r . The President and the Secretary of the Treas­
u ry are going to do everything they can to make and work fo r effec­
tive coordination in this area under whatever ground rules fo r that
coordination the Congress sees fit to establish. T he existing ones or
the changed ones. B u t I do not consider th a t I have the judgment
or the background, nor do I think it would be appropriate, fo r me to
advise the Congress as to the particular ground rules it in its judg­
m ent should fix under which this coordination will carry on. W e are
going to do our very best to coordinate under the ground rules, what­
ever they are. W e are going to try to get along and work together
w ith these independent bodies which draw both th eir supervisory and
th eir m onetary authority in the financial field directly from the Con­
gress of the U nited States. They do not take them through the
President. T h at applies to the Federal Reserve B oard, the federal
Deposit Insurance C orporation, the Federal Home Loan B ank Board,
and to the Com ptroller o f the Currency who, fo r adm inistrative pur­
poses, is in the Treasury D epartm ent.
The C h a i r m a n . X have this suggestion to make. You have a law
here th a t is 90 years old. You adm it yourself th a t there is a great
sim ilarity between this interest-bearing currency th a t they are issuing
rig h t now and the notes th a t were being issued. I t was supposed to
stop 90 years ago. I n addition you have the Em ploym ent A ct of
1946, ju st as clear, I think, as a law can be w ritten. A nd I think—
my personal opinion-—th a t the Chief Executive should consider ser­
iously setting iip a coordinating committee himself. I do not person­
ally believe it is effective to p u t a num ber o f people who are, we will
say, of the same ran k and the same category as yourself and the Fed­
eral Reserve B oard, Com ptroller of the Currency, F D IC —to have
one of you do it—w ith all due respect to you. I do tru st you and I
think you are honestly try in g to do a good job, but I do not think it is
the rig h t th in g to do, to have the C oordinating Committee set up
among you people who are not the top person, you are not the Chief
Executive. I th in k the Chief Executive should consider s e ttin g up
his own coordinating committee to where they would be responsible
to him to make reports to him occasionally. I think th a t would be an
effective coordinating committee.
Secretary F o w l e r . M r. Chairm an, as you know, there is and has
been such a body which is composed of four people: the Chairm an of
the Council of Economic Advisers, the Director of the Budget, the
Chairm an of the F ederal Reserve Board, and the Secretary? o f the
Treasury. In popular term s it is called the quadriad. T h at body
meets inform ally w ith the President quite frequently. W e have full
and open discussions of the problems th a t t i e President wants to
t
!
x

this group. There is this existing instrument.
Now, as you well know, there are, of course, limitations of time on
the range of problems that the Chief Executive and his financial ad­
viser, the Secretary of the Treasury, can be concerned with.



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 4 3

I do not think that the Congress can hold the Chief Executive re­
sponsible for policies and operations in a field where the Congress
has created an agency and declared it to be independent.
The C h a ir m a n . I will challenge that right now. You show me the
language in any law that Congress has ever passed that makes a dec­
laration that the Federal Reserve should have this. You show me in
the debates of Congress, House or Senate, where it was ever expressed
that it was the intent that the Federal Reserve should be independent.
Secretary F o w l e r . Mr. Chairman, I am using the word “independ­
ent” and I think you realize that I did not infer it meant independent
from the Congress, but independent in that I can find no authority
under which the line of command to these agencies goes through the
President of the United States or the Secretary of the Treasury.
The C h a ir m a n . I would not take the time of that now. I chal­
lenge that statement, my dear sir, and I challenge Mr. Martin to pre­
sent testimony just like you have. He has not presented it yet, nor
has anyone else.
I will yield to Mrs. Sullivan.
Mrs. S u l l i v a n . Thank you, Mr. Chairman. Mr. Secretary, ac­
cording to a report in the April 15 issue of the American Banker, Un­
der Secretary of the Treasury Deming in Houston, Tex., severely crit­
icized Chairman Patman’s bill to curb negotiable CD’s.
Did these remarks have the official blessing of the Treasury ?
Secretary F o w le r . I do not recall the remarks, Mrs. Sullivan,
and I do not recall the circumstances. I would have to refresh my
recollection on the text of the speech and confer with Secretary Dem­
ing who is out of the country at this time.
Mrs. S u l l i v a n . Will you furnish an answer for our record after
you have had a chance to talk with Mr. Deming ?
Secretary F o w le r . Yes.
(The article referred to and Secretary Fowler’s reply follow:)
[From the American Banker, Apr. 15, 1966]
D e m in g C oncerned O ver

CD

R a t e s , S ees P a t m a n R x T oo S trong

(Special to the American Banker)
H o u st o n .—Under

Secretary of the Treasury Frederick L. Deming this week
expressed concern over the ‘‘rapid buildup of rates on certificates of deposit.”
But, he said, he believes the proposal of Representative Wright Patman, Demo­
crat, of Texas—to outlaw the certificates—is too drastic.
“The real concern” Mr. Deming said in an interview, “is that banks have
continued to make these rates more attractive to the public. The question is
how long this money wiU stick with them.”
Withdrawal of an appreciable amount of deposits upon maturing of the certifi­
cates, after banks have made long-term loans, would pose liquidity prob­
lems for the banks, said Mr. Deming, former president of the Federal Reserve
Bank of Minneapolis.
He said the run-up in rates on the certificates “has been greater than any­
one could have anticipated,” but he sees no need for going to the lengths
of the proposal by Representative Patman, who is chairman, House Banking and
Currency Committee.
“I don’t think th at the excesses have been such that you’d want to eliminate
CD’s completely,” he said.
Mr. Deming said lie has no ideas as to the amount of corporate funds which
may have been shifted from Treasury issues into certificates of deposit It




144

UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

would be too difficult a task for the Treasury to try to ascertain the extent
of such shifts, he said.
The Treasury Under Secretary, who came to Houston to address a group
of bankers and businessmen at a dinner preceding Thursday’s annual meeting of
the boards of the Federal Reserve Bank of Dallas and the Houston branch, also
sa id :
He likes the general tenor of the proposed legislation, favored by Chair­
man J. L. Robertson of the Senate Banking and Currency Committee, to provide
better scrutiny of banks and savings and loan associations.
Prospects for price stability in the economy look better, but there is still
some strain on the Nation’s resources that is creating inflationary pressures.
Approximately $12 billion will be drained out of the economy in the Gov­
ernment’s fiscal 1967. starting July 1, as a result of monetary restrictions, fis­
cal measures, higher taxes, including those for medicare and President John­
son’s wage-price guideposts and call for voluntary restraints.
No one expects corporations to drop all their plans for the 16-percent to 19percent increase in capital expenditures forecast for this year, but “some of it.”
He declined to fix a percentage that he believes should be cut.
Higher taxes could be imposed if the Vietnam spending escalates, if Congress
appropriates funds beyond those stipulated in the budget, or if inflation ap­
pears to be getting out of hand.
“I don’t think,” Mr. Deming added, “that he (President Johnson) would touch
wage and price controls.”
Mr. Deming said that while prices on “sensitive materials” have risen, and
inflationary pressures continue, they “are nothing like during the Korean War.”
Prices on farm and food products appear to have been flattening out during the
past month, he said.

(The
ment :)

f o l lo w in g

statement

w a s s u p p lie d

by the Treasury

D e p a r t­

Under Secretary Deming spoke informally in Houston, Tex., at the April 13
meeting of the joint board of the Federal Reserve Bank of Dallas and its
branches. In his prepared remarks, no itext of which was made available, Mr.
Deming made no reference to Chairman Patman’s bill, H.R. 14026.
In a press conference held in conjunction with the speech, Mr. Deming was
asked by a reporter what the Treasury position was with respect to H.R. 14026.
Mr. Deming replied that the Treasury Department had not taken a position with
respect to the b ill; however. Mr. Deming commented that he would like to make
two points: First, that the Treasury Department was concerned with the certif­
icate of deposit question, and second, that it was his offhand impression that
Chairman Patman’s bill went further than was necessary under present circum ­
stances.
Mr. Deming’s statement at the press conference in Houston is essentially the
same position as that taken by Secretary Fowler in his testimony on May 191966, before the Committee on Banking and Currency when he sa id : “While I
do not favor H.R. 14026, I do not mean to say that we see no problems at all in
the CD area, or that we have no concern about the current role CD’s seem to be
playing in the interest rate structure.”

Mrs. S u l l i v a n . Also, on the same interview, Mr. Deming is q u o te d
as saying that it would be too difficult a task for the Treasury to as­
certain the extent of shifts of funds from Treasury bills to CD s.
Does this mean that the Treasury-Federal Reserve joint study of the
Government securities market is really not being taken seriously by
the Treasury?
Secretary F o w l e r . N o , I am sure it does not carry any s u c h
inference.
Mrs. S u l l i v a n . Thank you. I would appreciate it if you w o u ld
have a fuller answer to the first part of the question.
That is all, Mr. Chairman.
The C h a ir m a n . Mrs. Dwyer ?



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 4 5

Mrs. D w t e r . N o questions, Mr. Chairman.
The C h a ir m a n . Mr. Moorhead ?
Mr. M o o r h e a d . Thank you, Mr. Chairman.
Mr. Secretary, I wonder if you could help me distinguish between
negotiable CD’s and the nonnegotiable CD’s.
First, when we say nonnegotiable do we mean nontransferable or
do we mean they do not pass to a holder in due course like a negot iable
instrument ? Are they transferable ?
Secretary F o w l e r . Rather than discuss this in technical, legal
terms, Congressman Moorhead, I think, as a practical matter, you
might have a small CD that would be dressed up and appear for all
practical purposes to be negotiable, but would not in fact be nego­
tiable, that is, you would run into difficulties in moving it around.
The larger CD s are the ones that are really money market instru­
ments. So I think really the negotiability has some relationship to
size as well as to the express legal terms that may be there.
M r. M o o r h e a d . In the bill that you have submitted to us, do you con­
template the possibility of authorizing the Board and the FDIC to
permit different—make greater differentials between negotiable and
nonnegotiable CD’s?
Secretary F o w l e r . N o , sir; we were trying to keep this just as sim­
ple as possible because it is addressed to a temporary transitional prob­
lem. Rather than deal with all the varying shapes of this problem, we
have tried to keep it simple by providing authority to create a rate
differential on savings, between savings up to the $10,000 mark, or the
insured amount, ana everything above that. That is the one dis­
tinction.
I think it might be of interest to you, sir, to inquire of the regula­
tory or supervisory authorities—the Federal Reserve Board and the
FDIC—as to whether or not they already have the authority to make
the distinction between the negotiable and the nonnegotiable type of
CD. Where we have found in our discussions with them that they feel
they lack the authority to move sharply is in terms of the amount of
the instrument, and that is why this particular proposal goes specifi­
cally to differentials in terms of the amount of the deposit.
Mr. M o o r h e a d . Mr. Secretary, I notice we have before us a table
relating to the growth of negotiable certificates of deposit and up here
we have a chart showing the growth of negotiable time certificates. I
think it might be helpful----Secretary F o w l e r . These, I might say are not our products. They
have another author, therefore I am not in a position to explain them.
Mr. M o o r h e a d . Do you have tables that show the growth of non­
negotiable certificates of deposit ?
Secretary F o w l e r . We do not have it readily available. I do not
know whether it could be pulled together or not. With respect to the
charts and tables you mentioned, I am informed that they did come
from the Treasury Department, but they are not here as part of my
statement today.
Mr. M o o r h e a d . I think it would be helpful in our deliberations if
we could have tables, if they were readily available, to insert in the
record. I would ask you to insert them in the record, Mr. Chairman.



1 4 6 trNSOTJND COM PETITION FOR SAVINGS AND TIM E DEPOSITS

(The chart referred to follows; see also pp. 137-139.)

Secretary F o w le r . I will be glad to make available whatever we
have. I did not bring it along because rather than going over the
entire range of this problem, Congressman Moorhead, I was trying to
pick out one simple point.
(The following material was submitted for the record by the
Treasury Department:)
The request for information on the growth of nonnegotiable certificates of
deposit is not readily answered, since data bearing directly on this category
are not available. Data separating savings and time deposits at all commercial
banks are available from semiannual caU reports, the latest applying to June
1965, but the can report data do not show nonnegotiable certificates of d e p o s it
as a separate item. Only a sketchy approximation of nonnegotiable CD's is
presented in the following table, derived by subtracting savings deposits, and
large-size negotiable CD's at weekly reporting banks from total time and
savings deposits. The resultant numbers may represent the trend in non­
negotiable CD’s, but the levels are overstated, and the trend itself may be
somewhat distorted, since the figures obtained would include savings deposit
of other than individuals, partnerships, and corporations, they would in c lu d e
time deposits, open account, and they would include negotiable CD’s smaller
than $100,000 or at other than weekly reporting banks.
A second table, “Types of Time and Savings Deposits, IPC, Held by Member
Banks on Dec. 22,1965,” was taken from the Federal Reserve Bulletin of April
1966. Using information obtained from a special study undertaken in late 1965
and early 1966, it classified time deposits of individuals, partnerships, and
corporations by type of deposit




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 1 4 7
C o m m e r c ia l b a n k t im e a n d s a v i n g s d e p o s it s
[In millions of dollars]

Total time
and savings
deposits i

December 1961_____ _______________
December 1962...........................................
December 1963____ _________ _ ____
June 1964. .......... . ...................................
December 1964........................................
June 1965. ________ ______ __________

Savings
deposits of
individuals,
partnerships
and corpora­
tions 2

82,909
98,244
111, 590
120,264
127, 539
138,399

Negotiable
C D 's 3

63,858
70,967
76,303
79,327
82,922
87,317

Remainder
including
non*negotiable
C D ’s*

2, 782
5,442
9,579
11,687
12,585
15,276

16,269
21,835
25, 708
29,250
32,032
35,806

1 Includes time deposits of States and political subdivisions, domestic banks, foreign banks and official
institutions, U.S. Government and postal savings.
2 This breakdown is available for all commercial banks from call report data beginning with June 1963.
The call report for December 1965 is not yet available.
3 The negotiable C D data were obtained from reports of the weekly reporting member banks and are for
denominations of $100,000 or more. This category includes negotiable C D ’s held by individuals, partner­
ships and corporations, as well as others.
♦Derived b y subtracting 2d and 3d column from 1st column.
Source: Federal Reserve and Treasury estimate.

T y p e s o f t im e a n d s a v i n g s d e p o s it s f I P O , helH b y m e m b e r b a n k s , o n D e c . 2 2 , 1 9 6 5 1

Number of banks
Type of deposit

Savings deposits..................................................
Savings certificates........... ..............................
Savings bonds.......................................................
Other nonnegotiable CD’s ...............................
Negotiable CD 's...................................... ..........
Time deposits, open account...............................

Reporting
specific
types
5,893
2,773
130
2,157
1,777
1,763

Total...... ....................................................

Amounts held

Percentage
of all
member
95
45
2
35
29
28

In billions
of
dollars
74.4
6.6
0.4
5.1
15.9
4.4
106.8

Percentage
distribution

70
6
<
*)

5
15
4
100

1 Tim e deposits of individuals, partnerships, and corporations.
2 Less than one-half of 1 percent.
Source: Federal Reserve Bulletin, April 1966.

M r. M o o r h e a d . I r e a liz e t h a t t h e b ig n e g o tia b le CD? a ls o h a v e a
s
r e la te d e ffe c t o n th e s m a lle r o n e s a n d I m i n k m a y b e so m e o f t h e ta b le s
m ig h t b r in g t h a t o u t i f i t is tr u e .

Mr. Secretary, I note on page 12 of your testimony, and then I note
also in glancing at the bill that you very kindly provided, authority is
given to the Federal Reserve Board and to the FDIC to control rates
in these different ranges. My concern, sir, is, should not this authority
be centralized in one agency—one or the other so that it would be
uniform? Is it not important to have the rates for the member banks
the same as the rates for the nonmember banks and do we not run a
danger by dividing authority? In the banking agencies everything
has not been uniform in the past.
Secretary F o w l e r . Y o u do. Congressman, run such a danger and
you will continue to run such a danger as long as the structure of
delegation of authority to these supervisory institutions is as the




148

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

colloquy between the Chairman and I indicated. We might have a
difference in emphasis here, but I think the present arrangements do
place a very high premium on voluntary coordination between the
various bank regulating bodies and in this particular case you would
be depending upon the FDIC and the Federal Reserve Board to arrive
at some meeting of minds as to the appropriate level. It was cer­
tainly implicit in my submitting this proposal as to the appropriate
level that, in the course of these hearings, either formally or informally,
this would not be left entirely to chance.
Mr. M o o r h e a d . Mr. Secretary, if Congress decided that this issue
that is presented by the bill that you have presented to us is essentially
more of a monetary problem than it is the safety and soundness of the
banking system, would it not be possible for us, if we so chose, to put
all of the authority into the hands of the Fed ?
Secretary F o w l e r . Well, I think you would perhaps lodge the au­
thority—this is something of a technical question—you could probably
lodge the authority in the FDIC, but make clear, either in the com­
mittee report or in the language in the bill itself, that in exercising this
particular authority to the nonmember banks, the FDIC would follow
the pattern set by the Federal Reserve Board in dealing with member
banks.
M r. M o o r h e a d . Y o u s a id p u t i t in th e FDIC—I t h o u g h t a b o u t i t the
o th e r W ay a r o u n d .
Secretary F o w l e r .

By directing the FDIC, in exercising its au­
thority in this particular area, to achieve conformity with whatever
was set by the Federal Reserve Board.
M r. M o o r h e a d . Thank y o u .
The C h a ir m a n . Mr. St Germain?
Mr. S t G e r m a ik . Mr. Secretary, in your testimony you make recoinmendations of 5 percent on time deposits up to $5,000. Would that,
in essence, be a help to the savings and loan institutions and savings
banks m view of the fact that their funds are repayments on mort­
gages they are now holding—many of them are 4y2~or 5-percent mortgages. How could they afford to pay 5 percent on these time d e p o s its ?
secretary F o w l e r . N o w , as for tne savings and loans and mutual
savings banks, of course, what they choose to pay is up to them now.
I he purpose and effect of this bill, if enacted, sir, would be to p r e v e n t
the commercial banks from offering beyond 5 percent to the small
saver, the fellows whose deposits have gone up to as high as the $10,000
insured limit. It is my information—but this is something that the
committee could inquire into—that this is about the top of the range
that the savings and loan institutions could afford to pay.
t

M r. S t G e r m a i n . D o y o u f e e l t h e y c a n p a y th e m ?
I t w o u ld h e lp so m e m o r e th a n i t w o u ld o th ers.

think it would help most clearly those that are in an area where there
are commercial banks already offering CD’s to the small saver at 5
percent or more. It would equalize rate competition more or less at
InrM
J ; rn ar?as " here that was n°t the case, and savings
T
and loans and mutual savings banks were still receiving deposits an d
^ growth at lesser rates, it certainly would not help
institutions m that particular situation.
Mr. St G e r m a in . Nothing further.



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 1 4 9

Mr. O t t i n g e r . Would the gentleman yield for one question?
The sayings and loan associations testified that they could not afford
to pay higher rates, such as 5, 5% percent, because of this mortgage
situation. I just wondered whether it would be a practicable solution
to permit them to do so and whether they cannot, m fact, afford to do
so. This is a means by which they themselves get their funds, through
these mortgages.
Secretary F o w l e r . I think they would have to speak for themselves
on this. I have some impression that, while in this world one never
gets all that one would really like to have in the way of a sure situation,
there is some feeling on the part of these organizations that this would
be helpful. It would retard or arrest the outflow—they said they need
something to arrest the hemorrhage.
Mr. O t t i n g e r . In your response to Mr. St Germain’s question there
is some confusion. Did you intend that the savings and loan associa­
tions be allowed to charge a higher rate or did you intend that we
should curb the rate of interest which the commercial banks could
charge on CD’s?
Secretary F o w l e r . We are dealing with what the commercial banks
can do on CD’s. What the savings and loan institutions should be
permitted to do is a matter for the Federal Home Loan Bank Board
and I think that you would want to hear from Chairman Horne on
that.
Mr. O t t t n u e r . The purport of your suggestion on page 10 is that
the Federal Reserve should set a lower rate of interest on small de­
nomination CD’s. In other words, go back to regulation Q. Is it
not that the savings accounts should be allowed to go up ?
Secretary F o w l e r . Not at all.
The C h a ir m a n . Have the gentlemen finished ?
Mr. St G e r m a in . Yes.
The C h a ir m a n . Mr. Halpern?
Mr. H a l p e r n . Mr. Chairman, I would like to commend the Sec­
retary for his analytical and perceptive and most informative presen­
tation here this morning. I, for one, would have to evaluate the
views he offered before I make my mind up on this legislation.
I am pleased to note that the Secretary thinks that the bill to ban
CD’s outright is drastic action. I feel such action could well be an
invitation, Mr. Chairman, to financial crisis.
While I have the opportunity, Mr. Chairman, I would like to com­
mend the distinguished Secretary on the superb job he is doing. Mr.
Secretary, in little more than a year that you have been at the helm of
the Treasury Department, in my opinion and in the opinion of others,
you are proving yourself to be one of the Nation’s great Secretaries
of the Treasury and I wish to compliment you.
S e c r e ta r y F o w ler . T h a n k y o u v e r y m u c h , s ir .

Mr. H a l p e r n . That is all, sir.
The C h a ir m a n . Let me get this straight about your bill, Mr. Sec­
retary. If I read this correctly, it will permit, not require the Fed­
eral Reserve to arrange these rates in a way so that up to the $10,000
insurance limit, no more than, 5 percent interest can be paid on time
deposits, including negotiable CD’s, and that this is the same for sav­
6&-49G—66------ 11



1 5 0 UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

ings and loans. But above that they can continue to pay up to 5%
percent; is that correct ?
Secretary F o w le r . That is correct.
The C h a ir m a n . I s that not a definite discrimination against the
poor man?
In other words, two people come to your window if you are a banker.
One of them has $100,000 and they say we will give you 5y2 percent
and the man who has only $10,000, they say we will give you only 5
percent.
Secretary F o w le r . Some may view it as such, but as m y statement
indicates, while it is very difficult to draw the line in any given amount
and give a compelling rational justification for it, the one that we have
fixed upon is that the depositor who comes to the bank and makes his
deposit under the terms and conditions where there is absolutely no
risk is not in the same position as the depositor who comes and puts
his money with the bank and takes a risk.
The C h a ir m a n . Do y o u consider there is a risk above $ 1 0 ,0 0 0 ?
Secretary F o w le r . There is always a risk, Mr. Chairman. I am
happy to say that I do not think that in view of the character and na­
ture of our financial structure and the supervisory authority that is
exercised with relation to it that it is a very major risk. I think it is
a very, very minor risk, indeed. But for the logic of a differentiation,
I think this is just as good a logic as any.
The C h a ir m a n . If you are trying to make an excuse, it is fine.
Mr. Gonzalez?
Mr. G o n z a l e z . Mr. Secretary, referring back to the page 10 that
Mr. St Germain referred to in your first recommendation, I m ight
preface my remarks by saying that last week I said, and I repeat here
todav, that it looks very much to me that we are federalizing the loan
sharks, that up to now they have been pretty much com partm entalized
on the State level. We lost the fight on the State level and it looks to
me we are losing it at the national level.
You speak here of a 5-percent maximum rate on time deposits lip to
$10,000. Now, just exactly how would this proposal help solve the
liquidity problem of the few large banks that have the most outstand­
ing CD’s?
Secretary F o w l e r . It is not addressed to that. It is not addressed
to that in any particular. I am here concerned with what I think is
the most immediate problem before this committee, the one that re­
quires the promptest attention, and that is something that will retard
or arrest the outflow of funds from the savings and loan organizations
and the mutual savings banks to those who offer 5 percent or beyond
in rates of interest for so-called time and savings deposits.
If I can be perfectly clear on one thing, I did not come down here
today to deal with the whole range of banking problems and all of the
aspects of the CD’s. I am trying to pinpoint in my testimony this one
problem and suggest that this is one which the committee ought to give
first priority to, if I may respectfully do so.
M r. G o n z a le z . But you place this as your first recom m en d ation .
This is the first one that you mention, is it not, on page 10?




UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

151

Secretary F owler. T h is is the only one. I indicated th at in the
last paragraph in the statem en t:
Finally, I would like to emphasize just as strongly as I can that these pro­
posals are not a cure-all or a permanent attempt to deal with the problem of
competition in the financial area.
There are m any other aspects to th is problem th at the comm ittee
w ill be concerned w ith.
Mr. G onzalez. T h at is true. Som ebody has subm itted the prop­
osition th at 95 percent o f the negotiable C D ’s are in denom inations
o f $100,000 or better. So then how is th is in any w ay in your specific
rem edy to address you rself to the problem as you say ?
Secretary F owler. I w ould like to, i f I m ay, refer you to one aspect
o f the statem ent.
Mr. O ttinger. W ill the gentlem an yield ?
Secretary F owler. Bear w ith me just one m om ent here.
Mr. O ttinger. W ill the gentleman y ield for just a comment on that ?
Mr. G onzalez. L et us not perm it him to stray from this question.
Secretary F owler. On page 8, sir, the only comment that I offered
was t h is :
I cannot conclude that a flat ban on negotiable certificates of deposit would
be desirable. If. in the judgment of the Committee, some action is deemed
desirable, a better approach might lie in the direction of providing the appro­
priate monetary authorities with greater discretion to set levels of reserve
requirements on large negotiable certificates of deposit that might exceed those
on other time and savings deposits. Of course, you will want to consider
carefully the views of those much closer to the problem of day-to-day bank
supervision.
N ow , I th in k th at is the on ly part o f th e statem ent that is really
responsive, sir, to you r question about how to deal w ith other phases
o f the problem . T he single one we are p in p oin tin g here is the socalled sm all savin gs flow. I w anted only to voice a preference to
indicate th at I thou ght a flat ban w ould be undesirable and drastic,
and that m y preference w ould be to m ove in g iv in g the m onetary
authorities a rig h t to vary the reserve requirements in relation to the
different character and amount and m aturity o f some o f these in stru ­
m ents.
Mr. G onzalez. I realize th at you are not m aking a sort o f shotgun
approach to this. I do not think it lends itse lf to it anyw ay. B u t
I hate to see ourselves get into th is sort o f th in g on interest. There
is no question— it is obvious that there is an aspect o f savings and
loans versus banks and banks versus savings and loans and so forth.
In the m eanw hile I am afraid that the overall public interest is being
overlooked. T h is is w hat I am concerned w ith and your suggestion,
as the C hairm an so ap tly pointed out, penalizes the sm all saver.
M y tim e is up.
T he C hairman . Off th e record.
(D iscussion off th e record.)
T he C hairman . M r.M inish ?
Secretary F owler. W ith your perm ission, I w ould supplem ent m y
com m ents to Congressm an Gonzalez by d irectin g h is attention to p ages
13 through 18 o f th e report o f th e Com m ittee on F in an cial In stitu tio n s




152

UNSOUND COMPETITION FOR SAYINGS AND TIM E DEPOSITS

to th e P resid en t w hich w as released in A p r il 1963. I t deals w ith the
question o f reserves on tim e accounts and the conclusion o f th e Com­
m ittee. I w ill q u o te:
No. 3. The Committee with one member dissenting favors the continuation
of reserve requirements on time and savings deposits at commercial banks
and the introduction of a similar reserve requirement for shares of savings
and loan associations and deposits of mutual savings banks. In addition
Federal agencies that supervise financial institutions should be endowed with
sufficient authority to assure that the institutions maintain adequate liquidity
over and above cash reserve requirements.
I th in k that general conclusion and the reasoning th at led up to it
are pertinent to your particular question and th a t w as th e background
fo r the comment th at I m ade th at I th ink th e dangers that m ay exist
in term s o f large C D ’s go m ost im portantly to the question o f preserva­
tion o f liq uid ity and therefore, the authority o f the regulatory bodies
to fix differing reserve requirements w h ich have some relationship
to the liquidity. Preservation o f liq u id ity is th e heart o f th e problem.
Mr. G o n z a l e z . T he F ederal R eserve System in its 1952 report, in
one o f its recom m endations asks fo r an extension o f its authority over
all insured banks to control reserves. S o I im agine th is w ould be in
line w ith the recom m endations th a t you referred to here in th e com­
m ittee’s reports, or is there any sim ilarity between the tw o ?
Secretary F o w l e r . I have n ot com pared th e tw o to determine
whether th ey are the same or w hether there are differences, sir.
Mr. G o n z a l e z . T he F ederal R eserve System said th ey had a pretty
high rate o f w ithdraw als from th e System . T h is has created a bad
situation and they are asking fo r ad ditional authority to cover their
reserve regulatory authorities over all banks.
Secretary F o w l e r . O ver nonm em ber banks. T h is is a s e p a r a t e
question from th e one th at th is report is addressed to, a l t h o u g h I
think the m atter is covered in another p art o f th e report.
Mr. G o n z a l e z . T h ank you v ery much.
T he C h a i r m a n . M r.M in ish .
Mr. Mj n is h . M r. Secretary, is it la w fu l under our ta x la w s fo r com­
mercial banks to take m oney received from C D ’s and in vest in tax-free
m unicipal bonds, ta k in g as an incom e ta x deduction th e interest paid
on C D ’s to large corporations ? I s th is leg a l or is it rig h t ?
T he C h a i r m a n . L et m e see i f I understand that.
Secretary F o w l e r . I w ould lik e to hear th a t question again, too.
T he C h a i r m a n . Y o u are ask ing w hether a bank can p a y say 5 per­
cent on C D ’s, th e in terest b ein g ta x deductible, and then take that
money, w hich really costs them only about 2% percent considering
their ta x bracket, and invest it in m un icipal bonds at say 4 percent. Of
course the 4-percent returns from th a t w ould be ta x exem pt and your
question is, w hether or not th a t is legal, to g et th a t w in d fa ll ? I guess
it w ould be considered a w in d fa ll.
Secretary F o w l e r . I w ould lik e to th in k about yo u r question a n d
ou a considered answer.
e fo llo w in g statem ent w as subm itted b y the T reasury D e p a r t m ent:)
B xm N S E s B xL & sm o t o Taz -D s m n In c o m e
A question has been raised as to whether commercial banks may use the
proceeds of certificates of deposit to invent in municipal bonds, the interest on



UNSOUND COMPETITION FOR SAYINGS AND TIM E DEPOSITS

153

which is exempt from Federal income taxation, and deduct the interest paid on
such certificates of deposit.
The Internal Revenue Code provides in section 265(2) that interest on in­
debtedness incurred or continued to purchase or carry obligations, the interest
on which is exempt from tax, is not deductible. This provision was enacted to
prevent the double benefit that would otherwise ensue from such borrowing and
investment in municipal bonds. Were section 265 not the law, the exempt income
would not be taxable, and in addition, the interest on obligations incurred or
continued to receive tax-exempt interest would be deductible.
In the light of its legislative history, the provision has been interpreted to
permit commercial banks to deduct the interest on time deposits. Certificates
of deposit of commercial banks, because of their similarity to time deposits,
have been treated in the same manner. Of course, interest on nondeposit obliga­
tions of banks, such as notes and debentures, incurred or continued to carry or
purchase tax-exempt obligations is not treated in the same manner as interest
on deposits.
Mr. M in is h . Mr. S ecretaiy, ju st recently the G overnm ent speeded
up the w ithdraw al rate o f w ith h oldin g ta x paym ent. W hat have you
been doin g to g et some o f th is m oney from the ta x loan accounts where
I recall 4 or 5 years ago they had $5 billion?
Secretary F o w ler . Secretary D illo n m ade a com plete study — I
cannot remember the exact tim e—I believe I w as out o f the Govern­
m ent at th e tim e, but I have a recollection th at a study w as prepared
listin g the relationship between the various services provided by the
banks and the benefits received by the so-called tax and loan accounts
arrangem ents. I w ill be glad to supply you w ith a copy o f th at report
which w as m y predecessors explanation and com ment on the subject. I
have not-----Mr. Min is h . I was going to ask you about that later on because at a

hearing here some years ago he said that the Department was making
the study but we never received it.
Secretary F owler. Such a study has been prepared and has been
available fo r a year or tw o.

Mr. Mjn is h . Recently did you call in some funds from that ?
Secretary F owler. W e are constantly draw ing them down. T h at is
the w ay all the bills g et paid.

Mr. M in is h . Are you going to continue to ?
Secretary F owler. W ell, the balances go up and down.

A s taxes
are paid the ta x and loan account goes up at a particular bank, and
as w e pay b ills to various contractors, or salaries o f Governm ent em ­
ployees, tiie balances g o down. T h ey g o t dow n as low , I think as $1.5
billion on A p r il 20.
Mr. M in is h . A re you going to keep it down?
Secretary F owler. T h e m oney ju st keeps com ing in. Y ou cannot
keep it at a g iv en level. T he ebb and flow o f these accounts is an
inescapable consequence o f th e ebb and flow o f G overnm ent ou tp ay­
ment and G overnm ent inpaym ent. F o r exam ple, at th e four periods
o f the year w hen corporations m ake th eir ta x paym ents w e have
considerable am ounts o f cash. A t th e tim e w hen the quarterly p ay­
m ents are m ade on th e in dividu al incom e ta x w e also have a considera­
ble am ount.

Mr. M in is h . You cannot keep it at a minimum.
Secretary F o w l e r . T here is a constant effort on our p art to do so
and one in w h ich a sister com m ittee to th is one, th e H ou se W a y s and
M eans Canoonittee g iv es us a good g o in g over— and w ill n e x t M onday
m considering th e debt-lim it legislation.



154

UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

Mr. M in is h . O n p age 9 o f your sta tem en t:
While none of us is in a position to evaluate just how serious this threat may
be as a long-term matter affecting these institutions, there is a genuine current
concern in the Congress, in the Federal Home Loan Bank Board, and in the pri­
vate economy, that a continued savings outflow could place undue stress on some
of these financial institutions, and undue constraints on the flow of money into
the mortgage market and homebuilding*
I have a letter here th at shows how serious the problem is. This
is a savings and loan in stitution in N ew ark, N .J ., and I received this
yesterday.
Permit me to present the facts from the records of our own association. Dur­
ing April 1966 the total sum of $2,794,963 of savings was withdrawn* Of this
total we, by inspecting the endorsements of the returned withdrawal checks, have
traced the use of course of $1,118,760. Of this traceable amount of $1,118,760,
we find that $509,372 or 45.53 percent was delivered to one, and only one, of the
commercial banks of Newark, which since last fall and persistently to the present
time has advertised to the public issuance of certificates of deposit at a 5-percent
yield.
Secretary F o w le r . I th in k th a t is an exam ple o f w hat I fear is going
on in m any other areas.
Mr. M in ish . T hat is all, Mr. Chairm an.
The C h airm an . Mr* H arvey.
Mr. H arvey. T hank you, Mr. Chairm an.
Mr. Secretary, I g et the im pression th a t back in M ichigan at the
grassroots o f m y district th is is quite a critical situ a tio n ; that actu­
ally, it could very sharply curtail home b u ild in g and apartm ent build­
in g in the m onths ahead. I have the im pression, also, th a t some o f the
savings and loans and other institutions such as that are acting in sort
o f a psychology o f fear. In other words, even though th ey have money
to lend, they do not know w hat is g o in g to happen at the end o f the
next quarter because o f a sh ift in funds, and so forth, so they are not
real anxious to loan those fun d s out. U p u n til now in our hearings, I
w ill be honest w ith you, I have fe lt as you did, th at the chairm an’s bill
would bring about financial chaos as I suggested one day. I have
leaned tow ard H .R . 14422. I noticed in your testim ony th is morning
that you oppose that particular b ill, but y e t I note th a t m your b ill the
approach is pretty much the same, is it not ?
Secretary F o w le r . A s a m atter o f fact, I th ink I said I have con­
siderable sym pathy w ith the apparent objectives o f H .R . 14422, and
I think the tw o b ills are try in g to achieve som ew hat the same objective.
B u t it did seem to me that the approach o f th a t b ill w ould be unneces­
sarily rig id and that it involves unnecessary discrim inatory action
against sm aller savers at com m ercial banks under the present interest
rate spread.
Now , you w ill find a continuing em phasis in m y com ments on the
tem porary transition period. I w ould hope som eday th at w e w ould
back to a situation in w hich th e spread between w hat th e passbook
saver gets fo r h is or her money and w hat others g et fo r larger amounts,
w ould be not nearly as great as it is today. B u t under th e current cir­
cumstances it w ould seem to me th a t to push a ll th e savin gs back to the
4-percent level for the so-called sm all saver w ould be too drastic.
(M r. A sh ley now presiding.)
Mr. H arvey. I would certamly want to think your bill over and

Know more about it, and how it is going to affect the various institutions



UNSOUND COMPETITION FOR SAVINGS A N D TIM E DEPOSITS

155

and so forth . I personally fe e l th at it is th e a p p ro a ch to take w ith the
lim ited know ledge th a t I have at th is tim e. W h ile w e have you here,
Mr. Secretary, I did w an t to ask you a q u e stio n o r so in the tim e I have
about the b alance-of-paym ents problem .
Secretary F o w l e r . A re you g o in g to g e t in t o th a t ?
Mr. H arvey. J u st tou ch on it.
Secretary F owler. L et m e g e t m y-----Mr. H arvey. Y ou do n ot h a v e to get th e b r ie fc a s e out or anything.
Secretary F owler. I alw ays like to g et th e briefcase out on this.
Mr. H arvey. I have read in th e paper r e c e n tly since we can expect
that our balance-of-paym ents deficit w ill b e som ew h at in the n eigh ­
borhood o f $2 and $3 b illio n th is year. T h is is f a r in excess, o f course,
o f what w e had expected earlier. T hen I r e c a ll reading o f the speech
you m ade in P h oen ix n ot so lo n g a g o a b o u t so m e o f these voluntary
restraints on oversea investm ents in bank le n d in g and you are sug­
gesting th at they w ould be continued fo r t h e duration o f the V ie t­
nam war.
N ow , I th ink in a ll fa irn ess th a t we in C o n g r e ss here have been led
to believe th a t these v o lu n ta ry restraints w e r e g o in g to be tem porary.
Secretary F owler. T h ey are tem porary, M r . H arvey. Ju st as the
war in V ietnam is tem porary.
Mr. H arvey. B y tem porary you m ean t h e y are as tem porary as
the w ar in V ietnam ?
Secretary F owler. M y ju d gm en t at t h is tim e is that it w ould be
foolhardy to abandon these v o lu n tary p r o g r a m s w hile we are at war
in V ietnam . A n d in m a k in g th e sta tem en t I d id in P hoenix and I
noticed som e considerable com m ent from o th e r s about that— I w ould
like to be very clear th a t w e do n ot view th e s e volu n tary program s as
a part o f any perm anent, lo n g -la stin g s o lu tio n o f th is particular
problem. I do not see th em as part o f it .
Mr. H arvey. T h ey are sem iperm anent?
Secretary F owler. N o, no, le t us be clea r a b o u t this. I f you would
read, and I w ould be g la d to provide y o u w it h a copy o f m y state­
ment yesterday on th e first quarter b a la n c e o f paym ents in detail,
I think there is a general u n d erstan din g in m a n y circles, and in finan­
cial circles throughout th e w orld, th a t a v e r y special strain, and
special difficulties, are created fo r a c o u n tr y in m aintaining equi­
librium , or attain in g equilibrium , in th e b a la n c e o f paym ents w hile
it is carryin g on m ilita ry a ctiv ities on th e s c a le w e are.
Mr. H arvey. T h at is m y n e x t question. I k n ow that the reasons
you have g iv en are th e fig h tin g in V ie tn a m , b u t really, is n ot th is a
classic case o f inflation w here the im p o r ts g o up and th e exports
go down?
Secretary F owler. T here are tw o fa c to r s t h a t m y statem ent d ev el­
oped yesterday. T here is th e direct co st t o o u r balance o f paym ents
from expenditures in sou th east A sia. A n d I d o not g iv e any m axi­
mum figure to th at, b ut I s a y w e can v e r y d e fin ite ly account fo r som e­
th in g in th e neighborhood o f $700 to $750 m illio n o f direct outlays.
Our balance o f paym ents w o u ld be r u n n in g a t an annual rate th a t
much less i f th at a c tiv ity w ere n ot g o in g o n .
T hen th ere is the in d irect cost. N o w t h e in d ir e c t cost is reflected
in several w ays. Y o u h a v e t o ask y o u r s e lf j u s t to m ake i t sim p le,



156

UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

w hat w ould the gross n ational product have been in th e first quarter
under a situation in w hich there were no V ietnam %
Mr. H arvey. L et m e just ask you— I have only a couple o f minutes.
I w anted to touch on a couple o f things. I f our deficit exceeds th e $2
b illion figure, w hat effect do you think th is w ill have, i f any, on the
negotiations to create an international un it o f m onetary exchange?
Secretary F owler. I t should n ot have any at all. I did n ot say
it w ould not—I said it should not have any at all. A n d I w ould hope
th at those w ith whom we are n egotiatin g w ill understand.
I t should not have any effect at all because th is is a contingency
plannin g exercise to create a m echanical arrangem ent and an agree­
m ent and understanding by w hich, when additional liq u id ity needs
to be provided from sources other than the deficits in our balance o f
paym ents it can be done quickly and in an orderly w ay.
These arrangements take years to create, as the present discussions
and negotiations indicate. T herefore in m y judgm ent it w ould be
very unwise to set aside or put these negotiation s on th e back burner,
because the war in V ietnam w hich is the root now o f our problem in
gettin g to equilibrium could end w ith out relation to any particular
timetable. T his is not a prediction, th is is sim p ly th e recognition of
the fact th a t it could happen.
Mr. H arvey. W as not trie international n egotiations tow ard this
new u n it th e reason, chiefly fo r requests fo r voluntary restraints?
Secretary F owler. N o indeed. Y our tim e sequence is aw ay off*
T he reason fo r the v o l u n t a i y restraint program w as because o f a very
sharp upsweep in outflows in 1964— foreign bank credit w ent u p $2.5
billion m 1964. T he rate o f direct investm ent outflow w ent up very
sharply and we had over a $1 b illio n deficit in the fou rth quarter o f
1964. I t w as only in J u ly o f 1965, in som e remarks th a t I m ade at a,
m eeting, that the U n ited States invited, and you m igh t say initiated,
the course o f m oving out o f discussion in to concrete negotiations on
international m onetary affairs. A contributing factor tow ard m aking
th at request, or that suggestion, one th at w ould be entertained was
the clear dem onstration through th e voluntary program s th a t w e did
have control o f our balance-of-paym ents situation.
Mr. H arvey. I n your judgm ent, Mr. Secretary, do you consider the
restraint on business investm ent abroad to have been any success?
Secretary F owler. I th in k w e have received excellent cooperation
from the banks and nonbank financial institutions. I th in k w e have
received excellent cooperation from com panies operating a b r o a d and
I do consider the volun tary program s to have been successful and to
h ave substantially m oderated outflow s w hich w ould have otherwise
made our deficits du ring th e period since la st F ebruary quite a differ­
ent order o f m agnitude.
Mr. H arvey. One other question and I w ill finish. H a s you r D e­
partm ent m ade any decision w ith respect to tourism ?
Secretary F owler. T h a t was discussed to som e extent yesterday at
th e press conference. I th in k I am repeating m y self fa ir ly accurately
w here w e said w e are Staying w ith th e current program . *W e h ave to
in ten sify an d im prove th e effort to encourage foreign ers to tou r the
U n ited St&t$s anu th e .effort to ha.ve U .S . citizens sta y a t hom e and
sfcfc th eir edtinfcry; Wear© fo tg o in g any im p osition of a h e a d ta x , or



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

157

any other restrictive p olicy by Governm ent act on the righ t o f a
citizen g o in g where he or she pleases.
Mr. H a r v e y . T han k you very m uch, M r. Secretary. Y ou can be
certain th at we w ill g ive very careful consideration to the b ill w hich
you suggested here w hich w ould appear to be a very th o u g h tfu l ap­
proach to th e problem .
Secretary F owler. T hank you, sir,
Mr. A s h l e y . Mr. W eltner?
Mr. W eltner. T hank you, Mr. Chairman. Mr. Secretary, I read
your statem ent quite carefully and I think y ou very ap tly put it on
page 10 w here you characterize the bills pending before m is com ­
m ittee as “perm anent arrangem ents th at w ould com partm entalize our
financial m arkets.5 T h ey w ould be just that. I think i f w e pass
5
these b ills it m ig h t forestall some natural change in the market where
funds could come from the bank and g o back into savings and loan
associations. T h en w e m ight have to come back and undo it. I think
it is w ise th a t th e Congress not place rig id restraints upon tem porary
conditions.
N ow , it appears to me, though, th a t your recommendation o f a
m axim um rate on th e m axim um insured am ount o f deposit, w ith the
existing regulation rates on the excess, is not really a goal that has to
be accom plished by legislation. W h y can’t the F ederal Reserve sim ply
amend its present regulations to provide that? I f th at were done, if
the circum stances changed, then w e do not have to come back and
approve, in both H ouses o f Congress, rem edial legislation.
Secretary F owler. I w ould prefer the answer to th at question to
come from th e F ederal Reserve B oard spokesman. M y inform ation
and im pression— arrived at b y serious m eeting and discussions in
Decem ber and Jan u ary and February— is th a t the B oard’s legal ad­
visers consider it w ithou t authority, as they understand the current
law , to fix rate differences based on the am ount o f deposit.
Mr. W eltner. I f th at is the case, Mr. Secretary, then it w ould cer­
tain ly answ er m y question. H ow ever, it seems sort o f strange to me
that w e have an agency o f Governm ent em powered to make decisions
but----- Secretary F owler. W ith ou t assum ing th e role o f a law yer— I could
at least read the provision o f the statute to you—th is is 12 U .S .C . 371:
(b) Bate of interest to time deposits
The Board of Governors of the Federal Reserve System from time to time shall
limit by regulation the rate of interest which may be paid by member banks to
time and savings deposits and shaU prescribe different rates for such payments to
time and savings deposits, having different maturity, or subject to different con­
ditions respecting withdrawal or repayment or subject to different conditions
by reason of different locations, or according to the varying discount rates of
member banks in the several Federal Reserve districts.
There is n o reference to amount.
N ow , our proposal here w ould insert at th a t p oin t in th e law th is
language :
In addition to the above, the said Boiard may prescribe the limit on the rate
# interest which may be paid on that part of any time or savings deposit that
not exceed the maximum amount that may be insured by the Federal DePfmt Insurance Corporation, lower than the limit prescribed for that part of such
wposifc that exceed* such amount '



158 U SO N COMPETITION
N UD

TOR SAVINGS AND TIM E DEPOSITS

Mr. W e l t n e r . I s n ot the character, being fu lly insured u p to $10,000,
a different condition o f repaym ent ?
Secretary F owler. T h is is som ething you have to pursue w ith the
F ederal R eserve B oard.
Mr. W eltner. Mr. Secretary, i f w e passed a b ill such as th is, is there
any assurance that the F ederal Reserve B oard w ould prom ulgate a
n ew order under regulation Q th a t w ould m ake that differential in
the interest rate based upon the m axim um insured am ount ?
Secretary F owler. T he clear inference o f m y statem ent is, in the
processes o f legislation, either through open testim ony or oth er com­
m unications, that th e Congress w ould assure itse lf o f th at fact.
Mr. W eltner. T hank you, Mr. Secretary. I have sat on th is com­
m ittee for alm ost 4 years now , and I have often heard our d istin ­
guished chairman direct him self to the question o f th e response and
the receptivity o f the Federal Reserve B oard to the desires and wishes
o f Congress. Based upon that “con dition in g” I am n ot exactly sure,
were we to adopt such a bill and have a fu ll acceptance o f yo u r pro­
posal, that that would indeed be im plem ented by th e F ed eral Reserve.
Secretary F owler. Lacking such assurance you m ig h t w ant to make
it mandatory for the first year.
Mr. W eltner. A nd make a “perm anent arrangem ent” in our finan­
cial m arket; would we n ot ?
Secretary F o w l e r . Y ou would be so involved.
Mr. W eltner. T hank you, Mr. Secretary.
Mr. A shley . Mr. T odd ?
Mr. T odd. I wonder i f he should suggest that members o f th e com­
m ittee sit on the Board as far as th is regulation is concerned.
Mr. W eltner. W e have one member o f th e com m ittee w ho h a s tried
to sit on that Board.
Mr. A shley . In his absence we need not continue th is any further.
Mr. T odd. Mr. Secretary, I appreciate your com ing before u s this
I have a number o f questions th a t I w ould lik e to ask.
D id the C oordinating Com m ittee on B an k Supervision review your
proposal and proposed b ill th at you have ?
Secretary F owler. N ot as such. I have a m eeting scheduled for
th is afternoon in w hich I expect to do that, but the chairm an indicated
that the committee w ould not be m eeting tom orrow and since I am
dedicated to the debt lim itation hearings before the W a y s and Means
Committee on M onday. I had to come in today w ithout the benefit of
consultation w ith the C oordinating Com m ittee as such. I have dis­
c u s ^ th is w ith some o f the individual members, however.
* r*J 0?0, ^ wonc^ ^ there has been any discussion o f th e 5-percent
er
rate w hich you are proposing ? Chairm an H o m e ’s letter did n o t dis­
cuss t-nis and it is my im pression that th is is to o h ig h a rate fo r some
savings and loans to live w ith.
Secretory F owler. I d o not believe that I could add a n y th in g to the
committee’s understanding o f w hat the p osition o f the F ederal H om e
ljoan B ank Board, F ederal R eserve B oard, or F D I C w ou ld be o n this
question.

1 ^ in k ^ is important to us if we are to establish some
S w JLT® i T ““ a e r a t e knowledge of the impact of this par™
^
loanS' M y own impression, based o»
my own discussions with those at home, would be
4% -would



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

159

be about th e m axim um they could liv e w ith. I t w ould seem to m e we
should have some accurate expression from th e C oordinating Com m it­
tee or the H om e L oan B ank Board as to th is interest rate. T h at is w hy
I wondered i f you had an opportunity to discuss it w ith them.
Secretary F owler. No.
Mr. T odd. I t is a m atter of policy th at you are bringing up here.
Secretary F owler. T here are a great m any questions about th is situ­
ation on w hich I w ould like to have a great m any more answers than
I currently do. B u t it was som ething, as I indicated, that had to be
done in fa irly short order and I subm itted it here as an approach and
as a principle and as an attack. I think it is im portant that you try
to keep it sim ple. Y ou are never g o in g to g et som ething that is g o in g
to please everybody, and you w ant to get som ething that is goin g to
help and th at you can g et through.
Mr. T odd. W h a t w ould you think o f the idea o f establishing say,
a 6-month m inim um fo r the m aturities o f C D ’s? W ould this assist?
Secretary F owlek. I think the authority fo r that already exists and
therefore th e concern o f the committee should be, w hy does not the
appropriate authority exercise that ex istin g authority to amend the
regulations in th a t fash ion ?
Mr. T odd. I thin k your suggestion that th is authority be utilized
by the F ed is an excellent suggestion. I w ould be concerned that we
on the com m ittee not g et involved in m aking piecemeal decisions as
far as m onetary policy is concerned. I do not think we can address
ourselves to th is too w ell.
I wonder i f you have any inform ation or any opinion, rather, as to
whether the rate in regulation Q, the interest rate in December was
prim arily in response to a liqu id ity problem or an attem pt to slow
down an overheating o f the economy ?
Secretary F owler. I did not engage in any discussion, nor was I
aware, prior to the action, o f th e exact nature o f the action that was
contem plated. M y discussions had to do w ith w hether any action
should be undertaken at th at particular tim e. I was in no way aware
of, nor did I have, nor can I give you any authentic background of,
the purpose and m otivation.
Mr. T odd. In connection w ith th is problem, I wondered i f it would
also be appropriate fo r the com m ittee to discuss whether or not reserve
requirements could appropriately be raised on C D ’s, th a t th is w ould
make them a less expansionary influence in the economy ?
Secretary F owler. I tried to raise that, and did raise it in m y state­
ment. I referred to it before.
. On page 8 you w ill find the first fu ll paragraph suggesting, “i f
m the jud gm en t o f the com m ittee some action is deem ed desirable, a
better approach m ig h t lie in the direction o f p rovid in g the appropriate
m onetary authorities w ith greater discretion to set levels o f reserve
requirements 011 large negotiable certificates o f deposit that m ight e x ­
ceed those on other tim e and savings deposits. O f course, you w ill
those m uch closer to the probw ith th a t in any depth or w ith
M y precision. B u t t th in k th is is in the lin e o f approach, certainly,
that w ould appeal m ore to m e than ou tla w in g the C D ’s com pletely
as th e other b ill did.



160

UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

Mr. T odd. In this one, if the reserve requirement were raised, it
would reduce the liquidity problems as they come due?
Secretary F owler. T h at is righ t. T h a t is w hy I m ade reference to
the com m entary in th e report o f -the Com m ittee on F in an cial Institu­
tions in A p r il 1963, w hich I thin k indicates th at one o f th e important
elem ents in this entire picture is concerned w ith adequate instruments
to deal w ith the liq uid ity problem . T h is is n ot true only o f the com­
m ercial banks. I w ould like to take this opportunity to call to your
attention th e fact th at on Septem ber 2 0 ,1 9 6 5 ,1 subm itted to Congress
a proposed bill to provide for an increase in th e m axim um amount of
insurance coverage from $10,000 to $15,000 on deposits. In the letter
o f transm ittal I m ade it very clear th e recom m endation w as m ade only
on condition that a number o f steps w ould be taken to protect further
the safety and the liqu idity o f the financial in stitutions w hose ability
to attract funds from the public w ould be enhanced by th e increase in
deposit and share insurance coverage. T he bill I subm itted c o n t a i n e d
a number o f im portant provisions designed to accom plish these ob­
jectives. F o r exam ple, it provided adequate authority to th e Federal
H om e Loan B ank B oard to insure the m aintenance o f insured associa­
tions. I t w ould m ake liq uid ity requirem ents applicable to the total
o f withdraw able accounts and borrow ing, rather than th e w ithdraw ing
alone, and would im prove accounting and enforcem ent conditions.
The overall question o f liq u id ity th a t is raised has its c o u n t e r p a r t
in the savings institutions. A t the conclusion o f the report o f the
Committee on F in an cial In stitu tio n s to w hich I referred earlier, the
uestion o f reserves fo r tim e deposits is taken up. I t goes b e y o n d
ins tem porary question w e have here in v o lv in g w ith d raw als from
savings and loan institutions. I t is one w hich I w ould hope th e c o m ­
mittee could shortly turn its attention to both in the question you raise
and also the pending bill th at is before th e com m ittee d ealin g w ith inc r e ^ n g t h e m axim um am ount o f insurance coverage.
(Mr. T o d d subsequently subm itted the R eport o f the Com m ittee on
*^nancial In stitutions, w hich m ay be found in th e appendix beginning

a

Mr. A s h l e y . Mr. M ize?
Mr. M i z e . Mr. Secretary, w ou ld you care to conjecture on w h at the
ta a n c ia l situation o f th e country w ould be and w ou ld have been had
tbe * ederal R eserve not done w hat it did in D ecem ber ?
k ^ ra ta ry F o w l e r . N o , I w ould n ot p articularly care to c o m m e n t
on that. I think that in answ ering questions o f the chairm an I have
co m m u ted on it m any tim es. I w ould only sa y th a t in p e r s p e c t i v e , I
tninK th at it is fa irly clear th a t a p olicy o f m onetary and fiscal res t ^ in t w as indicated a t the tim e th e action w as taken. W e w ere in
t i » tte o e s o f considering w h at com bination o f fiscal an d monetary
SSEmJ
d h®
W e fe lt th a t th e inform ation that
w ould become available in th e m onth o f Decem ber h a v in g to do with
the budget figures fo r the rem ainder o f fisc a ll9 6 6 and fo r fiscal 1967
w hich w ould encompass the w hole F ederal program as fa r as w e could
see it w as essential. T h e better course w ould be in th e lig h t o f that
sum to ta l o f inform ation, to try to arrive togeth er in a coordinated

^
gLgggP
^

Frol** m * w d methods and choice of m«m» of fiscal

wtaunt

™ad h, .pjropriM. m te tho*.

I have indicated, ! "was not successful in prevailing—my advice
the Board moved in the field of monetary re­


■ hs not accepted and
w


UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

161

straint. T hen, as subsequent comments have been m ade clear, the
President announced shortly thereafter, w e were goin g to accept that
action as a fa c t o f life.
Mr. M ize. W ell, w ould you care to conjecture on w hat you feel
m ight be a situation i f th e action th at was taken by the F ederal R e­
serve in D ecem ber w as rescinded ?
Secretary F owler. I th ink that as I have indicated before, in testi­
m ony before the J o in t Econom ic Committee, that th is is a tim e in
which a m oderate m easure o f both fiscal and m onetary restraint is
appropriate and has been appropriate to the situation for these m any
months.
Mr. M ize. T hank you.
Mr. A shley . Mr. Annunzio?
Mr. A nnunzio . T hank you, Mr. Chairman.
Mr. Secretary, I w ould like to join m y colleagues in com m ending
you for your very constructive and practical statem ent before the com ­
m ittee on th e problem s th at face us— the com m ittee and the people of
the country. I should also like to comment th at as a member o f th is
comm ittee I have heard m any w itnesses— and I would like to use the
analogy o f th e w ar in V ietnam — everybody w ants peace, but they just
do not know w hat to do about b ringing peace to the world. B u t at
least you came before the com m ittee w ith a b ill, a practical suggestion
w hich indicates you recognize, like th e members o f th is committee,
that there is a problem in the m oney market, there is com petition for
money, and th a t in the public interest we m ust do som ething to stop
th is bidd in g in the m oney m arket am ong th e various financial institu­
tions that ex ist in the country.
Mr. Chairm an, before I get into m y questions, Mr. Eees, our col­
league from C alifornia had to leave. H e introduced a bill today regu­
lating bank certificates o f deposits and I w ould like to ask unanimous
consent to include his press release in th e record.
Mr. A shley . A t th is point? W ithout objection, so ordered.
(T he press release referred to fo llo w s :)
L e g is la tio n

R e g u la t in g B a n e C e r t if ic a te s
C on gressm an R ees, M ay

of

D e p o s it

In tr o d u c e d

by

19, 1966
Legislation restricting the use of bank certificates of deposit was today intro­
duced by Congressman Thomas M. Rees, Democrat of Los Angeles, Calif.,
a member of the House Committee on Banking and Currency.
“It is my belief that the unregulated use of certificates of deposit is dangerous
to the banking system of this country. Already overinvestment in certificates
of deposit has caused serious problems of liquidity in banks throughout this
country and, in some instances, has contributed to bank failures,” said Rees.
“The unregulated use of CD's in driving interest rates up has caused a serious
dislocation in the savings and loan industry. For example, in California bank
certificates of deposit are being sold for amounts of even less than $100, for terms
as short as 30 days, and at interest rates of up to 5*6 percent. This has caused
a flow of deposits from savings and loan institutions, which were held at 4.85 per­
cent (prior to today’s hike to 5 percent). The result has been a slowdown of
both the building and real estate industries as new mortgage money is very diffiC ir *°
U
continued the Congressman.
If we do not develop reasonable restrictions on CD's, not only is the banking
system dealing with an extremely dangerous situation in terms of liquidity, but
U threatens the further development of fast-growing States such as California
necessary mortgage capital,” stated Rees.

The bill which I am introducing defines certificate of deposit as a deposit

I year or more maturity, which can draw an interest rate no more than the
**vmgs account interest rate authorized by the Federal Reserve Board. In this




162

UNBOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

way the CD would be relegated to what its original intention was— allow
^to
businesses to invest their excess funds in a time account for interest revenues,”
explained the Congressman.
“I believe this approach is far sounder than merely placing a floor on bank
CD’s,** concluded Rees.
Bees hopes that his legislation on the subject of certificates of deposit can be
heard during the current hearings by the House Committee on Banking and
Currency.
M r. A n n u n z i o . Mr. F ow ler, C ongressm an W eltner sat on th e com­
m ittee fo r 4 years. I have been here 15 m onths and I have heard many,
m any com m ents from our chairm an on th e F ederal R e s e r v e Board.
W hen I first came to C ongress and sat in one o f these m eetings, in
reading, I read about th is C oordinating C om m ittee th at exists, w ith
you as the Secretary o f the T reasury and th e C om ptroller o f th e Cur­
rency and the F ederal Reserve B oard and th e F D IC . I w ant yon to
know th at I w as a m em ber o f th e cabinet o f G overnor Stevenson in the
S ta te o f Illin o is. A s a m em ber o f th a t cabinet I h ad nine divisions
under m y jurisdiction but th e ch iefs o f tw o o f those divisions, the
c h ie f o f th e State factory inspectors and th e chairm an o f the industrial
com m ission, had th eir appointm ents approved b y th e Senate o f Illin ois
and natural there w as a conflict o f p o licy m atters because th ey felt
th at I had no jurisdiction u n til one day I discovered th a t i f I d id not
sign th e payroll sheet th a t th e ch ief inspector and chairm an o f the
industrial com m ission, along w ith th eir em ployees w ou ld n ot be paid.
S o one o f the p ayroll periods cam e a lo n g and the director o f labor
ju st fo rg o t to s i m th e payroll sheets. B y th a t tim e th e G overnor and
press and everybody else w anted to know about th e problem th a t ex­
isted in th e departm ent o f labor and soon I g o t th e recognition that
I w as look in g for. T h a t seem s to be th e problem o f th e C oordinating
C om m ittee.
A ga in , I w ould lik e to em phasize th a t som etim es in these com mittees
you wonder w h o w atches us, and w ho coordinates th e coordinator.
S o I agree w holeheartedly^w ith th e chairm an o f th is com m ittee that
i f the C oordinating C om m ittee is to coordinate these various agencies
h a vin g to do w ith m onetary p olicy o f th e country, th a t direction
should come from th e P resid ent, th e head o f our G overnm ent. In this
w ay understanding is established and th e ground rules are laid, so that
w hen one agency issues a d irective, at least th e other agency ought to
h ave some know ledge o f w h at is g o in g on.
M r. F ow ler, on page 3 o f your prepared statem ent you suggested all
bank deposits cost the banks interest. B u t is it not true th a t approxi­
m ately one-half o f th e bank deposits, th e dem and deposits, cost the
banks n othin g at a ll ?
Secretary F o w l e r . D em and deposits do n ot bear interest. I do n o t
h ave the exact proportion, b ut it is about h a lf. T h e banks have as the
very basis o f th eir being, so to speak, the fu n ctio n o f i n t e r m e d i a t i o n —
o f ta k in g the m oney th a t is on dem and and u sin g it again st r e s e r v e
requirem ents and to loan out th e rem ainder.
Mr. A n n u n z i o . M r. Secretary, m y tim e h as expired, but I w o u l d
appreciate g ettin g from y o u r office a copy o f form er Secretary D i l l o n ’s
report to w hich Mr. M inish referred.
Secretary F o w l e r . Y es, sir.
M r. A s h l e y . M r. O ttinger?



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

163

Mr. O ttinger. Mr. Chairman, considering one o f th e bills that I in ­
troduced is subject to discussion, I wonder i f w e could not have unani­
mous consent to proceed som etim e after the noon hour.
Mr. A shley . I th in k we w ill continue w ithin reasonable lim its to
accommodate the desires o f the members. I do not intend to continue
on too lo n g after 12 noon.
Mr. Ottinger. Mr. Secretary, I am very interested in the proposals
you have m ade. I am som ewhat concerned about areas o f possible
confusion.
F irst, I w ould like to have it made clear, th at your proposal is th at
the F ederal B eserve B oard and the som etim e com plem entary reaction
o f the F D I C w ould have, in effect, changed th e power o f regulation Q,
bring dow n th e interest rates on certificates o f deposit on tim e de­
posits on denom inations below the $10,000 present lim it-----Secretary F owler. A lso on the first $10,000 o f any larger amount.
Mr. Ottinger. Y our proposal is not, on the contrary, th at the sav­
ings and loan associations be perm itted to increase the rates that they
charge on their am ounts— the question as far as your proposal is con­
cerned does not involve the ab ility o f the savings and loan associations
to pay h ig h rates ?
Secretary F owler. N o. I t is a proposal, however, that takes into
account the actions and policies o f the F ederal H om e Loan B ank
Board.
Mr. Othnger . There is a difference in the restrictions as they exist
on Federal savin gs and loan associations, w hat they m ay charge on
th eir accounts and th e 4 percent that you referred to on page 4 as to
the lim it on passbook accounts?
Secretary F owler. Y es.
Mr. O ttinger. T h e present lim itation on w hat savings and loan in ­
stitutions m ay pay is 4% percent?
Secretary F owler. N o, it varies around the country. I t is somewhat
on a regional basis. I think the announcem ent on Tuesday, for ex ­
am ple, w hich w as addressed to a particular situation, w ould allow sav­
in gs and loan associations in C aliforn ia to continue to have access to
advances fo r expansion if their annual dividend rates w ould not ex ­
ceed 5 percent as o f J u ly 1, 1966, and are com pounded not more fre­
quently th an quarterly.
Mr. O ttinger. T h is I take it is a feature to w hich m y colleague, Mr.
T odd, w as referring, th at some o f them are g o in g to have a hard tim e
ta k in g advantage o f that.
Secretary F owler. T h at is right.
Mr. O ttinger. I w ould like to refer to a question by Mr. Gonzalez
earlier, and th at is, W h a t is th e sense o f concentrating on these sm all
certificates i f indeed our problem is th a t 90 percent o f them are in the
larger denom inations? I t is m y understanding th at th e volum e is so
great in these certificates o f deposit now , som e $17.5 b illion , th a t even
the 10 percent o f the sm aller denom ination certificates are causing real
problem s fo r th e m ortgage m arket and th a t is really w h y w e have to
concentrate on the sm all certificates, even thou gh th ey represent a
sm all percentage overall.
Secretary F owler. I th in k th a t is true. I t is the b ig ones w hich
m ake up a lo t o f th e volum e but th ey do not really draw th e deposits



164

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

aw ay from th e ty p ica l savin gs and loan organizations and m utual
savin gs banks.
Mr. O ttinger. I n m y b ill I pick $15,000 lim it on the basis th at we
w ou ld even tu ally adopt the adm inistration’s proposal fo r increas­
in g it.
Secretary F owler. I had th at in m ind, too.
Mr. O ttinger. I hoped we m ight. B u t in settin g the lim itation, if
it w ould becom e apparent through these hearings th at w e need to know
more about where the savings and loan in stitutions lie, w ould it be
possible fo r you or you in conjunction w ith the F ederal R eserve people
to work up figures fo r us show ing for various denom inations o f cer­
tificates o f deposit and how m uch m oney at the present tim e is
invested ?
Secretary F owler. I thin k th at the inform ation on th at subject
w ould best come from the surveys o f the F ederal R eserve Board. It
has made one and I do n ot know w hether the inform ation requested
w ould be w h olly responsive to your question. W e in T reasury do not
have this inform ation in the form in w hich you requested. I w ill do
m y best to see i f we can g et together th e inform ation th a t is available,
either at the Federal R eserve Board or F D I C or other sources.
(T h e inform ation referred to fo llo w s :)
Time certificates of deposit at insured commercial tanks, Apr. 26, 1965, by size
of certificate
Sise of certificate

[Amounts In thousands of dollars]i

All banks

$10,000 and under___________________________________________ 10,217,617
Over $10,000 to $50,000______________________________________
4,445,881
Over $50,000 to $100,000________________________ _____________ 2,290,200
Over $100,000 to $250,000_____________________________ ________ 2, 525,378
Over $250,000 to $500,000______________________________________ 2,966,921
Over $500,000 to $1,000,000____________________________________ 7,345,464
Over $1,000,000______________________________________________ 6,250,630
Total certificates of deposit--------------------------------------------- 36,041,850
Source: Comptroller of the Currency, Federal Deposit Insurance Corporation, and the
Federal Reserve Board.

M r. O t t i n g e r . Y o u recommend on page 8 th a t we consider raising
the reserve requirem ents behind a t least large denom inations o f certi­
ficates. D o y ou have legislation in m ind or could you prepare some­
th in g?
Secretary F owler. W ell, I w as really, in a ll m odesty, expressing a
preference fo r a particular approach and su g g estin g th at i f the com­
m ittee m oved in th is particular direction, I th in k you w ould w ant to get
m uch m ore in form ation from th e supervisory authorities.
Mr. O t t i n g e r . Y ou recom m end th a t w e leave discretion to th e F ed ­
eral R eserve and F D I C in settin g interest rates and lim itations. It
s till seems to m e th a t it is th e F ederal R eserve B oard th a t g o t us into
th e problem th at w e are in now by perm ittin g 5 y2 percent to be paid
on certificates o f deposit. I think th at there are m any o f us w ho were
n ot com placent about le a v in g th a t discretion in th e F ederal Reserve
B oard. I rather lik e you r suggestion, how ever, th at th is is a tem porary
situ atio n and perhaps w e provide a tem porary solu tion in term s of
rig h tin g w h at w e do in a period o f a year or tw o years and take another
look at them . W ill you h ave an y objection, i f w e placed a lim itation o f



UNSOUND COMPETITION FOE SAVINGS AND TIM E DEPOSITS

165

2 years to h a v in g a $10,000 or a $15,000— w ell, either interest rate m an­
dated at th a t level or a floor placed such as m y b ill does—no certificates
under th e denom ination o f $15,000 ?
Secretary F owler. M y own im pression is th a t the m ovem ent here
to m andate regulation is not a good practice or a good precedent for
the Congress to undertake, and that the delegation o f authority w ith
fixing o f standards for the exercise o f th at authority is a better avenue
o f approach. C onditions can change and do change very rapidly as
we have found. I t is better to make allow ance for it. I would think
that in th is particular field, i f the com m ittee has very strong feelings
and th ey w ant to assure, i f they pass th is law , th a t it is not goin g to
lie unused, that you can effect that kind o f understanding in the process
o f legislation, either form ally or inform ally.
Mr. Ottinger. Y et, you are w illin g to have us m andate interest
rates, is th at correct, the 5-percent interest rates ?
Secretary F owler. N o ; I said th at even in d ealing w ith the interest
rate m atter, it is better not to m andate it in to law. I think you are
dealing w ith m en w ho are sensitive to th is situation and i f there were
very clear expressions o f in ten t o f Congress th a t this authority w ould
not lie unused. T h is goes on in th e leg isla tiv e history.
Mr. O ttinger. T h e F ederal R eserve B oard could have taken from
that— the F ederal Reserve B oard could have taken some action to
am eliorate its effect o f regulation Q. I t could have been directed spe­
cifically to some o f the problem s w e have now i f they had seen w hat
w as h app enin g to the 5-percent rate and p ut it back. M aybe they
could not have discrim inated in their interpretation o f the law between
large and sm all denom inations.
Secretary F owler. I think in all fairness to the Board, you have to
recognize there is a certain chronology to th is business. There were
in itial apprehensions and fears w hich I shared m yself in December
and asked the C oordinating Com m ittee to study and look closely at the
problem. T h ey did in January. T h e B oard sent out and m ade a
survey o f the changes in rates th at were occurring early in the year.
T he returns from th at survey did not indicate too much w as happening,
and then the situation took a m uch sharper, and much more acute turn,
during the m onth o f A p ril and it has only been in the last 2 or 3 weeks
that you and I and a lo t o f others have fe lt th at some o f our earlier
apprehensions were now som ewhat justified and th at w e ought to ad­
dress ourselves very specifically and concretely to th is problem.
Mr. Ottinger. J u st one more question, Mr. Secretary.
There is concern expressed in your statem ent that the chairm an’s
overriding concern about your solution th at you proposed or m y solu­
tion, th at w e w ould be discrim inating against th e sm all investor in
favor o f th e large investor. T o w hat extent do you feel that th is is
a legitim ate concern, or on the contrary, th at it really reflects th e in ­
creased purchasing power, i f y ou w ill, o f the larger in stitu tion s ? A re
we really d oin g an ythin g to th e sm all investor i f w e place a lim itation
on these certificates o f deposit and th e interest th ey m ay charge on the
level at w hich th ey m ay be issued th at is n o t already the case?
Secretary F owler. T o me, it is a th orough ly w arranted and justifi­
able action on several scores.
N o. 1, at least in the context th a t I presented it, it is a tem porary
m atter to deal w ith a transitional problem .
63-496—ee------12



166

UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

N o. 2, insofar as it can, th e proposal is that each person gets the
sam e rate on the first $10,000 and i f the fello w can go m ore than that,
then on the larger volum e he w ould g et a better return.
There is also an im portant elem ent o f risk attached to the larger
amount. T here is also the fa ct th at there is in the law today in the
w ay it operates a discrim ination between th e so-called passbook saver
and the iello w who takes tim e, and has th e know ledge and know-how,
to take off from work and to g o dow n to the bank to do w hat I am
afraid I have not had the opportunity to do, and that is, to buy C D ’s.
Mr. T odd. W ould the gentlem an yield ?
Mr. Ottinger. Yes.
Mr. T odd. In th is connection, Mr. F ow ler, I wonder i f my under­
standing is correct, in your d raft b ill, you w ould raise th e passbook
saving rate?
Secretary F o w l e r . I t w ould not affect th a t at all.
Mr. T odd. I t would not affect it at a ll ?
Secretary F owxer. N o, sir.
Mr. T odd. Thank you.
Mr. Ottinger. Thank you, Mr. Secretary.
Mr. A shley. Mr. Secretary, you were very generous w ith your time
and the com m ittee does appreciate it very much, th e benefit o f your
counsel on th is m ost im portant m atter. I f there are no further ques­
tions, the committee w ill stand in recess u n til n ext T uesday m orning
a t 10 o’clock.
(W hereupon at 1 2 :10 p.m., the com m ittee adjourned, to reconvene
at 10 a.m., Tuesday, May 24,1966.)




TO ELIMINATE UNSOUND COMPETITION FOR SAVINGS
AND TIME DEPOSITS
TUESDAY, MAY 24, 1966

H ouse of R epresentatives,
Committee on B anking and Currency,

Washington, D.C.
T he com m ittee m et, pursuant to recess, at 10 a.m., in room 2128,
R ay b u m H ouse Office B u ild in g, H on. W rig h t P atm an (chairm an)
presiding.
P resent: R epresentatives Patm an, B arrett, Mrs. Sullivan, Reuss,
A sh ley , Stephens, Gonzalez, M inish, W eltner, Grabowski, Gettys,
Todd, O ttinger, M cG rath, A nnunzio, Rees, Mrs. D w yer, H a lp em ,
T alcott, and M ize.
T he Chairman . T he com m ittee w ill come to order.
T h is m orning, the com m ittee continues public hearings on H .R .
14026 and related bills to elim inate m isuse o f certificates o f deposit
and tim e deposits generally.
B efore w e hear from today’s w itnesses w ho are five o f the seven
m em bers o f th e F ederal Reserve Board and tw o other high officials o f
the F ederal R eserve System , I w ould like to make some prelim inary
remarks.
“I t seem s to me th at the F ederal Reserve has made a serious m istake
over the p ast several years in repeatedly raising the interest rate ceil­
in g on com m ercial bank tim e and savings deposits to the present very
h igh lim it. T h e argum ents advanced in support o f these increases—
particularly the increase o f Decem ber 1965— strike m e as weak and
even illogical. I t does not seem consistent to act to restrain credit w ith
one hand and to increase the flow o f deposits into the com mercial bank­
in g system w ith the other. T he result has been to place com peting
savin gs institution s a t a serious disadvantage, to bear down w ith un­
equal pressure on the housing m arket, and to set in m otion a w asteful
and possible dangerous scramble for deposits. I t is not reassuring to
have it explain ed th a t a rise in the rate ceilin g w as necessary in order
to avert a m oney m arket crisis. N or is it sensible to raise the ceilin g
and then criticize bankers for g o in g to th e ceiling. B oth the theory
and the practice o f regulation Q are in need o f some serious rethinking.
I t is to be hoped th at the rethinking occurs before a point o f no return
is reached.”
In terestin g ly enough, these few sentences I have ju st read did not
origin ate w ith th e chairm an o f th is com m ittee. T h ey w ere spoken
verbatim on A p r il 13, 1966, by Mr. G ordon M cK inley, vice president
o f M cG raw -H ill, In c., publishers o f B usiness W eek. Perhaps our
w itnesses th is m ornin g w ill address them selves to M r. M cK in ley’s




167

168

XJNSOXJND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

charge and to con vin cin g th is com m ittee w h y C ongress should not
it s e lf prescribe specific g uid elin es w ith respect to tim e deposits.
T h e le g isla tiv e h istory o f th e provision o f th e B a n k in g A c t o f 1933
co n tro llin g h ig h b id d in g fo r vola tile deposits stron gly suggests that
th e F ed era l R eserve B oard has sad ly fa llen dow n on th e job.
B efo re w e hear the B oard ’s side o f it, le t m e quote from Senator
G lass on th e Senate floor back in 1933:
We confide to the Federal Reserve Board authority which it does not now
possess in this connection to regulate interest on time deposits in order to put
a stop to the competition between banks in payment of interest, which frequently
induces banks to pay excessive interest on time deposits and has many times
over again brought banks into serious trouble.
N ow it seems to m e th at last D ecem ber’s liq u id ity crisis fa cin g banks
in the large m oney centers due to possible w ith draw al o f $ 3 ^ b illion of
corporate funds attracted in the first place by h ig h rates on negotiable
certificates o f deposit is ju st w hat Mr. G lass w as w orried about.
B egin n in g in 1956, tn e F ed eral B eserve B oard began successive
amendm ents to regulation Q w hich the evidence indicates is the source
o f this problem. T hese changes have resulted in th e present sky-high
interest ceilin g on tim e deposits— in clu d in g C D ’s— and a m inim um
m aturity o f only 30 d ays on such deposits, w hich is ridiculous for a
tim e deposit. T hese changes w ere m ade by th e B oard at the behest
o f a few large money m arket banks so th a t th ey could outbid Treasury
b ills fo r liq uid balances o f large corporations. I n addition to the
h ig h rate and short m aturity, n eg o tia b ility w as also a necessary
feature.^ S o w h ile the B oard argues it is helpless under th e law to
define tim e deposits in term s o f m inim um size, let there be no m istake
th a t th e B oard does have the authority in term s o f rates and m aturities
to stop the rate w ar w hich th e B oard itse lf started—th e raid in g of
fu n d s out o f the Treasury b ill m arket and th e raid in g o f funds out o f
th r ift institutions and hom e financing.
I TTi ■

n o

a ! tt

ti

a

^

a

LJ a a

J

«m a

__ ___ 1_1 _

i

? _^

tim e out to le g is la t e bank supervision w hich it m istakenly e n t r u s t e d
to the F ederal B eserve B oard. I t is unthinkable th a t th e sam e probJem fa cm g our b anking system in 1907—illiq u id ity a n d u n s o u n d
b i d d i n g fo r dep osits—w hich led to establishm ent o f th e Federal
Reserve S ystem , still plagues u s today.
N ot fo r 1 m inute should anyone th in k th a t th e various b ills now
before th is com m ittee are intended t o dim inish com petition fo r s a v i n g s
or to prohibit com m ercial banks from seeking tim e d ep osits on a s o u n d
basis. T he large m oney centers seem to have spaw ned some purely
banking problem s w hich w e expect tod ay’s w i t n e s s e s to c o m m e n t on
in depth. G overnor R obertson, in the course o f you r testim ony, we
w ould appreciate some discussion o f your 1956 dissent in the B o a r d ’s
decision to raise regulation Q on D ecem ber 3 o f th at year, w hich s e e m s
ave precisely predicted w hat has happened by constantly increas­
in g interest rates.
J
D o y on have th a t before you ?
M r. B o b e r t s o n . Y es, I do.

if
rn ^ f™ ^ B B S° K’ Yes; 1 wiU P” ***! m any way you like, MrET



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

169

The C hairman . I f you w ill. I think it is so opportune and tim ely,
and it occurs to me th at you predicted in 1956, 10 years ago, w hat
w ould happen.
Mr. Robertson. Y ou w ould lik e to have m e read the dissent in 1956 ?
The Chairman . Y es, if you will, please.

STATEMENT OF THE BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM; PRESENTED BY J. I. ROBERTSON, VICE
CHAIRMAN; CHARLES N. SHEPARDSON, MEMBER, GEORGE W.
MITCHELL, MEMBER, SHERMAN J. MAISEL, MEMBER, AND AN­
DREW F. BRIMMER, MEMBER; CHARLES J. SCANLON, PRESIDENT,
FEDERAL RESERVE BANK OF CHICAGO; AND WILLIAM F.
TREIBER, FIRST VICE PRESIDENT, FEDERAL RESERVE BANK OF
NEW YORK
i l r . R obertson. T h is is taken, Mr. Cliairman, from the B oard’s
annual report. I have not read this in a lo n g tim e, but I am sure it
m ust be righ t. T h is s a y s :
Governor Robertson voted against this action for the reasons set forth in the
statement beginning on the following page.
A. An increase----The Chairman . T h at was on Decem ber 3, 1956, if I remember
correctly ?
Mr. R obertson. T h a t is right.
A. An increase to 3 percent in the maximum interest rates that member banks
may pay on (1) savings deposits and (2) time deposits not payable within 6
months would make it possible, it is alleged, for commercial banks to compete
more effectively against other savings institutions for time deposits. Payment
of such higher rates of interest might have these undesirable results:
(1) I t would increase bank ojjerating costs and make it more difficult for
banks to raise additional capital that they need. Since any bank offering higher
rates would have to pay them on existing as well as new deposits, net profits
after taxes of some member banks could be reduced by as much as 25 percent—
or more in the case of country banks—and this would lower iu-t profits to below
6 percent of capital accounts, compared with an average of around 8 percent
for many years.
(2) To offset such additional costs, banks would be under pressure to seek
higher yielding assets, which would probably be less liquid and more risky, and
thus impair the liquidity and solvency of the commercial banking system. Prob­
ably the principal purpose of the legislation authorizing regulation of interest
rates on time deposits was to prevent such a development, which was to some
extent responsible for the banking difficulties of the 1930’s.
Furthermore, I have some doubts as to the effectiveness of such a raising of
the interest ceiling in attracting savings to banks, because competing insti­
tutions could always pay higher rates. Their ability to pay more is due not to
this limitation on banks but to other advantages with respect to such matters as
taxation and restrictions as to the nature of assets th at can be acquired. In
addition, it is questionable whether generally higher rates on savings deposits
would bring about a material increase in aggregate savings or would merely in­
fluence the form in which savings are held. It is plausibly argued that banks
should be permitted to distribute to their customers as much of their earnings
as they think they can afford, and that, since bank earnings are higher than they
have been a t times in the past, banks should be permitted to pay higher rates
of interest on savings deposits. My answer is th at Congress imposed on the
Board the duty of preventing that very thing to the extent that it might jeopar­
dize the soundness of the whole banking system. If the ceiling should be raised
whenever a few banks feel they can afford to pay higher rates, there is no point

in having a ceiling.
view of thoto possible undesirable consequences to the commercial banking
System, and
 my doubt concerning the effectiveness of such an increase, I would


170

UNSOUND COMPETITION FOR SAYINGS AND TIM E DEPOSITS

question the wisdom of raising the ceiling at this time and would vote to retain
the present maximum rates. The number of banks which are now paying ceiUng
rates is smaU and only a fractional percentage of these banks actively seeks the
privilege of paying higher rates. I would not accede to the wishes of those few
banks and thereby, perhaps, adversely affect the whole banking system.
B. An increase in the maximum rate which can be paid by banks on time
deposits payable in less than 6 months is questionable for a number of reasons:
1. Many of the funds thus held are not genuine savings but are liquid bal­
ances subject to withdrawal either to meet cash needs or to invest in other liquid
assets whenever a rise in short-term market rates of interest makes such a shift
profitable.
2. Banks would tend to treat such deposits the same as savings and determine
their asset structure accordingly. This tendency is illustrated by the present
situation in New York City banks which have substantial time deposits consisting
of foreign central banks’ balances and other liquid funds, such as trust depart­
ment deposits, but have permitted their holdings of liquid assets to faU to ex­
ceptionally low levels. They now want to raise interest rates payable on such
deposits to keep from losing them because they are so ill-prepared to meet the
withdrawals.
3. Payment of high rates of interest on short-term time deposits would en­
courage evasion of a prohibition against the payment of interest on demand
deposits.
4. Any resulting tendency to shift from demand to time deposits would reduce
required reserves and thus release reserves for lending. This would not be in
harmony with existing Federal Reserve credit restraint policies.
5. Liquid funds of this nature should be invested in open market paper, so
that holders would have to bear the burden and risks of fluctuating rates and
not shift that risk to the banking system.
Finally, it should be noted that if the ceilings are raised sufficiently to be
effective, they will enable commercial banks to attract funds now invested in
Government securities—short term and long term. This may have a detrimen­
tal effect on the Government securities market and even lead to higher levels
of interest rates generally, as applied to the borrowing public. I doubt the need
for, and prospective benefits of, a present change in the ceiling rates on time
and savings deposits are such as to warrant risking this possible consequence.
N ow , Mr. Chairm an, th at w as w ritten 10 years ago, and it sounds
pretty good still.
T he C h a p m a n . D id it predict w hat w ould happen i f these rates
continue to increase ?
Mr. R ob ertson . I th in k th is is true, but I am sure som e o f m y as­
sociates w ould not concur in these view s.
I w ould add for m y self th a t n o tw ith stan d in g th e im pressiveness o f
those view s, the ceilin gs have been raised a num ber o f tim es in the
interim , and as a result we have not only th a t dissent, but w e have
other dissents as w e know the record discloses. B u t w e now have a
situation in w hich the rules have been b u ilt into the pattern o f com ­
petition in th is country, and consequently you sim p ly cannot back up
to the situation w hich existed 10 years ago w ith ou t very destructive
consequences.
. I w ould suggest perhaps the w ay to lin k th is to th e present sub­
ject o f the hearings w ould be if I were to proceed w ith th e s t a t e m e n t
w hich I w ill read in b eh alf o f th e B oard, and then perhaps the comm ittee w ould lik e to interrogate a ll the members.
T he C h airm an . T h a t w ill be satisfactory. Y ou m ay proceed, sir.
M r. R ob ertson . I t is m y purpose tod ay to express th e v iew s o f the
B oard o f Governors on th e tw o b ills—H .R . 14026 and H .R . 1 4 4 2 2 ^
th at are the subject o f these hearings. I t m ig h t be h e lp fu l to begin
w ith a sum m ary o f recent developm ents in b anking, attem p tin g to
place those developm ents in historical perspective.
A s th is com m ittee is w ell aw are, th e com m ercial b a n k in g system
Digitized forhFRASER e m ore active in recent yea rs in seek in g lon ger term savings
as becom


UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

171

funds. T h is has n ot been an isolated phenom enon, but rather an in ­
tegral part o f a m ajor change in the character o f com m ercial banking.
B anks have become increasingly ready to challenge traditional or out­
moded practices. T hey have become more aggressive not only w ith
respect to b id d in g for deposits, but also in finding w ays to p u t funds
to profitable uses, in opening new facilities, in providing new services
for bank customers, and in reducing costs by adopting more efficient
techniques o f production, especially through autom ation.
In addition, the increased activity o f banks in b id d in g for tim e
deposits appears to reflect a response to the declining trend o f bank
liquidity over the postw ar years. U nder the conditions o f high
liquidity and lim ited loan demand that prevailed from the m id1930’s through the early years o f the postw ar period, banks showed
little interest in com peting for tim e and savings deposits. A s loanto'deposit ratios advanced over the postw ar years, banks came to be
increasingly concerned about their ab ility to m eet their customers’
loan demands. T h is concern increased in late 1959, when soaring
credit dem ands and m onetary restraint p ut m any banks under pres­
sure.
Shortly thereafter, banks increased their efforts to attract tim e and
savings deposits, especially for corporate tim e deposits through the
issuance o f n egotiable certificates o f deposit. T he em ergence o f the
negotiable certificate as a money m arket instrum ent began in early
1961, when a large N ew Y ork C ity bank announced that it w ould
issue certificates o f th is kind to both corporate and noncorporate cus­
tomers and that a large Government security dealer was establishing a
secondary m arket for those instrum ents. Since 1961, outstanding
negotiable certificates in denom inations o f $100,000 or more— certif­
icates large enough to be traded readily in the secondary market—
have increased to more than $17 billion. G row th in outstandings
has been relatively slow since the fa ll o f 1965, however, and it m ay be
that the period o f rapid grow th o f these deposits is largely behind us.
I f I m ay divert your attention fo r just a m oment, Mr. Chairm an,
you w ill note on your chart, on the right-hand side, the grow th in
1965 was sharp, but th at sharpness was accentuated by grow th in the
first three quarters, w ith a slow in g off in the last quarter w hich has
proceeded during th is year.
T he C hairman . J u st a moment.
Mr. E euss . A short question on that point. T he chart there— m y
old eyes have difficulty. Is that Decem ber 1,1965 ?
Mr. R obertson. Decem ber 1,1965.
Mr. R euss . W ell, I am under the im pression th at negotiable C D ’s
have increased another b illion dollars to about-----Mr. R obertson. U p to about $17 b illion.
Mr. R euss . $17y2 billion , isn ’t it, to date?
. Mr. R obertson* I cannot give you the exact figure, but som ewhere
in that area— 17.6.
Mr. R euss . I w ould lik e to see a projection, because I , fran k ly, am
a little skeptical about th is notion th at a ll is now peaceful.
Mr. R o b ertso n . N o-----Mr. R euss . A n d th e negotiable certificates o f d ep osit are n o t g o in g
UP* I am under th e im pression th ey have gon e up-----T he C h a irm a n . W e prepared th e charts.
Mr* R euss. I t is our w a r t?



172

UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

T he C hairman . A n d we w ill extend it in view o f your request.
Mr. R eu ss. B efo re the hearing is over, I w ould lik e to have an
accurate estim ate o f where they have gone since then.
Mr. T alcott. Can you change th e chart at som eone’s request 2
M r. R obertson. I w ill furnish all the inform ation desirable.
Mr. R euss . I am told that, as o f M ay 11, there were $17,571 m illion
o f negotiable tim e C D ’s outstanding.
Mr. R obertson. Right.
M r. R euss. T h at, to m e, indicates no slack ing off o f the upward
curve.
Mr. M itchell. May I?
Mr. R obertson. Y es, sir.
Mr. M itchell. I t reached about 16.3 or 0.3, in the sum m er o f 1965,
but it did not change again until ju st recently, w hen it w ent up into
the 17% range. I t w as flat fo r a period o f about 6 m onths.
The Chairman . M ay I suggest, G overnor R obertson, th a t you pre­
pare a new chart and bring it r ig h t up to date and w e w ill insert it in
the record at th is point.
Mr. R obertson. W e w ill be very glad to do that, sir.
(T h e inform ation requested fo llo w s :)

NEGOTIABLE CD's




UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

173

Outstanding negotiable time certificates of deposit 1 at weekly reporting member
banks on selected d a te s3
In million»
of dollar«
796
Dec. 31, 1960___________________________________________________
Dec. 30, 1961------------------------------------------------------------------------------ 2, 782
Dec. 5, 1962___________________________________________________ 5.442
Dec. 31, 1963----------------------------------------------------------------------------- 9,579
1964:
Mar. 25------------------------------------------------------------------------------- 10,718
June 24-------------------------------------------------------------------------------- 11 , 687
Sept. 30------------------------------------------------------------------------------ 11,955
Dec. 30----------------------------------------------- ----- -------------------------- 12,583
1965:
Jan. 27____________________________________________________ 13,633
Feb. 24____________________________________________________ 13,866
Alar. 31------------------------------------------------------------------------------- 13,962
Apr. 28------------------------------------------------------------------------------- 14,741
May 26------------------------------------------------------------------------------- 15,110
June 30------------------------------------------------------------------------------ 15,342
July 28____________________________________________________ 15, 840
Aug. 25____________________________________________________ 16,177
Sept. 29___________________________________________________ 15,917
Oct. 27____________________________________________________ 16,387
Nov. 24____________________________________________________ 16,610
Dec. 29____________________________________________________ 16,097
1966:
Jan. 26____________________________________________________ 16,430
Feb. 23____________________________ _______________________ 16,483
Mar. 30____________________________________________________ 17,193
Apr. 27____________________________________________________ 17,502
May 18*___________________________________________________ 17,743
*Denominations of $100,000 or greater.

“Figures for 1960-62 are estimates.
3 Most recent date for which data are available.

Mr. R o b ertson . Pressure on banks to find lendable funds has inten­
sified since 1961, as loan demands of customers have continued to out­
strip the growth o f deposits. Consequently, banks have become in­
creasingly" alert to the possibilities o f tapping new sources of funds,
especially through issuance of negotiable and nonnegotiable certificates
of deposit in smaller denominations, often called “savings certificates”
or “savings bonds.”
T he tw o b ills before the committee would cut off commercial banks
from im portant sources o f funds through which they have been able
to meet the rising financing needs o f businesses, consumers, home
buyers, and State and local governments. T hey w ould also prohibit
banking practices o f lo n g standing. T he earliest data available show ­
in g a detailed classification o f tim e and savings deposits by typ e in d i­
cate that, in 1928, tim e certificates and open account tim e deposits
comprised about one-fourth o f all member bank tim e and savin gs de­
posits held by businesses and individuals. T h is is nearly as h igh as
the current proportion. The issuance o f certificates o f deposit to sm all
savers has been a common practice in some M idwestern and S ou th ­
western S tates fo r m any years. In 1928, country banks in the S t.
L ouis and K ansas C ity Federal Reserve D istricts held as large an
am ount o f savings under tim e certificates o f deposit as in savings
accounts, su gg estin g th a t in those districts, sm all-denom ination tim e
certificates were a le a d in g channel for th e placem ent o f individual
savings. O ur m ost recent survey confirms th a t certificates o f deposit



174

UNSOUND COM PETITION FOR SAVINGS AND T IM E DEPOSITS

in sm all denom inations are still an im portant source o f fu n d s to small
banks in th e M idw est and the Southw est.
I m ig h t say th at in m y hom etow n o f B roken B o w , N ebr., they still
use tim e certificates instead o f sa v in g s deposits as a g en era l rule.
T h e C hairman . F o r your area or the w hole cou n try %
M r. R obertson. N o , n o ; ju st fo r B roken B ow on ly.
T h e Chairman . T h a t’s g ood ; ju st your area.
M r. R obertson. M y area.
T h e n eg o tia b ility feature o f certificates o f d ep osit a lso h as substan­
tia l le g a l precedent. T he lan gu age used by m any b an k s in their cer­
tificates is patterned a fter w ord ing used in fo u r ex a m p les published
b y the B oard in 1933, to p rovide guidance to m em ber banks in draw­
in g up tim e certificate contracts th a t w ould be con sisten t w ith Federal
R eserve regu lation Q. T h e suggested lan guage w as w id e ly adopted,
and m any banks presently issue certificates o f d ep o sit th a t are legally
negotiable, even thou gh little use is m ade o f the n e g o tia b ility features.
M any o f these certificates are in sm all d en om inations and are issued
b y sm all banks, even th ou gh th e largest part o f th e d o lla r volum e of
negotiable certificates consists o f certificates issued b y la rg e banks with
denom inations in excess o f $100,000. T h u s, a recent F ed era l R e s e r v e
survey indicated th a t three-fourths o f th e num ber o f m em ber banks
w ith n egotiable certificates o f deposit outstand ing t o in d iv id u a ls and
businesses on Decem ber 22,1 9 6 5 , were banks w ith less th a n $50 m illion
in total deposits.
T he changed attitu d e o f banks tow ard b id d in g fo r tim e d e p o s it s ,
together w ith th e increases in m axim um rates p a y a b le on tim e and
savings deposits under regulation Q , h as altered sign fican tly the
role o f th e com m ercial banks as an interm ediary ch a n n elin g funds
from savers to borrowers. T h e p roportion o f to ta l cred it flow s fi­
nanced by expansion o f com m ercial bank deposits h a s been consider­
ably high er in recent years th an in m ost postw ar years. T h is increase
in th e financing o f econom ic expansion throu gh th e b a n k in g system
has been accom panied by som e decline in th e rela tiv e p o sitio n o f the
banks’ m ajor in stitu tio n a l com petitors in th e sa v in g s field, a l t h o u g h
the absolute size o f these nonbank in term ediaries h a s continued to
increase rapidly. M ost recently, p articu larly in th e p e rio d since yearend, th e grow th rate o f a ll financial in stitu tio n s h a s slow ed , as more
savings h ave tended to flow d irectly from savers to borrow ers rather
than th rou gh financial interm ediaries, reversin g th e p a tter n o f savings
flows th a t had p ersisted over th e exp ansion o f th e p re v io u s 5 years.
W ith th is background in form ation in m ind, let us tu r n n o w to more
specific consideration o f H .R . 14026 and H .R . 14422. T h ere is every
reason fo r C ongress and th e supervisory a u th orities to rem ain alert
during periods o f structural ch ange in financial flow s such as those
now m process. T here is alw ays a p o ssib ility th a t ch a n ges in the
com petitive position o f financial in stitu tio n s m ay be accom panied by
excessively zealous efforts to g a in a short-run ad van tage, and to actions
th a t m ig h t raise questions about th e liq u id ity , so lven cy, an d viab ility
o f financial institutions. I n con tem p la tin g th e need fo r supervisory
or leg isla tiv e action, how ever, it m ust be borne in mind that the
forces of competition h a v e great potential fo r promoting the interests

o f the consumer and for serving the public interest.



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

175

T he tw o b ills a t issue represent, in the B o a rd ’s judgm ent, efforts
to circum scribe com petitive processes in w ays th a t are harm ful to
the public interest. H .R . 14026 w ould prohibit issuance o f negotiable
certificates o f deposit and other sim ilar negotiable instrum ents purely
on the grounds o f their negotiability. W e can see n o justification
for a general prohibition o f that kind. T he legal status o f th e n ego­
tia b ility feature o f tim e certificates has a longstanding historical
precedent. On econom ic grounds, the attribute o f n egotiab ility does
not, in and o f itself, im pair the liqu idity o f th e issu in g bank nor o f
the banking system as a whole. T he ab ility o f the holder to sell these
certificates in secondary m arkets increases the attractiveness o f the
instrum ent. B ecause the certificates bear stated m aturities, bank
p ortfo lio m anagers are in a position to adapt the m aturity structure
o f their assets to the scheduled m aturities o f their deposit liabilities.
T he em ergence o f new financial instrum ents, and the adjustm ents in
financial m arkets th at take place because o f them , have to be taken
into consideration in the form ation o f m onetary policy. B u t the
mere presence or absence o f negotiab ility does not im pair the ability
o f the m onetary authorities to im plem ent w hatever policy is called
for by the econom ic situation.
H .R . 14422 w ould prohibit insured banks from accepting tim e
deposits in denom inations o f less than $15,000. I t w ould deny to
banks the use o f an instrum ent em ployed fo r m any years in attracting
savings o f individuals. I t w ould deny to the sm all saver a form o t
bank deposit to w hich he has been accustomed, but it w ould not pro­
h ib it the issuance o f certificates o f deposit in large denom inations to
individu als o f substantial w ealth or to businesses. U nder the present
structure o f ceilin g rates, sm all savers w ould obtain at most the m axi­
mum rate payable on passbook savings— 4 percent. Those fortunate
enough to be large depositors could earn as much as 5 ^ percent.
Su ch differential treatm ent o f large and sm all savers on the basis o f
d ep osit size alone w ould be discrim inatory.
The F ederal Reserve A ct now specifies four criteria the Board may
use in settin g the m axim um rates payable on time and savings de­
posits : m aturity o f deposit, conditions respecting w ithdraw al or repay­
ment, bank location, and the discount rates in the several Federal R e­
serve districts. I t has been suggested by the Secretary o f the Treas­
ury th a t the act be am ended to give the Board tem porary authority to
use an additional criterion for differentiating m axim um perm issible
rates, nam ely, th e extent to w hich a tim e deposit is afforded protec­
tion through insurance by the Federal D ep osit Insurance Corpora­
tion. T he rationale underlying this proposal is th at returns on invest­
m ent should be scaled according to th e risk assumed by the investor.
A ccordin gly, because a depositor’s risk on the insured portion o f the
deposit is elim inated by the assum ption o f a contingent lia b ility by the
Federal G overnm ent, the m axim um rate payable on that portion could
be less than on the uninsured portion.
T he B oard welcom es consideration o f measures aim ed at increased
flexib ility in adm inistering ceilin g rates on tim e and savings deposits.
B u t experience has tau gh t us th at th is is a com plicated field in w hich
changes som etim es produce ram ifications th a t are n ot anticipated. F o r
th is reason, th e im plications o f a new leg isla tiv e proposal should be
thorou gh ly explored by Congress, and new pow ers should be exer­



176

UNSOUND COM PETITION FOR SAYINGS AND TIM E DEPOSITS

cised b y regu latory agencies o n ly a fter carefu l exp loration o f ultim ate
as w ell as im m ediate effects.
F o r exam ple, in ad m in istering th e proposed am endm ent, it may
w e ll prove difficult to achieve at one and th e sam e tim e its stated ob­
jectives and equitable treatm ent as between sm all and la rg e depositors.
H ow ever, w e w ish to assure y o u th a t i f th e su ggested am endm ent is
enacted in to law , th e B oard w ill conscientiously assum e th e responsi­
b ility fo r its use, in conjunction w ith its e x istin g au th ority to regulate
in terest paym ents and its other p olicy instrum ents, as th e public in­
terest requires.
T h e am endm ent also raises questions concerning th e p rinciple o f
eq u ity am ong com peting financial institutions. C onsequently, Con­
gress m ig h t wish to consider w hether p arallel leg isla tio n is needed to
authorize the application o f a sim ilar criterion w ith respect to rates
o f interest on federally insured deposits or shares a t other savings
institutions.
C hanges in the com petitive situation am ong financial interm ediaries
m erit continuing close surveillance. T h e B oard is w a tch in g develop­
m ents closely fo r any ind ications th a t these com petitive developm ents
m igh t be ta k in g form s th a t are harm ful to th e p u b lic interest. The
B oard has ordered a new survey— w h ich is now in th e field— o f changes
since early 1966 in the rates banks are p a y in g on variou s classes o f
tim e and savings deposits, and in th e net flow s o f these deposits during
th is period. I f regulatory actions seem to be needed, in th e lig h t o f
u n fo ld in g developm ents, th e B oard w ill n o t hesitate to take w hatever
action is called for. I t also w ill n ot hesitate to request n ew legislative
authority i f th is should seem necessary or desirable.
N ow , M r. Chairm an, I w ould be very g la d to attem p t to answ er any
questions, but I know m y associates w ill w a n t to exp ress additional
view s, at tim es d iffering from m ine.
T h e C h a i r m a n . W e w ill feel free to interrogate each one o f them.
Governor, we appreciate you r statem ent and it g iv e s u s a lo t o f
inform ation w hich w e w ill need, and it certain ly w ill receive c a r e f u l
consideration.
I t com es from th e B oard, as I understand ?
M r. R obertson. I t does.
T h e C h a i r m a n . A s w ell as from y o u rself ?
M r. R obertson. Y es, sir.
T h e C h a i r m a n . T h e m ain question before u s r ig h t now , Governor
R obertson, is th e increase o f th e rate o f 4% percent to 5% percent*
Decem ber 6. N atu rally, th at h a s caused a lo t o f trouble. N ow , do
you feel th a t th e B oard should g iv e consideration to lo w erin g that
rate a t th is tim e, G overnor R obertson?
M r. R obertson . A s you know , m y fe e lin g in D ecem ber w as th a t th is
w a s n o t th e appropriate action a n a th a t dissent is a m atter o f public
record.
H ow ever, I feel that, now th a t the com p etitive situ a tio n has developed, m th e lig h t o f those actions, th a t w e should be v ery careful in
seein g w hat th e problem is and th en g ea rin g our action to £ne problem*
b u t th a t w e shou ld take action in correctin g an y developm ent that
w ou ld be adverse to th e p u b lic interest.

I would think that, in order to do that, we vrould want to be very
sore that we know what we are doing, wheai we axe doing it, a n d that



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 7 7

it is tim ed right. T h is can be done as soon as our survey is com pleted,
w hich should be by the m iddle o f June. W e should then be in a posi­
tion to determ ine the nature o f the problem and tailor th e rem edy to
su it it.
T he C h a irm a n . N ow , you state here that although you do not favor
the su ggestion o f lim itin g the am ount o f, say, under $10,000, you g et
4 percent, and above $10,000, 5 y2 percent, and I share your view s on
that. I th in k it is discrim inatory. I do not think the Members o f
Congress w ill vote fo r it, not on th e floor o f the H ouse, because I have
never know n M embers to vote to discrim inate against the poor in favor
o f the rich.
F or th at reason, I do not thin k they w ill do it.
Y ou state th at although you are again st it, you w ill, o f course, if
Congress enacts it in to law , carry out your responsibility, w hich, as I
understand the law , you are charged to do.
Mr. R obertson. T h at is our job.
T he C hairman . A n d you do not m ind d oing it.
N ow , i f Congress does not g et w hat it w ants from the B oard o f
Governors— there is lots o f feelin g all over the N ation about th is
th in g ; there is lots o f feelin g fo r other financial institutions, not
because th ey are savin gs and loans, credit unions, m utual savings
lans, but because o f w hat th is adverse action is doing to the homeu ild in g industry and th r ift institutions a ll over the country. T hey
feel th at u n fa ir advantage has been taken o f them and th a t advantage
is cu ttin g to th e heart in lots o f places in th is country, and the people
are very strongly against it and are dem anding th at their Members o f
Congress do som ething about—dem anding o f them th at som ething be
done about it.
I t is discrim ination at its w orst, from the standpoint o f m any o f
our correspondents and m any o f our constituents. So, do not be
surprised i f Congress should assume its duty o f try in g to do som e­
th in g about th is, either by law , or, I guess, a join t resolution would
be sufficient. I f Congress passed a join t resolution tellin g the Board
th a t w e w a n t you to put the interest rate at 4^2 percent, you w ould
have to do t h a t ; w ould you n ot ?
M r. R obertson. I am sure w e w ould be obliged to do it.
T he C hairman . A n d a lo t o f us feel lik e th is 4% percent w ould
really solve th is question.
I f you reduce th at 5% to 4% , a ll financial institutions could live
and really have h ealth y and wholesom e com petition. W e hope you
w ill g iv e consideration to it, G overnor Robertson, because the situ a­
tion rig h t now is critical.
T he reason the people feel strongly about th is is, back in 1932, under
Mr. H oover, a R epublican adm inistration, there w as a lo t o f feelin g
o f dissatisfaction , because the banks had n o t had any fee lin g about
hom ebuilding and w ould not h elp out in the hom ebuilding m arket,
and M r. H oover in itiated , o f course, th e F ederal H om e L oan B ank
System , and g o t th e F ederal savin gs and loans started, because the
banks w ould n ot do it. T hey ju st w ou ld n ot do it, because they were
not interested in it.
N ow , a fter a ll th is period o f tim e, th is $130 b illion financial in ­
dustry has been b u ilt up, savin gs an d loans, and has b u ilt m ore Tiomes

S




178

u nso und

c o m p e t it io n

for

s a v in g s a n d

t im e

d e p o s it s

th a n h ave ever been b u ilt in A m erica. W ith o u t savin gs and loans,
w e w ou ld n o t have our fine hom es over th e N ation , or as m any.
Y ou realize th at, d on ’t you, G overnor R obertson ?
M r. Robertson*. V ery "much so.
T h e C h a ir m a n . T herefore, w e should n o t do an y th in g so drastic
and arbitrary as to p un ish those very in stitu tion s th a t really saved
our country, because shelter is about one o f the m ost im portant things
w e h ave fo r fa m ily lif e in th is country, and w e m ust encourage things
lik e th at. A n d th a t is the reason there is so m uch resentm ent now
again st it th at seems to h it the in stitu tion s th e hardest th a t have done
so m uch fo r us in the la st 30 years in the w ay o f b u ild in g hom es, decent
hom es, fo r people to liv e in.
T h e fe e lin g o f M embers, I th in k you w ill find, is very strong in
th at direction, and it is possible th ey m ig h t g et im p atien t w ith the
F ed eral R eserve B oard i f som ething is n ot done to change it, and I
ju st hope that the B oard w ill g iv e consideration to th a t and not even
w ait u n til June, or i f th e situation begin s to w orsen, as it seems to
be right now.
It is ju st intolerable, w e just cannot p u t up w ith it.
A n yw ay, you p led g e th at the B oard w ill g iv e consideration in these
changin g tim es, to the ch an gin g situations. B u t it is real u r g e n t ,
G overnor Robertson. I t is pressing dow n on th e people rig h t now,
and we m igh t be throw n into, or be on th e verge o f a real depression,
and w e do n ot need any depression r ig h t now .
Mr. R o b ertso n . I w ould lik e to say, M r. C hairm an, w e are very
alert to th is, and w e are n o t w a itin g on statistics. W e are actively
endeavoring to find out w h a t th e actual picture is, in order th at we
can decide w hether w e w ill have m eans at our d isp osal to improve
the situation.
A s o f th is m om ent, there is som e doubt as to w hether th e problem is
as real as som e peop le think. I t is a p ro b lem ; there is no question
about it, bu t th e flow o f fu n d s from one k in d o f in stitu tio n to another
k in d o f in stitu tion seem s to h ave tapered off to som e extent. There
are sp otty situations, o f course, bu t a lo t o f th e problem at th e moment
I m igh t say, in m y ow n view , is based on fear o f w h at is lik ely to
happen rather than on any present situation , but th is is som ething that
we are w atch in g verv carefu lly.
T he C h a irm a n . T h is 1965 action, on D ecem ber 6, p u t th e rates up
37^/2 percent. Sup p ose autom obile m anufacturers increased their
prices th a t m uch or labor had attem pted to increase th eir w age rates
th at m uch— or anybody else—people w ould scream to th e h ig h heavens,
and th ey could not take it at a ll. B u t here, th e m onetary authorities
come along and at one stroke o f the pen ju st increase interest rates
37% percent. I occurs to m e th a t real consideration should be given
to that part o f you r order im m ediately.
D o you h ave in m in d any im m ediate sessions o f you r B oard ?
M r. R o b e r tso n . T h is subject is raised at p ractically every session
o f our B oard in som e form or another.
T h e C h a irm a n . M rs. S u llivan ?
M rs. S u l li v a n . T h a n k you , M r. Chairm an.
G overnor, in th e testim on y before th is sam e com m ittee la st Thurs­
d ay, M ay 19, Secretary o f th e T reasury F o w le r stated th a t negotiable
C D ’s served as a liq u id m oney m arket instrum ent rather th an as a



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 7 9

savings m edium . W hat are the dangers to com m ercial banks o f their
bidding up h ig h fo r huge funds which are essentially liquid, interestbearing deposits rather than bona fide bank deposits received in the
norm al course o f business ?
Mr. R o b ertso n . W ell, the dangers, o f course, from m y own per­
sonal poin t o f view — and I m ay say th at I am perhaps more interested
than m ost people in the question from a supervisory point o f view , be­
cause o f background in th is field— m y m ain concern about the w hole
CD field goes to the point o f liqu idity o f the banks them selves.
N ow , it is perfectly possible fo r banks to use tim e certificates of
deposit to obtain funds safely.
I t depends entirely upon w hat they put those funds into, but i f they
put those fun ds into long-term obligations, and you have w ithdraw als
because o f interest patterns goin g up, and you can’t roll those over,
they have insufficient liq uid ity w ith w hich to meet those w ithdrawals.
T his constitutes a very real danger and I thin k is one o f the things
w hich have to be w atched very closely. T h is is one o f the reasons that
I have pressed over the years for much more effective bank supervision
than we have, and unified Federal supervision.
B ut, we do not have that sort o f th ing. W e do need, it seems to me,
to develop as a m atter o f governm ental p olicy, m uch better bank su­
pervision than we have, one that is concentrated on the problem from
the point o f view o f safety, liq uid ity, solvency, and v ia b ility o f the
institutions.
Mrs. S u lliv a n . Governor, w h y does th e F ederal Reserve System
perm it th is situation to persist after really h a vin g created it by in ­
creasing th e interest rate ?
Mr. R ob ertso n . I m ust let other members, m y associates, speak on
th is subject, but I am sure that they feel and deeply feel that this is
being handled in a safe manner by the banking institutions o f this
country, th a t th ey are in a position to m aintain appropriate liquidity
and enable them to meet these w ithdraw als.
From m y p oin t o f view , there has been an attitude developed over
the years w hereby banks have come to believe that whenever interest
rates are pushed up to tlie ceilings, w e w ill autom atically raise those
ceilings. T h is is a false premise, because I do n ot think th is B oard or
any other board w ill perm it banks to p ay high er rates to attract funds
unless they are convinced th at banks are h an d lin g th is in a safe and
sound manner. T h is is a m atter o f j udgm ent.
Mrs. S u lliv a n . W ou ld any o f the other o f your associates care to
express an opinion ?
Mr. R ob ertso n . I am sure they would.
Mrs. S u lliv a n . Mr. M aisel?
Mr. M a is e l. Mrs. Congresswom an, I th in k th e fa ir th in g to say here
is th at w e are concerned w ith the efficiency o f our m onetary and credit
system . M y ow n attitude in Decem ber was, first, th a t w e w ould have
been better off d ela y in g the use o f m onetary p olicy at th a t tim e in the
hope o f g ettin g fiscal action, and second, h a v in g decided to use m one­
tary restraint, th at we w ould have been better off u sin g open m arket
operations rather than causing rates to g o up through a discount
change, but h a v in g done it, I do n ot think th a t w e had m uch choice.
The present situation results sim p ly from s a y in g : “I f w e d o n o t allow
banks and other financial in stitutions to com pete w ith th e m oney m ar


180

UNSOUND COM PETITION FOR SAVINGS AND TIM E DEPOSITS

ket, th ey sim p ly are n o t g o in g to have th e m oney to lend to their cus­
tom ers.” I th in k th is is th e question w e are concerned here with—
in term ed iation, and how our banking system operates.
I disagree w ith th e earlier statem ent o f G overnor Robertson, I
th in k h is d issen t w as w rong. M y ow n fe e lin g is th a t a m istake was
m ade b y p u ttin g price ceilin g s through regu lation Q on the amount
th a t banks could p ay from th e period o f 1957 through 1963. As a
resu lt o f th a t action w e had th e norm al results o f any price ceiling.
F u n d s flowed too fa r into the w rong areas. A s a result, w hile savings
an d loans did a very good job, tow ard th e end o f that period they had
m ore m oney com ing in than they knew w hat to do w ith. T h e ways in
w hich th ey used th is m oney w as rather inefficient fo r the economy.
L ess and less o f th eir m oney w as g o in g into th e sin g le -fa m ily house
m arket. M ore and m ore w as g o in g in to other typ es o f use.
T h e concentration o f fu n d s in savin gs and loans tended to flow
in to certain States. A ll o f th is, I think, w as a resu lt o f the Q ceiling
w hich w as m aintained too lo n g b y th e F ed era l R eserve. T h e restric­
tio n on th e am ount th at banks could p ay w as too great.
N ow , I th ink th is has increased the problem w e face. W e must
decide w hether w e believe in th e m arket se ttin g rates. D o w e believe
th a t savings should flow w here th e m arket feels th ey w ill be used most
efficiently ?
M y ow n b elief is th at there is a danger in com petition, ju st as there
is a danger in any m arket. H ow ever, fo r th e present, un til we see
how great the danger is, and w here w e are g oin g, w e ou gh t not to
m ake th e m istake th a t w e m ade before. W e should n o t create addi­
tional problem s b y u sin g ceilings. Interest-rate ceilin g s are like wage
ceilin g s o r price ceilin gs, or any other sort. T h ere are tim es w hen they
are usefu l.
On th e other hand, h istorically, th e w a y w e tr y to run our economy
is to le t th e m arket determ ine w hat th e m ost efficient use o f resources
is. W e d id n ot do th is, so th a t p art o f w hat w e are seein g now is a
correction o f a p rior m aldistribution o f funds. C ertain institutions
w hich w en t w ay out o f lin e and g o t too m an y fu n d s com pared to what
th ey could use efficiently are now suffering slig h tly . B u t since
believe in a free-m arket econom y, I th in k th a t, at least fo r the time
being, w e ou ght to le t the m arket distribute th e fu n d s the w ay it can
m ost efficiently.
Mrs. S u lliv a n . T hank you, M r. M aisel.
M y tim e h as expired.
T h e C h a irm a n . M rs. D w yer?
Mrs. D w y e r . N o questions.
T h e C h a irm a n . M r. Reuss?
Mr. R eu ss. T hank you , M r. Chairm an.
F ir st, G overnor Robertson, le t m e take th is o p p ortu n ity, ir r e le v a n t
to the hearin g th is m orning, to congratulate you on th is splendid job
you are d o in g w ith respect to our balan ce o f paym ents and foreign
bank loans.
Mr. R o b ertso n . T h a n k you v ery m uch.
M r. R e u ss. I th in k you, an d you r colleagues, o u g h t to be congra^
ulated fo r p ro v id in g one o f th e rela tiv ely few b rig h t h o p efu l brush
strokes on our balance-of-paym ents p u n tin g .



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

181

N ow , on the subject on w hich I do not feel as chum m y, certificates
o f deposit, let m e recapitulate m y view s on th is m onster w hich I pre­
sented last Decem ber before the J o in t E conom ic Com m ittee, w hen
you and your colleagues were present.
I t seems to me th at in allow ing certificates o f deposit to g o up in
5 years from zero to more than $17% billion, the F ederal Reserve
System has allow ed the O ld M an o f the Sea to get on its shoulders
and ride it. I am im pressed by the fact th at to the extent that the
certificates o f deposit have abstracted m oney from our savings and
loan associations, it has had the effect o f transferring credit from
the hom ebuilding industry, where there is now a 9.9-percent unem­
ploym ent rate? where more economic a ctivity could be accom plished
w ithout inflation, it has transferred large parts o f th is to bank in ­
ventory loans, w hich have a very inflationary effect.
In your statem ent, Governor Robertson, you refer on page 4 to the
marked increase in credit flows through the commercial h an k in g sys­
tem, and “T h is increase in the financing o f economic expansion”— that
is how you refer to it.
N ow , I really question th at philosophy o f the Federal Reserve. I
do not th in k th at autom atically more credit in the F ederal Reserve
means econom ic expansion. Som e o f it m ay mean inflation. A nd
to the extent that bank loans, particularly by the big 30— N ew YorkC hicago banks w hich hold the bulk o f these $17% billion o f certifi­
cates o f deposit— I have reason to believe th at some o f their lending
practices are in order to build up inventories in business in excess
o f th a t w hich is needed.
M y objection to th e uncontrolled negotiable tim e certificate o f de­
p osit regim e w e now have is, first, th a t it diverts credit from those
sections o f the econom y w hich could lend it in a noninflationary m an­
ner, as to the h ousing industry, to financial institutions, by b ig banks
w hich lend in part at least in an inflationary manner.
Second, I object to the discrim ination in our banking system which
allow s the 30 b ig banks w hich, having bu ilt up a secondary m arket
and h a v in g a good opportunity to m arket the certificates say at 5%
percent, I object to the discrim ination in th eir favor and at the e x ­
pense o f th e other 13,000 banks, not to m ention all the other financial
interm ediaries.
T hird, I object because, since the F ederal R eserve now has only a
4-percent reserve requirem ent on negotiable certificates o f deposit, it
seems to me you therefore lose som e control w hich you ought to have
over the total credit capacity o f our banking system and th u s either
have to tigh ten m oney inordinately over the w hole system and squeeze
the other 13,000 banks in order to control the 30, or, more probably,
you have to loosen th e credit-creating capacity o f the entire system
m order to n ot squeeze out the 13,000 banks w hich are not im portantly
in the tim e certificate o f deposit business.
I w ould lik e, therefore, fo r you and your colleagues to com m ent
upon m y indictm ent, i f you w ant to call it th a t, and specifically to ask
your view s on the R euss proposal w hich I have been m aking ever
since Decem ber, w hich is th a t the F ederal R eserve ought to increase
the reserve requirem ent on negotiable certificates o f deposit, w hich it
could do tom orrow , from 4 to 6 percent— and m ore th an that— th a t it
ought to h ave pow er from Congress to increase those reserve require63-496— 66----- 13




182

UNSOUND COM PETITION FOR SAVINGS AND TIM E DEPOSITS

m ents on n egotiab le certificates o f deposit w ith in its discretion up to
a level o f perhaps equal to th a t required fo r dem and deposits.
W o u ld y o u com m ent on th e package ?
Mr. R o b e r t s o n . I f I could com m ent, first, I am sure some o f my
associates w ould en joy d eb ating th is issue.
I hesitate to say to o m uch, because I am in sym pathy w ith th is point
o f view . T here m ay be differences betw een us in som e areas, but in
general I have great sym pathy w ith th is p oin t o f view .
I th in k th a t in so fa r as th e drains from the savin gs and loans are
concerned, th ey are n ot due to th e b ig C D . I t is the gim m ick instru­
m ent— the savin gs certificate or savin gs bond at a high er rate of
interest— w hich has been p u llin g fu n d s out o f the savin gs and loans
and, therefore, from th a t p oin t o f view any changes sh ou ld be directed
to th a t field instead o f the other.
I do how ever realize th at the im pact o f m onetary p olicy in a time
w hen you are h av in g a tig h t p o licy ough t to be evenly distributed over
the econom y, as evenly as possible. I t is intended to have a bite, but
you don’t w ant to take the w hole bite in one area and no b ite in another.
Furtherm ore, there are areas w here th e in flationary im pact o f loans
is particularly great. F o r exam ple, in p la n t and equipm ent expan­
sion, the m achine tool industry is probably th e tig h e st area and is the
greatest bottleneck in the w hole field, and to the exten t th a t loans are
m ade in th a t area, y ou are m erely ad d in g to the dem and fo r the in­
adequate supplies. T herefore, I th in k it is u n fortu n ate th at at the
present tim e you are h a v in g a b ig g er im pact on th e b u ild in g industry
than y o u are in other areas.
W ith respect to the reserve requirem ents, I happen to believe that
th is is a tim e w hen w e should be raisin g reserve requirem ents on time
certificates to th e extent we have pow er, and I w ould w elcom e, p e r s o n ­
ally ? a m ore flexible, a w ider spread pow er to fix reserve requirements
o n tim e deposits, because, in m y opinion, tim e deposits are m uch n e a r e r
to being a part o f the m oney sup ply today than th ey were 10 years ago.
A t th at tim e, you could argue w ith great certain ty, I th in k , th at they
really were not, th at all you had to do w as control the dem and deposits,
I no lon ger believe this. I believe th a t tim e deposits are com ing closer
and closer to b eing a p art o f the m oney su pp ly.
N ow , w ith those com m ents, le t m e su ggest th a t you get your re­
sponse, and th at is w hat you w ant, from either G overnor M itchell or
G overnor M aisel or G overnor B rim m er.
Mr. R e u s s . I do intend to g et it from each one o f you r c o l l e a g u e s .
I note th a t m y first go-around tim e is up, b ut I do h ave tim e for a
comm ent, and a question, w hich is : F ro m w h at you h ave ju st s a id ,
G overnor R obertson, it does appear th at y ou agree w ith me, and since
you are a m em ber w ith the rig h t to vote on th e F ed , and since th e F e d
is not d o in g w h at you and I th in k should be done, it is g o in g t o be my
business from th is d a y forw ard to see th a t th e F ed is directed and re­
quired to do th a t w hich you and I hope som e o f yo u r colleagues w a n t
to do but are ev id en tly prevented by b ein g out-voted from n ow doing*

That is all.

T h e C h a i r m a n . M r. A sh ley?
M r. A s m u r . G overnor R obertson, from th e testim ony you have
presented; I tak e it th a t th e F ed eral R eserve B oard n o t on ly objects
to the leg isla tio n under consideration but has no recom m endation for
any leg isla
 tio n in th a t area, a t a l l ; is th at correct, sir ?


UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 8 3

Mr. R o b ertso n . T h at w ould be m y personal view , sim ply because I
happen to thin k th at we have am ple powers w ith in existin g legislation
to cope w ith any foreseeable problem m the im m ediate future.
I see no problem arising w hich w e are not in position to cope w ith.
Mr. A s h l e y . D o you see any problem w hich needs som e action d i­
rected to it?
Mr. R ob ertson . I see a problem w hich m ay be com ing up, and soon
we w ill have better inform ation to jud ge w hether we can correct it.
W e m ig h t return, fo r exam ple, to a schedule w ith rates adjusted to
m aturities, so th a t a depositor could earn a h igher return only by g iv ­
in g up, fo r a lon ger span h is righ t to w ithdraw h is m oney.
There are m any w ays in which this problem can be dealt w ith, but
I w ould say th a t as o f th is very moment, I w ould not advocate any
particular change. I w ould w ant to see the w ay in w hich the problem
u nfolds before a c tin g ; but we m ust act prom ptly once w e have iden­
tified a problem w e can help to solve.
Mr. A s h l e y . W ell, now , it is pretty w ell known that savings and
loans are, in m ost parts o f the country i f they are m aking any loans
at all, requiring a third down, and also that the loan be less than 10
years old. I s th is a situation that is confronting them, just the out­
grow th o f k ind o f a norm al increase in dem and for credit, Governor?
Or is th is a rather unique situation th at is caused by a unique prob­
lem to w hich there should be some kind o f attention directed and,
presum ably, a solution found ?
Mr. R ob ertso n . A tten tion is being directed to this problem. The
problem is th a t in some areas o f the country, savings and loans have
suffered a loss o f savings accounts, but so have all financial institutions
in the im m ediate past. There has not been the grow th in savings there
was before, because o f the flow directly from savers to the markets.
H ow ever, they fear that if there is another increase in the rate struc­
ture, the flow to them w ill be dim inished greatly, and as a result they
are not m aking forw ard com m itm ents.
There has also been a tendency, I understand, on the part o f bor­
rowers, to speed up th e use o f outstanding com m itments in order to
take advantage o f low er rates, and this is adding to the difficulties that
savings and loan associations face at the present tim e. B u t they fear
a greater outflow, m ore than they can sustain, because o f their very
low liq uidity position, and th is is not a problem w hich has just come to
the fore now ; th is is a problem w hich has been developing over
the years.
B u t th is is n ot a problem w e are not aware o f; w e are aware o f it.
Mr. A s h l e y . W ith the change in regulation Q, hasn't th is p u t in ­
creased pressure on savin gs and loans and sim ilar institutions to re­
spond in kind as best they can ?
D oes th is p u t pressure on them to seek m eans by w hich to pay their
depositors m ore ?
Mr. R ob ertso n . Oh, y e s ; absolutely.
Mr. A s h l e y . A n d ju st p u t continued pressure on h igh er interest
rates?
Mr. R o b e r t s o n . Oh, no question about th e fa c t th a t there has been
greater pressure on them . T hey are g o in g to have to p ay m ore in or­
der to get th e fu n d s w ith w hich to m ake th eir loans. T h is is m erely a
p a rt o f the process, th e com petitive process.



184

UNSOUND COM PETITION FOR SAVINGS AND TIM E DEPOSITS

M r. A s h l e y . B u t th ey are resp on d in g to a situ ation brought about
b y th e F ed era l R eserve B o a r d ; is th is n ot so ?
M r. R o b e r tso n . T h is is a situ ation w h ich is brought about by a
tig h te r m onetary p o licy w hich, in turn, is designed to curb demand, in
order th a t w e do n o t have an excessive volum e o f m oney chasing an
inadequate su p p ly o f goods and services, so you have the situation----M r. A s h l e y . I t seem s to m e th at banks have enjoyed, however, a
very favorab le com petitive situ ation as against th e sa vin gs and loans.
I can understand the necessity fo r a tig h t m oney policy upon occa­
sion, but I do n ot believe, as I understand it, G overnor, th at this has
been brou ght about in a m anner th at treats equally and fa irly institu­
tio n s’ differin g characters. O f course, the com m ercial banks, I believe,
h ave been favored over th e savin gs and loans, from the evidence that
has been presented to me. T h is is certain ly the conclusion I would
have to reach.
Mr. R o b e r t s o n . I th in k y ou ou ght to be careful about that, because
over the years one kind o f savin gs in stitu tion has had no ceilings over
it at a ll, w hereas the banks have had. A n d , fo r m any years, the sav­
in g s in stitu tion s did have a com petitive ad van tage over banks.
N ow , u n fortu nately, th is particular increase w as so abrupt and so
great th at it changed th at com petitive pattern to o abruptly and did
create th at problem you are ta lk in g about. N o question about that in
m y opinion. B u t it is a problem w hich you ju st do not turn back im­
m ediately, because patterns becom e established.
M r. A s h l e y . V io len t actions often do beget v io len t reactions, and
th is is w h y w e are here today.
Mr. R o b e r t s o n . T h a t is righ t.
Mr. A s h l e y . B ecause o f the violence o f th a t action.
Mr. R o b e r t s o n . T h is is rig h t, b ut I m erely urge y o u to be c a r e fu l
in know ing exactly w h at you r problem is.

Mr. A shley . Y ou urge me to be careful, but you do not choose to
exercise that care yourself.
Mr. R o b e r t s o n . I w ould lik e to say w e are tr y in g to be as careful as
w e can, M r. Congressm an.
Mr. A s h l e y . T h at is a fter th e fa c t som ew hat, is it n ot ?
Mr. M a i s e l . M ay I speak, M r. Congressm an ?
Mr. A s h l e y . O f course.
M r . M a i s e l . I th in k that y ou are c a llin g attention to something
w hich has been w ell know n. T h is situation is not a particularly dif­
ferent situ ation th an at any other tim e w hen m onetary restraint has
come in to th e econom y. T h is is a norm al cost o f u sin g monetary

Policy-.

.

.

.

w

I th in k w hat you are objectin g to— and I think th is is a p oint that
has to be m ade clearly — is th e h ig h cost, in a particular sector a n d
particularly in the area th at w e are ta lk in g about, housing, o f the use
o f m onetary policy. I f th e Congress believes that m onetary policy
should not be used because it is costly in specific areas, then th is is a
proper basis upon w hich to m ake its decision. I certainly have always
called attention to th is fact.
T h is is w h y , in m y ow n view , fiscal p o licy , such as an increase in
taxes or d o in g aw ay w ith th e investm ent credit, w ould have been a
better p olicy fo r th is period. B u t I th in k , h a v in g fa iled to use fiscal
p olicy in D ecem ber or Janu ary, h a v in g required th a t monetary



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

185

policy be used to attempt to curtail the excessive demand and for
balance-of-payments reasons as well, then I think it is not surprising
•that the use of monetary policy costs particular sectors a great deal.
This is what we know about the use of monetary policy, that it has to
pinch in the mortgage market and other specific sectors.
Mr. A shley . May I interrupt %
I t seems to m e that by g iv in g the banks -the opportunity to get a
greater return fo r their CD'S, th is encourages at a tim e o f restraint, at
a tim e when the B oard is seeking to restrain it, th e banks, th e com ­
mercial banks, have opportunities to invest their now relatively easy
obtainable fu nd s in short-term loans as against and distinct from — and
I do n ot think that that is an econom ically w ise th in g—at a tim e when
restraint is necessary, particularly when the concom itant result is that
there is a relative dim inution in funds available for what in fact is
a socially desirable purpose, even during a period o f restrain t; nam ely,
the construction o f at least a m inim um number o f homes for an in ­
creasing population.
Mr. Maisel. I agree w ith your point entirely, except in the causal
factor. In fact, I feel even more strongly than you as to w hat the
problem is here. B u t I think the idea that settin g a low er regulation
Q ceiling, w ould fix th is problem is incorrect. A s an exam ple, in the
first quarter, w e know that the relative flow to the money market from
all savings institutions, including th e commercial banks, was about
even.
N ow , in A p ril, the com m ercial banks did a little better. B ut I still
think that the problem is that all these institutions are com peting with
the money m arket and sales o f goods. A great deal o f the flow out o f
savings in stitu tion s arose from the fact th at during the past 3 or 4
years they were not collecting real savings. T hey were collecting
sophisticated m oney. I t seems clear th at they sought th is larger in ­
vestor kind o f m oney from the typ e o f advertising th at has taken
place in the financial press and from w hat we know o f the type o f
money th a t has been attracted into savings institutions. N ow there
are fa irly good indications that most o f the m oney that has been flow­
ing out, or a great deal o f it, is th is type o f sophisticated money. I t is
not particularly flow ing in to tlie banks, it is flow ing into the money
market.
I have been told that fo r m any institutions, because they have in ­
creased their rates in th e last quarter, th ey have been gettin g more
small accounts than they have had previously.

The problem here is that we are dealing with a question of competi­
tive markets on a broad scale. This is what we have to be certain that
everybody understands. Setting a lower regulation Q ceiling on time
certificates or savings certificates or anything of that kind would not
necessarily mean that savings institutions are going to have more
money. It probably would mean that there would simply be less
money available to all institutions to put into mortgages and things of
that sort, because more of it would go ino the money market or be
spent for current consumption.
Now, this flow has been attracted to the money market simply from
the fact that when you use monetary restraint, interest rates have to
go up. But I think that it is clear that we must differentiate. We
should not accept the oversimple explanation, post hoc propter hoc,



1 8 6 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

that it is the fact that Q ceilings were raised that is taking the money
out o f the savings institutions. I f Q ceilings had not been raised* the
money m ight have gone out even faster, and less m oney would be avail­
able to the m ortgage market.
Mr. M it c h e ll. Could I say just a word, Mr. Congressman, please?
First, about the relative advantage o f the banking system as a result
o f the Q changes. Banks are paying 5^4 or 5% f ° r large C D ’s, and
lending the funds at 5%. They are not m aking much money. The
advantage to them is that it enables them to take care o f their most
urgent customers.
In the short run it is essentially a loss operation, not a profitable
operation.
Now, on the second point, that banks-----Mr. A s h le y . May I ask to whom they are lending it ?
Mr. M it c h e ll. To prime customers; they pay 5% percent.
Now, the other point that you were m aking is th at the banks, by
virtue o f the change in the C D ’s, have been able to get a larger share
o f the market.
Banks’ share o f total funds raised in 1965 was just under 40 per­
cent, and in the first quarter o f this year it is 25 percent. Banks, in
fact, are getting considerably less than they got last year. A nd this
ties into what Governor Maisel was saying, th at the capital markets
are the gainers; these funds are not goin g into the banking system
from savings and loan associations, they are going into the market.
Mr. Ottinger. $l7y2 billion went into C D ’s, did it not?
Mr. M it c h e ll. $17% billion, no. The level o f C D ’s outstanding
last fall was $16.2 billion, and after the first o f the year this total rose

to about $17% billion, so this is an increase of about $1.1 billion, but
the annual rate at which additional funds are being supplied to all
sectors was $88 billion in the first quarter.
Mr. A shley . What was the volume, what was the amount in CD’s,
in 1960 or 1961?
Mr. M i t c h e l l . Zero. The large negotiable CD was introduced in
1961.
Mr. A shley. What is it now?
M r. M

it c h e l l

.

$17V billion.
s>

Mr. A s h l e y . From zero to $17% billion ?
Mr. M it c h e l l . That is right.
Mr. A shley. In how long?
M r . M it c h e l l . Five y e a r s , I w o u ld say.
Mr. A s h l e y . Where are those dollars coming from,

Governor?

Mr M itc h e ll. Some of these came out of the money and capita
market; some of them came out of bank demand accounts. After all;
when a bank issues a CD, it is competing with its own accounts.

Mr. A shley. How a.bout savings and loan associations?
Mr. M itchell. Well, to the extent savings and loan

associations

had hot money, yes, it was attracted; but to the extent they had genu-

me savers, no.

J

aJ?1*'
P ° we
to what extent it came from the various
sources that you have enumerated ?
Mr. M it c h e ix u Well, there is some conjecture on that.
Mr. Maisel. Well, I can calculate here that for 1961 through 1965'
mcrease “ savings and loan shares wag abont $50 billion? They



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 1 8 7

were 62.1 in 1960; they were 111.2 in A p ril. W hereas about 17 billion
went into negotiable C D ’s during that period, th at period showed one
o f the largest rates o f increase in savings and loans m history.
Mr. A shley . O bviously, we are talk in g about a period o f enormous
credit g r o w th ; is that not so ?

Mr. Maisel. That is correct.
Mr. A shley . I w ould not expect— we still are faced w ith the fact
that 17 b illions o f dollars are now in certificates o f deposit that were
elsewhere 4 years ago. T hat is the key point, is it not?
Mr. M itchell. There are several places they could have been. T hey
could have been in the com m ercial banking sy stem ; in dem and deposit
accounts; in open book accounts; they coula have been in nonnegoti­
able C D ’s; th ey could have been in the money m a rk et; they could have
been in the stock m a rk et; they could have been in the bond m ark et;
and there is a billion dollars o f foreign m oney in there on which you
have taken th e ceilin g off.
Mr. A shley . W ell, do we know, Governor, exactly where these
funds cam e from ?
Mr. M itchell. W ell, no; we do not know exactly where they came
from ; w e know th e sources they could have come from .
Mr. Maisel. L et m e put it another w a y : D u rin g th is period the
amount o f liquid assets in the U .S . economy w ent up by alm ost 200
billion. T h a t m eans th at about 8 or 9 percent o f the increase in
liquid assets d uring th a t period w as in negotiable C D ’s. N ow , w hether
you thin k th is is a large percent or a sm all j>ercent to be m ade up o f
C D ’s depends on your point o f view . I th in k a m ajor point to be
made is th at th is w as th e w ay a free m arket distributed the 200 b illion
of liquid assets th a t were created during th at period.
Mr. A shley . W ell, I think that a m atter o f 1 percent, depending
upon the extent to w hich your economy is sophisticated, could be very
m eaningful.
Thank you, Mr. Chairman. ^
T he Chairman . A t th is point, I w ould lik e to place in the record
a statem ent in the M ay 19, 1966, D a ily B ond B uyer entitled “Banks
A dd $5 B illio n o f T a x-E xem p ts in 1965.”
W ithou t objection, it is so ordered.
(T he article from th e D a ily B ond B u yer fo llo w s :)
[From the Daily Bond Buyer, May 19. 1966]
B a n k s A dd $5 B il l io n

of

T a x -E x e m p t s

in

1965, R is e

of

15.4 P ercent

May 18. —Insured commercial banks increased their holdings
of state and local government bonds last year by 15.4 per cent over the previous
year—a rise from $33.3 biUion to nearly $38.5 billion—Federal Deposit Insurance
Corporation Chairman K. A. Randall reported today.
The increase in commercial bank holdings of local government securities was
slightly offset by a decline in all insured banks’ investments in state and local
bonds.
Mutual savings banks’ holdings dropped from $367.8 miUion in 1964 to $300.2
million as of the end of last year, a drop of about 19 per cent', Chairman Randall
said.
W a s h in g to n ,

U.S. HOLDINGS DOWN

While insured commercial banks were adding to their investments in local
government bonds, they were disinvestors in Federal government securities.
Their holdings in this area dropped from $62.6 billion to $59.2 billion, a decline
of about 5.4 per cent on a year-to-year basis.



1 8 8 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

Total assets of insured banks, both commercial and mutual savings, rose by
8.6 per cent last year to a total of $426 billion. Deposits increased 8.1 per cent
to $377 billion, while capital and surplus accounts, after a rise of $2.7 billion
during the year, amounted to nearly $34 billion.
TOTAL LOANS U P 1 4 .9 PERCENT

Assets of insured commercial banks, totaling $375 billion on Dec. 31, 1956,
rose by 8.8 per cent during the year. Total loans, less valuation reserves, ac­
counting at year-end for almost 54 per cent of the banks’ total assets, were 14.9
per cent higher.
Continuing a strong rate of growth, commercial and industrial loans gained
18.6 per cent, while loans on real estate rose 12.9 per cent. Total consumer
loans were 14.3 per cent higher, with closely similar percentage changes in in­
stallment and single-payment loans.
For the first time banks were requested to report separately on Federal funds
sold, most of which were previously included in loans to banks, total Federal
funds sold as reported on December 31 amounted to slightly over $2 billion.
DEPOSIT LIABILITIES

Deposit liabilities of insured commercial banks totaled $332 billion on De­
cember 31, after an increase of 8.3 per cent during the year. Time and savings
deposits of business and individuals, which rose 15.4 per cent, accounted for
more than two-thirds of the expansion in deposit volume.
Total capital accounts of insured commercial banks increased 9.0 per cent
during the year. Almost three-fifths of the dollar gain was in capital stock,
notes, and debentures.
Insured mutual savings banks reported an increase of 7.3 per cent during
1965 in their total assets. Total loans of these banks, about 98 per cent of which
are real estate loans, were up 10.3 per cent for the year.
Deposits of insured mutual savings banks totaled almost $46 billion on De­
cember 31, following a gain of 7.3 per cent in 1965. Total surplus accounts
rose 6.1 per cent to slightly under $4 billion.
The Chairman. Mr. Talcott.
Mr. T alcott. Thank you, Mr. Chairman.
I have a couple of rather random comments.
First, I am pleased w ith the testim ony o f the Federal Reserve
Board, Mr. Robertson.
I am pleasantly surprised, in a way, that you did not follow right
along with the administration, because sometimes I feel that you do not
show as much independence as you have a righ t to exercise. I am
pleased also that you have recognized that Members of Congress some­
tim es get pretty panicky during an election year and want to appear to
be doing a lot o f things for particular industries. W e have a national
interest that we must consider at the same tim e, and so I was relieved
when you indicated that you were going to exercise caution and study
this problem more fu lly before you make any drastic recommendation
or accede to executive or political proposals.
I commend you for this good and sound approach to a very com­
plicated and complex problem.
I was curious, Mr. Robertson, about your vote on the various in­
creases in the rate ceilings. Could you tell me whether you voted for
the increases in the rate ceiling that you mentioned earlier in your
testimony.
Mr. R obertson. The answer is “I did not.”
Mr. T a lc o t t . Over the whole 10-year period, you did not vote to
increase-----Mr. R obertson. W ell, now, I expect I could go through th is and tell
you.



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 8 9

I thin k you w ill find that I did not vote— I did vote for one, I
believe, when th at w as raised at the tim e we raised the discount race,
we raised the ceiling on tim e certificates up to a p oin t equal to savings
deposits, but I have never voted to authorize the paym ent o f a rate to a
business concern higher than that w hich a bank could p ay to an in d i­
vidual, because I thin k Government should never be in a position of
saying to a bank “Y ou cannot pay to a sm all or an individual person
as much as you pay to a large one.” So, I have never done that, but I
think you w ill find me on th e opposite side in m ost o f those cases.
Mr. T a lc o t t . W ell, it is good to be on one side m ost o f the tim e, I
suppose, and y et keep flexible so that we can vote differently at times.
I think we proved this in Congress. W here it used to be pretty cer­
tain th at th e Congress would protect, or even w atch out for, the sm all
investor, la st week I think Congress neglected the sm all investor. So
even Congress can make some sudden dram atic changes in its attitude.
You can no longer expect them to act the same w ay consistently.
Isn ’t that righ t, Mr. Chairman ?
The C h a irm a n . I appreciate your interest in a low interest rate.
I think you w ill be given an opportunity to vote on that pretty soon.
Mr. T a lc o t t . W e had that opportunity last week.
The C h a irm a n . S till com plaining about h igh interest rates, and
w ill you vote for a 4 ^ -p ercen t ceiling ?
Mr. T a lc o t t . I voted for it last w eek; let’s w ait and see what I do
next week. B u t, I think, sometimes, that governm ental regulation
can produce m ore problem s than it solves.
Mr. Chairm an, I have a short statem ent I w ould like to make i f this
is an appropriate time.
The C h a irm a n . I t m ay be included at th is point.
(T h e statem ent subsequently subm itted by Mr. Talcott follow s:)
S tatem ent

of

H o n . B urt L. T alcott , a R epr e se n t a t iv e
t h e S t ate of C a l if o r n ia

in

C ongress F rom

Secretary Fowler has suggested legislation that would empower the Federal
Reserve Board to set maximum interest rates payable on time deposits at 5
percent for deposits up to $10,000 and 5% percent for larger deposits.
This proposal is apparently the Administration’s response to the problems
created by inroads of banks into the flow of savings to savings and loan asso­
ciations and mutual savings banks.
During the first decade or so after World War II, savings and loan association
deposits grew much faster than time deposits at either mutual savings banks or
commercial banks. Despite their slower deposit growth, banks were able to
meet customers’ loan demands largely by increasing loan deposit ratios, which
were very low owing to large acquisitions of U.S. Government securities during
World War II. Until the mid-1950’s, most commercial banks simply did not have
to compete aggressively for savings accounts because they didn’t need additional
deposits in order to serve loan customers.
Things began to change in the mid-1950’s. First, commercial banks’ holdings
of Government securities had fallen to more normal levels, relative to deposits
and total assets. Second, commercial banks were becoming increasingly com­
petitive in their lending operations—especially in the fields of consumer loans
and mortgages.
As a result, the banks found it necessary and profitable to compete more
aggressively for time deposits, and they began to pay higher rates. During
the late 1950’s, the spread between rates paid by savings and loan associations
and mutual savings banks, on the one hand, and commercial banks, on the other,
narrowed progressively. The Fed and the FDIC had, since the 1930’s, imposed
a ceiling interest rate of 2% percent on time and savings deposits. This limita­
tion had never before been- an effective one, since before the mid-1950,s banks

had not wanted to pay more than the ceiling. When it became clear that the


190

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

ceiling was getting in the way, the maximum was raised, first in 1957, and then
in 1962,1963,1964, and 1965 to give banks the elbowroom they needed to compete
aggressively. Without these relaxations of the ceilings, the competition of
banks for time and savings accounts would have been largely forestalled. With
them, time deposits of commercial banks have increased enormously in recent
years.
Two separate facets of these developments must be distinguished. First, com­
mercial banks were able to get an increasing share of the savings deposit busi­
ness of households, farms, and unincorporated enterprises. This cut into the
business of savings and loans and mutual savings banks.
Second, commercial banks, starting in the late 1950’s, began to solicit time
deposits from corporations, foreigners, State and local governments. Most dra*
matically, in 1961, the big New York banks reversed their policy of not accepting
corporate time deposits and began issuing negotiable CD’s, which are practically
the same as Treasury bills from the holder’s point of view. In addition, these
large investors have acquired substantial nonnegotiable CD’s.
An important further result was a rise in short-term interest rates, including
rates paid on time deposits, savings and loan shares, and money market instru­
ments, relative to long-term rates. The spread between short and long rates had
accounted for much of the postwar profitability of the savings and loan industry.
As this spread has narrowed, the industry’s situation has become more pre­
carious. The Federal Home Loan Bank Board put an administrative lid on in­
terest rates paid by savings and loans in 1964 to avert what it felt were unsound
tendencies. But as banks continued their invasion of the savings market, the
Board’s restriction became increasingly onerous and in consequence was relaxed
last week. Now, savings and loans may pay as much as 5 percent on savings cer­
tificates held for 6 months or longer in areas where they face severe competition
from banks.
This recent Federal Home Loan Bank Board action was prompted by a large
outflow of savings and loan share capital following the quarterly interest pay­
ment date on March 31. Their loss, I am told, was well over $500 million.
Mutual savings banks also lost heavily—over $300 million. It appears that these
deposit losses have created something bordering on panic in the industry, which
fears a repetition after the June interest payment date passes. One result has
been a drying up of mortgage loan commitments by the savings and loans (and.
perhaps, the mutual savings banks). If this is so (the facts are not easy to come
by for such short-term developments) mortgage markets may become very tight.
Up until this spring they have been less tight than they were in late 1959-early
1960.
The savings and loan industry and the building and real estate lobbies have
swung into action to solicit relief. Beyond political considerations life those of
economic welfare of the country. The two should be distinguished. From the
point of view of the national welfare, two opposing considerations emerge.
The Federal Reserve may be inhibited from pursuing an appropriate monetary
policy because of the exposed position of the savings and loan associations and
mutual savings banks. Monetary restriction raises interest rates, especially short­
term rates. The present situation permits banks to pay up to 5M percent on
i
time certificates of deposit. Increasingly, banks have been issuing small denomi­
nation certificates of deposit, paying 5 to 5% percent, to attract ‘‘small” private
savers. Presently banks cannot ofTer more than 4 percent on passbook savings,
and some of the sales of certificates of deposit have come out of passbook savings
account*. But they have also cut severely into S&L and MSB deposits. Further
pressure on interest rates resulting from a tighter monetary policy would pre­
sumably aggravate the situation—especially in view of the Home Loan Bank
Board’s reluctance to allow savings and loans to raise their own rates to de­
positors. The question is whether such a policy would result in excessive restric­
tion of mortgage credit* or in failures of some savings and loan associations, and
how serious these results might be.
The Fowler proposal (or some variant of it) might make it possible to tighten
money with minimum effects on the savings and loans and the building industry*
The basic problem is to determine whether this is in the national interest, or
simply m the interest of the savings and loan associations and the building to*
The stake of the latter is clear. The nationalinterest is less clear.
What the Nation stands to lose by this kind of regulation, is the benefit that
comes from the kind of competition in financial markets that has developed durmg recent years. In general, we would expect this competition to attract funds



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 9 1

where they are most needed, and to see that they are channeled through those
institutions or markets that can handle the job most efficiently.
The results of increased competition for savings during the past several years
have been, in my opinion, enormously beneficial. Despite some regulators’ con­
trary beliefs, free market competition in finance is an important ingredient of
economic progress. It has made possible a tremendous improvement in the serv­
ices provided by the banking system. Today’s problem is probably more the re­
sult of too much regulation (S & L’s are forced to put nearly all of their money
into mortgages) rather than too little. History shows that one regulation breeds
another. The Fowler proposal is an example. So are the proposals embodied in
H.R. 14026 and II.R. 14422.
None of these proposals should be accepted without much more justification
than has been provided so far. Not only should we be reluctant to grant further
powers to restrict comi>etition, but we should be doubly reluctant to permit fur­
ther restrictions that reduce the returns to small savers and have a discriminatory
effect on smaller banks. I am pleased that the Federal Reserve Board has re­
frained from backing the Fowler plan or either of the two bills before us today.
The case for any of these measures is far from proved. Rather, the Board’s
testimony suggests to me the need for a full-scale study of policies to promote,
rather than hinder free competition for the saver’s dollar.
The Chairman . M ay I state to the witnesses here to d a y : O bviously,
we w ill not have an opportunity to interrogate you today, even i f
you come back tom orrow m orning, w hich we hope that you w ill, and
I just wonder if it w ill be all right, Governor Robertson, i f you w ill
speak for the others, th at you w ill be glad to answer any questions that
any member o f the com m ittee desires to submit to you in w riting,
before you look over your transcript ?
Mr. R ob ertso n . I w ould be delighted.
Mr. T alcott. A nd each member has a right to propose some ques­
tions?
The C hairman . C ertainly.
Mr. T alcott. M ay I ask just a couple questions now that m ay only
emphasize w hat Mr. Robertson said.
Last Thursday, Secretary F ow ler advocated restriction o f rates paid
on a tim e deposit up to $10,000, to 5 percent, even though larger de­
posits can earn 5 y2 percent.
T his is hard fo r me to see, w hy the sm aller depositor should be de­
prived o f the sam e interest rate as the larger depositor.
The Secretary m aintained that part o f his rationale was because
the sm aller deposit w as covered by the F D I C insurance. I take it
that you disagree w ith the Secretary on th is ?
The Chairman . I believe Governor Robertson covered that in his
statement.
Mr. R ob ertson . I did cover it. I think you should never discrim ­
inate between th e sm all and the large; the existence or nonexistence of
insurance is a very w eak reed to hang onto in tryin g to make a d is­
crimination betw een the tw o, and you have problems.
Suppose an in d ivid ual holds five different certificates o f deposit,
each o f w hich is $15,000. N ow , one o f those, I w ould guess, the first
$10,000, w ould be at the 5-percent rate, and the balance at 5V2, but how
about the others ?
I do not know how it w ould work in th at situation.
Mr. T a lc o t t . A t least h a lf o f 1 percent w ould be a p retty h igh rate
to be p a v in g fo r deposit insurance.
Mr. R o b ertso n . W ell, w ould it be applied on each in d ivid u al cer­
tificate?



192

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

Suppose the depositor has a demand deposit o f $10,000, that would
exhaust his insurance; then, does the 5 rate apply to the balance ?
I t is a very difficult thing to administer.
Mr. T alcott. I s that not a very good reason for not follow ing the
Secretary’s suggestion ?
Mr. R obertson. I would personally think so.
Mr. T alcott* Then, w ith regard to the small banks again, and the
small depositors, too, the small banks have m ostly small depositors as
you indicated, over three-quarters of all the banks w ith total deposits
under $5 m illion have accounts o f less o f $10,000.
Mr. Robertson. Much less.
Mr. T alcott. Only one-third o f all depositors w ith the giant banks
with deposits o f over $2 y> billion fall into that class.
Mr. R obertson. I think that is about right.
Mr. T alcott. Then, the Fow ler proposal would be, in effect, just not
fair to the smaller banks. W ould you interpret it that way ?
Mr. R obertson. The impact o f it would be much greater on the
smaller bank than the larger ones.
Mr. T alcott. Suppose the interest rates were to rise f u r t h e r and
the banks began to lose their time dep osits; then, would the ceiling
rates have to be raised ?
Mr. R obertson. N ot with my permission.
Mr. T alcott. D o you think that would be the consensus o f the
Federal Reserve Board members ?
Mr. R obertson. Y ou would have to take a vote—No.
Mr. T alcott. You think it would not ?
Mr. Robertson. I do not have any idea how they would vote on
this. T his would depend on judgment, and a lot o f things— circum­
stances, and then again whether or not monetary policy would be more
effective leaving it right there or taking it off.
Mr. T alcott. D o you think you have adequate powers or authority
now, or w ill new legislation be necessary in order to increase the inter­
est rates?
Mr. R obertson. In my view, we have adequate powers now. If
there is any way to make them more adequate, I would favor i t ; but I
think we have enough power now.
Mr. T alcott. I have some other questions that I would like to put to
the members o f the Board, but my time has expired already.
The C hairman. Suppose you submit them in w riting; would that be
satisfactory?
Mr. T alcott. T hat w ill suit me.
The C hairman. A nd they may be inserted at this point in the
record.
(F o llo w in g are questions submitted to each member o f the Board
t>f Governors, Federal Reserve System , by Mr. T alcott, w ith Mr.
Robertson’s reply on behalf o f all Board m em bers:)
June 3,1960.
D e a r ----------------- : At the meeting of the House Committee on Banking and
Currency on May 24.1966,1 was granted the privilege of asking several questions
of each Member of the Board of Governors of the Federal Reserve System.
For the record, may I please have your complete, Jbut succinct, answers to tbe
following questions:
1. Has the pursuit of anti-inflationary monetary policy been h am p ered by
fear of the effects of rising short-term interest rates on savings and lo®
n
associations and mutual savings banks?



y2

UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

193

2. Do you, as a Member of the Board of Governors, favor legislation at this
time to extend the Fed's powers to limit interest paid by commercial banks
on time and savings deposits ?
3. Do you, as a Member of the Board of Governors, believe that a differ­
ence of one-half of one per cent between the maximum rate paid on time
deposits under $10,000 and the maximum rate on larger deposits is justifiable
because of deposit insurance coverage of amounts up to $10,000?
Your usual splendid cooperation and accommodation will be greatly
appreciated.
Warm personal regards.
Sincerely,
B xjut L. T alcott ,

U.S. Congressman.
B oard of G overnors ,
F e d e r a l R e se r v e S y ste m ,

Washington, June 13,1966.
Hon. B u r t L. T a l c o t t ,
House of Representatives, Washington, D.C.
D e a r M r. T a l c o t t : This is in reply to your letter of June 3 ,1 9 6 6 , to each Board
member in which you asked three questions regarding interest rates and thrift
institutions. I am replying on behalf of all Board members.
Question 1. Has the pursuit of anti-inflationary monetary policy been ham­
pered by fear of the effects of rising short-term interest rates on savings and
loan associations and mutual savings banks ?
Answer. The short answer is “No.” In formulating monetary policy we try to
take into account the expected impact of various alternatives on all segments of
the economy. We have during the current period of monetary constraint fol­
lowed with special care the impact of monetary policy on the flow of funds to
selected parts and institutions in the economy. Our continued examination of
the various developing relationships has not, however, deterred the System from
moving toward a more restrictive monetary policy in order to combat inflationary
dangers.
Question 2. Do you, as a Member of the Board of Governors, favor legislation
at this time to extend the Fed’s powers to limit interest paid by commercial banks
on time and savings deposits?
Answer. The Board believes that discretionary authority to “distinguish tem­
porarily between these two markets (the large negotiable CD market and that for
smaller time deposits) in setting ceiling rates might in some situations facilitate
actions to smooth the transitory adjustment problems of competition for savings
funds in smaller amounts without disrupting flows of funds in the money and
capital markets.”
Question 3. Do you, as a Member of the Board of Governors, believe that a
difference of one-half of one per cent between the maximum rate paid on time
deposits under $10,000 and the maximum rate on large deposits is justifiable be­
cause of deposit insurance coverage of amounts up to $10,000?
Answer. Insurance coverage is obviously valuable to the smaller depositor in
that it eliminates risk to him. The precise value of insurance coverage, however,
cannot be determined with exactitude. Furthermore, it seems clear that the
value of insurance would be greater to depositors in some banks than in others,
reflecting differences in exposure to potential loss.
Sincerely yours,
J. L. R o b e r t s o n .
The C h a i r m a n . Mr. Stephens.
Mr. S tephens . G overnor R o b e r t s o n , isn't w h at has happened so
far, as the slow dow n in the b u ild in g trades and in the b u ild in g busi­
ness and in the inaibility o f people to borrow, exactly what the mai°rity o f the F ederal R eserve B oard intended tx> happen ?
Mr. R ob ertson . E x a ctly . T hat is w h at a restrictive m onetary
policy does. I t is designed to cut dow n on th e a vailab ility o f m oney.
Mr. S t e p h e n s . W a s it envisaged that it w ould have s u c h a drastic
effect on the h ou sin g ind ustry and th e m ortgage m oney as has
d u a l l y come about? W a s it expected th a t it w ould n ot be in just




194

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

one area or tw o areas but would be a wider spread cutback than has
actually happened?
Mr. R obertson. Y ou never know where the im pact is going to fall
the hardest. Y ou would like to have the impact even over the entire
econom y; I , personally, would like to see it have its greatest impact
where the greatest shortage exists, but you cannot do that w ith mone­
tary policy. T his is a general instrument which applies across the
board.
N ow , as to whether or not the impact has been greater than we
expected, I would say, in general, no; we have to curb the supply of
money and credit.
Mr. S tep h en s. You did not think it would take effect so rapidly ?
Mr. R obertson. In some areas the rapidity has been greater, per­
haps, than was expected.
Mr. S tep h en s. W ell, I would agree w ith you, that you cannot ex­
pect where the im pact w ill fa ll, and, o f course, a great deal o f the
impact falls on us here in the Congress. W e agree w ith the ob­
jectives o f the Federal Reserve, that we do not w ant to have a period
o f inflation, but we also do not want to have a depression in anywise
either.
Mr. R obertson. I think I m ight just say that there is not a single
member o f the Board who does not agree w ith you, that we cannot
live with inflation. W e do not w ant to manage m onetary policy in
any way which would result in inflation. A s a matter o f fact, it is
our job to see to it that we do have stable prices.
Mr. S tep h en s. Investors in my area, and homebuilders, and others,
say that the effect has been probably more drastic there because of the
expansion o f hom ebuilding in th e last few years than it would have
been in some other areas, other places, where you do not have the ex­
pansion for homes.
Take, for example, a community like Athens, Ga., where my home
is. W e have had, I am delighted to say, an expansion due to Federal
research programs that have been placed at the U niversity o f Georgia,
the expansion o f the educational system. The new m onetary policy
has brought to a h alt almost the entire activities in b uilding at a time
when really, sincerely, there is need to expand, and people are hurt­
in g for homes under the circumstances.
Is there any possibility o f having areas relieved in that type of
situation ?
Mr. R obertson. I t can be done by selective measures taken by Con­
gress, through such agencies as Fannie Mae or Federal Hom e Loan
Bank loans, but you can’t do it through a general monetary policy
which has, by its very nature, to apply across the N ation.
Mr. S te p h e n s. I appreciate that.
Another question I would like to ask is t h is : W ho advised on cutting
the m ilitary construction program o f th e U nited States, the $600
m illion m ilitary construction program? I t was cited on th e floor of
the House, when w e were debating another bill, as a w ay to curb
inflation, and I can’t understand why that particular th in g would be
selected when we were at war, and I wonder who advised the Secretary,
McNamara, to cut it ?
Mr. R obertson. I can only tell you that th is is a m atter that the
F ederal Reserve neither can be credited w ith nor blamed for.



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

195

Mr. S tephens . W ell, I appreciate that, but w ouldn’t the m onetary
policy o f the U n ited S tates have som ething to do w ith that? I f you
try to curb inflation, w ouldn’t th at be part o f the m onetary p olicy o f
the U n ited States ?
Mr. R obertson. T he m onetary p olicy o f the U n ited S tates is de­
veloped by the F ederal Reserve. T hat is the m onetary policy. N ow ,
to the extent that other agencies o f Governm ent, or the G overnm ent as
a whole, do th in g s th at do tend to curb inflation, th at is welcom e, but
it is their own business; not ours. W e have not been con su lted ; w e are
not inform ed.
Mr. S tephens . T hank you very much.
The C hairman . Mr. G onzalez ?
Mr. G onzalez. W ell, it appears as if the F ederal Reserve System has
not provided th e com m ercial banks w ith the steady grow th o f reserves
year after year to support their increased dem and deposits. T his, o f
course, forces them to bid the more aggressive banks fo r C D ’s and bor­
rowings. In addition to C D ’s, I w onder i f you w ould please list the
various instrum ents w hich the commercial banks have developed in
recent years in order to borrow funds ?
Mr. R obertson. W ell, I w ould m ention first the prom issory notes
that some banks have been issuing. T h ey have changed the name o f a
piece o f paper from a certificate o f deposit to a prom issory note and
sold it, and on th at th ey have no reserve requirements, on that they
have no insurance assessm ents—th is is a m eans for borrow ing funds for
as short as 5 days, w hich comes very close to being demand deposits.
T his is one.
O ther w ays include repurchase agreem ents and purchases o f Federal
funds. T h e F ederal fu n d s m arket has developed over the past 10 years.
Mr. G onzalez. W ell, I notice in your last report, the 52d report,
where you are recom m ending an extension o f your authority over all
insured banks, n ot only the member banks, but a ll insured banks, and,
apparently from the report, I gather th at one reason w as the d is­
turbance, from the p oin t o f view o f the report, or the rate o f w ith ­
drawal o f banks from m em bership in the System .
Is th is w ith d raw al really dangerous or does it just appear to be when
you look at it over a 5-year period ?
Mr. R obertson. L et me start by sayin g, from m y point o f view —
and I think m y associates w ould all agree— that the burden o f carrying
on a central b an k in g system for this country and h avin g a m onetary
policy w hich ap p lies evenly throughout the country calls for that
burden to be shared by all com m ercial banks.
So, from m y p oin t o f view , every com m ercial bank should be sub­
jected to reserve requirements w hich are com parable to those a p p li­
cable to other institution s.

Once you do this, those institutions should also have access to the
benefits, namely, they ought to have ^access to the discount window in
order to meet emergency needs for funds.
I w ould a p p ly these rules straigh t through the banking system .
The fa ct th a t banks are lea v in g the System now , because as nonm em ­
bers they have m ore m oney to invest due to low er reserve requirem ents
is a distu rbin g factor, but it is not a m atter o f calam itous size, because
we still have about 83 percent o f the deposits o f the country in member
banks. N evertheless, I do not thin k it is fa ir, m yself, that som e in sti­



1 9 6 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

tutions can escape reserve requirements sim ply by m oving out of the
Federal Reserve System .
Mr. G o nzalez . I notice that quite some big ones have come into the
System , though, lately.
Mr. R o b e r t s o n . I c a n ’t t h i n k o f a n y .
Mr. G onzalez . New York banks %
Mr. R obertson . N o, that is switching, you see, from a State charter
to a National, but that does not bring it into the System.
They were members when they were a State bank.
Mr. G onzalez . In view o f this seem ingly or apparently failure of
the System to keep pace with banking needs-----Mr. R obertson . There has been no failure o f the System to keep
pace with banking needs.
Fortunately, in the past 6 or 7 years, we have pumped reserves into
the banking system in order to enable them to make loans and thus to
expand the economy o f th is country.
I think the trouble is, at the moment we have too many funds, too
many reserves, in the banking system. A s a result, we have to curtail
that, because the money supply now is too large in relation to the
volume of goods and services available to purchasers; so, I think no one
can say we have failed in m aking funds available to banks w ith which
to make loans. I f we had done more, we would have had inflation a
long time ago.
Mr. G o nza lez . T hat is why I couched m y question in the words or
phrase “appears to,” because it seems you have this other development,
unprecedented development in the tremendous growth in negotiable
C D ’s and the more aggressive banks bidding for them on the terms
that they have. Now, in other words, your opinion is that one is not
necessarily the cause of the other, that is, your restrictions, or keeping
pace with the banks’ needs for reserves, are not necessarily the cause
o f the increase in the CD speculative field ?
Mr. R obertson . In m y view, this does have some relationship. I
think that, personally, the larger banks can obviate some o f the
impact o f a restrictive monetary policy by buying funds in order to
meet the demands o f their creditors. B ut, overall, i f you take the
whole banking system, the extent to which we provide reserves or
contract reserves is determined by whether or not we think the money
supply is grow ing too slow ly or too fast to carry on the economy of
this country in a noninflationary way.
Mr. G o nza lez . W hy don’t the banks raise more equity capital, or
do they ?
Mr. R obertso n . Banks, over the years, I must say they have ra ise d
equity capital but only reluctantly.
In many cases, this changes the ownership o f the individual, one man
loses control if he is not in position to buy new equity, and as a result
of this reluctance they have sought other means o f acquiring funds.
Mr. G onhalez . B ut they are pretty low in relation to their liabilities,
are they not?
Mr. R obertson . Low er than they have been at some tim es in the
p a st; yes.
Mr. G o nza le z . Thank you very much.
Mr. R o bertso n . I w ant to say, however, that I do not think that, as a
whole, the banking system is undercapitalized today. I do not think



UNSOUND COMPETITION FOR SAYINGS AND TIM E DEPOSITS 1 9 7

that, fo r a m inute. I th in k they are p erfectly sa fe and p erfectly
sound. T h is country is very fortunate to have as sound a banking
system as it does have.
Mr. G onzalez. T hank you very much.
The Chairman . Mr. M ize?
Mr. M ize. T hank you, Mr. Chairman.
Governor, p art o f th e reasoning behind the raise in the rediscount
rate and the raise o f the Q ceilin g in Decem ber w as to p u t dow n the
pressure on the inflational d evelopm ent; is th at righ t ?
Mr. R obertson. T h at is right.
M r. M iz e . W e ll, i t d id n o t accom plish w h a t y o u a ll h o p e d ; is th a t
rig h t ?
Mr. R obertson. Because it was not done in the righ t w ay, from
my point o f view .
You had better ask m y associates now , as to their p oin t o f view .
Mr. M ize. W ell, now, is it not true th at the prim e rate th at was
being charged by th e b ig banks to their borrowers had started to firm
up long before you raised your rediscount rate in December ? W h at I
mean, they w ere m ore selective, because o f the shortage o f m o n ey ; is
that correct ?
Mr. R obertson. I thin k th at is true.
M r. M ize. W h a t do you th in k the 30 b ig banks in N ew Y ork and
Chicago who are u sin g the h igh rate C D ’s have done wT the funds
ith
they have attracted ?
Mr. M itchell im plied th a t they were borrow ing at 5 y2 and loaning
at 5 y2, and th a t it w as a loss operation.
M aybe that should be directed to Mr. M itchell.
Mr. Mitchell. W ell, th ey have been try in g to take care o f their
prime custom ers. B u t th at is not the only th in g that they have done.
In A p ril o f th is year, they expected a larger loan demand than m a­
terialized. H a v in g gotten ready for it, their alternative in that in ­
stance, though p retty hard to pinpoint, w as S tate and local securities.
B asically w h at they have done or what they are try in g to do and have
been tr y in g to do m the period since last fa ll is have adequate funds
available for th eir custom ers to whom they have had longstanding
commitments. T h is w as the m ain objective and the reason they are
paying th a t price for funds.
M r. M iz e . I n o th e r w o rd s, th ey w ere su fferin g fro m th e squeeze on,
or th e sh o rta g e o f fu n d s in g en eral, a n d by y o u r action, th e action of
th e B o a rd , you en ab led th e m to ta p some m o re liq u id fu n d s ?
Mr. M itchell. Y es, so they could do business at a loss, in effect,
if they fe lt they had to. There is not much o f an incentive here.
M r. M iz e . H ow in h e a v e n 's n am e could you p o ssibly conceive th a t
th a t w o u ld re s u lt in less p re ssu re -----Mr. M itchell. Mr. Congressm an, it has resulted in pressure on
bank custom ers because banks have been tu rn in g m any custom ers
away and g e ttin g others to defer their dem ands or to postpone them ,
and so m ore pressure has been exerted on bank custom ers than I think
is generally realized.
M r. M ize. I th in k i t is u n fo rtu n a te th a t it h as affected th e sm all
businessm an m o re t h a n th e b ig c o rp o ra te ones. I t h u r ts th e sm all
businessm an m o re, because in te re st re p re se n ts a sig n ific an t expense



1 9 8 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

to him, but it represents not too much to the big borrowers, because
of their higher income tax rate.
Mr. M it c h e ll. I agree; this again is one of the shortcom ings of
monetary restraint. On the other hand, a modest-size bank has its
own prime customers that it w ill take care of, too, and they may not
be very large business.
M r. M ize . B u t an u p w a rd raise in the p rim e ra te in th e b ig banks
causes th e sm all banks, o r gives them an o p p o rtu n ity to raise th e ir
rates.
Mr. M it c h e ll. They probably started with a local prime rate of
6 percent and some o f them are still there.
Mr. Mize. Thank you, Mr. Chairman.
The C hairm an. May I suggest that the differences between the small
man and the big man and interest rates, I would consider th r e e :
No. 1—the big man can deduct his interest— 50 percent writeoff,
taxwise. The little man, of course, is not in such a fortunate posi­
tion ; he does not profit to that extent.
Secondly, the big man can offer stock to the public, if interest rates
are too high, but the little man cannot.
Finally, retained earnings are really costless capital to the big man,
and he can draw on them. I t is a great benefit. The little man has
no retained earnings. So, the big man is helped greatly by high
interest rates, whereas the little man is discriminated against.
That is my view o f it. D o you agree with that, Mr. Mize?
Mr. Mize. W ell, generally, I would like to see the rates fa ll where
they may. I think the action o f the Federal Reserve in December
helped the b ig man and hurt the little man. I w ill say that.
The C hairm an. That is what I was saying.
M r. M ize. A t the same tim e, Mr. Chairman, I regard you very
highly, but I still am a great champion o f the independence o f the
Federal Reserve System.
The C hairm an. Independent up to a point.
Mr. M in ish . Mr. Robertson, on the top o f page 6 o f your state­
ment, you say “negotiability does not, in and o f itself, im pair the
liquidity o f the issuing bank nor o f the banking system as a whole.”
Does that statem ent cover savings and loans?
M r. M itch ell . N o.
Mr. R obertson. I t was not designed to cover savings and loans at
all. I do not know any savings and loan association that issues a
negotiable tim e deposit.
Mr. M in ish . I was thinking o f the banking system as a whole.
Mr. R obertson. I was thinking o f the commercial banking system.
Mr. M in ish . I just w ant to say that in the Newark m etropolitan
area, which has a population o f roughly 18 m illion people, 1 o f the
savings and loan banks had withdrawals o f over $1 m illion in 30
days, and they traced roughly 50 percent o f that money to the 1 bank
in the area issuing C D ’s.
Mr. R obertson. Probably, however, those C D ’s were not b ig nego­
tiable instruments but were the so-called gim m ick instrum ents, the
savings bonds and savings certificates.
Mr. M in ish . B ut it put this bank in a rather precarious position.
Mr. R obertson. Yes.




UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 1 9 9

Mr. M in is h . In the W all Street Journal today I noticed, “N ew
York B anks T o Issue D ollar C D ’s in L ondon.” D id you have an
opportunity to read the article ?
Mr. R ob ertso n . Y es, I saw it.
Mr. M in ish . D o you have any comment on it ?
Mr. R ob ertso n . W ell, it is a very interesting proposal, one that is
g oin g to deserve a lo t o f study.
M y first question about it was what it w ould do to the balance-ofpaym ents program , because I have a concern w ith th is and, as I get
it, it w ill have no effect whatsoever. T hey borrow funds. I f they
buy funds there and bring them to this country, as one o f the papers
said they intended to do, th is would not im prove the balance o f p a y ­
ments at a ll because the short-term funds are now taken into con­
sideration as increasing our liab ilities, but th ey are not taken in to
consideration in arrivin g at balance o f paym ents.
On the other hand, i f that were to move the rates up so much that
holders o f A m erican bonds were to sell the bonds and invest in th e se ;
then, o f course, th is w ould have an effect. B u t I really suspect that
all th is w ould do is to add more funds to the E uro-dollar market. I t
w ill be foreign dollars that they are b ringing in, th at they are
attracting to them selves, and th ey w ill utilize those in connection w ith
the loans abroad. T o the extent that th ey take care o f loans abroad
that otherw ise A m erican banks here w ould m ake abroad, so much to
the good. T h is has m any aspects th at I am not in position to discuss
this m orning, sim ply because I do not know.
Mr. M in is h . N ow , Mr. Robertson, I have been on th is committee
now g o in g on 4 years, and I am privileged fo r the first tim e to have
so m any members o f th e Federal R eserve B oard here. T he th in g
that has bothered me fo r some tim e is the question o f the Open Market
Comm ittee. Som etim es it is referred to as a secret com m ittee, isn ’t it?
Mr. R obertson. I do not know w hat you m ean by a secret com m it­
tee. O bviously th is com m ittee’s actions affect the w hole market, and,
as a result, no one attends these except the presidents o f the F ederal
Reserve banks and the seven members o f the B oard and members o f
the staff o f th e B oard and o f each o f these banks. B u t they are all
sworn to secrecy. In fact, you do not have leaks from the Open M ar­
ket C om m ittee. Y ou majr have people say in g th at they have gotten a
leak, but take m y w ord fo r it, they have not.
Mr. M in is h . H ow m any attend ?
Mr. R obertson. I would guess 40. A m I rig h t about th is ?
Mr. M in is h . I w ould like the experience o f attending one o f your
m eetings. I w ould like an answer from you and each o f the members.
W ould you in v ite me ?
Mr. R obertson. N o ; w e w ould not.
Mr. M in is h . W ou ld anyone else like to com m ent on that ? I w ould
like to have th eir com m ents.
Mr. B rim m er ?
Mr. B rimmer. I w ou ld not in vite you.
Mr. M in is h . Y ou w ould not?
Mr. B rimmer. I w ould not.
Mr. M in is h . I w an t you to know th a t I sw ore to u phold the C on­
stitu tion , w hen I w as sw orn in as a M em ber o f C ongress.



200

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

Mr. R o b e rtso n . This is Mr. Scanlon, the president o f the Federal
Reserve Board o f Chicago.
Mr. S c a n lo n . I would not, Mr. M inish.
Mr. M in is h . Mr. Shepardson ?
Mr. S h e p a rd so n . N o, sir.
M r.M in is h . M r.M itchell?
Mr. M it c h e l l . W ell, I would like to invite you, but I do not think
it would be an appropriate th in g for us to do, and I do not think it
would be consistent with the direction Congress has given us.
M r.M in is h . M r.M aisel?
Mr. M a ise l. I think that this is true. I t would not bother me. I
personally feel that the Committee ought to make a good deal more
o f its deliberations public. I do not think, though, that in vitin g you
or any other individual would, necessarily, be the best w ay o f doing
it. That would be my only reaction.
M r. M in ish . I have convinced m yself th a t it is a secret com m ittee.
Thank you.
The C h a irm a n . May I say this, that the Open M arket Committee
is composed of 12 members-----Mr. R o b e rtso n . T hat is right.
The C h a irm a n . The 7 public members o f the Federal Reserve
Board, and then the 5 members chosen from among the presidents of
the 12 Federal Reserve banks. Now, you have no right to bring in
those other seven bank presidents. You see, the law compels the
formation o f an Open Market Committee composed only o f 12 mem­
bers, but you are in violation o f the law when after you bring in the 7
Federal Reserve Board members and the 5 presidents of the Federal
Reserve banks to this secret room, you also bring in the other 7 and
allow them to participate in the discussions. They do everything
but actually vote. Tney are bound to have some influence. W hy
wouldn’t any member of this committee or any Members o f Congress
be just as trustworthy in the public interest? W hy those seven are
selected by private commercial banks. E very board o f directors is
composed o f nine members, six o f them selected by the private banks.
T hat makes all these presidents selected by the private banking
system—they are allowed to come in, and you do not allow anybody
else to come in.
I think that these presidents go right back and report to their direc­
tors. ^Naturally, they would, because they are selected by their direc­
tors, and these directors are interested in all kinds o f businesses.
I have estim ated, Governor Robertson, that at least 500 people
in the U nited States know 10 m inutes after that m eeting is over what
has gone on in there.
Is that estim ate very large, in view o f the fact that the 40 you
adm it are there, and these 12 presidents g o right back— and m ay even
communicate by wire before they get back. D on ’t you think 500 would
be a reasonable estim ate o f the number o f people that know w hat goes
on at these secret m eetings %
Mr. R o b e rtso n . No, Mr. Patm an, I must say I do not agree w ith
you.
No. 1, certainly the law requires that there be a 12-man Open M arket
Committee, and I think I should say th a t we have the utm ost respect
for the law.



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 2 0 1

The C h a ir m a n . T he law says th at there sh all be 12 members.
Mr. R o b e r ts o n . Y es. N ow , the question as to w hether or not it is
illegal fo r us to have those who are alternate mem bers o f the O pen
M arket C om m ittee in there w ith the presidents, I th in k is not debat­
able. I think that under the law we have the pow er and the right, the
legal righ t, to have them present.
B u t let m e tell you exactly for the record w hy w e have them.
T his is a tra in in g operation. W e w ant to keep people as closely
fam iliar w ith the operation o f that C om m ittee as possible, w ith in the
group, so th a t w hen it is their turn to act as v o tin g members o f that
Com m ittee, they know the operations, they know w hat is g o in g o n ;
they have prepared them selves.
B ut, in addition to that, we do gain real benefits from attendance
by the presidents who are not v o tin g members. W hen the vote is
taken, o f course they do not vote, but th ey do m ake a presentation to
the O pen M arket C om m ittee, g iv in g us a picture o f the econom y in
their particular districts, as it relates to, contrasts or accords w ith
the picture o f the econom y as we get it on an overall basis. N ow , I
doubt very m uch th at any president o f a F ederal Reserve bank re­
ports to h is board o f directors on th e F ederal open m arket opera­
tions.
The C h a ir m a n . G overnor Robertson, m ay I make this observa­
tion there?
N ow , Mr. H a y es o f N ew Y ork, gets $75,000 a year. T hat is'public
money just th e same as the rest o f us g et around here, and he holds
that job by reason o f the fact that six o f those banker directors vote
for him. D o you thin k he is g o in g to fa il to give them all o f the
inform ation th at he gets at these m eetings ? D o n ’t you think it would
be unrealistic to suppose that a president under those circumstances
would not d iv u lg e to h is board o f directors, to the members o f the
board w ho elected him , w’hat was g o in g on ?
Mr. R o b e r ts o n . I thin k it is very im probable that any president
of a F ederal Reserve bank ever reports to his board o f directors on
what goes on in the open market operations. Remember that every
president w ho is selected must be approved by the Federal Reserve
Board here. W e must approve him , or he can’t serve.
The C h a ir m a n . I do not consider th at a problem . Y ou have got
to approve som ebody, and whoever they p ut in there, if there is no
objection, you w ould approve.
Mr. R o b e r ts o n . W e have objected.
T he C h a ir m a n . W ell, very seldom. I doubt, i f I asked you to
bring in the ones you have objected to, that it w ould be over three—
that was the C hicago bank, w asn’t it?
M r. R o b e r ts o n . I w o u ld n o t w a n t to discuss it.
B u t I th in k th ey do not report back, and I th in k th ey are all quite
aware o f the position o f the B oard o f G overnors, th a t they should
not report to th eir directors on w hat goes on in the O pen M arket
Com m ittee, and I am sure that this is adhered to by every president
of the-----The C h a ir m a n . Mr. G ettys ?
Mr. G e t t y s . T hank y o u , Mr. Chairm an.



202

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

Mr. Robertson, the action o f the Federal Reserve Board on D e­
cember 6 last was intended to curb inflationary trends; is that cor­
rect, sir?
Mr. R o b e rtso n . That is right.
Mr. G e tty s . Isn ’t it true that the purpose intended has been ac­
complished, except that it was not predicted that the building and
construction field would be hit so hard \
Mr. R o b e rtso n . I w ould say th e m ore restrictiv e m o n etary policy
in being to d a y is h av in g its im pact in cu rb in g th e inflation -----Mr. G e tty s . The inten d ed im pact.
Mr. R o b e rtso n . But it was not thought at the tim e that this would
have the great impact on the housing industry that some people fear
it is going to have.
Mr. G e tty s . Now, are there other fields which have been unpredictably affected by the Q action ?
Mr. R o b e rtso n . I cannot think of any. Y ou do not mean the Q
action, you mean the whole operation ?
Mr. G e tty s . T h e whole situ atio n , yes.
Now, you stated, Governor Robertson, that you would not have
taken that action at the tim e, but you had other suggestions ?
Mr. R o b e rtso n . Yes.
Mr. G e tty s . I f your suggestions had been adopted by the Board,
what effect, as o f this time, would your suggestions have had, or
what would they have been ?
Mr. R o b e rtso n . I would be very glad to answer that w ith the
recognition that no one can tell w hat would happen or could have
happened i f some other course of action were taken.
Mr. G e tty s . You still hold the same view now ?
Mr. R o b e rtso n . I still hold the same view now. I f the desire at
that time was to curb inflation, then the result to be achieved was to
curtail the expansion o f bank credit and the money supply o f the
country, and the way in which I would have suggested doing that
would be to hold the ceilings on interest rates on C D ’s exactly where
they were and let the banks get needed funds from the discount w in­
dow o f the Federal Reserve.
Remember, you do not act sim ply to push interest rates, because
interest rates, in m y opinion, do not have as strong an im pact in
curtailing the impact on credit as many people think. A s has been
pointed out here this morning, large businesses can w rite off half
the charge. T he interest rate does not mean any difference in bor­
rowing. They need money to carry on the business, which is a profit­
able business, and if they do, they are going to get the m oney, andconsequently, I would have made it im possible for banks to expand
their credit as fast as they did by merely raising the interest rates
on C D ’s and g ettin g more funds w ith which to do it. I w ould have
raised the discount rate, but I would have used open market opera­
tions then to reduce the availability o f funds, and th is w ould have
resulted in a slower increase-----Mr. G e tty s . L onger overall tim e ?
Mr. R o b e rts o n . Y ou still would have the effect o f restrictive
monetary policy.




UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 2 0 3

Tlie other action w ould have follow ed : In stead o f u sing interest
rates as your goal, use them fo r a signal fo r w hether your actions
are right or w rong, accurate or inaccurate.
Mr. G e t ty s . Y ou th in k the B oard has now th e pow er to correct
and control the situation w ithout additional legislation ?
Mr. R o b e r ts o n . I do.
Mr. G e t t y s . I believe that is the view o f other members o f the
B o a r d ; is that correct ?
Mr. R o b e r ts o n . T hey are all here.
Mr. M a is e l. Congressm an G ettys, I think we ought to be clear that
we are discussing twT separate m atters. One has to do w ith the im pact
o
of tighter m oney on the hom ebuilding industry. I gave a speech on
December 28, 1965, in w hich I predicted just about exactly w hat has
happened. T he speech w as w ritten just after the discount rate in ­
crease. I th ink anybody know ing the way m onetary restraints work
would agree th a t they did expect w hat has happened to happen.
N o one should be surprised.
I am sure m ost members o f the B oard were w ell aware o f the fact
that when you use an overall m onetary policy, it has a prim ary effect
in the m ortgage market.
Mr. G e t t y s . Y ou predicted it w ould have a selective im pact ?
Mr. M a is e l. Y es, th at has been the case every tim e m onetary policy
has been used. W hen you ask w hether we should or can correct the
situation th e answer is not so clear. W e have the ability to do what
we thin k is correct w ith respect to the com petition am ong financial
institutions. W e do n ot have sim ilar pow er w ith respect to com peti­
tion between the m ortgage and m oney m arkets. Congress has that
power.
I think the traditional w ay to correct a lack o f m ortgage money is
through som ething lik e F an nie Mae. I f C ongress believes that the
housing m arket has suffered, it seems to m e th at it is up to Congress
to see w hether they w ant to exert their legal authority through F annie
Mae or in other specific areas. T h is w as th e answer o f Governor
Robertson. F a n n ie M ae is set up so it can have a differential im pact
in a specific m arket.
A nother w ay th at th e Congress has set up to take care o f this prob­
lem is through advances o f the F ederal hom e loan banks. T hat is a
second one. I t seem s to m e proper that in th e past Congress recog­
nized the im pact o f m onetary policy, in a selective fie ld ; nam ely, the
m ortgage field, and found w ays to develop its ow n tools to deal w ith
the problem.
N ow , the F ed eral R eserve can’t solve th at problem if it is charged
w ith en forcin g m onetary restraint. W e m ust be conscious o f that. I
do not th ink any changes in regulation Q , in a period o f m onetary
restraint, w ould do m uch tow ard so lv in g th e problem o f the m ortgage
market or the housebuilding industry.
Mr. G e tty s . T hank you. I w ould like to pursue that, but m y tim e
is up.
T he C h a irm a n . M r. H alpern.
Mr. H a lp e r n . I w ould like, Mr. Chairm an, to take th is opportunity
to ask an expression o f view s by th is d istin gu ish ed panel on a m ost
tim ely and pertinent m atter, one th a t has a direct relationship to
m onetary p olicy.




2 0 4 u n s o u n d c o m p e titio n f o r s a v in g s a n d tim e d e p o s its

W ould each o f you express your opinion on this committee’s recent
action in recommending that the Congress grant to the President
standby controls over consumer credit ?
Mr. R o b e rtso n . I w ill be g la d to give you m y answ er.
Mr. H a l p e r n . I w ill be very happy to hear from you.
Mr. R o b e rtso n . I th in k th a t th ere are p eriods in w hich selective
controls can be effectively used an d can serve a purpose. I generally
am opposed to selective controls a n d p re fe r g en eral controls because
o f th e very g re a t difficulty o f a d m in iste rin g those selective controls
like consum er credit, on an equitable basis.
This goes not only to controls on consumer credit, but controls on
real estate credit as well, such as we had under regulation X once
before. A ny selective control of this kind is unfair. There are always
ways to evade and avoid it, and consequently I would hope to avoid
the use o f it. B ut on a standby basis I would not rule them out,
because I think there are occasions when that m ay be the real thing
that you need for a very short period o f tim e, and I w ould like to
use it, and I think it is important for a short period— as short a period
as possible.
Mr. H a lp e r n . W ould you do it now ?
Mr. R o b e rtso n . No, I would not.
Mr. H a lp e r n . You would not now ?
Mr. R o b e rtso n . No.
Mr. R eu ss. W ould the gentleman yield?
Let me understand the question.
Mr. R o b e rtso n . I w ould n o t ap p ly th em a t th e m om ent.
Mr. R euss. W ould you accept the power to have the option to
apply?
Mr. R o b e rtso n . On a standby basis, yes, but I would not apply it
if I had the power, as o f the moment.
Mr. H a l p e r n . Mr. Shepardson ?
Mr. S h e p a r d s o n . I have substantially the same view as G o v e r n o r
Robertson. I think, under certain conditions, they m ay be used effec­
tively. I t seems to me that selective controls are extrem ely difficult
to use. A nationwide regulation that would fit the various situations,
is so difficult to form ulate, and evasions are so great that it is o f d o u b t ­
ful value in most circumstances. U nder the im petus of an all-out
war, the readiness o f people to abide by such regulations is an e x p r e s ­
sion really o f patriotism , and under those circumstances you may
effectively use that type o f an instrument.
We had selective controls before, and it did not take very long before
we experienced evasions that were almost uncontrollable.
I think I would agree with Governor Robertson as to their value as
standby powers. I think they should be used rarely and under only
the greatest pressure.
Mr. H a lp e r n . Y ou do not think this would be a tim e to grant them?
Mr. S h e p a rd so n . No.
Mr. H a lp e r n . Mr. Brimmer?
Mr. B rim m er. Mr. H a l p e r n , I share Governor Robertson’s a n d
Governor Shepardson’s view s on the usefulness o f standby controls
over consumer credit, however, I would add a footnote, t think at
this tim e the decision by the Congress to grant such a power m ight be
interpreted in a lig h t different from w hat the Congress intended.



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 2 0 5

W hile Congress m igh t intend to provide these as em ergency measures,
the public m ay interpret the action as a directive to the F ederal Reserve
to apply the controls at th is tim e along w ith other general m onetary
instrum ents.
Therefore, I w ould not encourage the Congress, if they were to ask
m y opinion, to enact such legislation at this tim e.
Mr. H a lp e r n . W ould you use it currently ?
Mr. B rim m er. I w ould not under current conditions.
Mr. H a lp e r n . Mr. Scanlon?
Mr. S c a n lo n . I share Governor R obertson’s view , Mr. H alpern.
I do have great hesitation about the adm inistration o f selective con­
trol regulations in peacetim e periods. F rom experience, during the
w artim e period, they were difficult to adm inister and I w ould have
some reservations on th e adm inistration now, but I w ould give the
President standby authority, though I w ould not invoke such authority
presently.
Mr. H a lp e r n . Mr. M itchell ?
Mr. M i t c h e l l . I w ould have no objection to th e power being con­
ferred, but I w ould certainly feel that from the evidence before us at
the present tim e there is no need for it to be conferred at this particular
time, and the im plication that it ought to be used I think w ould be
unfortunate unless facts change.
I w ould also say th at along the line Mr. M ize was follow in g a little
earlier, that th is is another place where the im pact o f monetary re­
straint is now being felt. A s some banks have come under increasing
pressure some o f the finance com panies have had difficulty in hold­
ing onto th eir bank loans.
M r .H a lp e r n . M r.M aisel?
Mr. M a ise l. I think the standby controls should have been I'etained
as a perm anent part o f the anti-inflationary pow ers o f the Government.
Mr. H a lp e r n . I s that affirmative?
M r. M a isel . Y es, th e y — th a t is, th e sta n d b y pow ers to use co ntrols
over co n su m er c re d it in case o f need— should h av e been m ade p e rm a ­
n e n t in ste a d o f h a v in g been allow ed to lap se in th e fifties.
Mr. H a lp e r n . W ou ld you apply them now ?
M r. M a is e l. N o, I w ould not.
Mr. H a lp e r n . Mr. Treiber ?
Mr. T reib er. I share the general view s expressed so far. I nder the
present circum stances, I think that general policies— m onetary policy
and fiscal p olicy— are called for to fight the inflation. I see 110 objec­
tion to the existence o f consumer credit standby authority, but would
consider it u nfortunate i f the enactment o f that legislation at this tim e
were interpreted by the public as su ggestin g th at it be used as an alter­
native for fiscal and m onetary policy.
Mr. H a lp e r n . T hank you, Mr. Chairman.
The C h a irm a n . W e w ill recess u ntil 10 o ’clock in the m orning, and
we w ould lik e fo r all o f you gentlem en to be back here if possible.
Mr. R ees. W ou ld th e chairm an yield?
I introduced a b ill, H .R . 15173, w hich is aim ed at develop in g some
type o f control over certificates o f deposit, or at least defining them .
I w as w ondering i f th e B oard m igh t look at th e b ill betw een now
and tom orrow m orning, at w hich tim e I w ould appreciate your com ­
ments.




2 0 6 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

The C h a irm a n . I t is considered relevant to th is particular bill that
is now under consideration, and, naturally, we want consideration
given to it, i f you w ill, please.
Thank you, gentlemen, very much.
(W hereupon, at 12 o’clock noon, the committee adjourned to re­
convene at 10 a.m., W ednesday, May 25, 1966.)




TO ELIMINATE UNSOUND COMPETITION FOR SAVINGS
AND TIME DEPOSITS
WEDNESDAY, MAY 25, 1966
H ouse of R epresentatives ,
C om m ittee on B a n k in g and C u rrency ,

Washington, D.C.
T he com m ittee m et, pursuant to recess, at 10 a.m., in room 2128,
R ayburn H ou se Office B u ild in g, H on. W rig h t Patm an (chairm an)
presiding.
P resen t: R epresentatives P atm an, B arrett, Mrs. S u llivan , Reuss,
M oorhead, S t G erm ain, Grabowski, G ettys, T odd, O ttinger, M cGrath,
A nnunzio, R ees, W id n all, F in o, and Johnson.
T he C h a ir m a n . T he com m ittee w ill please come to order.
T oday th e com m ittee continues hearings on H .R . 14026 and related
bills. I w a n t to take th is opportunity to briefly express m y thanks to
the B oard fo r app earin g before the com m ittee, and commend them for
the fo rth rig h t w ay in w hich th ey defend and argue for their various
positions.
A lth o u g h it is apparent th at not a ll o f the B oard members think
exactly alike, you all m ust still be given fu ll credit for the sincerity
and honesty o f purpose w hich you alw ays exhibit. A s w itnessed by
the B oard ’s vote on the Decem ber 6 action and as w itnessed by the
various p ositions taken in answ ering questions asked by members o f
this com m ittee w e obviously all do not interpret facts in the same
way.
X m ust also take th is opportunity to deplore the fact that Chairm an
M artin has refused to appear at these hearings either last week or
this week, due, as he expressed it, to a conflict in schedule. T he com ­
m ittee, o f course, w as anxious to have a ll members o f the F ederal
Reserve B oard appear to assist us and the Congress in arrivin g at a
solution to a problem w hich has devastated th e th r ift industry, the con­
struction industry, the b u ildin g trade unions, prospective hom e buyers,
sm all businessm en and m any others. T his situation in m y opinion,
and in th e opinion o f m any, has resulted directly from the action taken
by the F ederal R eserve B oard in D ecem ber 1965.
In itia lly , I understood that Mr. M artin had to attend an official
intergovernm ental m eeting in Europe. I have since learned, how ever,
that Chairm an M artin and Governor D aane were not atten d in g an
official m eeting o f governm ents but rather a tten d in g an A m erican
Bankers A ssociation international convention in Spain. A p p aren tly
from the picture in th e m orning paper Chairm an M artin and G overnor
Daane feel th at it is m ore im portant fo r them to attend a convention
whose one purpose, at least according to th e m orning paper, seem s to



207

208

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

be more in the nature o f a fiesta rather than a work session. Many
of us were somewhat disturbed over the fact that these gentlemen have
placed bullfighting above the importance of arriving at solutions to
the problems o f the American economy.
I understand that the House w ill be meeting at 11 o’clock this morn­
ing. W e w ill go as far as we can with a continuation of questioning of
members of the Board by the committee, and if necessary we w ill ask
the Board to appear again tomorrow or at another agreeable time.
Governor Robertson, this is too serious of course, for levity, but I
would like to ask, does the Federal Reserve have colors of its own?
Mr. R o b e rtso n . H ave what?
The C h a irm a n . I notice this Governor went into the bull ring with
the Federal Reserve. I wondered if the Federal Reserve had colors.
M r. M aisel. Green.
The C h a irm a n . Green would be better than greedy.
Anyway, seriously, do you have colors ? D o you have a standard ?
Mr. R o b e rtso n . N o ; we do not.
The C h a irm a n . That was a mistake. That was a little levity.

STATEMENT OF THE BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM; PRESENTED BY J. L. ROBERTSON, VICE
CHAIRMAN; CHARLES N. SHEPARDSON, MEMBER, GEORGE W.
MITCHELL, MEMBER, SHERMAN J. MAISEL, MEMBER, AND AN­
DREW F. BRIMMER, MEMBER; CHARLES J. SCANLON, PRESIDENT,
FEDERAL RESERVE BANK OF CHICAGO; AND WILLIAM F.
TREIBER, FIRST VICE PRESIDENT, FEDERAL RESERVE BANK OF
NEW YORK—Resumed
The C h a irm a n . Mr. Todd is here now and since it his turn to quesr°*n *5? Wltness? *
call on him next, but I introduced a House
Jom t Resolution No. 1148. It is short and I w ill read it.
S e c t i o n 1. Notwithstanding the provisions of section 19 of the Federal R e serv e
Act and section 18(g) o f the Federal Deposit Insurance Act, no bank (other
th a n a mutual institution) whose deposits are insured by the Federal D e p o s it
Insurance Corporation may pay any interest, discount, or other return on any
time deposits, savings deposits, or borrowings at a rate in excess of 4y2 percent
or such other rate as may be established by the Board of G overn ors
of the Federal Reserve System with the approval of the President
S e c . 2. The provisions of this resolution shall be applicable with respect to—
( 1 ) savings deposits held, and
( 2 ) b o rro w in g s an d tim e d e p o sits o b tain ed or ren ew e d d u r in g th e tw oy e a r p eriod w h ich b e g in s on th e d ay a f te r th e d a te o f en a c tm e n t o f t h is Act.

Briefly, I know you gentlemen quickly interpreted this the same wav
it is intended, for a 2-year period that this rate will be a limit of 4i/2
percent. During that time it may be changed with the approval of
the President. How would you feel about that, Governor Robertson ?
Mr. R obertson. Just of! the cuff, I think this would be a tremendous
burden to pla<re on the President, to decide the rate o f interest which
should be a ceiling on interest deposits.
The C hairm an. W e w ant to go into this somewhat. T h is th in s is
so serious. W ill you gentlem en be able to be here tomorrow m orning?
Mr. Robertson. I will be able to be here tomorrow morning.




UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 2 0 9

T he C h a ir m a n . I t looks like we w ill have to come back. It does not
look as if we w ill be able to finish. Som e members w ant to study these
and some members have proposals o f their own.
Mr. T odd, you m ay proceed.
Mr. R o b ertso n . Could I just say, Mr. Chairm an, in response to the
question th at w as just raised by Mr. Rees yesterday, a statem ent w ith
respect to his proposal w iiich I w ould like to subm it for the record ?
I do not have copies, but I w ill send those copies up today.
T he C h a ir m a n . W ell-----Mr. R o b ertso n . I w ill have them here this m orning.
T w o o f m y associates also have statem ents.
T he C h a ir m a n . Y ou m ay insert them at this point.
(T he statem ents referred to fo llo w :)
S ta te m e n t o f

J. L.

R o b e r t s o n , V ic e C h a ir m a n , B o a r d o f G o v e r n o r s o f t h e
F e d e r a l R e s e r v e S y s t e m , o n H .R . 15173

At the committee hearing yesterday. Representative Rees asked the Board to
comment on H.R. 15173 at this morning’s session. From our very brief study,
it appears that the bill has three main provisions. It forbids insured banks
(1) to issue interest-bearing negotiable certificates of deposit or other negotiable
instruments, (2) to pay interest on time deposits held for less than 1 year, and
(3) to pay higher interest rates on time deposits than on savings accounts.
The Board views such blanket prohibitions on competition for savings as
detrimental to the public interest. They would erect legislative barriers to
a free movement of funds that has great potential for increasing efficiency in
financial markets. In their efforts to compete for savings of individuals, banks
would be effectively limited to the acceptance of passbook savings, since few
individuals would be willing to hold time deposits with a maturity of a year or
more at interest rates no higher than those on savings accounts. The result of
such legislation might be that the maximum rate on passbook savings would have
to be raised to prevent banks from being barred from effective competition with
nonbank intermediaries.
The bill’s prohibition of negotiable CD’s is the same as that of H.R. 14026.
Our objections to that bill thus apply to this bill also.
The other two provisions of H.R. 15173 seem unwarranted. As we noted
yesterday, time certificates have been used in some sections of the country for
many years as a medium for the investment of savings by individuals and other
small investors. These certificates frequently have a maturity of less than 1
year. Maintenance of a solvent and liquid banking system does not require
that all such certificates should have a maturity of 1 year or more. Time de­
posits of fixed maturity permit banks to tailor their asset structure to the
maturities of their liabilities. With time deposit matitrities of appropriate
length, there is justification for permitting rates on time deposits to exceed those
on savings accounts, which are in practice paid on demand.
In the past, Congress has taken the view that considerable latitude should be
provided to the regulatory authorities for adjusting ceiling rates on time and
savings deposits in the light of unfolding economic developments. As we noted
yesterday, the Board welcomes consideration of measures directed at increased
flexibility in administering interest rate ceilings. This bill, in our judgment,
moves in the wrong direction, by providing a statutory prohibition and a statu­
tory freezing of certain interest rate relationships on banks’ time and savings
deposits.
The changes in financial flows and in competitive relationships among financial
institutions that seem likely to result from this bill are drastic. Such legis­
lative action hardly seems appropriate to a competitive situation which, though
it requires careful surveillance and possibly action to avoid excesses that might
unduly harm particular sectors of the economy, at the same time offers promise
of substantial gains in economic efficiency and in incentives for saving.




2 1 0 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS
S t a t e m e n t o f S iieb m a n J. M a is e l, M em ber, B o a rd o f G o v e r n o r s o f t h e F e d k r a l
R e s e r v e S y s te m , o x II.R. 14026 a n d R e la t e d B i l l s

1. This is a proper period for the use of monetary restraint. Failure to do so
without taking alternative actions might speed up inflation and aggravate a
sticky balance-of-payments position.
(a) The demand for goods in the economy at the moment is pressing too hard
upon our physical capacity to produce and therefore is tending to generate sizable
price increases.
(1) Generally, I think we would be better off if the bulk of excess demand
is removed by fiscal rather than monetary policy, since extremes in the
application of monetary policy create large problems for the economy. The
timing of monetary (rather than tax) restraints is less certain. Monetary
restraint’s differential impact on parts of the economy probably is greater
than that of fiscal policy, while its final incidence on subgroups in the country
is probably less certain.
(2) On the other hand, given the decision to rely upon monetary instead
of greater fiscal restraint, I believe that monetary policy should be made
as effective as possible.
(b) In the current situation, higher interest rates and tighter credit avail­
ability in the United States will aid the balance of payments. Again, I feel
other steps to correct the balance-of-payments situation are preferable, such
as the use of taxes, tariffs, and other governmental policies. Since such steps
have not been taken, monetary restraint and higher interest rates are necessary
to aid in the adjustment process of bringing about an equilibrium balance of
payments.
2. Given a decision to adopt a policy of monetary restraint, raising the ceiling
of regulation Q, and not adopting a split rate, was a proper corollary to the
rise in the discount rate last December.
(a) I do not believe that small savers should be discriminated against in
favor of large savers, corporations, or financial institutions. If Congress decides
to penalize small savers. I would help to enforce such a decision, but it seems
to me enforcing a lower rate of return for the savings of a selected group of
citizens without considering carefully other alternatives would conflict with the
best traditions of the American way of life.
(b) I think the previous use of interest-rate ceilings to halt normal competition
among savings institutions turned out to be unfortunate for the country. The
protected position of some institutions resulted in a good deal of waste and
inefficiency. Unless there is a real danger from excessive competition, or unless
the period is one in which the market is acting in a destabilizing manner, one
should hesitate to impose ceilings on wages, prices, interest rates, or any other
good without a clear theory as to what the ceiling is to accomplish, who is to
gain by it, who is to pay for it, and whether the ceiling is the most efficient form
of transferring money from one group to another.
While we have no exact figures yet, there are indications that some sm all
savers are responding to the appeal of higher rates by increasing th e ir sa v in g s.
This is exactly one of the developments that is desired as a result o f m on etary
restraint. It is a major reason why the savings institutions now should have
some freedom to increase rates—to stimulate, and to share in, a larger fin an cial
savings flow.
(c ) I doubt that a ceiling on either negotiable CD’s or on small ones w ou ld
give the results some hope for. Thus far it certainly appears as if co m p etitio n
among institutions has aided savers. At the same time, we have no proof that
it is the major cause of the April losses in some institutions. From all ap p ear­
ances the main competition thus far has been between the money market and
all financial institutions for sophisticated money. Imposing a ceiling of 5 percent
on $100,000 CD’s might simply force money into U.S. Government agency issues
at 5.5 percent or into other market instruments.
Many of the major losses of funds seem to have centered in savings in sti­
tutions that knowingly risked this situation by departing from their normal
scope of operations. It was a risk that I and most regulatory authorities de­
plored and called specifically to their attention in public statements. Som e
simply tried to expand by attracting larger deposits. Others went further.
To strive for increased profits, they sought money-market money rather than
real savings and used that money for lending on more speculative properties at
higher rates. The average stability in a given institution of small savings still
seems to be much greater than for larger blocks of funds. Such stability should
not have been expected for larger savers. Should the small thrifty family that




UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 2 1 1

is not at fault be penalized before we hare better proof -that such action would
stabilize sufficient funds to make the inequity worthwhile?
3. I should make it clear that if our survey shows that unstable conditions
exist, or that a further ratcheting of interest rates without productive results
appears imminent, I would vote to impose some stabilizing regulations even at
some sacrifice of both fairness for the small saver and the efficiency expected
from the market. But I would do so with a great deal of unwillingness, and such
a decision would require a particularly careful measuring of alternatives.
I am concerned with the potentially greater instability of larger CD’s. I do
not, however, feel that their existence can force the Board to raise the Q
ceiling, any more than their existence last December seemed to me then to
lend weight to the argument for raising the discount rate. I believe that at
the present, within rather broad limits, the discount rate is a price fixed by
the Board and not the market. The existence of market rates against the ceil­
ing may lead to a particular distribution of credit which differs from that
which would exist without the ceiling. The question which must be answered
is whether such a distribution is desirable and for how long the pressure can
be maintained given the facts that money is fungible.
4. These hearings have properly called attention to the fact that even though
monetary policy is applied generally, its major impacts center in certain selective
markets. These costs which result from restraints must be measured each
time monetary policy is used. When, as in the current -period, a decision has
been made to use monetary restraint in place of more pointed and vigorous
fiscal and balance-of-payments procedures, then these particular costs will be
experienced.
If in the circumstances, Congress believes that selective cushioning is needed
for the areas hit hardest, clearly they should consider taking special action.
I have gone on record on numerous occasions over the past 10 years to the
effect that Congress has properly established the special assistance program of
FNMA and the advances of the FHLBB to deal with such a problem. They
represent ways of putting money directly into the housebuilding market when
a determination has been made that such areas are suffering too much as a
result of the application of general monetary policy.
If it appears that the pinch of monetary restraint is too great in particular
spheres, action should be taken either to substitute other types of policy for
monetary ones or aid should be given directly to the sectors where the cut­
backs appear to be antiproductive from the point of view of the economy as
a whole. Until evidence is available to the contrary, however, I believe the most
reasonable presumption is that special ceilings on all, negotiable or small, CD’s
would not offer sufficient aid to the mortgage market to make worthwhile the
sacrifices they would entail for savers, other institutions, and many borrowers.
A Pandora’s box might be opened in which decisions now made by the market
as to how to distribute savings among institutions and borrowers would have
to be made by law or governmental fiat. This I am certain we would all much
prefer to avoid.
Sta tem en t

of

G eorge W . M i t c h e l l , M e m b e r , B oard
F ed e r a l R e s e r v e S y s t e m

of

G o v ern ors

of

the

I would like to briefly state my basic reasons for believing that the Board’s
position with respect to regulation Q ceilings is appropriate at this time. In do­
ing so I want to make clear that I do not project this view into a future in which
conditions may be changed or changing.
I start with the proposition that the broad subject with which this hearing is
concerned is a flesh-and-blood problem, and I would like to recall my diagnosis
its potential in a speech I delivered several months ago, and has previously
been referred to by Mr. Strunk.
At that time I considered in what respects contemporary credit developments
mi£ht, from either the overall or the structural view, become a cause for concern. My choice of something to worry about, which may yet turn out to be a real
menace to our credit structure, was not that we had too much debt in the ag­
gregate or in broad economic sectors; nor was it the level of credit quality
which could be safely serviced by an expanding economy. Rather, it was the
growing business of borrowing short and lending long—the transformation of
uQgid claims into long-term credits by depository intermediaries.
Digitized for Back on October 22, 1965, I pointed out that; for the saver and investor these
FRASER
totennediaries
http://fraser.stlouisfed.org/ were offering the best of all possible worlds. Thus the investor
Federal Reserve Bank of St. Louis

2 1 2 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

had a highly competitive return on his funds, and yet by prevailing practice he
was always instantly able to convert his deposit into direct expenditure or direct
investment if market conditions open up more exciting earning opportunities.
The channeling of these flows into long-term instruments has also provided
more ample funds for use by corporations, individuals, and the various units of
government. And financial intermediaries themselves by lengthening their port­
folios and broadening their range of assets have been able to live well off an in­
creasingly slender interest rate differential.
“In surveying these uniformly pleasing results, however,” I noted, “that the
question naturally arises whether they have been obtained by risking serious
destabilizing repercussions in the future. Certainly while banks and other sav­
ings institutions have been expanding the volume of liquid claims in the hands
of the public, they have been assembling in their own hands an entirely different
time profile of matching assets. Not only are their loans and investments far less
liquid than the claims against them as has always been true; they are far less
liquid than they were 5 or 10 years ago.”
I went on in that speech to point especially to the liquidity risks attaching
to CD issuance, but my remarks could equally well have been punctuated by
illustrative references to the risks inherent in the passbook share accounts of
savings and loan associations.
“In considering the vulnerability of depository institutions to savings out­
flows,” I said, “the potentially disruptive contingency—and the one that is most
likely to create a challenge to monetary policy—lies in the possibility of rela­
tively sudden shifts of funds from ‘time’ deposits to direct investment in equity
or credit markets. In this respect, negotiable certificates of deposit constitute
the most vulnerable segment of the total since they are directly competitive with
the full range of money-market instruments and are held by corporations and
other institutions likely to respond quickly to relatively small shifts in yield
differentials. Indeed, the most immediate and direct constraint on monetary
policy posed by the new profile of bank liabilities may lie in the need to weigh
carefully the impact of specific actions on such differentials.
“More broadly, those charged with formulating monetary policy must recog­
nize that the process of transforming liquid savings into long-term instrum ents
does lack some of the Automatic checks and balances inherent in a single con­
tract between the original saver and the ultimate borrower. A widespread shift
by depositors to other forms of asset holdings—say a move by corporate holders
of negotiable CD’s into market instruments or by individual savers into com­
mon stocks—might force readjustments in bank assets that would have serious
repercussions on those credit markets in which banks are inactive and into
which it may be difficult to entice other investors without significantly higher
yield incentives.
“This would be particularly likely in markets such as those for m unicipal
bonds and mortgages where bank participation has increased sharply in recent
years. It might well occur whether the readjustment undertaken by banks
losing time deposits was confined to reduced takings of new issues or exten d ed to
actual liquidation from existing portfolios.”
These comments foretold a contingency which began to come into being with
the December 1965, tightening in monetary policy and the subsequent rise in
market interest rates. A major asset adjustment that would have been required
of banks (and an unexpected impact on their customers) was partially eased by ®
change in regulation Q. This change permitted banks to offer higher rates for
what amounted to about 14 percent of their total deposits. So far as the larger
banks were concerned, it enabled them to be more competitive with the security
markets. So far as the smaller banks were concerned, it enabled them to be more
competitive for local pools of funds.
B u t in both instances the banks were also competing with each other and,
more fatefully, with themselves. They had in passbook savings about $90 b
ft"
lion on which the ceiling was not changed. To a considerable extent they
round promoting CD and open-book accounts a t 4%, 5, or 5*6 percent attracted
large transfers from their own lower rate passbook savings accounts and thus
only raised the price on funds they already had. This redundancy of cost had a
substantial moderating influence on their competitive drive.
Furthermore, even with these higher deposit rates banks have not been able to
fully offset the lure of high-yield market instruments for their customers J the
most that banks altogether have been able to do is to keep up a positive net inflow
of time deposits, but with a growth rate far below last year—a third less i®
January-April than in the comparable period of a year ago. Savings and lo&
®



UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 2 1 3

association and mutual savings bank net inflows have also been dropping—to a
rate only half that of 1965. Thus, all financial intermediaries have been feel­
ing the tug of higher market rates of interest. Meanwhile the share of credit
demands met through direct flows of savings to the market has risen sharply as
savers *bypassed banks and other intermediaries and put more of their funds
directly into securities. Last year the banking system was able to accommodate
two-fifths of the credit used by individuals, businesses, and governments; in the
first quarter of this year, the banking system’s contribution fell to only about
one-quarter of the total.
What does this background of fact and principle signify for how we should
approach today’s problem?
I think it is clear th a t we all have a common goal of maintaining the stability
of our financial institutions and of providing savers with the best yields and
the greatest liquidity consistent with that stability. I would add that near-instant
liquidity of time deposits at banks or savings and loan associations is a privilege
that must not be too widely shared. It can hardly be shared at all with any
very large number of that kind of depositors whose withdrawals are stimulated
by rate incentives. A predictable, even though large, turnover in savings ac­
counts is one thing, and well within financial managements’ capabilities—a con­
centrated mass withdrawal to take advantage of rising yields is an entirely dif­
ferent m atter and much more difficult to deal with. This is one reason for the
Federal Reserve rules that today deny passbook accounts to business corpora­
tions and to State and local governments, two types of depositors who are ex­
ceptionally sensitive to rate differentials.
Today many depository institutions are recognizing the destabilizing threat
of rate changes, and they are trying to stratify their depositors, according to sen­
sitivity to yield differentials on the one hand and to desire for liquidity on the
other. Those that are sensitive to higher yields are being locked in with varying
maturity arrangements; this is a major virtue of the certificate of deposit.
Those th at are more liquidity conscious are being offered lower yields in pass­
book-type accounts.
The rates, terms, and conditions offered vary widely from place to place in
the Nation, reflecting the great variety of economic and financial circumstances
and the differing judgments of thousands of financial managements. In the
process several new mutations of deposit instruments have taken place. A few
such mutations may be bad, or at least nonprofitable in the longer run, but I
regard as constructive those savings contracts th at compel the holder to accept
some meaningful restraints (maturity or otherwise) on his ability to demand
cash from his depositary institution and then pay that holder well for his giving
up otf liquidity. And for this reason, denouncing longer maturity, higher
yielding CD’s just because they are of small denomination strikes me as anti­
thetic, not only to equity but also financial stability.
In a problem as complicated as this one, it is possible to mistake surface
symptoms for underlying causes of disequilibrium. The result of an erroneous
analysis may be to damage our financial intermediary system, reduce the bene­
fits of a competitive financial system, or to thw art the effectiveness of monetary
action, the major instrument of public policy being used to counter emergent
inflationary pressures a t this juncture.
Bank and savings and loan competition has been vigorous for several years
now. But it moved into the acute stage when monetary restraint reached its
current levels and it became obvious th at the aggregate of credit would not be
large enough to go around. The problem, in my view, is linked directly to the
way in which we are dealing with overheating, or the threat of overheating,
in our economy. Were we using fiscal policy to counter these pressures, I doubt
the issue we are considering today would even have arisen, greater reliance
upon fiscal restraint would probably not have produced the monetary stringency
we now see around us or may be expecting. Our problem is clearly worse,
however, because financial intermediaries have implicitly promised more liquid­
ity, yield, and accommodation to their customers than they can readily deliver.
Admittedly, there is room for differences of view on what, if anything, should
be done now. In seeking solutions, we must keep in mind th a t there a re both
short* and long-run problems involved, cyclical as well as secular developments
with which to cope. In the short run, we have to quell the hysteria and break
the paralysis th a t seem to be gripping some participants in and observers of
the financial scene. The financial structure is essentially resilient and well
Uianaged, and there exist governmental mechanisms established fo r the very
Digitized forPurpose of easing adjustm ents th a t m ust come in the w ake of shifts in dem ands
FRASER
'o r goods and for finnnrtqi services. While not denying th a t a problem exists
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68-496 St. Louis 15
Federal Reserve Bank ofO—66

2 1 4 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

for all financial intermediaries—as a result of the Government’s reliance on
monetary policy as the main tool of economic restraint—the situation hardly
warrants the crisis atmosphere that has developed in some quarters, or the
overreaction by portfolio managers which threatens to curtail housing activity
unnecessarily sharply.
What is important is to be sure that in dealing with the short-run
problem we do not adopt solutions that in the long run will hurt more than help.
I believe the best and most lasting solution lies in permitting intermediaries,
savers, borrowers, and the market to work out their own salvation. Most of
them are doing well enough now and others are taking constructive corrective
measures. If governmental actions are needed, they should be actions designed
to remove restrictions and inhibitions, rather than those which hamper adjust­
ment to evolving economic needs.
I would like to add a postscript to my statement, with respect to the impact
of monetary conditions of recent years on the smaller banks of the Nation and,
by inference, on the effect of restricting their use of CD’s and open-book accounts.
Unfortunately, our statistical knowledge of how small banks are faring depends
upon Oall Report data which are not very current From data for June 30,
1965, the latest information we have, I think it clear that small banks w'ere
holding their share of the market for demand deposits, losing out on passbook
savings, gaining slightly on CD’s and open-book accounts held by State and local
governments and gaining well on CD’s and open-book accounts held by individ­
uals, partnerships, and corporations.
Using June 30, 1961, as a comparison year, defining small banks by the total
of their deposits in each of these categories, and choosing deposit levels in each
case to set off 75 percent of the 13,543 banks in the Nation, these are the results :
(1) Banks with demand deposits otf less than $5,110,000 had 11.6 percent
of the demand deposit market in 1961—11.5 percent in 1965.
(2) Banks with less than $3,250,000 in passbook savings had 13.0 percent
of that market in 1961—and dropped to 10.9 percent in 1965.
(3) Banks with less than $1,310,000 in CD and open-book accounts to
individuals, partnerships, and corporations had 7.1 percent of that market
in 1961 and gained to 11.9 percent of it by June 30,1965.
These data are now almost a year old and what the statistics for June 30,
1966, would show is partly a matter of conjecture—my conjecture would be the
smallest 75 percent of the banks are still holding their own on demand deposits,
still losing on passbook savings, and more dependent than ever on the small CD
and open-book ’ ccount to hold their share of the time deposit market.
a
Mr. R euss. May I see the copies, now?

The C h a ir m a n . The clerk will make them available to you.
Mr. Todd?
Mr. Todd. Thank you, M Chairman.
r.
I very much appreciate the opportunity of clarifying some of m
y
own questions with you gentlemen on the Board. One of my concerns
is that as much as we talked about monetary restraint and tight m
oney,
I find m the May 1966 Federal Reserve Board Bank of St. Louis Be^ ^ ar^ J entitled “Monetary Expansion Continues.”
lc1e
Perhaps the point of view can best be expressed by reading one
paragraph which is the following: “The interest rate rise since last
July has been caused by swelling demands for funds rather than by
monetary restrictions. The intensity of the demands for loan funds
has been witnessed by very rapid expansion of the bank loans, very
large offerings of corporate and municipal securities and su b s ta n tia l
increase in governmental debt outstanding as well as by the in c r e a s e to
interest races*
I have a problem myself in reconciling the statements th a t are gen'
eW made th a t we are in a period of monetary restriction, and tm?*
which says we are not in a period of monetary restriction. This is
Dome out to me by expansion of the money supply which has occurred
since last year which is on the order of, I believe—depending on
you consider the money supply, some $10 billion* m d I just wonder




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 1 5

how you gentlemen look at this. On the one hand we call it mone­
tary expansion and on the other hand we talk of tight money. Are
we talking about the same thing, or is this just a difference of inter­
pretation of policy that we have now ?
Mr. Robertson. I think probably it is an application—a mixture of
the two, Mr. Todd.
Certainly, the restrictiveness of monetary policy has meant that the
money supply and bank credit have expanded more slowly than other­
wise would have taken place. We have not attempted to bring to a
halt the expansion of credit. But certainly, we have expanded at a
slower rate than would have otherwise taken place if we had not been
very reluctant in providing reserves.
Mr. Todd. You mean the open market operation; this is really what
creates the money supply, is it not ?
Mr. Robertson. It depends on how you provide your reserves, either
through open market operations, or through the discount window.
Either avenue is available for increasing the reserves of the banks.
You are right in thinking that most of the reserve expansion is being
provided through open market operations.
Mr. Todd. And this has really been an expansion—an expansionary
policy, has it not, in that banks have been able to meet loan demands
up until recently ?
Mr. Robertson. Banks who had----Mr. Toro. Without many restrictions.
Mr. Robertson. Banks have been able to meet their loan demands,
but less readily and with more difficulty and at higher cost since the
interest levels were pushed up.
Mr. Todd. I think this particular series of hearings is caused by
another aspect of this, and this is the attraction of money from the
savings and loans to the banking system, which appears to me to be
also a means of expanding the money supply. Savings and loans are
not able to create money, out banks increase by 25-fold in the money
they attract from the savings and loans. And since I have limited time
now, I simply want to suggest that it seems to me we have to make
some decisions within 2 weeks, by the middle of June, or we are faced
with the prospect of substantial withdrawals from savings and loans
moving over into the banking system. Perhaps some sort of liquidity
problem for savings and loans. As a consequence, it seems to me we
are in the midst of an academic discussion, but we must make some de­
cision quickly on the basis of information available to us.
I wonder how severely you consider the potential liquidity crisis the
first of July and if the Board is prepared to move in this? You have
mentioned that you are going to do some more studying and I think
M Martin has indicated before they were going to study this situ­
r.
ation closely, but you can study things so closely you do not act. I
do not think there is much prospect of the committee, except via the
chairman’s resolution, taking action quickly, yet this may be an alter­
native to inaction by the Board. I wonder what the position of the
Board is on this?
Mr. Robertson. I would respond first and the others, I am sure,
would be very glad to respond.
First, let me reemphasize that we are as alert to this problem as any­
one else
could possibly be. The question is the very nature of the
problem, the
http://fraser.stlouisfed.org/ size of the problem, the way in which you should develop
Federal Reserve Bank of St. Louis

2 1 6 UNBOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

remedies for it, if it is there and if it is real and not just fear. But,
also, I think it must be borne in mind that there are limitations to
what you can do with respect to monetary policy to ease the burden
here. It may be that what we need to do and what should be done
is to deal with this particular problem selectively through either
FNMA or the Federal Home Loan Bank Board in order to provide
funds, in order to see that the construction industry doesn’t bear the
whole brunt of the restrictive monetary policy.
On the other hand, if you were to ease monetary policy to the point
where the whole interest rate structure would drop down, we would
have in my view inflation in this country that no one could stand.
Now, I will let the other members of the Board express their views.
Governor Shepardson %
M S h e p a r d s o n . Mr. Todd, I would agree completely with what
r.
Governor Robertson said. We are definitely alert to this problem.
We do not consider it something for longtime study. We are fully
aware of the possible movement of funds m early July. We are try­
ing to marshal our information to the point that we will be in a posi­
tion to take constructive action before that time. What that action
might be, I think is impossible to determine at this point. I do think
that it is important that we recognize this is only one of several areas
that we are concerned with. If we were to take steps to lower the
availability of funds to banks, which are providing the funds for busi­
ness, both large and small, we might very well see the problem shift
from the present problem of construction and mortgage funds to a
problemof small business funds.
A drastic curtailment of the ability of banks to draw in funds to
meet the credit needs of business could create a new and different set
of problems. We would find small banks and medium-sized banks and
their customers being hurt just as well as large banks.
The suggestions that have been made for some limitation on the flow
of funds have largely been directed toward the smaller deposits. All
the suggestions that I have seen would place limits on the rates paid
for the smaller amounts. Well, those are the funds that go to small
business, by and large. I think that we have to be very careful that
in correcting one problem, we don’t create an equally difficult problem
in another area. And I would agree with Governor Robertson’s sug­
gestion that probably a more satisfactory or more constructive way of
meeting this would be through the agencies created to assist in financ­
ing homes, perhaps by increasing FNMA’s authorization or that of
the Home Loan Bank Board.
There was some discussion yesterday about selective controls. W
ell?
it seems to me this is a problem that needs a selective answer through
the agencies created to handle this particular area.
Mr. Todd. Thank you. Mr. Chairman, my time has expired.
The Chairman. We will get back to you, Mr. Todd.

The Board is coming back tomorrowmorning to give us all an oppor­
tunity to ask further questions.
Mr. Ottinger?
Mr. O ttinger. Thank you, Mr. Chairman.
I would like to put in the record at this point, if I could, a letter that
I have received from the National League of Insured Savings Associa­
tions, H a rry P, Greep, president, and Rex G. Baker, J r., vice president, endorsing my bill, H.R. 14422, proposing a floor on time deposits,




UNSOUND COMPETITION FOR SAVINGS A N D TIME DEPOSITS 2 1 7

prohibiting issuance in denominations of less than $15,000, but pro­
posing that the limitation should preferably be raised to a minimum
denomination of $100,000.
The C h a ir m a n . Without objection, s o ordered.
(The letter referred to follows:)
N ational L eague

Hon. R ic h a b d L. O t t in g e r ,

op

I n su r ed S a v in g s A ssociations ,

W ashingto n , D.C., Map 18, 1966.

S ouse of Representatives,
W ashington, B .C .
D e a r C o n g r e s s m a n O t t i n g e r : In connection w ith the appearance of repre­
sentatives of the National League of Insured Savings Associations as witnesses
before the House of Representatives’ Committee on Banking and Currency on
May 9 and 10,1966, you invited an expression of the view s of the National League
with reference to H.R. 14422, a .bill to prohibit insured banks from accepting time
deposits in amounts less than $15,000. which you introduced on April 7,1966.
At its legislative conference in February 1966 in Washington, the National
League discussed the topic of certificates of deposit a n d recommended legislation
toward limiting the issuance of negotiable certificates of deposit to a minimum
denomination of $100,000. This position was ratified by a special meeting of the
members of the National League held on May 3, 1966, at its management con­
ference in White Sulphur Springs, W. Va.
The National League position is based on the theory th a t certificates of deposit
Issued by banks should partake of the nature of money market instruments
involving substantial blocks of funds, and should not impinge upon the type of
deposit normally handled in savings accounts. T hat position finds support in the
action of the Board of Governors of the Federal Reserve System in amending
regulation Q in December 1965, since the limit fo r interest rates on savings
accounts was maintained at 4 percent per annum w hile the limit for interest
rates on certificates of deposit and other time deposits was permitted to rise to
5% percent per annum from a former limit of 4 p ercent on time deposits of 30
to 89 days and 4 ^ percent on time deposits of 90 d a y s or more.
Subsequent experience in issuance of certificates o f deposit has shown a grow­
ing number of examples of their issuance in denominations so small and for
terms so short as to attract the attention of investors w ho otherwise would have
probably chosen a savings account in a bank or a sim ila r savings account in a
savings and loan association as an investment medium.
Since H.R. 14422 would alleviate this situation by placing a minimum limit of
$15,000 on the issuance of nonnegotiable certificates of deposit, the National
League supports the principle of the bill. I t would p re fer to have the minimum
placed at a higher figure. It would also urge am endm ent of the bill to place a
minimum limit of $100,000 on the issuance of negotiable certificates of deposit.
The principle of fixing express dollar minimum lim its should likewise be ex­
tended to other types of time deposits in order to p rev ent their future adaptation
to instruments competing with savings accounts.
As noted J>y its principal witness, Mr. Everett C. Sherbourne, the National
League also hopes that action will be taken to w ard requiring a longer time
differential between a savings account and a time deposit, preferably 6 or 9 months.
Sincerely,
H arry P. Greep,

President.

R ex

G. B aker ,

Vice P resident.

Mr. O t t i n g e r . You gentlemen of the F e d e ra l Reserve Board are
very complacent about the effects of your c h a n g in g regulation Q to
permit 5i/>-percent interest on certificates of d ep o sit and you have said
no dire effects have yet been felt. I am su re y o u are aware th a t be­
cause of the construction cycle it takes some tim e fo r these effects to be
felt. I t will be some 8 or 9 months before th e re a l effects can be felt.
The savings and loan people in my area say i t is impossible to m ake
new commitments a t th is time in th e m ortgage field, and th a t means

that houses th a t would have been built in the f u tu r e w ith this financing
http://fraser.stlouisfed.org/
will not be St. Louis
Federal Reserve Bank ofstarted. Construction workers a n d builders won*t be out

2 1 8 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

of work, though, until housing financed by current commitments is
completed.
Governor Robertson, you say that you disagreed with the action
taken in December. I like very much your thinking on what should
have been done. Yet you say at this time that you do not think any
action is called for to correct the situation that arose against your will
from what you consider a bad decision. This disturbs me.
The Chairman of the Home Loan Bank Board, Mr. Horne, has
suggested that you be given discretion to set a differential interest
rate on the deposits under $10,000. Others have suggested that with
respect to the kind of limitation on size that I proposed, you be given
discretion. If you were given discretion to put a floor on the size of
certificates of deposit, or to put a differential interest rate, would you
use it? I would like to hear from you and the Board as to whether
your present disposition would be to use it. I know you are against
this as a matter of principle.
M R o b e r t s o n . That would be my reaction, that this would dis­
r.
criminate against the small man in favor of the large man and this
goes against the grain as far as I amconcerned.
Furthermore, I do not want you to get the impression that I think
there is nothing that should be done to meet this problem. I think
something should be done, but I want to see the size of the problem
and the nature of the problem.
I want to see the size and nature before I act.
Furthermore, one of the reasons I would be disinclined to use this
proposal of levels for different rates is that I think there is a m
uch
more equitable and much better way of doing this and that is to gear
rates to maturities. Now, this is fair from many points of view.
No. 1, the longer a man gives up the use of his funds, the more inter­
est he ought to be permitted to get for them. From the bank point of
view, it is in a much better position to schedule its loans and portfolio
assets to the maturities the longer it knows it is going to have the
funds available. Therefore, I would prefer this sort of program.
Mr. O t t i n g e r . D o you have the power to do that now ?
Mr. R o b e r t s o n . Absolutely. As a matter of fact, we did it until
1964. In 1964 we moved away from this and then completely away
from it in 1965.
Mr. O t t i n g e r . Then why have you not taken the action%
M R o b e r t s o n . Well, this is a matter of lack of unanimity of opin­
r.
ion on the subject. I would prefer to let each of my associates speak
for themselves.
Mr. O t t i n g e r . I would like to have them do that. You said that
the primary drawout from the savings and loan banks was c a u s e d by
issuance of what you described as “gimmick certificates,” which I take
it are nonnegotiable certificates of deposit in small d e n o m in a tio n s .
Does the $17.5 billion in certificates of deposit you cited include these
nonnegotiables?
Mr. R o b e r t s o n . They are the $100,000 and more.
Mr. O t t i n g e r . Do you know how much is in nonnegotiable c e r tificates of deposit?
Mr. R o b e r t s o n . I can get the figure on it. This will not be an ex­
act figure because, in the way we figure it, some of the smalltime CD?
S
are in negotiable form, but they are never negotiated and it is »<*
done. But the volume of time——




UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 2 1 9

M O t t i n g e r . Would it be possible to get the volume of time de­
r.
posits under $25,000, $20,000, $15,000, $10,000?
M M i t c h e l l . You can get time accounts for individuals, partner­
r.
ships, and corporations with size breaks at $10,000, $10,000 to $25,000,
$25,000 to $100,000, and over $100,000. These data are for Novem­
ber 1964, the most recent survey.
Mr. O t t i n g e r . Is your current survey going to give that infor­
mation ?
Mr. M i t c h e l l . N o. We can give you aggregates in open book and
CD’s—negotiable and nonnegotiable. For individuals, partnerships,
and corporations the total at the end of the year was $35 billion^
whereas, passbook savings were $92 billion and State and local govern­
ment time accounts totaled $12 billion.
Mr. O t t i n g e r . But you do not have any knowledge as to how much
in volume there are in certificates of deposit, negotiable or nonnegoti­
able, in denominations of $10,000 or less, which Mr. Home was talk­
ing about, or $15,000 or less as reflected in my bill ?
Mr. Mitchell. I do not think so. N o ; we do not, I am sure.
Mr. O t t i n g e r . Could you supply such information as you can get
on this?
Mr. R o b e r t s o n . Yes; we will get whatever information we have.
(The information requested follows:)
D istribution

op

T im e Certificates
S ize

of
of

D eposit
B ank

by

S ize

of

Certificate

and

The attached table shows certificates o f deposit issued by insured commercial
banks classified by size of bank and by size of certificate. The data, which
refer to certificates outstanding on A pril 26, 1965, w ere provided by the banks
in a supplementary statem ent to the regular report of condition on that date.
The data cover both negotiable and nonnegotiable time certificates of deposit,
including those sometimes called savings certificates o r savings bonds.
Of the $36 billion in total certificates outstanding on the reporting date, more
than one-fourth w ere in denominations o f $10,000 o r under. N early h a lf of
the $10.2 billion of certificates in the sm allest size classification w ere issued by
banks w ith less than $10 million in total deposits. A t the other end o f the size
distribution, $13.6 billion—more than one-third of the total—w ere in certificates
with denominations exceeding $500 million, and the bulk of these larg er denom­
ination certificates w ere issued by banks in the largest size class.

The time certificate of deposit is thus not simply a money-market instrument
whose issuance is confined to large banks. Rather, it is a type of instrument
offered to a wide variety of savers and investors by banks in all size classes.
Time certificates of deposit at insured commercial b<mksf A pr. 26, 1965, "by size
of certificate and bank
[Amounts in thousands of dollars]
Size of bank (total deposits)
All banks

Total certificates of deposit............... 36,041,850

By size:

$10,000 and under. _
10,217,617
Over $10,000 to $60,000.......................... 4,445,881
Over $50,000 to $100,000......................... 2,290,200
Over $100,000 to $250,000..................... 2,525,378
2 ver $260,000 to $500,000....................... 2,966,921
7,345,464
.................. 6,250,630




Under $10
million

$10-$100
million

$100-$500
million

6,898,688

8,299,903

5,201,075

15,642,184

4,962,422
1,299,466
295,795
212,188
93,681
28,217
7,085

3,874,851
1,728,496
765,583
724,498
560,631
409,773
246,132

834,764
722,321
534,236
629,571
704,128
980,121
795,963

545,580
695,598
594,586
959,121
1,618,481
5,927,353
5,201,460

Over $500
million

220

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

[From the Federal Reserve Bulletin, April 1966, pp. 466-485]

TIME AND SAVINGS DEPOSITS,
LATE 1965 AND EARLY 1966
Effective December 6 , 1965, the Board
of Governors increased to 5 Vi per cent per
annum the maximum interest rate payable
by member banks on time deposits. The pre­
vious ceiling had been 4 per cent for time
deposits with maturities of 30-89 days and
4 Vi per cent for deposits with longer ma­
turities. There was no change in the 4 per
cent rate payable on savings deposits.
To determine the structure of interestbearing deposits at member banks and the
immediate response of banks to the change
in the rate ceiling, a survey of time and sav­
ings deposits was conducted by the Board of
Governors over the year-end. All member
banks were asked to report not later than
January 3, 1966, interest rates applicable to
each major type of deposit held by individu­
als, partnerships, and corporations (IPC)
as of December 3, when the Board’s action
was taken, and any changes made after that
date or definitely planned for the near term.
They were also asked to report the dollar
amount of each type of deposit outstanding
on December 2 2 and to supply selected in­
formation on the characteristics of the dif­
ferent types of deposits they used. Reports
were received from virtually all of the 6 ,2 2 0
member banks in existence at the end
of 1965.
This article summarizes the results of the
survey. The first part of the article relates
to the deposit structure at the time of the sur­
vey, the second, to the initial rate increases
following the change in the ceiling; and the
Note.—Caroline H. Cagle of the Board’s Division
of Research and Statistics prepared dm article.




third, to the structure of rates and other
characteristics of the deposits.
Since early 1966, some member banks
have increased their rates to higher levels
than those they had contemplated at the time
of the survey. As a result the accompanying
tables understate the current level of rates
and the increases since December 3. The
tables also, of course, do not reflect changes
in deposit structure that have occurred since
the end of last year.
DEPOSIT STRUCTURE

Historically, savings deposits have made up
the bulk of all interest-bearing deposits at
member banks, They still do, but in recent
years their importance has declined as
banks have introduced new instruments
designed to counteract specific forms of
competition. Since 1961, for example, banks
have developed negotiable certificates of de­
posit (CD’s), which are aimed at attracting
funds of corporations and other large inves­
tors and at halting the movement of demand
deposits of these groups from large commer­
cial banks into short-term money market
paper. Other new instruments, such as sav­
ings certificates and savings bonds, have
been aimed at retaining or attracting funds
of individuals and other small investors that
might flow to other savings institutions or
into securities.
Data on the following types of deposits
were collected in the survey: savings de­
posits; savings certificates; savings bonds;
other nonnegotiable certificates; negotiable
certificates of deposit; and time deposits

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 2 1

open account. Each of these will be dis­
cussed below.
Savings deposits, which may be held only
by individuals and certain types of nonprofit
organizations, are usually evidenced by a
passbook. The bank must reserve the right to
require at least 30 days’ written notice before
withdrawal, but in general practice these de­
posits may be withdrawn on demand. They
are particularly well suited for savers whose
deposits are in small amounts or whose
needs for withdrawal are irregular and un­
predictable. On December 22, 1965, 95 per
cent of all member banks had savings de­
posits, and the amount outstanding was
$74.4 billion, as shown in Table 1. At that
time they represented 70 per cent of all
interest-bearing deposits, IPC, compared
with 8 8 per cent 5 years earlier.
Savings certificates (sometimes called in­
vestment certificates), savings bonds, and
other nonnegotiable time certificates are all
instruments that banks have been promoting
in recent years in soliciting more interestsensitive types of savings and liquid funds
from smaller businesses and institutions.
These instruments generally state that the
bank will pay to the holder on a designated
maturity date either ( 1 ) the principal
T able 1
op T im e and Savings D eposits , IPC, H eld
by M ember B anes on D ecem ber 22, 19651

T ypes

Num ber o f banka
]>PC of
deposit

Savings deposits___
Savm p certificates..
jwridgs bond*..........
Otbwnonoc*oti*ble
CD's. .777...
Negotiable CD’* ....
Tims deposits, open
Account.................

Amounts held

Reporting Percentage In billions Percentage
dis­
of
specific
o f all
tribution
dollars
member
types
74.4

70

5,893
2,773
130

95
45

6 .6

6

2

0 .4

<J>

2.1S7
1,777

35
29

5.1
15.9

5
15

1,763

28

4 .4

4

106.8

100

amount shown on the instrument plus ac­
crued interest at a specified rate or ( 2 ) a
specified redemption value, which includes
the amount originally deposited plus accrued
interest.
A distinguishing feature of these and
other types of time deposits is that they are
not redeemable prior to maturity or until
the expiration of a prescribed period of
notification of intent to withdraw (not less
than 30 days) except in hardship circum­
stances, and then only at some sacrifice in
interest. The instruments are far from
standardized, however. Those having the
same name may vary in character from bank
to bank. And others, though given different
designations by different banks, may be
identical in character. Certain important
characteristics of the various instruments
are discussed in the last section of this
article.
Of these three types, savings certificates
are the largest component. On December
2 2 , 1965, these certificates amounted to
$ 6 . 6 billion, or 6 per cent of all time and
savings deposits, IPC. They were issued by
nearly half of the banks, but principally by
small institutions. Banks in three Federal
Reserve districts— Chicago, St. Louis, and
Minneapolis— accounted for almost threefifths of the total.1 These instruments have
been an important form of time deposits in
these Reserve districts for some years. At
the time of the survey 6 out of 1 0 member
banks in those districts held some of these
deposits.
Savings bonds generally are patterned
after the U.S. savings bond and typically are

Total........

J Time deposits o f individuals. partnership*i, and corporations.
* L m than one-ha If o f 1 per ocut.




1Appendix Tables I-VI show for savings and the
various types of time deposits, the number of banks
with such deposits and the amounts of 'each type of
deposit at various levels of interest rates; in these
tables the banks are classified by size and by Federal
Reserve district.

2 2 2 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

redeemable at specified intervals according
to the schedule of redemption values shown
on the instrument. On December 22 only
$422 million of them were outstanding, and
they were held by 2 per cent of all the banks
surveyed. Banks in all size groups issued
them, but a few large banks in the Philadel­
phia and Atlanta Federal Reserve Districts
accounted for the major part of the total.
Other nonnegotiable time certificates
totaled $5.1 billion, and they accounted for
5 per cent of all time and savings deposits,
IPC. They were used by large and small
banks throughout the country, but banks
with total deposits of less than $500 million
had two-thirds of the total.
Negotiable CD’s are evidenced by a docu­
ment that specifies a principal amount, a
maturity, and the rate at which interest will
be paid. The distinguishing feature of these
instruments, in contrast with those described
above, is their negotiability. The bulk of the
negotiable CD’s outstanding have been is­
sued by large money market banks to na­
tional corporations and other large investors
in marketable denominations (generally
$ 1 0 0 ,0 0 0 and over) at rates competitive
with other money market instruments, and a
sizable secondary market in these CD’s has
developed. Some smaller banks also com­
pete for funds of large national corporations,
while others issue negotiable CD’s in smaller
nonmarketable denominations to their local
and regional customers.
Less than one-third of all member banks
reported that they issue negotiable CD’s, but
the volume outstanding on December 2 2 to
IPC holders totaled $15.9 billion, the second
largest category of IPC deposits. All banks
with total deposits of $500 million and over
had some of these deposits, and these banks
accounted for nearly three-fourths of the
total amount outstanding.




Time deposits, open account, generally
are evidenced by a written contract specify­
ing the terms and conditions for handling
the deposit and the rate of interest to be
paid. A special advantage of this type of
account is that it can provide for the deposit
or withdrawal of funds from time to time
without the issuance of separate instruments
for each transaction. These deposits, used to
a considerable extent for large accounts, can
be tailored to the needs of the individual
customer, and they show a wider range of
usage and characteristics from bank to bank
than the other types described. They are also
used for special types of small deposits, such
as Christmas and vacation clubs, on which
many banks pay no interest.
Large banks account for a high propor­
tion of all time deposits, open account. The
number of banks that use these deposits is
about the same as the number that issue
negotiable CD’s, However, the volume on
December 2 2 , 1965— $4.4 billion—was
much smaller than the amount of negotiable
CD’s outstanding.
RATE INCREASES AFTER DECEMBER 3

The initial changes in maximum rates paid
on time deposits, IPC, in late 1965 and
early 1966 affected about one-fourth of all
member banks. Most of the increases
amounted to one-half of a percentage point
or less, as shown in Table 2. Nevertheless,
the amount of deposits affected (other than
savings) was substantial, because most of
the banks that raised rates held relatively
large amounts of deposits.
As might be expected in view of the in­
terest-sensitive character of the major
holders, rate increases were most prevalent
on negotiable time certificates of deposit and
on time deposits, open account. About fourfifths and two-thirds, respectively, of these

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 2 3

T able 2
N um ber

of

M e m b e r B a n k s a n d A m o u n t o f T i m e a n d S a v in g s D e p o s i t s ,
I n t e r e s t R a t e I n c r e a s e s a f t e r D e c e m b e r 3, 19651

‘ As of the survey date, 1,450 banks, or 23 per cent o f til
1965. TT* to o l amount of time deposits affected by these
Deposit figures a n as of Dec. 22, l% 5 .
1 Less than $500,000.

A

f f e c t e d by

. banks, had raised their rate on one or more types of deposits after Dec. 3,
was $22.3 trillion, or 21 per cent o f all time deposits I PC at member banks.

deposits were in banks that increased their
rates by one-half percentage point or less.
Prior to December 6 the banks that held
most of these deposits were paying the old
4 Vi per cent ceiling.

Rate increases affected smaller amounts
of savings certificates and bonds and other
nonnegotiable certificates, types held mainly
by individuals and other small investors.
Between one-fifth and one-third of the
banks holding these types of deposits
changed their maximum rates, and the pro­
portion of all such deposits affected was
considerably less than one-half.
The proportion of banks raising their
rates and the proportion of other time de­
posits affected by rate changes were greater
for large banks than for smaller ones, as
shown in Table 3. Among banks in the larg­
est size group (those with total deposits of
$500 million and over), more than fourfifths of all negotiable and nonnegotiable
certificates of deposit and time deposits,
open account, were in banks that raised their
maximum rates. For savings certificates the
proportion was nearly half. By contrast, for




IPC,

N ote.—Dollar amounts may not add to totals because o f rounding.

small banks (total deposits of less than $ 1 0
million), the highest proportion of deposits
of any type affected by rate increases was
one-fifth.
Savings deposits were least influenced by
rate increases, in part because there was no
increase in the 4 per cent ceiling for these
deposits. Only 7 per cent of all member
banks had raised their rates on savings by
early 1966. Most of these were small institu­
tions in the Middle West and South. For the
most part these banks had been paying low
rates, and in this move they raised their
rates to 3 Vi or 4 per cent.
STRUCTURE OF RATES AND OTHER
CHARACTERISTICS

The survey obtained information on the
structure of rates on interest-bearing de­
posits, as shown in Tables 4-5, and on vari­
ous characteristics of the major types of time
deposits, as shown in Tables 6 -8 .
Structure of rates. On December 3 nearly
three-fourths of all time and savings de­
posits, IPC, were in banks that were paying
ceiling rates. Rates paid were highest for
those instruments held mainly by large, rate­

2 2 4 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

conscious depositors and lowest for those
held principally by small savers.
Nearly all negotiable CD's, savings
bonds, and time deposits, open account,
were in banks with a 4 Vi per cent maximum
rate on December 3, as shown in Table 4;
nevertheless the number of banks at this rate
level represented less than one-third of all
banks holding negotiable CD’s and time de­
posits, open account. For savings certificates
and other nonnegotiable CD’s, most of the
banks paid no more than 4 per cent, but
those banks that had moved their rate up to
4 Vi per cent on other nonnegotiable CD’s
held almost half of the deposits.
With respect to savings deposits, 45 per
cent of the banl^s were paying the 4 per cent
ceiling on December 3, and these banks
accounted for almost four-fifths of all mem­
ber bank savings deposits. Nearly all of the
largest banks were paying the ceiling rate,
but this proportion dropped as the size of
bank declined—to about two-fifths for
banks with total deposits of less than $ 1 0
million, as shown in Appendix Table I.
Rates on most forms of other time depos­
its also varied with the size of bank. When
banks are grouped by size of total deposits,
the larger the size group, the higher the pro­

portion within the group that were paying
the ceiling rate. Most of the time deposits
in banks with total deposits of $500 million
and over were in those banks with a maxi­
mum rate of AVi per cent on December 3,
as shown in Table 5. This proportion
dropped to less than one-fourth for banks
in the smallest size group. There were two
exceptions—savings bonds, on which most
banks regardless of size paid 4Vi per cent;
and savings certificates, on which few banks
of any size paid as high as 4 Vz per cent.
Rates also varied to some extent by geo­
graphic areas. They were highest in the San
Francisco District where nearly all time and
savings deposits were in banks paying the
ceiling rate on December 3. At the other
extreme, less than 6 per cent of the time and
savings deposits (except negotiable CD’s
and savings bonds) in the Minneapolis
Federal Reserve District were in banks pay­
ing the ceiling rates.
Reflecting the relatively small number of
rate changes after December 3 on sav­
ings deposits, the proportion of all member
banks paying the 4 per cent ceiling did in­
crease a little—from less than one-half to
one-half—by early 1966, but the proportion
of all savings deposits that they held re-

T a b le 3
R elation

of

Size

of

Bank

to

Rate I ncreases

at

M ember Banks

after

D ecember 3, 1965

(Number and deposits of banks raising rate, ai percent*** of *11member banks with specific type of deposit, by size^oMwnk group)
Number of banks
Type o f deport

Size of bank
(total deposits, in millions of dotlan)

Deposits, December 22,1965
Size o f bank
(total deposits, in millions o f dollars)

10
SO

asas

Tim# deposits, open

1Lass than oae-halfof 1 percent




50-

100 -

100

500

6
25

8

21
24

20
30

500 and

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 2 5

T able 4
M aximum R ates P aid on V arious F orms o f T im e and Savings D eposits , IPC,
o f M ember Banes on D ecember 3, 1965, and in E arly 19661

1 Time and savings deposits held on Dec. 22,1965. Excludes banks that reported no interest rate paid.
maximum rale applies to maturities o f 1 year or more where available. When a bank did not report a rate for this maturity, the rate
. . nex* shorter m aturity was used.

2 p ie

3Less than one-half of 1 per cent

T able 5
B anks P aying O ld AYi % C e ilin g R a te o n Tim e D eposits, IPC , o n D ecem b er 3, 1965, and
B anks P aying O v er 4V4 % in E a r ly 1966
(Percentage o f all member banks with specific type o f deposit, by size-of-bank group)




.

2 2 6 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

mained about unchanged at four-fifths, as
shown in Table 4.
Few banks raised the rate on any type of
time deposits above 5 per cent in the period
covered by the survey. On savings certificates
and savings bonds most of the rate adjust­
ments pushed the maximum rate paid to 4 Vi
per cent; few banks raised their rates above
this level. By early 1966, two-fifths of all
savings certificates and four-fifths of all sav­
ings bonds were in banks paying a rate of
AV2 per cent. Because most large banks that
hold the bulk of negotiable CD’s and time
deposits, open account, and a substantial
volume of other nonnegotiable CD’s ad­
justed their maximum rate upward to 4 3
A
or 5 per cent after December 3, nearly all of
these deposits in the largest bank-size group
(total deposits of $500 million and over)
T a b le
M i n i m u m D e p o s it A c c e p t e d

on

V a r io u s F o r m s

were in banks paying over 4Vi per cent by
early 1966, as shown in Table 5. Among
smaller banks relatively few had raised their
rate on any form of time deposit above 4 V
i
per cent in the period covered by the survey.
Other characteristics. For each of the ma­
jor types of time deposits issued by banks
on December 3, the survey requested infor­
mation as to the minimum deposit required
and the minimum and the maximum matu­
rity; whether the agreement included a pro­
vision for automatic renewal or an option to
redeem prior to maturity; and whether the
instrument was issued only to individuals
and nonprofit associations.
Some instruments— even though they are
designed for relatively small savers— require
larger minimum deposits than apply to pass­
book savings accounts. The minimum de6
of

T i m e D e p o s it s ,

I PC,

on

D ecem ber

3, 1965

(Percentage distribution of the number of banks in each size-of-bank group)

Type of deposit,
ana rise ofbank
(total deposit*. is millions of dollar*)

Minimum deposit accepted (in dollars)

All
bank*
with

,

-

1 000

4,999

Saving* certificates;
All tb e groups................
Under 10 0 ...................
100 - 500.....................
500 and over...............

100
100
100

13
9
9

32
36
37

Saving bonds:
AD tile groups. , ............

100

68

69
65
70

<
*
>
()
>

7

100

10,00099,999

10
10

Under 106...................
100 - 500.....................
500 and over.........

too
100

25
23
14

13
16

2
6

“j ■

5

Ocher noonegotiabk CD’*:
AH s in groups...............

100

11

18

Under 100...................
100 - 500.....................
500 and over...............

100
100
100

11

19

100

11

5
3

11

5

1
5
8

22

18

23
19

20

33
20

Negotiable CD's:

Au size groups.. . ...........

Under 10 0 ...................
100 - 500..............
500 and over__ .....

10
0
100
10
0

Ti»dcpoH ta,<
Alt s o t group
Under

10 0 .

100
to
o
100




3
1
1
18

(»
)

2
3
17
IS

17
It
8

3

11
8

5

5

11

3
17
21

14

6
22
19

55
34
39

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 2 7

T a ble 7
M i n im u m a n d M a x i m u m M a t u r i t i e s o n V a r i o u s F o r m s o f T i m e D e p o s i t s , I P C , o n D e c e m b e r

3

, 19 6 5

(Percentage distribution o f number of banks in each sizc-of-bank group)

Type of deposit,
ana size of bank
(total deposits* in millions
of dollars)

All
matur­
ities

Savings certificates:
All size groups.. - ..............

Minimum maturity
(months)
3 or
less

Maximum maturity
(months)

4—

7-

Over

6

12

12

100

42

33

23

(*)

Under 100....................................
100-500........................................
500 and over................................

100
100
100

41
52
47

34
25
26

23
20
21

(>)

Strings bonds:
All size groups................................

100

62

12

Uader 100....................................
100-500........................................
500 and over....................

100
100
100

60
55
90

15
5

Other nonnegotiabie C D 's:
All size groups................................

100

53

29

17

100
100
1 00

50
81
79

30
12

18
5

13

8

Under 100........................
100-500............................
500 and over......................
Negotiable C D’s:
All size groups................

1
2

9

12

14

g
30

No
infor­
mation

or
less

6

712

"

)

Over
60

No
infor­
mation

1

3

86

10

1

<’)

I

87
73
51

9

1

20

(')

4

3
7
14

33

2

5

I

12

86

1

3

]

16
5

82
95

1

2

10
10

100

1

5

85

1

0

1360

5
3
3

73
67

3

84

2

86

9

1

8

1

24
28

too

66

22

11

(’)

1

100
100
100

61
95
93

25
4
7

13

(*)

1

Time deposits, open account :
All size groups..............................

100

61

28

8

0)

3

17

72

8

1

2

Under 1 0 0 ..................................
100^500................
500 and over

100
1 00
100

59
78
94

29
14
5

g
1

8

C)

3

17
16

72
72
78

7

1
1

3

11
21

Under 1 0 0 ........................
100-500................
500 and o ver.............................

1

12

1

3

86

10

t

2
1

74
67

23
3!

1
1

1

1Less than one-half o f 1 per cent.
posit required by the largest number of
banks, regardless of size, .was less than $ 1 0 0
for savings bonds and less than $500 for sav­
ings certificates, as shown in Table 6 . Nearly
half of the banks with savings bonds and
one-fourth of those with savings certificates
restricted the use of these instruments to in­
dividuals and nonprofit associations— higher
proportions than for other forms of time de­
posits. This restriction was more common for
large than for small banks.
Most banks reported that savings bonds
included an option for redemption prior to
maturity and that savings certificates con­
tained a provision for automatic renewal at
maturity. The latter was more common for
small than for large banks, as shown in
Table 8 . The largest number of banks indi­
cated that the usual minimum maturity was




3 months or less on both instruments, while
the maximum maturity was generally 7-12
months for savings certificates and up to 5
years for saving bonds. (See Table 7.)
The characteristics of other nonnegotiable certificates of deposits varied with the
size of bank. In the smaller banks (total de­
posits of less than $ 1 0 0 million) about half
of the banks had minimum deposit require­
ments of less than $ 1 ,0 0 0 , whereas for the
largest banks (total deposits of $500 million
and over) about a third reported that the
minimum was $10,000 or over. As for
savings certificates, the most common mini­
mum maturity was 3 months or less, and
maximum maturity was 7-12 months. Few
banks indicated these instruments were re­
stricted to individuals and nonprofit associ­
ations, and only one-third of the banks

2 2 8 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

T a b le
R e n e w a l * R e d e m p t io n ,

and

reported they contained a provision for
automatic renewal at maturity.
Negotiable CD’s and time deposits, open
account, carry substantial mmimiiTn deposit
requirements. In banks with total deposits of
$500 million and over, where the bulk of
these deposits are held, the largest number of
banks reported the minimum requirement on
negotiable CD’s was $100,000 or more and
on time deposits, open account, it was
$10,000 and over. The minimum maturity
most frequently reported was 3 months or
less, and the maximum maturity, 7-12




8

E l ig ib il it y C h a r a c t e r is t ic s o f V a r io u s F o r m s
D e c e m b e r 3, 1965

of

T

im e

D e p o s it s , IP C ,

months. The largest banks almost never re­
stricted these instruments to individuals and
nonprofit associations, and relatively few of
the instruments include a provision for auto­
matic renewal or an option for redemption
prior to maturity. For smaller banks that
held instruments of this type, the minimum
deposit requirement was lower—generally
less than $5,000 for banks with total de­
posits of under $100 million. Some banks
of this size included in the agreement a pro­
vision for automatic renewal or an option
to redeem prior to maturity.

UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 2 2 9

APPENDIX
T able I

Savings D eposits : M aximum I nterest R ates P aid

by

M ember Banks, D ecember 3, 1965,

and

E arly 19661

All survey banks with deposits

Group

All
member
banks
(June 30, Total
1965)

Maximum rate 1
paid, early 1966
(per cent)

4

3 or
less

3%

Banks not raising rates

Banks raising rates after Dec. 3, 1965

Total

Maximum rate 1
paid, Dec. 3. 1965
(percent)

Maximum rate 1
paid, early 1966
(per cent)
4

3 or
less

3%

3 or
less

3%

Total

No
rate

Maximum rate 2
paid, Dec. 3, 1965
(per ccnt)
4

3 or
less

3%

Number of banks
6,235

5,893 2,946

155 2,092

405

2*4

87

34

124

273

8

5,4*8 2,662

768 2,058

3,902

3,593
1,730
241
254
75

233
134
19
17

66

26
7

68

157
96
9
9

8

948
164
204
65

510 1,518
271
511
40
37
24
26
g
2

141

243
259
75

444 1,492
255
504
37
37
24
23

2

2

3,360 1,424
1,596
837
222
148
190
237
73
63

New York
Philadelphia .
Cleveland
Richmond.. . . . . . . . ,
Atlanta. . . .

250
411
411
504
414
511

227
401
395
492
406
515

169
311
65
208
256
333

Chicago.
St* Louis......................
Minneapolis.. , , ,
Kansas City............
Dallas____..
San hr&Dcisco

495
834
677
225

448
489
781
544
223

81
431
472

Size of bank (total deposits,
in milliont of dollars):
10-50.................
50-100...................
100-500 .
500 &nd over

111

16
14

16
3
2

1

38
10
8

2

8

2

Federal Reserve district:

311
88

221

11

57
129
72
68

47

33
201
212

82

82

100

198
99
36
74
27

463
261
372
276
45

2

17

20

54
15
17
51

17
20
22

14
9
45

51
81
52

16
26
58
32

22

21

21

4

4

5
18

28

4

22
1

5

2
1

21

1
6

4
12

14
16

4

1

4

13
9
4

21
2

1

7
15
4

12
2

210

381
341
477
389
464

32
14
13
30
17
29
79
41
4

1

4
3

951
397
408
729
522
219

152
291
43
194
247
288
295
62

23
399
451
217

11

57
101
-i 1

47
33
197
212

62
77

80
99

194
87

462
248
363
272
45

22

58
26
2

Amounts (in millions of dollars)
All member banks...............

74,422 60,644 7,25® 6,528 2,290 1,930

308

52 1,046 1,244

125
85
46
52

20

146
26
19

72.132 58,714 6,942 6,476

S in of baak (total deputes,
briOiM * of dollars):
Leu than 1 0 ................
10-50*
50-100.........................
100-500. *
500 and over.. ........

981 1,670
5.461 2,810
7,922 2,013 2 806
754
s ’993 4,229 1 ,0 1 0
16,817 14,181 1,519 1,117
181
33,410 31,502 1,727

336
784
436
627

137
300
358
168

ioe

191
668

390
574
108

1

119
272
292
363

217
512
143
264
108

5,125
11,957
5,557
16,190
33,303

2,619
856 1,650
7,254 1,928 2,775
3,839
964
754
13,607 1,467 1.116
31,394 1,727
181

4

63
227
208

74
73
150
165
39
96

2,284
14,093
3,452
6,804
3,623
3,471

2,027
45
12,513
771
1,379
971
4.329 1,807
2,724
641
632
2,610

121

13,901 10,642 1,665 1,594
690
218
632
1,340
65
663
68
795
88
273
2,509 2,148
2,734
36
31
8
16,926 16,918

31

Federal R aw m district:
New York............
Philadelphia..........
Cleveland..
Richmond................

2,421
14,393
3,810
6 972
3,769
3,768

212
45
2,164
809
12,814
771
1,587 1,117 1,106
4 471 1 832
660
2,849
232
643
2,893

297

Chicago............... „
St. Louis......................
Minneapolis................
Kansas City........... ..
D a ll a s ................... 1
San Ftanciaco,___. . .

14,081 10,793 1,690 1,598
661
270
770
1,702
672
88
1,159
399
274
94
2,590 2 ,2 2 2
36
31
2,778 2,710
8
16,979 16,970

180
162
364
81
44
32

69
6

1 Excludes banks that reported no interest rate paid on December 3,
i
shown, it
was included in the group paying the next higher rata.


http://fraser.stlouisfed.org/
63-496 O—66------16
Federal Reserve Bank of St. Louis

137
300
208
142
123

11

151
81
332
74
44
52

25
52
23
6

<>
»

2

106

2
2

201

4
29

59
77

10
1

10

40
52

85
364
71
5

26
,6 6

3 Less than 5500,000.
N ort.—Figures may not add to totals because of rounding,

212

809

1 ,1 0 2

669
257
229

n

ab le

Group

5.5

5.0

4.5

4.0

Member Banks, D ecember 3, 1965,

and

Banks not raising rates

Banks raising rates after Dec, 3, 1965

3.5 or
less

Maximum rate paid,*
early 1966
(per cent)

Total
5.5

5.0

4.5

Maximum rate paid, 2
Dec, 3, 1965
(per cent)

4.0 or
less

4.5

Early 1966

3.5 or
less

4.0

Total

No
rate

Maximum rate paid,2
Dec. 3, 1965
(per cent)
4.5

4.0

3.5 or
less

Number of banks
2,773

6

60

852

1,715

140

532

6

60

429

37

77

352

28

75

2,241

423

1,680

138

1,747
772
95
114
45

2
2
I
1

31
19
J
3
2

452
274
38
60
28

1,165
447
50
40
13

97
30
I
10
2

283
175
25
36
13

2
2
1
1

31
19
5
3
2

227
144
17
30
11

23
10
2
2

34
23
6
6
8

191
125
11
22
3

19
6
1
2

39
21
7
6
2

1,464
597
70
78
32

225
130
21
30
17

1,144
437
48
38
13

95
30
1
10
2

15

t
5

4
8
3

22
58
135

5
17
23

14
36
92

3
5
20

F.R. district:
1

9
27
44

14
39
94

3
5
20

6
17
23

2
4

4
10
21

3
2

Cleveland
. ••
Richmond.........
Atlanta...............
f!hic4jrt...............
St Louis ...........
Minneapolis . • • >

298
151
269

3
2
2

32
61
135

248
76
119

15
12
13

13
25
37

3
2
2

8
20
31

2
3
4

4
I
4

7
16
25

2
2
6

6
2

285
126
232

24
41
104

246
73
115

15
12
13

571
212
414

1
5
2

95
91
117

451
105
286

23
11
9

62
82
115

1
5
2

53
76
111

7
1
2

3
7
2

43
65
106

3
2
2

13
8
5

509
130
299

42
15
6

444
104
284

23
11
9

Kansas City
Dallas
San Francisco. . . .

330
157
110

13
8
18

127
54
60

173
89
21

17
6
6

89
25
38

13
8
18

71
12
12

5
5
3

19
28

57
15
2

3
2

10
8
8

241
132
72

56
42
48

168
84
20

17
6
4




1

5

1

5

DEPOSITS

2
4

TIME

28
75
158

AD
N

1
8

Boston
New York . . . .
Philadelphia . ..

SAVINGS

Less than 10.......
10-50..................
50-100.................
100-500...............
500 or over

FO
R

SiMof bonk (total de­
posits, In millions of
dollan):

COMPETITION

survey
banks
with
de-

by

UNSOUND

Maximum rate paid,2
early 1966

230

T

Savings Certificates, IPC: Maximum Interest Rates Paid

UNSOUND

Amounts (in millions of dollars)
4,639

1,149

3,402

88

279
553
170
431
488 .

24
40
35
26
108

252
510
130
395
380

3
3
5
1

22

252
485
108
362

1,316
1,703
500
576
545

184
362
159
255
188

1,103
1,306
338
299
357

28
35
3
22
1

s

A
\>

( 3>
10

17
119
309

1
59
97

15
60
186

0)
(J)
26

463
67
180

6
12
3

56
34
79

41
1
2

13
32
72

360
276
60S

1,224
219
783

21
3
8

215
376
588

130
3

240
75
267

139
44
32

2
2
5

202
26
90

17
12
18

1,595
2,255
669
1,008
1,033

24
40
35
26
108

436
872
289
650
568

1,106
1,309
343
300
357

28
35
3
23
1

New York.

17
341
342

0)
10

1
270
130

15
61
186

0)

Cleveland..
Richmond.,
Atlanta. . .

592
234
542

41
1
2

81
153
357

1,614
628
1,399

130
3
17
12
18

Lost than 10.
10-50.............
30-100.........
100-500........
500 or over..

62
57
69
376

112

FJt. dktrict:

Chicago........
St. Louis---Minneapolis.
Kansas City. . .
Dallas..............
San Francisco.,

399
132
322

P
)

1
( 3)
1
1
5

£
10

9

33
65

536
200
463

68
121
285

462
66
175

6
12
3

206
245
585

( 3)
1

16
170
15

198
205
569

1,400
252
811

154
31
20

1,224
218
783

21
3
8

184
14
72

1
1

26

175
26
7

197
105
232

56
61
195

138
43
32

2
2
5

45

1

"3
8'

a rate for this maturity was not reported, the rate applicable to the next
shorter maturity was used.
3 Less than $500,000.
N o t e . —Figures

may not add to totals because of rounding.

231




0)

o
>

211
33

DEPOSITS

1 Excludes banks that reported no interest rate paid on December 3,
1965, or early 1966. Deposits are as of December 22, 1965.
2 When a bank reported a maximum rate in between those shown, rt
was included in the group paying the next higher rate. In most cases the
maximum rate is that applicable to maturities of 1 year or more. When

33

TIME

1,319

88

AD
N

585

3,413

SAVINGS

11

2,816

FO
B

1,667

234

el bank (total de­
posits in Millions of

m

COMPETITION

1,921

234

6,560

All

Maximum rate paid, >
early 1966
(per cent)

3.5

5.0

4.5

4.0

by

3, 1965, and E arly 1966

M em ber B anks , D ecem ber
Banks raising rates after Dec. 3, 1965

3.5 or

Maximum rate paid, z
Dec. 3, 1965
(per cent)

Maximum rate paid1 2
,
early 1966
(per cent)

Total
5.5

5.0

4.5

Banks not raising rates

4.0 or
less

3.5 or
less

4.0

4,5

Total

No
rate

Maximum rate paid *
Dec. 3,1965
(percent)
4.5

3.5 or
less

4.0

Number of banks
1

7

89

32

1

42

1

7

30

4

8

7

27

88

59

29

Lett
10........
10-50,.................
50.100................
100-500...............
900 u d over.. ..

45
46
6
21
12

1

3
1

29
33
4
14
9

11
12
2
5
2

1

21
14

1

3
1

16
11

1
2

4
2

2
3

15
9

4
3

2
1

2
1

1

1
1

2

1
2

24
32
6
17
9

13
22
4
12
8

11
10
2
5
1

4
6
9

3

4
4

1
2

3
2

4
3

1
7
9

1
4
9

3

I
2
8

2
4
15

2
1

1
2
12

2
3
5

6
9
13

6
7
7

2
6

5
10

1
3
2

1

1
2
2

3
2

12
13
2

7
3
2

5
10

4
1

10
3
.3

8
2
3

2
1

2
I

AD
N

FJt. Artrktt
1
2

ttirfivnrtnH
Atlanta

g
13
28

2
1

Chicago
St* Louii
Mfauittfwlii

13
16
4

I

K iiu ii Citv
Dallas
San Francisco—

IS
4
4




1

7
o
19
8
5
4
12
3
3

1

s

2
t

1

5
1
1

1

4
1

1
2

i
5

5
1
1

1
1

DEPOSITS

5
11
9

TIME

Boston
New Yoric
Philadelphia

SAVINGS

110

Stae of bank (total deM ^ taa U U o iN o f

FO
R

All oM fetr bnki
M

COMPETITION

Group

All
survey
banks
with
de­
posits i

IPC: M a x im u m I nterest R ates P aid

232 UNSOUND

T able i n
S avings B onds ,

UNSOUND

Amounts (in millions of dollars)

(3
)

5
25
6
73
313

340

0)

3

(3
>

71

0)
>

(3
)

(3
)
0)

(3
)

71

(J
)

72

346

335

11

5
23
6
40
272

3
18
5
37
272

2
5
1
3
(3)

4
25
121

75

4
24
121

0)

5
2
156

5
2
153

(3>
3

13
5
1

11
(3)
1

2
4

13

13

(Ji

<
2

(3)
(3)

Man):

Leu than 10..
10-50.............
50-100...........
100-500..........
500 and over..

20

5
39
272

(3

<)
5
(3
)

FO
R

J
’)
(3
)

VJL district:
4
24
121

Cleveland..
Richmond..
A tlanta...

5
32
161

157

Chicago.......
St* Louis___
Minneapolis.

13
5

5

2

(3
)

1

(3
)
0)
(3
)

2
4

<
2

<)
3

(3
)

O
)

(3
)

(J
)

P
>

0)

<)
3

rate is that applicable to maturities of 1 year or more. When a rate for
this maturity was not reported, the rate applicable to the next shorter
maturity was used.
°
3 Less than $500,000.

DEPOSITS

1 Excludes banks that reported no interest rate paid on December 3,
1965. or early 1966. Deposits are as of December 22, 1965.
2 When a bank reported a rate in between those shown, it was included
in the group paying the next higher rate. In most cases the maximum

233




O
)
' (3
)'

<)
3
(?

TIME

i City. . .
Dallas..............
San Francisco.,

U
<
3
)
1

0)

AD
N

4
65
121

SAVINGS

Boston.........
New York...
Philadelphia.

COMPETITION

422
Six* of bulk (total de­
posit* in inlUom of

24
3
COMPETITION
FO
B
SAVINGS
AD
N
TIME
DEPOSITS




UNSOUND

T able IV
O ther N onneootiable C D ’s , IPC : M axim um I nterest R ates P aid by M em ber B anks, D ecember 3, 1965, and E arly 1966

UNSOUND

Amounts (in millions of dollars)
4

1,758

452

9

2,890

1,149

1,695

46

252
459
275
504
344

482
718
256
231
It

19
16
5
6

153
270
111 .
340 .
1,345

26
82
32
149
,232

124
176
79
191
113

2
1
(3)

40
103
51
219
1,345

109
162
59
121

4
5
(3)

625
1,015
458
550
242

127
282
196
313
231

479
717
256
231
11

19
16
5
6

12
262
90

18
65
171

<
3)
2
7

10
317
44

7
218
9

3
98
35

(3)
1
<
3)

9
266
8

1
49
34

(3)
2
2

28
23!
234

9
165
56

18
64
171

<
3)
2
7

140
79
39

108
86
335

122
52
121

2
2
8

168
109
164

140
79
39

27
26
117

(3)
(3)

146
97
131

22
11
32

(3
)

205
114
347

8t
60
218

122
52
121

2
2
8

32
27
1

326
142
47

530
269
118

7
8
4

114
128
41

32
27
1

82
101
40

(3)
1
0)

69
51

43
76
41

782
318
129

245
41
7

530
268
118

7
8
4

27
51
890

no

126
100
5

3
2

114
88
923

27
51
890

86
38
32

1

29
30
922

84
58
1

213
180
109

85
79
104

125
100
5

3
2

116
136

a rate for this maturity was not reported, the rate applicable to the next
shorter maturity was used.
3 Less than $500,000.
N ote.—Figures may not add to totals because of rounding.

(3
)
(3
>

235




2
1

<
3
)
1
(3
)
<
*
>

<
3
>

DEPOSITS

1
that reported no interest rate paid on December 3,
1965, or eariy 1966. Deposits are as of December 22, 1965.
2 When A bank reported * iiin A u u w t i a » w in between those shown, it
a maximum rate »«■
* W X lC n a U U lft
................ group paying the next higher rate. In most cm s the
'
*
. ^ - --------- ----------was included in the
m«T<miim rate is that applicable to maturities of 1 year or more. When

<)
3
1

(3
)

TIME

684

AD
N

,521

SAVINGS

2,220

FO
R

46

7
218
9

<
3
)
(3
)

1,699

26
82
32
149
1,232

327
269
1,032

1,833

COMPETITION

1,521

236

by

Group

survey
banks
with
deposits t

5.3

5.0

4.5

4.0

V
Member Banks o n D ecember 3, 1965,

and

Banks raising rates after Dec. 3, 1965

3.5 or
less

Maximum rate paid,3
early 1966
(per cent)

Total

5.0

5.5

4.5

Banks not raising rates

Maximum rate paid,2
Dec. 3, 1965
(per cent)

4.0 or
less

4.5

Early 1966

4.0

3.3 or
less

Total

No
rate

Maximum rate paid, 2
Dec. 3, 1965
(per cent)
4.5

4.0

3.5 or
less

FO
B

Number of banks
5

223

632

814

103

487

5

223

231

28

245

151

19

72

882
543
107
170
75

4

60
42
9
57
J5

261
211
58
83
19

483
264
38
29

74
26
2
1

164
140
34
90
59

4

60
42
9
57
55

86
89
21
32
3

14
9
4
1

58
47
15
66
59

54
63
12
22

8
7
3
1

20
35
6
5
13
10

44
55
20
16
57
57

36
63
38
34
51
68

4
5
11
13
8
13

40
61
19
12
21
27

20
35
6
5
13
10

17
20
9
3
7
15

3
6
4
4
1
2

23
43
7
5
5
11

7
9
6
3
9
8

26
3
5
24
33
41

60
16
31
100
111
63

128
61
64
140
120

7
14
4
14
8
2

64
19
28
58
75
63

26
5
5
24
33
41

35
13
21
34
41
16

3
1
1

25
6
6
33
27
54

16
11
19
22
39
2

1,290

401

790

99

Lcm
1 0 ...........
10-50..............................
50.100......................
100-500..........................
500 u d over..................

44 ,
23
4
1

718
403
73
80
16

175
122
37
51
16

472
253
33
28

71
26
1
1

1

1

2
4
3

8
5
3

27
35

2

5
8

64
97
56
56
108
121

13
50
42

33
57
37
30
50
67

4
5
8
13
8
12

1
1
1

22
1
2
3
8
7

157
77
77
220
197
60

25
3
10
66
70
49

125
60
63
140
119
9

7
14
4
14
8
2

AD
N

1,777

Slat «l bank (total deports,
Ja m9Hom «f

SAVINGS

AH tttMbtr baato..................

COMPETITION

Maximum rate oald.2
early 1966

UNSOUND

T a b le

N egotiable CD’s, IPC: Maximum Interest Rates Paid

Ftdsral Rm h t i totiict:

PUyelpbii...............
Q ivdm d . . . . . . . . . .

104
158
75
68

t29

St^Louis........................
Minneapolis...................
Kwntwf City
Qi IJi i , ............ .
San Francisco., ............1[

221
96
105
278
272
123




148

1

4

U

1
4

i

2

1

DEPOSITS

jUchmond ...................
Atlintft................. ..

U

TIME

Boston.. .. » ...............
New Y o rk ..................

UNSOUND

15,874

12,154

2,472

1,148

28 12,869

72 12,154

634

12,352

510

3,004

1,838

1,138

28

SS4
857
499
2,562
11,403

27
77
52
1,377
10,620

175
402
270
912
713

338
362
177
271

82
207
149
1,679
10,752

27
77
52
1,377
10,620

52
128
93
299
62

36
98
106
1,359
10,752

45
107
41
317

472
649
350
883
651

123
274
177
613
651

337
360
173
269

12
15
(3)
1

New Y ork...
Philadelphia.
Cleveland. . .
Richmond...
Atlanta........

626
6,060
628
861
401
576

556
5,793
467
712
166
260

45
228
79
116
163
164

25
36
81
32
68
142

577
5,910
489
722
173
275

556
5,793
467
712
166
260

18
116
23

569
5,878
483
712
86
268

8
31
7
8
86
6

49
150
139
140
228
301

27
112
56
108
156
149

21
35
81
30
68
142

(*)
3
1
1
4
10

Chicago...........
St. Louis.........
Minneapolis. . .
Kansas City. . .
Dallas..............
San Francisco..

2,260
424
344
553
1,370
1,770

1,621
184
136
219
554
1,485

386
36
52

252

1,730

85

720
272

95

241
287
704
1,551

1,621
184
136
219
554
1,485

106
27
34
67
149
64

1,614
189
213
193
600
1,547

115
22
28
93
104
4

531
212
103
266
666
219

280
9
18
143
571
208

250
201
84
120
94
11

1
2
(3
)
l
(3>

All
8is« of bank (total deports in
“ ■ »of dollars):

FO
R

Federal Rsaerre dktrict:

11

DEPOSITS

237




a rate for this maturity was not reported, the rate applicable to the next
shorter maturity was used.
3 Less than $500,000.
N o t e . —Figures may not add to totals because of rounding.

i

TIME

i
banks that reported no interest rate paid on December 3,
1965 or early 1966. Deposits are as of December 22, 1965.
* when a bank reported a maximum rate in between those shown, it
was included in the group paying the next higher rate. In most cMM the
maximum rate is that applicable to maturities of I year or more. When

8

AD
N

120

211

SAVINGS

210

202

8

7
1
5

COMPETITION

Amounts (in millions of dollars)

238

VI
UNSOUND
COMPETITION
FO
B
SAVINGS
AD
N
TIME
DEPOSITS




T a b le

T im e D eposits , O pe n A ccount , IPC : M ax im u m I nterest
R ates P aid by M em ber B anks , D ecem ber 3, 1965, and E arly 1966

UNSOUND

Amounts (in millions of dollars)

155
365
193
600
3,088

514

2,645

34
72
92
332
479

25
1,682

15
337

4
23

6

2,888

10

12

2,645

57 „
174
83
92
108

51
25
219
2,582
26
1,802

25
1,682

4
23

6

14

2,804

15

218

143
315
168
382
508

31
61
75
233
392

55
169
81
91
108

56
85
12
57
7

25
1,786

31
300
183

15
221
106

10
54
43

7
24
34

231
153
115

71
84
54

148
53
24

12
16
37

276
2
2

65
(3)

141
1
2

70
1
(*>

34
96
89

18
76
80

11
13
4

5
7
5

YJL district:
N«w Y ork...
Philadelphia.

58

2,102

Cleveland..
Richmond.
Atlanta

623
3

Kansas City. . .
Dallas..............
San Francisco.

36
187
379

57
44

77
96
58

149
53
24

70
35
13

307

104

142

347

201

302
189
128

Chicago........
St. Louis. . . .
Minneapolis.

\n

63
23
9

393

(3
)

2

1

56
276

1
<
3
)
19
98
94

1

2

11

17
4

63
23
9
p>

2

91
290

12

307

1

56
276

6

4

201
68

23
9

38

1
1
23

(J
)

0)
14

2

64
289

a rate for this maturity was not reported, the rate applicable to the next
shorter maturity was used.
3 Less than $500,000.
N o t e . —Figures

may not add to totals because of rounding.

239




1
(>
*

5

DEPOSITS

1 Excludes banks that reported no interest rate paid on December 3,
1965. or early 1966. Deposits are as of December 22, 1965.
2 When a bank reported a maximum rate in between those shown, it
was included in the group paying the next higher rate. In most cases the
maximum rate Is that applicable to maturities of 1 year or more. When

201

210

TIME

504

AD
N

791

SAVINGS

l t514

4
28
15
177
2,580

118
2,494

10

219

FO
R

118
2,494

«
?

222

COMPETITION

4,401

2 4 0 UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

M O t t i n g e r . My time has expired. I would like each of the m ­
r.
em
bers of the Board to comment on this; namely, whether if they w
ere
given discretionary power to act with respect to the smaller C ’s,
D
they would use it or not.
M M i t c h e l l . I think they are better tools. I agree with G
r.
over­
nor Robertson, the maturity tool is the better one than size. I think
size would be highly discriminatory, not only to the small saver, b t
u
also to the small bank.1
The C h a i r m a n . Each member can file their comments. That is
your desire, is it not ?
Mr. O t t i n g e r . Yes.
The C h a i r m a n . M Widnall.
r.
M W i d n a l l . Governor Robertson, last week Mr. Fowler said th
r.
e
balance of payments was further deteriorating and in my view the d
efi­
cit will be $2.5 billion. Last week before the committee Secretary
Fowler insisted that the voluntary restraint program was still only tem
­
porary and not semipermanent as I have maintained. Last month M
r.
Fowler said the voluntary restraint program would continue for th
e
duration of the Vietnam war. I have been very critical of the program
and I am pleased to note I have been joined recently by some of th
e
more responsible elements of our business community. I dispute th
e
contention that the increased deficits are directly or indirectly related
primarily to the war in Vietnam. It is my contention that- the real
trouble lies in the sharply decreased balance of trade surplus and that
only a small portion of this decreased surplus can be attributed to
Vietnam.
Yesterday the Commerce Department announced figures for it an
d
they, too, were very disturbed. They showed a figure—
they show ed a
further decrease in balance of trade primarily due to the increased im
­
ports. Since you have been primarily responsible for this program
,
would you care to give us your opinion as to when they might be
laxed so we can begin to focus on the real problem how an increase to
imports and decrease in exports ?
Mr. R o b e r t s o n . N o . 1,1 cannot give you any answer as to when this
temporary program—and I think it is a temporary program—can b
e
brought to an end. This depends entirely on what happens with re­
spect to the balance-of-payments deficit, and the reaction of E u ro p e a n
holders of dollars—whether they want to turn them into gold or
whether they do not. I would say from all the conversations I h?ve
Par^m
program, there is a definite u n d e r s ta n d in g
that this is a temporary program and not a long-term prograrn .
Also, I thmk one must recognize that Vietnam cannot be dis­
associated' from the problem. But certainly, a real problem from m
y
point of view is the outflow of funds through investments a b r o a d . T
he
problem is attributable largely to the decrease in our s u r p lu s in the
rade balance. This is a natural consequence of prosperity in ! .lS
;
country, whach diminishes exports because there is such a d e m a n d m
this country for products that it is much easier to sell here than it is to
* m
lt 18 P^haps more profitable.
v .
bec^dly, m a periodsuch as this when demands are so high)
ports increase and this diminishes the trade balance, so that our trade



gg& SS;

particular* PP- “ "r811’

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 4 1

surplus is less and less adequate to take care of the dollar outflows
through other avenues.
I think that this problem is one which can be whipped, but not
quickly. I have advocated standby authority to impose a tax on inter­
national credits and investments, which I think would do the trick.
I am not in favor of selective controls of this nature any more than
anyone else on this committee or anywhere else, but the problem is
so serious and has been so serious that something has had to be done
about it and I see no way to cope with it.
Mr. W i d n a l l . Of course, as far as our exports are concerned, we
would seek some credit from the sale—we have received some from
the sale of airplanes which were actually a few items, each one a costly
item. At the same time, with imports, we have virtually millions of
items coming in that amount up to figures that compare with the export
of a few airplanes. I am starting to worry about the fact that in the
steel industry the imports have mounted so much that they are now
over a 10-percent figure. I can recall not long ago when we first started
importing steel where everybody said it would be negligible and we
did not have to recognize this as competition and this could go right on
without anybody thinking about it or worrying about it—that it can­
not affect our own business. It is clear that good steel is being manu­
factured in many places of the world and this can have a very serious
impact on our trade balance and also affect our balance of payments.
We are going to have to face up to that one of these days.
Mr. R o b e r t s o n . I think this is true and as you must recognize also,
businessmen in this country have not devoted the same imagination,
ingenuity, and drive to the export program that businessmen abroad
do in their situations. We must do everything we can to build up
export business. We have to see that it is adequately financed, but
we also have to see that markets are taken advantage of and we do
everything we can to find the markets abroad.
Mr. W i d n a l l . Does the voluntary restraint program impose a re­
straining influence?
Mr. R o b e r t s o n . I think not. The very fact that the banking in­
dustry has a leeway of $800 million unused under the guidelines, indi­
cates there is ample financing for any exports that anyone would wish
to make. I have never been able to run down any single situation
where an export has been lost for lack of financing.
Mr. W i d n a l l . Mr. Brimmer, you were doing some work in this
area for the Commerce Department, I believe ?
Mr. B r im m e r . I w a s.
M W i d n a l l . I would like to have your comments and your own
r.
opinion as to when you feel voluntary restraints might be relaxed so
we can focus on the program of increasing imports and decreasing
exports.
Mr. B rim m e r. I do not know that the voluntary program could, or
should, be relaxed. The general comments and the reason for the
program I will not repeat. But I do have an opinion of my own as to
why the business community part of the program which I had a re­
sponsibility for in the Commerce Department ought to continue for
some time into the future.
First, the business community obviously has been the principal
source of
 positive contribution to the balance of payments. You
know that. The trade surplus has been adding to the balance of pay­


2 4 2 UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

ments close to $5 billion a year, and even the temporary decline in
the trade surplus described in the news story which you quoted should
not be taken as an indication that this trade surplus will disappear or
even fall below $4 billion a year. It is one of the largest surpluses
among leading nations in relation to the total volume of trade. But
the core of the industrial company program involves voluntary re­
straint or modification of the outflow of funds for direct investment
ahead. I think this part of the program might very well have to be
continued in some form into the foreseeable future. I do not disasso­
ciate the Vietnam program from this.
In my opinion, if the Vietnam program— Vietnam activity—
the
had
not contributed to the deficit something in the order of some $700
million a year, which is a rough estimate at this time, it would have
been possible to ease the program during* 1966. As it turned out, this
is not possible. You will note that I said “ease” the program rather
than abandon the program completely. I think the backlog of in­
vestment projects, especially in Western Europe, would probably lead
to a level of plant and equipment expenditures abroad much higher
than could be sustained without stimulating an outflow from the
United States well over $3 billion a year. Now, it is a matter of
judgment as to whether direct investment outflow of that m a g n itu d e
should or should not be encouraged. My own feeling is that in 1964,
when it was about $2.4 billion, it was at a high level. I think in the
absence of some kind of modification, the level would probably be at
least $3.5 billion, i f not higher. I think the form of the program can
and should be modified as we go along. And I should say that the
companies themselves have made tremendous strides to modify the out­
flow. They have borrowed a substantial amount of money in 1965 to
modify— moderate—the outflow. I do not expect that they will
to
continue to make increments in that borrowing year by year on that
order of magnitude.
Now, I would foresee that the targets could be relaxed. In other
words, rather than making quantitative suggestions, they could be
encouraged to follow certain kinds of guidelines which would not put
a ceiling on the outflow, but would involve a different composition of
outflow* In my judgment, many companies would prefer that kind
of arrangement to mandatory controls. We should be reluctant to
talk about the possibility of mandatory controls, but I would think that
the alternative to such controls is voluntary cooperation. I repeat, I
think it would be preferable to have such moderate restraint on a
voluntary basis, for some time into the future. I would be r e lu c ta n t
to suggest a target date, because I think the problem is still with us and
it is not likely to disappear in the near future.
Mr. W i d n a l l . Thank you. Just one further question.
H appreciate it if you would comment on my guess of $*
2*
billion deficit in the balance of payments.
Mr. B r im m e r , I would not wish to comment on it, because I
reluctant to forecast. While working with the Commerce Depart'
ment program I found we had great difficulty in trying to see ahead 6
months. The deficit has been running about at an annual rate in the
nrst quarter of $2.3 billion, or something of that order of magnitudeThere were certain peculiar developments during that quarter because
several sizable transactions were simply pushed over from 1965.



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 4 3

For example, a substantial amount of foreign securities, especially
Canadian issues, were postponed from 1965 into 1966. I would not
expect that to continue throughout the year. I would expect the rate
to be less than $2.5 billion—‘ ut I would not want to suggest a particular
b
figure.
Mr. W i d n a l l . What more favorable factors do you see that would
change this below $2.5 'billion ?
Mr. B r im m e r . The first thing, as I said earlier, I would expect some
further improvement in trade. The pattern of exports which we dis­
cussed for the last month or so will probably not persist. I also think
there will be some substantial savings on direct investment outflow,
especially when you take account of the funds borrowed abroad by
X companies. I would expect some improvement in 1966 com­
J.S.
pared with 1965.
The tourist gap may not in fact widen as much as people have been
suggesting. After all, last year it was not as much as we had forecast,
so I think we will see some moderation in it. But I would not want to
catalog all of the possible favorable things because I have not been
working so closely with the balance of payments in the last few
months as I was in the Commerce Department. I am not up to date
on the details of the latest thinking of the technicians who are working
on them.
Mr. W i d n a l l . Thank you. My time is up.
(The following information was submitted for the record:)
F ederal R eserve B a n k

H W illia m B. W id n a ll,
on.

of

N ew Y ork,

New York, N.Y., May 2$,1966.

Committee on Banking and Currency,
U.S. House o f Representatives, Washington, D.C.

D ear M r. W id n a l l : At the hearings of the Committee on Banking and Cur­
rency this morning, you referred to the trade balance of the United States and
to various other aspects of our balance-of-payments problem, and you solicited
the views of the Federal Reserve representatives on these matters. I was about
to make a brief comment when your “time was up” and it was the turn of another
committee member to ask questions. I want to say in this letter what I would
have said a t the hearing, if the clock had not intervened.
Your comments on our exports and our imports highlighted, I think, the im­
portant role that stabiUty of prices in the United States plays with respect to
our balance of payments.
We have been seeing rapidly expanding business activity, increased demand for
and use of credit, declining unemployment, shortages of skilled labor and in­
creased production bottlenecks; in such a setting pressures on prices have been
mounting. With an already high utilization of resources, a high aggregate
demand for goods and services is pressing on a limited supply.
If we have further increases in prices a t home, it will be harder for American
products to compete in foreign markets. At the same time, with high demand
for goods a t home, further increases in prices in the United States will stimulate
Americans to buy more imported goods.
Thus it seems to me that general policies designed to slow down the growth of
overall demand for goods and services at this time serve the dual purpose of pro­
moting price stability at home and equilibrium in our international payments.
Monetary policy is now operating to slow the growth of overall demand. More
fiscal restraint (in the form of increased taxes and reduced expenditures) would
contribute directly to the same en d ; it would thereby lessen the need to place
too great an anti-inflationary burden on monetary policy, and would reduce the
inevitable pressure on interest rates.
Sincerely yours,

■

1he Chairman. Mr. McGrath.
http://fraser.stlouisfed.org/
Mr. Mc of St. Louis
Federal Reserve BankGrath. Thank you, Mr. Chairman.

W il l ia m F . T reiber ,

F irst Vice President.

2 4 4 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

M Robertson, on December 6 of 1965 the Federal Reserve Board
r.
raised the maximum interest rates payable on time deposits to Sy2 per­
cent. Is there any upper limit beyond which the Federal Reserve
Board has no authority to go ?
Mr. R o b e r ts o n . None whatsoever.
Mr. G e t t y s . Will the gentleman yield?
Mr. McGrath. I yield.

M G e t t y s . Does the State law sometime control that, Mr. Robert­
r.
son? You cannot authorize national banks to violate a State law,
can you?
Mr. R o b e r ts o n . N o . A national bank must comply with ceilings
established by State law. State laws may vary in this in some respects.
Mr. McGrath. That is all I have, Mr. Chairman.

The C h a ir m a n . Mr. Annunzio?
Mr. A n n u n z io . Thank you, Mr. Chairman.
Yesterday reminded me of primary day with the members selecting
whether or not thev were for an independent Federal Reserve Board.
Some of the members indicated they were for independency of the
Board and others indicated they were not for independency of the
Board. I want to state my own position.
In a democracy which is a government for, of, and by the people, we
cannot afford the luxury of independence. In reviewing the pages of
history, we find that tnose countries which have enjoyed the luxury
of independence have reverted to dictatorships, and consequently, more
harm than good has come out of a system of complete independence.
So I am not in favor of an independent Federal Reserve Board. I do
believe it should have some independence, but not total independence
from the Congress of the United States and the elected representatives
of the people.
I also believe strongly in the two-party system because that is the
only way we can have responsibility. At least, you can hold one of the
major parties responsible for action. People go to the polls to vote; it
is very elementary, but it works.
I was gratified to learn also, Governor Robertson of your position
in which vou indicated that the action of the Federal Reserve Board
in December was responsible for the problem before us and you also
made a statement that we must act quickly. I want to ask you, sir,
How long is “quickly”?
Mr. R o b e r ts o n . Again, let me say that this depends entirely on the
problem as it emerges, but we cannot afford to sit by and watch the
problem get into panic proportions before we act. If you want hours
or days, I cannot tell you this. This depends entirely on the Board.
But I would fully expect that the problem which is foremosfc before
this committee today is not one that will get out of hand by virtue
of lack of action on our part.
Mr. A n n u n z io . Mr. Brimmer, you are the new man on the B o a r d
and I have a question.
Mr. R o b e r ts o n . Could I just make one statement concerning your
comments concerningthe independence of the Boardf
I think I can say every member of this Board will agree with you.
Every member of this Board will agree with you that the Federal
Reserve is not independent of Congress. We consider ourselves to be
an agent of Congress and we will willingly and wholeheartedly carry
out any policy which the Congress prrejStwa. .



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 4 5

M A n n u n z i o . But you did not do that in December when Mr.
r.
Martin met with the President of the United States. The Board went
ahead anyway and increased the discount rate.
M R o b e r t s o n . Y o u have never seen a law enacted by the Congress
r.
that we have failed to carry out.
M A n n u n z i o . I have been a member of this committee for 15
r.
months and have heard the chairman refer to the Board as the fourth
branch of Government. I refer to it as the fourth estate* I have
before me the testimony of Norman Strunk and he says here:
This relatively new development in the growth of savings certificates obvi­
ously was not anticipated when the certificates of deposit first developed a few
years ago and it obviously was not anticipated last December when the Federal
Reserve permitted the commercial banks to pay as high as 5% percent on CD's.

Now, Mr. Brimmer, I want to know from you, as a member of the
Board, why the Board did not anticipate the increase in certificates
of deposit. Members of the Board are not naive people. They are
dealing with human beings when they deal with bankers, and when
you open the door a little hit for human beings they are going to open
the door a little more. I would like your comments.
M B rim m e r. Mr. Congressman, first of all, I appreciate your
r.
interest in my opinion on a matter before the Board before I joined it.
I am reluctant to go back and second guess my associates as to what
was on their minds at the time they took the action last December.
. I would prefer to look ahead and if you will permit me, I think
it will be helpful to examine somewhat more closely the question of
certificates or deposit and what happens when the Board took the
action last December. I assume you in fact—I assume Mr. Strunk
was talking primarily about negotiable certificates of deposit.
I would like to say that the question of negotiable certificates of
deposit we talked about yesterday, we looked at in fact what is hap­
pening. In the recent period of—I respectfully suggest you ask the
other members what was on their minds. I would like to intonate
the growth in certificates of deposit in 1966, the period when growth
was concentrated, which roughly is up to March. If you look at that
and use the data available, and this is some 350 weekly reporting mem­
ber banks. As a matter of fact, the growth in certificates of deposit
during this roughly 10-week period in 1966 has been roughly the same
as it was in 1965. During the same period, the weekly reporting mem­
ber banks have lost $1.8Trillion from their savings accounts and this
was in contrast to a growth of almost $600 million such accounts durinSJ^e same period in 1965.
h e also have some breakdown by Federal Reserve districts in the
2??
^as taken place. During the same period, these banks gained
billion in time deposits other than CD's during the 10 weeks 1966.
JN , it appears that the banks have been gaining in those kinds
ow
°i time deposits other than negotiable CD’s. There you got a rate
m. re rapid than a year ago. These gains, in my opinion, are due
o
theJPnd sPecial devices designed for consumer-type savings, sav­
ings bonds, savings certificates and so on,
1 have an opinion on this, blit I would not want to go into it in any
^ w°uld say I would be surprised if the Board had not antici­
pated that some shift in these flows would have taken place. Again,

their reasoning I think, what was on their minds

http://fraser.stlouisfed.org/
63-496—66----- 17
Federal Reserve Bank of St. Louis

at that time-----

246

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

M W id n a ll. Will the gentleman yield ?
r*
Mr. A n n u n z io . Yes.
M W id n a ll. I was very interested in your preliminary statem
r.
ent
when you started your time. I would like to know what country or
countries you feel have made greater progress than we have made w
ith
a different system than we have in the Federal Reserve?
Mr. A n n u n z io . I was not comparing the progress the countries were
making from a banking point of view. No one questions the progress
that we have made from a social, economic, and political point of view
.
But I still feel that these agencies, whether they exist in State, city,
county or national governments, should be responsible to the people
and to the elected officials of the people.
The C h a irm a n . Will the gentleman yield ?
May I add that the so-called independence of the Federal Reserve is
of recent innovation. There was no independent Federal Reserve u
p
until 1953. In 1951 there was a declaration of independence in a w
ay,
but it was never exercised until 1953, and Mr. Eisenhower was the first
President to ever mark them as an agency independent of the executive
branch, and, of course, we are all familiar with what has happened
after they seized that independence. We had three recessions within
8 years. Industry has paid $60 billion excess interest rates. I think
the record will show that the so-called independence has really been
seized. It is not granted by the Government. No law grants them
independence. They just seized it. Mr. Eisenhower recognized it and
since that time they have asserted it even under Democratic admin­
istrations.
Has your time expired ?
Mr. A n n u n z io . Yes.
The C h a irm a n . We have just a little time here. Mr. Fino and M
r.
Rees and Mr. Stanton, I think are the only members who have not asked
questions. Suppose we finish with them, if we can. If there is
no objection, we will stay so they can finish.
Mr. Fino?
M F i n o . Thank you, Mr. Chairman.
r.
The C h a ir m a n . Y o u take y o u r full 5 m in u te s.
Mr. F i n o . M Robertson, there are three types o f financial institu­
r.
tions offering passbook sayings accounts to customers: namely, the
savings and loan associations, the commercial banks, and m
utual
savings banks.
The question is this: What is the amount of passbook savings for
each of these types of institutions %
R obertson . M a y I g iv e y o u r o u n d fig u r e s, b e c a u se I d o not
ooKn u 'n ? 1* J d o n o t c a r r y th o s e m m y m in d , b u t ju s t g u e s s in g , around
*<J50 b illio n fo r th e c o m m e r c ia l b a n k s, $ 1 4 0 b illio n f o r th e s a v in g s and
lo a n s - w m e w h e r e a li t t l e le s s th a n $ 5 0 b illio n f o r t h e m u tu a l savings.
M r. M a ise l , N o t p a ssb o o k .
Mr. F i n o . Passbook savings,
M r. R o bertson . $ 9 0 f o r th e c o m m e r c ia l b a n k s, $ 5 2 f o r t h e m utual
Sa^ n g l r
$n ° f °r
s a v in g s a n d lo a n , a t o t a l o f $ 4 4 3 .
,
M r. M a is e l. P r o b a b ly a lo t o f t W $ 1 1 0 b illio n in t h e s a v in g s aft”
lo a n s m a y b e m s a v in g s ce r tific a te s.
W e d o n o t h a v e tlie breakdow n
f o r th a t.
F i n o . H o w h a v e th e fig u r e s y o p g i v e n m e c o m p a r e
th e fig u r e s o f a y e a r a g o f o r e a c h o f t h e t y p e s o f in s tit u tio n s ?



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 4 7
M r. R o bertso n . I d o n o t h a v e t h a t in f r o n t o f m e, b u t I w o u ld be
g la d to se n d i t t o t h e c o m m itte e .
M r. F i n o . I ’d a p p r e c ia te th a t.
( T h e in f o r m a tio n req u e sted f o l l o w s :)
P assbook savin gs accounts in com m ercial banks, m u tu a l sa v in g s banks , and
sa vin g s and loan association s
Commerical bank pass­
book savings accounts

Mutual savings bank
deposits *

Savings and loan share
capital »

Amount
Percent
(billions of change from
previous year
dollars)

Amount
Percent
(billions of change from
dollars)
previous year

Amount
Percent
(billions of change from
dollars)
previous year

End of year:
1961...................
1962_________
1963_________
1964....... ...........
1965_________

63.9
71.0
76.3
82.9
* 92.5

(*
>

11.1
7.5
8.7
11.6

38.0
41.0
44.3
48.5

52.1

5.3
8.0
7.9
9.6
7.4

70.9
80.2
91.3
101.9

110.3

14.1
13.2
13.8
11.6
8 .2

1 May include certificates but breakdown unavailable.
2 Not available.
3 Estimated on basis of all insured commercial banks.

Mr. F i n o . Is there any essential difference between a passbook sav­
ings account offered by each of these types of institutions?
Mr. R o b e r t s o n . I think not. No essential difference.
Mr. F i n o . I s there any good reason for differentials in rates on
passbook savings accounts on these three types of institutions ?
Mr. R o b e r t s o n . I think not.
Mr. F i n o . If we are to impose the same ceiling rate on nonnegotiable
CD’s for commercial banks and savings and loan associations, why
should not the same ceiling rate apply to passbook savings accounts
of these three institutions?
Mr. R o b e r t s o n . I believe all these financial institutions should be
operating under the same rules so that I would not argue this point
at all.
As to differences, I think they all ought to be subject to ceilings or
they should all be free of ceilings.
Mr. F i n o . Just justify if you can, in this connection, I would like
to have each member of the panel respond.
Justify if you can the continuance of regulation Q with a ceiling
of 4 percent when the rate of 4.15 percent is being paid by the U.S.
Government on U.S. savings bonds.
Mr. R o b e r t s o n . Well, I would want to differentiate in my own mind
the rate which the U.S. Government pays in order to finance itself
from the rate which private financial institutions are either willing
or are permitted to pay. I would like to confine my remarks to the
desirability or nondesirability of ceilings on payments that can be
made. I happen to believe that fundamentally, if we were starting
from scratch, you should have no ceilings at all and rates ought to be
determined by competitive forces, but I also believe that once you have
ceilings you should never raise them abruptly and thus change the
I think you ought to c?o it when there are no pressures whatsoever.
If this had been done in 1961 or 1963 when I endeavored to get it done,



2 4 8 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

we would not have the sort of situation we have now, because the com
etitive pattern would have grown up little by little with no pressures.
> t to remove the ceilings or put them up when there are pressures,
u
changes your pattern completely.
Your savings and loans have a portfolio of assets on which the rato
of interest was fixed when the pattern was much lower and they cannot
do anything about that. On the other hand, when they make real
estate loans at high rates, when the economy is operating close to
capacity, the situation is not quite the same because those will b
e
refinanced later whenever the borrower can get a new loan at a low
er
rate. Once having ceilings in one area, then you should be very
circumspect in changing those ceilings abruptly. You ought to do it
very gradually only in accordance with the absolute needs of the tim
e
and work toward a period when you are in the situation when there
are no pressures whatsoever and then remove them.
M F i n o . D o all the members of the Board agree with Mr. Robert­
r.
son in that connection ?
Mr. M i t c h e l l . I amnot---M r . M a i s e l . I think you have made a very important point, that
if Congress should impose ceilings they should request us to raise the
ceilings on passbooks of commercial banks up to the 5 percent being
paid by savings and loan associations. I think the point is a very valid
point. The reason why we have the very different rates, 5 percent for
savings and loans and 4 percent for commercial banks, is partly
historical. Once the current situation calms down, I agree with you,
that the question of whether this large differential makes any sense or
not should be reexamined.
M G e t t y s . You will have a different crowd screaming, though,
r.
would you not ?
Mr. M i t c h e l l . I would say there is a rate differential between com
­
mercial banks and savings and loan associations, as far as p assb ook
accounts are concerned, at which funds will not move.
The banks can live with a rate of half of 1 percent under the S. & I*
rate without losing their funds to that competition. When the differ­
ential gets larger than that, funds start to move one way or the other,
there is no question about that. So I think there is a differential in
the ceilings that would neutralize flows between these associations and
the banks.
M S h e p a r d s o n . I would respond to Mr. Fino, that if we are going
r.
to have ceilings, I think they should be the same. I agree with w
hat
Governor Mitchell just said as to the competitive situation in the
market; the banks might be able to get funds at a little less rate because
of other factors than S . & L.’s. If we are going to set m a n d a to r y
ceilings, I think they should be the same and these various types or
institutions should be allowed to compete on whatever basis the total
market forces justify.
Mr. F i n o . Mr. Brimmer?
Mr. B r im m e r . The only additional comment I may add r e la te d to
the narrow question which you posed initially. That is the com
­
parison of the passbook rate paid by the commercial banks and the
rates available on U.S. savings bonds. I would think that the choice
of the rate is obviously up to the Treasury. But I could see a justifica­
tion for a slightly higher rate and my response is—it is just a little bit

S




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

249

more liquid than a passbook account and a little more troublesome to
get and maintain. I think this smaller degree of liquidity could
justify a higher rate.
Mr. F i n o . Just one other question. Is it logical to assume that
maintenance of the 4-percent rate on commercial bank passbook sav­
ings accounts invites the transfer of funds from these accounts to bank
CD's?
Mr. R o b e rts o n . Very much so. And this is taking place, the sophis­
ticated depositor who is in search of a high rate of interest will go
to a savings bond or certificate. Why should he leave his funds in ?
So the man who is penalized is the one who is unsophisticated, the
very one who needs protection.
Mr. F in o . Thank you.
The C h a ir m a n . Mr. Rees?
Mr. R ees. Thank you, M Chairman. I would like to have placed
r.
in the record an article in the Wall Street Journal of today entitled,
“Block to Building—Big Outflow of Savings From S. &L.’s Forces
Cut in Mortgage Loans.”
The C h a ir m a n . Without objection, it is so ordered.
(The article referred to follows:)
[From the Wall Street Journal, May 25, 1966])
B lo c k to B u il d in g — B ig O u t f l o w o f S a v in g s F e o m S&L’b F orces C u t i n
M ortgage L o a n s — S o m e H a l t L e n d in g fo r N o w ; B a n k s ’ 5*4 P er c en t R ate
on T im e D e p o s it s A tt r a c t s F u n d s — D is a p p o in t e d H o m e b u y e r s

(By Donald Moffit, Staff Reporter of the Wall Street Journal)
Scratch Ned Smokler’s new apartment house. The Detroit builder thought he
had a mortgage loan lined up last month, but it suddenly fell through.
Scratch several hundred home sales in Los Angeles, too. The buyers were told
last month that they qualified for mortgages—but then the two savings and loan
associations that were processing their applications suddenly stopped making any
mortgage loans at all.
These are no isolated incidents. Mortgage money in the last few weeks has
been drying up drastically even for builders and would-be homebuyers who would
easily qualify for loans in anything approaching a normal market—indeed, even
for some who already had qualified.
a sa v in g s h e m o r r h a g e

The reason: Savings and loan associations, which finance more than 40 per­
cent of the Nation's home and apartment mortgages, are seeing savings flow out
of their institutions much faster than new savings come in. So they are reducing
mortgage lending drastically, and in some extreme cases stopping it altogether for
the time being.
As recently as the end of March the situation was far different. A tight-money
pinch throughout the economy caused mortgage-interest rates to rise rapidly in
the first quarter and prompted mortgage lenders to tighten credit standards. But
this squeeze mainly hit “marginal” borrowers—those whose monthly income, in
the judgment of lenders, could not quite cover the higher mortgage payments
necessitated by the rising interest rates. Loans still were available to those
with high credit ratings. Savings deposits in S&L’s exceeded withdrawals by
$1.3 billion in the first quarter, and the S&L’s managed to increase their mortgage
lending slightly, to an estimated $5 billion in the first quarter from $4.9 billion
in the 1965 period.
In April, though, savings withdrawals from the Nation’s S&L’s exceeded new
deposits by an estimated $500 million to $700 million. That was the biggest 1month net outflow ever. While a net outflow is not unusual in April because of
withdrawals for Federal income tax payments, the outflow in April 1965 amounted
to only $99 million.



2 5 0 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS
In May, w ith no m ore pressure on depositors to w ithdraw fu n d s to settle in*
come ta x hills, S&L’s usually gain savings. B ut in d u stry sources say the sav­
ings outflow has continued th is month. So it is now estim ated th a t, unless
funds s ta rts flowing in again heavily, S&L’s will cut th e ir m ortgage lending in
the la s t 9 m onths of 1966 to $13 billion, from $19 billion in th e 1965 period. A
cutback on th a t scale could crimp residential building severely in th e rest of
1966.
HIGHEB WITHHOLDING, HIGH EB PRICES

W hat happened? In d u stry sources generally sketch th is p ic tu re : Increased
w ithholding from payrolls, for social security taxes a t th e beginning of the year
and now fo r Federal income taxes as well, has reduced th e take-home pay of
m any consum ers—a t the same tim e th a t rising prices have le ft th e consumers
in need of m ore spendable funds. The new financial p ressu res ap p ear to have
caused m any people to stop m aking new savings deposits an d to have forced
some to dig into p ast savings. Some studies indicate much of th e money re­
cently w ithdraw n from S&L’s has gone to finance m ajor p u rch ases th a t consum­
ers apparently no longer can m ake o ut of income.
Compounding the trouble fo r S&L’s, commercial b an k s now ap p ear to be
attra c tin g a bigger share of w hat new savings deposits still a re being made,
because they now are paying higher rates th a n th e S&L’s. This is quite a
turnabout. C alifornia S&L’s not long ago w ere p aying th e highest rates on
savings (up to 4.85 percent) in the country, ad vertising these ra te s widely in the
E ast, and pulling in so much money th a t w orried F ed eral regulators were
putting some downward pressure on these w estern rates.
L ast December, however, th e Federal R eserve B oard increased th e rate that
banks are allowed to pay on tim e deposits (those left in th e b an k fo r a specified
time, such as 1 year) to 5 ^ percent from 4% percent. S&L’s officials a t first
thought th is would not h u rt them. B ut as more banks have moved up to the
high rates (some now pay 5Y2 percent on as little as $25) an d as savings have
flowed out of the S&L’s, th e ind u stry has changed its m ind in a hurry.
WASHINGTON MOVES

Prodded by a pilgrim age of S&L executives to W ashington, th e industry-regu­
lating Federal Home Loan B ank B oard la st week moved to lif t th e u n o fficia l
“ceiling” th a t lim its the ra te s S&L’s can pay on deposits. A fte r Ju ly 1, S&k’s
in C alifornia and Nevada, which have been p a rticu larly pinched, can pay *
percent on regular deposits, and m any have announced th e y will. F u r th e r ,
T reasury Secretary Fow ler la te la st week proposed to Congress th a t bank reg­
u l a t o r s be empowered to low er th e in terest banks can pay on tim e deposits
of $10,000 or less.
W hile an increase in th e rates they can pay on savings m ight help 13&L's stop
fu rth e r outflows of savings, some in d u stry officials doubt it will enable the
S&L’s to pull back in the money they already have lo s t “I t ’s like throwing a
drow ning m an h alf a life preserver,” savs one S&L president
So, fo r th e tim e being a t least, S&L’s can do little b u t c u rta il m o r tg a g e
lending f a r m ore drastically th an they had expected to a few weeks a go.
In D etroit, despite bank competition. S&L’s gained $23 m illion in new savings
during the first q u a rte r of 1966, an d were hopeful of m ain tain in g mortgage
lending a t th e $108 m illion ra te of la st year. In stead , n e t savings w it h d r a w a l s
reached $21 million in A pril and “th is year we’re c u ttin g back lending to $*W
million o r $35 m illio n /’ o r less tb an one-third th e 1965 volum e say s H. G eh rk e,
president o f D etro it’s big F irs t F ederal Savings & Loan Association.
A tlanta S&L’s a re planning to cu t th e ir m ortgage lending “betw een 50 percent
and 75 percent” in May, June, and Ju ly from th e $70 m illion they loaned in
thosre m onths la st year, according to E d Hiles, executive vice presid en t of Georgia
Savings & Loan Association.

In Elmhurst, a Chicago suburb, Elmhurst Federal Savings & Loan A sso c ia tio n
announced 3 weeks ago it would no longer accept loan applications. “Our savings
inflow isn’t satisfactory and hasn’t been since the first of the year,” says Theodore
Wilson, president “We’re flatly turning down any and all applications. W
®
think we will just coast for as long as 60 days to see if this market won’t sh***
o u t”
In southern California, where most of the country's larger S&L’s nxe
several associations, including those controlled by Lytton Finanetel CW*> baTe



UNSOUND COMPETITION FOE SAVINGS AND TIME DEPOSITS 2 5 1
announced they a re declining tem porarily to accept new m ortgage-loan
applications.
The L ytton associations say they are fulfilling existing loan com m itm ents.
But, says B a rt Lytton, chairm an of Lytton F in an cial in Los Angeles, “we’re not
open to am endm ents, suggestions, or counter-proposals” from borrowers. “We
refer all am endm ents, suggestions an d counter-proposals to those employes we
have discharged/* he says jokingly. N ot so jokingly, L ytton associations have
dismissed 170 employes, about one-quarter of th e ir w ork force, d u rin g th e p a st
6 m onths to keep costs in line w ith the drop in business.
A few associations, to h ear builders and loan agents tell it, even have canceled
com m itm ents they alread y had m ade to finance th e sale of homes. A Los Angeles
loan agent contends th a t 1 S&L ordered escrow agencies to re tu rn dow npay­
m ents and tru s t deeds (a s m ortgages are called in C alifornia) on 400 homes,
the sales of w hich w ere aw aitin g tran sfe r of loan fu n d s from th e S&L to sellers.
Two weeks before th a t, th e agent says, a n o th er association backed o ut of 200
commitments.
The associations he nam es deny they ever have canceled a loan comm itment.
B ut they concede they stopped processing loan applications in April, including
some applications fo r loans to complete sales on w hich dow npaym ents already
had been p u t in escrow. On some of these, applicants already had been sent
le tte rs indicating ten tativ e approval pending fo rm al action by th e S&L loan
committees.
A Los Angeles builder says he lost th ree home sales a few weeks ago because
the S&L th a t h ad m ade a n o ra l agreem ent to finance th e purchases broke its
word. “T hey asked me if I had anything in w riting. I said no, and they told
me to go ahead and sue ’em then,” he says.
Savings and loan executives in sist such cases are so ra re as to be insignificant
and say th a t suspension of new lending by some S&L’s is only tem porary. A
spokesman fo r the U.S. Savings & Loan League says th a t “this step has been
taken in order to fulfill m ortgage com m itm ents previously m ade” and th a t S&L’s
refusing to m ake new com m itm ents “will re tu rn to th e m ark et as soon as these
existing com m itm ents have been m et.”
B ut even th e optim ists don’t foresee a re tu rn to th e m ortgage lending volume
of la s t year. “The lending capacity of th e business will fall fa r short of the
dem ands of A m erican hom ebuyers,” says N orm an R. Strunk, executive vice
president of the U.S. Savings & Loan League. H e th in k s S&L m ortgage lending
fo r all 1966 m ay fa ll to about $18 billion, down nearly 25 percent from $23.9
billion la st year.
The consequences fo r the building in d u stry could be severe. H ousing starts,
while they have rem ained about level in an n u al ra te fo r th e la st several months,
fell below th e previous y ear in both 1964 an d 1965, to co nstitute one of th e few
soft spots in the economy. Now th e cutback in S&L m ortgage lending raises a
new th re a t, and econom ists see little chance th a t o ther m ortgage lenders such
as insurance companies, comm ercial banks, and m utual savings banks, will step
in to fill even p a rt of th e gap. These in stitu tio n s do n o t concentrate on m ortgage
loans to the ex ten t S&L’s do. Moreover, heavy loan dem ands from nonconstruc­
tion businesses have p u t a stra in on th e funds th ey have available to lend.
As recently as December, th e N ational Association of Home B uilders concluded
from a survev of its mem bers th a t housing s ta rts in 1966 would exceed the
1,542,000 of 1965. By M arch, however, the NAHB decided th ere would be a
“slight decline,” perhaps 1 percent. Now, says Norm&n F a rq u h ar, an economist
fo r the association, “i t ’s like riding a roller coaster. W e know we re going down
fast, bu t we don’t know w here bottom is.”
Individual builders, especially in C alifornia, long a g iant construction m ark et,
are ju s t as gloomy. B en Deane, a Los Angeles area builder, originally planned
to p u t up 1,500 new houses th is year. B u t now he say s: “W e’ll probably go
under 1,000 because of th e an ticip ated unav ailab ility of m ortgage cred it.”
“The g re a t m ajo rity o f hom ebuilders in S outhern C alifornia a re dependent
on th e S&L industry, an d practically none of them (th e S&L’s) a re m aking com­
m itm ents to finance new homes,” says b uilder L a rry W einberg. “A lo t of the
sm aller builders who don’t have com m itm ents now a re going to be out of business
in very sh o rt o rd er.”
F o r th e S&L’s them selves, th e situ a tio n probably spells a d ra stic slowdown,
a t least fo r 1966, in th e ir super-fast grow th ra te s of recen t years. T he U.S.
le a g u e say s to ta l savings in S&L’s h av e increased as much as 13 percen t a y ear
in recent years, w ith some S&L’s posting gains of 15 percent or even 20 percent.



2 5 2 UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS
The outlook fo r th is year, m ost in dustry sources agree, is fo r much more modest
grow th a t best.
E arnings of the large S&L holding companies eith e r a re show ing only small
gains from a y ear earlier, o r a re down sharply. L ytton F in an cial reported firstq u arter profit of $381,590, or 15 cents a share, f a r below th e $1,023,622, or 40
cents a share, earned in the 1965 period. B a rt L ytton say s cu ts in expenses
and higher interest rates on mortgage loans m ay reverse th e picture for the
rest of the year. B ut he ad d s: “Nobody can p roject earnings now with any
degree of certainty.”
Investors have ra th e r clearly soured on S&L stocks, too. T he K idder, Peabody
& Co. index of S&L stock prices h as dropped to 79.40 cu rren tly , down from 119
a t the end of 1965 and a peak of 397 in November 1961.

M
r.

We have read it.
I ca n see y o u d id n o t w r ite it.
I would like to explore two areas that I feel are the crux here.
First, the relationship between savings institutions and banks in
terms of coordination of decisions being made by both your Board an
d
the Federal Home Loan Bank Board; and second, wliat is a CD an
d
what is the effect of a CD in competition with other financial insti­
tutions and internally within a financial institution? In this con­
text, I would like to discuss the legislation I introduced this week.
I am a Congressman from California, from Los Angeles, and we have,
of course, a great deal of competition in that area for m
one^y, both in
the banks and savings and loans, because we are a fast-growing econ­
omy. I am reading from an analysis of a billion-dollar savings an
d
loan association, a Federal institution. They are well below the C
ali­
fornia average in terms of scheduled items. The management I con­
sider to be among the top in the entire industry.
Looking at the types of savings that they have in their institution,
79 percent of their deposits are deposits of $5,000 and more; 53.7 per­
cent are ^deposits of $9,000 and more. So you can see the pattern
here, an investor pattern rather than a savings pattern where m
om
and dad put a few hundred dollars away for furniture or for future
needs. I think you will find this pattern at least throughout the
savings and loan industry in the State of California. It is the in­
vestor, not a savings pattern.
R o b er tso n .

M r. R e e s.

I w o u ld a lso lik e to g iv e y o u th e e x p e r ie n c e o f t h is --------

M R o b e r t s o n . May I ask, are these all CD’s you are talking about,
r.
or ]ust regular passbook?
M R e e s . They have not gone into this 3-year savings type of
r.
certificate.
M r. R o b e r ts o n . S o th e s e a re th e a c c u m u la te d d e p o s its over the
ye™ S
a c c u m u la te th e ir fu n d s t o b u y h o m e s.

,

M R e e s * It shows it is primarily investor money. The type ot
r.
person who puts money in the savings and loans is the person w
ho
has funds for investment and part of their portfolio is this type °*
demand money.
Mr R o b e r t s o n . This would be more likely to be true if they were
a single deposit of that volume. If they are merely the accumulate"
deposits of individuals who are trying to buy a home, they inijp*
not oe*
M r. R e e s . These a re n o t p e o p le a c c u m u la tin g t o b u y a h om e. ^
^
e a v e r a g e in v e s to r i s p r o b a b ly 55 y e a r s o ld a n d probably
so ld a h o m e a n d h a s o th e r a ss e ts a n d se e k s t h i s a s a r e a d y money
in v e s tm e n t.



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 5 3

Mr. R o b e r t s o n . D o you have any percentages to show the deposits
over $100,000?
M R e e s . Of deposits of $2 5 ,0 0 0 and over, about 2.85. I would
r.
say one family could maybe have $ 3 0 ,0 0 0 or $ 4 0 ,0 0 0 in three or four
insured accounts; one for the wife and one for the child and however
it might be. It does show you when you draw the line; it is primarily
investor money and not saver money.
In terms of the first quarter of this year, in that institution, they
lost deposits of $19 million. This is a great deal of money. And of
that, $15 million was in those areas of deposit between $10,000 and
$11,000, investor-type money, investing up to the $10,000 insured ac­
count limit.
We find basically that there is a flow of this type of money directly
into the bank CD. In California the Bank of America is giving 5
percent. It is the smaller banks that are going up to 5^ percent. It
is the banks who can least digest a CD that are going up to the 5*/£percent basis.
Was there any consultation with your Board and the Federal Home
Loan Bank Board before the decision was made on December 6 ?
M R o b e r t s o n . I think not.
r.
M R e e s . Do you not think this is dangerous ?
r.
M r. R o b e r t s o n . I th in k it w o u ld h a v e b een b e tte r i f w e h a d .
Mr. R e e s . Do you think there may be a possibility in the future of
restructuring both your Board and the Federal Home Loan Bank
Board to see that there is some coordination among your policies? We
find the situation where your decision is directly affecting the savings
and loan industry. The decisions of the Federal Home Loan Bank
Board do not affect what you are doing nearly as much.
M R o b e r t s o n . Yes; they do, too.
r.
Mr. Rees. Not nearly as directly as your decision.

M R o b e r t s o n . I do not want to get into the question of degree, but
r.
on both sides, of course, any decision which they make in raising their
rates, for example, the rates that are permissible, for those that are
coming to borrow from the Federal home loan banks obviously affect
in particular areas the rates which savings and loans are paying in
contrast to those which banks can pay.
Mr. R e e s . Did you look at the potential effect of the savings and
loans before you made that decision ?
M R o b e r t s o n . I am sure every member of the Board had in mind
r.
the possible effect of raising these rates. No one—no one could over­
look this, it seems to me. You would not look exclusively at savings
and loans. You would look at all financial institutions and this would
be part of the background information which every member would
want to have before he made his decision.

Mr. R ees. D o you not think that we have to have some restructur­
ing so as to have some coordination between the two banking systems ?

Mr. R o b e r t s o n . I am firmly in favor of this and I would be delighted
to send you a speech I made last week in which I suggest that action
should be taken so that we have more uniform rules.
Mr. R e e s . I wish you would. It is my prediction that when July
comes up we are going to have serious problems of liquidity in the sav­
ings and loan industry throughout the United States. The with


2 5 4 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

drawals in the first quarter was a minor withdrawal in terms of what
is going to happen.
There should be some differential, some parity in interest rates be­
tween banks and savings and loan associations. Do you think it is
good in terms of competition? For example, banks have many m
ore
advantages than a savings and loan.
Mr. R o b e r t s o n . May I answer that and then Governor M
itchell,
who made this suggestion, may cover it, too.
From my point of view, the reason for the differential of one-half
of 1 percent has been the break-even point insofar as competition is
concerned between the two institutions—the banks can handle the
demand deposits and perform other services for individuals and there­
fore have the advantage in getting funds and therefore they can pay
4 percent when savings and loans are paying 4 y2
not lose to the
savings and loans. I do not think this necessarily follows for all tim
e,
because more and more people are getting interest conscious. Savers
are becoming sophisticated and they may very well move even for less
than a half of 1percent.
But I would prefer to have Governor Mitchell answer that.
The C h a i r m a n . If you will pardon me. You have an a m e n d m e n t,
Mr. Rees, I believe. Why do you not explain what your a m e n d m e n t
is so that the members will have it in the record, and so the m em b ers
of the Federal Reserve Board will know about it, too ?
M R e e s . Yes, Mr. Chairman, I wanted to go into that, but it looks
r.
like we are being called.
The C h a ir m a n . Y will have 3 o r 4 minutes.
Mr. R e e s . Let me explain the bill that was put in last week.
The bill is an attempt to define a certificate of deposit. In the bill
we define a certificate of deposit as being a nonnegotiable instrument
which must be held for at least 1 year at an interest rate no greater
than the passbook rate of the bank.
I have here an analysis by Governor Robertson of the bill. I intro­
duced this bill because I felt that the certificate of deposit is poten­
tially a very destructive instrument. In the newer growing banks in
California we have the problem of too many certificates of deposit.
You even had it in N e w York banks where major CD’s all became due
at a certain time, you had a serious liquidity problem. My bill is an
attempt to try to equalize the rates so the small passbook holder w ould
not be at a disadvantage, with the large corporate investor.
The C h a ir m a n . Would you like to place that in the re c o rd ?
Mr. Rees. The bill?
The C h a i r m a n . Your summary and any material that you have
co?^elliln^ your friM I assume you will offer that amendment.
*
M R e e s . Yes.
r.
The C h a i r m a n . Y o u may place it in the record at this point.
M Rees. Thank you, Mr. Chairman.
r.
(The analysis on H.R. 15173 by Governor Robertson was previously
inserted and may be found on p. 209.)
* ^ e^ H IK A *
A MN
right, we will recess then until tomorrow morn'
mng, Governor. We regret very much to ask you to come back.
under the circumstances, we have no alternative.




o u

UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS 2 5 5

Mr. T r e ib e r . I have been away from the Federal Reserve bank ira
New York since Monday afternoon and I have some things I think I
should take care of.
The C h a ir m a n . Since we have the members here, I think it will be
all right to excuse you, Mr. Treiber.
Mr. T r e ib e r . Certainly.
The C h a ir m a n . All right, we will stand in recess until tomorrow a t
10 o’clock.
(Whereupon, at 11:15 a.m., the committee adjourned to reconvene at
10 a.m., Thursday, May 26,1966. This meeting was subsequently can­
celed, to reconvene subject to the call of the Chair.)







TO ELIMINATE UNSOUND COMPETITION FOR SAVINGS
AND TIME DEPOSITS
TUESDAY, MAY 31, 1966
H ouse of R epresentatives ,
C om m ittee o x B a n k in g and C urrency ,

Washington, D.C.

The committee met, pursuant to notice, at 10:05 a.m., in room 2128,
Rayburn House Office Building, Hon. Wright Patman (chairman)
presiding.
Present: Representatives Patman, Reuss, Moorhead, Todd, Ot­
tinger, McGrath, Hansen, Annunzio, Rees, Widnall, Mrs. Dwyer,
Harvey, Stanton, and Mize.
The C h a ir m a n . The committee will please come to order.
This morning the committee continues hearings on H.R. 14026, con­
cerning negotiable certificates of deposit.
Our witnesses are Comptroller of the Currency James J. Saxon,
supervisor of the issuance of the Nation's circulating currency as well
as of national banks, and Mr. Larry Blackmon, Chicago, 111., who is
president of the National Association of Home Guilders. M Black­
r.
mon’s industry is vitally interested in the CD question because their
ability to provide homes for Americans is directly related to the ques­
tion, “Where is all the money going—Main Street, or Wall Street?”
According to the latest statistics, the modest increases in the money
supply created by the Federal Reserve, as well as savings money are
turning up in the hands of the customers of the large money-market
banks. Of the $18 billion in outstanding negotiable CD’s, over 70 per­
cent were issued by just 30 banks, every one with over $1 billion in
assets. Over 40 percent of the total—$7 billion—was issued by just a
handful of New York City banks. So it is perfectly clear what is
causing the pressure on smaller banks, thrift institutions, and homebuilding ana home buying.
Mr. Saxon can tell us in detail how the money market national
banks he supervises have issued CD's, debentures, notes, and loans to
raise cash to finance expansion for their big corporate clients, while
Mr. Blackmon, who follows Mr. Saxon as our witness, can tell us the
effects of these distorted money flows on other segments of our
economy.
Mr. Saxon, we are delighted to have you, sir. You may proceed
in your own way. If you will, summarize your statement. I assume
you have a copy for each member and it has been placed in front of
each member. I have mine and I am sure the other members have
one. We would appreciate that very much. Then we would like to
ask you questions, sir.



257

2 5 8 UNSOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

STATEM
ENT O H N JAM J. SA O , C M O
F O.
ES
X N O PTR LLER O T E
F H
C R Y
UR ENC
Mr. S ax o n . All right, Mr. Chairman.
'The C h a i r m a n . Come around, Mr. Blackmon, to the witness place
if you will, please. You know Mr. Saxon. Just sit there at the
microphone if you will and you will be heard after him. We have
asked him to summarize his statement, and we will ask you to do
the same thing.
All right, Mr. Saxon.
Mr. S ax o n . Mr. Chairman, in response to your suggestion, I will
summarize briefly this short statement which deals primarily with
regulation Q and the effects that regulation in our opinion has had
on the general financial industry in this country, all segments of it,
and on the commercial banking business. It is our view that regu­
lation Q has been and is a price-fixing mechanism which is odious
to the general principles on which this economy is operated, that this
regulation has been destructive of the normal flow of funds to the
needs of the market as those needs should be demonstrated by com­
petition among various segments of industry and commerce within
our economy, that for many years regulation Q was kept at rates
at such low level as to deter the normal flow of funds into commer­
cial banks, and to increase artificially the flow of funds into the sav­
ings and loan industry and into the mutual savings banks.
I point out that for many years there was no price regulation on
rates or maturities or quantity of funds which S. & L.’s or mutuals
could seek in the markets, ana even today the only restraint on rates
is that which is incidental to the limited control exercised through
advances from the home loan banks to the S. & L.’s, whereas today
by contrast the commercial banking business is subject to acrossthe-board rate regulation.
As has been pointed out, this has imperiled the proper function
of the economy, has materially affected in a serious adverse way the
normal allocation of funds and their most efficient uses in the economy
and has benefited artificially and improperly other competing indus­
tries, in itself has resulted ’n the problem to the extent that a prob­
i
lem exists in the savings and loan business which because of Q has
had freedom without limit to compete for funds countrywide, with­
out regard to rates, maturities, or other controls.
We note here today that whereas the Federal Reserve continues
its restraints on the commercial banking business, the Home Loan
Bank Board has just recently announced liberalization of its regu­
lations in terms of liquidity requirements and other r e q u ir e m e n ts,
and at a time when, in my opinion^ instead of liberalizing the H
orn®
Loan Bank it ought to be restraining these institutions. In faC
^
it is not apparently merely a matter of maintaining the status quo
in the savings and loan industry today.

It appears to be a matter of providing funds for continued ex­
pansion on the presumed basis that these funds are necessary to sup­
port the housing industry, much of this of course being directed
these comments primarily to small housing, although we know that
large construction is one of the major interests of the housing industry
and that this pressure to continue the existing rate of expansion




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 5 9

indeed to increase the expansion is contrary to the requirements of the
economy as it exists today with the inflationary pressures that are in­
herent and apparent in it in some segments, and regulation Q itself
is responsible basically, as it has been over the years, and as this
problem is now aggravated by the astonishing liberalizing regulations
of the Home Loan Bank Board at a time when there ought to be
reasonable restraint.
We would also point to the practices engaged in with the approval
of the Home Loan Bank Board for excessive appraisals of loans and
excessive loan rates, particularly in a period such as we now have here
in this country.
We do not believe either that one segment of the industry and busi­
ness of this country, the housing industry alone, should be protected
as a privileged sanctuary, and despite the restraints being imposed on
other segments of the economy, the business economy, the principle
somehow seems to be developed that the housing industry as a single
exception ought to be protected at any cost. This seems to be con­
trary to the principles which should govern the sound effective func­
tioning of the economy in the period m which we are now living.
We believe that there ought to be some restraints exercised on the
lending practices of the S. & L.’s, that there is a serious question
whether there ought to be any further expansion at this time, a serious
question as to whether such expansion should in any case be financed
by public funds through the home loan banks, and whether overall
this is not seriously harmful to the economy.
As I noted, to the contrary of these principles we see liberalizing
practices. Instead of a substantial expansion in required liquidity,
which, as I recommended to Mr. Dillon three and a half years ago,
ought to be a minimum of 15 percent of funds exclusive of home loan
bank borrowings and exclusive of loan commitments on the books,
we have what amounts today as a negative liquidity in the case of
S. & L.’s generally.
Now there are some very fine ones that operate according to sound
financial principles, but instead of true liquidity we have borrowed
liquidity in the main, liquidity based on borrowings from the home
loan banks, and it is notable in this respect that this borrowing from
and lending by the home loan banks is increasing. It is now at some
$6 billion and presumably, if this policy continues, this will expand.
By contrast, restraint in bank lending, it is now clear enough, indi­
cates approximately $600 million total advances by the Fed to the
commercial banks. I am not arguing that this restraint in the case
of commercial banks should be lifted at all. Perhaps it should be
increased, but I do seriously question whether the current policy of
the Home Loan Bank Board to liberalize at this critical period, if
their own statements can be taken as indicating a critical situation,
^nd I am not sure that this exists nationally at all. I do know in
California and a couple of other places there are problems, but I am
not persuaded that this is of such monumental significance as to war­
rant the hysterical—as I would describe it—hysterical reaction I have
beard and seen in a number of places.
So a policy of reasonable restraint, a period during which the
S. & L.’s, as some of them are now doing thankfully, would not extend
their commitments but would attempt to increase their liquidity, their



2 6 0 TJNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

true liquidity, their real liquidity, as indeed they could, by using the
inflow from present mortgage portfolio amortization to improve their
internal situation and to reduce their reliance on the home loan banks
in the country.
#
^
Instead we see a reduction in liquidity requirements from t to 6
percent. This I find impossible to understand.
We therefore, in conclusion, feel that there are two basic prob­
lems here. One, the role of regulation Q in this economy, and the
artificial restraints, the odious price fixing which regulation Q rep­
resents. In this connection I would refer to what I believe as I recol­
lect was the unanimous opinion of the President’s Committee on Finan­
cial Institutions that regulation Q ought to be put at a minimum on
a standby basis. I believe it ought to be abolished altogether.
I believe if regulation Q had been permitted, had been on a standby
or had been abolished during the past years, the artificial protection,
the privileged sanctuary enjoyed by the savings and loan industry
would not have put them in the posture which it is said they have or
exist in today. They would have been used and properly used in the
competition in the marketplace, and, presumably, as I noted earlier,
would have exercised the proper practices that many of them now do,
but unfortunately not all.
In conclusion 1 would note that in the April period the $900 million
of withdrawals from the S. & L. industry, that $500 million of this
came out of California alone, and that |500 million was fu r n ish e d
back again by the Home Loan Bank of San Francisco.
This is a question o f proper policy. It seems to me g o v e r n m e n ta l
policy by the Congress, Ty the administration, which such s u p p o r t is
b
desirable, particularly when it creates an attitude and a policy of p r o ­
tection regardless of the proprieties and the warrants of the m
oney
market.
I would note too that this industry has been well subsidized th ro u g h
the years. The 1964 tax figures of the Treasury showed that con­
trary to a projected 20- to 22-percent tax rate on all mutuals, m u tu al
savings banks and S. & L.’s, that the 1964 figures showed m u c h less
actually paid by S. & L.’s and the mutual savings banks.
In this connection I would like to note that one of the other m a j o r
competitors for the available funds in the money market at any
given point of time is the insurance industry. It is the one industry
that initially obtains its funds free of any cost through the premium*
Here too this is an industry which pays lesser taxes as its earning
grow. It paid something slightly over one-half of the taxes paid
by the commercial banking industry in 1964.
I note this item merely to suggest that there is a serious question
whether this type of privilege, this type of protection provides for the
best development in an efficiently operating financial economy.
That concludes my statement, Mr. Chairman.
(The complete statement of Mr. Saxon follows:)
S t a te m e n t o f J a m e s J . S a x o n , C o m p tr o lle r o f t h e C urrency

During the past few weeks, this committee has heard testimony on several
proposals which are directed towards curbing competition between savings a
loan associations and commercial banks. Rather than focus my attention
these proposals, I wish to address my statement to what in my opinion is
fundamental issue which underlies these proposals. Whether we think that tn



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 6 1
difficulty w hich now plagues the savings an d loan in d u stry is a p erm anent prob­
lem, a tran sitio n al problem, o r no problem a t all, th e basic issue is still the
s a m e ; Should regulation Q be used to reg u late price com petition among financial
institutions.
A card in al principle of o ur free en terp rise system is th a t governm ent should
impose economic regulation only in those a re a s w here free m ark et forces
lead to resu lts th a t are n o t in th e public in terest. W hen th e governm ent in te r­
venes to fix prices, ad m in istrativ e decisions a re su b stitu ted fo r those of th e
m arketplace— th e decisions o f one man o r a very few men replace th e judgm ents
of many. T here may be instances in w hich th is is a desirable course, b u t th e
burden of proof should re st w ith those w ho w ould advocate m ore controls over
competition, since com petition h as long been accepted by both scholars an d
businessm en as th e driving force behind o u r system of free enterprise. Indeed,
a com petitive system is a t th e roots of o u r trad itio n a l political a n d economic
philosophies. A lthough several proponents of m ore control have recently ap­
peared before th is committee, no one to m y knowledge h as offered th e kin d of
convincing evidence we should dem and before acting to increase the re s tra in ts
on our th riv in g financial system.
R estriction on in terest paym ents go back to the B anking Act of 1933, conceived
in the m idst of our w orst financial crisis. T here w as rem arkably little discus­
sion of in terest paym ents on deposits when th a t a ct w as under consideration.
AVhat discussion there w as rested on th e assum ption th a t the banking troubles of
the 1930’s w ere the resu lt of im prudent banking practices. Such practices w ere
forced upon th e comm ercial banks, so th e argum ent ran , by th e severe competi­
tion fo r correspondent an d o th er deposit balances. This competition, it w as
argued, led to high in tere st ra te s on deposits, which compelled banks to acquire
risky assets, thereby exposing them selves to th e illiquidity th a t pervaded the
banking crisis of 1933.
T here is no evidence, however, to support the view th a t ra te competition for
tim e deposits during the 1920’s w as excessive and led banks to “reach” for un­
sound assets. In fact, during th is period ra tes paid on tim e deposits by member
banks actu ally declined. In addition, from 1920 to 1929 commercial banks sue*
cessfully m aintained th e ir holdings of governm ent bonds a t about 10 percent of
to ta l earning assets, indicating th a t they did not attem p t to increase th eir e arn ­
ings by reducing the proportion of high-quality assets in th eir portfolios. More
recently, a fte r review ing th e evidence, both th e Commission on Money and
C redit and the P resid en t’s Committee on F in an cial In stitu tio n s concluded th a t
in terest-rate ceilings a re generally undesirable.
C urrent com petitive relationships betw een comm ercial banks and savings and
loan associations should be exam ined in the perspective of the whole post-W orld
W ar I I period. From 1946 to 1962, comm ercial banks operated a t a serious dis­
advantage in competing fo r savings because of the relatively low regulation Q
ceilings- F o r example, u n til 1962 banks w ere lim ited to a m axim um ra te
payable of 3 percent on tim e an d savings deposits, w hile m any savings and loan
associations paid 4 percent or higher a t tim es. In the 1946-61 period, com­
m ercial bank tim e and savings deposits increased by $44.9 billion, w hile savings
a t savings and loan associations increased by $63.5 billion. T his w as nearly a
ninefold increase fo r savings an d loan associations, com pared to less-than-atw ofold increase fo r comm ercial banks. D uring th e la st 4 years, on the other
hand, w ith th e comm ercial banks operating u n d er less restrictiv e ra te ceilings,
the grow th in com m ercial banks tim e an d savings deposits an d in savings a t
savings and loan associations w as n early equal.
To my knowledge, the com petitive relatio n sh ip of th e la st 4 years have n ot
had any h arm ful o r destructive effects on financial in stitu tio n s. As f a r as com­
m ercial banks a re concerned, th e ir position is sound, w h eth er we look a t q u ality
of assets, earnings, o r th e ir liquidity position. B ank earnings a re a t an alltim e
high. T he quality of bank assets h as been im proving in recent m onths. An
aspect of tig h t money conditions and strong loan dem and is th a t it allow s banks
to im prove th e ir portfolios by w eeding o u t th e ir m arg in al loans. B ank liquidity
positions a re also sound. T his is som ething we follow very closely and an
analysis of our m ost recent exam ination rep o rts shows th a t th e 200 larg est banks
have, on average, liquid assets equal to about 30 percent of deposits. These
banks have unquestionably been th e m ost aggressive com petitors fo r tim e deposit
funds.
A lthough I do not have d etailed knowledge of th e savings an d loan in dustry,
th ere is, in my opinion, no reason to believe th a t th e in d u stry is facing w ide­
spread insolvencies. I f th ere w ere any basis fo r the fe a rs th a t have been ex
63-496— 66------ 18


2 6 2 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS
pressed about the industry, th e Home Loan B ank B oard w ould be tightening up
ra th e r than liberalizing requirem ents fo r reserves and liquidity of member as­
sociations. However, recent actions of th e Board, according to its own press
release, have “liberalized dividend rates, reserve requirem ents, and liquidity
requirem ents of savings and loan associations/’ I t is difficult fo r me to under­
stand why the present situation calls fo r additional restrictio n s on commercial
banks when the Home Loan B ank B oard is moving in the opposite direction and
liberalizing requirem ents on savings and loan associations.
I recognize, of course, th a t compared to p ast years, th e savings and loan in­
dustry has been experiencing slower grow th in recent m onths. Although savings
and loan associations would like to re tu rn to the “good old day s” during which
banks were not allowed to compete vigorously, it is unreasonable to expect a re­
tu rn to the distorted competitive relationships of th e 1950’s. R ath e r than re­
turning to the 1950Js savings and loan associations m ust face up to prospects of
slower growth in the future, together w ith its corollary of low er profits and re­
duced tax benefits* (To some extent, as long as savings and loans grow rapidly
they pay virtually no taxes. In 1964, fo r example, savings an d loan associations
paid Federal taxes of only $124 million, or 17 percent of income a fte r dividends.)
It is clear th a t the kind of competition fo r savings fu n d s we have witnessed in
recent years has not led to “dangerous” or “destructive” com petition but rather
has brought about a healthy and vigorous financial system. Moreover, not only
are there no dangers in removing regulation Q, b u t th e re a re real advantages
to be gained.
The interest-rate rigidities imposed by regulation Q d isto rt th e allocation or
resources between different types of financial in stitu tio n s as w ell as among com­
m ercial banks themselves. Because of g reater efficiency, some banks could pay
more th a n the existing ceiling ra te w ithout engaging in im p ru d en t banking prac­
tices. O ther banks, which a re less efficient, find the ceiling a convenient shelter
from the rigors of competition. R egulation Q, therefore, imposes price controls
th a t protect the inefficient and discourage th e efficient, a re su lt which conflicts
w ith the goals of our free enterprise system.
Even if this inefficiency were th e sole cost of regulation Q, and it m ost definitely
is not, I would regard it a s sufficient justification fo r abolishing these rate
ceilings.
A nother aspect th a t should be noted is th e publicity associated w ith changes
in regulation Q ceilings. T h is publicity, and indeed th e publicity associated
w ith these hearings, calls public attention to th e 5 ^> percent ra te allow able under
regulation Q. As a result, many people feel th a t th e G overnm ent h as specified
5% percent as th e ra te th a t banks should pay and th a t they a re being cheated
if th eir bank pays less. I t is not ju s t th e financially u nsophisticated w h o make
this mistake. The recent Home Loan B ank B oard actions w ere reported in the
A tlanta Jo u rn al as follo w s:
“The Federal Home Loan B ank B oard told savings and loan associations they
must pay as high as 5 percent in terest on some form s of savings acco u n ts/'
T his kind of m isinterpretation seems inevitable if w e continue to have
ceilings on in terest ra te s which a re subject to infrequent and highly publicized
changes.
In closing. I have been unable to discover any dangers w hich a re clearly asso­
ciated w ith ra te competition fo r savings funds, and am convinced th a t by
nating regulation Q our financial stru ctu re, indeed th e en tire economy, would
realize significant benefits. T he proposals now before th is com m ittee would
remedy the dislocations and distortions stem m ing from reg u latio n Q by saddling
our financial system w ith even m ore controls and g rea te r rigidity. I do not think
th a t these proposals a re in th e in te re st of eith er th e financial community °r
th e public.

The C h a irm a n . Thank you, sir.
Now, Mr. Blackmon, please take about 10 minutes and hit the high
points of your statement and then the entire statement will be pl^ce,
m*ii le re.cor< immediately after your oral statement as Mr. S a x o n s
^
w be placed after his. The committee then would like to ask the tw
_ill
o
of you questions and bring out all the important points. If indeed
ce^a[n P01*ts are not brought out at the end of pur interrogation,
will be perfectly free to bring them out, and if not brought out by
yourselves, you can extend your remarks in the record


UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 6 3

STATEMENT OE LARRY BLACKMON, PRESIDENT, NATIONAL
ASSOCIATION OF HOME BUILDERS

M B la c k m o n . Thank you, M Chairman and members of the
r.
r*
committee. I was before the Subcommittee on Housing a couple of
months ago and testified on certain aspects of the housing bill, most
of which we supported. There were a few items we did not support.
However, in my opening remarks, I said that NAHB supported the
bill but we were concerned about present monetary policy and the
effect it was going to have on our industry and as being a major factor
in what we could and would do this year and in years to come.
M Saxon stated that special treatment was being given to the
r.
sayings and loan institutions, and that the housing industry had re­
ceived special treatment. I would say this to you gentlemen: many
years ago it was determined by this body that special treatment should
be given to encourage the American Nation to be a nation of homeownership.
The C h a ir m a n . M Blackmon, of course we shall be glad to hear
r.
you any time on that, but really our question is now on the CD’s.
M B la c k m o n . Yes, sir.
r.
The C h a ir m a n . I have an idea that your time would be used in ac­
cordance with my suggestion. This will be appreciated by the com­
mittee on that particular question. This other thing will not be over­
looked. You may put anything in the record which you wish to.
M B la c k m o n . I was concerned, Mr. Chairman, that there was an
r.
attack on the savings institutions because the CD’s themselves—I was
getting to that----The C h a ir m a n . That is all right. Then you use your time as you
desire.
Mr. B la c k m o n . Congress determined that homeownership is a great
thing in this country and that it would strengthen America. There­
fore it established the policy of encouraging savings in institutions
concentrating on residential lending. Over many years small savers
have been given a higher rate of interest than others. It is only in
recent years that an administrative change in policy permitted CD's
to pay a larger amount than savings in savings and loans and savings
banks of this country. I think this change is responsible for the
present chaotic condition in the Nation’s monetary policy. When the
Federal Reserve Board issued regulations relaxing regulation Q to
permit CD’s to bear interest at 5y2 percent without any guidelines
whatsoever, it resulted in small savings being shifted from savings
institutions into commercial banks. The commercial banks are using
these funds not for investment in long-term loans as they were in the
savings institutions; they are being invested in items of short-term
duration such as automobiles and other consumer financing. This just
aggravates the overheating of the economy rather than slowing it
down.
One of the reasons given for the relaxation of regulation Q last fall
was that banks were unable to cope with their funding of the large
volume of CD’s coming due at that time. I do not see how they can
hope to cope with the situation now if they could not cope with it
last November and December. Banks have been encouraged to en­
large this problem rather than to bring it under control.



2 6 4 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

To get back to the basic statement I was making earlier. Shifting
large amounts of money from one industry to another or from savings
institutions to commercial banks results in chaotic conditions in the
economy. The problem could be solved by overhauling our system
and creating a super board made up of the Comptroller of the C
ur­
rency, the Secretary of the Treasury, the Federal Reserve, the Council
of Economic Advisers, the Secretary of HUD, and the Home Loan
Bank Board. This Board should have formal meetings in which it
takes into consideration the overall welfare of the Nation and in w
hich
direction we should go, rather than having one segment, such as the
Federal Reserve, issuing a regulation that has a great impact on other
segments of our monetary policy and of our industry.
I think that this is necessary and I would like to urge this body to
create such a board. Our monetary policy in this country would b
e
coordinated more effectively as a result.
I believe, M Chairman, that is all the comment I would make at
r.
this time and I will be available for questions. I would at the end of
this like to make one comment concerning Fannie Mae that might b
e
of interest to the whole committee, but which does not concern CD’s.
(The complete statement of M Blackmon follows:)
r.
S t a t e m e n t op L arry B l a c k m o n , P r e s id e n t , N a t io n a l A s s o c ia t io n of H ome
B u il d e r s

Mr. C hairm an and members of the committee, approxim ately 2 months ago I
appeared before the Subcommittee on Housing on the D em onstration Cities Act
and related bills. A t th a t time, I said th a t th e homebuilding in d u stry ’s support
for those bills w as tempered by th e fact th a t m onetary pressures on our industry
were rapidly crippling our capacity to produce the kind a n d volume of homes
American fam ilies require.
Since then, necessary long-term credit which is the lifeblood of o u r industry
has become less and less available to our customers. Consequently, all over
our Nation the American homebuilding industry—one of th e N ation’s most
im portant industries—is in serious distress.
W ithout a vigorous homebuilding industry th e American economy cannot long
rem ain healthy. The economic im portance of homebuilding is briefly described
in attachm ent A. This huge, basic industry is today in danger of serious credit
starvation from which it will not quickly recover, if continued much longer.
^ One m ajor cause of this critical slump is th e loss by savings an d loan institu­
tions and savings banks of savings deposits pulled into th e comm ercial banking
system by last fall’s amendment of regulation Q, A previous w itness gave you
the figures on the extent of th is drain on savings and loan deposits and the
resu ltan t drastic im pairm ent of th e lending capacity of th e savings and loan
system. To finance its customers, homebuilding depends on savings and loans
(and savings banks which are suffering equally).
We therefore believe the hearings you are conducting on th is subject are most
timely. ^ I t is the considered opinion of the American homebuilding industry that
the deliberate diversion of savings from long-term investm ent into short-term*
high-yield commercial lending has grave im plications for th e continued vitality
of the homebuilding industry, and, therefore, inevitably fo r th e en tire American
economy.
By raisin g the m aximum permissible in terest ra te on tim e deposits to 5Vj
percent from 4 % percent and in reducing to 30 days th e ir m inim um permissible
term, the Federal Reserve Board set in motion the forces w hich have produced
this result. At th e tim e it w as intim ated th a t th is in terest ra te rise w as design*]
to perm it banks to work out of th e aw kw ard situation in w hich they found
themselves as a result of increasing use of certificates o f deposit. The action
has not by any m eans reduced th e size of th a t problem. On th e contrary, it has
sharply increased th e am ount of certificates outstanding. B ank funds held
under certificates rose from $16.3 billion in November 1965 to $17.4 billion on
April 20, 1966. I f a t th e end of the la st v ear th e banking system could wot
handle th e lower am ount of m aturing certificates a t th e th en m axim um of 4%



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 6 5

percent, how will it be able, in the months to come, to refinance the larger (and
growing) amount at a sharply higher interest rate? And, particularly, how can
banks cope with this growing load of debt when the minimum maturity of
certificates has been shortened to as little as 30 days?
If the general level of interest rates does not decline prior to the maturity
of large volumes of these certificates, the Federal Beserve Board may decide
it is necessary to raise the permissible rate even higher than 5% percent, regard­
less of the serious reaction this may have on other segments of the economy.
We fear—and I use that word advisedly—that the concept of certificates
of deposit as a substitute for long-term savings will become permanently im­
bedded in the commercial banking system. Originally used sparingly as an a t­
traction for temporary corporate surpluses, certificates of deposit are rapidly
being exploited as a device to seek long-term savings of the small saver—in
short, to compete with savings institutions. I t is this fierce and unfair com­
petition which deprives homebuyers of credit to buy new, or to refinance exist­
ing, homes. I say “unfair” competition, because in an interest-rate war long­
term investors simply cannot compete; they cannot raise their earnings as
rapidly or as flexibly as can commercial banks whose funds turn over rapidly
in short-term investments. Two recent news items from the Wall Street Journal
will serve to illustrate what is happening. They are attached as exhibits I and
If allowed to compete for these savings practically without restraint, com­
mercial banks can take most of it for their own uses—which are not the uses
which support homebuilding and other industries based on long-term credit.
In brief, we believe the current situation gives rise to two extremely serious
problems, the first a problem for the commercial banking system in coping
with the large and increasing volume of certificates of deposit issued at higher
interest rates and, the second, the governmental problem as to how far com­
mercial banks should be permitted to go in competing with savings institutions
for long-term savings.
We are shocked a t recent newspaper reports of a proposal advanced by no
less an official than Vice Chairman of the Federal Reserve Board, which would
in effect convert savings institutions into commercial banks. We find in it no
indication where residential mortgage loans of the future are to come from. Ap­
parently this is a matter of small concern to those who set credit policies. (It is
high time that the importance of residential credit be recognized.
We have for some time urged that the monetary system has become too
complex to be left to the unilateral action of one agency and that an overall
policy board should be established to include representatives of the Home Loan
Bank Board, Comptroller of the Currency, Secretary of the Treasury, Secretary
of Housing and Urban Development, Council of Economic Advisers, and the
Federal Reserve Board.
The entire situation is aggravated by the present “tight money” crisis. In this
connection, I enclose for the committee’s information an interim policy state­
ment (exhibit III) issued by the board of directors of our association a t its
meeting in Washington last month. As set forth therein, we strongly believe
monetary policy should not solely be relied upon to restrain the overall economy.
It simply will not work. The major consequence of such a policy is to restrict
homebuilding, small businesses, and local government without restraining spend­
ing by big corporations and consumer spending, both of which elements are
major contributors to the current inflationary danger.
If we are to avoid disastrous consequences to our country's economy, the
restraints need to be shared equally and soon. It is already almost too late
so far as much of the spring and summer building seasons are concerned.
Mutual savings banks net inflow for the first quarter of 1966 was 36 percent
less than a year ago, and savings and loan associations were down 31 percent.
These are the funds necessary to maintain a reasonable level of homebuilding.
Without them the situation assumes crisis proportions. Because of the long
leadtime in the homebuilding business, the sharp decline which will occur later
this year has not yet been recorded; most homes now starting construction
are financed by mortgage commitments issued last fall.
Unless the conditions on which we have very briefly touched are quickly cor­
rected—unless restraints are imposed on the use of certificates of deposit to
recognize th at the savings pool must be preserved for long-term capital invest­
ment and not used up in short-term, higher yield commercial lending—irrepa­
rable damage to the homebuilding industry, to other business, and to the Nation
could result*




266

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS
[A tta c h m e n t A ]

S ig n if ic a n c e op H o m e b u il d in g i n t h e A m e r ic a n E c o n o m y

The im pact of new residential construction is a m ajo r force in, and spreads
throughout the entire American economic structure. F o r example, last year’s
1 ^ million new dwelling units generated in construction activity alone approxi­
m ately $21 billion. W hen you add to this the im pact of expenditures which are
directly related to the construction of new dwellings, such a s schools, community
facilities, service industries, durable goods expenditures, and the like, the total
directly related im pact of housing expenditures am ounts to $35 billion, or approx­
im ately $ 1 in every $18 of the to tal am ount of gross natio n al product activity
last year.
Each new home built provides about 2 man-years of employment, h alf offsite, a
little more than half onsite. L ast year's housing volume th u s provided close to
3 million jobs. In addition, w hat the economists call th e m u ltiplier effect of
such expenditures is also enormous. F or example, it h as been calculated that
the m ultiplier effect of construction activity as it spreads through th e economy
in economic terms is about double the direct dollar expenditures. The thousands
of products used in new dwellings come from every area of the country and
affect virtually every industry. W hat follows is an analysis of th is impact in
more detailed form.
SINGLE-FAMILY U N IT S

C onstruction cost (stru ctu re alone ).—One million single-family homes repre­

sent a to tal direct construction expenditure of about $16 billion, or approximately
$16,000 per house .1 In term s of labor th is m eans 3,300 m an-hours of employment
per home, or approxim ately 2 million m an-years of employment in th e singlefam ily housing sector alone.®
SITE IMPROVEMENT

In addition to home construction th e site improvem ent costs are estimated to
be $2 ,2 0 0 per home, or a contribution of $2 .2 billion to th e gross n ational product.
MULTIFAMILY U N IT S

Construction c o s t —The construction cost in 1964 of the m ultifam ily structures

alone represents a t least an additional $5 billion contribution to th e gross na­
tional product.
T he am ount spent on site improvements of m ultifam ily u n its approached $1
billion in 1964.
COMMUNITY DEVELOPMENT

The building of new homes stim ulates other types of construction activity*
They m ean new or bigger schools, more churches, b etter highw ays, c o m m u n it y
facilities, expansion of public utilities, etc. A conservative estim ate of these
related construction activities would be $3 ,0 0 0 p er single fam ily and $1 ,0 0 0 per
m ultifam ly unit, or an additional $4 billion added to the gross natio n al p r o d u c t.
ADDITIONAL DIRECT EXPENDITURES

Upon completion of a home and its purchase, an ad d itio n al $1,000 per unit
is generated by the service industries. This would include th e commission tbe
builder would pay to th e real estate broker, th e settlem ent costs th e purchaser
would pay the title company, a loan placement fee which would be paid to the
local lending institution, fee paid to an appraiser, lan d surveyor, and real estate
tra n sfe r taxes paid to both th e local and Federal G overnm ents .5
DURABLE GOODS AND FU R NISH ING S

A new unit, w hether single fam ily or an apartm ent, necessitates th e purchase
of new appliances, rugs, drapes an d curtains, garden p lan ts and e q u i p s 1 1
1’
I Based on Bureau of the Census C-25 series, ’‘Sales Housing,” February 1965. a r .1
v
* Bureau of Labor Statistics. “Labor and Material Requirements for Private One-Famw
House Construction,” June 1964.
* Housing and Home Finance Agency, 16th Annual Report, table 111-35. p. 100. Modinea
to new sales price of new homes as published by the Bureau of the Census, C - 2 5 s e r i e s . „
* M. L. Colean, R. J. Saulnier, “Economic Impact of the Construction of 100,000 HousesChicago: The United States Savings & Loan League.
5 NAHB economics department estimate.




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 6 7
fu rn itu re, and fo r some, m aybe even a new car. New hom eow ners also spend
about $200 the first y ear on im provem ents. T he to tal expenditure is estim ated
to be approxim ately $3,000 p er unit, or $3 billion ad d itio n al goods and services in
our economy.*
BELATED SERVICE EXPENDITURES

D uring th e first y ear the average homeowner w ill spend an a d d itio n al $2,000:
R eal e state tax es on the average new house being b u ilt a re approxim ately
$400 a year. In te re st on an $18,000 m ortgage w ould be a n ad d itio n al $1,020.
Insu ran ce fo r fire, liability, theft, etc., would be between $60 an d $100 a y ear.7
H eat and u tilities an ad ditional $360, m aintenance an d rep a ir $150.®
TH E MULTIPLIER EFFECT

M easuring the direct expenditures resulting from th e construction o f 1% m il­
lion housing u n its each year, a to ta l dem and fo r goods an d services of approxi­
m ately $35 billion is generated.
T he em ploym ent of these goods an d services and th e w ages paid g enerate
additional purchasing pow er w ith th e re su lta n t stim ulation of v irtu a lly every
sector of th e economy. C onservative estim ates of th is m ultiplier fa cto r suggest
th a n these billions spent on new construction itself generates a t least a n equal
am ount o f o th er economic activity, th u s bringing th e to ta l economic im pact
to $70 billion.
H IG H LEVEL OF HOMEBUILDING ESSENTIAL TO TH E ECONOMY

New housing construction g enerates not only dem and fo r on- and off-site con­
struction activity, th e services of local banking, insurance, and real e state agen­
cies, b u t th e m an u factu rer h as a larg e stak e in th e hom ebuilding m arket. Each
home provides a m a rk e t fo r b e tte r th a n 3,000 different item s *
Any change in new construction volume, though it m ay be slight, w ould be felt
by thousands of factories, n atio n al d istrib u to rs, an d th e ir local suppliers. In
addition, m illions of w orkers in th e in d u strial comm unity f a r removed from the
construction site would, likewise, be affected.
According to a recent study by th e B u reau of L abor Statistics, each $1,000 of
single-fam ily home construction price generates a dem and fo r 72 m an-hours of
employment onsite, 35 m an-hours in tran sp o rtatio n , trad e, and related services,
38 m an-hours in th e m an u factu rin g stage, an d 12 m an-hours offsite construction
activity. In addition to these “p rim ary ” m an-hours, they show an additional
47 “secondary” m an-hours. T ra n sla tin g th is in to employment sta tistic s we find
th a t fo r each $1,000 of construction activity, th ere a re 204 m an-hours of employ­
m ent generated.1 A slowdown in construction activity, therefore, would have
0
far-reaching effects on th e economy of any com m unity and, in fact, th e N ation
as a whole.
[From the Wall Street Journal, May 25, 1966]
E x h ibit I
B lo c k t o Building<—B ig O u tflo w o f S a v in g s Fbom S&L’s F o rc es C u t in M ort­
gage L o a n s— Some H a l t L en d in g Fob N ow ; B a n k s ’ 5V2-P eb cen t R a te on
Tim e D e p o s its A t t r a c t s F u n d s— D isa p p o in ted H om ebuyers

(B y Donald Mofl^tt, Staff R ep o rter of th e W all S treet Jo u rn a l)
Scratch Ned Sm okler’s new ap a rtm en t house. T he D e tro it builder thought
he had a m ortgage loan lined u p la s t m onth, b u t i t suddenly fell through.
S cratch several h u ndred hom e sales in Los Angeles, too. T he buyers w ere
told la s t m onth th a t they qualified fo r m ortgages—b u t th e n th e tw o savings and
loan associations th a t w ere processing th e ir applications suddenly stopped m aking
any m ortgage loans a t all.
• Colean, Saulnier, op. cit.. and NAHB economics department estimate.
TBased on Bureau of the Census, “Sales Housing.” C-25 series; Housing and Home
?5L Agency; American Bankers Association; U.S. Savings & Loan League.
nce
■Survey of Current Business, and Bureau of the Census, C-25 series, “Upkeep and

Improvements.”

•Estim ate by NAHB economics department, based on Colean and Saulnier. op. cit.
. 10 Bureau of Labor Statistics. “Labor and Material Requirements for Private One-Family
House Construction/* Bulletin No. 1404, June 1964, p. 5.




2 6 8 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS
These are no isolated incidents. Mortgage money in th e la st few weeks has
been drying up drastically even fo r builders and would-be hom ebuyers who would
easily qualify for loans in anything approaching a norm al m ark et—indeed, even
for some who already had qualified.
A SAVINGS HEMORRHAGE

The reaso n : Savings and loan associations, which finance m ore th an 40 per­
cent of the N ation’s home and apartm en t mortgages, a re seeing savings flow out
of their institutions much fa ster th an new savings come in. So they a re reducing
mortgage lending drastically, and in some extrem e cases stopping it altogether for
the time being.
As recently as the end of March th e situation was f a r different. A tight-money
pinch throughout the economy caused mortgage interest ra te s to rise rapidly in
the first q u arter and prom pted mortgage lenders to tighten cred it standards. But
this squeeze m ainly h it “m arginal” borrowers—those whose monthly income,
in the judgm ent of lenders, could not quite cover th e h igher m ortgage payments
necessitated by the rising interest rates. Loans still w ere available to those with
high credit ratings. Savings deposits in S&L’s exceeded w ith d raw als by $1.3 bil­
lion in th e first quarter, and the S&L’s managed to increase th e ir mortgage lend­
ing slightly, to an estim ated $5 billion in the first q u a rte r from $4.9 billion in the
1965 period.
In April, though, savings w ithdraw als from th e N ation’s S&L’s exceeded new
deposits by an estim ated $500 million to $700 million. T h a t w as th e biggest
1-month n et outflow ever. W hile a net outflow is not unusual in A pril because of
w ithdraw als fo r Federal income tax payments, th e outflow in A pril 1965 amount­
ed to only $99 million.
In May, w ith no more pressure on depositors to w ithdraw funds to settle in­
come tax bills, S&L’s usually gain savings. B ut industry sources say the savings
outflow has continued th is month. So it is now estim ated th at, unless funds
s ta rt flowing in again heavily, S&L’s will cut th eir m ortgage lending in the last
9 months of 1966 to $13 billion, from the $19 billion in th e 1965 period. A cut­
back on th a t scale could crimp residential building severely in th e re st of 1966.
HIGHER WITHHOLDING J HIGHER PRICES

W hat happened? Industry sources generally sketch th is p ictu re: I n c r e a s e d
w ithholding from payrolls, for social security taxes a t th e beginning of the y ear
and now fo r Federal income taxes as well, has reduced th e take-home pay of
many consumers—a t the same time th a t rising prices have le ft th e c o n s u m e r s in
n e e d of more spendable funds. The new financial pressures appear to have
caused many people to stop making new savings deposits and to have forced some
to dig into past savings. Some studies indicate much of th e money recently
w ithdraw n from S&L’s has gone to finance m ajor purchases th a t c o n s u m e r s ap­
parently no longer can make out of income.
Compounding the trouble for S&L’s. commercial banks now appear to be at­
tracting a bigger share of w hat new savings deposits still a re being made, be­
cause they now are paying higher rates th an the S& L ’s. T h is is quite a turn­
about. C alifornia S&L’s not long ago were paying th e highest ra tes on savings
(lip to 4.85 percent) in the country, advertising these ra te s w idely in the East,
and pulling in so much money th a t worried Federal reg u lato rs were putting
some downward pressure on these w estern rates.
L ast December, however, th e Federal Reserve B oard increased the rate that
b n n k s are allowed to pay on time deposits (those left in the bank for a sp ecified
time, such as 1 year) to 5% percent from 4 y2 percent. S&L officials at first
thought this would not h n rt them. B ut as more banks have moved up the
rates (some now pay 5% percent o n as little as $25) and as savings have flow ed
out of the S&L’s, the industry has changed its mind in a hu rry .
WASHINGTON MOVES

Prodded by a pilgrim age of S&L executives to W ashington, th e industryregulating Federal H ome Loan B ank B oard la st week moved to lift the un­
official “ceiling” th a t lim its the rates S&L’s can pay on deposits. A fter July
S&L’s in C alifornia and Nevada, w hich have been p a rticu la rly pinched, can P&
?
5 percent on regular deposits, an d m any have announced they w ill. Further

Treasury Secretary Fowler late last week proposed to Congress that ban*



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 6 9
reg ulators be empowered to low er the in terest banks can pay on tim e deposits of
$10,000 or less.
W hile an increase in the ra tes they can pay on savings m ight help S&L’s stop
fu rth e r outflows of savings, some in dustry officials doubt it w ill enable th e S&L’s
to pull back in th e money they already have lost. “I t ’s like throw ing a
drow ning m an h a lf a life preserver,” says one S&L president.
So, fo r the tim e being a t least, S&L’s can do little b ut cu rta il m ortgage lend­
ing f a r m ore drastically th a n they had expected to a few weeks ago.
In D etroit, despite bank com petition, S&L’s gained $23 m illion in new savings
during th e first q u a rte r of 1966, an d w ere hopeful o f m ain tain in g m ortgage
lending a t the $108 million ra te of la st year. Instead, n e t savings w ith d raw als
reached $21 m illion in A pril and “th is year w e’re cutting back lending to $30 m il­
lion or $35 m illion,” or less th an one-third the 1965 volume, says H. Gehrke, presi­
dent of D etro it’s big F irs t F ed eral Savings & Loan Association.
A tlan ta S&L’s a re planning to cu t th e ir m ortgage lending “between 50 percent
and 75 percen t” in May, June, an d Ju ly from the $70 m illion they loaned in
those m onths la s t y ear, according to E d Hiles, executive vice president of Georgia
Savings & L oan Association.
In E lm hurst, a Chicago suburb, E lm h u rst F ederal Savings & Loan Association
announced 3 w eeks ago it would no longer accept loan applications. “O ur sav­
ings inflow isn ’t satisfacto ry an d h asn ’t been since th e first of the y ear,” says
Theodore W ilson, president. “W e’re flatly tu rn in g down any and all applica­
tions. We th in k we w ill ju s t coast for as long as 60 days to see if this m arket
won’t shake o u t ”
In southern C alifornia, w here m ost of th e co untry’s larg er S&L’s a re based,
several associations, including those controlled by L ytton Financial Corp., have
announced they a re declining tem porarily to accept new m ortgage loan
applications.
The L ytton associations say they are fulfilling existing loan commitments.
B ut, says B a rt L ytton, chairm an of L ytton F in an cial in Los Angeles, “we‘re not
open to am endm ents, suggestions, or counter-proposals” from borrowers. “We re­
fer all am endm ents, suggestions an d counter-proposals to those employes we
have discharged,” he say jokingly. Not so jokingly, Lytton associations have
dism issed 170 employes, about one-quarter of th e ir w ork force, during the past
6 m onths to keep costs in line w ith the drop in business.
A few associations, to h ear builders an d loan agents tell it. even have canceled
com m itm ents they already h ad m ade to finance the sale of homes. A Los Angeles
loan agent contends th a t 1 S&L ordered escrow agencies to re tu rn downpayments
and tr u s t deeds (as m ortgages a re called in C alifornia) on 400 homes, the sales
of w hich wT
ere aw aiting tra n sfe r of loan funds from the S&L to sellers. Two
weeks before th a t, th e agent says, an o th er association backed out of 200
comm itments.
T he associations he nam es deny they ever have canceled a loan commitment.
B ut they concede they stopped processing loan applications in April, including
some applications fo r loans to complete sales on w hich dow npaym ents already
had been p u t in escrow. On some of these, applicants already had been sent
le tte rs indicating ten tativ e approval pending form al action by th e S&L loan
committees.
A Los Angeles builder says he lost th ree home sales a few weeks ago because
th e S&L th a t h ad m ade an o ral agreem ent to finance the p urchases broke its word.
“They asked me if I had an y th in g in w riting. I said ‘N o/ an d they told me to
go ahead and sue ’em then,” he says.
Savings an d loan executives in sist such cases a re so ra re as to be insignificant
and say th a t suspension of new lending by some S&L’s is only tem porary. A
spokem an fo r th e U.S. Savings & Loan League says th a t “th is step has been
taken in order to fulfill m ortgage com m itm ents previously m ade” and th a t S&L’s
refusing to m ake new com m itm ents “w ill re tu rn to the m arket as soon as these
existing com m itm ents have been m et.”
B u t even the optim ists don’t foresee a re tu rn to th e m ortgage lending volume
of la s t year. “T he lending capacity of th e business w ill fa ll fa r sh o rt of th e
dem ands of A m erican hom ebuyers,” says N orm an R. S trunk, executive vice
president of th e U.S. Savings & Loan League. H e th in k s S&L m ortgage lending
fo r all 1966 m ay fa ll to about $18 billion, dowT n early 25 percent from $23.9 b il­
n
lion la s t year.
T he consequences fo r th e building in d u stry could be severe. H ousing sta rts,
w hile they have rem ained about level in an n u al ra te for th e la st several m onths,



2 7 0 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS
fell below the previous year in both 1964 and 1965, to constitute one of the few
soft spots in the economy. Now the cutback in S&L mortgage lending raises a
new th reat, and economists see little chance th a t other mortgage lenders such as
insurance companies, commercial banks, and m utual sayings banks, will step in
to fill even p a rt of the gap. These institutions do not concentrate on mortgage
loans to the extent S&L's do. Moreover, heavy loan demands from nonconstruc­
tion businesses have put a strain on th e funds they have available to lend.
As recently as December, the N ational Association of Home B uilders concluded
from a survey of its members th a t housing sta rts in 1966 would exceed the
1.542.000 of 1965. By March, however, th e NAHB decided there would be a
“slight decline,” perhaps 1 percent. Now, says Norman F arq u h ar, an economist
for the association, “it’s like riding a roller coaster. We know we’re going down
fast, but we don’t know where bottom is.”
Individual builders, especially in California, long a gian t construction market,
are ju st as gloomy. Ben Deane, a Los Angeles area builder, originally planned
to put up 1,500 new houses this year. But now he s a y s : “W e’ll probably go under
1 .0 0 0 because of the anticipated unavailability of m ortgage cred it.”
“The great m ajority of homebuilders in southern C alifornia a re dependent on
the S&L industry, and practically none of them (the S&L’s) are making commit­
ments to finance new homes,” says builder L arry Weinberg. “A lo t of the smaller
builders who don’t have commitments now are going to be out of business in very
short order.”
For the S&L’s themselves, the situation probably spells a d rastic slowdown,
at least for 1966, in th eir super-fast grow th rate s of recent years. The U.S.
League says total savings in S&L’s have increased as much as 13 percent a year
in recent years, w ith some S&L’s posting gains of 15 percent or even 2 0 percent.
The outlook for this year, most industry sources agree, is fo r much more modest
growth a t best.
Earnings of the large S&L holding companies eith er are showing only small
gains from a year earlier, or are down sharply. Lytton F inancial reported firstquarter profit of $381,590, or 15 cents a share, fa r below th e $1,023,622, or 40 cents
a share, earned in the 1965 period. B a rt Lytton says cuts in expenses and higher
interest rates on mortgage loans may reverse th e picture fo r th e rest of the year.
But he a d d s : “Nobody can project earnings now w ith any degree of certainty."
Investors have rath er clearly soured on S&L stocks, too. The K idder, Peabody
& Co. index of S&L stock prices has dropped to 79.40 currently, down from 119
at the end of 1965 and a peak of 397 in November 1961.

[From the Wall S treet Journal, Mar, 30, 1966]

E x h ib it II
Several N ew Y ork City S avings U nits R eport H eavy W ithdrawals — Savebs
A pparently S eeking H igher I nterest R ates on C ertificates as 3-Day
“Grace P eriod” Starts

(By a W all Street Jo u rn al Staff R eporter)
N ew York. Several leading New York C ity savings in stitu tio n s reported
heavy w ithdraw als by savers who were apparently seeking higher interest
returns elsewhere.

For many °f the city’s savings banks and savings and loan concerns yesterday
was the first (lay of a 3-day “grace period” during which depositors may with­
draw funds without losing interest payments for the quarter ending tom orrow .
Bowery Savings Bank, the country’s largest mutual savings bank, said net
«V
dayJ totall d
m iulon* °P from $3.6 million a year earlier
itJa* »
million on December 29, the first day of grace in the last quarter of
l3F e inatj tutional investors withdrew $1.4 million of the
total amount: similar figures for earlier periods weren’t immediately available.
V ^1I s’ p.rej. ” , the New York Bank for Savings, said incomplete
day lndlcated «*at «et withdrawals would exc«rf the $8.5 million
last DecembCT 2 9 ^ * 8g°
W d Just about equal the $5.1 million total of
i t / n ’amp
association in Manhattan, which declined the useof
^
2 s y ^ e rd a y totaled $500,000, up sharply fro®
$24o,000 on the corresponding day a year earlier and $250,000 on D ecem ber 29.



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 7 1
SW ITCH TO SAVINGS CERTIFICATES

The heavy sw itching from savings in stitu tio n s in th e New York C ity area p re­
sum ably w as m ainly to larg er com m ercial banks in M etropolitan New York,
m any of which a re offering savings certificates paying a re tu rn of 5 percent and
even more in some cases. Most m utual savings banks and savings an d loan con­
cerns, by contrast, are paying 4 ^ percent on reg u lar savings accounts.
M any of the comm ercial banks, w hich a re b arred from paying m ore th an the
prevailing 4 percent on passbook savings, also w ere h it by a sw itching problem—
m ainly by w ithdraw als from reg u lar savings accounts by custom ers who used
the funds to invest in a bank’s own savings certificates w ith a higher yield. B ut
in some instances comm ercial-bank savers w ith d raw funds from banks n ot offer­
ing higher yielding certificates to purchase those of o th er banks.
Among larg er New York banks offering 5 percent savings certificates m ainly
in minimum denom inations of $2,500 and for 9 m onths or more are F irs t N ational
City Bank, Chase M an h attan Bank, and B ankers T ru st Co. B u t some large
suburban Long Island banks a re offering an even higher retu rn , including M ea­
dow B rook N ational Bank, w ith ra te s as high as 5^4 percent and F ra n k lin
N ational Bank, 5.10 percent.
A savings and loan executive, M ichael Z arrilli, p resident of W est Side F ed eral
Savings & Loan Association, said net w ith d raw als a t his concern w ere “a little
heavier th an usual.” H e said custom ers m aking w ithdraw als “tell us th e money
is going into eith er certificates or the stock m ark et,” an d added th a t clients are
about equally divided.
Some th r if t in stitu tio n officials also noted th a t first-q u arter w ith d raw als are
often used to m ake income ta x paym ents due A pril 15.
A savings and loan official told of a neighborhood businessm an who fo r 4 years
had m aintained an account containing a t least $40,000. T he official said “the
businessm an cam e to us today, said he liked us an d liked to support neighbor­
hood institutions, but he w as still going to w ithdraw his money an d buy certifi­
cates a t F irs t N ational City B a n k /’
Officials of New York City comm ercial banks said they didn’t have any immedi­
ate figures on any sp u rt in savings certificate sales. B u t one banker commented,
“I ’m sure w e’re going to see a su b stan tial increase in new savings certificates
placed w ith depositors.”
At the sam e tim e th a t savings and loan associations in the New York area
were experiencing heavy w ith draw als due to ra te differentials, such institutions
in New York and elsew here faced tougher sledding on still a n o th er front. F ed­
eral home loan banks, w hich m ake loans to member savings and loans and sav­
ings banks to help them m eet w ithdraw als, have been raisin g th e ir lending
charges in recent w eeks in line w ith increases in in terest rate s generally.
A nother round of in terest-rate increases by F ed eral home loan banks w ill sta rt
affecting savings and loan associations w ith th e n ext few days, in d u stry sources
say.
According to th e ir inform ation, a t least 8 of th e 1 2 d istrict banks w ill be post­
ing higher charges on loans to associations about A pril 1. W hile various banks
T
have separately increased charges a num ber o f tim es lately, the la te st moves
are generally considered to be th e second general round so fa r th is year.
B asically, th e increases a re prom pted by th e h igher rate s encountered by the
System on its own m oney-m arket borrowings. In mid-M arch, th e System paid a
5.40 percent ra te on a $ 5 4 3 m illion note offer, m atching the highest it has ever
paid.
SOME OF TH E RAISES

T he Greensboro, N.C., d istric t bank raised its ra te to 5% percent yesterday.
Expected to follow suit shortly are th e Spokane and Topeka d istrict banks. The
Spokane bank is cu rren tly a t 4 % percent and th e Topeka bank 5 percent. The
P ittsb u rg h and Chicago banks a re moving up to 5% percent from 5*4 percent
and 4% percent, respectively.

The Cincinnati bank is going to a 5*4 percent rate from 5 percent, the In­
dianapolis bank to 5% percent from 4% percent, and the Des Moines bank to
percent from 4% percent Some industry men expect the Little Rock bank
to move soon to 5% percent from 5 percent, but said they couldn’t confirm this.
T he Boston, New York, an d San Francisco banks a re said to be rem aining
a t 5 percent. All th e ra te s apply to w hichever k in d of loan is th e m ost commonly
made by each bank. In most cases, th is is a short-term secured loan.



2 7 2 UNSOUND COMPETITION FOB SAVINGS AND TIME DEPOSITS
The New Xork sa v in g s in stitu tio n s’ w ithdraw als were seen as foreshadowing
sim ilar sw itching expected to occur among financial in stitu tio n s in o ther parts of
the country a fte r th e interest-paying period ends T hursday. Switching com­
mences earlier in New York because of the law s’ provision th a t lets institutions
pay interest to the end of th e q u arter even though funds are w ithdraw n in the
3-day grace period th a t began yesterday.

E xhibit III
T he F ollowing S tatement I s a S ynopsis of the R esolutions A dopted by the
B oard of D irectors of the N ational A ssociation of H ome B uilders at I ts
1966 Spring M eetin g W ith R esp ect to N a tio n a l M o n eta ry and F isca l
P olicies

Our deep concern fo r our country’s w elfare and the fu tu re o f th e important
homebuilding industry requires th a t we summarize, in th is in terim policy state­
ment, th e potentially disastrous condition of our industry, arisin g from im­
properly balanced national fiscal and m onetary policies, and th a t we suggest
the indicated remedies. W ith each day th a t passes th e situ atio n worsens.
Actions taken too la te a re no better th an no action a t all.
W hile virtually all other sectors of the economy are expanding, homebuilding
operates under severe restraints. Homebuyers, p articu larly those of moderate
means, are inordinately affected; it w ill soon be literally impossible to build for
fam ilies of low o r m oderate income.
Unless quickly corrected, th is could lead to irreparable dam age to th e industry,
to other business, and to th e Nation.
Meanwhile, w ithout visible im pairm ent, credit continues to flow freely in
recordbreaking amounts, into in d u strial expansion and in to short-term and
higher yielding consumer loans. The stated objective of m onetary restraint to
“cool our overheated economy" is not being accom plished: in fa c t it is further
feeding the fires of inflation.
The homebuilding industry does not believe th e burden of restrain in g inflation
should fall so heavily on our industry. We believe th a t necessary actions to
prevent inflation (an objective which we h eartily endorse) m ust, to be effective,
more equally restrain all segments of the economy and—perh ap s particularly—
Federal, State, and local government construction and other spending, which
can reasonably be deferred.
Effective coordination between all Government agencies dealing w ith mone­
tary and fiscal policy is an essential ingredient to a stable economy and to the
mortgage m a rk e t The m onetary and fiscal system of th is N ation a re too com­
plex to be subject to unilateral action of any one agency. T he President should
establish immediately an overall policy board (including representatives of
fe d e r a l Reserve Board, Home Loan Bank Board, Com ptroller of th e Currency.
Secretary of th e Treasury, Secretary of H ousing and U rban Developm ent, and
Council of Economic A dvisers) to consider the im pact of an y m onetary or fiscal
action on all elem ents of th e economy.
These actions, if taken im mediately and pursued vigorously, could avoid
repeal of th e investm ent ta x credit provision o r increased income taxes.
W e vigorously oppose m andatory wage and price controls, w hich prevent oper­
ation of a free m arket. W e recognize th a t such controls m av be imposed on the
economy unless th e recommendations in this statem ent a re im m ediately and
effectively implemented.
To perm it F ederal N ational Mortgage Association to continue to fulfill its
unction of backstopping” the mortgage m arket when o th er secondary lenders
I 0- ? ! av*v
\
d€J enture-issuing power, now lim ited to 10 tim es authorized
capital and surplus, should be doubled. This w ill p erm it FNMA to rescind
^ en} 2 ? ,0°? m aximum loan lim itation and o ther lim itatio n s which have
fu rth e r increase discounts on loans not eligible fo r FNMA purchase.
Building trad es unions demands fo r wage increase have flagrantly violated the
wage-pnoe guideline proposed by th e Council of Economic A dvisers as a means
# inflationary labor costs in th e construction in d u stry . T here is
e ^ u s e fo r recognition of increases which violate th e guideline in government**}
°a
p™v
,aiU?* w a«es” ™<ter the Davis-Bacon Act w hich affect* nil
publicly financed c o n tra c tio n and m ultifam ily housing financed u nder the Na­
tional H ousing Act. F u rth e r, such m easures as th e common situ s picketing



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 7 3
bill can only strengthen the hands of those seeking fu rth e r to escalate the steep
spiral of construction labor increases of recent m onths.
We vigorously support ap p ro p riate action in conform ity w ith these principles.

The C h a i r m a n . Thank you very much, Mr. Blackmon.
Mr. Saxon, you mentioned getting rid of regulation Q, and of
course, that would be unrestrained competition. Would there be any
limit, any restraints, in a case like that ?
Mr. S a x o n . That would depend on the good judgment of the banks
themselves.
The C h a i r m a n . I think you are correct, but what about the Minne­
sota case where a number of bankers all went in together and them­
selves agreed to restrain competition, did a lot of things that were not
in the public interest, and then were indicted in a criminal case. It
involved over a quarter of a million dollars in fines, I believe.
Mr. S a x o n . Mr. Chairman, there are two different questions.
The C h a i r m a n . In other words, that shows that if you leave it
up to them entirely, there will be abuses. Now that was, we will
say, an exception. But if you have no regulation Q, you have no
limit.
Mr. S a x o n . It seems to me the question involves two different prin­
ciples. The one, conspiracy to agree to fix prices, and secondly a
question whether there should be rate control and freedom of banks,
that is institution by institution, to compete as need arises and war­
rants for funds. I do not see any conflict in the two. The Govern­
ment in that case did exercise its statutory authority and responsibility
to move in to question the one practice, and succeeded, but I do not
think this offends the principle, in my opinion, of freedom of com­
petition for funds at all.
The C h a i r m a n . All right. Now you state that you support free
competition among our financial institutions, including, I assume
savings and loan associations, credit unions, and mutual savings banks.
I wonder if you would be in favor of allowing these other institutions
to offer checking account services? That would be maximum com­
petition.
Mr. S a x o n . N o , I do not think so. These institutions were created
as a special type institution with particular emphasis on housing con­
struction. They are engaged in other activities through the open-end
mortgage. Many of them do installment loan and single payment to
consumer financing and engage in other types of financing, but no, I
would not, because this would---The C h a i r m a n . I do not want to take up too much time. I want the
other members to ask questions.
Mr. W i d n a l l . Mr. Chairman.
The C h a i r m a n . Yes, sir.
Mr. W i d n a l l . Mr. Saxon, if the banks are permitted to have mil­
lions of dollars on which they pay no interest, and I am talking
about checking accounts now, why should not the savings and loans
have the same type of opportunity to accumulate funds ?
Mr. S a x o n . Banks are engaged in an entirely different character
of business, Mr. Widnall, the broad sweep of commercial, mortgage,,
consumer installment, other types of financing, capital financing
across the board. They are deposit institutions, and as such it is a
debtor-creditor relationship, and liquidity based on demand deposits



2 7 4 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

is essential to provide the means of meeting their liquidity and their
needs.
I do not see that the problem here arises from a lack of capacity to
engage generally in the commercial banking business* The problemto
the extent that it exists—and, as I say, I believe this has been sub­
stantially exaggerated so far as I can determine—I am not sitting
on the Home Loan Bank Board and do not know the cases one by
one, but I wonder, from what I have heard, whether it is not sub­
stantially exaggerated—as to whether this industry, the savings and
loan industry, which has done a good and useful job in this country,
should not be subject, particularly in a period like this, to reasonable
restraints in terms of prudent banking practices.
The problems that exist in California today, exist because of highly
excessive lending on large projects, housing construction, office build­
ing construction, large block development, much of which still over­
hangs the market from San Diego to San Francisco, and also into
Las Vegas and Phoenix, and are not the result of any restraints on
institutions which are soundly managed, but because of excesses.
Institutions are 100to 110 percent loaned up, making 90-percent loans
on excessive appraisals. This is the problem.
The C h a ir m a n '. I have about 1 minute left, M Saxon, and I w
r.
ant
to ask a question not entirely related to this. There is a lot of talk
about balance of payments. Do you know of any other country m
the world that does not control exports of its capital overseas except
the United States?
M S a x o n . I know offhand, M Chairman, of no major country
r.
r.
that does not have some form, whether it is in terms of exchange re­
strictions---The C h a ir m a n . Yes.
M S a x o n (continuing). Or restrictions on the transfer of capital
r.
or exports.
The C h a ir m a n . That is right.
M S a x o n . One formor another.
r.
The C h a ir m a n . That is right, fine.
M Reuss?
r.
M R e u s s . Thank you, M Chairman.
r.
r.
M Saxon, like other members of the committee, I have been con­
r.
cerned by the enormous growth of negotiable CD’s from practically
zero 5 years ago to $17.5 billion today. I have been concerned recently
not only because of the diversion of part of that total that w
ould
otherwise be available to savings and loans for homebuilding m
ort­
gages, but also because much of that money, when it gets into the banksystem, is used for making loans which have an inflationary p0'
tential. I am thinking particularly of inventory loans.
One of the reasons why negotiable CD’s are so irresistibly attrac­
tive, to the large banks which issue them is because of the fact that
they, under the Federal Reserve’s rules, have a reserve r e q u ir e m e n t of
only 4 percent, as against a reserve requirement on demand d ep osits of
16% percent. Yet, from the standpoint of the corporation owning
the certificate of deposit, it is very like a demand deposit with th
e
secondary market available. They can divert that into cash very
quickly.
Mr. S a x o n . Yes.



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 7 5

Mr. R e u s s . My own approach to this problem, which our committee
is wrestling with, has been along the following lines: First, I believe
that an overall coordinating board, somewhat along the lines as sug­
gested by Mr. Blackmon, would be in the public interest. Second, I
think that the Federal Reserve should be empowered to raise reserve
requirements on time deposits over the present level of 3 to 6 percent
which has statutory authorization, to something perhaps equal to the
level on demand deposits, giving the Fed opportunity to make what­
ever reasonable classifications among the different time deposit in­
struments it wishes.
My question to you is, would it not be in the public interest for
Congress to vest the monetary authorities with that Kind of authoriza­
tion ?
Mr. S a x o n . Mr. Reuss, supposing the Federal Reserve does not have
the authority now, and I do not know offhand whether they do or
not----Mr. R e u s s . I t does not. The present authority is only between 3
and 6 percent on all savings.
Mr. S a x o n . On savings.
Mr. R e u s s . And time deposits, too.
Mr. S a x o n . On the principle which premises your statement and
question, whether or not the two types of deposits should not be
equated so far as reserves are concerned or substantially so----Mr. R e u s s . Let me interrupt to say that I did not say they had to
be equated.
Mr. S a x o n . Have the power.
Mr. R e u s s . I propose simply to give the Fed power to raise it to the
present level of demand deposits, or anywhere in between.
Mr. S a x o n . I would think selected controls of this type are and
would be unfortunate, to select out one type of funds for special treat­
ment. I t would work harmful results.
The question in my mind would be whether or not the Fed should
not eliminate the reserve requirement on time and savings accounts,
particularly savings accounts today. I do not know why, what justi­
fication there is for retaining reserve on time funds.
M r. R e u s s . Let us put to one side savings, which have a 4 -p e r c e n t
ceiling.
Mr. S a x o n . Yes.
Mr. R e u s s . They have a very modest 4-percent reserve requirement.
I am talking about negotiable CD’s.
Mr. S a x o n . I would think not. The CD is not as new an instrument
as much of the current literature would seem to indicate. We have a
record of the substantial issuance and outstanding amounts of negoti­
able CD's going back to the early thirties and before then. One bank
in particular, was a very large issuer of CD’s in the early thirties,
and there were others. This received tremendous publicity and in­
terest at the time City Bank opened it up on a broad scale in New
York. But it is not in accord with the facts to say that the CD began
5 years ago or did not exist substantially until 5 years ago. This is
not true.
Now of course there has been a very substantial expansion of it, but
it also was a substantial factor as much as 20 and 30 years ago.



2 7 6 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

The C h a ir m a n . Y o u mean negotiable CD’s ?
Mr. S a x o n . Yes, Mr. Chairman.

Mr. W i d n a l l . Will the gentleman yield ?
Mr. S a x o n . Yes, Mr. Chairman.
Mr. W i d n a l l . In what denominations?
Mr. S a x o n . The denominations were varied. I cannot give you, Mr.
Widnall, a precise figure, but the amount was substantial.
Mr. W i d n a l l . I think there is a great deal of difference between
denominations of $1 million or $100,000 and denominations of $250
and $500 which you can get today.
M r. S ax o n . W ell, th er e is a d ifferen ce in a m o u n t, b u t th e large— Mr. W i d n a l l . I think it is important. Now they were doing this

you say back in the early thirties ?
Mr. S a x o n . Yes.

Mr. W i d n a l l . What were the denominations they were issuing at
that time?
M r. S a x o n . I w o u ld h a v e to g e t so m e fig u res f o r y o u i f I can on
th is, b u t th ey w ere— th e d e n o m in a tio n s w ere q u ite su b sta n tia l.
The C h a ir m a n . Y o u are recognized, Mr. Widnall.
Mr. W i d n a l l . Thank you, Mr. Chairman.

I would like to continue to follow up on liquidity. The bank has the
ability to lend you $100,000 and say, “There is one condition in con­
nection with this. You must retain $25,000 in a checking account in
our bank and a minimum balance of $ 2 5 ,0 0 0 .” They do not pay any­
thing for that $25,000, do they?
Mr. S a x o n . That is correct, sir.
Mr. W i d n a l l . What do they do with the $ 2 5 ,0 0 0 ? Do they lend
it out, make money on it?
Mr. S a x o n . That is correct, sir.
Mr. W i d n a l l . Does the savings and loan have the same ability?
Mr. S a x o n . Either that or invest it or use it as liquidity, one or the
other as the liquidity, cash liquidity.
Mr. W i d n a l l . Do the savings and loans have the same ability to
^°t
^ave to pay interest on any of their money, do they
Mr. S a x o n . Yes, they pay money, although they have other systems
that are substitutes for this. They are very active in the points areaPoints on loans now are running from 2 to 7 around the country.
Mr. W i d n a l l . Banks do the same thing, do they not?
. ..
Mr. S a x o n . T o the extent that this exists, it is minor, and to a lim
it
of 1 point. We are talking 2 to 7 points. In the case of a $1 million
loan that is $20,000 to $70,000.
Mr. \ \ i d n a l l . The point I am trying to make is that when you a#
comparing sayings and loans with the banks, where the banks can
make substantial sums, it can be done without actually having to bor
row the money or pay for it.
Mr. S a x o n . Yes. I think this is a traditional practice, and it
been a good one, so as to assure to the maximum extent p ossib le thjj
funds are available to all. This is true particularly in the case of t J
larger borrowers. This is not normal, as you know, in the case o
}
smaller borrowers. Where the compensating account exists, it
mainly for the substantial borrowers, and I think this is a good




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 7 7

proper practice to assure that while these funds are not being used
but are on credit, to the extent of the compensating balance such funds
shall be available for other borrowers.
Mr. W i d n a l l . I just read in the paper today an ad for a bank saying
that if you maintain a $500 balance, why there will be no charge against
your checking account. Some have a $1,000 balance. I know that
there are probably millions of dollars that banks have in checking
accounts that do not freely flow because there is a guaranteed balance
within them, and these are not counted in the loan area, but they do
have the ability to pick up a great many millions of dollars toward
their liquidity without borrowing from anybody, and without any
charges at all, that have to be paid by the bank.
The savings and loans of course are dependent entirely on their
savings, and they have to pay interest on all of those savings, and
I would agree with you that they have a problem of borrowed liquid­
ity at the present time. This may be true with some of the other
financial institutions. But they do not count the sources of money
that are available to the banks, and where the certificates of deposit
have hurt, particularly in the lower denominations, has been in with­
drawals from the savings and loan institutions. I think they have
had to borrow from the Federal Home Loan Bank in order to meet the
withdrawals caused by people taking out small amounts of money and
placing them in certificates of deposit.
I know of a number of individual instances where this has been
taking place.
Mr. S a x o n . Yes, I am sure this is true. But I am not sure I see the
efficacy of the point. This industry has been seeking to attract funds
without rate regulation for years, has not provided internal liquidity
except in terms of a minority of the institutions. They are 100 per­
cent loaned out. I think it is a matter of management of the institu­
tion on a sound financial basis, and without excessive reliance on the
home loan banks.
#
t
The commercial banks are under severe restraint in borrowing from
the Federal Reserve, not only in times like these, but ordinarily. They
are supposedly emergency loans. Generally after 2 to 3 weeks if a
bank continues to borrow heavily from the Fed or excessively, depend­
ing on the size of the bank, a call is received from the Federal Reserve
bank of the region or district questioning them or requiring a cessa­
tion of the practice, and indeed we deal with this in our own examina­
tion reports, every one of them, where there has been any continued
borrowing—(a) continued borrowing and (b) at a level which seems
disproportionate.
I t seems to me this is a false infusion of funds, or it can be developed
into a false reliance on an infusion of governmental funds.
Mr. W i d n a l l . With respect to commercial banks, how much of a
percentage of reduction has there been within the last year in money
going into the mortgage field %
Mr. S a x o n . I do not know the figures offhand, Mr. Widnall. I will
supply these for the record. Since the Fed liberalized regulation Q,
there has been a very substantial increase in commercial bank entry
into the mortgage field, as you know. Now what has happened in the
last few months I do not know.

03-496 O—86----- 19


2 7 8 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

(The information referred to follows:)
Real estate loans, insured commercial banks
Date
Dec. 20,1963 _______
_________ ___________________ _____
Dec. 31,1964 ...................................
............... ............................
Dec. 31,1965.____________ ______ __________ ______ ____ ______
Increase during 1964
Increase during 1965

Dollar volume
(millions of
dollars)
$38,861
43,436
49,026
4,575
5,590

Percent of
total loam
25.0
24.9
24.5
=
----------------

N ote.—B ecause of a change in the definition of real estate loans in the 1965 report of condition, figures
for 1963 and 1964 are somewhat overstated relative to 1965.

Mr. W i d n a l l . We do know this up in the area that I happen to
represent in Congress. There certainly is a shortage of mortgage
funds, a very substantial one. Do you have any comment on that,
Mr. Blackmon?
Mr. B la c k m o n . Yes, sir. I take issue with Mr. Saxon on the fact
that the national banks are going into the mortgage business. In fact
the truth of the matter is that- many of them have been selling off their
portfolio of mortgages. There is a tremendous shortage of money for
the financing of homes in this country as a result of this CD draining
money from the savings and loans, and I might say also the savings
banks, because they are in the same category as the savings and loans.
But the commercial banks around the country, to my knowledge, have
not been increasing their purchasing of home mortgages. I think
statistics will showTthat over the last year they have unloaded a great
deal of their portfolio.
Mr. W i d n a l l . Thank you. My time is up.
The C h a ir m a n . Yes, sir.
Mr. Todd?
Mr. Todd. Thank you, Mr. Chairman.
Mr. Saxon, I am delighted to have you with us this morning.
I notice on the first page of your prepared statement that you make
strong reference to the effect of competition on our economic system,
which you seem to consider to be a very important consideration in pro
motmg efficiency in our financial institutions.
I take it you feel that, neglecting problems of adjustment, the re­
moval of regulation Q and ceilings on rates that savings and loans can
pay would promote competition.
Mr. S a x o n . Yes, sir.
Mr. Todd. I believe this w a s recommended bv the President’s Com­
mission on Money and Credit.
Mr. S a x o n . Yes, sir.
Mr. Todd. Am I correct in that statement ?
Mr. S a x o n . Yes, sir.
Mr. Todd Do you feel that it would be beneficial for the same reasons
ingsT^0^
6 Percen* ce^*ng that banks pay now on passbook sav'
Mr. S a x o n . 1 think the answer is yes, that there is a differential dis­
advantage m the face of the small saver?
, , i
/his would thereby promote competition
you feel is of substantial significance.



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 7 9

Mr. S a x o n . I think banks— and this is generally my experience
here—the banks have not been excessive in competing for funds gen­
erally throughout the country at all. As a whole as we look at the
picture, particularly in the CD area in the great mass of the banks, the
national banks certainly which we see, are using their competitive
power quite moderately. I do not see excesses here, I think the dif­
ferential does raise a question, the differential between the small saver
and the large saver of between 4 to 5 or 5y 2 percent as a maximum.
Mr. T odd. In other words, you think, if I see your philosophy cor­
rectly, you think that the enhancement of competition which would
result if the passbook savings rate were raised would not only increase
the efficiency of the financial institutions but be in accord with our
general philosophy of free competition in our economy.
Mr. S a x o n . That is correct,
Mr. T odd. That the regulatory agency really has the function to
determine financial soundness of the institution and not to allocate the
resources between them.
Mr. S a x o n . Yes, sir.
Mr. T odd. The competition----Mr. S a x o n . Yes, sir.
Mr. T odd (continuing). Should be the one that allocates the re­
sources.
Mr. S a x o n . Yes, sir.
Mr. T odd. Then would I be correct in believing that you feel the
broad public interest is promoted by competition, and that it clearly
outweighs our traditional means of regulating the interest rate ceil­
ings, that the promotion of competition----Mr. S a x o n . The answer is yes, the most efficient mechanism of allo­
cating resources to their most effective use in the economy. I do not
know how the Government can perform this function as efficiently.
We talk about the housing industry. We project x starts. Now who
can profess to say what the starts should be outside of the normal
demand generated throughout the country and reflected in terms of the
market forces.
Mr. T odd. S o that the role of the regulatory agency then would be
one of promoting financial soundness, but at the same time promot­
ing competition between the various agencies which are being regu­
lated, and this would be the primaiy public interest consideration of
the agency.
Mr. S a x o n . That competition ought to exist among all o f the finan­
cial businesses generally.
Mr. T odd. Well then, would you feel that if the regulations were
issued by a regulatoiy agency which had some anticompetitive effect,
that this would have to be, if it were to be in the public interest, it
would have to be addressed to the financial stability of the institution ?
In other words, the only reason for issuing a regulation which is anti­
competitive would be one which would effect the financial soundness
of the institution.
Mr. S a x o n . I think this is correct, We attempted to meet- this
roblem and did effectively in connection with the smaller national
anks and their acceptance of time funds on negotiable CD issues out­
side of their normal market area, and we issueS an instruction to all
examiners that this practice was to be proscribed. We indicated that

E




280

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

any of these banks out of territory, out of trade area funds, ought to
be related to the normal deposit structure of the bank and other tests
of this sort. This is what I mean by using the regulatory technique to
effect financial soundness and stability.
Mr. T odd. The reason I bring this up—and my time is expiring—
is we were to a certain extent on different sides of the bank merger
bill, but I think we both, based on this colloquy, believe that competi­
tion is the primary function of a regulatory agency and there is a pri­
mary public interest involved in financial institutions, would that not
be correct?
Mr. S a x o n . Yes, sir.
Mr. T odd. Fine. Thank you very much.
The C h a ir m a n . Mr. Ottinger.
Mr. O ttinger. Thank you,Mr. Chairman.
I am disturbed, Mr. Saxon, by a number of your statements. I do
not think they are really an accurate reflection of the way the money
market works. We have a highly regulated industry in the banking
industry and various credit and thrift institutions all have a relation­
ship to each other, changing the regulation of one necessarily sharply
affects what can be done in the other.
It seems to me what actually happened was quite different from what
you describe with the liberalizing of regulation Q at the same time
that the rediscount rate was put up. The increase of the rediscount
rate was a proper attempt to restrict credit overall in the economy to
curb the inflationary pressures that we had. However, at the same
time the Federal Reserve Board, by increasing the rates payable on
CD’s, lifted the lid on restraint applied to commercial banks so that the
credit flowed from the thrift institutions into the commercial banfe
and industrial credit became relatively easy. The whole burden of the
inflationary curb was placed on this one segment of the economy.
The Home Loan Bank Board has not liberalized its liquidity rul^
as a matter of policy because it wants to, but it has acted in desperation
because it was feeling such a tight pinch on available funds attribut­
able to the siphoning off of its funds to CD’s. I t is not a question of
the home industry being protected while other segments of the finan*
cial world are restricted but it has been quite the contrary. Commer­
cial banks have been permitted to expand credit almost without lifl^
through the device of the high-interest-bearing CD, while the lid is on
in a great many ways on the homebuilding industry and the saving®
and loans and thrift institutions.
I th in k th is is o n e o f th e th in g s th a t g r e a tly d is tu r b s m a n y o f us o*j
th e co m m ittee. T h e se in te r r e la tio n sh ip s a r e n o t g iv e n p r o p e r regard
b y th e v a r io u s r e g u la to r y a g e n c ie s a c tin g q u ite in d e p e n d e n tly o f the
oth er. D o e s th a t n o t d istu r b y o u at a ll?
Mr. S a x o n . I would not say that. There should be c o n s u l t a t i o n and

coordination and indeed there is. We have a coordinating c o m m i t t e e
which meets regularly. I think we have had seven meetings. Six 0
them were taken up primarily with discussion of the S . & L. industry
and generally led by Mr. Home himself. I did not mean to sugge*
that there is any l a c k ---------Mr. O t t i n g e r . The Federal Reserve Board said it did not consult
the Home Loan Bank Board in making its decisions.
,
Mr. S a x o n . N o ; and it did not consult our office, either, as a n w # #
of fact. I received the first word of the announcement of the dutfr



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

281

in regulation Q from the Monday morning newspapers, to be frank
with you. I believe in coordination. We have this Committee and we
have been working along with them, with the Secretary of the Treasury
being involved whenever he can. But on the other hand my question
goes to Q itself and I do not think the S. L. problem that exists to­
day would have existed if Q had not imposed the restraints it has on
banks.
The two types of institutions would have learned to live with com­
petition in the market years ago, and we would not face what resulted
from the changes th at came in 1962 from Q. I do not think the Home
Loan Bank Board has moved to meet these changes. Many of the in­
stitutions have, though. They have begun to restrain themselves, and
you certainly, I am sure, read the statement of the head of the Home
Loan Bank of Greensboro, N.C., in which he stated that the industry
ought to retrench now for the time being and lay the basis for future
growth in order to increase its liquidity.
Banks today are—most of them at least—using this period of tighter
money to improve their own portfolio where th at is necessary.
Mr. O t t i n g e r . D o you not see any danger in bank liquidity fr o m
these CD’s without any reserves behind them?
Mr. S a x o n . Well, there are different types, Mr. Ottinger. In the
case of many of the banks, CD’s are protected by the primary liquidity
in the form of cash resources. Secondly, secondary reserves and in
the reliance on prime quality of short-term paper in the banks’ port­
folios. B ut I would like to read the figures just taken recently of the
200 largest banks of the country. I think it would be of great interest
to the committee in view of some of the statements that I read in the
press. Now here are the figures.
Loan deposit ratios of the 200 largest national banks of the country,
62.5 percent. Now in a period like this, this figure is certainly not
excessive. Net liquid assets to total deposits, 27 percent. Net liquid
assets to total deposits, 30 percent.
Now these figures hardly indicate an illiquid position in the com­
mercial banks as a result of the CD. Indeed, many of the banks today,
when they set up the CD’s they set up against the scheduled maturities
of the CD, municipal bonds, or other securities which automatically
provide liquidity. Indeed, in and of itself the CD is a very useful
and liquid instrument, because I do not know an instrument th at pro­
vides for a better projection of needs by scheduled maturities, like the
term loan, a very, very useful mechanism providing liquidity through
amortization. The CD establishes a scheduled m aturity of funds.
Mr. O t t i n g e r . I would love to go at this further with you, but my
time has expired.
The C h a ir m a n . All right. Mr. Harvey?
Mr. H a rv ey . T hank you, Mr. Chairman.
Mr. Saxon, I would like to direct your attention for a moment to
the Participation Sales Act which passed the House here a week or
so ago. Here this morning we are talking about the impact of approxi­
mately $17 billion of CD’s in the market, and yet a few weeks ago the
Treasury Department testified before the Rules Committee th a t within
the next 10 years there could be as many as $50 or $100 billion worth
of assets in this, and further within 2 years, as I understand it, over $8
billion of assets will be sold a t interest rates of 5 percent or higher.




282

UNBOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

W hat impact will this have on private credit and the home mortgage
iparket, in your judgment ?
Mr. S a x o n . I t will absorb funds available for investment by the
commercial banking system and other segments of the financial indus­
try of the country, that is, the sale of these certificates. To that extent
.it would, of course, displace the use of these funds for other purposes.
On the other hand, you have the question of the extent to which
the Government can, given the proper circumstances, move out of
direct competition with the private area, and to the extent that it
accomplishes this, it would be desirable.
The rate question, it seems to me, is a matter of the relative tightness.
As it exists today, I think the tightness has been somewhat
exaggerated.
Mr. H a r v e y . Well, am I not correct, though, if I understand the first
part of your statement, it is going to make the situation we are talking
about here even more acute, as the Government sells more of its assets.
I t is going to absorb a portion of the mortgage m arket; is that not
correct?
Mr. S a x o n . That is correct, sir.
Mr. H a r v e y . That is correct, and that is precisely—I see Mr. Black­
mon nodding his head—that is why his organization so vehemently
opposed the participations, because that is what they fe a r; is that
correct?
Mr. B la c k m o n . That is correct.
Mr. S a x o n . On th e o th er h a n d , i f I m a y ta k e a m o m e n t, Mr. Harvey,
w e are a la rg e c a p ita l g e n e ra tio n eco n o m y a s y o u k n o w . Capital
gen era tio n y ea r b y y e a r h a s b een en orm ou s, ev en th o u g h it h a s n o t met
fu lly th e n eed, th e enorm ou s n eed , fo r fu n d s in th is c o u n tr y to finance
our in d u str ia l an d com m ercia l g r o w th . B u t p a r t o f th is w o u l d be
tak en u p , to w h a t e x te n t n o one can sa y , b y th e n o r m a l a n d continuing
in crease in th e g en era tio n o f c a p ita l.
Mr. H a r v e y . Well, assuming what you say in your sta tem en t, th*

theory that you set forth in your statement, to be true, then how do
we in Congress go about channeling more money into the hom ebuilding market ? I t seems to me that is conspicuous by its absence in your
statement. The banking industry is not doing it. The homebuilding
industry is suffering very badly as a result of it.
I t seems to me that in the housing bills that this Congress has passed
in the years that I have been here, we have set th at forth as a matter
of national intent or of congressional intent, that we wanted to en­
courage the homebuilding industry. Now something has got to b©
done to do it. W hat suggestions do you have ?
Mr. S a x o n . Mr. Harvey, rather than rely on artificial methods, such
as Q or these bills before this committee, if it is the ju d g m e n t of Con­
gress, as it has been in past years, to give special concern to housin?
needs, then it ought to be done through legislation providing f°r
Fannie Mae or some other governmental agency or the use of some
other governmental technique to provide directly for those needs, s o as
to impose a minimum interference with the normal operation of tho
financial mechanism competitively in the country.




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

283

Congress, as I understand it, has done this before in past years. I
do not agree with Mr. Blackmon’s statement that the housing industry
is in a deplorable condition today. O f course I respect you, Mr.
Blackmon. I think this industry naturally wishes to see itself expand
as others do, and it is entirely dependent on individuals, institutional
or the financial industry for its resources to finance building. I get
enormous requests.
Mr. H a r v e y . Let us be realistic about it. The money is not coming
into the housing industry from the banks. I t is going into coiyorate
lending. I t is going in where they can make more money on it. In
fairness to Mr. Blackmon here I think that is true, and I do not think
in your statement here this morning or in what you have said you
have suggested any cure for it, and I think this committee is concerned
about it. I can tell you just having returned from Michigan th a t in
my judgment the homebuilding industry is indeed very critical up
there at this time. I f you want me to name them, I can give you one
project after another th at has been stopped or that has not gone for­
ward simply because the money is not there. Savings and loans have
just about stopped lending completely. I think this is a very critical
situation.
Mr. Blackmon, would you care to comment on this at all ?
Mr. B la c k m o n . Yes, sir.
As all of us know, the homebuilding industry is one of the basic
industries in this country, about the second largest industry. There­
fore what happens to it affects the entire economy and the Nation a
great deal.
Mr. Saxon, for your information, in the early 1950’s \se were pro­
ducing nearly 2 million units a year; we are producing less than
1,500,000 units at this time. There are markets available, but we do
not have funds with which to serve these markets.
We have some 4.5 million deteriorating houses in this country. We
have 11.5 million substandard houses. Our market is plentiful and
could be expanded. But the funds have dried up and it is the one
thing that I think concerns this committee.
In past years, the CD has been used as a device for corporate funds
with a regular schedule of payments and payments of debt and so
forth. Out of the clear blue the Federal Reserve Board changed the
entire policy on CD’s to allow the CD’s to pay more than the savings
institutions. I t thereby encouraged the flow into commercial banks
not only of corporate funds but of all other types of funds—down to
$25, on a 30-day basis.
A great deal of money is being artificially channeled not into the
housing authority, but into industrial plant expansion.
Certainly when you get a 7-percent investment credit for plant ex­
pansion you can pay more for money than you can under normal
conditions.
The big problem is that the switch from the established procedure
has brought a large amount of money into commercial banks, and they
are eagerly investing it in consumer credit. This creates an inflation­
ary spiral and drastically tightens the money supply for the housing
industry.



284

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

Mr. H a r v e y . Thank you. My time has expired, Mr. Blackmon.
The C h a ir m a n . Yes, sir. Mr. McGrath?
Mr. M c G r a t h . Thank you, Mr. Chairman.
Mr. Saxon, I understand that there are about $17.5 billion in
negotiable CD’s outstanding today.
Mr. S a x o n . That is correct.
M r. M cG r a th . D o y o u h a v e a n y id ea a s to w h a t p e r c e n ta g e o f that
su m b e lo n g s to th e 200 la r g e s t b a n k s in th e c o u n tr y ?
Mr. S a x o n . I d o n ’t h a v e th e figu res. I w ill s u p p ly th em .
Mr. M c G r a th . I would be interested in seeing this.
Mr. S a x o n . I w ill su p p ly th em .

(The information referred to follows:)
Outstanding negotiable certificates of deposit, by size of bank,1 May 18t 1966
(Amounts in millions of dollazs]
Sice of bank
Under $100,000,000.....................................................................
$100,000,000 to $200,000,000.........................................................
$300,000,000 to $600,000,000—
..................................... .............
$600,000,000 to $1,000,000,000................................................
$1,000,000,000 or more..................... ................................
Total....................................................

Percent of
total

Number of
banks

Amount of
CD's out­
standing

65
61
41
30

$136.1
377.7
1,801.2
2*429.4
12,920.3

W2
13.7
72:8

243

17,723.7

100.0

66

LI
21

—

*Weekly reporting member banks.

Mr. McGrath. I would also be interested in tracing, if possible,
where the great bulk of the increase in the money that lias gone into
CD’s has come from since about 1962, which is the date you referred
to.
Mr. S a x o n . This is, of course, difficult to determine precisely, boj
much of the growth has been at the expense of growth in commercial
bank demana deposits. These have had very little growth in the past
fewyears.

M!r. McGrath. Mr. Blackmon, you stated that last year we built
about 1.5 million dwelling units in this country. Do you have any
idea how many dwelling units we should build each year just to keep
even with the increase in families ?
Mr. B la c k m o n . Of course, all your statistics will show that housing
starts to a great extent are related to family formations, taking out,
of course, the consideration that during the thirties when the depression was on, and the war when it stopped, and this caused a larger
amount of units to be built shortly after the war than the normal fam­
ily formation.
I think our industry today, in order to provide proper housing for
the American families in this country, could easily produce 2 million
units a year, and then that would go up as the family formations thrf
are just b a n n in g to be created concerning the W orld W ar I I babies,
th at would continue to rise. B ut with a normal year of 1.5 million
units, we are down considerably, and our starts will even show *
greater decline, as Congressman Harvey has brought out, as soon a8




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 8 5

those statistics start being revealed in August probably, September,
October, and November.
But we could usually take 1.6 million regular units and 600,000 units
of these substandards to better house America very easily. We have
the manpower, we have the materials available. One of the biggest
problems is the money.
Mr. S a x o n . I would like to comment on that. This again gets
back to the question as to whether in this period, with the inflationary
pressures th at exist, this one industry and this alone should be freed
entirely of the normal operation of restrictions th at are being imposed
on other segments of industry. I just find no basis for it, th at there
must be a certain given natural increase each year in the creation of
housing.
Incidentally it isn’t all individual housing, although naturally this
association would base it on this basis. Much of the construction
we are talking about, and one of the larger uses of funds represents
large substantial construction, office buildings and the rest of this.
You can see it if you go through M ainland and Virginia, unused
capacity here in this area, the expansion here in the District of Colum­
bia, the projected expansion which is very substantial. This absorbs
funds. All of this is involved in the picture.
I think it is misleading to accept this on the basis that you are de­
priving an individual family of a home alone. There are other very
substantial promoters, project promoters, office buildings and other
large developers which have obviously a very substantial interest in a
continued expansion, and apparently without regard to the general
economic condition of the country and the inflationary forces that
exist, and th at today ought to be restrained.
Mr. O t t i n g e r . Would the gentleman yield ?
Mr. M c G r a t h . I y ie ld .
Mr. O t t i n g e r . I think we are very concerned not to be pumping new
money into the economy as you suggest might be a solution, by supply­
ing additional money through Fannie Mae into the savings bank and
home loan industry. W hat we are concerned with is the fair
distribution of credit to all institutions under a policy of monetary
restraint.
W hat we are saying is that the real pinch from our policy of mone­
tary restraint has been felt in the home loan business, whereas through
the device of the CD’s, the commercial segment of the economy is
allowed to expand in a virtually unrestrained manner. We would just
like to see a restoration of some equity between these two segments of
the financial economy.
You don’t have a situation today where the home loan industry is
going wild with credit and with funds. I t seems to me you have ]ust
the reverse situation, where the funds are being let out freely to the
commercial world through the instrument of the CD’s while the home
loan industry is being pinched very severely through the drain of funds
from the traditional source, which is the small th rift depositor.
The C h a i r m a n . I suggest th a t we will have to confine our question­
ing to about 2'or 3 minutes in order for all the members to ask questions.




286

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

Mr. M c G r a t h . Just one more question, Mr. Chairman.
The C h a ir m a n . Yes. We have Mr. Hansen and Mr. Annunzio, Mr.
Bees and Mr. Mize.
Mr. M c G r a t h . Mr. Saxon, do you have any figures on how many
CD’s savings and loan associations themselves hold in total amount?
Are they in this market as holders of CD’s, do you know ?
Mr. S a x o n . Yes.
M r. M c G r a t h . In a significant manner?
Mr. S a x o n . They have been a very substantial factor in this, which
is a critical question. As of April 26,1965, they held over $975 million
in CD’s. If the funds are being used as aggressively as is being
suggested for housing construction, by that I would include very
large scale construction too, then how could these funds be placed so
widely in commercial banking institutions ?
Now the recent regulation of the Home Loan Bank Board reducing
liquidity requirements from 7 to 6 percent, and withdrawing the
authority to include as part of the liquidity, CD’s in commercial
banks, is going to have a substantial impact. This is a critical
question.
The C h a ir m a n . Mr. Hansen?
Mr. H a n s e n . Thank you, Mr. Chairman.
Mr. Saxon, going back to the line of reasoning that was used in
your discussion with Mr. Ottinger, it appears that the intent which
preceded the change in regulation Q on the part of the Federal R eserve
banks has not come to fruition. In other words, by way of the high
interest rate on CD’s, there hasn’t been as much restraint placed on
the banking industry as there has been on the building and loan
industry, because of the transfer of funds.
What in your opinion would have been the effect, had they let
the interest rate stand and increased the reserve requirements?
M r. S a x o n . I think we would have had a substantial additional
interference in connection with the international balance-of-payments
problem we face. Regulation Q was one of the factors primarily
responsible for the creation of the Euro-dollar market. It is a serious
matter. The change in Q was not alone a matter of trying to give
th e banks flexibility in competing for funds. It was also to p rovide
some mechanism for the banks to compete internationally in the way
of retaining funds in terms of their effect on the money markets.
I think it would have been unfortunate if the Fed had not moved,
or had moved very late to achieve a permitting of some flexibility here.
I don't believe this outflow from the savings and loans has gone all
to the banks by any means, Mr. Hansen. I don’t think this can be
demonstrated. A lot of this is sensitive money. A lot of this Cali­
fornia money came from the East; definitely hot money.
A lot of it, much of it up to the $100,000 area deposited and above,
has gone into the stock market, I presume, and to other financial
instruments.
This type of restraint that is here proposed, if it is actually adopted
we would find quite naturally that this type of person, this in v e s t o r or




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 8 7

depositor, if we may characterize him as such, can put his money into
Treasury securities now at 5, into agency securities at 5.5, in any other
number of instrumentalities, so I don’t think the outflow has been by
any means entirely to the banks.
Mr. H a n s e n . In your judgment this should have been started
sooner.
Mr. S a x o n . I think if it had, Mr. Hansen, we would have seen a
better relationship in the money market.
Mr. H a n s e n . Thank you.
The C h a ir m a n . If we have the executive session at 1 1 :30 which we
have agreed upon, then we will have to restrict the individual ques­
tions to about 2 minutes each. Would it be all right, Mr. Saxon and
Mr. Blackmon, for the members to submit questions in writing for you
to answer when you look over your transcripts?
Mr. B la c k m o n . Certainly.
The C h a ir m a n . Then the witnesses may extend their remarks to ex­
pand on anything they desire to. Next is Mr. Stanton.
Mr. S t a n t o n . Thank you, Mr. Chairman.
Mr. Saxon, there is not too much you can be asked in a couple of
minutes. You do a beautiful job of presenting the bank picture, and
vou do a beautiful job of presenting the picture for unrestricted regu­
lation in this country.
As Mr. Harvey said, we are interested in this particular bill, as to its
effect on the homebuilding industry. Not necessarily the savings and
loan industry itself.
Your statement, as you said, went through a period of unfair com­
petition as to banks. "But in relation to this, don’t, you think we will
see a phasing out of the passbook as a means of savings, if we continue
the unrestricted use of CD’s ?
Mr. S a x o n . S o far we don’t observe any substantial indication in
this direction. In many areas, in my own area in the Middle West, in
Pennsylvania, in a number of districts the CD has been the traditional
reliance for the small saver, rather than the savings deposits. They
have been issued for generations and generations, the nonnegotiable
So apart from those areas where CD has been used in place of the
savings deposit, while we may see more of a change in the future, so
far we haven’t. We now have and have had for many years large
amounts of nonnegotiable CD’s. I think some $18 to $20 billion are
outstanding now. They have been large for a long time.
Mr. S t a n t o n . Mr. Chairman, I h a v e r e fe r e n c e h e r e to th is f u ll p a g e
a d sent me which appeared in a Columbus, Ohio, p a p e r r e c e n tly a d v e r ­
tising the investors guaranteed savings bonds, and I would lik e to
submit it for the record because it is a change in our p a r t o f th e c o u n tr y
from the historic passbook savings, to something e n tir e ly d iffe r e n t.
The C h a ir m a n . Without objection, you m a y in s e r t it in th e rec o r d
a t t h is p o in t.

(The advertisement referred to follows:)




288

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS
[From the Columbus (Ohio) Cltizen-Journal, May 24, 1960]

H e re a r e s o m e strik in g fig u r e s , lifted fro m a n ew m a rk e t stu d y c o n d u c te d b y U .S . N e w s a n d W orld R e p o r t T h e su rve y w as
sp o n so re d b y L ife In su ra n c e A g e n c y M a n a g e m e n t A ss n . B u t th e re su lts a r e im p o r ta n t to e v e r y o n e w h o s a v e s o r in v e s ts money.

Here’s what people say they do
about saving and investing money.
Investor Savrfr Bonds are
proving to be Central
(HiiO’s-most popular new
savings plan. Here are 10
special advantages.

See how you compare
with other people buying
life insurance.

i - Earn a p w a s tw * return at I V
.
.

•
•
•
•
•

93% have checking accounts
78% have savings accounts
39% own Government Bonds
26% are stockholders
13% have mutual funds

76% ot the people said they plan to do more savins in the next few years.

•
•
•
•
•

26% would consider fife insurance
25% named common stocks
22% would buy Government Bonds
13% would include mutual funds
67% planned to put more in savings accounts

Now, the point is this. Everyone is inter
ested in making their money go farther,
work harder, and (retting a better return
on it. And good family money manage*
ment requires a balance between the
protection of life insurance, the poten*
tial growth of stocks and bonds, and the
guaranteed security and high return of
bank savings. You need them all
The backbone —the bedrock of making
your money grow, is money in the
It’s rock solid and safe. You can lay yoor
l»»nds on it when you need i t And it
p w s . For example: 55,000 in our 4-4%
Investor Saver Bonds will grow to
$6,253 in fire years. And we guarantee it

^Imst-rnibnmn-tlumwtr IS




Our Investor Saver Program has becom
e
one of the m popular ways to save
oot
money at a guaranteed high rate of
return. So,if yon are carefully planning
your family’s future, Bank savings
•hodd be the foundation. The best way
to baSd that foundation is with Investor
Saver 4%% Bonds.
Incidentally, in the survey almost half
of the people questioned said that they
needed apian that forced them to save
regularly. We have the answer to that,
too. Stop at any officeand ask about our
Investor Save-O-Matic plan. It work*

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UNSOUND COMPETITION FOB SAVINGS AND TIME DEPOSITS

289

Mr. S ta n to n . Another question, Mr. Saxon. Do you have any
knowledge, with this particular change in trend in the last couple of
years, in the last 6 months in general, of a shift of request for bank
charters from savings and loan industries who maybe see the hand­
writing on the wall, with this unrestricted competition and the desire
of the savings and loans to get into the banking field, or is there a
merger element?
Mr. S axon . We have had one conversion, a stock charter association
in Ohio, a very good institution. W e have had a number of inquiries
from other institutions, stock savings and loan associations.
I don’t think this is unhealthy or improper, if an institution wants
to move in one way or another. So long as it is sound, I think we
should give fair consideration as we did m the Ohio case.
We haven’t approved any since then, but if we had an application
by a good, well-rounded association who would wish to convert, we
would do so. I don’t read it necessarily at this juncture at least as
suggesting any general trend, but I think this type of convertibility is
not unhealthy.
Mr. S t a n to n . Thank you very much.
The C h a irm a n . Mr. Annunzio. I am sorry we are so pressed for
time.
Mr. A n n u n z io . Thank you. My time is limited, Mr. Saxon. On
page 1 of your testimony I was very much interested in your state­
ment, and I would like for you to elaborate further.
When the Government intervenes to fix prices, administrative decisions are
substituted for the market price. The decisions of one man or a few men replace
the judgments of many.

I think th at the Congress and the Congressmen have been lax in
their responsibilities as fa r as the agencies are concerned, and I am
happy to read your statement. The Congress should have been more
responsible in regulating these agencies instead of being independent
of each other, getting them more or less to work together with the
elected head of our Government, the President of the United States.
I would like to have you further elaborate on this statement. My
time is limited, and consequently I am interested in your views, because
we are all in agreement, whether it is the building industry, yourself,
or the Secretary of the Treasury and even some members of the Fed­
eral Reserve Board, in that when the Federal Reserve Board did act
in December, no one knew about it, so th a t we are all members of the
same club.
Mr. S a x o n . Yes.
The C h airm an . Mr. Rees.
Mr. A n n u n z io . Pardon me, Mr. Chairman. I wanted to get his
reaction. Ju st what did you mean ? My 2 minutes are not up yet.
Mr. S a xon . We are referring there to regulation Q as a prim e exam­
ple of price fixing.
Mr. A n n u n z io . W hat did you mean by replacing the judgm ent of
many? Are you agreeing with us that we should nave a lot of men
at these discussions, at least the elecfted representatives of the people?




290

UNISOUND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

Mr. S a x o n . It would have been very helpful if we had known in
advance of the change in regulation Q.
M r. A n n u n z i o . T h a n k y o u .
The C h a ir m a n . Mr. Rees.
Mr. R e e s . Thank you, Mr. Ohainnan.

Mr. Saxon, you have been talking about competition. I have dis­
cussed this problem with the Federal Home Loan Bank Board several
weeks ago before their decision in lowering the liquidity and raising
the interest rates.
I am from California, which is a State that needs money. We are
expanding. What would you think of changing the regulations in
the Federal Home Loan Bank Board, which would increase the liquid­
ity as you suggested up to 15 percent, and then allowing them to com­
pete in terms of interest rates? Now they are, in reality, regulated.
They oun’t draw down the 17 percent, if they don’t do as the Board
wants them to.
Mr. S a x o n . That is correct.
Mr. Rees. As you know, an administrative agency can really harass
an institution, if they decide they want to. This would give you
competition.
M r. S a x o n . Yes. It has differing effects. While it is designed to
impose restraints on some, in the process very well run institutions are
proscribed, limited necessarily as a result of this particular type of
regulation.
I am not so sure that this whole package was a very desirable pack­
age. Indeed in a period like this in some of the additional restraints
I am posing additional restrictions on banks and holding companies
in this instance, I don’ know whether this is desirable either. T h ere
t
are other aspects of this problem.
Mr. R e e s . Mr. Blackmon suggested, and this has been suggested in
these hearings, that there be established probably by statute a co­
ordinating group, which would coordinate the Federal Home Loan
Bank Board, the Federal Reserve Board, your office, Treasury and
whoever else might be affected, so that there might be at least some
discussion in terms of unilateral discussions being made by any in­
dividual agency which would affect another agency.
Mr. S a x o n . I think this is very desirable, Mr. Rees. It would carry
us back to where we were in 1935 when the Secretary of the Treasury
and the Comptroller of the Currency sat on the Federal Reserve Board
and participated in these decisions.
As it is today, on some grounds of supposed threat to independence,
they are excluded. I am not speaking for the Secretary now. I aw
just speaking for myself, but I think this is meritorious.
,
Mr. R e e s . I introduced a bill which would define a certificate ot
deposit. I consider the CD to be a dangerous instrument, when used
by bankers like Mr. Silverthorn of San Francisco, in terms of liquidityThe bill provides that the certificate of deposit must have at least a
1-year maturing and would not be able to draw any more interest
than the passbook rate of the bank. What would you think of that
type of bill, from the point of view of CD?
Mr. Saxon. I think it would introduce further rigidities into an
already highly complicated structure. It could well be harmful.



UNSOUND COMPETITION FOB SAVINGS AND TIME DEPOSITS

291

stead of providing some protection for the savings and loans, it could
well end up in providing additional difficulty for them. I think it
might well give false comfort.
M r. B e e s . What about the dilemma of the certificate of deposit. I
think we found last December before the Board made the decision to
raise rule Q that this is a rigidity, it does affect the liquidity of a
bank?
All of a sudden, if the CD’s were to leave, it would put many banks
in receivership. Isn’t there some way that we can regulate the Cl)
in terms of building up reserves behind it or by providing that you can
only have so much in CD’s in terms of your total investments?
This is a problem we are having in California, as you know, from
a lot of smaller banks that have been forced to merge because of the
problem of CD’s and liquidity.
Mr. S a x o n . I think we are out of that now as far as I am aware in
California. Most of these CD’s in the smaller institutions which were
disproportionate to their structure have since been liquidated.
We met the problem in the case of the smaller banks generally
throughout the country, as I indicated in response to a question from
Mr. Todd by requiring our examiners to appraise each one of these
situations individually, and to limit or proscribe, any deposit from
outside the immediate trade area of the small bank.
In the case of the larger banks, we have got to presume as I do
that large New York City and Chicago banks have? as I am sure they
do have, the financial sophistication to manage their money well, ana
if they can’t, we are indeed in trouble. But I know they can.
I think it is a differentiation between institutions. This applies to
the savings and loan industry. Many of them are careful and prudent
and well-run institutions. There are some certain areas, such as
California, where it is very difficult.
Mr. B e e s . Thank you.
The C h airm an . M r. Mize ?
Mr. M iz e . Thank you, Mr. Chairman.
Mr. Saxon, Mr. Mitchell of the Federal Beserve Board last week
said that he felt some large New York and Chicago banks were actually
using these 5.5 CD’s as a kind of a loss leader, and they were borrow­
ing money at 5.5 percent and lending it at 5.5 percent and actually
losing money. Do your examiners find that to be the case ?
M r. S a x o n . I th in k t h e r e fe r e n c e s t o th e p r e ss , in t h e u se o f su c h
te r m s a s c h a s in g d o lla r s a n d t h e im p lic a tio n s t h a t th e a m o u n t o f m o n e y
th a t is c h a n g in g h a n d s a n d b e in g ta k e n a t t h is r a te is la r g e , I don t
t h in k th e s e c o m m e n ts a r e w e ll fo u n d e d .
Mr. M iz e . Mr. Bees has described his bill. Now you know Mr.

Patman’s bill would outlaw negotiable CD’s entirely. Mr. Ottinger s
bill would limit the denomination size to $15,000. which of the three,
bills would you accept, or do you not like all of them ?
Mr. S a xo n . I w ould accept anything that Congress enacted. That
is p o in t one.
M r. Miz e . I know .
Mr. S a x o n . T h e CD is a good and useful instrument. It has been
used for many many years, both th e negotiable and the nonnegotiable

CD.




292

UNBOUND COMPETITION FOR SAVIN<3S AND TIM E DEPOSITS

Now abuse may occur from time to time. We have attempted to
deal with that, and I think effectively, by directions to our examiners.
The power is ample to do so.
But the instrument itself inherently is a very sound and useful tool
and has been for many, many years, and I would hate to see some action
taken to cure as ephemeral a problem to the extent that such problem
exists, by the adoption of rigidities and restraints which could have in
the long run very seriously harmful effects.
In fact, we have more than ample power to deal with any situation
today where we see an excess amount, and we are doing it wherever
we see it. Where we see an excessive amount of CD’s m relation to
the total deposit structure, we have the authority and do cut it back,
It is a uniform rule now with respect to the smaller banks, and we
are using it in other areas, and we are planning more and more care
and prudence in the handling of the CD’s by the larger banks too as
years go on.
Mr. A n n u n z io . Will the gentleman yield?
Mr. Mize. If the Chairman will grant me any more time.
Mr. A n n u n z io . Mr. Saxon, w ill you answer Mr. Mize’s question on
the comments made by Mr. Mitchell of the Federal Reserve Board, that
on these CD’s, 5.5 percent, that actually the big banks are taking this
money and losing money by paying out 5.5 percent ?
The C h a ir m a n . Answer it for the record, please.
Mr. A n n u n z io . Answer it for the record.
(The information referred to follows:)
R eply of H on. J ames J. S axon, Comptroller of the Currency

I would not characterize the issuance of 5.5-percent CD’s as a “loss leader.”
It is true that considered as a permanent source of funds, 5.5-percent CD’s would
be only, marginally profitable but two facts must be kept in mind:
( 1 ) The amount of CD’s issued at this rate is not very large.
,
(2) The availability of the CD instrument aUows large banks to meet liquidity
needs by issuing such certificates. It is liquidity rather than earnings con­
siderations which are paramount.
Additional Statement by L arry B lackmon, P resident, N ational
or H ome B uilders

A s s o c ia t io n

Under the permission of the chairman to extend my remarks I am im pelled
to point out that the opposition, voiced by the ComptroUer of the O orren tf
saxon and others primarily interested in the commercial banking system,jo
any attempt to restrict certificates of deposit leaves completely unanswered
the foUowlng questions of vital interest to the American homebuilding industry'*) If the present flow of funds from savings institutions into com m ercia
winks continues, where win permanent residential mortgage financing com
®
mof t®
ft8e financing for its customers scarcer than at any time to
re«othi8tory, how can the homebuilding industry perform the job, which v#
?8ert£ned to J* and the American public expects of tt, of expanding
(
m°derate-income families?
a^
competition for savings" advocated by Mr. Sa*? ’
we avoid return to the pattern of 40 years ago when the majority
prodTlct* was concentrated in price brackets which ontt
011
families of high income could afford?
.
J?* yiltaal nullification of regulation Q was antfT?l®
O bi?ctive 8erv« i by diversion of billions of dollars I**1
residential mortgages into high-yield consumer financing?




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

293

The homebuilding industry does not mind curtailment to serve a national
good; it objects most strenuously to being asked to bear practically the entire
burden of so-called anti-inflationary moves which, insofar as we can observe,
have served merely to stimulate bank lending and bank profits while failing
(as history proves they must) to cool an overheated economy.
I call the attention of the committee to an excellent statement of views with
which we agree, contained in a letter from John E. Horne, Chairman, Federal
Home Loan Bank Board, printed in the Washington Post for Tuesday, May 31,
1966 (copy attached).
Attached also are two typical illustrations of the vigor with which commerical
banks are seeking (unfortunately, successfully) to attract long-term savings*
[F r o m th e W a s h in g to n P o s t , M a y

31, 1966]

F ob the S malleb Saver

Readers of your May 21 editorial “Split Levels for S&Ls” may be impressed by
the fact that the article contains a number of points to which most reasonable
people might subscribe. Nevertheless, the editorial may be misleading because
it omits consideration of the effects of massive shifts of funds among financial
institutions in a short period of time.
Your editorial ignores the fact that the banking system has long maintained,
by regulation, two sets of rates, one for small savers and one for large savers.
For many years the small saver received the higher rate, but beginning in late
1964 banks were granted the authority to pay the large saver, usually an orga­
nization not eligible to hold a passbook savings account, a higher rate on the
grounds that it was necessary in order to stem the flow abroad of corporate and
other large deposits. Thus the holder of a certificate of deposit began to receive
a rate higher than the individual who used a savings passbook.
A few ingenious banks, finding that there was no explicit prohibition against
issuing small certificates of deposit, began to offer certificates in small denomina­
tions, even as little as $25, at a rate above that for the savings passbook. Since
^December of last year they have been able to offer rates as high as 5% percent
through this device to persons who would ordinarily be passbook savers.
Banks had ordinarily issued certificates of deposit only in large amounts; but
now that the certificate was eligible for a rate higher than the passbook, it sud­
denly became a consumer savings instrument. Testimony before Congress shows
that the Federal Reserve did not intend to disturb the relationship among in­
stitutions for consumer savings accounts.
Furthermore, rapid mass shifts of funds in a short period of time from a spe­
cialized set of financial institutions, confined to one market, to a generalized
set of financial institutions can lead to quite undesirable effects. Let me make it
clear that the loss of a substantial amount of funds in April from the savings
and loan associations is not likely to affect their soundness. However, their
ability to serve the mortgage market has been reduced far more substantially
than most would consider desirable.
Nor is it evident that massive shifts of funds to banks is helpful in any way.
We know that not all resources are readily transferable, and sharp reductions in
the use of resources in residential building is not likely to satisfy demand else­
where. What is more, the banks have increasingly concentrated their lending
in the last year in commercial and industrial loans, which by their very nature
move into inventory and plant and equipment. In both these areas there is
ample evidence of overheating.
„
_ _
As for the small saver, the institutions which the Federal Home Loan Bank
Board regulates have offered him the best rate of return on deposit-type savings
for many years. Even today, except for the certificate of deposit instrument,
savings and loan associations offer a higher rate than banks in most places. In
any event, the small saver should not be used as an excuse for preserving a con­
trivance which can seriously distort flows of funds and which makes a travesty
out of the reasoning underlying the 5.5 percent rate on certificates.
It would seem, therefore, that your editorial runs the riak of slavish endorse­
ment of what appears to be competition but really reflects an artificial device
contrived because our laws are not explicit. I think it is within this frame­
work that Secretary Fowler’s position as well as that of others should be judged.
J o h n E. H o r n e ,

63-496 O—
http://fraser.stlouisfed.org/ 66------ 20
Federal Reserve Bank of St. Louis

Chairman, Federal Home Loan Bank Board.

294

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

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UNSOUND COMPETITION FOB SAVINGS AND TIME DEPOSITS

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296

TTNJSOTJND COMPETITION FOR SAVINGS AND TIM E DEPOSITS

The C h a ir m a n . N o w Mr. Blackmon wants about 1 minute on a
question he brought up in the beginning. Then we will have an execu­
tive session. Mr. Blackmon.
Mr. B la c k m o n . Mr. Chairman and members of the committee, since
appearing before you the last time, there has been a problem created
in our industry that I would like to bring to your attention. The
borrowing authority of Fannie Mae to finance its secondary market
operations is presently restricted to 10 times its capitalization and sur­
plus. Because FNMA is purchasing loans at the rate of $40 to $50
million a week, it is quickly reaching its statutory limit. As a result,
it has restricted its purchase to a $15,000 limit. This limit throws a
burden on high cost areas in the country, in the West and in other parts
of the country. For this reason I think some action should be taken
quickly to increase Fannie Mae's borrowing authority.
Our board of directors last month recommended that this authority
be increased from 10 to 1 to 20 to 1. I understand you have two bills
before you, one from Mr. Hanna, increasing it to 15 to 1, and one from
Congressman Widnall increasing the authority of Fannie Mae on an
outright basis by $1.1 billion. We believe it is a m atter for Congress
to determine the more feasible approach.
(The following information was submitted for the record:)
A dditional Remarks of Me. B lackmon

As this committee is no doubt well aware, the mortgage money crisis of recent
months has highlighted the reliance of the homebuilding industry on FNMA’s
private secondary market. Recently, FNMA has been purchasing mortgages at
levels from $40 to $45 million per week. This heavy volume has caused consid­
erable drain on FNMA’s borrowing capacity—currently set at 10 times capital
and surplus.
At current rates of use, it is Ukely that FNMA will have exhausted its borrow­
ing capacity for its private secondary market operations some time this sum'
mer. It should be emphasized that these operations are carried on at no cost
to the U.S. taxpayer.
***** k°ai^
directors meeting 6 weeks ago our members expressed con­
siderable concern about this problem and what failure to meet it would do to
the homebuilding industry, already operating under severe strain and disloca­
tion as a result of current monetary policy.
After much study and discussion, our members adopted a resolution calling
FNMA’s borrowing power. It was our hope and expectation that
this important Federal agency could be given sufficient authority t o enable it
to continue to provide the secondary market backup and flexibility which has been
so important a part of the homebuilding financing machinery in recent years.
. l t WJ
?®
feeIin* that FNMA needs at least double its current borrowing authority, tf it is to operate without artificial restrictions, and that anything
lees would result in recurrent crisis during the coming year.
- * * 5 at a
understand why no recommendation has been forthcoming
from the executive branch to the Congress about this critical situation,
flti
tb A t tbe Housing Subcommittee of the House Banking
Committee is considering a number of approaches that would
by Increasing FNMA’s borrowing capacity without any
eventual real cost to tbe U.S. taxpayer.
^
r n 2 w aPP ! ^ ^
ar
^ Congressman Hanna, that of increasing the bort
n
i
times capital and surplus would, we have been
Th0*iSSJwi
^nestions about the rights of prior debenture holders.
a 7 Cong*?®nai1 Widnall, which would have the merit
0n FNMA operations, would increase the Treason
^
capacity by over $1*2 bflM
of activity tMs may not last the fuU year and mi*bt
regnire coming back to the Congress again for additional funds.




UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 2 9 7

We have e v e r y confidence both in the judgment of the subcommittee, under the
able chairmanship of Congressman William Barrett, to select the most logical
approach, and, in the wisdom of the Congress to legislate the soundest method.
We are grateful to both Congressman Widnall and Congressman Hanna for
their sincere efforts to solve this problem.
It is, of course, inconceivable to us in the homebuilding industry, that appro­
priate steps would not be taken to allow FNMA to continue to perform, without
artificial restraints, the vital functions set forth in its charter. At the present
time, in order to preserve its currently limited borrowing authority, FNMA is
refusing to buy mortgages valued over $15,000. This action is discrimina­
tory against many areas of the country, particularly the north and the west
where higher labor and land costs make it difficult to provide much housing for
the market under such a restriction.
These are times of money crisis and shortages for essential business. FNMA’s
creators envisaged that it was at just such times the agency would be of the
greatest usefulness. It has been able to do so in the past, when its borrowing
capacity was adequate.
It would be disastrous to the small businessmen represented in the home*
building industry if the agency were not again able to perform that function
during the months ahead.
The C hairm an . I would like to ask each one of you gentlemen this

one question without further comment.
There is a proposal that we permit interest on deposits of under
$100,000 at a 4.5-percent rate and permit interest on deposits of
$100,000 and over to be at the rate prescribed under regulation Q.
Would you be inclined to favor that, Mr. Saxon, or would you be
opposed to it?
Mr. S axon . I would be opposed to it, Mr. Chairman.
The C h airm an . H ow would you stand, Mr. Blackmon, on this
question ?
Mr. B lackmon . We feel that CD’s should have guidelines, and we
favor any guidelines that this committee might set.
The C h airm an . Y ou think this would absolutely relieve the
situation ?
Mr. B la c k m o n . I d o n ’t th in k it w ou ld relieve it co m p letely , but I
th in k g u id e lin e s w o u ld be h e lp fu l.

The C hairm an . I t would be helpful in the present situation ?
Mr. B lackmon . Yes, sir.
The C hairm an . Would it be more helpful in any of these bills if
there was a smaller amount than that? You would like to have it as
1arge as possible, wouldn’t you ?
Mr. B lackmon . Our board passed a resolution that it should not
be lower than $25,000.
The C hairm an . Well, would you consider a $100,000 minimum
adequate?
Mr. B lackmon . Certainly.
The C hairm an . Thank you very much, gentlemen, for your attend­
ance here. We will have an executive session in 2 minutes, and shall
reconvene at 10 a.m. tomorrow.
(Whereupon, at 11:30 a.m., the committee adjourned, to reconvene
at 10 a.m., Wednesday, June 1,1966.)







TO ELIMINATE UNSOUND COMPETITION FOR SAVINGS
AND TIME DEPOSITS
W EDNESDAY, JU N E 1, 1966
H o use op 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, pursuant to notice, at 10:05 a.m., in room 2128,
Rayburn House Office Building, Hon. W right Patm an (chairman)
presiding.
Present : Representatives Patman, S t Germain, Weltner, Gettys,
Todd, Ottinger, McGrath, Hansen, Annunzio, Rees, Halpern, Johnson,
and Mize.
The C h a ir m a n . The committee will please come to order.
This morning the committee continues hearing testimony on H.R.
14026, to correct abuses related to certificates of deposit.
We are very pleased to have as our witnesses three academic econo­
mists to give their views on the CD problem. The large negotiable
CD is a money m arket phenomenon which has been the subject of
much debate since its origination in 1960. Certainly, the large negoti­
able CD, thoug;h containing the word deposit in its name, is not a
bona fide deposit at all—on that the testimony before our committee
is crystal clear. I t is a money market instrument designed to attract
the extremely volatile short-term cash balances of large corporations.
Nearly everyone agrees that the CD situation has gotten out of hand,
not just from the standpoint of competition, but as a problem for the
banks themselves as they attem pt to keep this hot money. But
no one has come up with a precise diagnosis and a course of treatm ent
for these giant financial patients of ours.
So we are hopeful Doctors Rousseas, Klebaner, and Carson will all
contribute valuable suggestions as well as analysis.
I assume each of you gentlemen has a prepared statement. In any
case, I suggest th at in the course of your testimony you all touch on
the very interesting remark by Comptroller of the Currency Saxon
on May 25, in A tlantic City, that the large money market national
banks depend on renewing these large C B ’s, that otherwise serious
liquidity problems will result. This is a veiy disturbing rem ark and
all members of this committee have a special responsibility to be con­
cerned and to find out all we can about this shocking state of affairs
m our banking system*
Mr. Rousseas, would you take about 10 minutes and summarize your
statement, and then Mr. Klebaner and Mr. Carson. Then the members
of the committee would like to ask you questions.
AH right, M r, Rousseas.




299

300

UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

STATEMENT OP STEPHEN W. ROTTSSEAS, PROFESSOR OP ECONOMICS,
NEW YORK UNIVERSITY

Mr. R o u ssea s. Mr. Chairman, I will summarize the statement that
I have submitted in writing to this committee.
The C h a irm a n . We will put all three statements in the record after
each one’s oral statement.
Mr. R ou sseas. In my testimony, I will not attempt to disentangle
the claims and counterclaims of CD’s with respect to thrift institu­
tions. My own interest lies in the implications of CD’s for monetary
policy, and with the Federal Reserve Board’s actions in that con­
nection.
One of my concerns has been in the postwar short-run changes in­
duced in the income velocity of money and their bearing on the effec­
tiveness of monetary policy.
It seems to me CD’s are a very unique money market instrument.
Not only are they high-priced money, they are the only money market
instrument which is issued directly by the commercial banks them­
selves.
Without going into any detailed balance-sheet analysis I have tried
to indicate, m my written testimony, that shifts from demand to time
deposits within the commercial banking system results in an increase
in velocity, given the differences in reserve requirements for these
different types of deposits. This very same phenomenon would occur
if funds were to drift from passbook and time deposits of savings
banks and loan associations into commercial bank time deposits, since
by and large these thrift institutions do keep a significant part of
their reserves in the form of demand deposits with the commercial
banking system.
I have also tried to indicate that when nonbank c o r p o ra tio n s-which hold about 70 percent of the negotiable CD’s—switch out of
Treasury bills and into CD’s, this also, results in increase in the income
velocity of money assuming that the Treasury will not retire any debt.
In my statement I refer to the Federal Reserve Bank of New York s
claim that they are the ones who invented and thought of the idea
of CD’s; that a former vice president of the Federal Reserve Bank of
New York made the first public statement on CD’s and that the First
National City Bank of New York first issued them in 1961 and arranged at the same time, for a secondary market in neg o tia b le CD s.
The C h airm an . I do not understand how this would be correct
when they had over a billion dollars of CD’s outstanding in 1960.
Mr. R ou sseas. My understanding is th at certificates of deposit had
existed in the Southwest and in California, but they were not negoti­
able and that consequently there was no secondary market for. CDs*
lm a y be wrong on this. But my understanding is th at negotiable
CD’s began m 1961, about February of 1961.
Certificates of deposit had, of course, existed earlier than that but
we are now talking about CD’s as a new kind of money market instru­
ment. And I think this dates back to about January or February oi
1961. The First National City Bank of New York was the innovator
and arranged with a dealer in Government securities for the simul­
taneous creation of a secondary market for CD’s of a very high de­
nomination, in the million dollar category, I believe.



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 3 0 1

My own position is that Federal Reserve Bank of New York is
involved in a slight inconsistency. I t takes pride in having fathered
CD’s and then, says that if excess reserves and velocity changes are
generated (given the differences in reserve requirements between de­
mand and time deposits), it can undertake the necessary counteracting
open market operations.
I want to focus my testimony on this particular aspect of the Federal
Reserve’s position.
I t should be pointed out that in the early 1950’s the Federal Reserve
Bank of New York, under the distinguished leadership of Allan
Sproul and Robert V. Roosa, was the major supporter of what is now
called the “new” monetary policy. This “new” monetary policy
shifted the emphasis of monetary control over to the supply side and
argued that with the emergence of the very large public debt, as a
result of the Second World War, large, yield-conscious, conservative,
nonbank financial intermediaries could easily be locked into it by very
small changes in interest rates via the open market operations of the
Federal Reserve System.
Now, it seems to me that in the postwar period, and especially since
1955 when monetary policy has really been applied in the modem sense,
the range of interest rate variation has been very large indeed. And
velocity changes have also been extraordinarily large. As a matter of
fact, I think many economists are rather perplexed as to whether a
velocity maximum exists at all. Empirical data indicates we have not
yet reached it. I think the last calculation for velocity in the first
quarter of 1966 would bring us to a slightly over 4.2 rate of turnover
of the money supply.
The problem, as I see it. is th is: if the Federal Reserve System takes
pride m having fathered CD’s and CD’s result in velocity changes,
then the counteracting open market operations of the central bank,
contrary to the “new’”monetary policy, will have to become progres­
sively larger and larger.
I cannot, in the time allotted to me, get into any detailed analysis
of these velocity changes. There is considerable disagreement about
them from a policy point of view and I have submitted to the staff of
this committee some supporting material which will present my own
views on this issue.
With respect to the bills now before this conmiittee, I would like
to pay special attention to section 1 of Mr. Rees’ bill, H.R. 15173, which
would prohibit insured banks from issuing negotiable CD’s and un­
secured notes. I favor this part of Mr. Rees’ bill. I find, however,
that I do not understand the reasoning behind section 2 of H.R. 15173
since I do feel that some spread in interest rates is justified between
passbook savings and nonnegotiable time deposits.
Apparently, most of the bills now before this committee are con­
cerned with the impact cf CD’s on thrift institutions. My own con­
cern, however, is with the monetary policy implications of negotiable
CD’s and high-cost time deposits. From this point of view, I would
suggest abolishing the distinction between city and country banks and
requiring a uniform legal reserve ratio for all demand and time
deposits. This would strengthen monetary policy by severely limiting
the power of the banks to generate excess reserves through a reduction
of their total required reserves.




3 0 2 UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS

I should like to point out that the unique characteristic of CD’s is
that they increase excess reserves by reducing the required reserves of
the commercial banking system.
The proposal which I am now making would also serve to lessen the
pressure on th rift institutions, for commercial banks would not be
willing to encourage the inflow of high-cost money if their excess re­
serves were not affected. Perhaps, this approach is to be preferred
even to section 1 of H.R. 15173. I t would achieve the same ends while
at the same time contributing to the effectiveness of monetary policy.
As for the velocity changes attributable to the dumping of Treasury
bills by the banks, a standby supplementary reserve requirement ad­
ministered by the Federal Reserve System would also be in order*
I would like to conclude my comments by saying that I would regard
the committee’s bills and my own proposal as a patchwork approach
to a serious problem. I think it is time we took a good look at commer­
cial banks and their relation to the Federal Reserve System. We might
also consider at the same time how we might improve upon the Federal
Reserve System so as to increase its power and authority to regulate the
flow of credit and decrease the influence of the commercial banking
system on its actions.
With regard to this last part of my statement, I have in mind the
accommodating changes in regulation Q by the Board o f Governors
every time the commercial banking system finds itself in a liquidity
squeeze, and I am raising the question as to whether the Federal
Reserve System has not to some appreciable degree lost its initiative in
determining monetary policy.
Thank you, Mr. Chairman.
(In a letter to the committee, dated June 15, 1966, Professor Rous^
seas submitted the following information:)
It has come to my attention that the Board of Governors was on the phone
the next day to the Federal Reserve Bank of New York demanding to know if
my testimony was correct that the New York bank had taken credit for “invent­
ing” CD’s. The public information officer of the New York bank explained that
President Hayes had made such a claim, but before a closed meeting of the
American Banking Association in Atlantic City. The fact, h o w e v e r , that the
New York bank subsequently circulated a copy of President Haye’s r e m a r k s in
mimeographed form did constitute a public disclosure.

(The complete statement of Professor Rousseas follows:)
S t a t e m e n t of S t e p h e n

*
n X n
fmm<*

W . R o u s s e a s , P r o fesso r of
U n iv e r s it y

E c o n o m ic s ,

N ew

Y ork

1 ha7 e read some of the testimony given before this committee
1)8611 fairly presented and clearly joined. I shall not

H ? e cla™s and counterclaims that have been made concerning
of. deP°sit with regard to interbank c o m p e t i t i o n , their
tif institutions or, for that matter, on the earnings and liquidity
definSi v ta h ^ commercial banking system. Nor shall I burden you with an>
m ir d f
l a“alyS1 of the Phenomenal rise in negotiable CD’s as a mone
i
FHnk i f x w v!?t Sl£°* ^ eir lntroduetion in 1961 by the First National Cit!
fs
^ owl(rlge of these developments will be taken for g ra n ted
Ipm nm w STLm
m regulation Q which are at the bottom of the V ^
with
? y- f eommittee. My testimony will be concerned,
i * fv
th5 broader implications of this new money market instrument
° f l ley of monetary policy and the short-run changes induced
snnnlv^ L n v^ l'• i e - in the average rate of turnover of the naonW
den^nd d e ^ it"
defined in terms of currency in circulation plus adjusted



UNSOUND COMPETITION FOR SAVINGS AND TIME DEPOSITS 3 0 3
CD’s, as is well known, a re high-priced money. B ut a p a rt from th is they are
a unique money m ark et instrum ent. U nlike T reasu ry bills and open m ark et
commercial paper, CD’s a re issued by the com m ercial banking system itself. F or
example, nonbank transactio n s in T reasu ry bills involve an exchange of dem and
d ep osits; they do not affect the reserve position of th e com m ercial banking sys­
tem as a whole. B ut banks a re p a rt of all p rim ary tran sactio n s in CD’s, and the
uniqueness of CD’s lies in the fa c t th a t they involve a sw itch from dem and to
time deposits w ithin th e comm ercial banking system.
In all of this discussion it m ust be kept firmly in m ind th a t o f th e m any types
of financial interm ediaries, com m ercial banks alone have the pow er to create
money under a fra c tio n a l reserve banking system. The im portance of CD’s can
perhaps best be understood by com paring them w ith T reasu ry bills. E ver since
the T reasury-F ederal R eserve accord of M arch 1951, banks have resisted pressure
on th eir reserve positions. D uring tight-m oney periods, they have been allowed
to convert a su b stan tial p a rt of th e ir holdings of short-term G overnment debt
instrum ents into cash and to use the resu ltin g excess reserves to m eet the pressure
of the F ed w hile a t th e sam e tim e expanding th e ir loans, alb eit a t a slower ra te
than would otherw ise have been possible. In th e absence of any requirem ent fo r
the banks to hold a supplem entary reserve ag ain st th e ir deposit liabilities in the
form of G overnm ent debt obligations, th e banks have been able to sell th e ir
T reasury bills to nonbank investors an d to refuse th e refunding operations of the
T reasury fo r m atu rin g issues. Comm ercial banks have th u s been able to increase
the income velocity of money by activ atin g idle balances w ithin the banking
sy stem ; th a t is, though the in te rn al tra n sfe r of dem and deposits does n o t affect
the to tal money supply, its ra te of utilizatio n is affected. R equired reserves, in
the final equilibrium position, a re u n altered and th e velocity increase represents
a conversion, on th e asse t side, from investm ents to loans. By w ay of contrast,
CD’s p erm it the expansion of bank loans via a drop in required reserves. And
w ith the overly perm issive cooperation of th e F ed eral R eserve System in chang­
ing regulation Q to su it th e needs of th e comm ercial banking system, the banks
have been able to bid aggressively fo r CD’s and control th e am ounts issued by
paying the a p p ro p riate in tere st rates.
For purposes of illu stra tin g th e effects of CD’s, I w ill assum e th e follow ing:
(1) T h a t all banks a re totally loaned up and w ill continue to be so; (2) th a t
the public’s subjective preferences a re such th a t CD’s and dem and deposits are
considered to be very close su b stitu te s; (3) th a t in terest ra te s on tim e deposits
are not a t the m axim um ceilings set by regulation Q ; and (4) th a t th e T reasury
bill ra te on new issues is a t least 25 basis points below th e CD ra te on comparable
m aturities. U nder these assum ptions, the com m ercial banking system w ill bid
for tim e deposits by raisin g the in te re st ra te s payable on such deposits. As a
result funds w ill quickly sw itch from dem and to tim e deposits w ithin th e com­
mercial banking system . Given th e lower reserve ra tio required on tim e deposits,
excess reserves w ill be generated by v irtu e of the drop in to tal required reserves.
The banking system as a whole w ill therefore be able to expand loans an d sec­
ondary deposits by some m ultiple of the newly created excess reserves. The
initial drop in th e money supply induced by th e sw itch out of dem and deposits
will th u s be p a rtia lly offset. The n et resu lt w ill be a less th an proportionate
fall in dem and deposits (an d hence in the money supply) and an increase in
income velocity th ro u g h th e activ atio n of idle balances.
The very fa c t th a t we assum ed zero excess reserves before the sw itch can be
taken to indicate a tight-m oney situ atio n brought about by ap p ro p riate F ederal
Reserve open m ark et operations. The increase in velocity resu ltin g from the
switch can th erefo re be seen as a p a rtia l offset to th e effectiveness of m onetary
policy as a contracyclical tool. P rio r to the emergence of CD’s, velocity increases
were, as we have seen, largely th e resu lt of banks an d nonbank corporations
moving out of T reasu ry bills. CD’s a re m erely th e la te st innovation in the
postw ar a ssau lt on m onetary policy, w ith banks now in the “fo rtu n a te ” position
of being able to increase th e ir lending capacity by sim ultaneously converting
investm ents into loans (dum ping T reasu ry bills) and by decreasing required
reserves (issuing CD’s ) —th u s speeding up even m ore th e p o ten tial ra te of change
in the velocity of circulation.

In one sense, however, CD’s are an improvement over Treasury bills from the
banks’ point of view. They allow the generation of excess reserves without
reducing unduly the secondary reserves of the commercial banking system.
Indeed, a senior vice president of the First National City Bank of New York
was moved to observe a few months ago that “banks became financial inter­
mediaries
 between corporate treasurers and those seeking credit; we funneled


304

UNSOUND COMPETITION FOR HAVINGS AND TIME DEPOSITS

short-term funds to loans, and our loan expansion has been in large measure
accommodated by CD’s” (Dun’s Review, Feb. 18,1966).
I should point out that the same results would occur if, for example, funds
were to shift from the passbook and time deposits of savings banks and savings
and loan associations to commercial bank time deposits. This follows from the
fact that such thrift institutions keep their reserve balances in the form of com­
mercial bank demand deposits. A simple analysis of bank T-accounts would
bear this out Similarly, a switch by corporations from Treasury bills to CD’s
would have an identical effect if we make the more than reasonable assumption
that the Treasury does not retire any debt In all of these cases, there will be
an increase in the velocity of circulation which will act as a partial offset to
monetary policy.
I cannot, within the time allotted to me, get into any detailed analysis of
velocity changes and their impact on the effectiveness of monetary policy. This
is an area in which there has been much disagreement. I have, however, ap­
pended to this statement two studies which represent my own views on this
issue. One Is a reprint of an earlier article published in the Review of Eco­
nomics and Statistics in 1960, and the other a typescript which brings the data
up to date and challenges the view that velocity changes strengthen monetary
policy by providing a safety valve against excessive and uni