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REVISED PRINT

TO EXTEND THE PERIOD DURING WHICH
DIRECT OBLIGATIONS OF THE UNITED STATES
MAY BE USED AS COLLATERAL SECURITY
FOR FEDERAL RESERVE NOTES

HEARINGS
BEFORE THE

COMMITTEE ON BACKING AND CURRENCY
HOUSE OE REPRESENTATIVES
SEVENTY-FIFTH CONGKESS
FIRST SESSION
ON

S.417
TO EXTEND THE PERIOD DURING WHICH DIRECT
OBLIGATIONS OF THE UNITED STATES MAY
BE USED AS COLLATERAL SECURITY
FOR FEDERAL RESERVE NOTES

FEBRUARY 16, 18, 1937

133727




UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1937

COMMITTEE ON BANKING AND CURRENCY
H E N R Y B . STEAGALL, Alabama,
T. ALAN GOLDSBOROUGH, Maryland
M I C H A E L K. REILLY, Wisconsin
F R A N K W. HANCOCK, J R . , N o r t h Carolina
CLYDE W I L L I A M S , Missouri
B R E N T SPENCE, Kentucky
J A M E S I. FARLEY, I n d i a n a
J A M E S A. M E E K S , Illinois
H E R M A N P . KOPPLEMANN, Connecticut
MARTIN J. KENNEDY, New York
THOMAS F . FORD, California
P A U L BROWN, Georgia
D. W O R T H CLARK, I d a h o
W R I G H T PATMAN, Texas
RAYMOND S. McKEOUGH, Illinois
MARCELLUS H . EVANS, New York
A N D R E W J . TRANSUE, Michigan
J A M E S P . McGRANARY, P e n n s y l v a n i a

J . T. CRAWFORD, Clerk
II




Chairman

J E S S E P . WOLCOTT, Michigan
HAMILTON F I S H , J R . , New York
CHARLES L. G I F F O R D , M a s s a c h u s e t t s
P H I L I P A. GOODWIN, New York
ROBERT LUCE, Massachusetts
DUDLEY A. W H I T E , Ohio
F R E D L. CRAWFORD, Michigan

TO EXTEND THE PEBIOD DUEING WHICH DIEECT OBLIGATIONS OF THE UNITED STATES MAY BE USED AS
COLLATERAL SECURITY FOR FEDERAL RESERVE NOTES
TUESDAY, FEBRUARY 16, 1937
HOUSE OF KEPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.
The committee met at 10:30 a. m., Hon. Henry B. Steagall (chairman) presiding.
The CHAIRMAN. Mr. Eccles, whenever you are ready for the committee, we shall be very pleased to hear you. The Senate has passed
S. 417, which is identical with H . E. 2302. If there is no objection,
we will proceed to consider the Senate bill which the Reporter will
insert at this point.
(S. 417 and H. R. 2302, the bills under consideration, read as
follows:)
[S. 417, 75th Cong., 1st sess.]
AN ACT To extend the period during which direct obligations of the United States maybe used as collateral security for Federal Reserve notes
Be it enacted by the Senate and House of Representatives of the United
States of America in Congress assembled, That the second paragraph of section.
16 of the Federal Reserve Act, as amended, is amended to read as follows:
"Any Federal Reserve bank may make application to the local Federal Reserve agent for such amount of the Federal Reserve notes hereinbefore provided for as it may require. Such application shall be accompanied with a
tender to the local Federal Reserve agent of collateral in amount equal to
the sum of the Federal Reserve notes thus applied for and issued pursuant
to such application. The collateral security thus offered shall be notes, drafts,
bills of exchange, or acceptances acquired under the provisions of section 13 of
this Act, or bills of exchange endorsed by a member bank of any Federal
Reserve district and purchased under the provisions of section 14 M this Act,
or bankers' acceptances purchased under the provisions of said section 14, or
gold certificates: Provided, "however, That until June 30, 1939, the Board of
Govenrors of the Federal Reserve System may, should it deem it in the
public interest, upon the affirmative vote of not less than a majority of its
members, authorize the Federal Reserve banks to offer, and the Federal
Reserve agents to accept, as such collateral security, direct obligations of the
United States. At the close of business on such date, or sooner should the
Board of Governors of the Federal Reserve System so decide, such authorization shall terminate and such obligations of the United States be retired as
security for Federal Reserve notes. In no event shall such collateral security be
less than the amount of Federal Reserve notes applied for. The Federal
Reserve agent shall each day notify the Board of Governors of the Federal
Reserve System of all issues and withdrawals of Federal Reserve notes to and
by the Federal Reserve bank to which he is accredited. The said Board of
Governors of the Federal Reserve System may at any time call upon a Federal
Reserve bank for additional security to protect the Federal Reserve notes*
issued to it."
Passed the Senate February 10, 1987.
Attest:
EDWIN A. HX\LSEY,

The
sir?

CHAIRMAN.

Sewetary.

Mr. Eccles, will you proceed in your own way.




1

2

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

STATEMENT OF HON. MARRINER S. ECCLES, CHAIEMAN OF THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. ECCLES. We are asking for an extension of the power to
use Government bonds as collateral back of Federal Keserve notes.
We are asking that this power be extended until June 30, 1939.
This was a power that was given to the Keserve Board under the
Glass-Steagall Act of February 27, 1932, for a period of 1 year.
The CHAIRMAN. Kight on that point, would you state what, in
your opinion, the reasons were for the passage of the act.
Mr. ECCLES. I have a statement here that was sent up to Chairman Steagall of your committee at the time it was recoxnmended
that the bill be passed and, if I may, I can refer to that statement.
The CHAIBMAN. Proceed in your own way, please sir.
Mr. ECCLES. Section 16 of the Federal Reserve Act was amended
by the act of February 27, 1932, so as to provide that until March
3, 1933, the Federal Keserve Board (now the Board of Governors
of the Federal Reserve System), if it deems it in the public interest,
shall have authority, by an affirmative vote of not less than a majority of its members, to authorize the Federal Reserve banks to
offer, and the Federal Reserve agents to accept, direct obligations
of the United States as collateral security for Federal Reserve notes.
The act was again amended by the act of February 3, 1933, so as
to extend the period of this authority until March 3, 1934, and was
further amended by the act of March 6, 1934, so as to extend the
authorization to March 3, 1935, or until the expiration of such
additional period not exceeding 2 years as the President may prescribe. The President has extended the authority until March 3.
1937, when it will expire unless it is renewed by the C o n g a s .
At the time the act was first amended in this respect, February 27,
1932, it was deemed necessary in the public interest for the Federal
Reserve System to attempt to maintain an easy-money policy and
thus to encourage the extension of credit by member banks. The!
maintenance of an easy-money policy required the purchase by the
Federal Reserve banks of large amounts of Government securities
in order to put member banks of the Federal Reserve System in funds,
with which to pay off their existing indebtedness to the Federal
Reserve banks and to build up reserves. I t was the expectation that
member banks in possession of excess reserves would become more
active in seeking out opportunities to employ funds in order to increase their earnings and that these endeavors of the banks would
tend to stimulate business and reduce unemployment and mitigate
the forces of deflation. Another result would be the lowering of the
interest rates both in the open market and on loans to customers,
which would encourage enterprise and reduce the burden of debt
service. The Board has continued to maintain an easy-money policy
since that time, and it is believed that this policy has been an important factor in bringing about the broad recovery in business which
is now under way.
In order to enable» the Federal Reserve Banks to purchase United
States Government obligations, in accordance with the System's
easy-money policy, the Board, on May 5,1932, authorized the Federal
Reserve banks to pledge direct obligations of the United States as



EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

3

collateral for Federal Reserve notes within certain limitations. Since
that date, such obligations have been pledged continuously as collateral for Federal Reserve notes. The maximum amount pledged at
any time amounted to $1,098,000,000 on March 20, 1933. On December 2, 1936, Federal Reserve notes were outstanding in the amount
of $4,497,999,000 and there was pledged as collateral against them
$4,695,000 of eligible paper, which is a negligible amount of eligible
paper, $88,000,000 of United States Government securities, and
$4,464,838,000 of gold certificates.
As a consequence of large gold imports in recent years there are
now enough gold certificates held by the 12 Federal Reserve banks
combined to enable them to provide a 100-percent cover for all outstanding Federal Reserve notes. While this is true in the aggregate
for the 12 banks, however, it is not true in the case of some of the
individual Reserve banks. More important is the fact that in case
gold should leave the country in large amounts, as it has on previous
occasions, notably in 1931 and 1932, the Federal Reserve System, in
the absence of authority to pledge United States Government obligations for Federal Reserve notes, might find itself compelled to adopt
a restrictive credit policy at a time when such a policy might start
a disastrous deflationary development, or aggravate one that was
under way. In 1931 the System had the experience of being unable,
owing to lack of authority to pledge Government obligations against
Federal Reserve notes, to adopt an active policy of combating a deflation. A large outward movement of gold might reduce the goldcertificate holdings of the Federal Reserve banks below the amount
necessary to provide cover for outstanding Federal Reserve notes,
and, without authority to pledge Government securities for this purpose, the Federal Reserve banks, in order to get the necessary collateral to take the place of gold certificates held against outstanding
Federal Reserve notes, would have to sell Government obligations to
the point where member banks would be forced to borrow from the
Federal Reserve banks. Such borrowings, in turn, might cause member banks to tighten their lending policies and to contract credits,
with a consequent rise in money rates and serious restraint on business activity. I t is clearly not in the public interest to run the risk
of such a development by permitting the authority to pledge Government securities against Federal Reserve notes to lapse.
For these reasons it is proposed in the bill under consideration
that the authority to issue Federal Reserve notes against United
States Government obligations be extended until June 30, 1939, with
the same safeguards against undue use of the authority as were
incorporated in the original legislation.
Now, that is a very general statement of the history of the legislation.
The CHAIRMAN. Let me ask you a question, please. Why should
we not make this permanent law?
Mr. EcciiES. I tried to get it. I tried, in the Banking Act of 1935,
to eliminate altogether collateral requirements for Federal Reserve
notes.
The CHAIRMAN. A S far as I am concerned, I am in full accord with
that, but I am wondering now why we should make this legislation
temporary.



4

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

Mr. ECCLES. The only reason for it was that we felt we possibly
could not get it as a permanent provision.
The CHAIRMAN. Who had that impression?
Mr. ECCLES. Well, that is the impression I had from a conference.
Mr. FORD. D O I understand by this that a bank that buys a million
dollars worth of Government bonds can take that million dollars
worth of bonds to the Federal Eeserve Board and p u t them up as
security and get back a million dollars in Federal Reserve notes?
Mr. ECCLES. YOU are speaking of a Reserve bank?
Mr. FORD. A member bank.
Mr. ECCLES. N O ; the member bank can borrow on a basis of 15
days, on Government bonds, from the Reserve banks of its district.
Mr. FORD. Yes.
Mr. ECCLES. And

the Reserve bank will give it credit in its account and it can, of course, withdraw that entire credit either by asking the Reserve bank to transfer the funds, or it may want the funds
transferred by wire, by draft, or it can draw down the entire balance
i n currency.
Mr. FORD. They can use those bonds for 15 days?
Mr. ECCLES. They can renew it. They can borrow money on the
bonds.
Mr. FORD. When they borrow, they pay interest?
Mr. ECCLES. Yes.
Mr. FORD. That is
Mr. SPENCE. This

all I wanted to know.
does not contemplate the entire collateralization
of these notes by direct obligations of the United States. I t can be
partly collateralized by these obligations and partly by acceptances.
Mr. ECCLES. I have another statement here that is a little more explanatory than the one I gave and if you want to take the time it
really explains the entire thing. Mr. Chairman, should I take the
time to give that?
Mr. FORD. We can take all the time that may be necessary.
The CHAIRMAN. YOU may proceed in your own way, Mr. Eccles.
Mr. ECCLES. This, I think, for the sake of brevity, really covers
practically every question that might be asked with reference to this
particular subject.
The CHAIRMAN. I suggest you just answer Mr. Spence's questions.
Mr. MCKEOXTGH. I would suggest that the gentleman read it for
the benefit of the committee. I would like to hear it.
Mr. SPENCE. I would like to have an answer to my question, please.
Mr. ECCLES. Repeat it, please.
Mr. SPENCE. I wanted to know if, under this continuation, the
issue of notes would be collateralized entirely by obligations of the
United States Government or might it be partially collateralized
by these obligations and partly by other eligible paper?
Mr. ECCLES. The law requires that they must be collateralized by
gold certificates and eligible paper. I n the absence of a sufficient
quantity of eligible paper the only acceptable collateral was gold certificates. So that at a time when there were inadequate amounts of
commercial paper, eligible paper, there was a very large amount of
gold required to make up the deciency in the available commercial
paper. That happened at a time, in 1982, when we were losing a lot




EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

5

of gold. Gold was going out of the country. I t put the Reserve
banks in a position where they could not carry out an open-market
operation. They did not have a sufficient supply of gold, it was felt,
to meet the outward flow of gold and to provide for the amount of
gold collateral back of Federal Reserve notes in the absence of eligible paper, so that when it came to carrying on an open-market
operation to ease the money situation they were unable to do it.
Under the Federal Reserve Act, Federal Reserve notes, theoretically, are issued not by the Federal Reserve banks but by the Board of
Governors through the Federal Reserve agents. These agents must
obtain from the Federal Reserve banks collateral consisting of eligible paper or gold certificates to cover the entire issue of Federal
Reserve notes, 100 percent. Under the authority of the Glass-Steagall
Act, as extended from time to time, United States Government obligations can also be used as collateral. These collateral requirements
are entirely independent of the 40-percent gold certificate reserve
requirements for Federal Reserve notes, which have always remained
in effect.
I n practical operation Federal Reserve notes are paid out by the
Federal Reserve banks in response to the public demand for currency. They are not and, cannot be forced out or kept out by the
Reserve banks since the public will not keep more currency than it
requires for its needs and all redundant currency comes back to the
Reserve banks.
The requirement that collateral for Federal Reserve notes should
consist only of eligible paper or gold certificates is based on a misconception of the way the Federal Reserve banks function. I t is
based on the idea that there is something inherently sound and
safe in a currency that is covered by commercial paper and gold
certificates, and that currency covered by Government obligations
is somehow inherently inflationary. As a matter of fact, the Federal
Reserve banks have two important liabilities to the public, Federal
Reserve notes and deposits. All the assets of the Federal Reserve
banks, including gold certificates, eligible paper, and United States
Government obligations, are in effect security for both types of
liability. There is no advantage in segregating one type of asset
against one type of liability, and the other assets against the other
type of liability. The soundness of each is equally important to the
public.
Since it was deemed necessary for the Federal Reserve banks to
acquire a large portfolio of United States Government obligations
for the purpose of carrying out a policy of monetary ease in the
interests of economic recovery it would not be good policy now to
decree that the Reserve banks may no longer use these United States
obligations as collateral for their notes.
To be sure, it happens that at the present time the 12 Federal
Reserve banks combined hold enough gold certificates to cover their
Federal Reserve notes, but this situation may not continue. If large
exports of gold should occur and the Federal Reserve banks should
lose a considerable part of their gold certificates, they might find
themselves confronted with the same situation that existed in the
autumn of 1931 and in the winter of 1932. At that time a terrific
deflation was sweeping the country with devastating effects on our




6

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

economic life. Banks were heavily in debt to the Reserve banks
and were losing gold to foreign countries and currency to the Amercan public which was withdrawing its deposits from the banks for
safe-keeping. I n these circumstances the Federal Reserve banks
were helpless to come to the assistance of the member banks, even
though the Reserve banks had $1,400,000,000 of gold in excess of
legal-reserve requirements. They were helpless because nearly all
this gold had to be held as collateral for Federal Reserve notes and
could not be used as a basis of open-market purchases which would
have helped to stop the deflation and might have prevented the worst
phases of the depression.
I t was to meet that situation that Congress passed the GlassSteagall Act on February 27, 1932. After that the Reserve banks
were enabled to engage m open-market operations—which greatly,
though belatedly, relieved the situation, contributed to monetary
ease, and were an important factor in assisting the recovery movement. I t would not be wise now to deprive the Reserve banks of
the authority to pledge United States Government obligations as
collateral against Federal Reserve notes and run the risk of a repetition of the situation which existed in 1932.
While this country at present has a large and growing supply of
gold, foreign countries have large claims against this gold, which
may at any time result in a great outflow of gold from this country.
A t the end of 1936, banks in the United States held about $1,500,000,000 of short-term balances due to foreigners, and foreigners held
about $6,500,000,000 of American investments, of which readily marketable stocks and bonds comprised perhaps two-thirds. A substantial withdrawal of these funds could rapidly change the situation and
make it imperative once more to permit the Reserve banks to pledge
United States obligations against Federal Reserve notes. I n these
circumstances the only wise and safe course is to continue this authority, which is used but little now, but may become important in the
future.
I t is at a time when gold is leaving the country, and when a liquidation is under way, that collateral requirements hamstring the Reserve banks and prevent them from following the course required
by the public interest. A t times when credit is expanding, and
restraint may be necessary, collateral requirements do not exercise
any restraint because at such times the banks borrow from the Reserve banks and their borrowings produce the eligible paper required as collateral for Federal Reserve notes. Collateral requirements therefore, are a perverse instrument of control; they restrain
when expansion is urgently needed to arrest deflation and they
cease to function as a restraint when a restraining influence would
be in the public interest.
I t should be mentioned also that, while the 12 Federal Reserve
banks combined have at present enough gold certificates without
pledging any United States Government obligations, the gold certificates are not evenly distributed among the Federal Reserve banks,
and there are two Federal Reserve banks, those of Atlanta and
Minneapolis, that would have to liquidate a part of their portfolio,
if they were not permitted to use Government securities as collateral.
The total amount of such securities pledged as collateral at the
present time is $87,000,000, of which $60,000,000 is at these two
banks.



EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

7

A table showing the amount of Federal Eeserve notes outstanding
in each Federal Reserve district and the collateral against those
notes as of February 3, 1937, is attached.
Federal Reserve note statement on Feb. 3, 1937
[In thousands of dollars]
Boston

New
York

Philadelphia

Cleveland

Richmond

Federal Reserve notes:
Issued to Federal Reserve
bank by Federal Reserve
agent
4,475,246
Held by Federal Reserve
bank
317,179

380,552

974,832

325,026

438,133

211,034

29,100

96,975

21,511

28,626

11,435

25,143

In actual circulation— 4,158,067

351,452

877,857

303,515

409,507

199,599

182,510

406,000
50

990,000
1,537

332,000
483

440,000
20

212,000

168,000
25

406,050

991,537

332,483

440,020

212,000

213,025

Chicago St. Louis Minneapolis

Kansas
City

Dallas

Total

Collateral held by agent as security for notes issued to
bank:
Gold certificates on hand
and due from U. S. Treasury
4,491,132
2,556
Eligible paper
U. S. Government securi87,000
ties
Total collateral

4,580,688

Federal Reserve notes:
Issued to Federal Reserve bank by
Federal Reserve agent
Held by Federal Reserve bank

Atlanta

207,653

45,000

San
Francisco

974,980
27,318

191,081
11.569

137,730
3,421

168,242
8,350

95,186
7,580

370,797
46,151

947,662

179,512

134,309

159,892

87,606

324,646

Collateral held by agent as security for
notes issued to bank:
Gold certificates on hand and due
from U. S. Treasury
990,000
Eligible paper
U. S. Government securities

171,632
38
22,000

128,000
4
15,000

167,000
73
5,000

97,500
164

389,000
162

193,670

143,004

172,073

97,664

389,162

In actual circulation

Total collateral

990,000

Another table showing the position in regard to collateral requirements and to reserves on February 24, 1932, is also attached.
Reserve position of Federal Reserve banks, February 24, 1032
[In millions of dollars]
Total cash reserves
Required as deposit reserve
Required as note reserve

3,140
691
1, 057

Total required as reserves
Excess reserves
Under Federal Reserve Act prior to Glass-Steagall amendment:
Additional gold required as collateral for Federal Reserve
notes
Gold in redemption fund

1,748
1,392
930
56

Total deductions from excess reserves

966

Free gold under Federal Reserve Act
133727—37
2

406




8

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY
Reserve position of Federal Reserve banks, February 24, 1932—Continued

Gold that may be released by pledge of Government securities as
Federal Reserve note collateral
713
Potential free gold under Federal Reserve Act as amended
1,119
Federal Reserve notes issued
2,908
Collateral pledged:
Gold
2,037
Eligible paper
921
2,958

Certain questions are sometimes asked about this proposal. Is it
inflationary? The answer is that it enables the Federal Reserve
banks to counteract a dangerous deflation by making it possible to
engage in open market operations at a time when gold is leaving the
country and a liquidation is in process. At other times it may increase the limits to which open-market operations of the Federal Reserve banks may be carried, but since these operations must be conducted in accordance with decisions of the open-market committee
and on principles definitely laid down by Congress, it can become
inflationary only if the Board and the open-market committee flagrantly disregard their duties and responsibilities.
Sometimes it is asserted that this proposal reintroduces bondsecured currency, which was one of the great evils prior to the
establishment of the Federal Reserve System, and does away with
the elastic character of our currency.
The answer to that is that the elasticity of our currency at the
present time does not depend upon the nature of the collateral back
of the currency, but upon the mechanism by which currency not
needed for circulation purposes finds its way back to the Federal
Reserve banks, and a currency demand can always be met through
these banks. The situation differs from the one that prevailed prior
to the Federal Reserve System in that at that time there was no
effective method of absorbing redundant currency nor of expanding
currency when a demand arose. The fact is that the establishment
of the Federal Reserve System has made our entire supply of currency responsive to changes in the public's needs, and consequently
elastic. There is nothing in the proposal that would in any way interfere with this elasticity.
Sometimes it is asserted that this proposal is a device by which
the Federal Reserve banks can finance Treasury deficits. This assertion has nothing to sustain it. The Federal Reserve banks do
not issue currency except in response to a demand, and if they did
the currency would not remain in circulation but would come back.
The power of the Federal Reserve banks to help the Government
finance deficits rests not on the collateral requirements of Federal
Reserve notes, but on the authority to buy Government securities,
even though these purchases must be made in the open market. The
pewer exists but is under control of the open-market committee,
which has clearly defined duties and responsibilities and principles
to guide it in its operations.
Mr. FORD. What would be more sound than the Government policy?
Mr. ECCLES. What would be, you say ?
Mr. FORD. Yes.

Mr. ECCLES. I do not think anything would be. The idea of putting gold certificates and eligible paper as security back of the Fed


EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

9

eral Reserve notes, leaving Government bonds as the security back of
the deposits has nothing to recommend it. You do not, of course,
secure the deposit liability. You do secure the note liability, even
to the point of restricting the security of the note liability to gold,
commercial, or eligible paper. We have broadened that, of course,
through this act, to permit the other important assets of the Reserve
System, Government bonds, to also be used as collateral back of the
note issue.
Mr. FORD. Right there, the deposit liability you speak of is the
deposit of member banks in the Federal Reserve bank.
Mr. ECCLES. That is the principal deposit they have.
Mr. WILLIAMS. W h y do the Government Reserve agents require
a specific collateral for a certain issue?
Mr. ECCLES. Why do they ?
Mr. WILLIAMS. Yes.
Mr. ECCLES. Because

the law requires them before they can issue
the notes.
Mr. WILLIAMS. I S there any necessity for that ? There is none in
.your judgment, at least, is there ?
Mr. ECCLES. I am on record on that. I debated that rather extensively for a long while. I t does not make much difference at the
present time. Of course, there will always be an adequate amount
of security back of the liabilities and where the Reserve banks are
permitted to pledge Government bonds, as well as gold and eligible
paper, all it does is involve the additional expense and trouble of
transferring the collateral from the bank to the agent and holding it
against the notes which are issued through his hands.
Mr. WILLIAMS. W h a t is the amount of eligible paper available at
the present time %
Mr. ECCLES. The amount of eligible paper?
Mr. WILLIAMS. Yes.
Mr. ECCLES. Well, it is practically nothing.
Mr. WILLIAMS. What is the amount available for that use ?
Mr. ECCLES. YOU mean in the Reserve System ?
Mr. WILLIAMS. Yes.
Mr. ECCLES. I could not say.
Mr. HANCOCK. I t has never exceeded 12 percent of the total

assets
of the member banks, has it ?
Mr. ECCLES. I understood you to mean what eligible paper do the
member banks have that they could jmt up with the Reserve banks.
Mr. WILLIAMS. That they have available.
Mr. ECCLES. Or that the Reserve banks have available to put with
the agents.
Mr.

WILLIAMS.

Yes.

Mr. ECCLES. On February 10, about $2,500,000 available for pledge
with the agents.
Mr. WILLIAMS. That is what they have put up ?
Mr. ECCLES. That is the total amount at the present time that they
have available. That is the total amount of paper the Federal
Reserve banks hold of all the member banks. They had $2,390,000
with the agents on February 10.
Mr. WILLIAMS. H O W does that compare with the eligible paper
that they had in 1932, at the time this act was originally passed?
Mr. FORD. Please define in a few words, eligible paper.



10

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

Mr. ECCLES. I do not know that I can do it in a few words. Those
acceptances and commercial paper, paper of business institutions used
for carrying on their current transactions, with maturities not exceeding 90 days. Agricultural paper, for the purpose of production, livestock, and production paper not exceeding 9 months. T h a t would
consist of certain types of warehouse receipts, bill of lading paper,
and so on. I n other words, paper representing current transactions.
Nothing exceeding 9 months.
Mr. FORD. That is about the same as the original Federal Reserve Act.
Mr. WILLIAMS. I want to know whether or not the Federal Reserve banks have up now all the eligible paper they have?
Mr. ECCLES. Yes; they have.
Mr. WILLIAMS. Have you available the figures showing the amount
of eligible paper in the hands of member banks?
Mr. ECCLES. No; I do not have that.
The CHAIRMAN. I S there any way to get those figures?
Mr. ECCLES. Well, we can get it out of the reports.
The CHAIRMAN. There has to be an adjudication of the question
I n advance of that, nobody knows how much there is.
Mr. ECCLES. That is correct. A bank, itself, may think its paper
is eligible and when it is submitted to the Reserve bank, the Reserve
bank may throw it out on some technicality or some technical requirement. I n other words, the member bank may think it is eligible and
so classify it but the Reserve bank may not.
Mr. HANCOCK. Did you not state, in the hearings here in 1935,
t h a t member banks never did have more than 12 percent of their
assets in eligible paper?
Mr. ECCLES. They did at one time, but by 1929 the amount had declined to between 12 and 13 percent of loans and investments according to their own estimates. Member banks reported that they held
about $2,500,000,000 of eligible paper at the end of 1936.
Mr. HANCOCK. That is what I understood.
Mr. WILLIAMS. I should like to pursue the question asked by Mr.
Spence here about whether or not, when a request is made by a bank
for notes, whether or not it can put up 100-percent bonds and get
100-percent notes?
Mr.

ECCLES. Yes, it

can.

Mr. WILLIAMS. Could they present, say, $1,000,000 in bonds and
get $1,000,000 in notes for it?
Mr. ECCLES. Are you speaking of a member bank?
Mr. WILLIAMS. One of the Reserve banks.
Mr. ECCLES. The Reserve bank can get currency from the agent by
putting up gold certificates, eligible paper, or Government bonds.
I n the absence of the eligible paper or Government bonds, then they
would have to put up the balance in gold certificates. If they had
no eligible paper and no Government bonds, they would have to put
up 100 percent in gold certificates. To the extent that they have
no eligible paper, they would have to put up 100 percent in gold
certificates.
Mr. WILLIAMS. They would have to do that, although they already
had gold certificate reserves.
Mr. ECCLES. I t would not make any difference. They may own the
gold certificates as assets, but they must pledge the assets.



EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

11

Mr. WILLIAMS. Under this law, they must actually put them up
with the Federal Reserve agents.
Mr. ECCLES. They, of course, usually pledge the gold certificates
in the same way that they must actually pledge the Government's
and the eligible paper.
Mr. W 1 1 ^^ 3 ^ 8 - I understand they have gold certificates available
to the extent of about 4 % billion; is that it?
Mr. ECCLES. Yes.
Mr. FORD. Here is

a bank that wants $1,000,000 in currency and
it has gold certificates and puts up 40-percent gold certificates and
the remaining 60 percent in eligible paper and Government bonds.
I t takes those to the Federal Reserve bank and gets $1,000,000 in
currency.
Mr. ECCLES. Are you speaking of a member bank?
Mr. FORD.

Yes.

Mr. ECCLES. N O . They just get credit on the books of the Reserve bank.
Mr. FORD. Supposing the member bank needs currency, how do
they get it ?
Mr. ECCLES. They get the credit on the books and then ask the
Reserve bank to ship them currency. They must carry a minimum
reserve and if they wanted currency from the Reserve bank and the
reserve was not of'sufficient amount to enable them to get currency,
they would then have to build up their reserve by rediscounting or
borrowing. Then, to the extent that their balances were in excess
of the legal reserve required balance, they could ask the Reserve
bank to issue them currency.
Mr. FORD. T O the amount of their needs?
Mr. ECCLES. That is right.
Mr. FORD. The reason I asked that question, Governor, is this:
The charge is constantly made, and I would like to clear it up in
this hearing if I can, that these banks get their money from the
Federal Reserve Board and do not pay anything for it and then
loan it out and get interest on it. I would like to have that cleared up.
Mr. ECCLES. Well, of course, banks, when they borrow from the
Federal Reserve—you are speaking of the member banks getting
their money without interest?
Mr. FORD. Yes.
Mr. ECCLES. Of course, that is not true.
Mr. FORD. That is what I wanted cleared
Mr. ECCLES. The member banks borrow

up.
from the Reserve bank
and they pay whatever the established discount rate is, or whatever
the rate may be on whatever other form of borrowing they may
undertake. The Banking Act, as you know, gave the Reserve banks
the authority to make advances up to 4 months against other than
eligible paper at a rate not less than one-half of 1 percent higher
than the established discount rate, so that the banks that borrowed
do pay interest and that rate fluctuates depending upon the moneymarket situation.
Mr. FORD. I S not a member bank in the same position with reference to the Federal Reserve bank that I am in reference to my
bank if I borrow money?




12

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

Mr. ECCLES. Well, a member bank, in borrowing from the Reserve
bank, is in a little different position. The Reserve bank can always
take care of the loan, so far as its ability to create money is concerned. An individual bank cannot. They may reach a situation
where they cannot make any loans, because they have no paper upon
which they could get credit and, therefore, they cannot pass credit
to you without being able to go and get credit.
Mr. FORD. I understand that. The point is this: I am a member
bank and I want to go to the Federal Reserve and borrow money,
and I have to pay interest on it just exactly the same as I would have
to from my own bank.
Mr. ECCLES. Yes; possibly at a different rate, however.
Mr. WILLIAMS. While you are on that question, Governor, the Federal Reserve banks, themselves, they do not pay interest, do they?
The Federal Reserve banks, they get this money without interest ?
Mr. ECCLES. Well, that is correct. Who would they pay interest to?
Mr. WILLIAMS. I say they do not pay interest. They do not pay
any interest.
Mr. ECCLES. That is correct.
Mr. WILLIAMS. They get the right to issue the bonds upon the
collateral put up without paying any interest to the Government ?
Mr. ECCLES. That is right.
Mr. WILLIAMS. NOW, what percentage of the outstanding obligations of the Government are now owned by the Federal Reserve'
System ?
Mr. ECCLES. Well, the Reserve System owns $2,430,000,000 of Governments out of possibly a total of around $35,000,000,000 outstanding ; it would be about 7 percent, something like that, between 7 and
S percent.
Mr. WILLIAMS. I n putting u p this Government collateral, is there
any limitation upon the kind of Government securities with reference
to maturities?
Mr. ECCLES. I do not think so. There is no limitation. The guaranteed securities are eligible for purchase by the Federal Reserve
banks but they may not be pledged with the Federal Reserve agents
as collateral.
Mr. WILLIAMS. Are they used ?
Mr. ECCLES. N O ; there are no guaranties at all. The Federal
Reserve banks own none of the guaranteed securities.
Mr. WILLIAMS. Well, I thought that language was direct obligations. Does that include the guaranteed obligations?
Mr. ECCLES. There was an amendment in the Banking Act of 1935
t h a t authorized the Federal Reserve banks to purchase guaranteed
securities, the feeling being that they should not be discriminated
against inasmuch as the Government had guaranteed or would guarantee them.
Mr. WILLIAMS. Can the Federal Reserve System acquire these
Government obligations directly ?
Mr. ECCLES. N O ; they must buy them in the market.
Mr. WILLIAMS. They have to acquire them in open market?
Mr. ECCLES. The Banking Act of 1935,1 think, provided that they
must buy them in the market.
Mr. WILLIAMS. Well, that is the fact, is it not? The law is you
cannot acquire them directly from the Government.



EXTENDING PEKIOD OF OBLIGATIONS AS SECURITY

13

Mr. ECCLES. That is correct
Mr. HANCOCK. The House bill permitted them to acquire them.
Mr. ECCLES. T h a t is right, and the Senate did not, and that is the
way it ended.
Mr. GOLDSBOROUGH. I am in favor of this bill for several reasons,
some of which have been stated and some of which have not been
stated. I t seems to me that the Board's recommendation for the
passage of this bill might appear to be in conflict with the Board's
action in raising the reserve requirements of the member banks. I
believe it wTould be in the public interest if you would reconcile the
action contemplated by this bill and the action of the Reserve Board
in raising the reserve requirements.
Mr. ECCLES. Well, there is really no relationship.
Mr. GOLDSBOROUGH. The relationship that might appear to a great
many people, it seems to me, is this: The raising of the reserve requirements would probably be considered for the purpose of preventing inflation, whereas the passage of this bill might indicate a necessity for remaining liquid, which seems to be a contradictory position.
Mr. ECCLES. The increasing of reserves affects the amounts of deposits that the member banks carry with the Reserve banks. Those
are the reserves of the member banks. Increasing reserve requirements merely makes it necessary that the member banks carry larger
deposits with the Reserve bank or larger reserves t h a n otherwise
would be the case. So far as the Reserve banks are concerned, they,
do not collateralize or secure in any way those deposits. There is
nothing in the law that requires it. That is the other liability I
referred to that requires no collateral. This has to do only with the
collateral back of the Federal Reserve notes. Now, Federal Reserve
notes are less now than they were at the bottom of the depression.
I n other words, at that time there was a lot of hoarded currency. At
the present time there is not, certainly, the same amount of hoarded
currency, and all this does is merely extend the period of time for
the Reserve banks to continue to secure their outstanding Federal
Reserve notes with Government bonds as well as with commercial
paper. The gold provision of the security is in no way changed.
Mr. GOLDSBOROUGH. This has no relationship to either inflation or
deflation except—I would just like an explanation and a reason for
the raising of the reserve. I thought it might be helpful.
Mr. ECCLES. That is a long story. Of course, I would be glad to
respond to whatever the committee may call upon me to do.
Mr. GOLDSBOROUGH. I do not insist upon it.
Mr. WOLCOTT. You were in the midst of a sentence there that I
thought had possibilities. I wish you would proceed with it. I wish
the stenographer would repeat that question, or rather, your statement.
The STENOGRAPHER (reading): "This has no relationship to either
inflation or deflation except."
Mr. ECCLES. Speaking of the collateral back of the Federal Reserve
notes, except the lack of authority to put up Government securities
back of Federal Reserve notes, at a time when this country may be
losing gold or at a time when gold was being hoarded when our
money was convertible, or at a time when abnormal amounts of currency were being hoarded, of course, would be deflationary in that
the Reserve System would be restricted to the extent that they had



14

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

commercial paper or eligible pa^er and gold certificates, so that a
lack of this authority under certain conditions could tend to prevent
the system from alleviating a deflationary situation.
Mr. GOLDSBOROTTGH. Another present practice of the Treasury,
which would appear to a great many to be in conflict with the purposes of the bill we are now considering, is the action of the Treasury
in purchasing gold. Is there anything that you can observe that
would indicate that there is no conflict between this policy and the
provisions of this bill?
Mr. EOCLES. Well, of course, that would indicate that we are getting gold rather than losing it, and it would appear that, certainly,
there is an adequate supply of gold.
Mr. GOLDSBOROUGH. But, the purpose in purchasing this gold is to
take it out of the money system, is it not? Therefore, it is deflationary in its purpose.
Mr. EOCLES. The purpose of purchasing the gold is to keep it out
of the money system and, to that extent, it does reduce what the
excess reserves of the banks would otherwise be. The amount of
the excess reserves was about $2,150,000,000 at the time that the
Treasury adopted their program of gold sterilization. H a d they
not adopted that program, gold imports would have added to the
$2,150,000,000 of excess reserves, and the $2,150,000,000 was of sufficient amount, if gotten into the credit structure, to have created,
with the deposits we now have, something between 20 and 30 billion
dollars of additional credit, and, therefore, of course, it was recognized that further gold imports adding to the excess reserves, could
serve no useful purpose and would get beyond the point where the
Reserve Board had any power to control the situation because they
were limited in their authority to increase reserve requirements to
a specific amount.
Mr. GOLDSBOROUGH. NOW, the question I am about to ask is necessary in order to clear up the difficulty in the minds of Members of
Congress who have approached me about it. W h a t is the authority
given by the law to the Treasury Department to sterilize this gold ?
W h a t is the authority and wThere are they given the authority to do
that?
Mr. EOCLES. Well r I could not answer that. That is a matter that
I suppose should be answered by the counsel of the Treasury. You
would not expect me to answer that, would you ?
Mr. GOLDSBOROUGH. I have been unable to find the statute giving
the Treasury the right to sterilize this gold.
Mr. FORD. I S not this whole thing, this extension, just sort of a
stand-by measure that we might describe in the Jesse Jones way
as a "shotgun in the corner" against a sudden withdrawal of gold
by foreign nations who now have some $8,000,000 in securities which
might be dumped at any time.
Mr. ECCLES. Yes; it is available for that purpose, but it is more
important from the present position because there is no eligible paper
available in the Federal Reserve banks and there are two banks in
the System that do not have—although the 12 banks as a whole have
sufficient gold to secure Federal Reserve notes to the amount now
outstanding, 100 percent—there are two banks with a deficiency that
would have to sell enough Government securities to put them in a
postion where they could



EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

15

Mr. FORD (interposing). Do you think it would help the committee
to say what banks those are ?
Mr. ECCLES. I t would not h u r t anything. There is no secret about
it. I just want to give you the exact figures. There was an
$87,000,000 deficiency. I t was not a great deal. At the present time
the collateral held back of the Federal Reserve notes is $4,491,132,000
of gold certificates; $2,256,000 of eligible paper, and $87,000,000 of
Government securities. Those Government securities are up, at
Atlanta, $45,000,000; St. Louis, $22,000,000; Minneapolis, $15,000,000;
and Kansas City, $5,000,000. The St. Louis and Kansas City banks
could have substituted gold certificates for the Government securities
with the agents without reducing their reserves against deposits below the legal minimum of 35 percent.
Mr. W H I T E . I S there any interest in this bill from the standpoint
that it helps to maintain the market on Government bonds?
Mr. ECCLES. I t has nothing to do with Government bonds so far
as maintaining the market is concerned.
Mr. FORD. Then, locally, it is a matter of protecting Reserve
banks.
Mr. ECCLES. I would not want to put it as a question of protecting
the Reserve banks.
Mr. FORD. Well, facilitating their operation. Let us put it that
way.
Mr. ECCLES. Yes. I t makes it possible to equalize the distribution of thes earning assets between the 12 banks in relationship to
their need. I n other words, other Reserve banks could, of course,
take over the $87,000,000 of governments from these particular banks,
so that there would be no deficiency. I t would reduce their earnings
from that source and make an increase in the earnings of the other
banks that took them over. The holdings of Government securities
are allocated among the banks of the System from what w^e call the
System portfolio. I n other words, the $2,430,000,000 are held in a
System portfolio and each bank has a participation in that portfolio
based upon a formula that calls for an adjustment quarterly. The
failure or the lack of having this bill would tend to upset that. I t
would cause certain banks to reduce their proportionate holdings in
this portfolio and increase that of other banks.
Now, one reason for that is that the reserves of the banks in each
of the Reserve districts are not all carried in their districts. The
correspondent-bank relationship permits member banks, so long as
they carry the reserve requirements with their Reserve bank in the
district, to carry any excess beyond that in a city correspondent, and
that usually goes to the larger cities and finally lands in New York.
That is where it would come. So that the reserves beyond the legal
requirements, that is, the money, leaves the district and goes to the
larger centers, as I say, and member banks in those cities then put
it in their Reserve banks; that is, the New York Reserve bank, the
Chicago Reserve bank, New York in particular, where they would
have very much larger balances carried than the Reserve banks of
other districts because New York and Chicago banks have the balances of banks outside, that is, that part of the balances representing
the excess beyond what they are required to carry with a Reserve
bank. That is why, as we increase reserve requirements, we will
133727—37



3

16

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

pull on New York much harder than any other section because those
banks, in order to meet the reserve requirement in their district, will
draw against their balances in New York. Therefore, the New York
banks have drawn down from the Reserve bank for not only the increased requirement for their own situation but to take care of a
transfer of what we term "country-bank balances" out of New York
into the Reserve bank of their respective districts.
Mr. FORD. I S this a fair question? I would assume that Atlanta.
St. Louis, and Minneapolis, and Kansas City are in a pooret* earning position than these other Reserve districts as a result of the
present existing situation, and that their situation would be better
if this were continued. Is that a good statement ?
Mr. ECCLES. Well, it happens to be at the moment that is true.
I t may be that next month the situation would shift. The shifting
of funds from one district to another affects this. I would not say
they were in a poorer earning situation than any other. I t merely
represents a situation at this time. I n 3 or 4 months, due to seasonal
shifts and conditions that develop, you may find that those banks
would have an adequate gold supply because, you see, there is what
they call the gold settlement fund between the 12 banks and the
ownership of the gold certificates transfers back and forth among
these banks and as the excess of gold certificates owned in one may be
transferred over to another, the requirement of Government bonds
would be lifted in the one district and the requirements of another
would be increased, so that the use of this merely gives some flexibility to a situation that otherwise would simply require constant
shifting, and adjustment and consideration, in the absence of commercial paper, that there just does not seem to be any reason for.
Mr. FORD. I t has two purposes then, both the internal and the
external ?
Mr. ECCLES. That is right.
Mr. W H I T E . D O you accept the collateral at 100 cents on the dollar?
Mr. ECCLES. Yes; that is correct. They may have some excess.
They may have excess collateral just as a customer does sometimes
with a bank.
Mr. W H I T E . Going back to the point I made just a minute ago,
the question about whether or not it had any effect, directly or
indirectly, on maintaining the market on Government bonds. If a
bank wants money and is not able to get it and they have Government bonds the chances are they might be compelled to sell the
Government bonds, is not that true?
Mr. ECCLES. Yes; they would either have to sell their Government
bonds or other bonds or let some of their paper run off. They would
have to liquidate something to get the money if they could not go to
the Federal Reserve bank and borrow it.
Mr. W H I T E . And, Government bonds are always readily used for
such purpose.
Mr. ECCLES. Government bonds, of course, are the most liquid
form of collateral and are very often used first with member banks
for short-term borrowings.
Mr. W H I T E . Inasmuch as that is true, therefore, would it not be
true also that this does have an effect on the market value of Government bonds? I mean it prevents the sale of a lot of those Gov-




EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

17

ernment bonds which, under this act, are used with the Federal
Reserve.
Mr. ECCLES. I t would not be necessary for the Reserve System t o
sell the bonds.
Mr. W H I T E . If they were not eligible for use with the Reserve
System ?
Mr. EccLES. The Reserve System does not use any bonds. They are
deposited with it. I mean the Reserve System does not use the paper
of a member bank that is secured by bonds. The Reserve System
loans to a member bank on its notes, that note being secured by
bonds. Those bonds and that paper is not used as collateral back
of Federal Reserve notes at all. The only bonds used as collateral
are the bonds which the Federal Reserve System own as an asset, that
they have acquired through an open market operation.
Mr. W H I T E . Maybe I do not make my point clear. If the local
bank could use the process you describe under the terms of this
law
Mr. ECCLES (interposing). You mean a local member bank or a.
local Reserve bank?
Mr. W H I T E . A local member bank.
Mr. ECCLES. This applies only to the Reserve banks.
Mr. HANCOCK. Would you mind explaining to the committee the
mechanics in carrying on that undertaking?
Mr. ECCLES. I would prefer to have the Treasury experts that are
operating that explain it.
Mr. HANCOCK. I thought you might explain it so far as it may
affect the operation of the Federal Reserve System.
Mr. ECCLES. The only way it affects the Federal Reserve is that it
keeps the gold imports from becoming part of the excess reserves.
To that extent I could explain it, the way it accomplishes that.
Mr. HANCOCK. What character of obligation can the Treasury issue
that would not be a deposit-creating instrument?
Mr. ECCLES. I do not just understand your question.
Mr. HANCOCK. The Treasury buys the gold, does it not?
Mr.

ECCLES. Yes.
HANCOCK. That is the
Mr. ECCLES. Yes.
Mr. HANCOCK. Then, how

Mr.

sterilization process ?

do you keep it from getting into the
banks and creating deposit liabilities ?
Mr. ECCLES. I t becomes a deposit liability. The gold as it comes
in, remember, adds to the deposits but does not add to the excess
reserves.
Mr. HANCOCK. That is what I want explained to us.
Mr. ECCLES. That is rather a technical process.
Mr. HANCOCK. Let me ask you this without expecting an answer,
and I am not critical in this. Are not the Treasury Department and
the Federal Reserve Board, in carrying forward the sterilization
program, undertaking to defeat the failure of Congress to give you
the authority to increase reserves up to the limit which you recommended they be increased in the act of 1935 ?
Mr. GOLDSBOROTJGH. T h a t question answers itself.
Mr, ECCLES. The limitation that was given to us to increase reserve requirements, of course, was not adequate.




18

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

Mr. TRANSUE. We did not put any ceiling on that.
Mr. EOCLES. To the extent there was a ceiling put on, it developed, as I anticipated when we asked for the authority, that it
may not be adequate, and it did develop sooner than I expected, that
it was not adequate, and, therefore, there were one or two alternatives either to get legislation giving the Reserve System further
power to meet this problem, or to carry out the program of sterilization in the manner in which it is being carried out. Otherwise,
we would have had a continuation, as long as gold imports come
into this country, of an increasing excess reserve.
Mr. TRANSUE. H O W far can you substitute, or how far can the
Treasury substitute, its gold-sterilization program for a lack of
power to further increase reserve requirements?
Mr. ECCLES. Well, of course, it can continue to sterilize gold so
long as it feels it is advisable to do so. All that operation does is
at once to freeze the domestic banking situation, so far as its reserve
position is concerned. I n other words, it isolates the domestic-credit
picture from the effect of the repercussions that gold exports and
imports may have upon it.
Mr. TRANSUE. D O you consider it an adequate substitute for the
power this committee tried to give you last year and did not?
Mr. ECCLES. I t is at this time. There is no serious question about
increasing reserve requirements further where you do not have unification. So long as the banks which are members can withdraw at
will from the Reserve System, and thereby evade the reserve requirements, to increase reserves substantially would tend to secure the
Eeserve System. I n other words, they could defeat the whole purpose by withdrawing wholesale if they wanted to. So, as a practical
matter, I question just how much further you may go in increasing
reserve requirements and, at the same time, retain the banks that are
now in the System; that is, the State banks which are now in, the
System.
Mr. FORD. A S a practical matter, sterilization is more practical
than increased reserve requirements. The other probably would be
more effective.
Mr. ECCLES. Well
Mr. HANCOCK. Well, it is less offensive; is it not?
Mr. EcciiES. Yes; much more so.
Mr. WOLCOTT. You made the statement that there is no available
eligible paper. I think that is a fundamental question. Could you
give us your opinion as to why there is no available eligible paper?
Mr. ECCLES. Because the banks have excess reserves and do not
have to borrow. The banks have eligible paper, but the only way
the Eeserve System can get t h a t paper would be to create such a
tight money situation that the excess reserves would be completely
wiped out and the banks would be forced to borrow from the Eeserve
System to maintain their reserve. I n other words, by creating a
deficiency of reserved so that the banks had to borrow to create the
reserve requirement which, of course, would be an inadvisable thing
t o do at this time.
Mr. WOLCOTT. I understood it was for the reason t h a t the banks
are not loaning.
Mr. ECCLES. I t would be simply because the banks are not borrowing from the Eeserve System.



EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

19

Mr. WOLCOTT. Now, another question that, perhaps, has very little
relation to this bill. Using now 1929 as a basis, do you know where
the index of business now stands?
Mr. ECCLES. Well, I could not give you that. Using the 1923-25
production index figures—you are speaking of production, not price?
Mr. WOLCOTT. Production; yes.
Mr. ECCLES. The production index figures of the Federal Eeserve,
which are based upon volume and not price, are 121 in December, and
I think estimated at 115 in January, as against 1923-25 averages.
Mr. WOLCOTT. With that in mind, what is the index of bank credits
on the same basis, or a comparable basis?
Mr. ECCLES. Well, I could not give you that.
Mr. WOLCOTT. The use of bank credit in proportion to our production?
Mr. ECCLES. Are you speaking of total bank credit? I t includes,
of course, all loans and investments, mortgage loans, commercial
loans.
Mr. WOLCOTT. I am trying to get some method of comparison.
Mr. ECCLES. There is more bank credit outstanding today t h a n
there was in 1929.
Mr. WOLCOTT. YOU use the average in 1923-25 as the basis for
estimating the production index ?
Mr.

ECCLES.

Yes.

Mr. WOLCOTT. The index of production, I understand, you said
was 119.
Mr. ECCLES. One hundred and fifteen estimated for January. I t
was 121 for December, as I recall the figures.
Mr. WOLCOTT. W h a t I want to get is a comparison between that
and the bank-credit index for a like period.
Mr. ECCLES. I cannot give you the amount for the total of outstanding bank credit in 1923-25; but the amount of bank credit
outstanding in 1929 was substantially more than it wTas in 1927 and
1925 and, at the present time, it is more than it was in 1929. The
total amount of outstanding bank credit today, as measured by deposits, is in excess of that outstanding in 1929.
Mr. WOLCOTT. H O W does that compare with the production index?
Mr. ECCLES. I t is much greater. I n other words, the production
is not up to 1929 whereas the amount of bank credit outstanding is
in excess of 1929.
Mr. WOLCOTT. Have we any way of determining that with some
degree of accuracy? Figures have been given out somewhere that
bank credit is only about 50 percent normal based upon the production index.
Mr. ECCLES. Of course, in speaking of bank credit that bank
credit can only be interpreted as the total deposits of banks.
Mr. FORD. That includes banks and everything.
Mr. ECCLES. Yes; that is bank credit.
Mr. WOLCOTT. Then, perhaps, we could deduct the investments and
Government obligations to arrive at a more accurate figure.
Mr. ECCLES. YOU mean bank credit
Mr. WOLCOTT. The thing that surprises me, and maybe you can
throw some light on the question, is that I have been told this is
the first time in the history of the United States in which the



20

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

volume of currency has increased at the same time that the commodity-price index has increased. The commodity-price index increases usually as the result of the acceleration of credit which offsets, to a large degree, the use of currency, thereby driving currency
out of circulation and substituting currency credit for it.
Mr. ECCLES. I cannot agree with that theory. Currency, necessarily, does not diminish with the expansion of bank credit. Currency would be likely to increase with the expansion of bank credit
and with an increase in prices. If prices go up, with an expansion
of the total means of payment, then it will take likely more currency
for pay rolls and for pocket money, and that is what currency is
largely used for. Currency has been going up. I t has been going
up because of the greatly increased business activities. People have
more money to carry around with them than they had. The pay
rolls are made in currency by a great many institutions and, with
the increased pay rolls, both in number of people employed and in
wages, it is taking more currency to meet that situation.
Mr. WOLCOTT. As business itself increases, there is usually a comparable increase in credit, is there not ?
Mr. ECCLES. Well, there is an increase either in credit or an increase in the velocity of the turn-over of the existing money supply.
Mr. WOLCOTT. I have been trying to get at where this credit is
coming from. If it is not coming from the banks, and we have been
told that the industries and business of the Nation is establishing
their own credit facilities so that they would be independent of the
banks, in order that they would not fall with another bank crisis,
and that they have been issuing stock and selling stock to the general
public to get their money rather than going to the banks to get it as
they usually have
Mr. ECCLES (interposing). That was done to a very large extent
during the twenties, when it was not difficult to sell stock and there
was a very little or no restraint upon the disposition and distribution
of the stocks that were issued.
Mr. WOLCOTT. Have you noticed any increase in that during the
last couple of years?
Mr. ECCLES. I think very little. There has been considerable refunding of outstanding bonded indebtedness at lower interest rates.
Mr. WOLCOTT. H a s this bonded indebtedness been decreased by the
issuance of stocks?
Mr. ECCLES. Not very much. I would say the great bulk of the
refunding is bonds. They make much more favorable terms. The
present market has encouraged that type of operation.
Mr. WOLCOTT. H a s there been any increase in the holding of industrial bonds by the banks or are those bonds being sold to the general public?
Mr. ECCLES. Not much is being sold to the banks.
Mr. WOLCOTT. What I wanted to bring out was, if you are attempting to control inflation by raising reserve requirements and you have
control of only about 50 percent of the credit which is being used
as a base for this industrial activity, then you must take into consideration there is another 50 percent over which you might not have
any control.
Mr. ECCLES. Well, of course, that assumption is that there is some
way of financing that can be done outside of the banks. Of course,



EXTENDING PERIOD OE OBLIGATIONS AS SECURITY

21

that is not true. I n the final analysis, even if business goes to the
market and sells its securities to insurance companies or to trustees
or individual investors, they, in turn, draw their money out of the
bank and give it to the institution, and the institution puts it right
back in the bank. All that operation does is increase the circulation
of the existing supply of money and that is what we need. We have
a deposit turn-over today of somewhere around 2 to 1 annually, based
upon national income. During the twenties the average demand deposit turn-over was about 3 to 1 or, in other words, assuming the same
velocity of the existing supply of bank deposits and currency, which
constitutes 100 percent of our money or practically all—there is a
little silver—assuming the same turn-over of the money that we now
have in our banking system as we had in 1929, and we can support
or produce a national income without further credit expansion of
more than 90 billion dollars, or at least 25 billion more than we now
have. We have about 2 billion dollars more of bank deposits and
currency than we had at the peak in 1929 today; so if business goes
to the market and finances, fine. That only tends to take detposits in
banks which are idle and put them in circulation through the purchase of stocks and bonds or mortgages, because the person that borrows the money or sells the stock or the collateral that secures the
stock, or the person that borrows the money, does that to put it back
into circulation.
Mr. LUCE. Please explain to me how a foreign country can withdraw the gold; that is the mechanical process, I mean.
Mr. ECCLES. Well, it is a matter of selling dollars that the foreigners have here. They have possibly 7 or 8 billions.
Mr. LUCE. My point is this, the gold is supposed to be sterilized beyond the reach of any human being except for the purpose of international exchange.
Mr. ECCLES. That is right.
Mr. LUCE. H O W is it possible for them to get that gold ?
Mr. ECCLES. I n our stabilization agreement we agreed to give gold
just as the British give you gold and the French. We are in the same
position of supplying gold. If the foreigners with either deposits
here or securities here, for any reason, decided to transfer those
funds, to convert their securities into dollars and offer the dollars
for sale, our stabilization fund would certainly have to intervene
and would have to furnish gold and, just as is the case today, where,
if a Britisher wants to sell pounds and buy dollars, why, as long as
you have the stabilization arrangement working and have any stability between your currencies, you must permit the transfer of gold
and, so long as that arrangement is working, you would have to permit gold to leave the country to maintain the dollar relation to other
currencies.
Mr. LUCE. I still do not understand where that gold is coming
from.
Mr. ECCLES. I t would come out of the Treasury and later it could
come from the Federal Reserve System. I n other words, the Treasury owns the gold but it has given to the Federal Eeserve banks gold
certificates or credits payable in gold certificates. I n other words,
the Federal Reserve banks own a warehouse receipt on gold which
is held in the Treasury.



22

EXTENDING PEKI0D OF OBLIGATIONS AS SECURITY

Mr. LUCE. What I do not understand is how Smith & Jones of
London can take a gold certificate and get gold for it while I
cannot.
Mr. ECCLES. Well, Smith & Jones of London do not have a gold
certificate. Smith & Jones have dollar balances or have American
stocks and securities and Smith & Jones decide to sell those stocks
or those bonds and they sell them and they get dollars in the New
York bank, we will say.
Mr. LUCE. That is all clear so far, but somebody goes to the Treasury with something with which he gets the gold.
Mr. ECCLES. Smith & Jones have those dollars in the New York
bank. They want those dollars transferred to London by cable
transfer, we will say. The New York bank would have to have the
credit in pounds in London, with the bank in London, to be able
to make the transfer of dollars. Now, the way they can get this
credit in London is through a gold transfer. The individuals do
not own the gold and they do not get possession of the gold but
when dollars are being sold, which would be the case if Smith &
Jones wanted to transfer their dollars to pounds, dollars are being
sold and pounds are being bought, and dollars go down and pounds
go up unless the stabilization fund intervenes, just in the same manner that if pounds were being sold and dollars bought, which is the
case today, unless Britain permits gold to come over here, the pound
would go down in relation to the dollar. The individuals know
nothing about it. I t is an operation of the stabilization fund to
keep the currencies in adjustment through the buying and selling.
Mr. MCKEOUGH. And no individual gets any gold?
. Mr. ECCLES. N O ; no individual gets any gold, but gold moves back
and forth.
Mr. MCKEOUGH. Does not Smith & Jones, in London, get gold if
they demand it?
Mr. ECCLES. I think they can get gold by going into the free gold
market. None of their obligations are payable in gold; but if Smith
& Jones want to buy gold, there is a free gold market there, and
they can go and buy gold on that market just as an American can.
I f any American wants gold and wants to hold that gold in London, he could sell his dollars and buy pounds, and then take the
pounds and go to the free gold market and buy gold and hold his
gold earmarked in London.
Mr. MCKEOUGH. H e could not have it delivered here?
Mr.

ECCLES. N O .

Mr. MCKEOUGH. I n other words, the American citizen is at a disadvantage as against the French or the English. An Englishman or
Frenchman can sell his dollars in New York by disposing of his
securities on the New York exchange, getting a credit in a New York
bank, buy the pounds with the dollars he uses for credit here, and,
with the credit established in London, go to the market and buy his
gold at $35 an ounce.
Mr. ECCLES. YOU have a free gold market in London.
Mr. MCKEOUGH. We do not have it here.
Mr.

ECCLES. NO.

Mr. HANCOCK. The practical purpose of the gold is to substitute
the purchase of dollars for pounds or the purchase of pounds for
dollars.



EXTENDING PEEIOD OF OBLIGATIONS AS SECURITY

23

Mr. ECCLES. I t is a yardstick in international exchange.
Mr. LUCE. There are other factors that are constantly influencing
exchange.
Mr. ECCLES. Yes.
Mr. LUCE. And you,

of course, take those factors into account. I
wish you would still further explain as to how they can withdraw
the gold simply by the ordinary process of exchange.
Mr. ECCLES. Well, of course, I should not be talking about the
stabilization fund. That is a function of the Treasury. They are
operating that fund, and I may have a personal opinion with reference to it, but the actual operation Congress has given entirely to
the Treasury to handle. They are managing it and I do not believe I should attempt to express the way it operates here, an opinion
as to the way it operates or the forces and influences that may cause
it to operate. I would prefer that the committee ask somebody
from the Treasury to discuss that question.
Mr. MCKEOUGH. Might I ask a question there? What concerns me
is with the seven or eight billion dollars of investments in domestic
market situations in the United States by foreigners, and their ability
to transfer that out when, as, and if they desire, in an open free
market in New York. Is tho' machinery set up between the Federal
Reserve Board of Governors and the Treasury Department sufficient
and adequate, in your judgment, to protect against any unwarranted
break-down in New York prices ?
Mr. ECCLES. YOU mean in stock-market prices?
Mr. MCKEOUGH. Yes; or in Governments.
Mr. ECCLES. I would not say that it was adequate to prevent a
break-down in stock prices. After all, the price of stocks depends
upon whether or' not there are enough buyers at any time to absorb
what is being sold. The order in which the foreign holder of securities would sell his stock would be a factor. If sold slowly, over a
long period, there possibly could be an orderly market. If, on the
other hand, you take the entire holdings of securities held by foreigners, if they undertook to liquidate them in a very short space
of time it could naturally, very easily, cause a revulsion in the
stock market or in the bond market.
Mr. MCKEOUGH. I t is much better now than it was in 1929 for the
reason that the values on the New York exchange are practically
40 billion as against a high of 90 billion in September of 1929.
Mr. ECCLES. Yes; the stock market is not as high now, relatively,
as it was in 1929. Secondly, you have a very different money situation. You have today an adequate volume of funds. You*have a
very easy money situation. The volume of deposits available for
investment is such that they could absorb a very large amount of
securities without the use of bank credit.
Mr. MCKEOUGH. But there is greater danger by reason of the large
amount of foreign capital now charged to the New York market,
according to the press and various economists throughout the country, who estimate seven to eight billions of dollars in foreign money
now in this country in investments with the market at about $42,000,000,000 in value as against $90,000,000,000 in September of 1929.
I am concerned about the American investor and whether by reason
of the operation of the Treasury and the Federal Reserve Board of
133727—37



4

24

EXTENDING PERIOD OE OBLIGATIONS AS SECURITY

Governors, whether the American investor is sufficiently protected
or do we have to resort to closing the market in the event of some
unlooked-for trouble in Europe that might produce heavy selling in
New York.
Mr. ECCLES. I think heavy selling would not eventuate because the
market today is on a cash basis as against a credit basis. As to the
market in/ 1929, there was nine billion of brokers' loans alone, not
taking into account the business of bank credit on collateral. Today
your brokers' loans are about one billion and the market today is
almost entirely a cash market. The foreigners', of course, purchases
are all for cash. Now, that type of a market is very different, a very
different market than a market permitted upon a small credit margin; I mean a small collateral margin in the case of credit such as
existed in 1929.
Mr. MCKEOUGH. I t is not fair to assume that the seven or eight
billion dollars poured in from outside sources has been, in a large
measure, a contributing factor to the upward swing of the market?
Mr. ECCLES. I t has not all come in to the market since the depression. There was, approximately, I would say, around three billion of it here all during the depression. I t never left the country.
There are always a lot of foreign investors here of the type that
cannot be influenced and that seven or eight billion does not all represent stocks or bonds in the market at the present time. There is
about one billion and a half of cash foreign balances. There is
approximately one billion and a half in foreign plants and equipment here and foreign investments that just do not leave. They are
just as permanent here as American capital.
Mr. MCKEOUGH. I S that part of the set-up ?
Mr. ECCLES. Yes; that is part of it so that you really have somewhere around, not to exceed four to five billion of total foreign
investments in bonds and stocks. Some of that was here during the
depression. The total amount of the increase in foreign investments
since the bottom of the depression has been around $4,000,000,000.
Now, that four billion is pretty largely accountable for our huge
increase in gold and is responsible for all the excess reserves that
we have.
Mr. MCKEOUGH. S O that if that were hurriedly taken out it would
have some severe repercussions not alone in the market but along the
line.
Mr. ECCLES. After all, that money is here. I t has gone into circulation and is back in the banks.
The CHAIRMAN. All right, gentlemen, the committee will meet at
11 o'clock Thursday morning.
(Whereupon, at 12:30 p. m., the hearing recessed until Thursday
morning, Feb. 18, at 11 a .m.)




TO EXTEND THE PERIOD DURING WHICH DIRECT OBLIGATIONS OF THE UNITED STATES MAY BE USED AS
COLLATERAL SECURITY FOR FEDERAL RESERVE NOTES
THURSDAY, FEBRUARY 18, 1937
HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. O.
The committee met at 11 a. m., Hon. Henry B . Steagall (chairman) presiding.
The committee had under consideration S. 417.
The CHAIRMAN. The committee will come to order.
Governor Eccles, Mr. Patman desires to discuss the bill with you.
I now recognize him for that purpose.
STATEMENT OF MARRINER S. ECCLES, CHAIRMAN, FEDERAL
RESERVE SYSTEM
Mr. PATMAN. Governor Eccles, you received the communication
that I send down to you by messenger, did you not ?
Mr. ECCLES. YOU mean yesterday aiternoon, do you ?
Mr. PATMAN. Yes; asking if you have available certain information to which I referred.
Mr. ECCI.ES. I did; yes, sir.
Mr. PATMAN. Most of the information

had been furnished to me
previously, but I wanted to make sure that you have it available.
This bill is an amendment of paragraph 2, section 16 of the original
Federal Eeserve Act, and it deals with what is eligible as security
for the issuance of Federal Reserve notes. Are Federal Reserve
bank notes issued now at all ?
Mr. ECCLES. Yes, sir. They make up a large part of our circulating medium.
The CHAIRMAN. H e said Federal Reserve bank notes, Governor.
Mr. ECCLES. I t is Federal Reserve note. The bank notes were
issued during the emergency to a very small extent.
Mr. PATMAN. YOU are not issuing them at all now ?
Mr. ECCLES. N O , sir.
Mr. PATMAN. Practically

all of our circulating medium, outside
of the coin, is Federal Reserve notes?
Mr. ECCLES. Most of it.
Mr. PATMAN. I n order that I may understand this I will ask you
to follow a Government bond from the member bank to the proper
person here in Washington and the issuance and delivery or Federal Reserve notes to the member bank in return for the bonds.
Mr. ECCLES. Notes are not delivered to the Federal Reserve member banks in payment of a bond.




25

26

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

Mr. PATMAN. I understand they are given credit. But if they
want the money they can get it.
Mr. ECCL.ES. Not in payment of the bond.
Mr. PATMAN. Not in payment of the bonds?
Mr. ECCLES. No, sir. The only way the Federal Reserve banks
get Government bonds, which they put u p as collateral for Federal
Reserve notes, is by purchasing them on the market.
Mr. PATMAN. Y O U are talking about Federal Reserve banks; but
I am talking about a Federal Reserve member bank.
Mr. ECCLES. But you asked how a Federal Reserve member bank
could get notes from a Federal Reserve bank, by sending its Government bonds to the Federal Reserve bank?
Mr. PATMAN. Yes, sir; that is right.
Mr. ECCLES. I t does not get notes in that way. I t can borrow
money from the Federal Reserve bank, secured by its note. I t can
borrow money on its own note; that is, on the bank's note secured
by the bonds. The proceeds of the bank's note—that is, the member bank note, secured by Government bonds—would be deposited
to the credit of the member bank.
Mr. PATMAN. And get Federal Reserve notes, if it desires?
Mr. ECCLES. Yes, sir; t h a t is right.
Mr. PATMAN. That is the procedure you go through, is it?
Mr. ECCLES. Yes, sir; that is right.
Mr. PATMAN. If the Federal Reserve bank desires to get additional Federal Reserve notes it is required to deposit the bonds, as
I understand it, with the Federal Reserve agent with 40 percent gold
certificates.
Mr. Ecci/ES. That is right.
Mr. PATMAN. And then they are issued on p a r value, the p a r value
of the bond, not the increased or market value of the bond.
Mr. ECCLES. That is right.
Mr. PATMAN. And those notes are available to member banks if
they desire to place with the Federal Reserve bank the necessary
collateral to secure it ?
Mr. ECCLES. If they haven't the balance.
Mr. PATMAN. I presume this is in the Richmond district, is it not ?
Mr. ECCLES. Yes, sir; it is in the Richmond district.

Mr. PATMAN. Suppose a bank here desires a million dollars worth
of Federal Reserve notes. I presume it would send a million dollars
in bonds to the Federal Reserve bank in Richmond as security for
its own note to the amount of a million dollars, and then the Federal
Reserve bank at Richmond would at least grant a credit?
Mr. ECCLES. That is right.
Mr. PATMAN. Which could be used for the issuance of the Federal
Reserve notes to the amount of a million dollars?
Mr. ECCLES. That is right.
Mr. PATMAN. When the bank here gets these Federal Reserve notes
it will be required to pay the rediscount, as I understand it ?
Mr. ECCLES. That is right.
Mr. PATMAN. W h a t is that rate now?
Mr. ECCLES. I t is 2 percent.

Mr.
Mr.
Mr.

PATMAN. H O W uniform is that rate?
ECCLES. I t is 2 percent in all banks except
PATMAN. And then what is that?




two.

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY
Mr. ECCLES. I t is iy2

27

percent.

Mr. PATMAN. Where is that ?
Mr. ECCLES. I n New York and in Cleveland.
Mr. PATMAN. I n New York and in Cleveland it is V/2 percent?
Mr. ECCLES. Yes, sir; that is right.
Mr. PATMAN. Suppose the bonds deposited were 3-percent bonds
and they paid 2 percent? Of course, they would continue to get the*
interest of 3 percent on the bonds ?
Mr. ECCLES. That is right.
Mr. PATMAN. Just like a person borrowing from an individual
bank?
Mr. ECCLES. That is correct.
Mr. PATMAN. If the Federal Eeserve bank at Richmond wanted to
increase its stock of Federal Reserve notes it would have a right to
get these notes without paying any interest at all, would it not?
Mr. ECCLES. That is correct.
Mr. PATMAN. Section 16 of the Federal Reserve Act says—that is,
one part of it does, but I do not recall which paragraph it is—that
when the Federal Reserve agent issues Federal Reserve notes the
Federal Reserve bank shall pay such interest charge as may be agreed
upon by the Federal Reserve Board, which I presume is the Board
of Governors of the Federal Reserve Bank. W h a t is the policy of
the Board of Governors on carrying out that particular section of
the law?
Mr. ECCLES. I am not familiar with the section to which you refer.
I do not know just what you are attempting to prove, but the Federal Reserve banks as such, of course, have never paid interest.
There is no one to whom they could pay interest. There was a time
when they paid a franchise.
Mr. PATMAN. I am not talking about the franchise, but about the
part of this section.
Mr. ECCLES. T O whom would they pay interest?
Mr. PATMAN. I t would go to the Treasury, I presume.
Mr. ECCLES. That is what the franchise tax was, of course. I t was
a form of that.
Mr. PATMAN. And by the reason of the fact that there was a franchise tax and these excess earnings would go into the Treasury, the
Board of Governors of the Federal Reserve Board fixed the zero rate
of interest?
Mr. ECCLES. I could not say as to that.
Mr. PATMAN. At any rate, they never charged any interest rate?
Mr. ECCLES. That is right.
Mr. PATMAN. Since that time the law has been amended so that
the excess earnings do not go to the Government, has it not?
Mr. ECCLES.

Yes.

At the time the F . D. I. C. was organized there was $149,000,000,
as I recall it, of the capital of the Federal Deposit Insurance Corporation.
Mr. PATMAN. That is not what I am asking about, if you will
pardon my making the suggestion. And I think we can shorten this
a great deal.
Mr. ECCLES. Then, what is your question ?




28

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

Mr. PATMAN. My question, Governor, is it not a fact now that
excess earnings of the Federal Reserve banks do not go into the
Treasury, as originally contemplated by the law ?
Mr. ECCLES. That is correct. Of course, the Federal Eeserve banks
have practically no earnings. They have had practically none the
past several years. I t has been a very small amount.
Mr. PATMAN. The excess earnings under the present law would
go into the surplus fund of each bank?
Mr. ECCL.ES. Yes, sir; that is correct.
Mr. PATMAN. And would not go into the Treasury ?
Mr. ECCLES. That is correct.
Mr. PATMAN. W a s that the same reason that was given back in
1914 or 1915 as to why there should be no interest rate charged,
because excess earnings go into the Treasury anyway? That reason
is not logical now, is it, for the reason that the excess earnings do
not go into the Treasury?
Mr. ECCLES. Inasmuch as the member banks are limited to a fixed
rate of return on the capital, any earnings in excess of that fixed
rate of return would go to the surplus of the Keserve banks. And,
of course, they could not be utilized except as Congress determined.
Mr. PATMAN. By special act of Congress?

Mr. ECCLES. Yes, sir; by special act of Congress. I n other words,
any excess, in case of liquidation after the stock of the Keserve banks
was retired at its p a r value, which would include all earnings, would
accrue to the Government.
Mr. PATMAN. That is only in the event of liquidation, is it?
Mr. ECCLES. Yes, sir; or at any time that Congress decided, they
could do just as they saw fit.
Mr. PATMAN. There is no question about that.
Mr. ECCLES. S O that the franchise tax, of course, would just eliminate any current earnings and may create a deficit.
Mr. PATMAN. I want to ask you some questions about the value
of the United States securities held in the different banks. As I
understand it, about $2,430,000,000 worth are held by the 12 Federal
Reserve banks?
Mr. ECCLES. Yes, sir; that is right.
Mr. PATMAN. W h a t is the value of the securities held by the member banks of the Federal Reserve System, just approximately?
Mr. ECCLES. I am going to tell you that. I will ask Mr. Smead
if that is it.
Mr. PATMAN. Well, just approximately.
Mr. ECCLES. On December 31, 1936, $11,639,000,000 direct obligations of the United States Government.
Mr. PATMAN. And how many guaranteed by the Government?
Mr. ECCLES. I believe $1,906,000,000.

Mr. PATMAN. $1,906,000,000 that are guaranteed to the Government?
Mr. PATMAN. W h a t about the nonmember banks of the Federal
Reserve System? Have you a record showing the amount in value
of the securities held by them?
Mr. ECCLES. I will ask Mr. Smead if he has that.
Mr. PATMAN. B u t you do know, as a matter of general information, that about l7y2 billion dollars of Government securities are
held in the banks of the country.



EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

29

Mr. EOCLES. Do you mean those held by Federal Keserve System?
Mr. PATMAN. Yes; including those.
Mr. ECCLES. Yes, sir; that is right.
Mr. PATMAN. I n other words, about 15 billion are held by member
and nonmember banks?
Mr. ECCLES. Yes; that is correct.
Mr. PATMAN. And about two and a quarter billion dollars plus are
held by the Federal Reserve banks ?
Mr. ECCLES. Yes; that is correct.
Mr. PATMAN. I n other words, the banks hold about 60 percent of
the Government securities outstanding, do they not?
Mr. ECCLES. N O , sir. There is 35 billion dollars outstanding; so
they would not hold more than half.
Mr. PATMAN. They would hold not more than half?
Mr. ECCLES. Including those held by the Federal Reserve System?
Mr. PATMAN. D O you believe the policy of permitting the banks
to purchase so many Government bonds have had a tendency to retard their efforts in the direction of obtaining eligible paper through
direct commercial lines ?
Mr. ECCLES. N O ; I do not.
PATMAN. YOU do not think so.
Mr. ECCLES. N O ; I do not.
Mr. PATMAN. Don't you think it is

Mr.

much easier for the banks to
make money in that way than through normal commercial channels?
Mr. ECCLES. N O , sir; I do not.
Mr. PATMAN. F o r instance, take

when the Banking Act of 1933
passed; at that time it was the law that interest may be paid on
demand deposits; and that interest, of course, was being paid on time
deposits, and the law was changed so as to permit that interest rate
to be regulated. Isn't it a fact that by reason of that the banks
have been saved an enormous amount of money annually?
Mr. ECCLES. I think possibly the Government has.
Mr. PATMAN. The Government has, you say?
Mr. ECCLES. Yes, sir.
Mr. PATMAN. But haven't the banks?
Mr. ECCLES. I think the Government has.
Mr. PATMAN. I will ask you about the banks, Governor.
Mr. ECCLES. Directly, the banks have; indirectly, the Government

has.
Mr. PATMAN. Both have profited by it, have they not ?
Mr. ECCLES. Yes; they have.
Mr. PATMAN. I S it not a fact that in 1932, we will say—and I am
sure you have the papers there before you—the member banks only—
not all banks, but member banks, representing about 7,000 out of
14,000, approximately—isn't that right?
Mr. ECCLES. 7,000 out of 19,000.
Mr. PATMAN. They paid $301,000,000 interest for that year on
time deposits, but they are paying only now about half of that
amount. Evidently some regulation was issued which permitted
them to reduce their interest rates considerably. Is that right?
Mr. ECCLES. That is correct.
Mr. PATMAN. S O they are saving about $150,000,000 each year
under 1932?
Mr. ECCLES. They are paying about that much less interest.



30

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

Mr. PATMAN. F o r 1930 they are saving about $300,000,000 alone?
Mr. ECCLES. I think that is correct.
Mr. PATMAN. That is on time deposits?
Mr. ECCLES. Yes, sir; on time deposits.
Mr. PATMAN. On demand deposits is it not a fact that they are
saving about $220,000,000 a year?
Mr. ECCLES. I do not have the figures.
Mr. PATMAN. The amount of interest paid on demand deposits
in 1936 as compared with 1930 ?
Mr. ECCLES. I n 1936 there was nothing practically on demand deposits.
Mr. PATMAN. I t was $3,000,000 for the first half?
Mr. ECCLES. Yes; $3,700,000.
Mr. PATMAN. I n 1930 they paid $225,000,000.
Mr. ECCLES. That is right.
Mr. PATMAN. Of course, that was reduced as time went on. But
comparing 1936 with 1930, the 7,000 member banks are saving about
a half billion dollars a year, are they not, Governor; representing the
difference in what they would have paid had the 1933 Act not provided against demand deposits and had not permitted a regulation
of time-deposit interest rates to the extent that it did ?
Mr. ECCLES. I do not think they would have paid that. You are
just assuming, of course, that they would have continued a rate of
interest on deposits and an easy money situation such as we have had,
as they paid at a time when they could get rates for money. The
fact that we fixed a rate on time deposits at 2V2 percent—that it, as a
maximum rate. I think the F . D. I. C. has done the same thing for
the nonmember banks.
There is a very small percentage of the total time deposits in the
banks which is receiving 2 percent. The banks have paid less than
the maximum amount they are permitted to pay. Very few of the
savings accounts are bearing more than 2 percent in the aggregate
and many of them less than that rate. Therefore from that I must
assume that if there had not been a maximum of 2 % percent there
is no reason to expect that they would have been paying more than 1
percent on the aggregate time deposits, which is iy2 percent less
than the maximum amount they could pay.
Mr. PATMAN. But at least they could have paid the contract rate
if it had not been for this regulation.
Mr. ECCLES. They would not have made a contract rate higher
than the 1 percent they are now paying.
Mr. PATMAN. Sometimes certain circumstances enter into these
questions which cause them to pay more than they might have paid.
Mr. ECCLES. The ability to use the funds.
Mr. PATMAN. But I am talking about certain banks. A n individual bank exercises the right to privately contract.
Mr. ECCLES. Of course, if he wants to run an unsound bank by
paying more for money than he can use that money for, that is bad
for the public interest.
Mr. PATMAN. But it is not evident that by the Government's
saving the banks, let us say several hundred million dollars a year
on the act of 1933, at the same time permitting them to receive
interest on such a large amount of Government bonds that they
purchased regularly—for which they should not be criticized under
present laws and system—but the natural tendency is for them to



EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

31

have that easy and comfortable situation rather than going out into
the market and taking eligible paper and accepting even pretty
good loans when they are offered to them ?
Mr. ECCLES. I do not think that is correct. I think that recovery
loans are increasing. The only way to bring about an increased
borrowing is through an increased business activity.
Mr. PATMAN. Through increased business activity, you say?
Mr. ECCLES. Yes, sir; that is right.
Mr. PATMAN. But let me suggest this, that with increased governmental business activity, like the building of water and sewer projects and kinds of P . W. A. projects, the bonds heretofore would
be handled locally by the local banks; that is, many of them would
be, and the banks would get the benefit of that interest. But now
is it not the tendency to take those bonds and put them together
and sell them to the larger banks and deprive the smaller banks of
that source of revenue?
Mr. ECCLES. No, sir; there is not a demand for credit until such
time as individuals and institutions can use credit profitably. Business institutions and individuals do not borrow money except where
they think they can use that money to their advantage. The Government borrows money as it did do, and it expends those funds in
the social interest, and it is not motivated by profit. The credit of
the Government is based upon the total national wealth and national
resources. The credit of the municipality or of the corporation or
of an individual is based entirely upon his income or the quoted
value of the particular resources that he has at the time he wants
credit.
Mr. PATMAN. I n regard to the interest rates you mentioned a
little while ago, Governor, what is the correction that your department is going to make now with reference to interest rates? Are
you expecting to adopt a policy that will cause them to increase,
stay as they are, or lower them?
Mr. ECCLES. We expect—or I will say, I expect, and I do not
want to speak for other members of the Board—that the long-term
rate is not likely to increass in the immediate future and, so far as
I can see, in the indefinite future.
Mr. PATMAN. I n other words, you are opposed to an increase in
interest rates?
Mr. ECCLES. Yes; I am in the long-term rate. I am in favor of
a long-term low rate. However, that rate will be determined largely
by the total amount of savings of the country in the relation to the
demand for capital; that is, the demand for new capital.
Mr. PATMAN. But the current interest rate is increasing, is it not,
Governor?
Mr. ECCLES. There is a tendency for the rate, which was practically at the vanishing point, to increase.
Mr. PATMAN. As that increases Government bonds will necessary
go down?
Mr. ECCLES. I do not think the long-term Governments will go
down.
Mr. PATMAN. YOU say you do not think the long-term Government
bonds will go down?
Mr. ECCLES. N O , sir; I do not. The short-term rates are still excessively low—commercial paper, three-quarters of 1 percent, call money
1 percent, bankers' acceptances, five-sixteenths percent.



32

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

Mr. PATMAN. And, Governor, if you will permit an interruption,
you expect them to go up a little bit, but you are not expecting any
increase in the long-term notes?
Mr. ECCLES. That is correct.
Mr. HANCOCK. Governor, is it not a fact that within the last 3
or 4 months, due to the policy of the Federal Keserve Board, that
the interest rate on short-term Government borrowings has jumped
from about 0.09 to more than 0.37?
Mr. ECCLES. T O just 0.37. That was the rate on the last $97,000,000 offering.
Mr. PATMAN. That will make the Federal Eeserve Board stabilization program that much more extensive.
Mr. ECCLES. Yes; that is correct.
Mr. PATMAN. If there should be a break in the market in Government bonds or a tendency downward, under the present law the
Treasury could use the stabilization fund to protect your bond
market ?
Mr. ECCLES. A S I understand it, the Treasury has the power to
buy Government bonds with their fund.
Mr. PATMAN. That is, to the extent of 2 billion dollars?
Mr. ECCLES. Yes; that is correct.
Mr. PATMAN. If that would protect it?
Mr. ECCLES. Yes; that is correct. The average rate on Government bonds is about 2.3 percent today.
Mr. PATMAN. I do not know of any other way to get the information except to ask for it, Governor. The last few weeks I have
noticed that certain large banks have been consistently selling
20 to 30 dollars worth of Government securities every week.
Mr. ECCLES. Getting prepared to take care of an increase in reserves.
Mr. PATMAN. D O these banks selling these bonds really need to do
that, Governor?
Mr. ECCLES. Yes; I think they do. There are certain of the banks
in the New York district which are unable to meet the increased
reserve requirements.
Mr. PATMAN. I am very glad to get that information, because I
was just a little apprehensive that they might be unloading their
Governments onto the smaller banks of the country.
Mr. ECCLES. They hold very few Government bonds. Most of the
paper held by the New York banks are the 90-day Government bills
and notes, from 1-year to 5-year notes. The percentages of Government bonds that they hold is less than 40 percent of their total
holdings of Governments. And I do not think they have been reducing their Government-bond holdings. Between June 30 and December 31, they increased by $122,000,000. The reduction is in the shortterm paper. I n the reduction of that paper one bank may reduce it
while another may take it. There is a shifting because certain banks
have excess reserves while other banks have a deficiency. Those
which may have deficiencies may sell and those which have excesses
may buy. The result in the New York district as a whole, of course,
is one of excess reserves. When the full amount of the increased reserve requirements goes into effect on May 1, of all the member banks
there will be a total of 197 banks only with deficiencies, if one-half
of the balances with correspondent banks is utilized.
Mr. PATMAN. D O you think the 197 banks that are selling Government bonds are getting ready for that?




EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

33

Mr. ECCLES. The total deficiency is $122,000,000. Of this deficiency,
12 New York banks have a deficiency of $100,479,000; one Chicago
bank has a deficiency of $8,000,000; and 16 of the reserve city banks—
and Chicago and New York are central reserve city banks—have a
deficiency of $10,998,000; and 168 country banks, figuring that they
will leave one-half of their balances with city correspondents—well,
the balances of the country banks with their city correspondents
today are more than twice what they normally carry. So, figuring
that they carry a normal amount, the total deficiency of country
banks, using this one-half of the balances and the excess that they
now have in the Reserve banks, would be $2,349,000, on the basis
of figures compiled early this year.
Mr. PATMAN. That is very interesting, Governor, but it still does
not clear up in my mind about these banks selling, let us say, $250,000,000 worth of these Government securities since December 15.
F o r the future your answer seems to be very reasonable and logical,
and it is reassuring to me, and I am very glad to get the information. But still I can hardly understand why before this order was
issued they were consistently unloading 30 to 40 million dollars
worth of Government securities a week.
Mr. ECCLES. Of course, it is a shifting from those who loaned up
pretty fully.
Mr. PATMAN. YOU say it is just a shifting?
Mr. ECCLES. W h a t is the total reduction? Do you have the figures
as to the total reduction, Mr. Smead? Isn't it a reduction in the
Government bonds held by the banks in the country?
Mr. HANCOCK. Governor, do the banks have advance notice of the
proposed action of the Federal Reserve Board before the public has
that information ?
Mr. ECCLES. I do not believe I understand your question.
Mr. HANCOCK. As a general rule do the banks have advance
notice of the anticipated policies of the Federal Reserve Board
before that information is available to the public ?
Mr. ECCLES. They do not. We try our best to keep the public
fully informed, I might say.
Mr. HANCOCK. I wondered whether the banks knew t h a t you were
going to increase your reserve requirements before the public knew it.
Mr. ECCLES. N O , sir; they did not. There was an indication on
"November 21. There was Treasury financing to be done, that is December financing. And in discussing the matter with the Secretary
of the Treasury it was felt advisable, in order t h a t no one could
be accused of bad faith
Mr. HANCOCK. I was not even hinting at that. I wanted to get
your answers in the record
Mr. ECCLES. I t was felt advisable, in order that no one could be
accused of bad faith, that the question of excess reserves be taken up
for consideration. I t was a public statement that I made to the
press. The banks had no more notice than the public received. And
when it came to taking action there was endless discussion and
consideration by^ all members of the Board at numerous meetings,
with a study of our findings and our charts, and with the best information that we could secure from our technicians. And when
action was finally taken no one knew or could possibly have known
what the final outcome would be until the Board had finally acted.
And when the Board acted, then a press release was given out.



34

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

The public got that information through the press release at the
same time that the banks received the information.
Mr. PATMAN. Governor, I shall ask yon one more question, which
I think will end this part of the discussion.
Mr. ECCLES. I was just going to tell you the decrease in Governments in the last 6 months. June 30, $11,721,000,000; December 31,
$11,639,000,000, or about $80,000,000 less. And practically all of
this shifting was in New York.
Mr. PATMAN. That does not cover the question that I wanted
to ask you.
Mr. ECCLES. I t was 6 months.

Mr. PATMAN. I was asking about December and up to now. There
is a reduction of $80,000,000 shown there; that is, $80,000,000 lower
up to the end of the last 6 months. But I am asking about the time
from December 15 up to the present.
Mr. ECCLES. We get weekly reports from the larger banks, which
compose the great bulk of the reserve system. And on the weekly
report and statement of December 16 the amount of Governments
was $9,310,000,000.
Mr. PATMAN. That shows a decrease there of $2,000,000,000 and
something?
Mr. ECCLES. NO, sir. Te other was all member banks.
Mr. PATMAN. But that is meaningless unless we have some explanation of it.
Mr. ECCLES. I was just going to show the fluctuation in Government securities for all of these reporting. There is no way in which
we can get a statement from all banks except when we get them on
these call dates.
Mr. PATMAN. Will you secure the information and furnish it to
me privately, if you desire, as to these institutions that have been
selling these bonds, showing whether or not the total amount has
decreased consistently since December 15 ?
Well, we will just pass that, Governor. I do not like to delay the
committee while you are looking for it.
Mr. ECCLES. I can give you the exact figures on the New York
banks. On February 10 Government obligations held by the New
York banks amounted to $3,444,000,000.
Mr. PATMAN. That was February 10, you say ?
Mr. ECCLES. Yes; that was February 10.
Mr. PATMAN. NOW, how about December 15?
Mr. ECCLES. That was February 10. Now, I shall give you the figures on December 15. That was $3,661,000,000.
Mr. PATMAN. That seems to show that they have had a definite
policy there of unloading the Government securities, does it not?
Mr. ECCLES. I should say that the Government has $50,000,000 a
wreek of bills maturing.
Mr. PATMAN. But normally they would repurchase, would they?
Mr. ECCLES. They would, I suppose, if it were not for the matter
of increasing their reserves.
Mr. PATMAN. But they did not know that back in the month of
December, did they?
Mr. ECCLES. Except the statement I have just indicated.
Mr. PATMAN. Except the statement that was issued to the press,
you mean?
Mr. ECCLES. Yes; that is right.



EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

35

Mr. FORD. I S it not reasonable, Governor, to assume that the banks
who watch closely the trends would be very likely to adopt the policy
of preparedness with reference to possible increase in their legal
reserves, knowing that this Board's tendency would be to bring it up,
if necessary ? Is that not reasonable to assume ?
Mr. ECCLES. I think it is reasonable to assume that the banks would
maintain an excess reserve, even though the Board had not indicated
that, so far as their loans were concerned—the very fact that there was
a possibility of increasing the reserve requirements, which was inevitable to most banks. W i t h $2,150,000,000 of excess reserve, it was
(juite apparent that some further increase at some time would be made
in reserve requirements. As to the timing and as to the amount, that
would be another question. But the wise bank would not get itself
completely loaned up, even if it could. The purchase of short-term
bills, of course, left the New York banks in a position where they
simply would let their bills run off or let their notes run off; and that
is exactly what happened.
Mr. BATMAN. I want you to know that I am in favor of giving the
Board wide powers to stop deflation, and also inflation. But I just
wondered about the inflation that you are trying to stop now. W h a t
is it?
Mr. ECCLES. Well, I do not see inflation now. All that I see is,
with the excess reserves now in the System, if that reserve were
used it could create a total debt structure.
Mr. PATMAN. I concede, Governor, that that is the situation that I
know about. I knew about this reserve. But is there any other
reason why you would want to guard against inflation?
Mr. ECCLES. There is this tendency. There is the tendency on the
part of institutional investors, insurance companies, mutual savings
banks, and trustees, to feel that the long-term rate is getting to a point
where, with a speculative or an inflationary development, they would
likely take losses or shrinkages in their investments. I t is necessary
to have confidence on the part of institutional investors in the longterm capital market, or in the long-term rate, as well as confidence
on the part of individuals. Otherwise we would find investment
funds that should go into the mortgage market, into the private bond
market, the municipal market, to provide new capital to put people
to work, going into the speculative fields of advanced commodity
buying and stocks and speculation. I n other words, when the rates
on long-term bonds get so low that an investor feels that there is
more speculation in that sort of an investment than there is in a
stock, the money may be pulled from the capital market and go
into a speculative inflation.
Mr. PATMAN. That is the other major reason you had in mind?
Mr. ECCLES. Yes, sir. That was one of the principal reasons—to
give assurance to the investing public, that is, institutional investors,
that the Board was desirous of preventing inflation, that there was
no desire to force artificially the long-term rates to a point where
they could not be sustained and would later come back and show
substantial losses on the investments. The fact that the total supply
of the means of payment, deposits and currency, is about $2,000,000,000 in excess of what it was in 1929 was an indication to us that
what was needed was that those funds should go out into investment
channels, that sufficient funds had been created for the present pur


36

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

pose to be able to carry a greatly increased volume of business without any increase in the mortgage or the bond field. I n fact, I think
mortgage rates in certain areas where they are held up to 6 percent
or 5y2 percent would likely come down, that the volume of funds for
investment purposes, without banks lending at all, is far in excess of
the current demand or use for funds. That demand is increasing
rapidly. And there are sufficient funds now on deposit to supply
that demand. And with those funds going into the investment
rather than into the speculative field it will tend to put into velocity
this existing supply of money which can support a national income
of better than $90,000,000,000 as compared with the national income
of 1929. We had at that time $55,000,000,000 of total time and
demand
Mr. PATMAN. YOU have answered the question I asked. Now, I
would like to ask one additional question. The time is getting late.
Naturally we are interested in the direction you are going in this
legislation and in similar legislation.
Mr. ECCLES. A t that time we had $55,000,000,000 of total time and
demand deposits.
Mr. PATMAN. YOU have answered the question I asked. But I
would like to ask another question. I know the time is getting late,
but, as I say, we are interested in the direction you are going in this
legislation and in similar legislation, and personally I would like
to know about that. Perhaps all the other members of the committee
know about it, but I am a new member on this committee. I would
like to know how you feel about branch banking. Are you working
in the direction of eventually having a branch-banking system in
this country?
Mr. ECCLES. If you are speaking about any work that the Board
has been doing, the matter has not been discussed, nor has it been
mentioned. So far as I personally am concerned, I have done nothi n g ; that is, I have done no work whatever, I have given no thought
to the subject, and I have prepared no legislation and I have not
requested that any legislation be prepared with reference to the
subject, in spite of the statements of some of the press and the
bankers. So far as my position on branch banking is concerned, my
position is well known. I stated my position before this committee
2 years ago; and I still feel as strongly as I felt 2 years ago that a
limited branch-bank development in this country is not only desirable
in the public interest, as well as in the interest of the little bank,
but it is inevitable.
Mr. GOLDSBOROUGH. Will the gentleman from Texas yield to me for
just a moment ?
Mr. PATMAN. Certainly, Mr. Goldsborough.
Mr. GOLDSBOROUGH. I n view of the fact that this discussion of
branch banking is entirely aside from the issue before the committee,
it is probably just as permissible for a member of the committee to
state his opinion as it is for the Governor.
So far as I am concerned, I am not only unalterably opposed to
any increase in branch banking but if I had my way there would
not be a single branch bank in the United States.
The CHAIRMAN. If I might be permitted to make a suggestion,
this is all very interesting, of course, and all of us are interested
in everything you have said and everything you have suggested.



EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

37

But I would like very much to finish with this bill so that we can
report it today.
Mr. PATMAN. I am not going to ask many other questions. I will
just tell you now, if you want to know, what I am driving at.
The CHAIRMAN. I do not want to cut you off at all.
Mr. PATMAN. I believe the chairman will agree with me that I
have been asking questions rather rapidly.
The CHAIRMAN. And I am not finding fault at all; but I am suggesting that we could get into a discussion of this matter which
might last for several days.
Mr. LUCE. Could you venture an opinion, Governor, as to how
large a part of the deposits in the banks are time deposits and what
part is demand deposits?
Mr. ECCLES. Are you speaking of member banks or of all banks,
including mutual savings banks?
Mr. LUCE. I am speaking of member banks.
Mr. ECCLES. And of member banks only?
Mr. LUCE. Yes; of member banks only.
Mr. ECCLES. A S I recall it, there is a total of about $10,500,000,000
of time deposits of member banks only on J u n e 30, which is the last
complete figure we have on what is known as evidenced by savings
passbooks, $8,565,000,000; certificates of deposits, $843,000,000. Then
you have the Christmas savings and miscellaneous items.
Mr. LUCE. Have you no apprehension as to all of this program
now going on on the thrift of the country ?
Mr. ECCLES. T O just what program do you refer?
Mr. LUCE. When one of the results is to bring the earnings of
thrift money down below 2 percent do you think it will not be a
discouragement to thrift?
Mr. ECCLES. I do not know how you get the impression that there
was an effort being made to bring thrift earnings below 2 percent.
Mr. LUCE. Oh, no. I did not mean to intimate that you had intended to do t h a t or to have that effect. But I am wondering if
the element of thrift and its bearing on the social welfare is being
kept in mind.
Mr. ECCLES. Certainly, I have it in mind. I t is a difficult matter,
of course, over any long period of time to determine or to fix longterm rates. They must be influenced by the total amount of savings that are needed in the country—not necessarily savings accounts in banks but the total savings aavilable for investment in
new facilities. We have not been short of savings, as evidenced in
the 1920's, by having a large volume of funds available for the
buying of foreign securities. I f the total amount of savings for
investment exceeds the demand or the need of new capital facilities
at the time, naturally the rates are going to tend downward. On
the other hand, if the demand exceeds the total amount available,
the rate will tend upward.
Mr. PATMAN. H a s the gentleman finished? While I am always
willing to yield to the gentleman, it is really not related to the inquiry
I had in mind.
Mr. LUCE. B u t I thought that you had finished.
Mr. PATMAN. Oh, n o ; I had not. I have a few more questions. I
have here a list of the 109 largest banks in the United States, which
I understand represent more than 50 percent of the total assets of all



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EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

banks, and the amount of Government securities they hold and their
deposits of interbank deposits. And one thing is very noticeable to
me on this list. For instance, take the first three banks, which are
New York banks, with assets of $2,356,000,000 for the first one, and
the second one with total assets of $1,972,869,000, and the next one
with total assets of $1,969,852,000. And all of these banks have
interbank deposits. We find the Bank of America at San Francisco
has total assets of $1,366,000,000.
The Bank of America at San Francisco has total assets of
$1,366,000,000, but it has only $39,584,000 of interbank deposits.
Then going down the list there is $254,122,000 interbank deposits for
a smaller bank, and then $278,969,000, $170,966,000, and $228,991,000,
It is noticeable that the larger banks have a large amount in interbank deposits except in the case of banks where there are branches.
For instance, take the Los Angeles bank, the Security First National
Bank of Los Angeles, and, although the bank compares in size with
those just ahead of it, they have only $25,845,000 in interbank deposits. The one just ahead of it on the list has $106,000,000 in interbank deposits.
The First National Bank of New York is smaller, yet it has
$158,000,000 in interbank deposits.
I have reached the conclusion, whether it is well founded or not—
and I hope the Governor will tell me whether it is not—that where
they have branch banks, like they do in California, that they want to
do business only with their own banks, and consequently they do not
have many large interbank deposit accounts.
For instance, take Los Angeles and San Francisco; if there were a
bank needed in a town the large bank in San Francisco or in Los Angeles would have the first claim on it, because an independent bank
would not be very successful unless it had a connection with one of
these larger banks. Therefore, I have reached the conclusion from
analyzing these figures, Governor, that branch banking has a tendency of concentrating the credit system of the country in a few
hands, and that if we were to adopt a policy which led to branch
banking that we would concentrate more power and wealth in the
hands of a few. I presume the Governor may entertain an entirely
different view than that.
Mr. ECCLES. Of course, this branch-banking question, I realize, is
a very debatable question; and it has been for a long period of time.
In other words, it is a hot subject. And for me to attempt to enter
into a discussion with you, considering its advantages and its disadvantages
Mr. PATMAN. I am not asking you to discuss it, Governor.
Mr. ECCLES. I realize that there are always two sides to every
question. But no one is more sympathetic to the place that the little
bank has been in the community than I am. And no one would be
more unwilling than I would be to do anything to put that little bank
out of business so long as it is giving the best service to its community. I would not want to be understood as favoring branch
banking that permitted the establishment of branches in any community that already had banking service.
Mr. PATMAN. But, Governor, if you permit it, and then if your
larger bank will not become the correspondent of the smaller bank
in a little town, the bank will eventually dry up if it cannot get the
service, and if the branch-banking concern does not want to serve it



EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

39

it can destroy the little bank and in that way create a demand for
one of their own branches, can it not ?
Mr. ECCLES. Any unit bank can get far more service from the
Federal Reserve System than from a correspondent bank.
Mr. PATMAN. But suppose it is not in the Federal Reserve ?
Mr. ECCLES. Then it should join the Federal Reserve. I am also
in favor of unification. Of course, there is the place where they
should carry their balances. I t is where the reserves should be kept,
because the only place where a member of the System should keep
his balance is with the Reserve bank.
Mr. PATMAN. I appreciate the information, but I shall not ask
to delay the committee long, but I shall ask to have the information
inserted.
On yesterday I asked Governor Eccles to prepare for the committee and to have available today a list of all the positions in the Federal Reserve System whose annual salary is $10,000 or more, showing
the name of the position.
Have you that information available with you, Governor? I just
want to have it entered in the record, if you have it.
Mr. ECCLES. Earnings and expenses of the Reserve banks during
1936, you ask. Now, what is the next one ?
Mr. PATMAN. I t is no. 7 on the list.
Mr. ECCLES (reading):
Information with respect to the annual salaries of the officers and the
employees of the Board of Governors as of December 31, 1935, is published on
pages 240 and 245 of the Board's 1935 annual report, a copy of which is attached
hereto.

Summaries or summary figures with respect to the salaries of officers and employees at the Federal Reserve banks are shown on page
250 of the same report. I t would take some time to compile more
detailed information with respect to the salaries paid to the individual officers of the Federal Reserve banks.
NUMBER A N D SALARIES OF OFFICERS A N D EMPLOYEES
OF FEDERAL RESERVE B A N K S
[Dec. 31, 1935]

Annual salary
of—
Federal Reserve banks
(including
branches)

Employees,
except those
whose salaries
are reimbursed
to bank

Chairman and Gover- Num- Annual NumFederal
ber salaries ber
nor
Reserve
agent

Boston
$20,000
New York
60,000
P h i l a d e l p h i a - 20,000
Cleveland
Richmond
Atlanta
Chicago
35,000
St. Louis
20,000
Minneapolis-__ 20,000
Kansas City
Dallas
20,000
San Francisco
Total

Other officers

185,000

$30,000
50,000
30,000
23,000
25,000
25,000
35,000
25,000
25,000
25,000
30,000
30,000
353,000




11 $105,250
616
40 480,100 2,250
11 105,200 791
21
177,400 910
17 126,100
547
30
182,540
368
31 265,500 1,082
19 135,200
552
12
79,100
336
19 144,800 491
16 113,500 339
30 212,600
775

Annual
salaries

$945,956
4,014,086
1,242,530
1,484,828
791,014
507,457
1,597,744
764,272
542,883
764,566
557,338
1,291,324

Employees
whose salaries
are reimbursed

Num- Annual
ber
salaries

73
316
109
165
167
329
376
188
68
160
119
148

$90,890
453,015
148,170
270,735
211,136
361,596
575,594
216,246
103,127
228,475
174,592
216,476

Total

Number

Annual
salaries

702 $1,192,096
2,608 5,047,201
913 1,545,900
1,097 1,955,963
732 1,153,250
728 1,076,593
1,491 2,508,838
761 1,160,718
418
770,110
671 1,162,841
476
895,430
954 1,750,400

257 2,127,290 9,057 14,503,998 2,218 3,050,052 11,551 20,219,340

40

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

Mr. PATMAN. I think that will serve the purpose, Governor.
Now, then, Governor, the other question—that is, question no. 8—
information relating to the retirement system of the Federal Keserve, showing the number of persons retired, the highest amount
received, the lowest amount received, and the average, together with
information regarding contributions to the fund.
Mr. ECCLES. Detailed information in answer to this question is not
available at the Board's office. There is attached copy of rules and
regulations of the retirement system, from which it will be noted
the system is governed by a board of 26 trustees. Of the 26 trustees,
1 is elected by the employees of the Federal Reserve Board and 1
appointed by the Board, and there is 1 elected and 1 appointed
member representing each of the 12 banks. All information with
respect to the maximum and the minimum retirement allowances is
contained in the records of the retirement committee of the board of
trustees. A copy of the last annual report of the retirement system
is attached hereto.
That is the report of April 1936.
Mr. PATMAN. If you will let me have that report I will pick out
the parts I would like to have inserted in the record.
Mr. ECCLES. I will leave the whole thing here with you, and you
can insert into the record whatever you want to insert.
(Excerpts from the April 1936 report to be inserted later by Mr.
Patman.)
Mr. PATMAN. D O you happen to know what the maximum is?
Mr. ECCLES. I do not think there is a maximum in excess of $4,000.
Mr. SMEAD. I t is determined by using 1.5 percent of the average
annual salary, multiplied by the number of years of service. Of
course, the system has been in operation but a relatively few years, so
what it might be under a given set of circumstances depends upon
those circumstances in connection with the individual case.
Mr. PATMAN. What is the maximum?
Mr. SMEAD. There is no set maximum, nothing over $12,000 is taken
in figuring the allowance.
Mr. ECCLES. I n other words, no pension applies to that portion of
the salary above the $12,000.
Mr. PATMAN. I just wanted to know about your system. Now, just
one other question. This reserve fund for social security, if I understand it correctly, will eventually absorb all of the United States Government securities. I think that is a very desirable thing, for the reason that it will solve two very difficult and troublesome problems. One
is tax-exempt securities and the other is the Government's paying
interest for the use of its own credit.
I s the Governor or the Board making any effort or giving any consideration to the question of changing these excess reserve requirements? I mean the reserve fund. I s there any effort being made to
change that?
Mr. ECCLES. Of course, that is not a responsibility of the Board of
Governors. Any matter of that sort, of course, has a very direct
bearing or influence upon the whole economy.
Mr. PATMAN. I know that. T h a t is why I assumed you were
considering it, if any change were contemplated.
Mr. ECCLES. Personally I have given considerable thought and
study to the subject, and I have asked some of the people in the
Division of Research to give some thought to its monetary effects.



EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

41

Mr. PATMAN. May I just insert in the record at this point certain
information regarding the 109 banks to which I referred a while ago ?
(List of principal assets and liabilities of the 109 largest insured
commercial banks in the United States follows:)
Principal assets and liabilities of the 109 largest insured commercial banks in
the United States
[In thousands of dollars]

Name and location of bank

Total
assets *

U.S.
GovernTotal
ment
capital
securi- account»
ties 1

Total
deposits 2

The Chase National Bank of the City of New York,
735,987
240,488 1,948,998
2,356,357
New York, N. Y
Guaranty Trust Co. of New York, New York, N . Y . . 1,972,869 818,382 267,649 1,391,358
The National City Bank of New York, New York,
622,645
194,401 1,388,736
1,969,852
N. Y
Bank of America, National Trust & Savings Associa1,366,549
492,485
105,036 1,219,705
tion, San Francisco, Calif
Continental Illinois National Bank & Trust Co. of
610,964
1,364,755
110,428 1,085,907
Chicago, Chicago, 111
581,413
920,457
1,123,819
110,048
Bankers Trust Co., New York, N. Y.._
198,110
849,962
972,969
61,876
The First National Bank of Chicago, Chicago, 111
764,668
92,326
Central Hanover Bank & Trust Co., New York, N . Y_. 970,721 397,944
257,427
600,248
721,544
89,897
Manufacturers Trust Co., New York, N . Y
141,507
583,747
752,308
89,144
The First National Bank of Boston, Boston, Mass
Security-First National Bank of Los Angeles, Los
539,817
63,705
610,630
150,986
Angeles, Calif
_
The First National Bank of the City of New York,
251,464
537,489
105,568
630,094
New York, N. Y
209,878
520,344
109,102
729,842
Irving Trust Co., New York, N . Y
156,571
497,259
82,493
635,115
Chemical Bank & Trust Co., New York, N . Y
104,024
472,150
48,380
561,647
Bank of the Manhattan Co., New York, N . Y
388,418
40,569
The Philadelphia National Bank, Philadelphia, P a . . . 461,393 141,100
163,196
368,953
45,787
437,659
The New York Trust Co., New York, N . Y
183,454
359,402
26,366
427,413
National Bank of Detroit, Detroit, Mich
214,001
308,756
39,717
354,193
Mellon National Bank, Pittsburgh, P a .
70,854
302,795
32,477
348,412
The Cleveland Trust Co., Cleveland, Ohio
298,164
20,757
334,492
168.278
The Northern Trust Co., Chicago, 111
277,336
90,353
The Union Trust Co. of Pittsburgh, Pittsburgh, P a - 392,411 189,790
274,122
32,471
329,306
150.279
Corn Exchange Bank Trust Co., New York, N . Y
271,974
288,181
33,586
American Trust Co., San Francisco, Calif
The Pennsylvania Company for Insurances on Lives
47,892
236,146
255,611
24,305
and Granting Annuities, Philadelphia, Pa
Wells Fargo Bank & Union Trust Co., San Francisco,
219,449
17.482
247,636
98,649
Calif
_.__
_._.
_
__
210,637
237,038
92,467
17,980
First National Bank in St. Louis, St. Louis, Mo
227,785
193,460
18,897
Harris Trust & Savings Bank, Chicago, 111
The Anglo California National Bank, San Francisco,
188; 413
225,430
36,113
22,640
Calif
183,805
191,360
130,000
12,589
First National Bank of Baltimore, Baltimore, Md
180,072
216,252
111,465
18,831
First Wisconsin National Bank, Milwaukee, Wis
176.091
211,575
48,174
33,912
The National Shawmut Bank of Boston, Boston, Mass.
164,612
181,694
37,077
9,418
Commerce Trust Co., Kansas City, M o . .
162.252
186,146
60,547
19,274
Bank of New York & Trust Co., New York, N. Y . . . .
159,630
212,850
31,453
19,877
The Marine Trust Co. of Buffalo, Buffalo, N . Y
153,425
171,078
62,318
14,606
The San Francisco Bank, San Francisco, CalifMercantile-Commerce Bank & Trust Co., St. Louis,
152,655
44,603
165,053
16,557
Mo.
145,878
161,812
48,681
17,669
Fidelity Union Trust Co., Newark, N . J
141,270
146,368
24,494
22,131
Fidelity-Philadelphia Trust Co., Philadelphia, P a . . . .
The Public National Bank & Trust Co. of New York,
34,641
137,810
14,370
155,164
N.Y
133,971
57,619
15,262
158,271
Central National Bank, Cleveland, Ohio
127,448
13,787
59,343
First National Bank & Trust Co., Minneapolis, Minn. 159,560
126,391
12,598
48,010
The National City Bank of Cleveland, Cleveland, Ohio. 139,954
Crocker First National Bank of San Francisco, San
124,701
52,401
14,085
142,653
Francisco, Calif. _
Manufacturers National Bank of Detroit, Detroit,
124,539
23,883
139,449
Mich
122,439
50,713
121,922
17,159
Girard Trust Co., Philadelphia, Pa
120,571
39,295
143,012
11,773
Seattle-First National Bank, Seattle, Wash
38,962
119,953
150,101
14,281
First National Bank of St. Paul, St. Paul, Minn
The Farmers and Merchants National Bank of Los
119,054
8,503
76,870
130,380
Angeles, Los Angeles, Calif.
118,742
44,584
6,500
129,998
The Detroit Bank, Detroit, Mich.__
Northwestern National Bank & Trust Co. of Minne116,827
39,435
12,250
131,137
apolis, Minneapolis, Minn
15,621
114,800
32,274
135,064
Brooklyn Trust Co., Brooklyn, N . Y
1
Figures as of June 30,1936, from 2d edition of Rand McNally Bankers Directory.
2 Figures from F. D. I. C. Form 89, "Summary of deposits", May 13, 1936, Federal Deposit Insurance
Corporation.




42

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

Principal assets and liabilities of the 109 largest insured commercial banks in
the United States—Continued
[In thousands of dollars]

Name and location of bank

Industrial Trust Co., Providence, R. I.__
First National Bank, Kansas City, Mo
City National Bank & Trust Co., Chicago, 111
Citizens National Trust & Savings Bank of Los Angeles, Los Angeles, Calif.
Whitney National Bank of New Orleans, New Orleans, La
The Bank of California, National Association, San
Francisco, Calif. __
The United States National Bank, Portland, Oreg
First National Bank of Atlanta, Atlanta, Ga
The Indiana National Bank of Indianapolis, Indianapolis, Ind
The Marine Midland Trust Co. of New York, New
York, N . Y . . .
First National Bank in Dallas, Dallas, Tex
Corn Exchange National Bank & Trust Co., Philadelphia, Pa
First National Bank at Pittsburgh, Pittsburgh, Pa....
The Riggs National Bank of Washington, D C ,
Washington, D . C
The Fifth Third Union Trust Co., Cincinnati, Ohio...
The Merchants National Bank of Boston, Boston,
Mass
Farmers Deposit National Bank, Pittsburgh, Pa
Peoples-Pittsburgh Trust Co., Pittsburgh, Pa
State Street Trust Co., Boston, Mass
Manufacturers & Traders Trust Co., Buffalo, N . Y__.
Mississippi Valley Trust Co., St. Louis. Mo
The Hibernia Savings & Loan Society, San Francisco,
Calif
The Commercial National Bank & Trust Co. of New
York, New York
California Bank, Los Angeles, Calif.The First National Bank of Philadelphia, Philadelphia, Pa —
Citizens & Southern National Bank, Savannah, Ga. _.
The First National Bank of Portland, Portland, Oreg.
The Toledo Trust Co., Toledo, Ohio
The Second National Bank of Boston, Boston, Mass..
City Bank Farmers Trust Co.. New York, N. Y
First National Bank, Cincinnati, Ohio
United States Trust Co. of New York, New York,
NY
The First National Bank of Scranton, Scranton, Pa...
Wachovia Bank & Trust Co., Winston-Salem, N. C...
Hartford National Bank & Trust Co., Hartford, Conn.
New York State National Bank, Albany, N. Y
The Continental Bank & Trust Co. of New York,
New York, N . Y .
Republic National Bank & Trust Co., Dallas, Tex.._.
First & Merchants National Bank of Richmond, Richmond, Va
The Ohio National Bank, Columbus, Ohio
Empire Trust Co., New York, N . Y
The Central Trust Co., Cincinnati, Ohio
National Bank of Tulsa, Tulsa, Okla
Lincoln-Alliance Bank & Trust Co., Rochester, N . Y_.
The National Bank of Commerce of Seattle, Seattle,
Wash
Commercial Trust Co. of New Jersey, Jersey City,
N. J
The First National Bank of Denver, Denver, C o l o —
The Huntington National Bank of Columbus, Columbus, Ohio
Provident Trust Co. of Philadelphia, Philadelphia, Pa.
First National Bank & Trust Co., Oklahoma City,
Okla
Central-Penn National Bank, Philadelphia, Pa
The Trust Co. of New Jersey, Jersey City, N. J
First Trust & Deposit Co., Syracuse, N. Y
Union Planters National Bank & Trust Co., Memphis,
Tenn
Citizens Union National Bank, Louisville, Ky
The First National Bank of Birmingham, Birmingham,
Liberty BanlToYBu^^




Total

U.S.
GovernTotal
ment
capital
securi- account i
ties
15,546
5,707
6,815

Total
deposits 2

131,227
129,486
128,376

43,094
51,158
18,462

118,074

21,842

119,212

43,983

8,394

106,178

129,379
114,603
116,173

28,313
47,520
42,218

15,276
9,003
12,358

105,700
104,949
103,245

114,435
114,157
111,007
106,863

108,715

50,607

7,454

99,233

120,522
115,005

25,985
26,073

13,685
12,647

98,408
97,624

117,772
114,915

24,264
43,162

14,854
12,282

97,283
96,320

98,039
111,012

36,433
25,584

8,518
10,796

96,099
95,291

98,267
107,500
108,480
87,315
100,784
95,548

27,123
62,579
19,000
17,963
17,953
31,388

8,846
15,693
15,867
9,300
12,020
8,824

93,091
91,606
90,203
90,012
89,363
87,847

101,291

29,584

12,857

87,344

108,406
100,321

32,769
14,944

16,997
9,996

84,591
84,529

99,794
90,513
85,734
87,390
78,250
106,880
82,988

28,436
16,054
16,195
24,896
9,971
32,897
9,737

9,768
7,736
6,329
8,152
7,018
24,661
11,872

84,155
80,755
77,479
76,598
74,999
74,477
72,996

106,308
82,703
85,518
68,787
68,921

30,472
29,705
22,170
22,882

32,194
10,032
6,050
8,287
5,890

72,683
70,831
70,266
69,787
66,544

75,655
77,675

7,641
20,199

8,243

65,774
65,495

73,615
72,265
73,477
72,164
63,356
67,761

20,735
25,808
16,051
25,225
16,671
18,390

6,719
6,772
7,708
7,151
8,670
6,261

65,384
64,700
63,963
62,722
61,930
60,893

67,038

21,876

5,746

60,405

78,229
63,159

17,889
16,128

7,994
4,514

56,959
56,609

61,944
63,685

11,410
16,755

5,913
18,017

56,584
55,142

62,795
68,375
60,661
63,513

13,145
9,918
12,888
6,812

7,817
11,028
7,268
10,132

52,850
52,470
52,416
51,926

54,454

11,940
20,207

7,349
3,977

51,847
51,503

63,755
60,538

16,097
17,492

11,794
8,684

51,382
50,701

43

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

The following statement was prepared by the Federal Deposit Insurance Corporation at my request:
Principal assets and liabilities of all insured commercial banks and of the 109
largest insured commercial banks in the United States
[In thousands of dollars]

All banks
(14,120 as of
June 30,1936)

Total assets*__
U. S. Government securities i.
Total capital account *
-..
Total deposits 2 — 2
Interbank deposits

53,578,392
14,772,477
6,298,588
45,187,902
6,315,339

109 largest banks
Amount
30,118,132
9,951,656
3,156,616
24,894,409
5,155,371

Percent of
total
56.2
67.4
50.1
55.1
81.6

1
Figures for all insured commercial banks from the June 30,1936, call report of the Federal Deposit Insurance Corporation. Figures for the 109 largest insured commercial banks as of June 30, 1936, from the
final 1936 edition of Rand McNally Bankers Directory.
2 Figures from F. D. I. C. form 89, Summary of Deposits, May 13,1936, Federal Deposit Insurance Corporation.

It will be noticed that 109 banks of the 14,120 hold 67.4 percent of
the Government securities held by all insured banks.
Mr. PATMAN. And then the information about the interest paid
and received by member banks, January 1, 1927, to June 30, 1936, I
would also like to have inserted at this point.
(Statement referred to is here printed in full as follows:)




TABLE 1.—Interest paid and interest received by member banks, Jan. 1, 1927-June 80, 1986

fc

[Amounts in thousands of dollars]
1933
1927

1928

1929

1930

1931

1932

Total for
year

First
half

Second
half

1934

1935

First half
of 1936

Interest paid by member banks on:
Deposits of other member and nonmember
34, J
75,352
52,9351
13,424
banks >-•
81,842
72,847
11,74:
1,677
3,498
68,131
1,101
2,695
97,1
42,8021
Other demand deposits
225,685 234,926 246,4931 225,2801 140,691
34,437j
8,365
12,494
3,706
9,298
Other time deposits
231,765 115,947
405,711 439,384 444,636 450,865 387,2841 301,5
115,818
227,371 196,490
88,210
Average amounts of member bank deposits: *
Deposits of other member and nonmember
4,119,000 4,185,000 3,947,000 4,473,000 4,399,000 3,484,000 3,284,000 3,293,000 3,284,000 4,252,000 5,604,000 6,534,000
banks *
17,862,000 18,103,000 18,541,000 17,923,000 16,609,000 14,161,000 14,005,000 13,723,000 14,005,000 16,425,000 19,342,000 21,466,000
Other demand deposits 3
Other time deposits
12,138,000 13,146,000113,158,000 13,302,000112,716,000 10,694,0001 8,983,000 8,890,000 8,983,000 9,497,000| 10,036,000 10,394,000
Average rate« of interest paid by member banks
on—
Deposits of other member and nonmember
1.2
0.4
banks »
percent1.7
1.6
1.8
«0.1
•0.7
0.048
0.034
0.1
1.0
2.0
.8
Other demand deposits 3
do
1.3
1.3
1.3
.3
*.l
.1
«.5
.048]
.034
•7
1.3
Other time deposits
do
3.0
3.4
3.4
3.3
2.4|
2.8|
2.6
2.0
«!
•2.61
1.7
Interest earned by member banks on—
1,254,289] 1,374,130 1,562,769 1,349,364 1,072,927 851,007
Loans
604,297
307,908] 296,389
540,014 498,4191 253,059
Investments (including dividends on stock)
i 458,401 498,420 472,868 472,351 480,296 457,7121 426,391 210,770
215,621 473,791 467,217
235,227
28,682
35,7991
Balances deposited with other banks
33,264|
16,759
6,190
36,318]
33,178
7,705
1,515|
2,4251
1,681
Average rate • of interest earned by member banks—
4.2|
5.11
5.4
5.7
4.9
6.1
5.5
4.7
«4.
On loans
percent—
4.3
•4.8
4.1
4.7
4.6
4.7
3.5
On investments
do
3.9
4.1
« 3.61
3.3
2.8
2.5
•3.5
4.7|
i Including both demand and time balances.
2 Averages of figures reported on call dates.
* Exclusive of certified and officers' checks and cash letters of credit and travelers' checks.
* These are not averages of the prevailing rates but simply ratios obtained by dividing interest payments by average deposits.
• Annual basis.
• These are not averages of the prevailing rates, but simply ratios obtained by dividing interest received by average loans and average investments, respectively.




I
O
M

Q

B
o
o
o

o
w

E

IS
O
CO

>
GO

Q

d

B

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

45

I would also like to have inserted at this point the statement of
interest paid and interest received by insured nonmember commercial
banks, 1934 and 1935.
(The statement is as follows:)
TABLE 2.—Interest paid and interest received by insured nonmember commercial
banks, 1934 and 1935
[Source: 1934 and 1935 Annual Reports of Federal Deposit Insurance Corporation
1934
Interest paid by insured nonmember banks on—
Deposits of other insured and noninsured banks l
Other demand deposits
Other time deposits
Average 3 amounts of deposits of insured nonmember banks:
Deposits of other insured and noninsured banks 1
1
Other demand deposits 4
_
Other time deposits
Average rate 6 of interest paid by insured nonmember banks on—
Deposits of other insured and noninsured banks >
percent..
Other demand deposits
do
Other time deposits
do
Interest earned by insured nonmember banks on—
Loans
Investments (including dividends on stock)
Balances deposited with other banks
Average rate 6 of interest earned by insured nonmember banks on—
Loans
percent..
Investments
do I

1935

$445,000
4,510,000
74,711,000

2 $68,512,000

86,410,000
2,145,769,000
2,715,751,000

2,413, 232,000
2,855,914,000

0.5
.2
2.8

583,000

2 2.4

$149,129,000
75,713,000
1,077,000

$143, 319,000
79,894,000

5.7
3.9

5.6
3.7

1
Includes
2

both demand and time deposits.
Includes any interest paid on demand deposits.
3 Average offiguresreported on call dates.
* Exclusive of certified and officers' checks and cash letters of credit and travelers' checks.
»These are not averages of the prevailing rates, but simply ratios obtained by dividing interest payments
by averag3 deposits.
• These are not averages of the prevailing rates, but simply ratios obtained by dividing interest received by
average loans and average investments, respectively.

Then I would like to insert in the record the statement of "Earnings and expenses of Federal Reserve banks during 1936", which
showed practically all of the earnings are coming from interest on
Government bonds; in other words, of total current earnings.
(Statement of "Earnings and expenses of Federal Reserve banks
during 1936.")




^

Earnings and expenses of Federal Reserve banks during 1936
Total

Boston

New York Philadelphia

Cleveland

Richmond

Atlanta

O

Chicago St. Louis

Minneapolis

Kansas
City

Dallas

San Francisco

C U R R E N T EARNINGS
Discounted bills
Purchased bills
_
U. S. Government securities
Industrial advances
Commitments to make industrial advances
Allother
TotaJ current earnings

$107,584
$7,658
29,592
2,163
35,181,125 2,394,4501
1,586,6881 140,768|
282,079
713,571

25,649
2,865

37,900,639 2,573,553

M

$1,649
$70,156
$1,459
$1,780
$1,495
$4,004
$6,586
$2,460
$7,511
$1,049
$1,777
2,816f
1,037
3,693
798
833
832|
2,088
10,577
3,0351
561
1,159
> 909,061 2,854,961 3,365,1161 1,790,550 1,442,5851 4,124,5521 1,804,145 1,265,5191 1,743,999 1,458,501 3,027,686
,
42,368 J 105,0861
20,385
79,125|
374,869| 311,519|
84,341 211,2041
47,995
75,735
107,077
65,290

2,965
76,506

15,731
67,696

21,668
29,795

1,625
34,726

1,548
186,948

17,736
18,658

979
14,785

166,605

5,434
10,059

71,799
39,638

10,537,030 3,256,497 3,537,159 2,056,153 1,524,121 4,423,476 1,863,217 1,362,018 1,973,304 1,574,705 3,219,406

Total operating expenses




$2,628,875 $141,917
17,304,889 1,066,946

$155,642
988,167
54,988
571
6,0471

$175,278
929,865

112,586|
3,658|
8,264

54,586
193
12,264

36,984
10,147
10,293

62,520
11,432
20,462

39,642
9,215
7,241

83,432
10,845
13,911

1,204

1,239

1,776|

B

21,639

O
W

2,600

43,7261
4,866
13,214

$126,291 $191,473
614,2001 983,910

$155,150 $231,609
716,856 1,503,984

$200,848 $308,226
880,831 2,123,984

1,350

$588,160 $158,796 $195,485
4,461,410 1,405,995 1,628,741

M

Q

o
o
o

CURRENT EXPENSES
Operating expenses:
Salaries:
Officers
Employees
Retirement System contributions
for current service
Legal fees
Directors' fees and expenses
Federal Advisory Council fees
and expenses
_.
Traveling expenses (other than
directors and members of Federal Advisory Council)
._.
Postage and expressage
Telephone and telegraph
Printing, stationery and supplies.
Insurance on currency and security shipments
Other insurance
Taxes on bank premises
Depreciation on bank building
Light, heat, power, and water
Repairs and alterations to bank
building
Rent
Furniture and equipment
Allother

O

s

71,728
7,045
8,882

83,5481
5,234
7,394

1,150

233,413
4," ,
15,277
576

750

710

296,883
3,940,790
654,191
853,7091

14,901
401,2791
28,708
58,159

55,561
668,081
114,9201
221,175

32,430
326,562
41,444
79,223

27,224
365,295
54,689
70,015

21,324
250,766
43,789
43,786

20,293
273,479
66,741'
48,972

32,523
513,020
46,472
86,086

14,372
179,6131
47,041
41,4881

29,912
148,932
23,822
37,388

13,600
272,853
56,124
46,247

13,104
187,550
41,355
43,617|

77,553

CO

276,422
259,737
1,369,378
1,207,339
393,592

37,303
17,501
143,6401
55,832
26,168|

56,987
37,818
396,709
227,327,
73,964

29,192
21,099|
69,767
126,5321
35,478

27,967
19,507
136,185
156,782
45,259

18,102
15,936
67,080
109,233
23,459|

15,206
17,264
53,187
47,293
19,345

31,217
21,871
169,742
125,834
45,522

6,173
21,169
53,050|
62,623
23,311

9,378
21,077
66,817
29,233i
20,067

10,005
26,204
87,303
82,806
36,262|

10,461
17,2691
32,114'
72,2391
19,140

24,431
23,022
93,784
111, 605
25,617

o
d

7,827
240
23,268
30,515

49,301

24,967
1,070
23,328
72,285

13,274
81,962
30,523
44,1881

6,031
30,794
8,261
29,143

4,754
4,577|
4,323
43,421

22,462
14,902
42,258
62,581

35,211
3,001
28,165
38,155

6,840

10,804

6,294
50,083
13,827
70,481

Kj

1,480
12,551
32,141

932,023
69,502
128,713

54,870
1,598
5,464

14,223

o
GO

210,634
188,109
273,736
990,906

31,993,6511 2,117,2861

4,027
11,411
40,099
34,135
7,770,9331 2,536,5731 2,993,9821 1,873,9271 1,763,2311 3,772,3771 1,726,9081 1,238,131 1,957,3701 1,435,7701 2,807,163
71,794
493,762

•
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2

H

Operating expenses:
Salaries:
Less reimbursements for certain
fiscal agency and other expenses.
Net operating expenses
Assessment for expenses of Board of
Governors
Federal Reserve currency:
Original cost
Cost of redemption
Total current expenses

5,977,313

277,754

26,016,338 1,839,532

1,419,999

324,475

459,293

302,939

636,304

863,797

417,436

197,977

342,237

306,463

428,639

6,350,934 2,212,098 2,534,689 1,570,988 1,126,927 2,908,580 1,309,472 1,040,154 1,615,133 1,129,307 2,378,524

1,679,566

123,479

609,979

161,061

155,081

73,747

58,865

193,744

49,908

39,751

48,391

49,148

116,412

2, Oil, 748
166,371

172,398
12,787

444,896
35,199

138,315
13,854

221,401
11,921

90,270
10,192

119,591
12,880

327,433
23,623

80,095
11,210

57,826
5,458

66,735
6,773

96,677
7,403

196, 111
15,071

29,874,023 2,148,196

Current net earnings
Additions to current net earnings:
Profits on sales of U. S. Government securities
All other
;
Total
Deductions from current net earnings:
Reserves for contingencies..
Special reserves and charge-offs
on bank premises
Prior service contributions to
Retirement System
Assessment for building for
Board of Governors
All other
Total




o

H-1

7,441,008 2,525,328 2,923,092 1,745,197 1,318,263 3,453,380 1,450,685 1,143,189 1,737,032 1,282,535 2,706,118
P R O F I T AND LOSS ACCOUNT

Current earnings
Current expenses

a

$37,900,639 $2,573,553 $10,537,030 $3,256,497 $3,537,159 $2,056,153 $1,524,121 $4,423,476 $1,863,217 $1,362,018 $1,973,304 $1,574,705 $3,219,406
7,441,008 2,525,328 2,923,092 1,745,197 1,318,263 3,453,380 1,450,685 1,143,189 1,737,032 1,282,535 2,706,118
29,874,023 2,148,196

§
R
o
d

o

8,026,616

425,357

3,096,022

731,169

614,067

310,956

205,858

970,096

412,532

218,829

236,272

292,170

513,288

8,902,507
584.301

478,125
3,106

2,889,122
2,288

582,301
7,797

559,635
554

296,982
3,296

239, 773 1,150,317
375,743
22,976

308,766
13,878

689,110
106,871

308,607
20,205

896,350
4,073

503,419
23,514

9,486,808

481,231

2,891,410

590,098

560,189

300,278

262,749 1,525,060

322,644

795,981

328,812

900,423

526,933

§

3,569,550

57,500

413,101

63,120

10,000

406,982

39,316

927,009

301,355

689,110

88,309

500,000

73,748

o

O
W

192,464

18,775

2,522,917

178,800

638,293

193,476

225,748

157,044

93,840

329,958

144,902

83,040

170,760

109,308

197,748

2,007,219
167,711

147,601
565

729,105
2,947

192,254
2,490

185,323
34,279

88,123
21,537

70,352
10,837

231,578
75,433

59,653
4,101

47,516
14,224

57,837
386

58,743
124

9,000,991

384,466

2,288,320

451,340

455,350

673,686

214,345 1,563,978

510,011

851,371

317,292

860,639

139,134
788
430,193

17,481

504,874

733,594

g
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r\

2

00

Earnings and expenses of Federal Reserve banks during 19S6—Continued
Total

Boston

New York

Philadelphia

Cleveland

Richmond

Atlanta

Chicago St. Louis

Minneapolis

City

Dallas

San Francisco

x

PROFIT A N D LOSS ACCOUNT—Continued
Net additions to current net earnings.

Paid U. S. Treasury (sec. 13b)
Transferred to surplus (sec. 13b)
Transferred to surplus (sec. 7)

$485,817

$96,765

$603,090

$138,758

8,512,433

522,122

3,699,112

869,927

$104,839 -$373,408
718,906

227,448
7,829,581
102,944
352,460

34,488
563,728

13,752
3,036,704

14,431
752,931

-76,094

648,656

83,968
736,185
94,119
-44,345

-62,452

280,136
-26,247
-48,456 -316,341

$18,404 -$37,918 -$187,367 -$55,390

$11,520

$39,784

$96,740

254,262

932,17$

163,439

247,792

331,954

610,028

254,262

28,354
725,553
25,030
153,241

16,460
179,052

10,959
236,833

25,036
228,445
10,601
67,872

610,028

225,165
225,724
-559

-32,073

NOTE.—Current expenses as shown above include the cost of furniture and equipment purchased during the year and normal depreciation on bank buildings and exclude contributions to the Retirement System on account of services rendered prior to the establishment of the Retirement System on Mar. 1,1934. Heretofore prior service contributions have
been included in current expenses and the cost of furniture and equipment and normal depreciation on bank buildings have been shown as deductions from current net earnings.
Operating expenses now include reimbursable fiscal agency expenses which heretofore were shown separately.




H
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o
o
o
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EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

49

The total current earnings of the Federal Eeserve banks were
$37,900,000 last year and of that amount $35,181,000 was acquired
through interest on Government securities and only a million and a
half, approximately, on industrial advances, which is the only other
large item.
Mr. LUCE. Reserving the right to object, I understood the gentleman to say that questions relating to interest did not bear upon the
matter now under consideration here.
Mr. PATMAN. The question of interest, you say ?
Mr. LUCE. Yes\: the question of interest.
Mr. PATMAN. Oh, no. I was talking about my particular line of
questions. I had just asked a question relating to something else.
The point I was making was that it was not related to the bank question that I was asking about.
The CHAIRMAN. The objection is overruled.
Mr. FORD. That information that the distinguished gentleman from
Texas asked about is something in connection with which I would
like to have this information shown; that is, the savings to the
Treasury resulting from the low rates, or the lowest rates on Treasury securities ever enjoyed, that is in the last 4 years.
The CHAIRMAN. Are you prepared to furnish that information?
Mr. FORD. Can the Board furnish the information?
Mr. ECCLES. We can furnish the current rates of interest on the
various types of Government securities.
The CHAIRMAN. I S not that information: available in the Treasury
reports?
Mr. ECCLES. Oh, yes; I think it would be available. The information showing tne total amount of interest paid on the Government debt today; that is, the annual interest charge as against what
it was at any previous date, the average rate of interest on the Government debt today as compared with what it has been in previous
yeas.
The CHAIRMAN. Are not those figures available in the Treasury
report?
Mr. ECCLES. Mr. Smead says that they are all available in the
Treasury report. The debt figures are on page 419 and the interestfigures on page 363 of the 1936 report.
Mr. FORD. If it is available a n d if it can be supplied, I would like
to have it shown with this other information.
Mr. HANCOCK. I S it not a fact that with the present rate of interest,
let us say, on $30,000,000,000 it is costing the United States less than
the $20,000,000,000 cost in 1932 ?
Mr. FORD. $24,000,000,000?

Yes; it is.

Mr. ECCLES. I think the Government debt is about $35,000,000,000
today.
Mr. HANCOCK. I was not speaking of the amount, but I was referring to the ratio. Are we not paying under the present rate of
interest, less on $30,000,000,000 than it cost to finance $20,000,000,000
4 years ago? That is just based upon the prevailing rate today.
Mr. ECCLES. I do not know. I f the prevailing rate today applied
to all outstanding bonds that would mean a lower rate than is being
paid, because some of the higher-rate bonds are still outstanding
and have not been refunded.
Mr. HANCOCK. I would like to ask the Governor this question: I n
your opinion, Governor, do you believe that the stiffening of the



50

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

short-money rate will have any considerable adverse effect upon
the price of commodities?
Mr. ECCLES. No, sir. I n my opinion it will have no effect. A s
to the increase in the short-term rate, of course, there is no assurance that there will be any substantial increase in the short-term
rate after the excess reserves go into effect. There is still as much
excess reserves as the System has had at any previous time, and
with the excess reserve, even after these ordered increases go into
effect and with the huge pile of deposits held by institutions and
individuals in the banks, I do not look to see high short-term rates.
F o r commercial paper, which is only three-quarters of 1 percent^
that would be no deterrent, certainly to business activity. If call
loans, which are now 1 percent, should go to V/2 o r 2 percent, I am
sure that would not be a deterrent on borrowing on securities. The
rates to livestock people and to the farmers are pretty largely controlled by the rate that the Production Credit Corporation establishes throughout the country. The Production Credit Corporation
is able to go to the money market, as it does, and get its money
on its debentures. I think just a week ago, after the announcement
of the increase in reserve requirements the F a r m Credit had greatly
oversubscribed their offering of debentures at less than a half of 1
percent. I do not remember the exact figure but I think it was
less than a half of 1 percent. Even though they were paying twice
that, or three or four times that much, it would still be less than a
2-percent rate. That would in no way be a handicap to agriculture t
because, as I understand it, the rate that they have established
throughout the country today is 5 percent for livestock.
Mr. PATMAN. Four and a half percent, isn't it? N o ; I believe
that is the crop loans.
Mr. ECCLES. That is the land bank.
Mr. PATMAN. I am talking about the crop loans.
Mr. ECCLES. This is a permanent organization known as the P r o duction Credit Corporation. The intermediate credit banks borrow
in the market. The intermediate credit banks then lend to the production credit associations, who lend directly to the farmers and t o
the livestock people in the various communities. That will tend t o
provide an abundant amount of funds at reasonable rates, I am sure.
Even though these excessively low rates should go up, in no way
would they be a deterrent upon the use of credit.
Mr. SPENCE. Mr. Chairman, may I ask the gentleman an admittedly irrelevant question?
The CHAIRMAN. I do not think that anybody will object.
Mr. SPENCE. I understand regulations forbidding exchange charges
have been postponed for 90 days. Can you tell me what the attitude
of the Board of Governors of the Federal Eeserve System would be
with regard to that matter?
Mr. ECCLES. The new regulation has been issued in which the
Federal Deposit joined with the Federal Eeserve Board, and t h a t
regulation is available, whether you have seen it or not.
Mr. SPENCE. I have seen that it was postponed for 90 days.
Mr. ECCLES. N O , sir. I t was postponed, but the new regulation
has been issued, so there will not be any necessity to take up the
other one in 90 days.




EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

51

Mr. SPENOE. W h a t is the new regulation?
Mr. ECCLES. That goes into another subject. I t is also unification
and branch banking, and all of these other questions; and all of them
are pretty closely related.
Mr. SPENCE. I s there any intention on the part of the Board to
return to the old regulation ?
Mr. ECCLES. I cannot speak for the Board.
Mr. SPENCE. I think you can speak for the Board Governors, can
you not?
Mr. ECCLES. I would not think that I could. W h a t the Board may
do I do not know. They have put out this regulation in which the
F . D. I. C. has joined. Of course, the new regulation does not recognize the exchange or absorption of exchange as a payment of
interest. I mean that it does not specifically spell it out as such.
I t would be a question of finding under the new regulation.
Mr. SPENCE. I S the new regulation in effect now ?
Mr. ECCLES. Yes; the new regulation is in effect now. The matter
of definition and the matter of interpretation is a bridge that we have
not as yet crossed.
Mr. SPENCE. Then there is one other question that I would like to
ask you. Is there any limitation as to the amount of Federal Eeserve
notes that may be issued for direct obligations of the United States
except
Mr. ECCLES. YOU mean Federal Keserve notes, do you?
Mr. SPENCE. Yes; Federal Eeserve notes.
Mr. ECCLES. N O , sir; there is no limitation. The only requirement is that they be secured with gold certificates and Government
bonds, if this extension goes through, or eligible paper for the balance. The real limitation for issuing them, however, is the demand
that the public has for currency. That fixes the limit. The minimum, of course, is the amount of currency that is required. If you
put out currency, you cannot keep it out; it comes back.
Mr. SPENCE. YOU have exhausted your power in regard to reserve
requirements ?
Mr. ECCLES. We have; yes, sir.
Mr. SPENCE. T O the full extent of the law ?
Mr. ECCLES. Yes; that is correct.
Mr. SPENCE. Are you contemplating asking for any additional
powers in that respect?
Mr. ECCLES. Not at this time.
Mr. PATMAN. If an emergency should occur, the President could
declare an emergency existed, and you would have unlimited power
to increase the fund, would you not?
Mr. ECCLES. A S I understand it—no. This was a substitution.
Mr. PATMAN. YOU think this was a substitution for the existing
statute ?
Mr. ECCLES. That is as I understand it.
Mr. PATMAN. I am glad to have that information.
Mr. ECCLES. Yes; this is a substitution. The other instrument of
credit control is by open market operations. Increasing the reserve
requirements merely puts the Board into a position where it can
exercise influence or control over the money market, whereas during
the past 4 or 5 years the excess reserves were so large during that




52

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

time that it exercised no control whatever. This action was not
taken in order to in any way influence or control the stock-market
operations. I t was not expected that by increasing the reserve requirements that it would in any way retard stock-market activity,
either up or down.
Mr. PATMAN. On this question that Mr. Spence brought out a little
while ago, does it seem to you to be a reasonable law that all of these
small banks that are required to carry their deposits with their correspondent banks should not receive interest on those deposits, in view
of the fact that the correspondent bank can use these funds with
which to buy Government bonds or for any other purpose, and get
interest on the funds all of the time; and if they need the money
they can take the Government bonds and place them in the proper
channels to get their money back very quickly. Under those circumstances does it seem to you that where the larger banks are going to
get the benefit of this situation that some provision should be made
that will permit—now, understand that this is rather an arbitrary
law. Do you think some provision should be made to permit them
to make a contract, any contract they want to make, which will permit the paying of interest?
Mr. ECCLES. The city bank correspondent relationship is one that
recognizes that one bank—and usually it is a country bank—can
carry its legal reserve as a deposit with another bank. That deposit
in the other bank can then be invested by that bank as it sees fit, or
it can be loaned. Therefore, it may not be a proper reserve of the
country bank.
We have the situation in Michigan in which the city correspondent
relationship meant that the city of Detroit had the reserves of the
country banks of the State of Michigan who were not members of
the Keserve System. The banks of Detroit invested those reserves
in the various bonds and types of loans and securities, collateral loans
and otherwise. And when it came to a question of suspending the
Detroit banks, whereas many of the country banks were in a condition where they did not need to close, yet they were forced to close
because that reserve was no longer a proper reserve.
So long as the city banks are permitted to pay interest on countrybank balances—and the Keserve banks, of course, cannot pay interest
upon them—there would be a natural tendency to withdraw from the
Keserve System and the concentration of the reserves in the city banks
and thus make a much more unsound banking system. T h a t is where
you get your concentration of funds in your large cities through that
process. That is where the real exercise of power and control comes;
that is, through this concentration through country-bank balances in
the cities instead of in the Federal Reserve banks in each district. If
the funds of the district were concentrated in the Reserve banks of
the district, and to the extent that you provide that interest is paid
upon these balances, these reserves of the country banks, which are
nothing more or less than the deposits of a city bank, just to that extent
you weaken the Reserve System and invite banks to get out of the
Reserve System so as to get interest from the correspondent. That
was permitted during the 1920's before the bank holiday. I t did not
result in any public good.
There is another weakness in the payment of interest to country
banks by city banks to the extent that it increases the balances of the



EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

53

country banks. I mean to the extent it increases the reserves of the
country banks carried with the city bank. To that extent it increases
the deposits of the city bank. If the country bank carried those
reserves in the Eeserve System directly, then it would give to the
Reserve System a much better control over the inflationary and deflationary problems.
With the reserves of a country nonmember bank carried in a city
bank, that city bank is required only to carry 20 percent in the case
of the Eeserve city bank and 26 percent in the case of a central
Reserve city bank, with the Federal Reserve banks, wrhereas if the
country bank were a member of the Reserve System the full amount
of the balance wrould be carried there. I n other words, the greater
the number of banks outside of the System, the greater the possibility of pyramiding, both on the up side and on the down side.
And the greater it reflects the possibilities, the greater the flexibility
and, hence, the difficulty of exercising monetary control by the
Federal Reserve Board.
Mr. HANCOCK. Governor, when it comes to the question of control
through open market operations, your restricting easy credit policies
is more or less jeopardized as long as your reserves exceed the amount
of Governments you own ? Isn't that right ?
Mr. ECCLES. Yes; that is right. If your excess reserves were
greater than the amount of Governments, of course, you could not
absorb them through the sale of Governments. Happily we are not
in that position today, and we can either increase the reserves, if the
money situation develops where for any reason it is desirable to
expand excess reserves by purchasing bills or notes in the market,
and, of course, we are in position to sell.
Mr. HANCOCK. YOU wyould have been in that position had you not
increased your reserve requirements; and you would have had only
one weapon left, which is the rediscount rate, and that is usually
quite ineffective.
Mr. ECCLES. That is right. The amount of excess reserves was
very close to the total amount of Governments, and to have absorbed
all of the excess reserves by selling off our Governments rather than
increasing the reserve requirements would have meant giving to the
member banks Government bonds for those reserves. I t would have
meant that the flexible instrument of control of market operations
would have been practically utilized, whereas the less flexible instrument, the instrument of increasing the reserve requirements, which
has a national application, would have been all that was left. Therefore it was decided by the Board to meet the excess reserve problem
through increasing the reserve requirements, which means the locking up of some of the banks' reserves rather than selling them Government bonds for those reserves on which they would get the interest, and the Reserve System wrould operate at a large deficit.
Mr. Chairman, in as much as this question of increased reserves
has been raised and discussed to a considerable extent, the Board
recognized that the instrument given to them by Congress to deal
with the stock market was not to create a tight-money situation and
thus hamper commerce, agriculture, and business expansion or recovery through higher-interest rates, but it was one of increasing
the margin requirements.
The CHAIRMAN. YOU did that, did you not?



54

EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

Mr. ECCLES. Yes, sir. I t has been done twice, on brokers' loans.
That has been done twice, until today the margin is 55 percent.
Well, let me put it in this way: The margin of cash payment of
$550 would have to be made for every thousand dollar purchase; or
the amount that could be loaned upon a thousand-dollar purchase is
$450, which, of course, is a pretty steep margin as compared with
what we have been accustomed to in the past.
This power given to the Board was for the purpose of preventing
the undue use of credit for speculative purposes. To the extent that
credit is not being used in the market an increase in margin requirements is not effective. I n other words, so long as the market is
largely a cash operation there is no way, so far as the Reserve
Board is concerned, to influence the market by either increasing
reserve requirements or increasing the margin requirements, to the
extent that loans are made by the bank system. Margin requirements
could continue to be increased and thus put the market on what
might be considered a cash basis.
I wanted to make that point because there have been some impressions given that the Board is using an instrument to deal with the
market situation and thus hampering commerce, agriculture, and
industry rather than using the other instrument which the Congress
has given them.
Mr. GOLDSBOROUGH. Isn't it your statement that the Governors of
the Federal Reserve System would not feel justified in using its
power to raise reserves for the purpose of controlling the stock
market? Isn't that your statement?
Mr. ECCLES. Yes, sir; that is right.
The CHAIRMAN. I am not so much interested in stock-market operations as I am in agriculture, industry, and commerce. I would
like to see the farmers in my district left where they can produce
to the limit of their capacity, and such liberal policies invoked as
are calculated to stimulate an enlarged consumption of products
of others, until we get to the highest standard of living and absorb
some of the millions who are unemployed, which is the situation that
we face now. I am unable to see in the situation that exists where
we are in any danger of flying too high or going too fast or reaching
a basis of inflation. I just do not see it. I would not put my thought
against yours in a matter of that kind, however.
Mr. ECCLES. N O ; and at the moment I do not feel that we are
doing it.
The CHAIRMAN. I am wondering what may be the result.
Mr. ECCLES. Inflation is an insidious thing. If you get enough
money created and then that money gets into circulation it is difficult to extinguish that money supply. And certainly with a volume
of deposits 2 billion dollars in excess of that in 1929 we have no
reason to say that deposits in the course of time cannot get into
velocity or turn-over. And then there would be a sufficient means
of payment to support a 90 billion national income on a 1929 price
Jevel. What we need today is to encourage those who have idle
money to invest that money in mortgages and long-term securities
for the expansion of industry and in the fields of private enterprise that would tend to give employment.
Mr. HANCOCK. Governor, if it could be carried on in a sound way
I assume that you personally, together with the power which you



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55

possess as the head of the Federal Keserve System, would be delighted to cooperate with the American people in doing a business
of $125,000,000,000 a year, would you not?
Mr. ECCLES. That is correct. And it seems to me that there is no
reason why such a situation cannot develop. I would not want to see
a $125,000,000,000 national income if the total production were not
increased proportionately. But merely getting a dollar income
through a great price rise is not the thing that we need in this
country. What we need in this country is the greatest possible
amount of production of goods and of service.
Mr. HANCOCK. I feel the same way.
The CHAIRMAN. And distribution also.
Mr. ECCLES. Yes, sir. Of course, it will have to be distributed if
it is produced. I mean the greatest production and distribution,
and not entirely on credit. We do not want to get that huge production and have it distributed on the basis of too much credit. We
want that distribution based upon the widest possible distribution
of the current national income.
I t seems to me Mr. Patman's questions would give a somewhat
erroneous impression, taken by themselves, with reference to the
bank picture. I t would appear that as a result of the Government
issuing and selling interest-bearing securities in which the banks
and reserve system own approximately half of the total outstanding
amount, and the fact that interest paid by banks to depositors has
been greatly reduced through the prohibition to pay interest on
demand deposits in accordance with the Banking Act of 1930, and
through the Board's action in reducing the total amount paid on
time deposits, the banks have made an undue profit at the expense
of the public. I t would seem to me that if we will but analyze the
entire banking net income over a period of years, and particularly
the last 6 jrears, the net result would certainly show that they were
in the red, in my opinion.
When the banks closed at the time of the bank holiday, the Government, in the public interest, saw fit to make their opening possible. The Government did not open them because of the interest
of the stockholders or the officers. The Government would not have
put into them a billion dollars of new capital except for the fact
that it was felt to be in the public interest.
The CHAIRMAN.. But you are sure, however, that the action inured
to the benefit of the stockholders of the banks very largely, in that
it helped them out of the great dilemma in which they found themselves, and it enabled them to continue their business.
Mr. ECCLES. YOU could not do otherwise and preserve private
banking.
The CHAIRMAN. I am not finding fault with i t ; I am only calling
attention to the fact that the bankers did benefit by it. But it
seemed to have made some of them angry, although we singled them
out as a class and advanced this billion dollars without security, the
Government standing aside until everybody else was paid. But still
some of them have never seemed to realize that the administration
had done a thing of advantage to them. I just wanted to say that.
Mr. ECCLES. Everybody benefited by it. And I think possibly the
bankers were the least grateful for the assistance that the Government furnished to them.



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EXTENDING PERIOD OF OBLIGATIONS AS SECURITY

We have not devised a money mechanism in this country yet that
does not involve a debtor-creditor system, w^hich means a system of
interest. And until we do do that, we have to have banks. And
those banks will either be publicly or privately owned, or, as we have
today, a portion of the stock, to the extent that the R. F . C. put the
capital into them the stock is publicly owned.
The interest that the Reserve System and that the banks have received from the Government on their bonds in this case, of course,
has enabled the banks to operate during a period of recovery until
such time as the demand for credit by commerce, agriculture, and
industry would take place.
I t is my opinion that as Government retires its obligations from
the banks, which it is doing over the period of recovery, that the
banks will expand their loans and investments in private fields. I n
other words, that will be the compensating operation. When private
borrowers were available and when credit could not be used profitably in the depression period the credit was not available because of
depression values, but the Government stepped in and did the borrowing, and their borrowing from the banks created the money which
they put into circulation. F o r that money they paid interest to the
banks as any other borrower would do. The banks rendered a service.
They could not hold the great bulk of deposits which the Government
created and spent.
The earnings from their assets, including Government bonds, taking the banking system as a whole, has not been as remunerative as
investments in almost any other kind of business. I know of no
business as a class that is possibly more essential in our economic
system and that has received over a period of 20 years a lower rate
of return.
I just wanted to make that statement for the record.
Mr. PATMAN*. YOU can consider the condition that they would have
been in if they had not received these additional benefits. Of course,
I am not charging that the banks made excessive rates of earnings.
Mr. ECCLES. I can see the condition that not only the banks would
have been in but that the country was in. I n fact, I remember the
condition they were in.
Mr. CRAWFORD. Governor, having in mind that the F . D. I. C.
encouraged the people to deposit their credits in the bank, and assuming we empowered the Federal Reserve Boarjl to impose these
increasing reserve restrictions, do you think that shadow hanging
over the bank management all of the time with reference to increased reserves tended to cause the banks to be somewhat reluctant
to make loans to these private individuals referred to, and that, in
turn, resulted in a lower income to the banks ?
Mr. ECCLES. I n my opinion, that in no way affected the willingness
of the banks to extend credit, because they had sufficient excess reserves not only to meet those requirements but reserves over and
above that. The only thing that has deferred bank lending is the
availability of acceptable borrowers.
Mr. CRAWFORD. Or interested adventurers in business?
Mr. ECCLES. Of course, banks cannot lend to adventurers. They
must have something tangible back of it.
Mr. CRAWFORD. They must have ample and satisfactory collateral
to put up to the bank, but they would not be willing to do it because



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57

they are not interested in adventuring. In that case the banks would
lose their support.
Mr. ECCLES. That is right. Of course, that is correct. The bank
credit did advance very rapidly the last 6 months of last year, which
is a favorable indication. And it is expected that there will be a
much more substantial increase in bank loans during the coming
year, with the present business activity and the expected business
activity.
The CHAIRMAN. Thank you very much, Governor.
Mr. GOLDSBOROUGH. Mr. Chairman, I move that this committee report the bill, and that the chairman be instructed to take such steps
as are necessary to bring the bill before the House for consideration.
The CHAIRMAN. Unless there be objection, that will be the order
of the committee. It is so ordered.
(Thereupon, at 1:05 p. m., the committee adjourned.)

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