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FEDERAL RESERVE ACT AMENDMENT

HEARINGS
BEFORE

THE

COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
SEVENTY-EIGHTH
FIRST

CONGRESS

SESSION
ON

H. R. 1699
A BILL TO A M E N D
OF T H E

S E C T I O N 12B A N D

FEDERAL

RESERVE

S E C T I O N 19
ACT

REVISED
M A R C H 25, A P R I L 1, 2, 5, 7, 1943

Printed for the use of the Committee on Banking and Currency

UNITED
GOVERNMENT
86330




STATES

PRINTING

W A S H I N G T O N : 1943

OFFICE

C O M M I T T E E

O N

B A N K I N G

A N D

C U R R E N C Y

Henry B . STEAGALL, Alabama, Chairman
B R E N T S P E N C E , Kentucky
T H O M A S F . F O R D , California
P A U L B R O W N , Georgia
W R I G H T P A T M A N , Texas
W I L L I A M B . B A R R Y , N e w York
A . S. M I K E M O N R O N E Y , Oklahoma
J A M E S A . W R I G H T , Pennsylvania
J O H N H . F O L G E R , North Carolina
H . S T R E E T T B A L D W I N , Maryland
B R O O K S H A Y S , Arkansas
L A V E R N R . D I L W E G , Wisconsin
R O G E R C. S L A U G H T . E R , Missouri
M A U R I C E J. S U L L I V A N , Nevada
M E R L I N H U L L , Wisconsin

J E S S E P . W O L C O T T , Michigan
C H A R L E S L . G I F F O R D , Massachusetts
F R E D L . C R A W F O R D , Michigan
R A L P H A . G A M B L E , N e w York
R O B E R T W . K E A N , N e w Jersey
J E S S I E S U M N E R , Illinois
F R E D E R I C K C. S M I T H , Ohio
J O H N C. K U N K E L , Pennsylvania
T H O M A S R O L P H , California
H E N R Y O. T A L L E , Iowa
B . J. M O N K I E W I C Z , Connecticut

HOWARD KEARLEY,

II




Clerk

FEDERAL RESERVE ACT AMENDMENT
THURSDAY,

MARCH

25,

1943

H O U S E OF R E P R E S E N T A T I V E S ,
C O M M I T T E E ON B A N K I N G AND C U R R E N C Y ,

Washington, D. C.
T h e committee met at 10:30 a. m., Hon. Henry B . Steagall (chairman) presiding.
T h e CHAIRMAN. T h e committee will please be i n order. I called
the committee this morning to consider H . R . 1699. I am sure members of the committee are familiar with the bill; it has been pending
i n the committee for several days.
(The chairman read H . R . 1699, which is as follows:)
LH. B. 1699, 78th Cong., 1st sess.]
A B I L L To amend section 12B and section 19 of the Federal Reserve Act during the continuance of the war
and for six months after the cessation of hostilities
Be it enacted by the Senate and House of Representatives of the United States of
America in Congress assembled, T h a t the second sentence of paragraph (1) of subsection (h) of section 12B of the F e d e r a l Reserve A c t (U. S. C., title 12, sec. 264
(h) (1)), as amended, is hereby further amended b y substituting a colon for the
period at the end thereof a n d a d d i n g the following: 11 And provided further, T h a t
d u r i n g the continuance of the present war a n d for six months after cessation of
hostilities a n y balance payable t o the U n i t e d States b y a n y insured bank, whether
represented b y a deposit account or otherwise, arising solely as a result of subscriptions made b y or t h r o u g h such insured b a n k for U n i t e d States Government
securities issued under a u t h o r i t y of the Second L i b e r t y B o n d A c t , as amended,
shall be excluded f r o m the definition of 'deposit* for the purpose of determining
the assessment base."
SEC. 2. T h a t the last sentence of section 19 of the F e d e r a l Reserve A c t (U. S. C.,
title 12, sec. 462a-l) be amended b y substituting a colon for the period at the
end thereof a n d b y a d d i n g the following: " P r o v i d e d , T h a t d u r i n g the continuance
of the present w a r a n d for six months after its termination no deposit payable
t o the U n i t e d States b y a n y member bank arising solely as the result of subscriptions made b y or t h r o u g h such member b a n k for U n i t e d States Government
securities issued under a u t h o r i t y of the Second L i b e r t y B o n d A c t , as amended,
shall be subject to the reserve requirements of this section."

T h e CHAIRMAN. I call your attention to a discrepancy in the two
sections of the bill i n one particular. Under section 2 the act
would be effective until the end of the war and for 6 months after the
cessation of hostilities. Under section 1 of the bill, which relates to
the matter of reserves, it would be effective during the continuance
of the war and for 6 months after its termination.
I should imagine that the termination of the war would relate to an
official declaration of the President declaring the end of the war, or an
A c t of Congress for that purpose; whereas, under section 2 the cessation oi hostilities would be the guide.
W e have with us M r . Crowley, Chairman of the Federal Deposit
Insurance Corporation. I am sure members of the committee will be




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RESERVE ACT

AMENDMENT

glad to hear M r . Crowley; and I am sure I am justified i n saying that
every member of the committee w i l l listen to h i m w i t h interest and
w i t h the highest regard for any views he may express.
Incidentally, I want to say here and now that I feel sure I speak
not only for the members of this committee who have had frequent
and intimate contact w i t h M r . Crowley during his service, but for the
entire membership of the House, when I make the statement that I
think he has made a most worthy and commendable record i n the
management of the Federal Deposit Insurance Corporation, and
rendered a great service for the protection of the depositors, the
stability of the banks, and of the national economy. [Applause.]
M r . CROWLEY. W e shall be glad to have y o u discuss the bill.
M r . DILWEG. M r . Chairman, may I say that he is an illustrious
son of the State of Wisconsin.
M r . STEAGALL. T h e State of Wisconsin has produced many illustrious sons, and there is an illustrious son of Wisconsin who honors
us b y his presence and his association w i t h us as a member of this
committee—in fact, we have two splendid sons of Wisconsin. I was
addressing m y remarks to the gentleman on m y right, but they
apply equally to the gentleman on m y left, M r . H u l l , who is one of
the most modest, but one of the most hard-working, conscientious,
and valuable members of this committee and of the House.
M r . Crowley, w i l l y o u proceed?
S T A T E M E N T OF HON. LEO T. CROWLEY, C H A I R M A N , FEDERAL
DEPOSIT I N S U R A N C E C O R P O R A T I O N ; A C C O M P A N I E D B Y DONA L D S. THOMPSON, CHIEF, DIVISION OF RESEARCH A N D STATISTICS
M r . CROWLEY. M r . Chairman and members of the committee:
I appreciate, of course, M r . Steagall, your kind remarks, and the
confidence and the cooperation that the Federal Deposit Insurance
Corporation have always had from this committee.
T h i s bill, H . R . 1699, is a b i l l that we agreed to sponsor at the request of the Secretary of the Treasury. T h e y feel that w i t h all of the
heavy financing that is coming along, especially the financing that
may be necessary i n April, they would like to have this bill enacted
as promptly as possible,
T h i s bill eliminates from our deposit assessment the deposits k n o w n
as the war loan account. T h a t is an account that may be set up i n a
bank, as a n agency for the Treasury, for the subscription of war-loan
bonds.
T h a t account is to be used for the purchase of bonds b y individual
depositors, or b y the banks' funds themselves. T h e balance remains
i n that account until the Treasuiy takes it out and puts it i n their
working balances.
T h e balance is withdrawn gradually so that on the average these
war-loan accounts may remain i n the banks possibly 60 days before
you get the turn-over of those deposits into a working account and
into the hands of individuals and business.
W e anticipate that this bill w i l l reduce the income, that the Insurance Corporation would collect b y $2,500,000 to $3,500,000.




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We are, of course, reluctant to talk about a reduction in the deposit
insurance income with the uncertainties that face us during the postwar period, but out capital and surplus at the end of this year will be
upward of $700,000,000. Our income is running now—anticipated
for this year—about $85,000,000 a year. So that we feel that if this
will help to make a contribution to financing the war, and will get
many of these smaller banks to take these war loan accounts, we are
willing to sponsor this legislation i n order to help the Treasury in their
financihg.
Substantially, that is the story. W e have a lot of testimony we can
submit here with reference to our income; with reference to what the
figures show would be eliminated from it. W e have the figures of
losses of banks and insured banks since we started, which we would be
very happy to go into with you, if you would like.
B u t we do want to sponsor and support the passage of this bill and
we would like to have it passed out of this committee so that you can
get it out in time for the A p r i l financing. T h a t date is A p r i l 12.
As far as deposit insurance is concerned, we have been able, during
the term of our existence, to set aside all of our income into surplus,
and a large part of our income from investments. So that to date
Deposit Insurance has a capital of $289,000,000 and a surplus of
about $325,000,000.
W e are adding to that surplus at the rate of about $70,000,000 to
$75,000,000 a year.
If the losses over the period of the next 65 years were to be similar
to those experienced since 1865, and we were to experience no recurrence of major banking crises, it would take about the income that
we have now to take care of the losses. So for that reason we are
reluctant to talk about giving up any further income for deposit
insurance.
I think the thing that is most necessary in financing this war is
that we continue to have the complete confidence of the depositors
of this Nation, which we have now. Y o u r banking system is i n the
best shape that it has ever been, asset-wise.
T o illustrate that, let me refer you to page 7 of my prepared statement, which is in front of you.
T h e quality of the assets of the banks today is better than at any other time
of record. T o t a l assets of the banks were appraised by examiners at 99.8 percent of book value i n 1942, compared w i t h 99.4 percent i n 1939 and probably
not over 90 percent i n 1933-34. Only 2.5 percent of the assets were considered
to be substandard i n 1942, compared w i t h at least 25 percent in 1933-34. I n
1942, more than 97 percent of the assets were not criticized; in 1933-34, less
than two-thirds of the assets of the banks escaped criticism. The improvement
has reflected i n part the elimination of weak and insolvent banks, in part the
charging off by operating banks of more than $4,000,000,000 of losses during the
ast 9 years, in part improvement in credit standing of debtors accompanying
usiness recovery and rising income, and in part the acquisition by banks of a
large volume of new assets consisting chiefly of U n i t e d States Government
obligations, cash and balances w i t h other banks, and sound loans.

T h a t is a very significant thing, to go into a war with your banks i n
that sound position. I t is a real credit to your banking system.
During the period of Deposit Insurance, we had liquidated 390
insured banks with 1,260,000 depositors, with $485,000,000 in deposits,
that were protected 97.8 percent; and the losses to depositors that were
not insured were less than $3,000,000. The losses to us were about
$50,000,000.




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FEDERAL

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There has been much talk on the H i l l here about aid to small
business. I t would be interesting to study the record of the banking
system and see how successful your little banks have been i n carrying
on, and how much money they have been able to make, and how they
have been able to prosper, as against the small businessman, during
this war. I think a lot of that is due to the policy of this committee i n
encouraging your small unit bank, and in encouraging your dual
banking system. I think Deposit Insurance has made a real contribution to your small bank, because it has restored confidence and
helped them i n their local communities.
If we had been able to do something like that for your small businessman, it would have helped him materially during this period.
O n page 5 - A of my statement there is a table that shows the increase i n deposits over a period of a great many years.
M r . FORD. T h a t 1942 figure of $77,200,000,000 of deposits, how
much of that is reflected i n Government bonds?
M r . CROWLEY. About 46 percent, M r . Chairman, that substantially
is what I have to present. I would be very happy, of course, to answer any questions the committee would like to ask.
The CHAIRMAN. M r . Wolcott desires to make some inquiries with
respect to deposits that have some relation to matters which will arise
i n the debate on the tax bill which is now pending i n the House, and
I am going to recognize M r . Wolcott now so that he may make such
inquiries as he may desire. I do this i n anticipation of the meeting
of the House, and the necessity for members to be on hand i n the
House today because of the importance of the matter under consideration.
M r . WOLCOTT. M r . Crowley, do the banks pay the Government any
interest on these war loan deposits?
M r . CROWLEY.

N O , sir.

M r . WOLCOTT. C a n you give us the total amount of time and
demand deposits i n banks as of the most recent date which you have?
M r . THOMPSON. These are partly estimated. T h e demand deposits
of individuals, partnerships, and corporations, about $47,000,000,000.
M r . WOLCOTT. C a n you give me the total, Government and all?
M r . THOMPSON. T h e total deposits, including mutual savings
banks, are about $100,000,000,000.
M r . W O L C O T T . $100,000,000,000?
M r . T H O M P S O N . Y e s , sir.

M r . WOLCOTT. AS of what date?

M r . THOMPSON. D e c e m b e r 31, 1942.

M r . WOLCOTT. W i l l you break that down for us?
M r . THOMPSON. Insured commercial banks, $88,000,000; noninsured
commercial banks, about $1,500,000,000; insured mutual savings
banks, $2,000,000,000.
The CHAIRMAN. W h a t is that $1,500,000,000 figure?
M r . CROWLEY. T h a t is the amount of deposits i n noninsured banks
throughout the Nation.
M r . THOMPSON. Those are the commercial banks.
M r . SMITH. D i d you say December 31?
M r . T H O M P S O N . Y e s , sir.

The CHAIRMAN. W h a t is the number of noninsured commercial
banks?
M r . THOMPSON. A l i t t l e u n d e r 1,000.

Insured mutual savings banks, $2,000,000,000.



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Noninsured mutual savings banks, between $8,500,000,000 and
$9,000,000,000. Of the total deposits i n all banks, $8,500,000,000
were to the credit of the United States Government.
M r . WOLCOTT. Of the total of $100,000,000,000?
M r . THOMPSON. Y e s , sir.

M r . WOLCOTT. A n d how much was that?
M r . T H O M P S O N . $8,500,000,000, o r w h i c h $8,000,000,000 w e r e w a r

loan accounts.
The total time deposits, including the time deposits in the commercial banks and the savings deposits i n the mutual savings banks, are
about $26,000,000,000.
M r . WOLCOTT. The rest would be demand deposits?
M r . THOMPSON. Of various classes; yes, sir.
M r . WOLCOTT. HOW much of an increase has there been i n deposits recently?
M r . THOMPSON. I believe reporting member-bank individual deposits have increased since the first of the year about $4,000,000,000.
T h a t is due largely to the withdrawal by the Treasury of its war loan
deposits and the spending of them. I do not have estimates of
total deposits but they have increased slightly.
M r . WOLCOTT. This increase of $4,000,000,000 is due to what;
will you repeat that?
M r . THOMPSON. It is due to the withdrawal by the Treasury of its
war loan deposits and the spending of that money i n war expenditures.
That went into the deposits of individuals.
M r . WOLCOTT. HOW much have the war loan accounts increased
recently?
M r . THOMPSON. They went up to a peak of slightly over $8,000,000,000 in connection with the December financing. They have now
declined to around $3,000,000,000.
M r . WOLCOTT. On page 5 - A of your statement, you anticipate that
i n 1944 the deposits of our commercial banks will reach $122,000,000,000.
M r . THOMPSON. Y e s , sir.

M r . WOLCOTT. A n d 1945 they will reach $147,000,000,000; and at
the end of 1945, $160,000,000,000.
T o what do you attribute that increase?
M r . THOMPSON. Largely to the purchase by the banks of United
States Government securities.
M r . WOLCOTT. Which means, in other language, spending by the
Government?
M r . T H O M P S O N . Y e s , sir.

M r . WOLCOTT. W i l l that money be available for the payment of
private taxes?
M r . THOMPSON. Of course, these resources or any resources can
be converted into cash presumably to pay taxes, but it is not necessarily a part of the income of the individual.
M r . WOLCOTT. TO what do you attribute the increase in individual
deposits?
M r . THOMPSON. I beg your pardon?
M r . WOLCOTT. TO what do you attribute the increase of individual
deposits?
M r . THOMPSON. TO expenditures by the Federal Government i n
war plants; expenditures by the war plants in the form of increased




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wages, distribution of dividends, payments for goods, the general
processes of trade.
M r . WOLCOTT. D o you know what percentage of these deposits
are made up of cash reserves of, not only corporations, but individuals?
I suppose it would be rather difficult to determine it with respect to
individuals?
M r . T H O M P S O N . Y e s , sir.

M r . CROWLEY. I think this, M r . Wolcott: I t is reasonable to assume
that where corporations have large balances, to some extent that is
cash accumulated out of depreciation reserves and things like that;
because they are not able to use their depreciation account for improvements and expansion, and that naturally goes into cash. So
that has a contributing effect toward liquidity of many concerns, like
railroads, who cannot buy any new equipment.
M r . WOLCOTT. It does not necessarily imply that the corporation
or the individual has any more assets.
M r . CROWLEY. I t may be a liquidation of his capital.
M r . WOLCOTT. W h a t is that?
M r . CROWLEY. It may be a liquidation of a part of his capital.
M r . WOLCOTT. I n other words, if a man is forced to sell his business
and cannot buy another business, he takes the cash and puts it into
the bank against the time when he can buy another business with
that cash.
M r . CROWLEY. If you had a large retail store, or a large jobbing
house, and you could" not replenish your merchandise, as you sold it
off, you built your cash position up when you formerly used to invest
the capital in merchandise.
M r . WOLCOTT. AS these business inventories decrease, there is a
tendency for their cash resources
M r . CROWLEY. TO become more liquid.
M r . WOLCOTT. TO increase, and that is reflected i n deposits?
M r . CROWLEY. That is right.
M r . WOLCOTT. What I was trying to get at—and I wish you would
comment upon it—is this: I t has been contended by a great many
members of Congress, including members of the Senate, that there
is more cash available i n deposits today for the payment of taxes
than ever before. D p you want to comment upon that? Of course,
I suppose that this cash, where you liquidate a business and put it i n
the form of cash, is available for the payment of taxes; but whether
that is indicative of any increase i n available resources or not is of
interest to us.
M r . CROWLEY. I think that naturally most of your concerns are
more liquid than they have been i n a long, long time. A n d when
your volume of business increases and your turn-over is greater,
naturally your cash position is always greater on account of the
volume of business you do, and undoubtedly people have more cash
than they ever had before, on account of the rise in wages, and things
like that.
M r . WOLCOTT. W e have had an increase i n currency i n the last 10
years of about $10,000,000,000. Is much of that reflected i n deposits
i n the banks?
M r . CROWLEY. I would prefer to have the Federal Reserve answer
that, because I think they make a better study of that than we do.
M r . WOLCOTT. DO you have anything else you want to contribute
to this general thought that might be helpful?



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M r . CROWLEY. NO, sir; I do n o t t h i n k so.

M r . CRAWFORD. M r . Crowley, suppose M r . A has a stock of goods
and accounts receivable, as of January 1, 1942; and as of January 1,
1943, he has liquidated that substantially. W e w i l l say i n the first
instance $100,000 and i n the second instance, $25,000; that is he has
gotten liquid to the extent of $75,000. I t is i n the form of demand
deposits. M r . B was not i n business, but he has his accumulated
savings over the years i n the form of $75,000 demand deposits. Is
there any reason, under our system, w h y M r . A should be protected
against the payment of Federal taxes any more than M r . B ?
M r . CROWLEY. I do not understand that he is.
M r . WOLCOTT. T h e question goes, I suppose, to the availability of
this money w i t h which to pay taxes.
M r . CROWLEY. I think that a man who is i n liquidation, or whose
company is i n liquidation naturally tends to accumulate cash during
the course of liquidation. If he goes back and buys merchandise, he
does not have the cash to pay taxes; I mean, his liquidity is gone.
M r . CRAWFORD. V e r y well; m y point is this: I do not propose to
get confused w i t h the idea that the fellow who liquidates his business
should be so protected, so far as his tax position is concerned, that
he can go i n business when he gets ready, any more than the fellow
should be protected who stays liquid all the time. D o you get the
point?
M r . CROWLEY. Yes, M r . Crawford. If I liquidate m y business
and have $100,000 i n cash, what tax would y o u want me to pay?
I would have no income from the $100,000, if it was lying i n the bank.
M r . CRAWFORD. I should want y o u to be just as liable for Federal
taxes as the fellow who was l i q u i d all the time. I n other words,
I would not want y o u coming up and making an excuse to me that
y o u could not use any of your cash for the purpose of paying Federal
taxes because y o u wanted to save it so that y o u could go back into
business some day. I am not meaning to say that you are recommending that to us.
M r . CROWLEY.

NO, no.

M r . CRAWFORD. B u t I am just developing the position of these two
people who are i n liquid positions b y reason, i n one case, of a fellow
who stayed i n a l i q u i d position; he always was long on dollars; and the
other fellow went long on inventory and receivables, and then later
became short on those and went long on dollars.
M y contention would be that any man today who has demand deposits to his credit is i n a position to pay Federal taxes w i t h that;
especially if he has no liabilities. I do not care whether it is some
fellow who liquidates his business or not.
M r . CROWLEY. YOU are assuming that they both owe income taxes?
M r . CRAWFORD. Surely; I am assuming that they both owe income
taxes, and I am assuming that b o t h are living under our system here
i n the U n i t e d States, under present concepts and practices and
commitments.
M r . CROWLEY. B u t the man who is 100-percent liquid and has all
of his assets i n cash, does not have much of an income tax to pay
because he has no income.
M r . CRAWFORD. L e t us assume that during the year 1942, for instance, he received $50,000.
M r . CROWLEY. YOU mean as a profit?




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M r . CRAWFORD. N o ; as salary.

M r . CROWLEY. I think he is i n a position to pay his income tax the
same as any other man, of course.
M r . CRAWFORD. L e t us assume that the fellow who liquidated his
inventory also made $50,000 on that liquidation i n 1942. M y contention is that one is just as subject to taxation and should be, justly
so, as the other.
M r . CROWLEY. W e agree on that.
M r . WOLCOTT. I want to make myself clear i n that regard. T h e
question i n my mind was not as to whether there was enough cash
available to pay income taxes; but what I was developing here is
whether we were justified i n raising the amount of income taxes, and
predicating that increase of taxes upon an increase i n deposits. I was
trying to find out what these deposits represented; if they represented
current earnings or if they represented the liquidation of assets.
Now, if they represent the liquidation of assets, that does not necessarily imply that the man's income has increased or that he is i n any
better position to pay Federal taxes than he was before.
That is what I was trying to develop, because both sides of this
question on the tax bill seem to be predicating at least part of their
case upon the fact that because deposits i n the banks have increased,
people are i n a better position to pay at a higher rate of income tax
than they were before.
M r . WRIGHT. IS it not better to take the increase i n national earnings over the year?
M r . WOLCOTT.

Yes.

The CHAIRMAN. I t is evident that members of the committee desire
to attend the session of the House, and I am going to suggest that
gentlemen withhold further discussion of the bill u n t i l we have more
time.
M r . KEAN. M a y I ask M r . Crowley just one question?
T h e CHAIRMAN.

Yes.

M r . KEAN. HOW do you handle, on your books, the question of
assets which you have taken over and which may or may not be good?
F o r instance, last year you saw certain photographs of certain properties in Jersey C i t y which you had taken over from the banks, and
on the photographs they did not look very good. Now, how do you
carry those as assets?
M r . CROWLEY. F o r instance, let us assume that we go i n and consolidate a bank and we get $1,000,000 of assets.
M r . KEAN. Questionable assets.
M r . CROWLEY. T h a t is right. W e appraise those assets on our owh
values, and we set that up on our books so that it is at the value at
which we appraise it. I n other words, we take our loss immediately.
M r . KEAN. Y o u take your loss immediately. T h a t is what y o u
should do and I wanted to know whether you did it.
M r . CROWLEY. AS a matter of fact, our reserves are. far in excess of
our losses on that.
M r . TALLE. M r . Crowley, I believe you stated at the outset that
the banking system is now i n the best position it has been in during
our history asset-wise. W i l l you comment on its condition incomewise?
M r . CROWLEY. AS to earnings of insured banks, their income is
about $400,000,000 for last year, and I think their invested capital is




9

FEDERAL

RESERVE

ACT

AMENDMENT

about $7,000,000,000, so their earnings were very satisfactory last
year.
M i s s SUMNER. Was that after taxes, M r . Crowley?
M r . CROWLEY. Yes, M a d a m .
M r . CRAWFORD. M r . Crowley, was there a remark i n your prepared
statement to the effect that some 6 or 8 months after hostilities
ceased, reserve requirements of banks will go up?
M r . CROWLEY. NO; what we said was that demands upon the
banks would go up. W e did not say anything about reserves.
M r . MONRONEY. M r . Chairman, why can we not report this bill
now?
The CHAIRMAN. Of course, when it comes to reporting the bill, it
is the wish of the committee and not the chairman that will rule, but
I should assume that members of the committee will want an opportunity to discuss the bill and try to understand it.
M r . WOLCOTT. M r . Chairman, a couple of years ago, we gave
consideration to a bill to reduce premium rates. I think there are
three things to which we have got to give consideration—the maintenance of these reserves i n the light of the recommendation that we
might reduce premium rates; the effect of relieving the banks of the
requirement that they pay premium on Government deposits, that
is, whether that shall be denied them hereafter. Then there is
another question which does not come to my mind right now, that
affects this situation. There are three things we have got to consider before we report this bill out. W e might want to amend this
bill to cover some of those other points.
M r . WRIGHT. M a y I ask one question, M r . Chairman? D o you
think it would be necessary or advisable to raise the premium rates
i n order to compensate for the loss which you are going to take on
relieving these particular depositors?
M r . CROWLEY. NO, we do not anticipate anything like that.
M r . WOLCOTT. T h e banks are all i n favor of this, of course?
M r . CROWLEY. T h a t is right.
M r . WOLCOTT. A n d they are also i n favor of reducing the premium
rates?
M r . CROWLEY. Surely.
M r . WOLCOTT. They cannot have their cake and eat it, too.
M r . CROWLEY. T h a t is right.
M r . WOLCOTT. I think we should hear from the banks as to whether
they want this or a reduction i n premium rates.
M r . FORD. TO what extent will taking these deposits out from
under the Federal Deposit Insurance Corporation affect reserves?
Y o u are also taking them out of reserves, too, are you not?
M r . CROWLEY. T h a t is right; you are taking the deposits out of
the reserve requirements and relieving the assessment at the same
time.
M r . MONRONEY. Does the Government have any priority on the
assets of failed banks for its own deposits?
M r . CROWLEY. Yes; that is the thing that the Congressman was
getting at, with respect to Government accounts. Our Government
accounts are* secured accounts with Government securities. I would
be glad to talk to you about that later, because a lot of people seem
to think that because that account is secured, there is no risk to the
Federal Deposit Insurance Corporation; and that a secured account
ought to be eliminated from our total base for assessment.



10

FEDERAL

RESERVE ACT

AMENDMENT

As a matter of fact, you are taking the other peoples' assets, the
war depositors' assets, to secure somebody else. A n d I have never
understood why a public body should have their deposits secured any
more than some person who had an account i n there as a result of his
sweat and work i n producing the deposit. I have always felt that it
was morally wrong to have secured deposits.
The CHAIRMAN. T h e committee w i l l stand adjourned and, if practicable to meet on Monday, we will meet then.
(Whereupon the committee adjourned to meet on the call of the
chairman.)
FEDERAL
TESTIMONY
LEO

DEPOSIT INSURANCE

CORPORATION

B E F O R E THE H O U S E COMMITTEE ON B A N K I N G AND CURRENCY
T . C R O W L E Y , R E H . R . 1699, T H U R S D A Y , M A R C H 25, 1943

OF

I am here to explain the position of the Federal Deposit Insurance Corporation
with respect to the exemption of war loan deposits from insurance assessments,
as proposed by H . R . 1699» Since the proposal to eliminate reserve requirements on war loan deposits (sec. 2 of the bill) affects the operations of the
Federal Reserve System primarily, I prefer not to comment upon that phase of
the bill.
War loan deposits.—A description of how the war loan deposit account operates
may be useful in understanding the effect upon the banks of the elimination of the
deposit insurance assessment on these deposits.
T h e war loan deposit account results from two types of transactions, each of
which involves the sale of securities by the Treasury. T h e two transactions are
the direct purchase of new issues by a bank and the purchase through a bank of
new issues by an individual or firm. W h e n the bank subscribes to a new issue
it creates on its books a credit to the Treasury i n a war loan deposit account.
When an individual or firm buys through a bank he gives the bank a check. T h e
bank charges the account of the individual or firm (thereby reducing that account)
and credits the Treasury's war loan deposit account, increasing it correspondingly.
T h e Treasury draws upon its war loan deposit account as it needs the money.
The withdrawals are gradual and fairly regular over a period of time. When the
Treasury withdraws money from a war loan deposit account and disburses it,
the money goes back into the hands of bank customers, and deposits of individuals and business enterprises increase correspondingly.
Upon the securities which it buys the bank receives interest from the date of
purchase and is prohibited by law from paying interest on the deposit owed to
the Treasury. T h e average rate of interest received on securities purchased by
the banks in 1942 was about 1 percent per annum. I n effect, therefore, the banks
pay on an installment basis w i t h no down payments and no interest for securities
upon which they average a return of 1 percent per annum; they also sell to customers for cash, securities for which they do not have to make immediate remittance to the Treasury. P u t another way, after deducting insurance assessments
of one-twelfth of 1 percent the banks receive a net income at the rate of about
eleven-twelfths of 1 percent per annum on funds they have promised to loan, but
haven't yet actually turned over, to the Treasury.
Effect of bill upon the Corporation and upon the banks.—Treasury
borrowings
for the fiscal year 1943 were estimated to amount to about $60 billion in the
President's Budget. So long as the Treasury borrows at this rate, we estimate
that war loan deposits in insured banks w i l l probably average between $3 and $4
billion and that insurance assessments thereon would amount to between $2.5
and $3.5 million per year. T h e Corporation's income from assessments in 1942
was slightly over $55 million; for 1943, it w i l l be about $70 million, according to
our present estimates. Insured bank profits are currently running between $450
and $500 million after taxes. T h e financial effect upon either the banks or the
Corporation of the elimination of assessments on war loan deposits does not appear
to be very important. W i t h the growth i n deposits total assessments paid in
future years will, of course, be larger in amount. Should deficit financing exceed
$60 billion in a year the amount of the war loan deposits would probably be
correspondingly higher. I n addition, the amount w i l l be affected b y Treasury
policy regarding (1) minimum balances, (2) frequency of borrowing, and (3)
extent to which various issues may be paid for through the war loan deposit
account.







FEDERAL

RESERVE ACT

AMENDMENT

11

'FEDERAL RESERVE

ACT

A M E N D M E i N T 12

T h e chart (chart A ) w h i c h I have here shows net m o n t h l y receipts of the Treasu r y on p u b l i c debt transactions a n d average m o n t h l y balances i n the w a r loan
deposit accounts f r o m J a n u a r y 1940 to J a n u a r y 1943, inclusive. T h e d a t a are
presented i n table 1. T h e net m o n t h l y receipts are p l o t t e d o n a scale w h i c h is
double t h a t used for the deposit balances, because i n 1941 a n d 1942 (as the chart
shows) the Treasury's net m o n t h l y p u b l i c debt receipts were a b o u t double the
average a m o u n t of war loan deposits. I t is o n this basis t h a t we have estimated
the effect of this b i l l ( H . R . 1699) u p o n the banks a n d the Corporation.
TABLE

1 . — W a r loan deposits

and

Treasury

net borrowings,

monthly,

1940-43

[In millions of dollars]
1941

1940
Month

1942

1943

War loan Treasury War loan Treasury War loan Treasury War loan Treasury
borrow- deposits1 borrow- deposits1 borrow1
borrowdeposits1
ings 2
ings*
ings > deposits
ings

January
February
March
April
May
June
July
August
September
October
November
December

819
816
815
814
813
811
653
718
716
714
712
625

167
256
175
118
150
160
803
135
168
64
136
752

506
478
475
554
552
652
672
751
828
578
845
1,345

852
213
1,083
58
490
1,241
551
1,408
425
2,238
1,456
2,898

1,787
1,658
2,162
2,079
1,690
1,077
1,833
2,459
1,167
2,569
2,320
5,537

2,074
2,369
39
2.542
3,609
3,852
4,714
4,549
4,798
6,420
3,212
12.054

7,030

2,899

i Daily average of special deposits on account of sales of Government securities.
* Monthly excess of public debt receipts over expenditures.

T h e exemption of w a r l o a n deposits f r o m the assessment a n d f r o m reserve
requirements w i l l practically eliminate the cost of h a n d l i n g such deposits. A s a
consequence, w a r loan deposits w i l l be very profitable accounts.
The Corporation supports the bill as a war measure.—We
have been t o l d t h a t
m a n y bankers have made representations t o the T r e a s u r y t o the effect t h a t they
are loath t o participate i n the h a n d l i n g of w a r loan deposits because of our assessment of one-twelfth of 1 percent per annum.
A s a consequence, the T r e a s u r y
has requested this exemption as a w a r measure t o facilitate w a r
financing.
The
exemption is t o be effective only for the d u r a t i o n of the w a r a n d for ( m o n t h s
>
thereafter a n d we approve the provisions of the pending bill, strictly as a w a r
measure.
The Corporation does not consider other reduction or exemption
advisable.—We
do not consider advisable any other reduction i n the assessment whatsoever, n o r
the exemption f r o m assessment of a n y other class or t y p e of deposit.
Our
reasons are set f o r t h below.
Losses versus assessments.—We
have no assurance t h a t the present rate of
assessment is adequate t o meet future needs. F r o m 1865 t o 1940, losses t o
depositors i n closed banks w o u l d have averaged one-fifth of 1 percent per a n n u m
of deposits i n a l l commercial banks if, as has been the case i n recent years, there
h a d been n o stockholders' double liability throughout the period. T h o s e losses
are more t h a n double the present rate of assessment. H a d there been n o major
post-war adjustments a n d no major b a n k i n g crises d u r i n g t h a t 76-year period,
the rate of loss w o u l d have been just about equal t o our present rate of assessment.
T h e favorable experience of the C o r p o r a t i o n over the past 9 years is characteristic of similar periods of recovery f r o m major b a n k i n g crises. T h i s is brought
out b y the a c c o m p a n y i n g chart (chart B ) . T h e supporting figures are presented
i n table 2. T h e chart shows t h a t if a deposit insurance f u n d h a d been established
at the close of the C i v i l W a r w i t h the same rate of assessment a n d the same
capital i n relation t o deposits, a n d the same relative b o r r o w i n g power as the
Federal D e p o s i t Insurance Corporation, i t w o u l d have enjoyed a favorable
record i n early years b u t w o u l d have become insolvent i n 1877.
Reestablished
i n 1880, the f u n d again w o u l d have enjoyed a n early favorable record b u t w o u l d
h a v e become insolvent again i n 1893. Reestablished i n 1898, once more i t w o u l d
h a v e enjoyed an early favorable record b u t w o u l d have become insolvent for the
t h i r d time i n 1930. T h e b a n k i n g collapse of 1933 w o u l d have r e m o v e d a n y
hope of restoring solvency t o the insurance f u n d .







FEDERAL

RESERVE ACT A M E N D M E N T

13

14

FEDERAL RESERVE ACT A M E N D M E N T

TABLE 2 . — T o t a l resources of hypothetical

deposit insurance

funds,

1865-1988,

and

of Federal Deposit Insurance Corporation
Total resources
Year ending—

Year ending—

As percent
of bank
deposits 1

In thousands of
dollars

As percent
of bank
deposits1

—

..

7,225
7,321
7,623
8,548
9,582
10,822
11,108
11,376
9,153

1.07
.79
.78
.80
.81
.89
.85
.93
.76

1874
1875
1876
1877
1878..
1879
1880
1881

8,798
4,902
2,773
—1,283
-9,418
-10,962
-11,036
-11,418

J 1 1 1 1

1865.
1866
1867
1868
1869
1870
1871
1872
1873

bk'^kkk's

O

In thousands of
dollars

Total resources

N E W F U N D STARTED
1880
1881
1882
1883
1884...
1885
1886
1887
1888
1889
1890
1891
1892
1893
1894
1895.
1896
1897
189S—
1899
1898
1899
1900
1901
1902.
1903
1904
1905

13,621
14,226
14,354
15,285
11,655
11,325
12,857
12,958
14,045
16,162
15,910
10,011
10,736
-9,634
-13,544
-16,337
-.20,488
-25,688
-25,864
-25,257
44,280
47,693
52,084
56,721
63,258
70,046
71,970
77,911

0.79
. 68
. 68
. 69
. 54
. 49
.51
. 44
. 44
.46
.43
.26
. 25
- . 24
31
-.37
-.48
-.54
-.45
-.37
. 78
. 71
. 69
.65
. 67
. 71
. 66
.65

1906
1907
1908
1909
1910
1911
1912
1913.
1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929.
1930
1931
1932
1933.

85,969
79,727
75,165
79,427
86,515
95,790
107,691
119,300
128,698
140,107
160,700
184,757
211,135
242,411
263,298
249,309
250,203
232,159
202,056
185,916
150,956
135,367
133,175
105,114
-18,573
-289,498
- 4 4 i, 594
-812,753

0.66
.61
.55
.53
.55
.58
.61
.66
.69
.67
.64
.64
.70
.69
.71
.73
.70
.60
.48
.41
.32
.28
.26
.21
-.04
-.65
-1.20
-2.44

F E D E R A L DEPOSIT I N S U R A N C E CORPORATION
1933

289,300

0.87

1938
1QQQ
lyoy

AKR 11A
400,114

421,622

0.8&

1935
1936
1937

337,210
353,172
385,340

.79
.73
.79

1940
1941
1942

497,209
555,662
620,000

. 81
. 81
. 8a

inoi

QQO OQO

. CO
oy

.CO
oo

iTotal deposits of all commercial banks.

At the beginning of deposit insurance, the Corporation's resources amounted to
about 1 percent of total deposits of insured banks. Today our resources amount
to about three-fourths of 1 percent of deposits. Three years from now, if present
tendencies continue, the ratio will be even lower (two-thirds of 1 percent). Of
course, a major part of the growth in deposits is being accompanied by a corresponding growth in bank holdings of Government securities and later will probably
be accompanied by some increase in reserves.
I n that connection I should like to show the committee this chart (chart C)
which gives deposits of all commercial banks in the United States from 1865 to
1945, and our estimates of the volume of deposits for 1943, 1944, and 1945, if
present financing tendencies continue. The supporting figures are given in
table 3. The period from 1934 to 1942 is the period of operation of the Federal
Deposit Insurance Corporation. Widespread failures and heavy losses ordinarily
do not occur during such a period of recovery and growth, particularly following
such a thorough housecleaning as took place in the period 1930-33. A n intensive




FEDERAL RESERVE ACT A M E N D M E N T

830 4 2
63—3



15

16

F E D E R A L RESERVE ACT

AMENDMENT

program of rehabilitation was also undertaken by the Federal Deposit Insurance
Corporation during the early years of its existence to further strengthen the
banking system so that many banks were restored to health which might otherwise have become insolvent and been forced to suspend operations even during
the period of recovery.
TABLE 3.—Deposits of all commercial banks, 1865-1945;
by years

estimated average deposits
Amount

Amount

1865
1866
1867
1868
1869
1870
1871
1872
1873
1874
1875
1876
1877
1878
1879
1880
1881
1882
1883
1884
1885
1886
1887
1888
1889
1890
1891
1892
1893
1894
1895
1896-.
1897
1898
1899
1900
1901
1Q09

i ona
1904
1905

__

$677. 000. 000
924, 000, 000
980, 000, 000
1 068, 000, 000
1 181, 000, 000
1 217, 000, 000
1 302, 000, 000
1 218, 000, 000
1 211, 000, 000
1 336, 000, 000
1 343, 000, 000
1 300, 000, 000
1 297, 000, 000
1 214, 000, 000
1 458, 000, 000
1 727, 000, 000
2 078, 000, 000
2 125, 000, 000
2 202, 000, 000
2 176, 000, 000
2 299, 000, 000
2 534, 000, 000
2 930, 000, 000
3 169, 000, 000
3 533, 000, 000
3 713, 000, 000
3 924, 000, 000
4 365, 000, 000
4 070, 000, 000
4 303, 000, 000
4 412, 000, 000
4 313, 000, 000
4 791, 000, 000
699, 000, 000
743, 000, 000
576, 000, 000
749, 000, 000
429, 000, 000
876, 000, 000
10 939, 000, 000
12 069, 000, 000

19061907
19081909
1910
1911
1912—
1913
1914
1915.
1916
1917
1918—
1919
19201921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931—
1932
1933
1934
1935
19361937
1938
1939
1940
1941
1942
1943 1
1944 1
1945 1
1945 * 2

—

$12, 946, 000, 000
13, 176, 000, 000
13, 713, 000, 000
15, 004, 000, 000
15, 730, 000, 000
16, 605, 000, 000
17, 515, 000, 000
18, 041, 000, 000
18, 695, 000, 000
20, 972, 000, 000
25, 242, 000, 000
28, 752, 000, 000
30, 254, 000, 000
35, 171, 000, 000
37, 301, 000, 000
34, 011, 000, 000
35, 891, 000, 000
38, 430, 000, 000
41, 776, 000, 000
44, 808, 000, 000
46, 475, 000, 000
48, 397, 000, 000
50, 293, 000, 000
50, 398, 000, 000
49, 489, 000, 000
44, 687, 000, 000
36, 668, 000, 000
33, 252, 000, 000
37, 482, 000, 000
42, 796, 000, 000
48, 125, 000, 000
48, 932, 000, 000
49, 345, 000, 000
54, 912, 000, 000
61, 371, 000, 000
68, 614, 000, 000
77, 200, 000, 000
99, 000, 000, 000
122,000,000,000
147,000,000,000
160,000,000,000

1 Estimate.
2 Year end.
Protection of depositors in closed insured banks.—From

the beginning of deposit

insurance to December 31,1942, 393 insured banks were closed because of financial
difficulties. Of these, 3 were subsequently reopened or taken over by other insured banks, and 390, having 1,266,000 depositors with total deposits of $485,000,000, were liquidated or merged with the aid of loans from the Corporation.
Deposits amounting to $474,000,000, or 97.8 percent of the total deposits in the
390 banks, were made available promptly without loss to the depositors. Only
1,966 of the 1,266,000 depositors, or less than one-fifth of 1 percent, held accounts
in excess of $5,000 and were not fully protected by insurance, offset, preferment,




'FEDERAL RESERVE

ACT

AMENDMEiNT

17

pledge of security, or terms of the merger agreements.
I t is estimated t h a t these
depositors w i l l lose less t h a n $3,000,000, o r a b o u t three-fifths of 1 percent of t h e
deposits i n these banks. T h e Corporation's losses are estimated at s l i g h t l y u n d e r
$50,000,000.
Deposits and losses in closed insured banks, 1934-4®t inclusive
Total
Number of banks..
Number of depositors
Amount of deposits
Amount of protected deposits
Amount of Corporation disbursements
Amount of estimated losses t o Federal Deposit Insurance Corporation
Depositors

Merged

Placed in receivership

$390
1,266,000
484,800,000
474,100,000
250,900,000

$150
902,000
382,300,000
382,300,000
169,700.000

$240
364,000
102,500,000
91,800,000
81,200,000

48,600,000
2,800,000

27,500,000
None

21,100,000
2,800,000

Condition of banks today.—The q u a l i t y of the assets of the banks t o d a y is better
t h a n a t a n y other time of record. T o t a l assets of the b a n k s were appriased b y
examiners at 99.8 percent of book value i n 1942, c o m p a r e d w i t h 99.4 percent i n
1939 a n d probably n o t over 90 percent i n 1933-34.
O n l y 2.5 percent of t h e
assets were considered to be substandard i n 1942, c o m p a r e d w i t h a t least 25 percent i n 1933-34. I n 1942, more t h a n 97 percent of the assets were n o t criticized;
i n 1933-34, less t h a n two-thirds of the assets of t h e banks escaped criticism.
T h e improvement has reflected i n p a r t the elimination of weak a n d insolvent
banks, i n part the charging off b y operating banks of m o r e t h a n $4,000,030,000
of losses during the past 9 years, i n p a r t improvement i n credit s t a n d i n g of debtors
accompanying business recovery a n d rising incomes, a n d i n p a r t t h e a c q u i s i t i o n
b y banks of a large volume of new assets consisting chiefly of U n i t e d States G o v ernment obligations, cash a n d balances w i t h other banks, a n d s o u n d loans.
W i t h assets i n excellent shape generally a n d reserves a m p l e a n d flexible, t h e
banks are able t o support whatever financial p r o g r a m m a y be necessary t o w i n
the war.
Post-war banking adjustments.—When
this w a r is over w e again w i l l t u r n our
energies t o peacetime pursuits. A tremendous p r o b l e m of conversion w i l l then
face us. Business w i l l require financing i n order t o convert a n d reequip factories
a n d plants, t o reopen channels of d i s t r i b u t i o n and, most i m p o r t a n t of all, t o
permit the small independent businessman t o reestablish his business.
This
financial responsibility w i l l f a l l chiefly u p o n the banks.
I f our b a n k i n g system
is t o continue to justify its existence i t m u s t be ready t o meet this responsibility.
Business m a y have t o be financed w i t h o u t r e d u c t i o n i n b a n k holdings of U n i t e d
States Government obligations.
Deposits m a y increase further.
W e do not
k n o w w h a t adjustments w i l l be called for after the w a r b u t w e d o k n o w t h a t
they w i l l be beyond a n y scale c o n t e m p l a t e d before this war.
W i t h deposits
greatly above present levels a n d demands for business a c c o m m o d a t i o n p i l e d o n
t o p of that, the only protection w h i c h b a n k depositors w i l l h a v e w i l l lie i n t h e
character of assets held b y the b a n k , i n the b a n k ' s c a p i t a l c u s h i o n s — a n d i n
deposit insurance.
I should like to present to this committee another chart (chart D ) w h i c h compares the capital accounts of national b a n k s w i t h their assets. D a t a for n a t i o n a l
banks are used i n t h i s instance because t h e y are the best figures a v a i l a b l e over a
l o n g period of time. If figures for a l l banks, N a t i o n a l a n d State, were used t h e
story w o u l d be about the same. T h e figures are given i n table 4. T h e lower
curve shows the amount of capital accounts for each $100 of assets h e l d b y t h e
banks; the upper curve shows the a m o u n t of c a p i t a l accounts for each $100 of
assets held i n the f o r m of loans, securities other t h a n U n i t e d States G o v e r n m e n t ,
a n d fixed a n d miscellaneous assets. I n other words, " c a s h a n d G o v e r n m e n t s "
have been eliminated. T h e chart shows t h a t even after t h e e l i m i n a t i o n of " c a s h
a n d Governments," capital ratios are n o w lower t h a n at a n y previous t i m e except
d u r i n g tlie period 1916 to 1932. T h e sequel t o t h a t period of b a n k credit expansion was the closing during 1921-33 of more t h a n 2,700 n a t i o n a l b a n k s because of
financial difficulties, w i t h losses t o depositors estimated a t $480,000,000.
The
d o t t e d line represents our best estimates as t o w h a t the ratios w i l l be i n 1943,
1944, a n d 1945.




18




FEDERAL

R E S E R V E ACT

AMENDMENT

F E D E R A L RESERVE ACT A M E N D M E N T
T A B L E 4 . — T o t a l capital accounts per $100 of assets of national

banks,

1865-1945

Total capital accounts
per $100 of—

Total capital accounts
per $100 of—
June 30—

June 30—
Total
assets

1865
1866
1867
1868
1869
1870
1871
1872
1873
1874
1875
1876
1877
1878
1879
1880
1881
1882
1883
1884
1885
1886
1887
1888.
1889
1890
1891
1892
1893
1894
1895
1896
1897
1898
1899
1900
1901
1902
1903
1904
1905

19

_

Total
assets

Selected
assets 1

$33.76
33.44
34.33
33.68
35.08
35.88
34.88
35.35
35.77
36.48
35.90
37.18
36.99
35.94
30.46
30.68
27.59
28.17
29.90
32.37
29.94
30.73
30.57
30.82
29.79
30.52
31.72
28.94
32.02
29.26
28.44
29.31
27.01
24.01
20.02
20.49
18.72
19.71
20.45
20.26
19.20

$97.87
84.01
80.96
75.49
74.45
72.44
70.03
67.19
66.87
67.68
64.16
65.85
65.10
66.96
65.13
56.19
50.43
49.21
49.51
52.09
51.65
48.83
46.88
46.76
44.56
43.73
45.30
42.51
45.26
44.64
42.48
43.13
41.81
37.53
32.28
32.41
29.98
30.66
30.85
30.66
29.20

1906
1907
1908.
1909
1910
1911
1912
1913
1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926.
1927-.192819291930
1931
1932
1933
1934
19351936.
1937
19381939
1940
1941
1942
1943
1944
1945

—

$19.16
18.92
19.14
18.41
18.70
18.62
18.27
18.53
17.85
17.85
15.10
13.50
12.26
11.13
11.27
13.65
13.80
13.40
12.94
12.24
12.25
12.24
12.63
13.47
13.77
13.67
14.67
13.70
12.56
11.85
10.66
10.59
10.78
10.22
9.43
8.71
8.23
2 6.10
«5.10
8 4.30

Selected
assets i
$28.96
27.99
28.91
27.87
27.90
27.72
26.81
26.83
25.79
25.22
21.31
19.11
17.64
17.01
15.76
18.61
19.74
18.99
18.66
17.51
17.21
17.05
17.19
18.20
19.21
19.54
21.13
22.48
24.60
25.69
24.60
23.39
25.30
25.42
25.02
22.98
23.78
8 8 26.00
2 3 29.00
8 8 31.00

Loans, securities other than U.S. Government obligations, and fixed and miscellaneous assets.
Estimated.
These ratios assume a decline in the volume of loans, securities other than U.S. Government obligations,
and fixed and miscellaneous assets. If these assets should not decline the ratios would be as follows: 1943,
$24.80; 1944, $25.50; 1945, $26.20.
1
8
8

While many of the loans to industry for war purposes w i l l be liquidated when
the war is over, we may well expect m a n y of them to be replaced b y other loans
w i t h a consequent increase in the total volume of bank credit extended to private
business. W i t h their continually narrowing capital margins banks will be more
vulnerable than formerly to shifts i n economic fortunes. I n that event, confidence
in the banking system will depend almost wholly upon the integrity and soundness
of the Federal Deposit Insurance Corporation.
Favorable outlook for bank earnings

and profits.—The

i m p a c t of t h e w a r h a s b e e n

felt in a very uneven number by the banks. Some have had an enormous growth
of deposits and assets, some have had little growth, and some have even lost
deposits. These disparities are the inevitable consequence of the profound
adjustments required by war and impose difficult burdens upon some banks as
well as on numerous other types of businesses.
Viewing the banks as a whole, however, earnings are increasing. W h i l e it is
difficult to forecast all of the factors involved—such as the rate of return on
Governments acquired, the changes i n other sources of earnings, future expenses
and charge-offs, recoveries, and taxes—we estimate that profits w i l l increase
sufficiently to cover increased taxes and that net profits after taxes for the banks
as a whole will continue to range between $400,000,000 and $500,000,000. T h u s
the increased taxes of the banks w i l l be paid for out of increased earnings rather
than reduced profits.




20

FEDERAL RESERVE ACT

AMENDMENT

I have here another chart (chart E) which shows for national banks since 1890
and for insured commercial banks since 1934, the amount of profits, after taxes,
earned on each $100 of total capital accounts, i. e., capital, surplus, undivided
profits, and reserves. The figures for 1942 are estimates, while those for 1943,
1944, and 1945 probably should be called "guesstimates." Supportingfiguresare
presented in table 5. The point of the chart is readily apparent. The banks can
and, in the future, will be able to pay the present rate of assessment.
TABLE 5.—Net

profits per $100 of total capital accounts, national banks, 1890-1941,1
insured commercial banks, 1984-45 2
N A T I O N A L BANKS

1890
1891
1892
1893
1894
1895
1896
1897
1898
1899
1900
1901
1902
1903
1904
1905.
1906—
1907
1908.

$7.70
7.68
6. 59
6. 69
4. 19
4. 75
5. 06
4. 60
5. 24
5. 73
8. 62
7. 70
9. 00
8. 55
8. 37
7. 53
8. 55
9. 49
7.87

1909
1910
1911
1912
1913
1914
1915
1916
1917
1918
1919—
1920
1921—
1922
1923
1924.
1925
1926
1927

$7. 52
8. 33
8. 12
7* 51
7. 87
7. 28
6. 04
7. 90
9. 12
9. 89
10* 44
9, 97
6.48
7. 39
6. 73
7.36
8.22
7.96
7. 91

1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945_

$8, 21
7.78
4.04
-1.45
-4.96
- 9 . 60
- 5 . 15
5. 14
9. 98
7. 11
6.05
7.44
6,97
7. 49

ENSURED COMMERCIAL BANKSJ
]

1934
1935
1936
1937

— $5.49
3. 35
8. 35
5. 97

1938
1939
1940
1941

$4. 68
5. 99
6. 08
6.72

1942
1943
1944
1945

1

$5. 87
5. 61
6. 12
* 6. 84
8
1

1 For 1890-1915, net profits are for fiscal years and total capital accounts are as of June 30 or nearest available
date: for 1916, net profits are for 18-montb period ended December 31,1916, adjusted to an annual basis,
and total capital accounts are averages of figures for lune 30, 1915, June 30, 1916, and December 31, 1916;
for 1917-41, net profits are for calendar years, and total capital accounts are averages of figures for call dates
during the year.
2
For 1934-41, net profits are for calendar years and total cpaital assounts are averages of figures for beginning, middle, and end of year.
* Estimated.

Summary and conclusion.—We support the proposal to exempt the War Loan
Deposit from insurance assessment, solely as a war measure, in our desire to
facilitate the Treasury's war financing. We consider inadvisable any other
exemption, and any reduction in the rate of assessment at this time.
We face an unknown future. If past experience is any guide we can anticipate
that in the post-war future American banking will face the most critical period of
its entire existence. While there are comforting elements of strength in our situation we must not close our eyes to those elements of weakness which may arise.
One of the principal bulwarks of depositors' confidence is the deposit insurance
system. Confidence in the banking system will be maintained so long as bank
customers believe that the banks are kept sound through good management and
supervision, and so long as they believe that the Federal Deposit Insurance
Corporation is financially sound and properly administered. Loss of confidence
would inevitably lead to hoarding on a scale greater than anything we have ever
imagined, and to a deterioration in the banking structure of such a character as to
require direct financial intervention of the Federal Government. Amid the
popular outcry that would accompany such developments what would be the







'FEDERAL RESERVE ACT

AMENDMEiNT

21

' F E D E R A L R E S E R V E A C T A M E N D M E i N T 22
prospects for continuance of a system of privately owned banks which had claimed
to be unable to support financially a deposit insurance system and had not made
adequate provision for the risks of doing business although it had a record of
sustained earnings and profits even after increased taxes?
Continuance of a system of privately owned banks is essential to the maintenance of the private business system which has contributed so much to the
greatness of this country. T h e preservation of our banking system calls for
wholehearted and intelligent participation in the war effort, for conservation of
earnings and provision out of current earnings for losses, for strengthening of
capital whenever possible, for farsightedness on the part of bankers and public
officials concerned w i t h banking, and for the maintenance of the Federal Deposit
Insurance Corporation i n as strong a financial position as possible. N o t until we
have completed our major post-war adjustments and have arrived at a comparatively stable post-war economy should we consider any reduction i n the assessment
rate or any further exemption of types of deposits from assessments.




FEDERAL RESERVE ACT AMENDMENT
THURSDAY, APRIL

1, 1 9 4 3

H O U S E OF R E P R E S E N T A T I V E S ,
COMMITTEE ON B A N K I N G AND CURRENCY,
Washington,
D.

C.

T h e committee met at 10:30 a. m., H o n . H e n r y B . Steagall (chairman) presiding.
T h e CHAIRMAN. T h e committee w i l l please be i n order. W e w i l l
resume the hearings on H . R . 1699. W e had not finished our discussions w i t h M r . Crowley.

STATEMENTS OF IEO T. CROWLEY, CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION; AND DONALD S. THOMPSON, CHIEF, DIVISION OF RESEARCH AND STATISTICS—Con.
T h e CHAIRMAN. M r . Crowley, I believe M r . W o l c o t t desires to interrogate you further. M r . W o l c o t t has not come i n yet, b u t w i l l be
i n soon.
I should like to ask you just what amount of insurance fees or
assessments would you have to forego the collection of as a result of
this bill?
M r . C R O W L E Y . $2,500,000 t o $ 3 , 5 0 0 , 0 0 0 .

T h e CHAIRMAN. H o w do y o u arrive at those figures?
M r . CROWLEY. W o u l d you answer that, M r . Thompson?
M r . THOMPSON. W e assumed that the war loan accounts would
average about one-half of the average rate of borrowing of the
Treasury. T h a t is revealed b y this chart w h i c h reflects the war loan,
accounts and the Treasury's monthly borrowings. T h e scale for the
Treasury borrowings is double the scale for the war loan deposits, and
that brings the two curves approximately together.
Assuming that the Treasury w i l l r u n a deficit, as indicated i n its
budget, of approximately $60,000,000,000, we came out w i t h a war-loan
deposit account of around—I believe i t was about three or four billion
dollars. Of course, that account can vary b y almost any amount,
based on Treasury, policy. T h e minimum below which the Treasury
does not want to go, the frequency of Treasury borrowings, w i l l all
affect the amount i n that account. B u t , on the basis of past experience, we assumed that it would r u n about $3,000,000,000 to $4,000,000,000, and that would make our assessments r u n anywhere from
$2,500,000 to $3,000,000 or even $3,500,000.
T h e CHAIRMAN. If I understand the operations at present, the
borrowings amount to approximately 50 percent of the funds raised?




23

' F E D E R A L R E S E R V E A C T A M E N D M E i N T 24

M r . THOMPSON. I believe they have been around 40 to 50 percent;
yes, sir.
The CHAIRMAN. Somewhere between 40 and 50 percent.
M r . PATMAN. T h e last one was 45 percent, I believe.
T h e CHAIRMAN. A n d you base this calculation upon the assumption that this ratio w i l l be maintained?
M r . THOMPSON. NO, sir. T h e payments may be made through
the war loan account, if the Treasury so desires, whether or not the
subscription is b y the bank. If a customer goes to the bank and
subscribes through the bank for an issue, the customer gives the bank
the check, the bank charges the customer's account, and could then
credit the Treasury war loan account. So that the amount i n the
war loan account would be determined, not solely by the amount that
the bank loaned or borrowed, but by the amount of Treasury financing
which the Treasury decided could be paid for through the war loan
account device.
M r . CROWLEY. W h a t it does, M r . Chairman, as I understand it,
i t makes this account a sort of an agency account i n the purchase of
this next issue that comes out. The funds from that will go into,
the war loan accounts, and until that money is put into the regular
channels of the Treasury, that account is exempted from deposit
insurance, whatever it may be.
T h e CHAIRMAN. B u t , does that cover subscriptions by individuals?
M r . C R O W L E Y . T h a t is r i g h t .
T h e C H A I R M A N . T h e same as b y the b a n k ?
M r . C R O W L E Y . T h a t is right.

T h e CHAIRMAN. T h a t being the case, we are dealing here with the
total borrowings of the Treasury rather than one-half of the borrowings?
M r . C R O W L E Y . L e t m e p u t it to y o u this way.

Y o u are

dealing

w i t h the total borrowings—it is a good deal as though we went down
to the bank and we borrowed $100,000 to buy merchandise or to build
a building, and check it out as the architect's certificate was issued.
T h a t account would be a dormant account for that particular purpose
and would not be included i n the assessment. It is an agency account
that is not included. Just as soon as the Treasury checks out of that
account, puts i t into their general fund and spends it, then i t becomes
a part of our assessment.
T h e CHAIRMAN. DO you assume that the borrowings of the Treasury
w i l l remain on the same ratio in the future as it has up to this time?
M r . CROWLEY. If they increase, this account w i l l increase. O n
the other hand, while this account is increasing, as soon as they put
i t into trade, into the channels of defense, we will get some benefit
when i t is spent, b y the increase in deposits.
T h e CHAIRMAN. Generally it will come back into the banks as
regular deposits?
M r . C R O W L E Y . T h a t is r i g h t .

T h e CHAIRMAN. A s a matter of fact, we do not have any right to
assume that the borrowings of the Treasury will not be greater
proportionately before this war is over, than they have been.
M r . CROWLEY. W e do not go on the theory but what they will be.
B u t we do support the relief that is provided here because we think
i t w i l l encourage many thousands of smaller banks to come i n and
take u p a war loan account.




'FEDERAL RESERVE ACT AMENDMEiNT

25

The CHAIRMAN. AS a matter of fact, we would not be safe i n assuming that we know just to what extent the financing of this country
may have to be done by borrowing?
M r . CROWLEY. I think that is right.
The CHAIRMAN. IS not that a correct statement?
M r . CROWLEY. That is right.
The CHAIRMAN. Of course, as the borrowings increase, and these
Treasury accounts increase, the assessments upon those accounts
for the benefit of the F . D . I. C . will be larger, under the operation of
your proposed legislation than would be the amounts which you would
have to forego?
M r . CROWLEY. That is right.
The CHAIRMAN. For the benefit of the Corporation?
M r . CROWLEY. That is right.
The CHAIRMAN. When it comes to that calculation, we do not have
any very definite information?
M r . CROWLEY. NO. W e took the Budget figures.
The CHAIRMAN. YOU took what?
M r . CROWLEY. WE took the Bureau of the Budget figures i n determining what we thought this would relieve the banks.
The CHAIRMAN. What are the Budget figures? W h a t do they
figure?
M r . THOMPSON. I t is the estimates of the 1943 Budget, which ran
to a deficit of $60,000,000,000 and on that basis we assumed that the
war loan accounts would average between three and four billions.
T h a t is for the 1943 fiscal year.
The CHAIRMAN. The Budget does not go beyond 1943?
M r . THOMPSON. That is right.
The CHAIRMAN. They have not any way of going beyond 1943,
have they?
M r . THOMPSON. NO, sir. Our estimate is just for 1943.
The CHAIRMAN. M r . Crowley, let me ask you this: W h a t portion
of the borrowings from the banks is taken care of b y nonmember
banks? D o you have those figures?
M r . CROWLEY. Y o u mean what are the loans of nonmember banks?
T h e CHAIRMAN.

Yes.

M r . CROWLEY. What are they, M r . Thompson?
M r . THOMPSON. D i d you mean loans to businesses, the customers,
or to the Federal Government?
T h e CHAIRMAN. I am talking about Government loans.
M r . THOMPSON. Last June the nonmember insured banks held
$1,650,000,000 of direct obligations. T h a t has since increased, but I
do not have the exact figures as yet.
T h e CHAIRMAN. T h a t is June of last year?
M r . THOMPSON. Y e s , sir.

T h e CHAIRMAN. What were the total borrowings from banks at that
time?
M r . THOMPSON. $23,000,000,000. This is just insured banks.
T h e CHAIRMAN. Well, you do not have many banks that are not
insured? Only about 1,000?
M r . THOMPSON. Y e s , sir.

M r . SMITH. What were the indirect obligations held by the nonmember banks?
M r . THOMPSON. $189,000,000.




' F E D E R A L R E S E R V E A C T A M E N D M E i N T 26

The CHAIRMAN. H a v e you any further break-down of these transactions with nonmember banks?
M r . THOMPSON. Yes, sir. W e have it broken down according to
bills, certificates
T h e CHAIRMAN. L e t us have all those figures.
M r . THOMPSON. T h e nonmember banks held $27,000,000 of Treasury bills; $1,375,000,000 of Treasury notes; $106,000,000 of certificates
of indebtedness; and $186,000,000 of Treasury notes, and $1,330,000,000 of bonds.
T h e CHAIRMAN. H a v e you any further break-down of those figures?
M r . THOMPSON. N O , sir.

T h e CHAIRMAN. B y districts, or otherwise?
M r . THOMPSON. W e have them by States.
The CHAIRMAN. L e t us see how they run by States.
M r . THOMPSON. Alabama: T h e direct obligations were
T h e CHAIRMAN. Give us the total for Alabama; it is not necessary
to break that down.
M r . THOMPSON. $5,500,000 direct obligations.

T h e CHAIRMAN. L e t us see what proportion goes to the money
centers. T h a t is really what I want to know.
M r . THOMPSON. W e are talking now just of nonmember banks, or
did y o u want all banks?
T h e CHAIRMAN. Nonmember banks.
M r . THOMPSON. I n Illinois, the nonmember banks held $78,000,000.
I n N e w Y o r k , the nonmember banks held $180,000,000. Pennsylvania, $202,000,000; Ohio, $68,000,000; New Jersey, $111,000,000;
M i c h i g a n , $ 4 6 , 0 0 0 , 0 0 0 ; M i n n e s o t a , $42,000,000; M i s s o u r i , $56,000,000.

M r . SMITH. I wonder if they have the figures with respect to
Federal Reserve districts?
T h e CHAIRMAN. I am coming to that in a moment. W h a t about
Massach use tts ?
M r . THOMPSON. $50,000,000.
T h e CHAIRMAN. A n d C o n n e c t i c u t ?
M r . THOMPSON. M a r y l a n d ,

$41,000,000.

M r . CHAIRMAN. HOW about Connecticut?
M r . THOMPSON.

$63,000,000.

T h e CHAIRMAN. C a l i f o r n i a ?
M r . THOMPSON. $137,000,000.

T h e CHAIRMAN. A l l the other borrowings are in Federal Reserve
member banks. Give us the break-down of those figures by districts.
M r . THOMPSON. I n June the member banks held $21,413,000,000
of direct obligations.
T h e CHAIRMAN. Give us the break-down by districts.
M r . T H O M P S O N . B o s t o n , $1,114,000,000; N e w Y o r k , $ 8 , 7 4 6 , 0 0 0 , 0 0 0 ;

Philadelphia, $1,064,000,000; Cleveland, $1,718,000,000; Richmond,
$823,000,000;

Louis,

Atlanta,

$651,000,000;

$594,000,000;

Minneapolis,

Chicago,

$3,414,000,000;

$416,000,000;

Kansas

St.

City,

$ 5 0 9 , 0 0 0 , 0 0 0 ; D a l l a s , $ 4 4 1 , 0 0 0 , 0 0 0 ; a n d S a n F r a n c i s c o , $1,923,000,000.

Those are the direct obligations only.
T h e CHAIRMAN. T h e other obligations so far as proportions go
correspond very well to that; do they not?
M r . T H O M P S O N . Y e s , sir.

T h e CHAIRMAN. M r . Crowley, I do not know whether the members
all fully understand the mechanics of these opreations between the




'FEDERAL RESERVE ACT AMENDMEiNT

27

Treasury and the banks. T e l l us what they are, just how the transaction is conducted.
M r . THOMPSON. W i t h respect to the war loan account?
T h e CHAIRMAN.

Yes.

M r . THOMPSON. The bank subscribes to the new issue and upon
receiving a notice of the allotment, credits the Treasury i n a war loan
account with the amount due on the allotment. The account remains
i n the bank until the Treasury withdraws it, which it does i n accordance with a pretty generally understood schedule.
Then calls are made upon all banks proportionately. The Treasury
will issue a call for 10 percent of the balance, or 9 percent of the balance, as the case may be, from time to time.
The CHAIRMAN. YOU say that these credits are placed to the
Government account when the allotments are made known to the
banks. Just how is that done?
M r . THOMPSON. I am sorry, I do not know the precise mechanics.
The CHAIRMAN. Just what is the rule, with respect to these allotments to the banks as to changes of allotments? W h a t do y o u
mean by that?
M r . THOMPSON. I believe generally a certain minimum amount is
always allotted i n full and the rest is cut down proportionately i n
accordance with the amount of the issues available for the subscriptions that have been made. These issues are generally oversubscribed. T h a t is handled by the Federal Reserve banks and so I
imagine that Governor Eccles could probably detail that.
T h e CHAIRMAN. M r . Crowley, let me ask you this question: Y o u
approve this bill?
M r . C R O W L E Y . Y e s , sir.

The CHAIRMAN. I t has what you might call an interdepartmental
support?
M r . C R O W L E Y . T h a t is r i g h t .

The CHAIRMAN. Consisting of the Treasury, the Federal Reserve,
and the F . D . I. C.?
M r . C R O W L E Y . T h a t is r i g h t , sir.

T h e CHAIRMAN. Of course, you did not originate the legislation?
M r . CROWLEY. NO; the Treasury really originated it.
The CHAIRMAN. They regard it as helpful to the war program?
M r . C R O W L E Y . T h a t is correct.

The CHAIRMAN. Has the bill the approval of the President?
M r . CROWLEY. NO ; I do not think a bill of this character necessarily
is ever discussed with the President. I know I never discussed it with
him.
M r . ECCLES. I t cleared the B u d g e t .
M r . CROWLEY. Y e s ; it was cleared b y the B u d g e t .

The CHAIRMAN. YOU do not know whether the President approves
it or not?
M r . CROWLEY. NO; because I do not think it is customary to take
up this kind of legislation with him.
T h e CHAIRMAN. I was thinking about this i n connection w i t h
another bill that was under consideration by this committee at one
time, which the committee approved, and we found out later that it
did not have the approval necessary at the time to pass the legislation.
I am wondering if this interdepartmental comity that seems to exist
at this time—and which I commend—obtains reciprocally among the
three departments that have approved this legislation.



' F E D E R A L R E S E R V E A C T A M E N D M E i N T 28

M r . CROWLEY. There is 110 disagreement at all on this legislation.
I think it is fair to assume that we have all had our opinions on legislation i n the past, and perhaps sometimes we had some things i n our
mind that the rest of them did not approve, and at other times some
of the rest of them had some things i n their minds we did not approve.
T h e CHAIRMAN. AS a general thing, when one department determines upon a policy, or a course of action, and it relates solely to that
department, the other departments as a matter of courtesy or comityacquiesce; it not that true?
M r . CROWLEY. F o r instance, on this reduction in assessment, while
the other agencies have an interest i n the board principle, I think we
are the ones that are affected by this reduction, just as the Federal
Reserve are on the reserve requirements. M y attitude on legislation
that does not affect the general banking system, for instance—on M r .
Eccles' or M r . Ransom's legislation pertaining to their own establishment—we have always kept our hands off. B u t where it affects the
general banking system and is a general policy, then we have met and
we have had our disagreements and, also, we have agreed lots of times
T h e CHAIRMAN. YOU remember the legislation to which I reffer, that
was approved at one time by this committee, which had to do with
the reduction of assessments against depositors and authorization for
a building.
M r . CROWLEY. I think there was a little job done on us at that
time, if that is what you refer to.
T h e CHAIRMAN. T h a t had to do with deposit assessments solely and
some other matters relating to the operations of the F . D . I. C.
M r . CROWLEY. W e have to be a little bit careful. W e have
accumulated a little fortune here, and when you get rich, everyone
wants to visit you and the thing we have to be careful of is that we
do not take on a lot of relatives while we have this capital surplus.
T h e CHAIRMAN. AS a matter of fact, the other departments did not
go along with you, w i t h respect to the bill of which I am speaking.
M r . CROWLEY. T h a t is right, but let us be fair
T h e CHAIRMAN. I am wondering, since this happy situation exists,
if we might not expect i n the future that the courtesies will be
reciprocal.
M r . CROWLEY. I assume that is right, but I do not think you can
have characters such as you have in all three agencies without having
opinions of their own.
T h e CHAIRMAN. Of course, this particular legislation is a matter of
concern to all these departments.
M r . CROWLEY. T h a t is right. This is something that affects the
general welfare.
T h e CHAIRMAN. I recognize that. That is undoubtedly true.
M r . Crowley, I do not remember at the moment just how far you
had gotten w i t h your statement the other morning; we were i n so much
confusion here and going so fast that we did not get very far, as a matter
of fact. So I am wondering if i t would not be well for you to state
n o w — i t would not hurt to refresh our minds on it for the moment—
what the condition of your account is at the moment, your assets and
liabilities and losses.
M r . CROWLEY. W e have United States Government securities of
$538,000,000. W e have cash of $17,000,000. W e have assets acquired
through bank suspensions and mergers of $60,000,000.




'FEDERAL RESERVE

ACT

AMENDMEiNT

29

Y o u asked the other day about those assets. They have been
reduced down to what we consider a very sound market value. T h a t
makes a total of $615,000,000. So that our capital is $290,000,000
and our surplus is $325,000,000.
Our annual income from investments is running about $13,500,000
a year. The income from assessments last year was $56,500,000,
making a total of $70,000,000 income.
T h e administrative expense was $3,600,000, and the deposit insurance losses were $3,400,000, making a total of $7,000,000.
T h e CHAIRMAN. What period do those losses cover?
M r . C R O W L E Y . T h e $3,400,000 i s f o r 1943.

O u r losses f o r t h e en-

tire period are estimated at about $50,000,000.
T h e CHAIRMAN. That is what I want to make plain.
M r . CROWLEY. T h e total assessments paid i n from the beginning
were $319,000,000. W e have appreciation i n our bond account of
$15,000,000.
T h e CHAIRMAN. HOW much increase do you anticipate this year i n
your income as against last year?
M r . CROWLEY. U p to $70,000,000 on assessments.
T h e CHAIRMAN. O n assessments alone?
M r . CROWLEY. T h a t is right. T h e n our income from investments
will go up to about $15,000,000 from $13,500,000.
The CHAIRMAN. SO that your income will run up to about $85,000,000?
M r . CROWLEY. That is right.
The CHAIRMAN. YOU still have the right to borrow of the Reconstruction Finance Corporation?
M r . CROWLEY. A n d also from the Treasury.
The CHAIRMAN. A n d from the Treasury?
M r . CROWLEY. That is right.
T h e CHAIRMAN. YOU have never exercised those rights, of course?
M r . CROWLEY. Oh, no.

We

c a n b o r r o w a b o u t $980,000,000;

up

to that.
The CHAIRMAN. The fact is, however, that while the right to borrow
might become valuable i n case of emergency, as a matter of fact, i n
case you borrowed, it would after all represent a liability of the
Corporation?
M r . CROWLEY. That is right.
T h e CHAIRMAN. HOW much do you think the Corporation should
have to constitute such a dignified, practical sum as not only to
command confidence—one that you would regard as sufficient reasonably to assure the public that any contingency that may reasonably
be expected would be taken care of i n the years that lie ahead?
M r . CROWLEY. I do not think, Congressman, that anyone could
answer that question definitely, because I think the longer the war
goes on the greater the demand w i l l be on the banking system when
it is over. Consequently, there is no way of knowing what demands
may be made on Federal deposit insurance. I would just like to go
back a little bit on deposit-insurance assessment. W h e n i t was determined that we would have the right to assess up to one-twelfth of 1
percent, you will recall back i n the Banking A c t of 1933, there were
certain changes made i n the banking laws that were very beneficial
to the banking system, such as interest on demand deposits and the
regulation of interest on time deposits; and that more than offset to
the banking system the cost of deposit insurance.



FEDERAL

30

RESERVE ACT

AMEINDMEINT

I t was always understood, according to the way I understood it,
that that was done b y the Congress to help to offset the assessment
of deposit insurance, and that that assessment was not to be passed on
to the depositors, but that was something that had to be paid by the
banks themselves.
T h e CHAIRMAN. L e t me ask you right there, what is the best estimate you can give of the amount that would represent the relief that
was extended the banks because of the provision which prevented the
payment of interest on deposits?
M r . CROWLEY. YOU mean at the time the legislation was enacted?
Y o u see, new deposits have grown enormously since then, but the
amount saved at that time was—how much was it, M r . Thompson?
W e can get it and put it i n the record.
M r . PATMAN. About $250,000,000.
M r . C R O W L E Y . M y i m p r e s s i o n w a s i t w a s $160,000,000 b u t w e c a n

look It up and put the right figure in.
M r . PATMAN. T h e figures were put i n the record at one time?
M r . CROWLEY. T h a t is right.
M r . PATMAN. I t was brought out that there were from $300,000,000
to $500,000,000 a year i n reductions in time deposits, something like
that.
M r . CROWLEY. I realize that with the inflation of deposits, our
income is going up. B u t I would be very reluctant to advocate any
change i n our assessment during this period. The banks are making
money. These deposits are available to them to put into Governments and w i t h our uncertainties I think it would be a great mistake,
and the people might misunderstand, if we were to tinker with depositinsurance income at this time. A n d certainly there is no better time
to try to build your reserves for the future than now.
M r . WRIGHT. Y o u r contingent liabilities increase at the same time
that your assets are increasing?
M r . CROWLEY. T h a t is correct, sir.
M r . MONRONEY. HOW much have your deposit liabilities increased?
M r . CROWLEY. Our deposits have gone up in a year from $69,000,000,000 to $88,000,000,000.
M r . THOMPSON. T h e y have gone up from $69,000,000,000 at the
end of 1941 to $88,000,000,000 at the end of 1942.
T h e CHAIRMAN. C a n we not bring that down a little closer? W h a t
are they now—approximately?
M r . THOMPSON. They have increased, but I do not have an estimate.
T h e CHAIRMAN. W h a t is the period covered in that increase from
$69,000,000,000 to $88,000,000,000?
M r . THOMPSON.

1942.

T h e CHAIRMAN. D u r i n g the year 1942?
M r . T H O M P S O N . Y e s , sir.

T h e CHAIRMAN. W h a t would those deposits amount to during 1943,
would y o u say?
M r . THOMPSON. I really do not know.
T h e CHAIRMAN. I know you do not know exactly, but you have a
judgment about it?
M r . THOMPSON. If I must hazard a guess, I would say probably
about $2,000,000,000.
T h e CHAIRMAN. A n increase of $2,000,000,000 during the year 1943?
M r . T H O M P S O N . Y e s , s i r ; so f a r .




'FEDERAL RESERVE ACT

AMENDMEiNT

31

The CHAIRMAN. I am not talking about "so far." I am talking
about the entire year. H o w much do you estimate will be the increase
during this year?
M r . THOMPSON. I would estimate between 20 and 25 billion; I am
sorry, I misunderstood you.
T h e CHAIRMAN. SO it would run considerably over $100,000,000,000
for this year?
M r . THOMPSON. Y e s , sir.

T h e CHAIRMAN. I thought the figure would be something like that.
M r . Wolcott suggests that I ask what portion of your liabilities would
be reduced by reason of this legislation?
M r . CROWLEY. W h a t proportion of what?
T h e CHAIRMAN. Of your liabilities would be reduced by reason of
this legislation.
M r . CROWLEY. NO reduction i n liabilities at all.
T h e CHAIRMAN. T h a t is what I understood to be the fact.
W h a t about the earnings of banks? H o w much of an improvement
have we had there? Give us the figures on that, please.
M r . THOMPSON. T h e profits after income taxes for 1942 we estimate
w i l l be around $400,000,000. T h a t compares with $455,000,000 i n
1941.
T h e CHAIRMAN. H O W is that?

M r . THOMPSON.
$400,000,000.
T h e CHAIRMAN.
M r . THOMPSON.
T h e CHAIRMAN.
M r . THOMPSON.
The CHAIRMAN.
M r . THOMPSON.

I n 1942 the net profits of banks will be around

W h i c h banks are you referring to?
A l l insured banks.
I want to make that clear.
A l l insured banks.
A n d what were they i n 1941?
$455,000,000. T h a t is after taxes.

T h e CHAIRMAN. N e t profits?
M r . THOMPSON. Y e s , sir.

The CHAIRMAN. HOW would you estimate those figures for 1943?
M r . THOMPSON. A t around $400,000,000, after taxes.
M r . CRAWFORD. AS of today's taxes you mean?
M r . THOMPSON. Y e s , sir.

The CHAIRMAN. Give us some figures that will show the change
during recent years with respect to the earnings of banks.
M r . THOMPSON. I n 1935 net profits after taxes were $207,000,000
and in 1936, $524,000,000. T h a t was due to a tremendous volume
of profit-taking on bonds. Y o u will recall that we had a rising bond
market at that time.
I n 1937 it was $381,000,000.
I n 1938 the net profits after taxes were $300,000,000; in 1939, they
were $388,000,000; and i n 1940, they were $401,000,000.
M r . CRAWFORD. W i l l you permit me to ask a question there?
T h e CHAIRMAN.

Yes.

M r . CRAWFORD. If you can do so, would you mind putting in the
record at that point a break-down of two items; as to the profits from
operations and the nonoperating profits—if I make myself clear?
M r . THOMPSON. Y e s , sir; we c a n do that.

(The matter referred to is as follows:)
86330—43—




3

32

FEDERAL REiSiERVE ACT

Earnings,

AMENDMENT

expenses t and distribution
of profits of insured commercial
banks,
(based on published figures for 1934~4U estimates for
1942-45)

1934-4$

[Amounts in millions of dollars]
1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945
690 643
Income from loans
Interest on U. S. Government securities
• 550 548
Interest and dividends on other securities
Commissions, fees, collection, ex90
76
change, and service charges...
202 205
Other current operating earnings

663

710

705

727

835

750

680j 640

574

572

532

1
522 f 284 1304 404
V216 » 205 205

666
195

925 1,178
189 180

105
225

111
241

115
232

121
235

160
226

170
226

769

129
233

848

140
233

149
227

180
226

Total current operating earnings- 1,518* 1,4861,567 1,634 1,584 1,605 1,631 1,730'1,820 1,997 2,1902,404
Interest on time and savings depositsSalaries, wages, and fees
Taxes other than on income2
Other current operating expenses

303
402
74
335

262
411
74
331

237
437
86
354

235
463
97
361

230
473
93
352

215
484
95
354

201
498
100
371

190
527
103
396

173
566
103
416

165
622
103
441

157
652
103
463

157
684
103
486

Total current operating expenses 1,114 1,078 1,114 1,156 1,148 1,148 1,170 1,21611,258 1,331 1,375 1,430
Net current operating earnings (before income taxes) (operating profit
before income taxes)_ _
Profits on securities sold
Net charge-offs on assets
Net (nonoperating profit)*

453

478

436

457

461

514

562

666

815

974

268
(2)
3 741 3 196 185

404

117
203

173
299

215
272

178
215

145
154

44
98

20
150

20
175

20
200

-741 -196

Profits before income taxes.
-337
Taxes on net income (including surtax
and excess profits tax)2
3
Net profits after income taxes
but before dividends.
-340
Cash dividends declared and interest
paid on capital
188
Net additions to capital

408

-528

83 -86 -126 -57 -37

- 9 -54 -130 -155 -180

212

536

392

310

400

424

505

508

536

660

794

5

12

11

10

12

23

50

101

138

213

281

207

524

381

300

388

401

455

407

398

447

513

207

223

226

222

232

237

238

232

230

240

250

301

155

78

1 6 164
51

217

175

168

207

263

J Break-down estimated.
2
Taxes on net income are estimates for 1934-41. Figures of income t^xes paid by national banks were
obtained from the Source Book of the Bureau of Internal Revenue for 1934-37; in 1938 the classification was
changed to include all "banks and trust companies";figuresof income taxes of nonmember banks have been
reported separately since 1936. Normal income taxes paid by all banks and trust companies amounted to
$4.1 million in 1934; $6.4 million in 1935; 14.9 million in 1936; $11.5 million in 1937; $12.1 million in 1938; $14.4
million in 1939; and $21.7 million in 1940.
1
Profits on securities sold are not available separately except for nonmember banks i n 1934 and 1935;
they are included with recoveries on securities and thus deflate the figures of net charge-offs on assets for
those years. Profits on securities sold of nonmember banks were $14.5 million in 1934 and $28.4 million in
1935; recoveries and profits on securities of member banks were $191.8 million in 1934 and $287.8 million in
1935.
< Minus (—) indicates nonoperating loss.

M r . CRAWFORD. T h a t will bring out very clearly what happened
on the bond situation.
The CHAIRMAN. I want to ask one or two questions that are not of
importance with respect to this bill, but for the record. Y o u r total
losses, you say, have been how much? I mean losses sustained by
the corporation?
M r . CROWLEY. About $50,000,000.
The CHAIRMAN. Could you tell us offhand where those losses
occurred, and when?
M r . CROWLEY. The largest part of them have been in N e w Jersey,
New York, and Pennsylvania, in the order named. I would say that
those three States were responsible for two-thirds of out losses, easily.
The CHAIRMAN. Those three States?
M r . CROWLEY. Yes; the rest was spread throughout the country.
The CHAIRMAN. A t one time I had the figures—because I happened
to be speaking to the State association of bankers in New Jersey, many




' F E D E R A L R E S E R V E ACT

AMENDMEiNT

33

of whom had very vigorously opposed all proposals of legislation to
insure bank deposits, and the figures at that time showed that losses
down to that time by the Deposit Insurance Corporation, which had
experienced its initial losses in straightening up the banking situation
at that time—of the entire losses over half were sustained in the
State of New Jersey.
M r . CROWLEY. It is now about two-fifths due to an increase in
our losses in New Y o r k and Pennsylvania. W e went into New
Jersey and did quite a wholesale job on quite a lot of banks. We
consolidated a lot of banks there. T h a t was the reason for that.
T h e amount of money that was expended was a great deal more than
that, but on account of conditions our liquidations have proved out a
little better than anticipated.
M r . SPENCE. I n what year did those losses occur?
M r . .CROWLEY. I t seems to me we must have gone into New York,
Pennsylvania, and N e w Jersey about 1935, 1936, and 1937, along in
there.
M r . FORD. W h a t were yourJosses i n California?
M r . CROWLEY. W e have had only one or two i n California; small
losses.
M r . KEAN. W i t h reference to those losses in N e w Jersey, I think
a large part of that was caused by the fact that they allowed a lot of
banks to open that they never should have allowed to open.
M r . CROWLEY. The banking situation in New Jersey was
M r . K E A N . V e r y bad.
M r . C R O W L E Y . I t w a s v e r y b a d ; yes.

M r . KEAN. They allowed a lot of banks to open that they never
should have allowed to open.
M r . CROWLEY. A n d the only way of correcting it was to do the kind
of a job that we did.
M r . WOLCOTT. I n any of these cases, did the depositors lose
anything?
M r . CROWLEY. When we went into a State like New Jers3y, we
notified the depositors, as you know, that we were going to take care
of these banks and that there would be no loss to depositors. If you
are going to maintain confidence in your banking system, the depositors
have got to understand that you are not going to run away from your
liability. However, in one very important case we were unable to
work out a satisfactory solution and the bank suspended. It was a
large bank with a number of depositors with balances in excess of
$5,000. Those depositors lost about $2,000,000.
M r . WOLCOTT. What is the average interest paid on time deposits
by the banks now?
M r . THOMPSON. Less than 2 percent.
M r . WOLCOTT. I n most instances it is 1 percent or less, is it not?
M r . THOMPSON. I can give you the figures for 1941, if you are interested in them. Interest paid on time deposits by all insured banks
in 1941 averaged about 1.2 percent of average time deposits held.
M r . WOLCOTT. I would like to find out how much of the earnings of
the banks are reflected i n a reduction of interest paid on time deposits,
for this reason. I am not so sure that we are not approaching a situation that looks healthy at the present time, but might not be so
healthy when people are given an opportunity to invest their money




' F E D E R A L R E S E R V E A C T A M E N D M E i N T 34

34

outside of the banks. I wonder if we are not creating a situation, perhaps without realizing it, where the banks are merely becoming
warehouses of the people's money and fiscal agents of the Federal
Government.
M r . CROWLEY. I think, Congressman, there are a lot of savings
accounts that are not really and truly savings accounts, if that is
what you mean.
M r . WOLCOTT. W h a t you referred to the other day as perhaps
liquidation accounts?
M r . CROWLEY. T h a t is" right. They are awaiting some type of
investment, such as you were talking about. I do not think by any
means you could say that the amount of money we have i n time
deposits is really and truly a thrift account.
M r . WOLCOTT. What would be the effect if the banks paid one-half
percent more on time deposits?
M r . CROWLEY. I do not think they could afford to, with what
they can get for money now. Y o u see, if they did that—how much
would it cost them, M r . Thompson?
M r . T H O M P S O N . T h e y h a v e g o t $15,000,000,000 o f t i m e

deposits.

One-half percent would mean $75,000,000.
M r . WOLCOTT. HOW does that $15 billion of time deposits compare
with deposits i n the banks during the period that you gave us> from
1936 on?
M r . CROWLEY. T h e increase i n time deposits is only about $2.5
billion or about 20 percent, as I understand it.
M r . WOLCOTT. M u c h of that might be liquidation deposits?
M r . CROWLEY. T h a t is right,

M r . WOLCOTT. YOU have not any way of knowing what percentage
of those are thrift deposits?
M r . CROWLEY. NO; we have not.

M r . PATMAN. I want to ask some questions, M r . Chairman.
This bill deals with two questions, as I understand it. One is the
reserves of the banks and the other is the assessment for the Federal
Deposit Insurance Corporation; is that right?
M r . C R O W L E Y . T h a t is right,

M r . PATMAN. The part about the assessments seems to be rather
plain. F o r instance, take a bank in Texarkana, Tex., where I live;
suppose that bank should buy $1,000,000 worth of bonds and the
bank gives the Treasury credit on its books for $1,000,000. When
that money is later transferred to the people, when the Government pays its debts to different people, such as when it pays the postmaster, the rural mail carriers, and other people in the community,
the money will be transferred into their accounts, and very likely
will remain in. that bank, or other banks nearby. So this proposal
is that during that period, from the time that credit is given on the
books, by reason of the purchase of $1,000,000 worth of bonds, until
it is transferred, there will be no assessment against it.
M r . C R O W L E Y . T h a t is correct.

M r . PATMAN. Suppose that the bank owns a lot of bonds; that would
not affect this at all?
M r . CROWLEY.

N o t at all.

M r . PATMAN. NOW, about the reserves.
affect the reserves of the banks?




Just how does this bill

' F E D E R A L R E S E R V E ACT A M E N D M E i N T

35

M r . CROWLEY. W o u l d you allow M r . Eccles to answer that, M r .
Patman, when his time comes?
M r . PATMAN. Yes. B u t while you are on the witness stand, I
want to ask you one or two questions. I have a bill here providing,
that there shall be no more branch banks. I t is what you might call
an antibranch bank bill, H . R . 316. A n d since this subject relates
to the whole subject of banking, I want to ask you something about
your views on branch banks.
Y o u are the head of the Federal Deposit Insurance Corporation,
representing about 14,000 banks, and I should value your opinion
highly, and I believe this committee and the Congress should. So if
you do not mind stating your views on branch banks, I should personally appreciate it very much.
M r . CROWLEY. Congressman, I think my position on branch banking throughout the banking system is generally pretty well known. I
have always been an advocate of the independent banking systeni. I
have always been opposed to the promotion of branch banking. The
promoters of branch banking have always talked about putting
branches i n communities that could not support a bank. M y experience is that they do not go into the communities where an independent
bank cannot live. They go i n and buy out the best independent bank
and make that a branch, because it costs, practically speaking, as
much money to operate a branch as it does to operate an independent
bank.
I feel that we are taking backward steps in our banking system—we
hear a lot of talk about trying to preserve the independent businessman, the small businessman, and yet we sit back here day after day
and see a continual expansion of branch banking. I think it is a very
unsound and a very unhealthy situation for the future of our banking
system.
Every one knows where I have stood for years on that subject.
Does that answer your question?
M r . PATMAN. Yes, sir. I n other words, then, you would favor
legislation along the lines proposed i n H . R . 316?
M r . CROWLEY. I would oppose any attempt to expand branch
banking. I think the question of branch banking depends entirely
upon State's rights and I think there should be something given to
Federal corporations to protect against an expansion of that type of
banking.
T h e CHAIRMAN. M a y I ask a question there?
M r . PATMAN.

Yes.

T h e CHAIRMAN. I wonder if you could give an estimate on this—
howmany banks were closed i n the Uuited States that have not opened?
Y o u do not have to be exact in your figures.
M r . CROWLEY. YOU mean since we started?
The CHAIRMAN. I mean during recent years from the peak i n
number.
M r . CROWLEY. I n

1920

you

had

approximately

30,000

banks.

N o w you have about half that number.
M r . PATMAN. Less than half that number.
M r . CROWLEY. T h a t is right.
The CHAIRMAN. Of course, many of them were in very small communities, and i n communities where there were more banks than there
should have been.




' F E D E R A L R E S E R V E ACT A M E N D M E i N T 36

Is it not true that the franchise rights in various communities
throughout the United States that were deprived entirely of banking
facilities by reason of the closing of banks, would be of great value—
billions and billions of dollars—during a period of 50 years?
M r . CROWLEY. I think that unconsciously we have made a bank
charter very valuable, because of our desire to restrict the expansion
of banking. As I review the losses in the banking system since 1920,
a lot of that was due to agricultural conditions, due to bad loaning
policies, but also a lot of it was due to a forced liquidation that kept
driving values down and down more all the time. I think that had
we been able to keep the confidence of our depositors, the depression
never would have gotten to the depth that it did; because you would
not have had forced liquidation.
I t is very evident to us, as we study many banks—Congressman
Kean talked about the banks that were kept open in New Jersey—
there were a lot of banks kept open in N e w Jersey that were in bad
shape. O n the other hand, I am fully convinced that there were many
banks that closed that had a better chance of surviving, if they had
had a chance to hold their assets for the enhancement in value that
came along in the years to come, in the years that came after.
The CHAIRMAN. W h a t you mean is that the closing of a bank did
not reflect an exactly fair estimate of values.
M r . CROWLEY. I think that is correct.
T h e C H A I R M A N . O f t h e assets?

M r . CROWLEY. I think that is correct.
The CHAIRMAN. I want to ask one question, if M r . Patman will
permit me, while I am interrogating again. Y o u did not have control
of the reopening of the banks following the holiday?
M r . CROWLEY.

No.

The CHAIRMAN. They took 6 months' time after the examination
and investigation for the deposit insurance to go into effect?
M r . CROWLEY. That is right.
The CHAIRMAN. A n d it was limited to a temporary insurance of
$2,500, before the permanent law was permitted to go into effect.
M r . CROWLEY. I think there was a good job done on opening the
banks.
The CHAIRMAN. I think that, too.
M r . FORD. California has the greatest system of branch banks of
any State i n the Union. I t has lost but one or two banks i n the
State. Our system is largely i n the Federal Reserve. I would be
unalterably opposed to any Federal law which undertook to tell us
when we should have branch banks or any banks
M r . CROWLEY. Well, of course, that is the theory of States' rights
that I subscribe to too, provided you follow that theory right straight
on through and just don't use it in the case of branch banking. I n
other words, I think in this theory of States' rights we use it when it
is to our advantage and throw it out the window when it is to our
disadvantage.
M r . FORD. T h a t is human nature.
M r . PATMAN. This bill I am speaking about provides no financial
institution chartered by or pursuant to any law enacted by the
Congress and any financial institutions, and their accounts, investment, or deposits are insured to any extent by the United States or
any agency or instrumentality thereof shall hereafter establish any




'FEDERAL RESERVE ACT

AMENDMEiNT

37

branch office provided, however—and then the bill exempts branches
that are established at the time of the enactment of the law. B u t
when the bill comes up, if we are able to get a hearing on the bill some
time in the future
The CHAIRMAN. We are hearing you on it right no^w.
M r . PATMAN. I expect to propose the phrase "at the time of the
enactment of this law" be changed to read "on or before January 5,
1943", the time of the introduction of the bill so as to put those out
that will go i n between that time and the enactment of the law.
W i t h reference to branch banks in California it is my understanding
that the Bank of America covers several States. Is that right?
M r . CROWLEY. N o t the Bank of America. Transamerica does.
M r . PATMAN. The Bank of Transamerica, that is just a holding
company?
M r . CROWLEY.

Yes.

M r . PATMAN. Transamerica owns the Bank of America?
M r . C R O W L E Y . Y e s ; a p o r t i o n of it.

Mr.
Mr.
to say
Mr.

PATMAN. Well, the control interest?
CROWLEY. N o t the controlling interest but I think it is safe
that Transamerica controls it.
PATMAN. Controls the Bank of America?

M r . CROWLEY.

Yes.

M r . SULLIVAN.

Yes.

M r . PATMAN. NOW, how many other chain banking and branch
banking institutions does this Transamerica control on the Pacific
coast?
M r . SULLIVAN. They have most of the banks i n Nevada.
M r . PATMAN. They have most of them i n Nevada?
M r . PATMAN. They own them in Utah, do they not, and in Arizona?
M r . CROWLEY. N o t in Utah, so far as we know.
Miss SUMNER. IS it your fear if it is not stopped it will spread
further?
M r . PATMAN. Yes. If it is not stopped we do not know where it
will go to.
M i s s SUMNER.

Yes.

M r . WRIGHT. AS you gentlemen know I am a new member of this
committee and I am anxious to get a little information on the point
of branch banking. Is there any control exercised over branch
banking by the Federal Deposit Insurance Corporation in connection
with branch banking?
M r . CROWLEY. Yes, we have three agencies for the control of
branch banks extending to banks under their supervision. We have
no control over stopping a holding company from extending their
ownership of corporate banks. We have no way to do that.
M r . PATMAN. SO indirectly you do not have sufficient force and
effect to stop it?
M r . CROWLEY. N o t the expansion of a holding-company system.
M r . PATMAN. I do not want to ask a lot of questions and take up
a lot of time about something you can put in the record. Y o u have
a complete statement about the Transamerica Corporation, do you
not, the holdings of this holding company?
M r . CROWLEY. Yes; we have, insofar as information is available.
M r . PATMAN. W i l l you place in the record a statement showing the
bank holdings and all the different holdings of different types and
character of the Transamerica Corporation? C a n you do that?



38

FEDERAL RESERVE ACT AMENDMENT*

Mr. CROWLEY. Yes, sir; and if you hold the hearings open to give
us a chance to confer with the Federal Reserve and get it ready?
Mr. PATMAN. Yes, sir; I presume it will be all right. And the
Transamerica Corporation as I understand it is interested not only
in banks but it is interested even in lumber yards and insurance
companies and credit agencies?
Mr. CROWLEY. That is right.
Mr. PATMAN. And different types of business?
Mr. CROWLEY. That is right.
Mr. PATMAN. And many different kinds of business. That is
right, isn't it?
Mr. CROWLEY. That is right.
Mr. PATMAN. It has been suggested they are even interested in
restaurants. What all kinds of business are they interested in, MrCrowley, if you know?
Mr. CROWLEY. I believe they have an interest in a tobacco company, lumber mills, insurance companies, real-estate companies.
Mr. PATMAN. And distilleries and wineries?
Mr. CROWLEY. We will make up the chart for the record, Congressman.
(The matter referred to is as follows.)
Transamerica

group as of close of business Dec. SI,

Banks under control

Date control
acquired

1942
Percentage
of stock
Total assets
owned by
(thousands)
Transamerica

CALIFORNIA
Bank of America National Trust and Savings Association, San
Francisco
Central Bank, Oakland..
First National Bank of Garden Grove
Bank of Pinole, Crockett Central Bank of Calaveras, San Andreas
Temple City National Bank
First National Bank of Fairfield
First National Bank of Weed
First Trust & Savings Bank, Pasadena

1930
Dec. 23,1938
Jan. 31,1940
Oct. 10,1940
June 17,1941
M a y 22,1941
May 29,1941
Dec. 11,1941

(0
99.72
82.60
62.30
90.83
77.33
89.60
90.00
65.30

$2,143,203
59.849
1,474
3,718
1,417
990
958
1,044
18,666-

1930
Oct. 28,1938
do
do
Dec. 13,1938
Jan. 5,1940
Apr. 2,1941
Aug. 10,1942
Sept. 14,1942

65.78
94.00
96.25
90.00
97.00
90.00
90.00
85.00
92.50

192,319
994
1,216
1,068
1,028
2,168
1,377
550
728

1934
Oct. 26,1938
Mar. 22,1939
M a y 17,1941

99.26
84.00
80.00
88.00

52,765
1,326
677
1,041

1939
1939

77.79
77.79

24,5765,092

1936

72.03

45,081

1931

91.30

OREGON
First National Bank of Portland
Clatsop County Bank, Seaside
Coolidge and McClaine, Silverton
First National Bank, Forest Grove
Bank of Sellwood, Portland
First National Bank of Cottage Grove
First National Bank of Prineville
Scio State Bank, Scio
Bank of Sweet Home
NEVADA
First National Bank of Nevada, Reno
Farmers Bank of Carson Valley, Minden
Farmers & Merchants National Bank of Eureka
Bank of Nevada, Las Vegas
ARIZONA
First National Bank of Arizona, Phoenix
Phoenix Savings Bank & Trust Co
WASHINGTON
National Bank of Washington, Tacoma
FOREIGN
Banca d'America e d'ltalia Milan, Italy

Indirect control.




(?)

FEDERAL
Transamerica

group

R E S E R V E ACT A M E N D M E N T

as of close of business

Dec. 31,

191$—Continued

Date
control
acquired

Other corporations under control

39

Percentage
of stock
owned by
Transamerica

Total assets

CALIFORNIA

1917
1924
1923
1928
1928
1930
1930
1930
1941
1941
1942
1942
1942
1942

99.90
100.00
100.00
92.00
100.00
moo
55.90
100.00
100.00
100.00
55.50
100.00
96.06
95.31

$127,555.48
57,184.35
51,994,964.88
10,237,879.56
318,658.67
17,517.33
4,777,694.37
89,010,086.05
16,829.67
2,759,477.12
17,501,642.04
7,007,283.45
792,304.33
5,455,947.26

1941

Corporation of America, San Francisco.
Coast Service Co., San Francisco
Capital Co., San Francisco
Pacific National Fire Insurance Co., San Frnacisco
Inter-America Corporation, San Francisco
American Brokerage, Inc., San Francisco
General Metals Corporation, Oakland
Occidental Life Insurance Co., Los Angeles
Timeplan, Inc., San Francisco
Premier Insurance Co., San Francisco
Pacific Finance Corporation of California, Los Angeles
Enterprise Engine & Foundry, San Francisco
Aerco Corporation, Los Angeles
Adel Precision Products Corporation, Los Angeles

69.43

13,629,861.71

KENTUCKY

Axton-Fisher Tobacco Co., Louisville
Proportion

of banks

and assets controlled
California

Number of Transamerica
banks
Number of independent
banks
Number of all banks.

Oregon

by banks in

Washington

Transamerica

group
Total

Nevada

Arizona

506

49

10

5

15

585

522

91

207

34

9

863

1,028

140

217

39

24

1,448

Resources of Transamerica
$2,849,276,000 $284,150,000 $57,469,000 $39,655,000 $66,870,000 $3,297,420,000
banks
.. •
Resources of independent
4,391,724,000 420, 373,000 1,083.340,000 141,109,000 18,477,000 6,055,023,000
banks
Resources of all banks. 7,241,000,000 704, 523,000 1,140,809.000 180,764.0C0 85.347,000 9,352,443,000
Percent of Transamerica
banks
Percent of independent
banks

40.40

49.22

35.00

4.60

12.82

62.50

50.78

65.00

95.40

87.18

37.50

59.60

100.00

100.00

100.00

100.00

100.00

100.00

Percent resources of 1 ransamerica banks
Percent resources of independent banks

39.35

40.33

5.04

21.94

78.35

35.26

60.65

59.67

94.96

78.06

21.65

64.74

Percent resources of
all banks

100.00

100.00

100.00

100.00

100.00

100.00

Percent of all banks..

M r . PATMAN. A l l right, sir. D o you look upon that as a healthy
situation to have a holding company like that, to spread out over
several States and grab up all these different kinds of institutions?
M r . CROWLEY. I think, Congressman, that all the three agencies
are i n agreement about that situation.
M r . PATMAN. T h a t it should be corrected?
M r . CROWLEY. T h a t is right.
M r . PATMAN. I n that statement about the holdings of Transamerica
I hope you make it full and complete and give the amount of interest
that Transamerica owns, like say i n the Bank of America it holds 91.3
percent of the stock.
M r . CROWLEY. NO, it is much less than that, Congressman. W e
will give it all.



' F E D E R A L R E S E R V E A C T A M E N D M E i N T 40

M r . PATMAN. NO, this is the Italian branch of it, I guess. I t used
to be the Bank of Italy. Take, for instance, the First National Bank
of Nevada, it owns 99 percent of the stock.
Miss SUMNER. Fifty-one percent is enough to do all the damage.
M r . PATMAN. E v e n less than that some times.
M r . FORD. I t has not done any damage, but the point is they have
got a banking system i n a State where they would not have it otherwise.
M r . PATMAN. Is there any effort made to entice people or encourage
people to borrow money from banks to buy Government bonds?
M r . CROWLEY. NO; I do not think so. 1 would prefer for the Federal Reserve to answer as to the bond policy.
M r . PATMAN. DO you have anything to do with postal savings?
M r . CROWLEY. NO. I n what way do you mean?
M r . PATMAN. Y o u do not have any control over it?
M r . CROWLEY. NO ; that is entirely under the Treasury Department.
M r . PATMAN. I notice i n all this advertising where people are
encouraged, and properly so, to buy all the Government bonds that
they can to help out in the war effort and that no credit is ever given
for the amount of money they invest in postal savings when the fact
is that you help the Government just as much when you invest $100
in postal savings as when you buy a $100 bond.
M r . CROWLEY. Except this, when you put the money into the postal
savings you keep it more in a demand position and the Treasury needs
to have money in longer maturities.
M r . PATMAN. B u t the fact is, of course, every 60 or 90 days you
can get your money on the bonds, can't you? A n d since all the money
invested in postal savings is in turn invested in Government bonds
anyhow it occurs to me it would be exactly the same thing and people
should be given credit in these bond drives for the amount of money
invested in postal savings. Don't you agree with that?
M r . CROWLEY. I think that postal savings is making a contribution
to the financing of the war.
M r . PATMAN. Because a lot of people who will put money in the
postal savings will not patronize a bank or any other financial institution.
M r . CROWLEY. I would think this, Congressman, if there was a large
growth in postal savings in lieu of buying War bonds that would be a
weakness.
M r . PATMAN. I t would be a weakness?
M r . C R O W L E Y . I t h i n k so.

M r . PATMAN. B u t you will notice notwithstanding that fact that
postal savings go into War bonds that there is no advertisement of
postal savings at all and there is no effort made by the Government
or by any person in the world to get people to invest in postal savings,
notwithstanding the fact that postal-savings deposits are going up
month by month and they are higher today than they have ever been
in the history of this country. There is one other question I want to
ask you.
M r . CRAWFORD. W i l l the gentlemen yield at that point?
M r . P A T M A N . Y e s , sir.

M r . CRAWFORD. Where a person puts money i n the postal savings
and leaves it there it costs the Government considerably less money
than if he buys a saving bond.




'FEDERAL RESERVE

ACT

AMENDMEiNT

41

M r . PATMAN. T h a t is true. I t is 2 percent on postal savings and
2.9 percent on bonds.
M r . CRAWFORD. Yes. Take the great majority of postal savings
and you find many of them go back for 10 years or more beyond the
duration of time a saving bond goes. F o r the period of years that
they are deposited, I do not know what the Treasury does with it,
but the point is the Government has the money.
Miss SUMNER. DO they put this back i n the bank?
M r . CROWLEY. T h a t is true. Some is put back. About $50,000,000 is in the bank.
M r . PATMAN. W e passed a law here one time I know at least permitting the assets of insured banks that are not members of the
Federal Reserve System to be used for rediscount purposes to the
Federal Reserve bank in that district.
M r . CROWLEY. T h a t is my understanding.
M r . PATMAN. I am not clear whether it was mandatory or permissive.
M r . CROWLEY. I t is permissive, a« T understand it.
M r . PATMAN. I t is permissive?

M r . CROWLEY. T h a t is right.
M r . PATMAN. I n other words, "may." Well, has that privilege
been permitted to be used to any extent, M r . Crowley?
M r . CROWLEY. Well, you see, since that law went into effect,
Congressman, there has been no borrowing on the part of banks at
all to speak of so there has been no use of i t made at the present time.
M r . PATMAN. There has been no use made? There has been no
occasion at all? They did not need to borrow?
M r . CROWLEY. T h a t is right.
M r . PATMAN. I n fact, any bank with Government bonds, now
all of them have Government bonds, can get money on them immediately if they want to?
M r . CROWLEY. T h a t is right.
M r . PATMAN. Either through the open market or through the
Federal Reserve bank i n that district?
M r . CROWLEY. T h a t is right.
M r . PATMAN. W h e n you put the statement in the record about
the amount of interest that has been saved, I hope you put it in up to
date, if it is not too much of a job, and that you also include the
same information on the reduction of interest on time deposits from
the time the law was changed up to now. A n d I have another question
1 want to ask you. D o you know about bond sales to servicemen?
M r . C R O W L E Y . NO, I d o not, Congressman.

(The statement referred to is as follows:)
FEDERAL

DEPOSIT

INSURANCE

CORPORATION,

May 6, 1943.
T h e H o n o r a b l e H E N R Y B . STEAGALL,
House of Representatives, Washington, D. C.
M Y D E A R CONGRESSMAN : A t the hearing o n S. 700 before the House B a n k i n g
a n d Currency Committee, T h e H o n o r a b l e W r i g h t P a t m a n , of Texas, requested
the C o r p o r a t i o n to prepare a statement showing the estimated savings to the
banks of the U n i t e d States resulting f r o m the acts passed b y Congress i n 1933
a n d 1935 p r o h i b i t i n g the payment of interest on d e m a n d deposits a n d p r o v i d i n g
for the regulation of the rates of interest o n t i m e deposits.
W e were also requested to compare the amount of this savings w i t h the assessments w h i c h have
been p a i d b y insured banks into the Federal Deposit Insurance F u n d .




Washington,

42

FEDERAL

R E S E R V E ACT

AMEiNDMElNT

It is estimated that the prohibition of interest on demand deposits and the
regulation of maximum rates of interest (at 3 percent) on time deposits resulted
in initial savings to the insured banks in 1933 and 1934 at the rate of about
$90,000,000 per annum or 0.25 percent of deposits.
The maximum rate of interest payable on time deposits was lowered to 2)4
percent, effective February 1, 1936. This further reduction probably had little
or no effect upon banks in central reserve and reserve cities since their rates were
already below that level. However, for country banks this reduction resulted i n
further substantial savings for 1936 as compared with 1935 of from $15,000,000
to $20,000,000 or 0.24 percent of time deposits and 0.12 percent of total deposits
in these country banks. The assessment rate is 0.083 percent of total deposits.
As a consequence of the easy money conditions which existed during the
thirties, all interest rates declined substantially. It is not possible to estimate
the extent to which the rate of interest on demand deposits would have declined,
lacking prohibition of interest payments, nor the extent to which the rate of interest on time deposits would have declined, lacking regulation of maximum rates.
It is reasonable to assume, however, that the low money rates would have brought
about a substantial decline in rates of interest paid on deposits.
If, without the prohibition of the payment of interest on demand deposits
other than interbank deposits, the rate had fallen to 15 cents per $100 of demand
deposits other than interbank deposits in 1934-40, and to 14 and 13 cents,
respectively, i n 1941 and 1942, the total amount of assessments at one-twelfth
of 1 percent of total deposits could be said to have been saved by the prohibition
of interest.; Similarly, if without the regulation of maximum rates on time
deposits, the rate of interest on time deposits had declined by 25 to 40 cents less
than it did per $100 of time deposits, the total amount of assessments could be
said to have been saved. The two together would have saved double the
assessments.
I n the case of interbank deposits, assessments paid on total deposits at onetwelfth of 1 percent of total deposits equalled from 33 to 40 cents per $100 of
interbank deposits for central reserve and reserve city banks which held all but
1 or 2 percent of interbank deposits during this period. Since these banks were
actively bidding for interbank deposits during the period, it is probable that such
deposits were profitable to them, and it is conceivable, therefore, that some
interest would have been paid on interbank deposits if such payment had not been
prohibited. If without the prohibition of the payment of interest on demand
deposits the rate on interbank deposits had not remained as high as necessary to
equal assessments, only a portion of the amount of assessments could be said
to have been saved by the prohibition of the payment of interest on interbank
deposits alone.
Our appraisal of these factors leads us to believe that the prohibition of payment of interest on demand deposits combined with the regulation of maximum
rates of interest on time deposits have resulted in savings to the banks as a whole
at least equal to the deposit insurance assessments paid. The amount of actual
savings from these factors for the period 1934-42, inclusive, cannot be measured,
however, and thus the conclusions are subject to debate.
Yours very truly,
FRANCIS

C.

BROWN,

Solicitor.

M r . PATMAN. T h a t is all.
M r . GIFFORD. T h e general result of this legislation is that the banks
don't want to take money from people now who expect to leave it there
on deposit for safekeeping for a while because they have to pay deposit
insurance; is that right, the banks have to pay this?
M r . CROWLEY. T h a t is right. If it takes the deposit it has to pay
the insurance assessments.
M r . GIFFORD. TO relieve the Government and the Treasury of
this charge they hold a further preferential place, the Treasury
does, over our own citizens, so that the banks will encourage them
more. D o you think, I do not like to ask if you think that is fair
to the general citizen of the country because the Treasury gets at all
times a preferential place. They get money now at a very low rate of
interest because they have to pay the deposit charges of this Federal
Deposit Insurance Corporation charge. T h e bank can say to them,




'FEDERAL RESERVE

ACT

AMENDMEiNT

43

" W e cannot lower the rate of our charge to you because we have to
pay this on your business." T h e Treasury is relieved of that. I
think you will find the Treasury has at all times a preferential position
over our own citizens. T h a t is not what I wanted to take up. I
wanted to ask definitely this question. I have a bank close to a large
camp. Their deposits are doubled. Their work is terribly increased.
They have to pay now, do they, on their deposits?
M r . CROWLEY. T h a t is right.
M r . GIFFORD. A n d this would relieve that bank greatly?
M r . CROWLEY. O n that particular war loan account.
M r . GIFFORD. The war loan is deposited?
M r . CROWLEY. This is i n the Treasury or general account now.
M r . GIFFORD. Well, it would not help my bank at all if the bank
was willing to take the deposits of those people who are at the camp
and who bring i n twice the deposits the bank ever had before and
have to handle?
M r . CROWLEY. I t does not help them, no.
M r . GIFFORD. It does not help them at all?
M r . CROWLEY. T h a t is right.
M r . GIFFORD. T h e third question: T e l l me why there is this practice of one bank depositing i n another bank and transferring deposits
back and forth. Every bank is reporting a lot of money held in
other banks. W h y is that?
M r . CROWLEY. T h a t comes under my friend back here.
M r . GIFFORD. I know, he is smiling there. I .just had that questo ask you. Y o u know banking and I do not. W h y do banks transfer deposits back and forth? There has got to be some advantage
there somewhere. I cannot understand it.
M r . CROWLEY. There is a little advantage there, Congressman.
There is an advantage there, all right.
T h e CHAIRMAN. AS a matter of fact any reduction of the assessment of the banks regardless of the cause of that reduction on the
class of funds that brought it about, would to that extent grant relief
to the bank. And, of course, insofar as the assessment could be reflected in the banks' policy toward borrowers it would be just as much
an inducement for loans as if the reductions were brought about by
reason of any other class of deposits?
M r . CROWLEY. T h a t is right.
M r . TALLE. M r . Crowley, I had no opportunity the other day to
pursue my questions as we were closing the meeting. A m I right in
saying that i n your introductory statement you said substantially this,
that the banking system of the United States is in better shape now
than ever before in its history?
M r . CROWLEY. Yes; in m y judgment.

M r . TALLE. A n d what would you say would be the primary test in
determining that liquidity?
M r . CROWLEY. I think it is the quality of the assets other than the
Government's, and then the liquidity that the banks have.
M r . TALLE. I n a serious depression nothing is liquid except cash.
M r . CROWLEY. Except the right of discount on Government
securities.
M r . TALLE. W h a t is the single type of asset, the one asset held i n
banks which overshadows all others i n the banking system today?
M r . CROWLEY. Of course, your Government securities overshadow
everything else.



' F E D E R A L R E S E R V E A C T A M E N D M E i N T 44

M r . TALLE. Liquidity then really rests on Government obligations;
is that right?
M r . CROWLEY. That is right.
M r . TALLE. Other questions which I had in mind pertained to the
investment of your funds and to income, but I will not take time to
deal with those questions because they have been covered here, I
think.
M r . CROWLEY. Thank you very much.
M r . PATMAN. I n your statement I wish you would make a parallel
column showing what the banks have received on demand deposits
by reason of their not being required to pay interest on demand deposits. T h a t is one column, and in another column, the amount of
savings on time deposits, and third, the amount they have had to pay
in assessments to the Federal Deposit Insurance Corporation. I
believe you stated positively that the argument was made and accepted
by Congress that the banks would be saved the interest on demand
deposits in order to compensate them for the amount they would
have to pay to the Federal Deposit Insurance Corporation.
M r . CROWLEY. I t was a compensating factor.
M r . PATMAN. A n d we would profit greatly by it?
M r . CROWLEY. T h a t is right.
M r . FORD. Another factor to be considered is, if I have $5,000 to
put in a bank, if I put it i n a Government bond I can get 2.5 percent
interest.
M r . CROWLEY. I think that is correct.
M r . FORD. If there is no interest on the deposits they have a tendency to put more money in Government bonds.
The CHAIRMAN. It might be stated for the record that one of the
considerations which entered into the provision preventing the payment of interest on demand deposits and regulating that on time
deposits grew out of the practice that had been indulged in considerably where banks i n need of cash instead of joining the Federal R e serve, or applying through the Federal Reserve if they were members,
or through some bank, and arranging across the counter through somebody who knew what he was doing, in many instances banks that got
i n trouble they went out and borrowed from the public under the
guise of deposits bearing interest.
M r . CROWLEY. T h a t is .right.
The CHAIRMAN. A n d that was one of the evils we had and why we
eliminated that practice.
M r . GIFFORD. The banking system is, of course, in a much stronger
position because it is filled with the IOU's of the Government and there
is no security in back of that. T h e rest of it is borrowed by individuals. They have to put in doubtful securities. B u t the I O U of the
Government has this backing, that we Congressmen are willing to
tax the people enough to pay them. T h a t is the soundness of the
banking system today. It is depending on us.
M r . CRAWFORD. I gather from your statement that this bill was
originated by the Treasury Department?
M r . CROWLEY. I t is done at the request of the Treasury believing
it would help their financing of the war.
M r . CRAWFORD. I just want to read your statement here. Y o u
said:
W e have been told that many bankers have made representations to the Treasury they are loathe to participate in the handling of war loan deposits because of
the assessment of one-twelfth of 1 percent.




'FEDERAL RESERVE

ACT A M E N D M E i N T

45

Are they actually loathe or do they actually refuse to participate?
M r . CROWLEY. AS I understand it between five and six thousand
banks now have a war loan account and what the Federal Reserve and
the Treasury want to do and would like to encourage is ten or twelve
or thirteen thousand banks to have that account.
M r . C R A W F O R D . I see.

M r . CROWLEY. This bill provides an incentive to do that.
M r . C R A W F O R D . Y O U t h i n k i t is n e c e s s a r y ?

M r . CROWLEY. T h a t is right.
M r . CRAWFORD. M r . Crowley, a matter came up here which I am
awfully anxious to further explore before any questions go out which
had to do with M r . Patman's bill which I think is a very important
bill. If I understood you correctly I thmk this is awfully important
to get into the record. If I understood you correctly in your defense
of the independent unit banking system you do not want to go outside the confines of the State control. Here is what I mean by that.
I want to be very specific. If State A has a State law which permits
branch banking, if I understand you correctly you are willing to step
aside and let that State handle its own affairs.
M r . CROWLEY. I am willing to step aside and let that State pass
State banking laws as it may, pertaining to branch banking, but I
think your Federal authorities and especially the Federal Deposit Insurance must have some protection that some commissioner doesn't
go out and expand branch banking all over the State and increase
our liability to undue risk.
M r . CRAWFQ,RD. I have no argument with that at all. Another
thing is this. Going back to the philosophy you have enunciated
here so often in recent years and with which I am i n full accord with
reference to protecting the capital structure of the banks which you
insure, can you state to us whether or not the earnings of the banks
i n smaller communities, by that I mean in towns of 15,000 population and less and right down to small villages of three and four thousand population, I am including the banks which you insure, are those
capital structures being preserved through adequate earnings under
the system which now prevails where Government agencies go out
and make loans and where many of those banks are being forced into
purchasing Government securities only to accommodate their excess
funds?
M r . CROWLEY. The capital ratio, Congressman, naturally is
fetting smaller all the time because of your increase in deposits.
>ut we have tried to get the banks to conserve as much of their
earnings as they possibly can to add to their capital structures, and
with the quality of the assets they have and with the conservation of
their earnings we feel they are doing the best they can. It would be
unwise to go out and require the banks to increase this ratio by the
sale of stock. As these deposits went up you would be doing it every
6 months.
M r . CRAWFORD. Are those capital structures relatively as good i n
the banks doing business in towns and villages of 10,000 population or
less, as they are in banks located in towns of above 10,000 population?
M r . CROWLEY. Generally they are better. I think that our small
banks are also making a little more money proportionately perhaps
than your larger ones and I think they are handling their earnings just
as judiciously as the large ones are. I think the small banking system




46

FEDERAL

RESERVE ACT

AMENDMENT

has done a fine job during the last 10 years.
I should like to insert into the record here.
(The matter referred to is as follows:)

I have some figures which

Average net profits per $100 of total capital accounts of all insured commercial
1989-41, and of insured
commercial
banks not members of the Federal
System,
1989-421
[Banks sxouped by amount of deposits]
All insured commercial
banits2

Insured commercial banks not
members of the Federal Reserve System3

1939
All banks
Banks with deposits of—
$100,000 or less ..
$100,000 to $250,000
$250,0C0 to $500.000.
$500,000 to $1,000,000
$1,000,000 to $2,000,000
$2,000,000 to $5,000,000..
$5,000,000 to $10,000,000
$10,000,000 to $25,000,000
$25,000,000 to $50,000,000
More than $50,000,000

banks,
Reserve

1940

1941

1939

1940

1941

$6.95

$7.02

$8.15

$5.20

$5.35

$6.93

3.62
6.04
7.64
7.65
7.18
6.40
6.44
7.55
7.36
6.36

3.99
6.54
7.89
7.66
6.91
5.91
6.30
6.65
7.11
6.84

4.74
7.66
9.14
8.89
8.00
6.92
6.49
6.81
8.15
6.82

1942 <
prelim$6.89-

3.48
4.26
4.57
2.88
6,00
6.54
5.86
7.79
8.18
7.35
7.71
9.33
« 12
7.44
8.34
6.67
6.34
7.72
5.65
7.60
4. 66
4.25
6.54
5.81
3.70
6.03
4. tt
4.31
2.74 I K R / 4.63
1.32
A
U
5.17 -1.39 | O. O \ 8 7.06
4.76
5.58
6.06
« 7.39

1 Excludes banks submitting reports covering less than the full year's operations or whose operations were
materially affected by mergers during the year.
2 Averages are based on ratios of individual banks.
3
Averages are based on aggregates.
< Averages are based on aggregates of 3,195 banks—approximately one-half of the total number of in*
sured commercial banks not members of the Federal Reserve System.
« Figures for 3 banks and 4 banks only and may not be representative.

M r . CRAWFORD. I am very glad to hear you say that. I am a little
bit concerned about it and the reason I am concerned is because I am
getting letters from small banks to the effect they are having a terrific
job in maintaining their earnings. Letters come in in connection with
the different agencies and if their earnings are holding up and if the
ratios are proper I am delighted to know it.
M r . CROWLEY. Banks in the M i d d l e West, of course, have experienced considerable reductions in their loans. B u t banks generally
have had to change their policies quite a lot in order to make money.
They have had to reduce their overhead and levy a charge for services
and charges for things like that which 10 years ago were almost
unknown. They have been able to supplement their earnings by
those factors. I think the banking system as a whole is getting along
all right with its earnings.
M r . CRAWFORD. NOW, going to the point raised by Mr., F o r d to
which you replied i n substance that you could go along with that
approach provided we did not use the States' rights to give us the
excuse to do some things and then kick out States' rights on other
matters. Where the Supreme Court holds that a certain type of
operation is i n interstate business it seems to me that is the thing that
will largely have to govern. T o make myself clear, suppose the Supreme Court later holds all banking is interstate business. T h e n that
would erase, would it not, the States' rights approach with reference to
branch banking.
M r . CROWLEY. I think when you get into interstate rights I presume
if you drew on your imagination sufficiently you could almost claim
everything would come under Federal control.



'FEDERAL RESERVE

ACT

AMENDMEiNT

47

M r . CRAWFORD. That is the reason I bring up this point, because
I am drawing on my imagination and I think it is only a matter of a
short time. I was just saying, drawing on m y own imagination, I
think it is only a matter of a short time until perhaps the Supreme
Court will hold that all banking is interstate commerce.
M i s s SUMNER. I don't see how they can.
M r . CRAWFORD. N e i t h e r d o I.

M r . MONRONEY. They are on wages and hours now.
M r . CRAWFORD. B u t until that time comes it seems to me that the
Congress will be inclined to do this very thing which you pointed out
awhile ago. B u t when that time does come then it appears that the
Congress will have to function so far as banking is concerned under
that decision.
M r . CROWLEY. T h a t is right.
M r . CRAWFORD. NOW, I wanted to come back to m y original point,
so long as the situation is as at present with reference to States' rights,
that is, the States have control over the establishment of branch
banks, if one or all of the States refuse to change the law so that
State branch banking could not be, so long as the States refuse or a
State legislature refuses to make a law which prohibits branch banking, then if I understand you correctly, to the effect that the Federal
Deposit Insurance Corporation, so long as that branch banking does
not interfere with its sound administration of the affairs of the Federal
Deposit Insurance Corporation will take no position i n the matter;
isn't that a correct statement?
M r . CROWLEY. T h a t is correct.
M r . WOLCOTT. Something came up on the floor of the House a few
weeks ago which has been interesting me since then. I have a nephew
at Camp Meade. H e is a thrifty young fellow. H e has been married
a short time. A n d after giving his wife most of his salary what he
has left over he wanted to go down to the bank at Laurel and deposit
there. They would not take it. W h i c h brings up this same question
that M r . Gifford raised about the bank i n a camp district doing two
million dollars of business every month i n soldiers' accounts. Now,
isn't there a law still on the statute books that a soldier can deposit
out of his salary and have withheld from his salary for deposit a certain amount every month to be deposited i n a Company account or a
Regimental account?
M r . CROWLEY. That is the Soldiers and Sailors.
M r . WOLCOTT. What is that?
M r . BROWN (of the Federal Deposit Insurance Corporation). T h a t
is a provision I think whereby finance officers take those deposits.
M r . WOLCOTT. Regimental finance officers?
M r . BROWN (of the Federal Deposit Insurance Corporation). T h e
so-called soldiers and sailors deposit accounts.
M r . WOLCOTT. IS that under the quartermaster department or the
paymaster?
M r . BROWN (of the Federal Deposit Insurance Corporation). I t is
handled by the finance officer.
M r . WOLCOTT. AS I understand it there is a set-up i n the A r m y
whereby a soldier can make an allotment of his salary to this account
each month.
86330—43




4

'FEDERAL RESERVE

A C T A M E N D M E i N T 48

M r . BROWN (of the Federal Deposit Insurance Corporation). I do
not know whether it can be done on an allotment basis but he has the
right to make it. I t is a savings allotment.
M r . WOLCOTT. L e t me see if I understand how it is done. H e has
the right to make a deposit i n this account and then it draws 4-percent
interest from the day he makes the deposit.
M r . BROWN (of the Federal Deposit Insurance Corporation). I do
not recall the interest rate. I t draws interest. I can find out and let
you know.
M r . WOLCOTT. I am sure it is 4 percent. Is that a liquid account?
C a n he draw that out at anytime he wants to?
M r . BROWN (of the Federal Deposit Insurance Corporation). I
looked into that sometime ago. I have an analysis in the office which
I will be glad to put in the record or furnish to you. A t one time, and
I am not sure whether that has since been amended or not because it
is over a year since I looked that up, at one time they could not.
M r . WOLCOTT. I wish you would put it in the record. I have talked
to a good many soldiers and sailors and marines, one was a major, one
a lieutenant, the other a first sergeant, one a first-class private, and a
private, and there wasn't one of them who knew anything about this
account. I wonder if perhaps the banks in the locality of these camps
would not be justified in calling the attention of the men to the fact
they can deposit in these accounts and receive 4 percent interest and
relieve themselves of the burden of carrying those accounts. I realize
that the banks i n the vicinity of the camps would have the burden of
holding that account since, as in the case of my nephew which I used
as an example, although I should not, he may be at Camp Meade 2
weeks and go somewhere else tomorrow. B u t I wish you would puti n the record this set-up by which soldiers and marines, and this applies
to the N a v y Department as well as it does to the Army, can mafce
deposits with the finance officers; and how much interest it draws;
whether it is liquid or not and if they can draw on it entirely at will.
M r . BROWN (of the Federal Deposit Insurance Corporation). I will
be glad to give you that analysis. As I recall it it was not an in-andout account. A t one time it had to be carried until the man's enlistment expired. I have the impression some legislation was considered
to change that.,
M r . SPENCE. W h a t is the actual amount of your liability on the
limitation of $5,000?
M r . CROWLEY. T h e last we had was about 27 billion, the last analysis that was made, i n September 1941.
M r . SPENCE. HOW does that run in proportion to all the deposits?
M r . CROWLEY. A t that time I think it was about 40 percent. A t
one time, September 1938, it was about 45 percent.
M r . SPENCE. IS it much higher in smaller banks than larger banks?
M r . CROWLEY. Yes, of course.
M r . SPENCE. W i t h reference to the banks you liquidate, what
proportion of the deposits were insured?
M r . CROWLEY. W e cared for and protected about 98 percent of all
the deposits i n those banks.
M r . SPENCE. AS a rule than it is the smaller banks?
M r . CROWLEY. NO; the larger banks. B u t we did it under our
authority to make purchases of assets for consolidation. I think
that the time of a closed bank is almost a thing of the past. I think
it is more economical for us to go in and consolidate an unsound bank



'FEDERAL RESERVE

ACT

AMENDMEiNT

49

w i t h some other bank and take care of the deposit liability. I t is
very difficult to determine whether a person that has $6,000 should be
paid only $5,000 or a person who had $5,000 paid all. A n d we find
i n liquidation we work out just as well and perhaps a little better b y
consolidating w i t h another going bank and taking out all of the
uiisound assets.
M r . SPENCE. A n d that to a certain extent wipes out the $5,000
provision?
M r . CROWLEY. I t gives 100-percent insurance for all practical
purposes.
M r . MONRONEY. YOU pay 100 percent of deposits or deposits up to
$5,000?
M r . CROWLEY. W e pay 100 percent under the conditions I have
just described.
M r . MONRONEY. T h a t gives y o u a cushion there for your consolidation.
M r . CROWLEY. T h a t is right.
T h e CHAIRMAN. T h e method that y o u employ, of course, prevents
the losses that are incident to expeditious liquidation.
M r . CROWLEY. T h a t is right.
M r . SPENCE. W h a t proportion were consolidations?
M r . CROWLEY. About two-fifths of the banks b y number holding
more than three-fourths of the deposits i n the closed or merged
insured banks. Y o u see, we merged banks i n N e w Y o r k that h a d
deposits of 25, 30, and 40 million dollars. T h e y h a d many deposits
i n those banks that were over $5,000. T h e net result to us was I
think we made money, or rather, saved money, b y the way we
handled it.
T h e CHAIRMAN. I want to ask a practical question there. Since
i t is true we are practically protecting all deposits, don't y o u think
i t would be sensible for the law to recognize that and say so or at
least increase the amount of individual deposits insured?
M r . CROWLEY. I think it would cost no more money to insure the
deposits 100 percent than it does to insure under the system we
have now.
T h e CHAIRMAN. T h a t statement covers what I h a d i n mind.
M r . PATMAN. T h i s holdiiig company law that Congress passed a
few years ago, it did not affect the Trans-America Corporation?
M r . CROWLEY. I t did not restrict them from further expansion,
Congressman. There was nothing in the l a w that gave anyone that
authority to restrict their expansion.
M r . PATMAN. Were they specifically exempt?
M r . CROWLEY. N o ; I mean i t d i d not stop the growth of any b a n k
holding company.
M r . PATMAN. YOU think that is a serious menace and should be
dealt with by Congress?
M r . CROWLEY. I do not think there is any doubt about it.
M r . PATMAN. A n d on this Trans-America statement I hope y o u
w i l l include i n there the percentage of the b&nks owned or controlled
b y the Trans-America Corporation i n each State.
M r . CROWLEY. W e will.
T h e CHAIRMAN. T h e committee w i l l adjourn to 10:30 a. m. tomorrow morning.
(Committee adjourned to F r i d a y , A p r i l 2, 1943.)







FEDERAL RESERVE ACT AMENDMENT
F R I D A Y , A P R I L 2,

1943

H O U S E OF R E P R E S E N T A T I V E S ,
COMMITTEE ON B A N K I N G AND C U R R E N C Y ,
Washington,
D.

G

T h e committee met at 11 a. m., Hon. H e n r y B . Steagall (chairman)
presiding.
T h e CHAIRMAN. The committee w i l l come to order. Governor
Eccles, the committee has invited you to discuss this bill, H . R . 1699,
and we will be glad to have you do so. If you desire to make a
prepared statement without interruption, the committee will be glad
to accord you that privilege and later the members may desire to
interrogate you.
I am sure it is not necessary to say more than this. W e are always
glad to hear you. Y o u may proceed.

STATEMENT OF M. S. ECCLES, CHAIRMAN OF THE BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
M r . ECCLES. M r . Chairman and members of the committee: I
appreciate the opportunity to appear before you this morning and discuss what I consider a very necessary bill and one the passage of which
is urgent. I feel that time is of the essence. I regret that the bill
could have been acted upon sooner.
The bill is a war emergency bill, the life of which expires 6 months
after the cessation of hostilities, as determined b y the President or b y
Congress.
The Treasury, as you know, are undertaking a financing program
to raise not less than $13,000,000,000 commencing M o n d a y ,
A p r i l 12. It is desired, i n fact it is very urgent, that this bill be gotten
out, if possible, prior to that time so that as many banks as possible,
or as many as can be persuaded to do so, will qualify for war loan
deposit accounts and that those banks which have qualified for war
loan deposit accounts can be persuaded to qualify for increased
amounts.
There is considerable delay in getting banks to act, because the
procedure is that they must get authorizations from their directors
authorizing them to pledge securities w i t h the Federal Reserve bank
for the amounts they desire to qualify for and, after their applications
are submitted to the Reserve bank showing proper authority, the
Reserve banks are required to act upon their applications. T h e
next financing drive opens on A p r i l 12, so that there is an element of
time involved, and I merely wanted to say today that I hoped it
would be possible for the committee to report the b i l l out this week
and get it acted upon next week. Inasmuch as a similar bill has




51

52

FEDERAL

RESERVE

ACT

AMENDMENT

passed the Senate, it would seem to me that there should be little
delay if this committee would report, say, the Senate bill out.
M r . ROLPH. H a s exactly the same bill passed the Senate?
M r . ECCLES. Practically the same bill. I would assume that this
committee might adopt the Senate bill with a House title and avoid
any need of a conference on the bill.
Now, M r . Chairman, I have a statement that I will read, if I may,
without interruption, that explains the purposes and the operations
of the bill.
T h e CHAIRMAN. T h e committee will be glad to have you do so.
M r . E C C L E S (reading):
T h i s measure provides that for the duration of the war and 6 months thereafter
so-called war-loans deposit accounts shall be relieved from Federal deposit insurance assessments a n d f r o m reserve requirements. Its enactment w i l l help to
perfect the machinery for a n d thus facilitate and make smoother the Government's war-financing operations.
I should like to state as simply as I can what the bill does and w h y its enactment
is important at this time. I t is not a complex matter, and I see no reason w h y it
should arouse controversy.
T h e bill has the approval of the Treasury, the Federal
Deposit Insurance Corporation, the B o a r d of Governors of the Federal Reserve
System, a n d the System's open-market committee. I might also say it has cleared
the Budget.
As members of the committee w i l l recall, war-loan accounts were originally
authorized b y the L i b e r t y L o a n Acts i n the last war and are now authorized by
the Second L i b e r t y L o a n A c t as amended. This act provides that the Secretary
of the Treasury m a y deposit " i n such incorporated banks and trust companies as
he m a y designate, the proceeds or any part thereof, arising from "the sale of the
bonds a n d certificates of indebtedness, Treasury bills and War Savings certificates
authorized b y this act
* * *."
Incorporated banks a n d trust companies may qualify for war-loan accounts by
a p p l y i n g to the Treasury through the Federal Reserve banks. Such accounts
are f u l l y secured b y a pledge of assets for a stipulated amount, which is the maxi m u m that may be on deposit i n the account at any one time.

T h e Treasury has authorized the Federal Reserve banks to act
upon these applications; it is not necessary to submit them to the
Treasury for consideration—they have given that authority to the
Reserve banks. T h e Reserve banks have the authority, without any
limitation except as to the requirements of collateral security; as to
the amount that any bank can qualify for, that is left up to the discretion of the Reserve banks without limitation [reading]:
W h e n banks w h i c h have qualified for war-loan accounts subscribe to Government securities for their customers or themselves, they enter the amount of their
allotted subscriptions i n the war-loan accounts on the payment dates and subject
t o call b y the Treasury. Subsequently, as the Treasury has need for funds, a
call is issued; that is, notice is given to these banks to transfer to their respective
Federal Reserve banks whatever percentage of the funds in the war-loan accounts
is required b y the Treasury to meet its current expenditures. T h u s the warloan accounts are drawn down gradually as Treasury needs arise, the money is
checked out of the Reserve banks by the Treasury and ultimately flows back
again to the banking system as deposits.
If there were no such mechanism—if all banks in subscribing to Government
securities for their customers or themselves were to transfer the funds immediately to the Reserve banks—thcro would be periodic heavy drairs on the deposit
totals of the banking system, w i t h seriously disruptive effects on the economy,
particularly on the Government b o n d market. T h e larger the financing operation, the greater a n d more disruptive the drain would be. I n peacetimes when
the Government was not compelled to raise and expend such huge sums as are
demanded b y the war a n d when banks had superabundant reserves, the situation
was very different. B u t today when the Treasury must go to the public and to
the money market for large sums of money every few months, and when reserves




'FEDERAL RESERVE

ACT

AMENDMEiNT

53

are rapidly absorbed as currency in circulation expands and bank deposits increase,
it is very important to extend the war loan deposit mechanism as widely as
possible throughout the banking system.
If there were no such mechanism, it would be necessary to p u m p billions of
reserves into the banking system to offset the heavy drains at financing periods
and thus prevent widespread liquidation w i t h the disturbance this would cause
in the bond market. T h e n as the funds were spent by the Government and
flowed back into bank deposits, the reserves that had been pumped i n would be
excessive relative to the current need. A n y such alternating scarcity and redundancy of reserve funds would create difficult problems for the Treasury and the
Reserve System.
T o the extent that the war loan account mechanism exists throughout the
banking system, such difficulties can be avoided and the flow of deposit resources
into the war-loan accounts, then to the Reserve banks as the Treasury needs and
calls for the money, then back into the banking system as the Treasury expends
the money, is accomplished smoothly and without disruptive effects. There is a
close adjustment and a minimum time lag between the drawing down of the
money and its flow back into the deposit structure.
Because of these considerations, the Reserve System has made a special effort
and a concerted drive through all of the Reserve banks to induce as many banks as
possible to apply and qualify for war loan deposit accounts. T h e results so far
have been gratifying, and a large number of banks, even though they m a y have
felt that the war-loan accounts should not be subject to deposit-insurance assessments or to reserve requirements, have applied and qualified. There are still
many thousands of banks which have not yet come in, and it is clear that the
requirements of existing law, which this bill would suspend for the duration, are
a real deterrent in many instances. N o t only is a more widespread setting up of
this convenient and necessary mechanism thus impeded, but banks that have
war-loan accounts are discouraged from* utilizing them as fully as w o u l d be the
case if these statutory requirements were suspended. Neither requirement
existed when war-loan accounts were originally authorized b y Congress in the
last war. We had no deposit insurance at that time and war loan accounts were
not subject to reserve requirements before 1935.
I hope that this measure will be promptly enacted so that the mechanism,
which I have tried to outline very simply, may be as widely set up and as generally
utilized as possible to facilitate the large financing operations w h i c h are ahead of
us as long as the heavy requirements of the war situation continue.

That concludes my formal statement, M r . Chairman.
The CHAIRMAN. Governor Eccles, what is the procedure if a State
bank, a nonmember bank, desires to extend a loan?
M r . ECCLES. Desires to do what?
The CHAIRMAN. TO make a loan to the Treasury.
M r . ECCLES. If they have a war loan account, if they have qualified
for it, they would put in their subscription or application through the
Reserve bank of the district, and they then credit the Treasury
through the war-loan account i n their bank.
The CHAIRMAN. They would qualify for accounts through the
Treasury?
M r . ECCLES. They qualify through the Federal Reserve banks,
who are the agents of the Treasury.
T h e CHAIRMAN. That is what I want to get.
M r . ECCLES. That is right.
T h e CHAIRMAN. When a State nonmember bank wants to take a
part of this loan, what is the process between the Treasury and that
bank and between the Federal Reserve and that bank?
M r . ECCLES. Well, the bank applies to the Federal Reserve bank
for authority to establish a war loan deposit account. T h e y deposit
with the Federal Reserve bank the collateral or securities required.




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T h e securities must be i n the minimum amount that must be put up,
which will be the aniount of the account. They must cover 100 percent with securities the amount of the war-loan account. I n other
words, they may qualify for a war-loan account equal to the capital
and surplus, or mav qualify for a war-loan account equal to twice
the capital and surplus, or may want to qualify for one equal to three
times their capital and surplus. Whatever amount they qualify for,
they must deposit collateral with the Federal Reserve bank of that
district i n that amount.
T h e CHAIRMAN. A n d what is the application of that rule, if it does
apply, to member banks?
M r . ECCLES. T h e same thing.
T h e CHAIRMAN. T h a t means, if I understand it, a bank that wants
to make a loan to the Government has to give bond to the Government
for the privilege of making the loan? Is not that about the way
it works out?
M r . ECCLES. Oh, no.

T h e CHAIRMAN. T h a t is not quite a fair statement of it; but, as a
matter of fact, they do have to make bond or give security to the
Government?
M r . ECCLES. If they want to establish an account for the Treasury
i n their bank, i n other words, if they do not want the funds that they
subscribe to leave the bank immediately, they must qualify. T h a t is,
if they do not want the funds to be paid out to the Reserve bank in
payment for the Government securities, then they must qualify for a
war loan deposit account, i n which case they merely give credit to the
Treasury in their bank for the amount of their subscription to Government securities, or the amount of the allotment of Government securities given to them as the result of their subscription.
T h e CHAIRMAN. W h a t is the purpose of the securities that the bank
puts up w i t h the Federal Reserve in order to make a loan to the Government, or to the Treasury.
M r . ECCLES. Of course what the bank does is the bank gets securities as the result of giving that credit, and the law requires that all
Government deposits with any bank must be secured.
T h e CHAIRMAN. Of course, that is the purpose of it.
M r . ECCLES. Otherwise, it is to protect the Government. T h e
Government has an account with the bank; if that bank should close,
the Government has securities to offset the amount of its credit in the
bank.
T h e CHAIRMAN. T h e situation is really this: A n y deposit that the
Treasury leaves with a bank as a result of loans extended to the
Treasury has to be secured by specific collateral pledged by the borrowing bank w i t h the Federal Reserve System?
M r . ECCLES. T h a t is right.
T h e CHAIRMAN. T h a t applies to nonmember banks?
M r . ECCLES. A n d to member banks alike.
T h e CHAIRMAN. I understand.

M r . ECCLES. T h a t is right; it applies to all banks.
T h e CHAIRMAN. Well, is not that really the most of the difficulty
that is likely to arise i n financing the program of the Treasury?
M r . ECCLES. W h a t do you mean—you mean the difficulty of putt i n g up collateral?
T h e CHAIRMAN.




Yes.

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M r . ECCLES. NO; that is 110 deterrent, because the collateral they
put up is offset by the deposit that they give the Treasury credit for.
I n other words, it is a pure bookkeeping entry.
T h e CHAIRMAN. AS I understand, the Treasury deposit account is
an obligation of the bank?
M r . ECCLES. I did not get that question.
T h e CHAIRMAN. The deposit account i n a bank creates an obligation on the part of the bank?
M r . ECCLES. I t is an obligation; it is a liability of the bank. W h a t
the bank does is to credit the Treasury account with the amount of the
Government securities which they purchase and that becomes a
liability of the bank. O n the other side of the ledger is an asset known
as Government securities. So that they give the Treasury a credit
for the purchase price of the securities which they purchase, and the
offsetting asset, of course, is the amount of Government securities
which they purchase.
T h e CHAIRMAN. What happens is the Government securities go to
the bank and by the pledge of those obligations the bank, i n keeping
deposits, protects the deposits w i t h specific collateral, or approved
collateral?
M r . ECCLES. What these banks do is, to the extent that the banks
buy Government securities, to that extent they create, through the
operation of their purchase, that much money. A n d the banks
as, for instance, will be the case commencing A p r i l 12 and running
through April 14, will be given the privilege of buying $2,000,000,000
of seven-eighths certificates, and the banks will create $2,000,000,000
of funds. There will be $2,000,000,000 more funds as the result of
that operation than there was before.
I t is what we call bank money or bank credit. A l l of our bank
credit, whether to the Government or whether to private parties,
creates money. I n other words, our money supply is largely composed of bank credit. That is why we hear so much about trying
to do the financing outside of the banks; because, to the extent it is
done through the banks, just to that extent it is inflationary i n that
i t increases the volume of money.
During this coming drive, the banks are expected to take $5,000,000,000 of the $13,000,000,000 of securities, so that there w i l l be
$5,000,000,000 more money at the end of the drive than there was at
the beginning of the drive, approximately.
Now, that covers the banks' subscription to Government and there
are likewise subscriptions to Government securities i n the community
by individuals and corporations, which are expected to be $8,000,000,000 during this drive. T h e Treasury certainly won't spend the
$8,000,000,000 during the period of the drive and, unless the banks
keep on deposit the Treasury funds in the war loan account, then those
funds would all come out of the communities' 13,000 or 14,000 banks.
T h a t $13,000,000,000 would all be immediately drawn out and
deposited in the Federal Reserve banks to the credit of the Treasury.
Now, to draw $13,000,000,000 out of the banking system would
simply eollapse the whole picture; that is all. There is only a billion
and a half of excess reserves in the banks. T o draw a billion and a
half out would eliminate completely the excess reserves and would
cause the banks to start selling heavily of Government securities
to meet the withdrawal.




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Now, what we are trying to undertake to do here is to make this
operation as smooth and as orderly as it is possible to make it, and
we would like to see every dollar of that 13 billion—the 8 billion from
the public and the 5 billion coming from the banks—credited to the
Treasury in the war loan accounts in the communities where the
14,000 banks are located, and the Treasury then draw down those
funds a few hundred million at a time as they spend them, and they
flow back again into the communities.
So that your picture would be this: Y o u would have, we will say,
possibly $13,000,000,000 of credit to the Treasury in the W a r loan
account. If that $13,000,000,000 were all raised at once, instead of
over a period of several weeks, the Treasury would draw them down a
few hundred millions at a time, possibly spending $200,000,000 to
$250,000,000 a day, so that the money would go right back into the
communities as fast as it was drawn out. That is, taking the country
as a whole. So that when the entire $13,000,000,000 that was to the
credit of the Treasury had been drawn down, there would be $13,000,000,000 back i n the hands of the individuals and corporations.
And, in that manner, the banks are not put under pressure to sell
securities to get funds to take care of the withdrawals covering subscriptions to Government bonds.
T h a t is why this thing is so urgent at this time, because the amount
of excess reserves is getting very low and the size of the financing is
getting very high. If the size of the financing were small, comparatively speaking, and the reserves were large, as has been the case
up until 6 months ago, then the war loan account would not be
necessary. If the Treasury were raising a couple billion dollars and
drawing it all out at once and there were 4 or 5 billion of excess reserves i n the banks, it would be a perfectly easy matter to draw out
of the banks of the country a couple of billions if they had excess
reserves i n excess of that amount. But, as I explained, that is not the
case today. T h e total excess reserves of all banks are about one and
a half billion and here is a financing operation of 13 billion.
M r . GIFFORD. HOW much of that will be conversion; how much of
the 13 billion needed will be simply to pay off what is due—will be
conversion?
M r . ECCLES. None of it will be conversion; not a dollar of it w i l l
be used to pay off what is due.
M r . SMITH. IS not part of it used in tax anticipation bills; is not that
involved i n that procedure; is not that part of it?
M r . ECCLES. No, it does not cover tax anticipation notes, except
one series, what is known as the two-purpose tax anticipation
note, a 3-year note, and a very small part of those notes are used to
pay taxes. T h e great bulk of them are just used as investments.
M r . GIFFORD. One party told me yesterday when bonds become
due they are simply going to convert them into other bonds.
M r . ECCLES. T h a t is true. There are some certificates coming due
on M a y 1 that will be converted; but that is no part of the $13,000,000,000. T h e $13,000,000,000 is entirely new money. I n addition
to the $13,000,000,000 of new money, there is a conversion operation
on M a y 1 covering some seven-eighths percent certificates that fall
due on that date.
M r . SMITH. Does that mean seven-eighths percent per year?
M r . ECCLES.




P e r year.

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M r . SMITH. Less than 1 percent per year?
M r . ECCLES. It is a 1-year certificate; that is right. I t is threeeighths for 90-day bills and seven-eighths for 1-year certificates.
M r . SMITH. Your alternative might be to lower the reserve requirements?
M r . ECCLES. Well, lowering the reserve requirements would only
meet the thing part way. And, of course, if you lower your reserve
requirements, that only meets it for this time, and what do you do i n
August? So it is not a way to meet the problem.
We could either lower the reserve requirements or we could buy
billions of Governments—we could do it either w a y — i n order to give
the banks sufficient reserves to take care of the heavy withdrawals.
B u t then, when the Treasury spent the money, you would have a large
excess amount of reserves. So that it makes for instability, rather
than for stability.
The CHAIRMAN. Let me ask you one or two other questions. W h a t
kind of security do you take from a bank that has a loan account
with the Treasury, for the purpose of securing deposits of the United
States?
M r . ECCLES. Well, the Governments themselves are largely used.
Banks are permitted to put up other securities which are acceptable
to the Reserve banks; but, as a practical matter, I think, as all
banks have Governments, Governments are largely used—in fact
are entirely used—as collateral. There may be some exception; I
do not know of it. B u t if a bank had no Governments and wanted
to put up other securities to secure the account, they are permitted
to do so.
The CHAIRMAN. AS a matter of fact they have no other securities
in sufficient amounts to take care of the situation, have they?
M r . ECCLES. The banks would prefer to put up Governments
rather than other securities, anyway.
The CHAIRMAN. But, as a matter of fact, they have no other securities in sufficient amount to take care of the situation, have they?
M r . ECCLES. I suppose if you took all of their loans and investments
other than Governments, they could qualify for a sufficient amount;
at least some banks could; perhaps some could not.
The CHAIRMAN. What happens is the bank buys the Government's
obligation and gives the Government credit for it on its deposit
account?
M r . ECCLES. That is right.
The CHAIRMAN. Then to secure the desposit account they turn
around and deposit Government obligations with the Federal Reserve
bank?
M r . ECCLES. That is right.
M r . GIFFORD. HOW about the 8 billion that the individuals and
corporations buy—will they take all that money out to buy the 8
billion of the 13 billion?
M r . ECCLES. Well, they would have to take that money out to buy
them unless the bank has qualified for a sufficient amount i n the war
loan account to cover the subscriptions of their customers i n the
bank.
M r . GIFFORD. HOW can you say there will be 13 billions of new
money? If I buy a bond or a corporation buys a bond, we have to
check it out of our account.




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M r . ECCLES. YOU check it out of your account in the bank and it
goes into the Treasury account in the same bank. So that, so far
as the bank is concerned, so far as their deposits are concerned, it
still has the money.
M r . GIFFORD. B u t we do not have to deposit the bond to do that.
M r . ECCLES. NO; but if you buy a bond from the bank, you give
the bank your check. A l l right. T h e bank charges your account
with your check and credits the Treasury account right in the bank
for the amount of your check, and the money never leaves the bank.
M r . GIFFORD. T h a t is true, but it takes that much money; that
8 billion as you call it would be subtracted from that?
M r . ECCLES. NO; it creates part of the 13 billion. T o the extent
you give the bank your check, or any other individual or corporation
gives the bank a check for the Government securities that it wishes
to purchase, the account of the individual or corporation would be
charged for the amount of the subscription, and the war loan account
i n the bank would be credited with the amount of the subscription.
So that there is no money that leaves the bank. That is why we are
so anxious to get all the banks to qualify for war loan accounts, so as
to avoid funds leaving the banks until the Treasury spends the money.
Then, as it spends the money, the money will go back into the economy as a whole and each bank will get some of the money back.
T h e y may not get the amount back which was withdrawn, whereas
some other bank may get more money back than was withdrawn.
B u t the economy as a whole would get back just the amount that the
Treasury withdrew and spent.
M r . GIFFORD. Are you going to tell us there is 13 billion more money
i n the country by that process?
M r . ECCLES. There would be 5 billion more.
M r . GIFFORD. T h a t is what I am trying to say.
M r . ECCLES. SO far as the 8 billion that individuals and corporations
buy, that creates no new money.
M r . GIFFORD. T h a t is what I asked you.
M r . ECCLES. T h a t creates merely a velocity of use or turn-over. I t
merely means the transfer of funds from one ownership to another
ownership. W h e n the banks buy securities, it means the creation of
new money.
M r . GIFFORD. I understand that. So that there would be 5 billion
more i n our economy than there was before—permanently?
M r . ECCLES. T h a t is right, unless and until bank holdings of Government securities diminish.
M r . BROWN? Governor, suppose under this t i l l you have a bank that
has $500,000 of deposits and suppose the bank fails and $100,000 of
those deposits is war fund money: Now, would the Government be
treated any differently, or would the individual depositor be treated
just like the Government?
M r . ECCLES. T h e Government's $100,000 is secured with $100,000
of Government bonds. T h a t is a preferred claim.
M r . BROWN. I n other words, this does not injure the individual
deposits by reason of having this money deposited?
M r . ECCLES. I would not think it would injure the individual
depositors.
M r . BROWN. I think that is one of the most important questions
that we ought to consider. If we pass this bill, I certainly do not




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want to give the Government deposits an advantage over individual
deposits.
M r . ECCLES. Well, we have always had it. There is a statutoryrequirement that Government deposits w i t h banks must be secured.
T h a t has always been the case. A n d there are many Government
accounts outside of the war loan account.
M r . BROWN. Well, does the bank then pay a premium on these
other accounts you speak about; do they pay a premium for this
Government money on deposit?
M r . ECCLES. HOW do you mean, pay a premium?
M r . BROWN. Well, would they have to pay one-twelfth of 1 percent
on the Government deposit, because on all money they have now they
have to pay that? Now, do they have to pay it on the Government
funds they have?
M r . ECCLES. They do. Banks whose deposits are insured b y the
Federal Deposit Insurance Corporation pay one-twelfth of 1 percent
on all funds, including the war loan account, and what we are asking
here is that the war loan deposit account, which is now subject to the
F . D . I. C. assessment, be relieved of that assessment. W e are not
asking that other Government accounts be relieved of the assessment,
but merely the war loan deposit account.
M r . BROWN. What I am trying to get at is how that w i l l affect the
individual depositor. W o u l d it injure h i m i n any way if this bill
were passed?
M r . ECCLES. I do not think it would affect h i m at all.
T h e CHAIRMAN. Governor Eccles, we passed amendments to the
Federal Reserve A c t which authorized advances or loans to be made,
secured by Government obligations, to nonmember banks. I mean
loans to nonmember banks, partnerships, individuals, and so forth.
W h a t has ever been done about that; what has been the operation
under that?
M r . ECCLES. Well, it is still i n effect, but very little use has been
made of it by the banks.
T h e CHAIRMAN. Has the Federal Reserve put that provision of the
law into effect i n an effort to develop that type of business b y Federal
Reserve banks?
M r . ECCLES. I t is i n effect.
T h e CHAIRMAN. I beg pardon?

M r . ECCLES. T h e Federal Reserve, of course, is prepared, i n accordance with statutory requirements, to make loans to nonmember banks
as well as member banks; likewise to make loans to others as required
by the statute; but there has been, so far as I know
T h e CHAIRMAN. AS a matter of fact, they have not made any such
loans as that?
M r . ECCLES. There may have been some; I could not say. If there
are, they are isolated matters; because, if a customer wants to borrow
on Governments, he can go to the bank and ordinarily borrow more
cheaply then he can from the Federal Reserve bank.
M r . GIFFORD. I want to have you explain about this transfer of
funds from one bank to another and show the advantage to be gained
by it. I brought that question up yesterday.
M r . ECCLES. I do n o t understand.

M r . GIFFORD. Where a bank has deposits i n other banks which it
can transfer or not.




'FEDERAL RESERVE

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M r . ECCLES.

ACT

A M E N D M E i N T 60

Yes.

M r . GIFFORD. W h a t is the advantage of it?
M r . ECCLES. W h a t you are speaking of is what we call interbank
deposits?
Mr.

GIFFORD.

Yes.

M r . ECCLES. T h e banks that are members of the Federal Reserve
System, member banks, are required, of course, to carry certain
percentages of their deposits with the Reserve bank of their district.
Those banks do not necessarily have to carry balances with other
banks, because they can effect all of their collection operations through
the facilities of the Reserve bank. Nonmember banks, under the
various State laws, are required to carry certain reserves. Those
reserves can be carried with other banks—reserve city banks, central
reserve city banks—as they are not members of the Reserve System
they do not have all the rights and the privileges of the Reserve
System.
If they should join the Reserve System, there would be no reason
to carry balances with other banks; but they are required now to
carry balances with other banks, or to carry cash in the vault, to meet
the State reserve requirements—cash in the vault plus balances with
other banks to meet the statutory reserve requirements applicable to
State nonmember banks.
M r . GIFFORD. DO they escape the one-twelfth assessment?
M r . ECCLES.

NO.

M r . GIFFORD. W h a t advantage is there in doing that?
M r . ECCLES. Well, they are required by statute to carry reserves
and, if they are not members of the Reserve System, there is ordinarily
only one place where they can carry them, that is, in other banks.
M r . GIFFORD. They cannot hold them within their own bank and
call them reserves?
M r . ECCLES. Well, they could carry them in currency in their
vaults. But, from the standpoint of facilitating their operations, it
is necessary, i n order to clear transactions, to have accounts either in
the Reserve bank or i n other banks. F o r instance, a customer of a
country bank may want a draft on a N e w Y o r k bank or a Chicago
bank, or may want a telegraphic transfer of funds; and there is the
need of collecting checks that are deposited with the bank but are
payable i n other cities. I t is necessary to clear those items through
their correspondent banks, if they are not members of the Reserve
System.
M r . GIFFORD. I have one question more and then I am done. I t
is very important to the people at large, I am sure. W h a t is that
B - 2 5 that a certain kind of notes can be discounted for only 3 months
and at the end of that time must be reduced 25 percent. Whose
order was that?
M r . ECCLES. I could not tell you; I do not know to what you are
referring.
M r . GIFFORD. Where a note is sent in to a bank, they say they
have orders in N o . 25 that this note can be discounted for not longer
than 3 months and, at that time, one quarter of it must be paid.
I have it on m y desk from m y own bank.
M r . ECCLES. Well, who is the order from?
M r . GIFFORD. Well, it came from the Comptroller yesterday. I
asked h i m and he said he did not know.




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M r . ECCLES. I have not heard of it.
M i s s SUMNER. I t is not true i n our State.
M r . KUNKEL. Governor, w h y should y o u have this deposit insurance on any riskless deposits? Y o u just called attention to the fact,
where there are Government deposits i n the banks aside from war
loan accounts, they are completely protected, and the same is true of
State funds i n many instances.
M r . ECCLES. Of course, if y o u raise the rate high enough on the risk
deposits, then if y o u could determine what they were, y o u possibly
could eliminate it on tne riskless deposits. I t is a question, i t seems
to me, of what funds the Federal Deposit Insurance Corporation requires to meet its contingent liabilities to the depositors i n the banking
system.
I t would be rather difficult, it seems to me, to define a " r i s k " deposit and a "riskless" deposit. There is certainly a great variation of
the definition of "risk," and what might be a riskless deposit now
would, i n a depression become a risk deposit.
M r . KUNKLE. I mean a Government deposit secured b y Government bonds would be a riskless deposit.
M r . ECCLES. Well, I think that, of course, is correct, thast no
money was ever lost where Government bonds are involved.
The
only way you could lose money on a deposit secured b y Government
bonds, of course, would be to have to sell the Government bonds at a
discount. If the bonds were carried through to maturity, of course
they would pay out the amount of the deposit. B u t in most instances
there is a big margin, even i n the case where Government securities
are put up as collateral on Government deposits.
M r . KUNKEL. There is one extreme case. A bank at home carries
an average deposit account of five to ten million dollars and, of course,
the only liability of the Federal Deposit Insurance Corporation is up
to $5,000. Y e t they have to have Federal Deposit Insurance on that
deposit and they also have to furnish security because the depositors
are in Pennsylvania.
M r . BALDWIN. M r . Crowley suggested yesterday that without any
additional risk he felt all demand deposits could be secured. I believe
that was his statement; is not that correct?
T h e CHAIRMAN. T h a t is right—without additional charges.
M r . BALDWIN. Without additional charges, that all demand deposits could be secured.
M r . SMITH. YOU mean exceeding $5,000?
M r . BALDWIN. Yes; I mean full coverage.
T h e CHAIRMAN'. As a matter of fact, what he undertook to say was
that they are securing all deposits anyhow; that they won't let y o u say
so under the law, but i n practical effect that is what happens.
Now, I want to ask you about this provision authorizing loans b y
the Federal Reserve bank on Government securities to partnerships,
corporations and State member banks. W o u l d it not be helpful i n
financing the Treasury program for State banks to understand that
they have this privilege of borrowing on Government securities from
the Federal Reserve banks?
M r . ECCLES. I think they all do understand that. W e have certainly given it plenty of publicity, that they not only can borrow o n
Government securities, but the Reserve banks have given a special
rate permitting all banks to borrow at par o n Government securities




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A M E N D M E i N T 62

at a rate of 1 percent; even though the bank might be getting 2 or 2%
percent on the security, it can still borrow at par at 1 percent.
T h e CHAIRMAN. I am just wondering if we are not losing their aid
in the Treasury financing program. I am only asking for information.
M r . ECCLES. NO ; I am sure all of the banks are well aware that
they can borrow from the Federal Reserve bank of their district 100
percent, or can borrow the par value of the security, at the rate of
1 percent. T h e y likewise know that in the case of Treasury bills
which bear three-eighths of 1 percent, they can sell them to the
Reserve bank of their district, at their option, on the basis of a discount
rate of three-eighths and they can reserve the right to buy them back
at any time at the three-eighths discount rate. So that, so far as
Treasury bills are concerned, they are the equivalent of cash.
M r . KEAN. I n the Senate bill, it provides i n the first clause "6
months after cessation of hostilities." I n section 2 it remains the
same day it is n o w — " 6 months after" the termination of the present
war. Now, the chairman thought that was inadvertent by the Senate.
I do not think it is. I think that is probably a good idea as loan deposits are going to continue for a while after the war, and if we provide
"6 months after the end of hostilities," you are going to get an automatic increase i n reserve requirements at a time when you might
not want to do it.
Now, was that done deliberately?
M r . ECCLES. I c o u l d n o t say.

M r . KEAN. W o u l d it not be a mistake to have an automatic increase i n the reserve requirements 6 months after the end of hostilities;
when we might still be trying to sell bonds, as we did after the last
war—the Victory bonds—to clean up the slack of expenditures at the
end of the war?
M r . ECCLES. Well, I do not think that has anything to do with an
automatic increase i n reserve requirements.
M r . KEAN. Well, it would, because you would automatically increase your reserve requirement if this thing suddenly expired.
M r . ECCLES. T h a t would increase the reserve requirements to the
extent of the reserve requirements on the war loan account.
M r . KEAN. Yes; that is right.
M r . ECCLES. T h a t is correct. B u t I would dislike very much to
have to see this go to conference and get that delay. As I understand
it, i n the Senate bill that is uniform. It provides until 6 months after
the cessation of hostilities.
M r . KEAN, I n section 1; but in section 2
M r . ECCLES. NO, it is uniform; it is the same in both.
M r . KEAN. I t is uniform i n both?
M r . ECCLES. T h a t is right.
M r . KEAN. T h e chairman said it was not the other day—in the
Senate bill.
M r . ECCLES. T h e Senate bill is uniform.
M r . BALDWIN. T h e House bill is not uniform.
M r . ECCLES. I t is the House bill that is not uniform.
T h e CHAIRMAN. T h e Senate changed it, then, did they?
M r . KEAN. T h e Senate made it uniform in both cases.
M r . ECCLES. T h e Senate made it uniform. It is the House bill
that is not uniform.




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M r . KEAN. W h i c h one did they adopt?
M r . ECCLES. YOU mean the Senate?
M r . KEAN.

Yes.

M r . ECCLES. T h a t "until 6 months after the cessation of hostilities
i n the present war," as determined by proclamation of the President,
and so forth.
M r . KEAN. T h a t is the same in both cases?
M r . ECCLES. T h a t is the same in both cases i n the Senate bill. I t
is i n the House bill that it is not uniform.
M r . WOLCOTT. T h e Senate bill says "until 6 months after the
cessation of hostilities i n the present w a r " as determined by proclamation of the President?
M r . ECCLES. T h a t is right, "as determined by proclamation of the
President."
M r . WOLCOTT. A l l of these other emergency measures say "cessation of hostilities, or by proclamation of the President, or by concurrent resolution of the Congress."
M r . ECCLES. Well, I do not know why this is any different—"until
6 months after the cessation of hostilities in the present war as
determined by proclamation of the President or concurrent resolution
of the Congress," and so forth.
M r . KEAN. "Concurrent resolution" is i n there?
M r . ECCLES. T h a t is right.
The CHAIRMAN. This language where you provide for its being
subject to termination upon the basis of a proclamation of the President, we say "upon a proclamation of the President declaring the
termination of the war"; and just changing the language to declare
"upon the termination of hostilities" is sort of mixing that up. B u t
that is a technical matter whicK we can work out i n the committee.
M r . PATMAN. M r . Chairman, there is a fundamental question involved i n this bill. I am not convinced that it is meritorious; I am
not convinced that it should become a law. I am going to seek
information from Governor Eccles as to the effect of it and I would
like to ask some questions about it without interruption, if the members will permit me to do so.
T h e CHAIRMAN. That will be entirely for you to decide, whether
you wish to be interrupted or not.
M r . PATMAN. W i l l the clerk of the committee distribute these
booklets, please?
Before the Ways and Means Committee recently, to be exact, on
February 14, I appeared and testified about many of the questions
that will come up in connection with the consideration of this bill,
and if the members will do me the kindness and the courtesy of
turning to page 35 of the testimony which is now being given to each
member, and will at their pleasure and convenience give it consideration, I would appreciate it very much. I n connection with that
testimony you will find the testimony of former United States Senator
from Oklahoma, Robert L . Owen.
Senator Owen was chairman of the Committee on Banking and
Currency of the Senate when the Federal Reserve Act was passed.
I think he knows more about the monetary question than any man
i n the world, and I think he is one of the best-informed men in the
world, and I believe that anything that Senator Owen says is certainly worthy of consideration by this Congress, and the .questions
86330—43




5

64

' F E D E R A L R E S E R V E A C T A M E N D M E i N T 64

discussed by Senator Owen are material and germane to a discussion
of this bill—its merits or demerits.
Governor Eccles, I believe you said that you want this bill as an
emergency measure indicating that the success of the next drive for
funds will depend at least to some extent upon the passage of this bill.
Of course, if that is true to any major extent, we should pass the
bill quickly and there should be no delay, but I am not convinced of
that, and for that reason I want to ask you these questions.
M r . ECCLES. L e t me make this statement. I do not want to give
this committee the impression that the Treasury financing would fail.
Now, if this bill is not passed, we can reduce reserve requirements.
We can buy billions of Government securities.
M r . PATMAN. Certainly.
M r . ECCLES. That, however, would create a terrific job on the part
of the System to maintain stability in the market so that when the
drive is over there would be billions of excess reserves again, and you
would have an instability of the Government market. T h e difficulties
of the job of the Reserve System in trying to maintain a stable market
would be accentuated.
M r . PATMAN. Y o u r remarks would be frightening to me if I did not
know that you can change these reserve requirements.
M r . ECCLES. Yes; but you cannot change them overnight.
M r . PATMAN. Why, you certainly can.
M r . ECCLES. B u t as a practical matter, you cannot reduce them and
increase them and reduce them and increase them weekly.
M r . PATMAN. YOU would not want to do that. Y o u would not have
to do it, because the monetary market does not act so quickly as that,
and react.
M r . ECCLES. B u t our power to deal with the reserve requirements
is limited. A l l that we can give, I think runs somewhere around
perhaps $5,000,000,000, which would be the possible total, and we
would then be down to the minimum statutory reserve of
M r . PATMAN. YOU can change the statute. Congress can change
the statute.
M r . ECCLES. Congress could, of course.
M r . PATMAN. Congress has never failed when you wanted it done.
M r . ECCLES. T h a t might mean that there would be no reserve
requirements.
M r . PATMAN. YOU are asking for no reserves here.
M r . ECCLES. Of course, I am only asking for no reserves against
this particularM r . PATMAN. I know it is a particular part.
M r . ECCLES. Reserves were never required against war loan accounts during the last war, or at any time except after the enactment
of the Banking A c t of 1935, and that is when reserves were first
required against these accounts.
M r . PATMAN. If I understand you correctly, you are expecting to
raise—at least the Treasury is—about $13,000,000,000 in this drive.
M r . ECCLES. T h a t is right.
M r . PATMAN. A n d you are expecting to induce or persuade people
who have money, individuals and corporations, to transfer
$8,000,000,000 of money that is already existing for $8,000,000,000
worth of these bonds, but after you have done that, you anticipate,




FEDERAL

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65

and you have reasons for that, that you will still need $5,000,000,000
that nobody has the money to furnish; therefore, you will have to
deliver these bonds to the banking system and have them create that
money by a flick of the pen—just out of thin air by a bookkeeping
transaction—and for the creation of that money you expect to pay
them interest.
A l l right. Now, on that $5,000,000,000, the two points involved,
as I understand them, are:
First, that this $5,000,000,000, as a deposit i n 13,500 banks in the
country, there would have to be an assessment of one-twelfth of 1
percent paid to the F . D . I. C . under the existing law for a period of
time until those funds are transferred to individuals or corporations
that the Government will owe and will pay. T h a t is one question, is
it not, Governor Eccles?
M r . ECCLES. T h a t is right.
M r . PATMAN. A l l right. N o w then, how long do you anticipate i t
will take on an average for that $5,000,000,000 to be transferred from
a deposit of the Government of. the United States to individuals and
corporations that will eventually get it on an average? What would
you consider?
Mr.. ECCLES. I would not be able to guess. I t depends entirely onthe total amount that the Government raises and upon the amount
that the Government expends.
M r . PATMAN. W o u l d you say 3 months, or 6 months?
M r . ECCLES. I t depends entirely on what they get in taxes as well.
I t may rim a month, 2 months, 3 months. I t would simply depend
upon the Treasury's policy whether they wanted to use up that
$5,000,000,000 first, or whether they used other sources of income.
M r . PATMAN. Well, you would say at least within 6 months?
M r . ECCLES. Anywhere from 1 month to 3 months.
M r . PATMAN. One to three. D o you think one-fourth of a year
would be a reasonable time? Is that right?
M r . ECCLES. T h a t is right.
M r . PATMAN. NOW then, the net result of that is that if you sell
these $5,000,000,000 in bbnds to these banks and create the money
to buy them, and you pay those banks a low rate of interest, seveneighths of 1 percent, that means for the money they have created
of that $5,000,000,000 for 1 year they will get $43,750,000 in interest.
M r . ECCLES. F o r 1 year?
M r . PATMAN. For 1 year. A l l right, now, then, for the 3 months
that they would have to pay that one-twelfth of 1 percent, they,
would be saving $1,041,000. Now, that looks to me like it is a pretty
small thing, if you allow them to create this money and give them an
annual interest rate of $43,750,000 for this money which you admit
is just created by a bookkeeping transaction, and now then you are
trying to save them this little assessment of $1,021,000. It looks
pretty small, Governor, pretty small.
M r . ECCLES. Of course, in the first place, you are figuring $43,000,000 for a year.
M r . PATMAN. T h a t is right.
M r . ECCLES. The difficulty is, when a bank sets up this deposit,
the bank does not know whether that deposit is going to be there a
day, 1 month, or 2 months.
M r . PATMAN. T h a t is right.




'FEDERAL RESERVE ACT

A M E N D M E i N T 66

M r . ECCLES. AS far as they are concerned, the banks hesitate.
They say:
Well, we do not want to open u p those accounts because they are subject t o
immediate withdrawal. W e know that the Treasury may draw on them at any
time, and therefore we have to keep those funds that we set u p here; we have t o
keep those funds idle i n the Reserve banks.

Now, that is not the view of some of the larger banks who do have
war loan accounts, and who have been, I think, convinced of the
^advantage of having those war-loan accounts.
The difficulty has been with a lot of the smaller banks primarily,
who do have balances or reserves, and what they do, they would,sooner
t u y and pay immediately for Government bonds than set up the war
loan accounts. There are thousands of banks that, instead of opening
a war loan account, would prefer to pay for the bonds at the time, by
drawing against their reserves i n the Reserve bank, or by drawing
against their balances i n a correspondent bank rather than qualify for
a war loan account, and that means, of course, a transfer of funds.
There is a good deal of merit to the point that you make, and I have
made the same argument. I have argued with banks that even though
they have to pay one-twelfth of 1 percent, they can still use this account profitably, and I think that there is considerable headway being
made with the larger banks, but we have still had great difficulty i n
getting the thousands of smaller banks to open up accounts. T h e y
argue that they do not need these additional funds and that they do
not want Government deposits upon which they have to pay onetwelfth of 1 percent. Whatever bonds they buy, they will pay for
them in cash and they do not want the deposit account.
M r . PATMAN. YOU are just as well off, and the Treasury is just as
well off that way.
M r . ECCLES. The Treasury?
M r . PATMAN. Certainly it is.
M r . ECCLES. Sure. They are just as well off. They are no better
off and they are no worse off. They are as well off as far as they
are concerned if the Federal Reserve will stabilize or maintain a
market on those securities, but our responsibility i n this size of an
operation is one of maintaining a stable situation which will assure
the success of the financing.
Where there is a huge volume of funds, that is, where there is an
unknown volume of funds coming i n from 14,000 banks all over the
United States into the Federal Reserve banks, there could be created
overnight a tight money situation that would be very difficult to
meet. The difficulty is that i n this country out here [indicating] they
will say, " I have big balances over i n Chicago and N e w Y o r k , " and
they can just draw down these balances, and transfer them to the
Reserve banks, and that can create a tight money situation i n the city
banks where the balances have been carried. T h a t is another aspect
of the problem.
M r . PATMAN. W o u l d you not think that a tight money situation is
improbable when our actual currency i n circulation is increasing at the
rate of $187,000,000 a week?
M r . ECCLES. Temporarily tight, I mean, i n the banking system.
The amount of currency i n the field has no influence whatever upon an
immediate situation that could develop i n the banking system.
M r . PATMAN. I do not agree with you.




'FEDERAL RESERVE

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67

M r . ECCLES. The thing that affects the banking system is the
amount of the reserves the banks have; the banks, if they do not have
adequate reserves, immediately start selling their securities, and as
they sell their securities the Federal Reserve has to buy those securities, and as we buy the securities, we, 6f course, supply the reserves
which they lose.
Now, as the Government spends the money, the funds go back and
the banks have then huge excess reserves again, and then it is a question of selling back the Government securities, so you would have a
terrific volume of Government securities coming into the Reserve
banks and going out of the Reserve banks, and that would create a
situation which would be very difficult to handle.
M r . PATMAN. YOU still do not frighten me, Governor, on that at all,
because I know that you can work pretty fast. Y o u have the power
and the authority to work fast.
M r . ECCLES. W e cannot work fast at all, because there are 12 men
who have to be brought into meetings from all over the United States
here, and it is a question of agreement on the policy on the open
market, i n tjhe first place. When it comes to the reserve requirements,
it is not as though you have one person who can act. Y o u have a
Federal Reserve System. Y o u have a Board, and it is not possible
to act overnight as you have indicated.
M r . PATMAN. A n d that Board operates through policies adopted
by the Board, and it does not have to be i n session every day for its
policies to be carried out.
M r . ECCLES. I t has to be i n session before it can increase or reduce
reserve requirements.
M r . PATMAN. T h a t is unquestionably true.
M r . ECCLES. I t would be likely that it would take weeks of discussion before you would get action.
M r . PATMAN. If there were a tight money situation, you could
probably do it rather soon, Governor Eccles.
M r . ECCLES. NO; I do not believe we could do it soon at all. We
would possibly buy a lot of securities. W e would probably stand
there. Instead of having $5,000,000,000 of securities as at present,
we might have to buy $5,000,000,000 more i n the market.
M r . PATMAN. Suppose you did. W o u l d that hurt?
M r . ECCLES. I t would not do any particular damage.
M r . P A T M A N . N O h a r m at all.

M r . ECCLES. NO, except then as soon as the drive is over you would
have to be i n the market again and buy and sell.
M r . PATMAN. YOU have got a whole army of people working on the
thing right at the moment.
M r . ECCLES. What harm would it do to adopt a program here that
would make that unnecessary? T h a t is the judgment of all those
that have to do with this mechanism and with the operation. Y o u
say that it would not do any harm to have to buy a lot of securities
and sell a lot of securities. I say that it would do far less harm to get
these banks to open up war loan accounts, and, to the extent that
waiving the reserve requirements and waiving the F . D . I. C. assessments would accomplish that, that is a very, very small concession to
make i n order to help facilitate financing. T h a t is the way I feel
about it.
M r . PATMAN. L e t me get to another point. We have covered the
one-twelfth of 1 percent.



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RESERVE

ACT

AMENDMENT

The other is on the no reserve requirement, no reserve requirements
for the $5,000,000,000. I am talking now i n the light of this bond
drive.
Under the existing law, when the banks buy these $5,000,000,000
i n bonds, they w i l l have to set aside a certain reserve, depending upon
the reserve requirements at the time.
Now, you proposed and said that these banks that want to buy
these bonds, they make application to the Federal Reserve banks,
and the Federal Reserve banks can i n advance certify that a certain
bank can buy up to a certain amount of bonds and not have any
reserves at all, and you anticipate, at least you contemplate, that
ou will have enough to absorb this $5,000,000,000, do you not,
Ir. Eccles?
M r . ECCLES. I don't
M r . PATMAN. Enough applications for extensions of this privilege
without reserves to absorb the $5,000,000,000 i n bonds.
M r . ECCLES. 'I do not get your point.
M r . PATMAN. Well, the point is, you take a bank i n Texarkana,
Tex., that buys $1,000,000 worth of bonds. A s i t is now, when that
bank buys $1,000,000 worth of bonds, it creates the money on
the books of the bank to buy the bonds, they give a deposit to the
Government, and on this deposit they have to maintain a certain
reserve.
M r . ECCLES. T h a t is right.
M r . PATMAN. Depending on what the reserve requirements are i n
that town at that time.
M r . ECCLES. T h e class of bank i t is, what class bank i t is.
M r . PATMAN. W h a t class bank. A l l right.
Now, then, y o u would change that so as to let this bank make
Application now for credit to get the benefit of this privilege up to,
.•say, $5,000,000, and the Federal Reserve bank at Dallas would say,
^That is all right, sufficient proof, O. K . i t , " and then this bank, when
this drive comes on, would be able to buy up to $5,000,000 i n bonds
and give the Government credit on the books of the bank and not
have to put up any bonds as they do now as security.
M r . ECCLES. Oh, they would have to put up $5,000,000 of bonds.
M r . PATMAN. P u t up i n the Federal Reserve bank i n Dallas i n
advance?
M r . ECCLES. Oh, yes, when the deposit account is opened.
M r . PATMAN. T h a t is right, but they would not have to maintain
any reserves against this $5,000,000?
M r . ECCLES. T h e y would not have to maintain a statutory reserve
which would, i n the case of a reserve city bank, be 20 percent. I n the
case of a country bank i t would be 14 percent.
M r . PATMAN. Yes. Now, Governor Eccles, if you had the power
yourself to raise or lower reserve requirements of banks i n order to
take care of any situation that might arise during war, you could
handle this situation w i t h this law, could you not?
M r . ECCLES. I would not think so.
M r . PATMAN. DO y o u mean to say you could not?
M r . ECCLES. I do not think so. I think it would be very, very
difficult.
M r . PATMAN. YOU do not mean to say now that the success of this
war depends upon this bill.

J




'FEDERAL RESERVE ACT AMENDMEiNT

69

M r . ECCLES. I would not deal with the problem by changing reserve
requirements. T h e instrument of changing reserve requirements is
still too cumbersome, and it is not a flexible instrument at all. I t
gives reserves to all banks uniformly, or takes them away whether a
bank needs them or does not need them. If one bank may have an
excess reserve, and you reduce reserve requirements, you add to those
excess reserves so that the difficulty with the reserve requirement
instrument is that it is a shotgun method, and it is not an instrument
that should, be used frequently.
T h e increased reserve requirements were needed at the time of the
Banking Act of 1935 i n order to offset the large reserves that were
being dreated by gold imports. T h e large gold imports and the
silver purchases that were made i n this country during the past 10
years were responsible for the large increase i n excess reserves, and
for the excessively easy money situation that developed.
I t was felt that the Reserve System should have the authority to
lock up, i n effect, the large gold imports that came in, to sterilize, in
effect, the gold imports by the right to increase the reserve requirements.
Now, that was done i n part. The gold is still here. As I have said
many times before, had this country owned the large amount of gold
that i t now has at the time the Federal Reserve A c t was passed in
1913, very likely the statutory reserve requirements would have been
placed very much higher than they were at that time, and I personally
would dislike very much to meet this situation by the reduction of
reserve requirements.
M r . PATMAN. L e t me suggest to you that the only inconvenience
that could be caused, say, i n Texarkana, i n a Texarkana bank, would
be if they needed more reserves, to either sell $1,000,000 of Government bonds to the open market committee, and thereby enable itself
to buy $10,000,000 i n Government bonds upon that reserve, or the
Texarkana bank put up bonds that they own receiving upon which
there is an interest charge of 2}i or 3 percent at the Federal Reserve
bank at Dallas, and get that money at 1 percent, at all Federal
Reserve banks.
M r . ECCLES. There are no bonds purchased today that yield more
than 2 percent.
M r . PATMAN. T h a t are purchased directly by the Government?
M r . ECCLES. T h e Government is issuing no bonds available to
banks that yield more than 2 percent.
M r . PATMAN. YOU mean the Government is not selling them any
bonds?
M r . ECCLES. T h a t is right.
M r . PATMAN. B u t that does not keep them from buying bonds on
the open market.
M r . ECCLES. There are no bonds i n the open market they can
purchase except one long-term issue that would yield them, I think,
more than about 2 percent. T h e bonds are already selling at substantial premiums.
Mr.

PATMAN. I

understand.

M r . ECCLES. SO that the average that the banks are possibly getting
on their portfolios today, considering the bills, the certificates, the
notes, and the bonds, would not be much more than 1 percent.
M r . PATMAN. Well, suppose that these bonds are sold to the banks
at seven-eighths of 1 percent.



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R E S E R V E A C T AME1N DMEiNTT

M r . ECCLES. One-year Treasury certificates?
M r . PATMAN. One-year Treasury certificates. Now, you know that
in all probability they will eventually become long-term bonds, will
they not? I mean that long-term bonds would be sold to take them
up. That is what usually happens.
M r . ECCLES. I do not know whether that would happen or not.
M r . PATMAN. C a n not you see, Governor Eccles, the possibility
of a $300,000,000,000 national debt if this war lasts much longer?
M r . ECCLES. If Congress does not do a better job about taxation
than they appear to be doing, I would hesitate to say where the debt
may go, or what may happen i n the inflationary picture.
M r . PATMAN. A n d you do not think that Congress has been doing
a good job on taxes?
M r . E C C L E S . N O , sir.
M r . P A T M A N . Y O U d o n o t t h i n k so?
M r . ECCLES. I do not.

M r . PATMAN. They have been considering, and I think they have
been giving sympathetic consideration to it. I want to pay every
dollar we can through taxes.
M r . ECCLES. They have been considering without action too long,
and they are just about a year late.
M r . PATMAN. I think that we are raising a lot of money. T h e taxes
that each individual pays, I think that he realizes that the war is on,
and that Congress has actually placed the tax burden on the country.
M r . ECCLES. Well, we are doing the poorest job of any country i n
the world today on the picture that the Government is spending
$250,000,000 a day, and getting one-third of it back i n taxes, and the
rest of it is just inflating the economy.
Mr.

PATMAN. If

we have

a $300,000,000,000

debt,

and we

can

maintain a 2}£ percent interest charge, that is $7,500,000,000 a year
interest. D o you believe that the people can pay that much interest
burden every year and carry on the other normal expenses of the
Government?
M r . ECCLES. I do not think that it makes any difference because
the people will be getting $7,500,000,000 of interest.
M r . PATMAN. YOU are assuming that the bonds will be equally
distributed, are you not, Governor Eccles?
M r . ECCLES. They will possibly be distributed somewhere i n relation to income. Income is not equally distributed, and neither are
bonds, and taxes are not equally distributable. Taxes are supposed
to be in relation to income, but so far as the economy as a whole is
concerned, the economy will be $7,000,000,000 better able to pay taxes
by getting the $7,000,000,000 of interest than it would be if they did
not get the $7,000,000,000.
M r . PATMAN. I n other words, the interest burden will be a blessing.
M r . ECCLES. I would not say it is a blessing at all. It is a negative
factor, taking the economy as a whole. So long as the debt is held
internally, the debt is not destructive. T h e real problem is the way
the financing is done. T o the extent that we have to be financing this
war through the inflationary route of bank borrowing, just to that
extent you increase the total volume of your supply of money, and it
accentuates greatly the inflationary nature.
M r . PATMAN. NOW, M r . Chairman, it is about 25 minutes to 1
and it is going to take me a good deal more time to finish, and I




'FEDERAL RESERVE

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71

would really like to ask some other questions. I regret to be compelled to make the request that Governor Eccles come back, but I
do not see any other way out of it.
T h e CHAIRMAN. L e t me ask the committee what about a meeting
tomorrow.
M r . BALDWIN. DO you expect to take action tomorrow?
T h e CHAIRMAN. W e are not going to act tomorrow.
M r . PATMAN. YOU would not want to interrogate a witness if the
members know in advance that nothing will be done.
T h e CHAIRMAN. I just want to say this, we are not going to act
tomorrow. I guess we might as well assume that we will not. I
suppose we might as well come back Monday, and then we can probably conclude the examination, and act all on the same day, Monday.
M r . FORD. M a y I interpose a question. M r . Eccles, is not a
reserve a kind of insurance?
M r . ECCLES. W h a t kind of reserve?
M r . FORD. W h y do you put reserves against deposits?
M r . ECCLES. I t is not insurance at all to my way of thinking.
M r . FORD. W h a t is it, then?
M r . ECCLES. I t is required for the purposes of national credit
policy and for operating reasons. M o s t "countries have no reserve
requirements. Canada, I do not think, has a statutory reserve
requirement. Great Britain has never had a statutory reserve
requirement, but as a matter of operation the central bank has
pumped funds into the banking system of sufficient amount to maintain a reserve that I think runs anywhere between 12 and 15 percent
in England, but in both countries, you have huge central branch
banking set-ups, and it becomes an easier matter to handle than would
be the case in this country where 48 different States have different
set-ups, with the national banking set-up, and with a set-up that
calls for State member banks as well as State nonmember banks.
M r . FORD. W h y does an insurance company set up a reserve?
M r . ECCLES. Well, its reserve is available to take care of losses.
These reserves that a bank carries with a Federal Reserve bank are a
required portion of its deposits, and not a part of the capital account
at all. A bank can have a reserve set up as a part of its capital
account—a reserve against losses or depreciation—and that is a form
of insurance, but that is a very different kind of reserve than the
reserve against deposits which must be carried i n the central banks.
M r . FORD. W h y is it that so many people are advocating, at least
a group are, 100 percent reserves? H o w would that affect deposits?
M r . ECCLES. W h a t they are advocating, 100 percent reserves, is to
take away from the banks any discretion whatever as to the amount
of money they will loan. T h a t would be the effect of it.
M r . FORD. W h a t I was thinking of was this: T h e deposit account
by the Government i n the first place is insured 100 percent by a
deposit of securities, is it not?
M r . ECCLES. T h a t is right.
M r . FORD. Then, why should it not be necessary to impose any
further tax on it for the purpose of insurance?
M r . ECCLES. Well, of course, I do not think you should impose an
F . I. D . C. assessment on that particular account. That is why we
are proposing this bill.




' F E D E R A L R E S E R V E A C T A M E N D M E i N T 72

M r . FORD. I realize that, but on any account which the Government has where it is insured 100 percent by the deposits.
M r . ECCLES. I do not feel that the question of insurance was based
upon the risk of the account at all. The F . I. D . C. insurance covers
risk as well as nonrisk deposits. I t is universally applied, and I think
that is proper. I think if you begin to put different rates on different
types of deposits, dependent upon risk, you would have certain deposits possibly bearing a very high rate. Y o u would have other deposits bearing no assessment rate at all. I think that tiling has all
been debated a good many times, and I think that the conclusion that
was arrived at, to apply a uniform low rate on all deposits, i s the most
simple and the most equitable way of getting at the problem. I t is a
question of the F . I. D . C. wanting so many funds, and they feel that
one-twelfth of 1 percent is not excessive, and it does not give them
more funds than they require.
I suppose if they felt it was riot adequate they would want to raise
the rate. If they felt it was giving them more money than they
needed, they would want to reduce the rate.
M r . KUNKEL. IS not the essence of insurance the amount of risk,
and does not your rate always vary with the ariiount of risk? .
M r . ECCLES. N o t this type of insurance. This is entirely different
than a private insurance company, entirely different.
M r . FORD. This is an over-all estimate?
M r . ECCLES. T h a t is right. Social Security is not that type of
insurance at all. Old-age pension schemes, for instance, are not
based upon the risks involved.
M r . Chairman, let me say, I do not know whether it is directly in
line with what is being said, i n the original bill or law of 1933 the
first deposit insurance law was passed, we set up a mutual insurance
system with a definite charge, one-quarter of 1 percent, with a proviso
that no further assessment would be levied except when necessary to
restore the fund to an amount equal to one-quarter of 1 percent of
the deposits of the participating banks. W e were clubbed into backing
off from that law and changing it requiring continuing assessments.
Later on the banks came along and wanted us to reduce the assessments. T h e record shows that if they had permitted their original
law to remain in effect, the banks would never have been assessed
again down to this time in order to maintain the required fund.
M r . KUNKEL. M a y I ask you a question at this point?
The CHAIRMAN. W e offered them cheaper insurance, but they
would not have it.
M r . KUNKEL. Was it not understood at that time when the sum
of $500,000,000 was reached, as a reserve for the Federal Deposit
Insurance, that at that time the assessments would be reduced or
limited?
The CHAIRMAN. Oh, no. When the original law was passed, it is
just as I tell you, very definitely. T h e thought was that to make
the fund sufficient they should have an amount equal to one-quarter
of 1 percent of the deposits of the participating banks, and that there
would be no further levy unless that fund was depleted. Then raise
it only sufficiently to restore it.
M r . KUNKEL. Was the sky the limit on the amount of reserves?
M r . WOLCOTT. According to M r . Patman's testimony before the
Ways and Means Committee and citing, as he does, the Journal of
the American Bankers' Association of February 1943, it is estimated



'FEDERAL RESERVE

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73

that the Government securities held by the banks on June 30, 1944,
would be $112,000,000,000. Their capital is $8,000,000,000. Their
deposits amounts to $152,000,000,000. C a n you break that down for
me and tell me where these deposits are coming from, and whose
deposits they are?
M r . ECCLES. I do not think that is possible, M r . Wolcott, and i t
would require a very extensive study that would spread over a period
of months. Y o u would have to have the cooperation of all the banks
to do it for you. The only way you could find out who owns the deposits, whether corporations or individuals, farmers or laborers—it
would require a terrific amount of work, and I do not think the banks
would do it.
M r . WOLCOTT. What I am trying to get at is, where are the banks
going to get the money to buy $112,000,000,000 worth with only
$8,000,000,000 capitalization?
M r . ECCLES. T h e banks could buy all the securities they want on
the capitalization. T h e capitalization has no relationship to the
ability to buy securities.
M r . WOLCOTT. Whose money buys the securities? Are they bought
out of deposits?
M r . ECCLES. Out of reserves.
M r . WOLCOTT. HOW are those reserves created so that you can buy
$112,000,000,000 of securities?
M r . ECCLES. The capital has nothing to do with it.
M r . WOLCOTT. Something has something to do with it.
M r . ECCLES. I t is the central bank
M r . WOLCOTT. What makes it possible for them to do it?
M r . ECCLES. Well, that gets into the question that M r . Patman
has been raising that the banks create our money. If you give the
banks the reserves, for every dollar of reserve you give them they can
create $5 of money for you. The Federal Reserve System could buy
$1,000,000,000 of securities and that would provide $1,000,000,000 of
reserves. O n the basis of these reserves the banking system could
create $5,000,000,000 worth of credit. If we reduced the reserve
requirements, correspondingly, they could buy $10,000,000,000,
M r . WOLCOTT. If there is some arrangement whereby the banks
can get a static income of $1,112,000,000 on an investment of $8,000,000,000, I think that we should know about it.
M r . ECCLES. A n income of what?
M r . WOLCOTT. $1,112,000,000. T h a t is only at 1 percent.
M r . ECCLES. YOU are speaking of the interest on the amount?
M r . WOLCOTT. Just guessing that the interest would be 1 percent.
M r . ECCLES. W h a t you have got to take a look at here, for the
banks, is what are they actually earning on the capital that they have.
M r . WOLCOTT. Are their earnings i n addition to what we were told
yesterday?
M r . ECCLES. NO. I have got some figures here. I will give them
to you Monday. T h e earnings of the banks from 1941 to 1943 have
gone down.
M r . WOLCOTT. W i l l you discuss that for us Monday?
M r . ECCLES. Yes. They have gone down $55,000,000 in 1942
over 1941.
(Whereupon the committee adjourned subject to the call of the
chairman.)







EEDERAL RESERVE ACT AMENDMENT
M O N D A Y ,

APRIL

5,

1943

H O U S E OF R E P R E S E N T A T I V E S ,
C O M M I T T E E ON B A N K I N G AND

CURRENCY,

Washington,

D.

C.

T h e committee met at 11 a. m., Hon. Henry B . Steagall (chairman)
presiding.
T h e CHAIRMAN. T h e committee will come to order.
M r . PATMAN. M r . Chairman, I had not finished my questions.
Governor Eccles, i n this huge program we have, where we are
spending so many hundreds of millions of dollars, that is, if this war
continues much longer, of course a large part of that money will
necessarily have to be obtained from the banks, the commercial banks,
that receive deposits.
I think it is admitted that banks buying Government bonds create
the money to buy them, and I just wonder if you have given consideration to the subject of possibly saving the Government, or the taxpayers,
interest on any part of that national debt?
M r . ECCLES. Y O U m e a n

M r . PATMAN. I n other words, to the extent that you have even
considered it, have you considered saving interest on any part of this
national debt?
M r . ECCLES. I would like very much to save interest, but I would
not favor robbing Peter to pay Paul.
M r . PATMAN. Have you given consideration to any plan, or tried
to devise or formulate any plan, that would enable the Government
to do any part of its financing without the payment of interest?
M r . ECCLES. The Government can very easily do all of its financing without the payment of interest.
M r . PATMAN. YOU have not answered my question. I asked you
if you have given consideration to it.
M r . ECCLES. I have given a good deal of thought to the question of
Government financing, but I have i n connection w i t h our own presentation of this subject had occasion to analyze very fully your point of
view, and I have come to the conclusion that an attempt to finance
the Government without interest would be a very inflationary procedure. I t would be entirely contrary to the whole basis of our capitalistic system.
M r . PATMAN. A n d you have not tried to devise or formulate a plan
that would enable you to do that, or overcome the objections which
you now see.
M r . ECCLES. I would not say that I have not tried. NO; I have not
undertaken to develop a plan that would, to my mind, destroy your
whole credit-debtor system.




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M r . PATMAN. YOU think that it would be inflationary. If you were
^convinced that that element could be removed and there would be no
more danger than under the present system, would you then give
consideration to it?
M r . ECCLES. I would give consideration to any plan that would
save interest if you offset the income which the banks get now from
that interest with some other means of sustaining them.
M r . PATMAN. Sustaining the banks?
M r . ECCLES. That is right.
M r . PATMAN. If I understand your theory you consider that interest
should be paid on the bonds because you consider that the banks must
be provided for more adequately, and that they are now rendering
service at a price as low as they could be expected and for that reason
this amount of interest should be paid as compensation to the banks
for carrying and handling the amount of money, or credit, that is
placed in circulation
M r . ECCLES. I think that credit extended by the banking system,
whether to individuals, cities, counties, States, or Federal Government,
should bear interest.
M r . PATMAN. I n other words, you make no distinction between the
Government, which is sovereign and has the power to create money
and does create money—you make no distinction of the United
States Government, and a State, county, or political subdivision?
Y o u think that all should pay interest?
M r . ECCLES. I make no distinction so far as they get their credit
from the private banking system.
M r . PATMAN. Under the present arrangement, if you sell bonds to a
bank, a commercial bank receiving deposits, you admit that they do
create money to buy those bonds, do you not?
M r . ECCLES. I meant any loan a bank makes.
M r . PATMAN. I am not talking about any loans; I am talking about
Government bonds.
M r . ECCLES. T h e bank creates the money, whether the loan be to
the Government or to a private individual.
M r . PATMAN. A n d the answer is—yes?
M r . ECCLES. Well, I reserve the right, M r . Congressman, to answer
these questions as I see fit, and I do not expect that you are going to
answer them for me. T o simply say the answer is "yes" may well
imply that the extension of credit by a bank to the Government has a
different effect than the extension of credit by a bank to anybody else,
which is not true.
M r . PATMAN. Well, I was trying to shorten the inquiry, and of
course if you want to insist on bringing i n everything else, it is all
right by me, but still I will ask you tins question:
When a bank, a commercial bank, receives deposits by the United
States Government bond, it creates the money to buy that bond,
does it not?
M r . ECCLES. I t creates the money; that is right. Whether it
creates the money to buy that bond, or whether it is using excess
reserves that it already has depends upon the condition of the bank.
A n y credit, whether to the Government or otherwise, by the
banking system results i n the creation of money; the money that is
created i n any capitalistic economy is created through credit extended
by its banking system.




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M r . PATMAN. T h e Federal Reserve banks now have the authority
to buy directly from the United States Treasury bonds up to
$5,000,000,000; that is right, is it not?
M r . ECCLES. T h a t is correct.
M r . PATMAN. NOW, those bonds under the present system provide
for that interest charge; that is right, is it not?
M r . ECCLES. T h a t is right.
M r . PATMAN. W h a t would be the difference to the country insofar
as inflation is concerned if those bonds were sold to the 12 Federal
Reserve banks, the $5,000,000,000 worth, without interest? Would
it be any more inflationary?
M r . ECCLES. Yes; very much.
M r . PATMAN. H O W w o u l d it be?

M r . ECCLES. It would be inflationary to the extent that that money,
when spent, would become a deposit i n the hands of the private
banking systems on one side of the balance sheet, and on the other side
it would be excess reserves, and with those reserves, those idle funds,
the banking system, i n an attempt to use those funds might buy
existing securities, whether public or private. T o the extent that
they had the reserves they would be under pressure to invest—to that
extent they would inflate the total supply of money.
M r . PATMAN. W e are talking about the $5,000,000,000 loan now.
M r . ECCLES. T h a t $5,000,000,000 would give you possibly
M r . PATMAN. I t has exactly the same effect, whether it is interest
bearing or noninterest bearing.
M r . ECCLES. I t would give you the possible effect of a $25,000,000,000 credit expansion.
M r . PATMAN. T h a t is true. Y o u do not get my point, or I have not
made myself clear. B u t so far as the Government collecting interest
on the $5,000,000,000 is concerned, means nothing i n that if they sell
$5,000,000,000 worth of bond's to the 12 Federal Reserve banks, and
they are interest bearing, it has exactly the same effect on the country
and the banking system as if they delivered to these Federal Reserve
banks non-interest-bearing securities; is that not so?
M r . ECCLES. T h a t is right.
M r . PATMAN. W e admit that. W e have gotten together on that.
M r . ECCLES. T h a t is correct.
M r . PATMAN. A l l right. So there is no difference at all.
M r . ECCLES. T h a t is right.
M r . PATMAN. HOW do you justify then requiring the Treasury to
pay interest on that $5,000,000,000? I t is created on the Government's credit, the $5,000,000,000 to buy these Government bonds. I t
is just an interchange or an exchange of Government obligations.
T h e Federal Reserve banks take one form of Government obligation
and deliver them i n return for another form of Government obligation,
but the difference is the taxpayers have to pay that interest. H o w do
you justify that?
M r . ECCLES. It would make little difference whether the Treasury
pays the Federal Reserve banks interest on that $5,000,000,000 that
you refer to or not. The only advantage in having those bonds that
the Federal Reserve takes as marketable obligations is so that the
Reserve banks can sell those bonds i n the market.
M r . PATMAN. Eventually.
M r . ECCLES. T h a t is right.




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amendment

Now, the interest that is paid on those bonds to the Federal Reserve
banks does not go to the stockholders of the Federal Reserve banks.
T h a t interest w i l l help to pay for the operation, or the expense of the
Federal Reserve Banking System. T h e earnings of the System i n
excess of the dividends which are fixed and run between $8,000,000
and $9,000,000, and of the expense, that is, the dividends and the
expense of operating the System—what is left over above that—is
added to the surplus of the Federal Reserve System which ultimately
would go to the Government, and Congress at any time can appropriate the funds, any part of the surplus of the Reserve banks when
they see fit, just as they did i n 1933. A t that time Congress appropriated $140,000,000 of the surplus of the Federal Reserve banks to
set up the capital of the Federal Deposit Insurance Corporation, so,
if the Federal Reserve banks do not get interest upon the Government
bonds which they hold, then it would be up to Congress to appropriate
such funds as would be required to operate the Federal Reserve System and to pay the dividends on their stock so long as that stock was
held b y the member banks.
M r . PATMAN. I am familiar w i t h the way the money is paid out,
M r . Eccles, and I am also familiar w i t h the law which was at one
time that all the surplus would go into the Treasury of the U n i t e d
States.
M r . ECCLES. Right.
M r . PATMAN. I am also familiar w i t h the law which has never been
carried out, that an interest charge would be granted the Federal
Reserve banks under certain conditions when money was issued.
T h a t has never been carried out, but the point I am making is, that
if you can sell $5,000,000,000 to the Federal Reserve banks, as y o u
can, and as you have done, you can do that without the payment of
interest, and the Federal Reserve banks do not necessarily have to
have that interest because they have sufficient earnings i n addition
to that $5,000,000,000 to pay more than their operating expenses,
and I am just giving that as an illustration of what can be done on a
large part of the national debt.
M r . ECCLES. T h e whole national debt?
M r . PATMAN. I d i d not say the whole national d e b t — I said a large
part of the national debt.
M r . ECCLES. W h y not finance it all without interest?
M r . PATMAN. There is a good reason for that. I am opposed to
that. I am i n favor of selling all the bonds y o u can sell to the people
that have the money to buy them, or the corporations.
I am i n favor
of considering just as high a tax as possible to pay off as much of this
debt as we can, but after we have sold all the bonds we can to people
who have the actual money to buy them, and we have raised all the
money through taxes that it is possible to raise, a lot of bonds w i l l
have to be sold at about 45 to 50 percent of the amount of money we
use, and that w i l l be obtained b y letting the commercial banks create
that money just b y a flick of the pen, and we will be i n this position
of having a perpetual debt on our haiids. If this debt gets to be
$200,000,000,000, or $300,000,000,000, as many people think it will,
the debt for interest alone will be from $5,000,000,000 to $7,500,000,000
a year just for interest. I t occurs to me that this Congress w i l l be
falling down i n its duty if it sits idly b y and permits this money to
be created i n that way and obligates the people and the taxpayers t o




federal

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amendment

79

forever pay the interest. It just does not make sense to me. M a y b e
I am wrong about it, but I have studied it a long time, and I do not
see any other way.
M r . ECCLES. YOU have changed your views, have you not, M r .
Congressman?
M r . PATMAN. N o t to m y k n o w l e d g e .

M r . ECCLES. D i d you not favor several years ago the selling of
noninterest-bearing securities to the banks only to finance the
deficit? Y o u favored that, did you not?
M r . PATMAN. YOU mean the Federal Reserve banks?
M r . ECCLES. Yes; and you now favor the public outside the banks
buying interest-bearing securities.
M r . PATMAN. Why, certainly I do, to keep down inflation. W e
would have inflation in this country if you did not do that.
M r . ECCLES. HOW would you prevent the banks from purchasing
those securities from the public?
M r . PATMAN. L e t the Federal Reserve banks buy them.
M r . ECCLES. F r o m the public?
M r . PATMAN.

Yes.

M r . ECCLES. W h y would you stop 15,000 banks? W o u l d you
prohibit them owning any Government securities?
M r . PATMAN. Except a certain amount. T h e proposal I have sets
a dead line, say, December 31, 1941, to permit the banks to always
own the amount that they held at that time i n Government bonds so
as to help them out i n their earnings. I would be willing for them to
be helped out i n their earnings, but l e t us not be i n a position of paying
the banks as much i n interest each year as their entire capital stock.
T h a t time is coming if we do not do something to stop it.
M r . ECCLES. I am glad to get that point, that y o u do favor then
the banks owning enough Governments for them to have a reasonable
M r . PATMAN. Sure I do, because they render a public service.
M r . ECCLES. Is tbis not what happens: T h a t as the volume of
money increases through the deficit financing operations, private held
debt by the banks is rapidly diminishing, and therefore the earnings
of the banks from loans and investments other than Government's is
falling. B u t that is being offset, though not entirely, b y the increase
i n the holdings of the Government, and I want to bring out here that
the earnings of the banking system for the year 1942, i n spite of the
large increase in Government securities acquired by them i n 1942,
are less than in 1941, that the loss of interest through loans paid off
by the banking system was not offset b y the increase i n the interest
received by the banks from Government securities, so that the net
operating profit from the banks of this country for the year 1942, i n
spite of an increase of $20,000,000,000 i n their holdings of Government securities, was about $55,000,000 less i n 1942 than i n 1941.
I would like to give you some figures on the trend of bank earnings
for 1942 as against 1941, which it seems to me w i l l prove that to stop
the banks as of the end of 1941 from acquiring further interest-bearing
Government securities is not justified because, after acquiring $20,000,000 more Government securities, the earnings at the end of 1942
are still less than they were i n 1941.
86330—43




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M r . PATMAN. L e t us agree that a different base would be desirable,
or a different amount.
M r . ECCLES. There may be a point
M r . PATMAN. T h a t is what I want you to get to. W i l l we ever
reach a point?
M r . ECCLES. There may be a point where the earnings of the
banking system are more than adequate to take care of their increasing expenses, together w i t h a reasonable return on capital. Now,
banks, as you possibly know, are prevented from purchasing the
percent Government securities that are being issued. T h e y are
allowed to invest i n new offerings only up to 7-9 year maturities,
which are the 2-percent bonds.
M r . PATMAN. T h e y are not prohibited from buying them i n the
open market, are they?
M r . ECCLES. Yes, they are. They are prohibited from holding.
M r . PATMAN. T h e 2}£-percent bonds? D o not some banks hold
3- and 4-percent bonds?
M r . ECCLES. Well, those are the old
M r . PATMAN. T h a t is what I mean.
M r . ECCLES. If they hold them, they are probably bonds that they
bought at a very high premium.
M r . PATMAN. T h e y bought them years ago.
M r . ECCLES. T h a t is right. They are.probably bonds which had
been purchased before the period of restriction. L e t me put it this
say: There is no restriction against a bank's buying bonds already
issued except bonds issued after a certain date of a certain type; that
is, banks are not allowed to hold those bonds. As the debt increases,
there w i l l be increasing amounts of certain types of bonds which
the banks are not permitted to take and hold. M o r e 2}{ percent
bonds probably w i l l be issued i n the future and W a r Saving bonds
series E ; F , and G, which likewise bear 2}{ percent or better and have
been issued i n large amounts, are likely to be continued.
M r . PATMAN. T h e y can take them as collateral; can they not?
M r . ECCLES. T h a t is right, except the E , F , and G bonds, which
are not assignable. T h e 2^-percent bonds, I think, are, but there
is a way, of course, of keeping banks from what we may term "profiteering" out of interest paid by the Government. They are a long
w a y from approaching that position.
M r . CRAWFORD. W i l l you let me ask a question?
Have you, i n your general approach, thought about putting an
accelerator or a sliding rule i n this provision that has to do with the
banks holding enough bonds to cover the operating expenses i n the
event other types of income do not prove adequate? I n other words,
suppose as we move on into this war effort the investment of private
funds dries up,we might say, and yet we release more and more
money to the people w i t h which they can buy something, and, if they
do not buy, the Government goes to the commercial banks to do its
financing primarily, or if we put in an enforced purchase of Government bonds, or Government securities by the people so as to avoid
going to the banks, we may have a situation where the banks will
lose, say, 50 or 75 percent of the present papers they have i n their
portfolios which create earnings for the banks, so we may have a
situation instead of using 1941 as a yardstick you will have to move
o n upward to accommodate your operating expenses of the bank.




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M r . PATMAN. I agree with you. T h a t is the reason I told M r .
Eccles we could agree that possibly a different or different amount
would be desirable. I accept that as logical and reasonable and
possibly desirable.
. M r . CRAWFORD. M y thought goes into this international phase
that is now being so actively discussed between M r . White, of the
Embassy, and some British authorities, and M r . Morgenthau.
M r . PATMAN. The reason I make that suggestion is that if we could
finance part of this national debt through the Federal Reserve banks,
which we can—possibly half of it, at least—the part that we would
normally get from commercial banks, that each year we could pay
2}i percent to the Federal Reserve banks on the amount we have
financed that way and, in 40 years, that entire amount will be paid.
Whereas, if we go ahead and let the private banking system create
this money on the Government's credit and we pay them—and
eventually we know the rate will be raised—2% percent each year for
40 years, we will still owe the entire amount. A n d what I am getting
at, M r . Crawford, is that if something is not done, you are going to
have a perpetual debt on the taxpayers of this country and they will
never be able to pay any more than the normal interest charges and
operating expenses of the Government. A n d I think that the Federal
Reserve bank officials—and I am disappointed that M r . Eccles refuses.
to give consideration to it; he insists on closing his eyes and not trying
to solve the problem at all—should and I cannot understand why they
do not give some consideration and try to save a large part of that
interest. I think if you would exercise the same diligence that you
insisted Congress should use the other day on raising taxes, you could
find some way to do that, M r . Eccles.
M r . ECCLES. W e l l Congressman, when the problem of excess
profits of the banks begins to appear, you w i l l find me just as diligent
about attempting to avoid profiteering on the part o l the banks as
we have been to prevent profiteering by anyone else. B u t that development is in the very opposite direction to what you are referring
to. Y o u r discussion is purely academic.
M r . PATMAN. B u t you are not thinking about the taxpayers.
M r . ECCLES. It is a practical question that is before you. T h e
trend of bank earnings is i n the opposite direction from what you
undertake to indicate here. F o r instance, I w i l l give you the figures
for banks outside N e w Y o r k C i t y i n the N e w Y o r k district. T h e
net profits of banks with less than $500,000 deposits—that is the
small banks—in 1941 were 4.8 percent of their capital accounts; i n
1942, their net profits were 2 percent. T h e net profits of banks w i t h
deposits between $500,000 and $2,000,000 i n 1941 were 5.7 percent
of their capital accounts; i n 1942 they were 4.3 percent. T h e net
profits of banks with deposits from $2,000,000 to $5,000,000 were 5.2
percent for 1942 and 4.7 percent for 1941. Only the larger banks of
over $20,000,000 increased their earnings from 4.5 percent on capital
accounts to 5.4 percent.
M r . PATMAN. B u t i h that class of banks there are more than 100
people who receive very high salaries, some up to $175,000 a year,
and i t is hardly fair, to my way of thinking, to take money out of the
Treasury to pay such huge salaries.
M r . ECCLES; There is only one banker, I think, who has received
such a salary; the salaries generally i n banks nowhere approach the
figure you name.



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M r . PATMAN. There are 140 that receive $25,000 to $175,000.

Mr. ECCLES. The banks for which I gave the figures are outside of
New York City, with deposits of over $20,000,000. The net profits,
of New York City banks with deposits over $100,000,000, dropped
from 6 percent on their capital accounts in 1941 to 5.6 percent in 1942.
The Minneapolis district shows a similar trend. The small banks,
under $500,000 deposits, dropped from 9.7 percent in 1942 to 7.6
percent in 1941. The banks of from $500,000 to $2,000,000 deposits
dropped from 11 percent to 9.3 percent.
I submit for your record the table of bank profits for the New
York and Minneapolis districts which contains the figures which I.
have read.
(The table referred to is as follows:)
Bank

profits,

1941 and 1942, selected groups

of member

banks
Ratios of

Net profits to
total capital
accounts
1942
New York City banks with deposits of—
Over $100,000,000:
Under $100,000,000
New York district banks outside New York City with deposits of—
Over $20,000,000$5,000,000 to $20,000,000
$2,000,000 to $5,000,000—
$500,000 to $2,000,000
Under $500,000
,
Minneapolis district banks with deposits of—
Over $10,000,000
$5,000,000 to $10,000,000
$2,000,000 to $5,000,000
$500,000 to $2,000,000
Under $500,000

Interest on
loans to total
earnings
1942

1941

1941

5.6
3.9

6.0
4.9

32
49

34
54

5.4
4.6
4.9
4.3
2.0

4.5
6.1
5.2
5.7
4.8

40
45
47
50
55

44
48
51
55
61

8.1
7.5
7.9
9.3
7.6

8.3
9.4
8.6
11.1
9.7

43
45
44
53
57

44
50
48
55
60

NOTE.—Figures are averages of ratios for individual banks in each group. The averages are affected to some extent by shifts in some banks from the smaller to the larger groups between 1941 and 1942.

And I was looking this morning at the figures for the banks in Mr.
Steagall's district, the Atlanta district. The smaller banks, as a rule,
suffered a greater proportionate decline in net earnings than did the
larger banks. The seven very small banks in the group having
deposits up to $250,000, reported a decline of 52 percent in profits in
1942 as compared with 1941. The 42 banks that had deposits of over
$10,000,000 reported a decrease of 13 percent in their profits for the
same periods.
Now, it seems to me that the record of bank earnings for 1942 as
compared with 1941 is not such that the Federal Reserve need to be
concerned about profiteering on the part of the banking system.
And your approach to this thing seems to me at the moment to be
rather academic, and you will find me just as ready as anyone to stop
profiteering by the banks when that time comes.
Mr. PATMAN. IS it very academic when we see facing us a 200
billion or 300 billion dollar debt?
M r . ECCLES. YOU are assuming that the banks are going to own the
greater part of that debt. It would be unfortunate if the banks should
own the greater part of that debt, or a very substantial part of that
debt. You will have such an inflation of bank costs and they will..



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go up so high that it will take the increased interest from that debt
to offset the increased cost.
What I would like to see considered is a much greater effort on the
part of the Congress to provide revenue through taxation which will
more nearly offset the sums that they appropriate to pay for the expenses. I would like to see this deficit cut to the bone and, what is
left over, I would like to see the funds raised from the public. So
far as I am concerned, I would like to avoid selling the banks $1
worth of Government securities and hold the situation as it is at the
present time, insofar as the volume of funds already created b y the
banking system is concerned. So that I am not anxious to see the
banks own a large part of the Government debt.
M r . CRAWFORD. M a y I join you i n that statement?
M r . ECCLES. B u t we will have the banks creating money b y the
purchase of Government securities and, to the extent they have to,
to that extent they are going to have to have the interest on the
securities to offset the increased expense due to the inflationary
development.
M r . PATMAN. B u t you are getting the wrong people to pay the bill
under the present system. W h e n the banks buy bonds, this $5,000,000,000 worth of bonds you state they w i l l have to buy i n this coming
campaign, they will of course receive interest on those bonds. T h e n
when the amount is transferred to the individuals and corporations
that the Government will pay the money to, the banks w i l l continue
to get the interest on the bonds. A n d if you are looking at it strictly
from the standpoint of compensating the banks because that amount
of currency or credit has been put i n circulation, why should not the
people who own it pay the cost of servicing it rather than the Government continuing to pay it for the next 100 years?
M r . ECCLES. It involves the question pf service charges.
M r . PATMAN. They are going to be paid the service charges on it
anyway.
M r . ECCLES.

Yes.

M r . PATMAN. A n d now they are paid twice; they are paid one way
by getting the Government interest, and paid the other way b y
getting the service charge.
M r . ECCLES. Well, it would appear that the interest and service
charges are not putting the banks i n the class of profiteers.
M r . PATMAN. Well, the fact remains that the entire capital stock
of all the 13,500 banks amounts to about 3% billion dollars.
M r . ECCLES. IS that with surplus?
M r . PATMAN. I concede that the surplus and undivided profits
w i l l run it up to about 6 billion 7 or 8 hundred million.
M r . ECCLES. Better than 8 billion.
M r . PATMAN. Anyway, the entire capital stock is
billion.
N o w , you already have the Government i n this position, which I
consider is a position that cannot be justified, of encouraging the sale
of bonds to the banks to the extent that by the end of the next fiscal
year these banks that have a capital stock investment of 3% billion
dollars will be receiving from 1 to 2 billion dollars a year interest
on the Government obligations they w i l l then hold. N o w that does
not seem to make sense to me. I recall the Stevens H o t e l was taken
over by the Government recently because they said the rent charged
would amount very soon to enough to pay for it, and it would be




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better for the Government to buy the hotel and pay for it in cash,
rather than to have to pay such high interest charges.
So I am apprehensive that one of these days the banks will have so
many Government bonds upon which they receive interest that there
will be a clamor i n this country, " W h y pay the banks 3% billion
dollars a year interest when they only have
billion invested i n
capital stock; why not take all of the banks over and save that
billion a year interest?" I am i n favor of the private banking system,
of free enterprise, and I think the banks are doing something against
themselves when they place themselves in that vulnerable position.
M r . ECCLES. W h a t would you suggest to take the place of the
interest that these banks now receive on Government securities?
M r . PATMAN. I would permit them to receive a certain amount
that is reasonable, but I would have the date fixed and, if that was
not satisfactory, I would fix another date.
M r . ECCLES. DO you think the banks hold a reasonable amount of
bonds at the present time, based upon this earning picture?
M r . PATMAN. I have not examined the picture lately. I presume
it runs from forty-five to fifty billion dollars—the amount of Government securities held by the banks; but I do not know; I have not
looked into it.
M r . ECCLES. T h e banks, including mutual savings banks
M r . PATMAN. Of course, they would not come in the category of the
banks I have been discussing.
M r . ECCLES. A l l right; just the member banks have 37 billion.
T h i s is as of the end of the year, the last figures, as of December 31,
$37,546,000,000 direct and guaranteed securities of the Government.
People all get the impression that the securities held by the banks
all bear a rate of interest higher than is the fact
M r . PATMAN. Well, they have some bonds that bear rather high
interest. Of course, I know the amount is limited.
M r . ECCLES. Of that $37,000,000,000, a very large portion is represented by three-eighths of 1 percent Treasury bills, seven-eighths
of 1 percent certificates, and Treasury notes that carry rates from 1
to 1% percent, or maybe some
So that the amount of return to
the banks on the Government debt is certainly not excessive.
M r . PATMAN. Y o u are talking about the short-term debt, but you
know there will be a refinancing and these certificates will be refunded
probably with long-term bonds drawing a much higher rate of
interest.
M r . ECCLES. I would not think that would be true unless there was
an opportunity to place such refunded issues with the public. I think
it is very desirable to have i n the banks the short-term debt and not
the long-term debt. T h e British development is a very interesting
one. T h e y agreed to pay the banks l){ percent on a 9 months'
security, and the British banks finance on that basis the British borrowing to the extent that it cannot be financed by taxes and by selling
to the public, and that basis was arrived at or that rate was arrived
at, so M r . Keynes who was over here last year told me, because the
banks needed about that much return to pay them for the services
which they were rendering.
M r . PATMAN. I want to ask you now about something else. I t
seems like we will not be i n agreement on this thing, and I think I
know your views and you know mine.
M r . SMITH. M a y I get some more figures in here just on this point?



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M r . PATMAN. I will be through i n just a minute, if M r . Eccles won't
take so much time to answer questions that do not require such extended answers. I think I w i l l give up, at this point i n the record
any further questioning along that line w i t h this understanding, M r .
Chairman, that I may place in these hearings my testimony and
Senator Owens' testimony and Congressman Voorhis' testimony before the Ways and Means Committee, also some other excerpts, and
I ask unanimous consent that I may do that.
M r . SPENCE (presiding). Without objection, that may be done.
M r . PATMAN. M r . Chairman, I am inserting herewith m y testimony,
the testimony of the Honorable Robert L . Owen, and the testimony
of the Honorable Jerry Voorhis before the Ways and Means Committee of the House of Representatives, February 13, 1943, on H . R .
1470, a bill to increase the debt limit of the U n i t e d States.
This testimony, I believe, is convincing that billions of dollars a
year can be saved the taxpayers if Congress w i l l prevent the payment
of unearned interest to finance the war. Further, that if the debt is
financed like we advocate, the entire national debt can be paid i n 40
years.
The testimony is as follows:
STATEMENT
OF H O N . W R I G H T P A T M A N , A R E P R E S E N T A T I V E
IN
C O N G R E S S F R O M T H E S T A T E OF T E X A S B E F O R E T H E C O M M I T T E E
ON W A Y S AND M E A N S , H O U S E OF R E P R E S E N T A T I V E S , F E B R U A R Y

13, 1943

M r . PATMAN. M y name is W r i g h t Patman, Member of Congress
from the First Congressional District, Texas.
I n the beginning I want to express my appreciation to this committee for giving consideration to this subject. I know it is a controversial subject, but I have studied i t for 25 years, 10 years before
I ever made any public declaration on it. I was very anxious to
seek the best advice from the best experts i n this Nation before I
ever made any public declaration on this subject.
Our public debt by the end of the next fiscal year w i l l be about
$210,000,000,000. A large part of this debt, i f present plans are not
changed, w i l l be owned by the 14,000 commercial banks i n the Nation.
The interest burden on this.debt w i l l be between four and five billion
dollars per annum. The interest burden this fiscal year w i l l be
$3,000,000,000, which is provided for i n the Budget message submitted by the President at the beginning of this session of Congress.
The net increase i n the public debt for the year ending June 30,
1944, w i l l be $75,500,000,000.
H O W LARGE PART OF INTEREST C A N B E SAVED

The occasion of my appearance before this committee is to make
a suggestion about how billions of dollars a year can be saved by the
Government on this huge national debt. Our interest burden after
the next fiscal year w i l l be much larger than the entire expenditures
of our Government in 1933 and more than four times as large as the
total expenditures of our Government i n 1914. T h e question of interest, therefore, becomes one of our major problems. I f a substantial part of this interest can be saved i t w i l l be of great help to the
already over-burdened taxpayers. I f the plan had been i n effect i n




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the past our Government w o u l d have been saved at least one-half
the interest burden, w h i c h w o u l d have amounted, over a period of
years, to billions of dollars.
I t is m y considered o p i n i o n that not only can a large p a r t — i n fact,
the greater p a r t — o f this interest b u r d e n b e safved b u t the method
pursued i n saving i t w i l l enable our Government to pay the entire
national debt i n 40 years even i f i t should reach $300,000,000,000 before this was is over. I n addition, the p l a n proposed w i l l retire a
definite amount of the debt each year, thereby reducing annually any
inflationary condition that has been brought about because of the
war, and more effectively retard inflation than the present system.
Inflation is our greatest danger. Monetary controls cannot stop
i t ; only adequate price control can retard or prevent it. I t must
be prevented or our country w i l l suffer a shock almost equal to losing
the w a r to the dictators.
M y p l a n is no different f r o m present plans and methods except
that no interest w i l l be p a i d b y the Government f o r a large part of
its credit used to finance the war.
I am opposed to the Government owning the commercial banks.
Those banks render a good service and are entitled to a f a i r profit.
M y advocacy of this proposal is i n favor o f the private banks and to
help them remain private. T h i s is no fight against bankers. T h e y
are d o i n g a splendid, patriotic job i n the war effort and they are
among the finest and best citizens i n every community. I f it is necessary f o r the Government to assist the private banks i n order to
keep them p e r f o r m i n g efficiently, I am i n favor of it.
F o r the first 125 years of our country's existence the question of
interest p a i d b y our Government was of only minor importance.
F o r the past 25 years, however, our Government's interest burden
has exceeded on a n average more than a billion dollars a year.
A n y o n e is entitled t o p a y f o r hire of his money. W h e n people
d u g g o l d a n d silver out o f the earth, i t was right, i f they loanecl
i t to the Government to get interest on it.
ROAD TO R U I N

W e should not permit the war burden to be doubled and trebled
t h r o u g h the payment of unnecessary interest. I t w i l l be traveling
the road to ruin.
T h e Treasury is spending monthly: 1
C u r r e n t l y : $6,000,000,000 f o r a war, a half billion f o r other purposes.
E n d of 1943: $8,000,000,000 f o r war, a half billion f o r other purposes.
E n d of 1943: $8,000,000,000 f o r a war, a h a l f b i l l i o n f o r other purposes.
F i s c a l yearly total spending: 1
E n d i n g J u n e 30, 1943: $74,000,000,000 f o r war, $6,500,000,000 f o r
other purposes
E n d i n g J u n e 30, 1944: $97,000,000,000 for war, $7,000,000,000 f o r
other purposes.
Dec. 31, 1941
Dec. 31, 1942
June 30, 1943
June 30, 1944

Gross puUio

delt1

$57,900,000,000
108,200,000,000
134,800,000,000
210,500,000,000

* Information from Banking. Journal of the American Bankers Association for February 1943, p. 24.




87

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Possible banking-system balance—sheet

amendment
as of June SO, 19441

Resources:
Cash and reserves
Government securities, direct and guaranteed
Other investments
War loans
Other loans
Total
Liabilities:
Deposits
Capital

$20,000, O O
O
112,000,000,000
8,000,000,000
8,000,000,000
12,000,000,000
160,000,000,000
152, 000,000,000
8,000,000,000

Total

160,000,000, O O
O

1

Information from Banking, Journal of the American Bankers Association for February 1943, p. 24.

I t w i l l be noticed that the banks are expecting to h o l d $112,000,000,000 of the Government's securities b y the end of 1944, w h i c h w i l l
be more than one-half of the entire public debt. T h e annual interest
on this amount, which must be p a i d by the taxpayer, w i l l be approximately $2,500,000,000. T h e Stevens H o t e l i n Chicago was purchased
by the Goveriment because the annual rent to be p a i d w o u l d soon
equal the purchase price.
I n connection w i t h the question o f how much o f the increased debt
f o r this year w i l l have to be purchased b v the banks, I desire to quote
the chairman of the board of directors ox the Chase N a t i o n a l B a n k o f
N e w Y o r k , W i n t h r o p W . A l d r i c h , i n a speech he made Thursday,
January 21,1943, i n which he stated:
Through 1943, it is estimated that the commercial banking system, that is,
all commercial banks plus the 12 Federal Reserve banks, may have to absorb$40,000,000,000 of Government obligations, an amount equal to about 60 percent
of the estimated increase in the total Federal debt.
B A N K S I N V U L N E R A B L E ATTITUDE

T h e B a n k of America statement of condition, December 31, 1942r
discloses that i t owns $1,043,000,000 of the U n i t e d States Government's securities and has a capital stock o f $50,000,000. I n other
words, this bank w i l l collect as much i n interest on these bonds i n 2
years as the amount of the entire capital stock of the bank.
T h e statement of one bank of N e w Y o r k f o r December 31, 1942r
discloses that i t had i n its portfolio Government obligations amounti n g to $1,988,096,539.18. T h e capital stock of this bank is $77,500,000.
T h e interest received on the Government obligations i n 2 years w o u l d
be much more than the capital stock of the bank.
T h e statement of another N e w Y o r k bank f o r December 31, 1942r
discloses that it had i n Government obligations at that time $1,692,372,867.88. T h e capital stock of the bank is $90,000,000.
O N E - H A L F A L L FEDERAL SOCIAL SECURITY BENEFITS

J a n u a r y 9, 1943, i t was reported that the 12 largest banks i n N e w
Y o r k City, as of December 31, 1942, held $11,182,594,000 w o r t h o f
U n i t e d States Government interest-bearing securities. These 12 N e w
Y o r k banks w i l l therefore collect approximately a quarter of a pill i o n dollars a year interest each year f r o m the Government on these
securities. T h i s amount is equal to about h a l f of the F e d e r a l G o v ernment's total expenditures f o r social security. T e n times as m u c h



88

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as the cost of the legislative department of our Government i n a year.
I t was reported January 20, 1943, that the 20 largest banks i n the
U n i t e d States, 12 of them being in New Y o r k City, held Government
bonds at the end of 1942 amounting to $16,407,197,000. The interest
that the Government w i l l pay to these 20 banks w i l l be between three
hundred and four hundred million dollars per year.
T h e total capital stock of all the commercial banks amounts to
$3,500,000,000, although their surpluses and undivided profits amount
to about $5,000,000,000 more. When these banks own enough Government bonds to entitle them to $3,500,000,000 a year, what do you
think w i l l happen?
A L L RIGHT TO P A Y INTEREST ON ACTUAL M O N E Y HIRED

I n the beginning, may I make it plain that I am not opposed to
interest being p a i d by individuals or corporations for the use of other
people's money that they have hired. Neither am I opposed to the
payment of interest by States, counties, and political subdivisions
for money that they hire. I am opposed to the United States Government, which possesses the sovereign and exclusive privilege of
creating money, paying private bankers for the use of its own money.
These private bankers do not hire their own money to the Government; they hire only the Government's money to the Government, and
collect an interest charge annually.
W h a t I am telling you I can prove by the highest authorities i n
the world. Over a period of years I have interrogated M r . Eccles,
M r . Morgenthau, M r . Bell, and the biggest bankers i n this country
and I know what their claims and contentions are, and what I say is
there is no dispute or contention about it, or controversy; it is admitted. A n d , furthermore, I have, I believe, the best authority i n
the world on financial matters to support this statement. I don't
want to take too much time, because I want you to hear from him.
There are more words of Senator Robert L . Owen i n the Federal
Reserve Bank A c t than the words of any other person, living or dead.
Senator Owen is one of the most highly cultured men i n the world.
I feel like he knows more about this problem than any other person
living. I know he is a modest man; lie has not tried to put himself
forward, but I feel, because of his attitude back i n 1913, when the
Federal Reserve A c t was being written, his attitude was not favorable to certain powerful interests and it is the same today as it was
then, and by reason of that unfavorable attitude on the part of some
o f the biggest fellows i n the country they have submerged the part
this great man had i n the writing of that history-making legislation.
F e w men i n the world have had the ripe experience and the successful
experience that Senator Owen has had. H e is a successful national
banker himself. H e organized a bank in 1890, owns a substantial
part of the stock, was president for a long time, has been an official
or director ever since, and he knows what this is all about.
Incidentally, it is a coincidence that Senator Owen, who was chairman of the B a n k i n g and Currency Committee in the Senate at the
time of the passage of the Federal Reserve Act, and Senator Glass,
who was chairman of the Committee on Banking and Currency i n
the House, when the Federal Reserve A c t was passed, were both born
about the same time within two blocks of each other, i n Lynchburg, V a .



89 f e J d e i r a l

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The CHAIRMAN. M a y I interrupt to ask a question there ?
M r . P A T M A N . Y e s , sir.

The CHAIRMAN. Y o u know that Senator Owen and Senator Glass
were the authors of the Federal Reserve System?
M r . P A T M A N . Y e s , sir.

The CHAIRMAN. Both played a conspicuous part i n the writing of
that act.
M r . PATMAN.

Yes.

The CHAIRMAN. D i d you get Senator Glass' reaction to this proposal?
M r . PATMAN. I only know how Senator Glass stood when the Federal Reserve A c t passed, and his views were contrary, i n many substantial respects, to Senator Owen's. I know his views since that
time, and I would consider he would definitely be very much
against it.
T h e CHAIRMAN. H e

would?

M r . PATMAN. Yes, sir. I know his views. I am not arguing
with him, or criticizing him or condemning him. I am just telling
you I believe that would be his views. I know how he stood i n the
past on these difficult questions.
INTEREST C A N B E SAVED O N P A R T OF W A R DEBT

Furthermore, i n this emergency i t is necessary that we sell all the
interest-bearing bonds that we can to the public, including corporations who have the money to buy them. T h i s is necessary to retard
inflation and it is very helpful to that end. I favor the levying and
collection of all the taxes it is possible for the people to pay i n order
to reduce the national debt as much as possible each year. A f t e r the
Government has collected a l l the taxes i t can collect and has sold
all the bonds to the public that can be sold, there w i l l remain 50 percent or more of the funds to be raised which must be obtained f r o m
the Federal Reserve banks or the privately owned 14,000 commercial
banks of the country, that accept deposits, or from both.
I t is this money that must be obtained from the Federal Reserve
banks and the commercial banks that I insist can be secured by the
Government without an annual interest charge.
M r . DISNEY. Congressman, i f you w i l l restate your proposal i n
just a word, i t would help me.
M r . PATMAN. The point is this; we want to sell a l l the bonds we
can to the public and corporations that have the money to buy them.
A n d I am not opposed to that. W e want to collect a l l the taxes we
can to pay on this war. B u t after we do that, we w i l l still have to
have a large sum of money each year, and that money must be
obtained through creation; i t has got to be created. A n d my point
is that the money, i f i t has got to be created on the Government's
credit, that the people should not have to pay interest on that money
that is so created. That is i t i n a nutshell, M r . Disney.
H . R. 1 GERMANE TO B I L L TO RAISE DEBT L I M I T — T H A T I T PROVIDES

I have before this Congress the b i l l H . R . 1. I t is germane i n the
consideration of this b i l l to raise the debt limit to $210,000,000,000.
The b i l l provides for the issuance of non-interest-bearing, non-negotiable bonds by the 12 Federal Reserve banks to finance the part of



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FEDERAL

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the war that would otherwise be financed by the commercial banks
and the 12 Federal Reserve banks on interest-bearing bonds.
The b i l l would prohibit the Treasury from issuing any further
interest-bearing bonds to the banks receiving deposits, and would
restrict the amount of U n i t e d States bonds held by any bank to the
amount held by such bank on December 31, 1941. The date is an
arbitrary one. A n y other fair date or fair adjustment of the amount
of bonds any bank could hold would be satisfactory.
FEDERAL RESERVE B A N K S DISTINGUISHED FROM COMMERCIAL BANKS

First, let us get our definition straight as to the kind of banks that
I speak of. T h e 12 Federal Reserve banks are owned by the private
commercial banks of the country. Not one penny of stock i n these
12 banks is owned by the U n i t e d States Government or by the people..
The total stock i n these 12 banks is about $150,000,000.
T h e 14,000 commercial banks include not only the national banks
and the State banks that belong to the Federal Reserve System, but
also the other banks which accept deposits which are State banks
and do not belong to the Federal Reserve System, but practically a l l
of them are insured by the Federal Deposit Insurance CorporationNO INTEREST SHOULD BE PAID ON LARGE PART

The money that must be secured by our Government after all the
bonds have been sold to the public that can be sold, and all the taxes
have been p a i d that can be collected without injuring our domestic
economy, can be secured without an interest charge through the use
of the 12 Federal Reserve banks. I t is right that the Government
use the banks for this purpose, because these 12 banks, although privately owned, operate exclusively upon Government credit. Theses
12 banks have the power to create the money that is placed i n circulation and used by the people. Congress has farmed out to them
this great privilege. I t is the most valuable privilege any government on earth ever delegated^ or conveyed to an individual group o r
corporation.
POWER NOT DISPUTED

T h e sovereign power of Congress to authorize the program that i s
proposed i n the b i l l I am discussing is beyond question. N o one questions the power of Congress to do what I propose.
SIMPLICITY AND SOUNDNESS OF P L A N

I n order to demonstrate the simplicity, desirability, and soundness
of the plan, I desire to first analyze the status of the present national
debt. I t w i l l not be my purpose to quote exact figures since exactness is not required for the purpose of this illustration. L e t us assume that the national debt now is a round number—$100,000,000,000'
which is very close to the actual amount. One-half of the amount
is held by individuals and corporations, including mutual-savings
banks and life-insurance companies which had the money to lend to
the Government i n exchange for interest-bearing bonds. The other
$50,000,000,000 is held as follows:
Forty-four billion by the private commercial banks which created
the money by a flick of the pen to purchase interest-bearing bonds
f r o m the Government and which they now hold.




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Six billion has been purchased by the 12 Federal Reserve banks
by creating it by a flick of the pen, and is now held by these 12 Federal Reserve banks, and the Government w i l l continue to pay interest
on it just the same as i f the bonds had not been purchased through
the use of the Government's credit.
CREATING M O N E T IS ACKNOWLEDGED

F o r fear that someone w i l l think that I am using a very radical
and unorthodox word when I say "create" i n connection w i t h the
banks' creating money with which to buy Government bonds, I
want you to know that the highest and best authorities i n our Government and i n the United States agree that the commercial banks
and the Federal Reserve bants actually create money on the Government's credit i n order to buy United States Government bonds.
There is no dispute about that question. T h e Honorable H e n r y Morgenthau, Secretary of the Treasury, admits it. So does the Honorable Marriner IS. Eccles, Chairman of the B o a r d of Governors of
the Federal Reserve System, and a l l other informed people.
Therefore, the main point for consideration by this committee is
whether or not the 12 Federal Reserve banks and the private commercial banks that create money on the Government's credit, should
continue this policy and thereby cause the taxpayers to pay interest
on it for generations to come.
HOW GOVERNMENT OBTAINS M O N E Y NOW

Under the present system i f the Government desires more money
and it is necessary to borrow the money from the banks, the following
procedure is adopted:
First. I f it desires, the Treasury can deliver bonds to the 12 Federal Reserve banks directly and receive credit for the amount of the
bonds on the books of the 12 Federal Reserve banks. Then as the
Treasury pays its debts, checks are given on these 12 Federal Reserve
banks and the funds are transferred from the Treasury to the ones
receiving the checks. I n this way the Government is paying interest
to the Federal Reserve banks just the same as i t pays interest to the
private banks and to individuals, although the Federal Reserve banks
operate on the Government's credit. I f the receiver of a Treasury
check i n a case like this desires the money instead of credit i n his
local bank, he is given Federal Reserve notes. These notes are not
obligations of the Federal Reserve banks, they are obligations of the
United States Government. Therefore, the Government and Congress, particularly, finds itself i n the idiotic position of permitting
the Treasury to deliver one f o r m of Government obligation—interestbearing notes—to the privately owned Federal Reserve banks and
receiving credit therefor, and then when the Federal Reserve banks
are called upon for the money they issue another f o r m of Government obligation, Federal Reserve notes, to satisfy the demand. I n
each case Government obligations are used. T h e net result is that
the taxpayers are paying for the use of their own credit.
T h i s power of selling bonds directly to the Federal Reserve banks
by the Treasury is authorized by the Second W a r Powers A c t w h i c h
became a law March 27, 1942, and can only be used to the extent o f
$5,000,000,000. The question is, i f it is good money up to $5,000,000,000 why is i t not good money up to $100,000,000,000? However, this



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does not stop the Federal Reserve banks from buying $100,000,000,.
000 or $200,000,000,000 of Government bonds in the open market
through the Open Market Committee in New York. The restriction
of $5,000,000,000 is only on a direct sale from the Treasury to the
Federal Reserve banks.
Second. T h e other way the Treasury would obtain the money
would be to sell interest-bearing bonds of the Government to the
14,000 commercial banks. I n a sale of that kind a commercial bank
receives the Government bond and gives the Treasury credit upon
its books f o r the amount of the bond. Then when the Government
pays its bills i t gives checks upon this fund in the local commercial
bank. T h e money has been created by a bookkeeping transaction and
it is seldom that the one receiving a check from the Government wants
the actual money but desires instead credit at the bank. I n that way
the money is created on the books of the bank but the actual money
is not paid out except to a very limited extent. I f the one receiving
the check, however, desires the actual money and the local bank does
not have the monery to pay the check, the local bank can obtain it
from the nearest Federal Reserve bank by depositing Government
bonds as collateral security. The bank w i l l pay the Federal Reserve
bank one-half of 1 percent interest on this money. T h e Federal Reserve bank w i l l pay the Government 30 cents per $1,000 for the money.
T h e net result is that the Government has not gotten anything f o r
the sale of bonds to the public and the collection of taxes, that the
U n i t e d States Treasury deliver to the Federal Reserve banks noninterest-bearing, nonnegotiable Government securities or certificates
of indebtedness and obtain from the 12 Federal Reserve banks credit
for the amount of the bonds or certificates. Then as the Treasury
pays its debts checks w i l l be given on these 12 Federal Reserve banks
i n the same way and manner as i f the bonds were interest-bearing.
T h e ones receiving the checks w i l l receive their money and the same
k i n d of money and i n the same way and manner as i f the bonds
were interest-bearing. T h e result w i l l be, however, that the Government w i l l be saved interest. I n this way the Government can
pay each year 2% percent to the Federal Reserve banks on these bonds
or certificates and m 40 years the entire debt w i l l be liquidated, whereas under the present plan our Government can pay 2% percent each
year for 40 years as interest and none of the principal of the debt
w i l l be paid but all of the debt w i l l still be due at the end of the 40*
years.
M r . DEWEY. M a y I query the witness at that point on just that use
of currency?
T h e CHAIRMAN. Y e s ; g o ahead.

M r . DEWEY. W h y d i d not the Government do that i n 1907 and 1912,
when there was a money panic, before the organization of the Federal
Reserve System, and the country went to dearing-house certificates
and there wasn't any currency to go around ? They had to go to the
only thing that existed at that time, which was the clearing house,
ana they issued real fiat money to take care of the requirements o i
trade and industry. A s the result of that we put i n a system known
as the Federal Reserve System, which would supply cash and take it
off the market when not needed. The Bureau of Engraving and P r i n t i n g was i n existence then. W h y didn't the Government go to the B u reau and buy some of this 30-cents-a-thousand currency and just p u t
i t out i n the country?



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AMEiNDMENT

M r . PATMAN. O f course, the gentleman would not seriously insist
that I attempt to answer that question. I was only 14 years old at
that time.
M r . DEWEY. Well, that is what you want to have done now, M r .
Patman.
M r . PATMAN. I don't know what was i n the minds of the people
who were i n charge of our Government at that time. O f course, I
know about the clearing-house certificates from reading the history
of the 1907 panic, and I well remember it, because it hit us awfully
hard i n Texas, and we all suffered from the depression down there.
I know they used the certificates, but as to why they didn't resort t o
other means—there are other means that could have been resorted to.
T h i s would fiot be the only one.
M r . DEWEY. They did resort to other means, by organizing the F e d eral Reserve System.
M r . PATMAN. A n d remember this, M r . Dewey, that up until 1917 we
had never paid any interest hardly on our national debt, only two or
three million a year over a period of 125 years.
M r . DEWEY. W e didn't have any national debt.
M r . PATMAN. Our interest burden has really not been sufficient t o
attract our attention except during the last 25 years, and for that
reason only should a plan like this be considered.
M r . DEWEY. W e didn't have any national debt.
M r . PATMAN. That is right; we didn't have any national debt.
I t was very small. B u t I cannot answer the question as to why
people, 35 years ago, did not do so and so, because I have no way o f
determining it. B u t I know one thing; their failure to do it is not
sufficient to justify us i n ignoring it. I am not w i l l i n g to ignore a
good proposition now because it was not adopted 35 years ago.
T h e CHAIRMAN. One question right there. Y o u mentioned this,
money that the Bureau of Engraving and P r i n t i n g gets out, and all
the Government gets for it is the cost of the printing.
M r . PATMAN. Yes, sir.

The CHAIRMAN. Y o u say the Government gets nothing for its credit.
The Government isn't out anything.
M r . PATMAN. I t is out its credit. I t signed a mortgage; it is behind it. I t has pledged all the resources of this Nation to back
it up.
The CHAIRMAN. Doesn't it give what Senator Owen and Senator
Glass were after, a sound system of banking?
M r . PATMAN.

Certainly.

The CHAIRMAN. That is getting something.
M r . PATMAN. Certainly; i t is a sound system of banking.
The CHAIRMAN. I t is put on a national basis.
M r . PATMAN. That is right.
The CHAIRMAN. And, of course, that was the trouble before. T h e
banks could not get the money. There was no Federal agency, and
no means by which they could get money. T h i s provides a sound
system of banking; isn't that right?
M r . PATMAN. Sure; it is a very fine system. I am not opposed toi t ; I am for it, but in an unusual case like this, why should we burden
the taxpayers on a $300,000,000,000 debt, when we know they w i l l
never be able to pay more than just the interest on it? T h a t means
a perpetual debt of $300,000,000,000. T h a t means that any inflation




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AMEiNDMENT

that we have i n that $300,000,000,000 w i l l remain indefinitely, whereas
i f you adopt a plan of saving the interest on a substantial part of
that money, you can reduce i t each year by as much at least as you
would pay i n interest, and then you reduce the inflationary condition
each year instead of having i t remain the same each year.
T h e CHAIRMAN. I haven't any disposition to argue w i t h you. I
may agree w i t h you .when you get through; I don't know. B u t i f
the banks were not to get any interest on this money that the Government borrows, how would you get the banks to lend the money?
T h e y say, " I t is the money of our depositors; we are responsible for
it, and i f we don't get anything for the use of it we w i l l just not
buy the bonds."
M r . PATMAN. I don't think that question is involved i n this at all.
T h e CHAIRMAN. I don't know why it wouldn't be involved. They
won't furnish the money i f they're not going to get any interest on it.
M r . PATMAN. I am not proposing that. I am proposing that the
12 Federal Reserve banks furnish it, not the commercial banks.
T h e CHAIRMAN. Suppose the Federal Reserve banks balk?
M r . PATMAN. They can't balk. They are an agency of the Congress.
They have to do what Congress says.
T h e CHAIRMAN. These bonds can't all be held by the Federal Reserve banks; they have to be scattered throughout the country.
M r . PATMAN. I am afraid we are talking about different things.
I am afraid you are talking about the usual industrial or commercial
transaction, and I am talking about the Government finances.
T h e CHAIRMAN. I beg your pardon. I am sorry; I didn't follow
you.
M r . DISNEY. AS I understand it, these banks are heavily loaded with
Government bonds, so heavily loaded that a sharp decrease i n the value
of Government bonds would wipe out their capital stock.
M r . PATMAN. T w o or three points decrease would wipe out their
capital stock, but there is no danger of that.
M r . DISNEY. Suppose there was a sharp decrease i n the value of
Government bonds, that would have a tendency to wipe out a part of
the capital stock of the banks, or some of them, and i f any sizeable
number of them should get i n that position, they would be liable to
be i n trouble and go broke and take the rest of the banks w i t h them.
H o w could we prevent that?
M r . PATMAN. T h a t is already provided for, M r . Disney. The Open
Markets Committee, which, by tne way, has been moved from Washington to New YorK, has already arranged that any bank i n distress
can get a hundred cents on the dollar on its bonds any time. There
is where the Government's credit comes into play again. They just
issue more Federal Reserve notes to buy those bonds, and they are not
going to let the banks suffer. They have already told them they w i l l
not let them suffer. There is no danger of that at all.
M r . DISNEY. NO danger of Government bonds——
M r . PATMAN. Declining; absolutely not. I t is, in effect, guaranteed
by the U n i t e d States, and there is no danger i n the world. I n fact,
I think i t is a good thing, although it is the Government's credit
being used again, free. I t is perfectly all right.
MR. KNUTSON. R i g h t at that point, why did Government bonds drop
to 82, along i n the f a l l of 1921 ?
M r . PATMAN. Becase of a situation you gentlemen had vision enough
to guard against when this war started. I n 1914, when the war started



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AMENDMENT

i n Europe, and i n 1917, when we became engaged i n the war, we did
not make any provision to protect the people who bought United
States Government bonds. They had to sell them i n the open market.
Consequently, when the war was over, and every one wanted to sell
their bonds, naturally the market went down and down, and some of
them sold as low as 75 cents on the dollar. I t was the crime of the age
to permit that to be done. Men i n the armed services had paid for
their bonds a few dollars a month over a period of time. A n d when
they came out of the service they saw these bond manipulators force
the price down to 75. I t was absolutely a crime. B u t you gentlemen
provided—and i f you w i l l remember, I appeared before this committee i n connection with that and invited your attention to it, and asked
you, for God's sake, to prevent any such thing happening i n the future.
Not necessarily because of my testimony did you do it, but you provided, anyway, that now they can get their money 100 cents on the
dollar^ and the people of this Nation should appreciate what this
committee d i d to initiate that type of legislation which w i l l protect
them against that a w f u l crime that happened after the other war.
There is one objection to this plan. M r . Chairman, not a serious
objection, not one that you cannot correct, but it is, I am afraid, an
objection.
The CHAIRMAN. W h i c h plan are you talking about?
M r . PATMAN. T h i s plan I am proposing now.
OBJECTION W O R T H Y OF CONSIDERATION

One objection is urged against this plan which I think is worthy
o f the greatest consideration. I t is that i f the commercial banks
buy the bonds a part of the excess reserves of the bank w i l l be used
i n the transaction, but i f the Federal Reserve banks buy the bonds
and the money is paid out into the country, it is deposited i n the
local banks and the excess reserves of the local banks are increased
by that much, which w i l l be more inflationary than the sale of the
bonds to the local banks.
This objection can be overcome completely by permitting the Board
of Governors of the Federal Reserve banks to change the reserve requirements of the local banks. I n other words, use the same system
to contract the reserves of the local banks that is now being used
to expand the reserves of the local banks. M r . Eccles has testified
that the objection can be cured that way.
That is the only real objection that has ever been urged to this
plan and upon analysis it becomes an excuse rather than a reason for
not approving the plan that w i l l save the taxpayers such enormous
sums of money annually.
The CHAIRMAN. Where would the banks get the additional reserve?
They can't call i n their loans very well. I f they did, they would wreck
the country. I t would embarrass the parties to whom they made
loans. Where would they get this extra reserve? I am not trying
to argue. I f they have to increase their reserves, where would they
get the increase ?
M r . PATMAN. I w i l l be glad to answer the gentleman's question.
I f this plan is adopted and we sell a million dollars' worth of bonds,
it w i l l require the Federal Reserve to take a million dollars of bonds
86330—43




7

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FEJDEiRAL REiSiERVE A C T

AMENDMENT

that are not interest bearing, and nobody doubts the power of Congress to do that. They all admit it. Raleigh, I guess, is your Federal Reserve bank, is it not ?
T h e CHAIRMAN. NO; Charlotte.

M r . PATMAN. A l l right; at Charlotte there is a credit of $1,000,000. W h e n they pay the Postmaster and the rural carriers and the
Honorable Bob Doughton their salaries, they w i l l take their checks
to the local bank, a commercial bank, and deposit them, and the local
commercial bank can use those deposits as excess reserves and purchase any kind of paper, 5, 8, or 10 times as much as that, depending
on what the reserve requirements are at that time. I w i l l admit
that that w i l l cause an inflationary condition, but you can correct
it by changing the reserve requirements of that bank so that i t could
not lend more than 2 to 1, or 3 to 1, or more than $1 for one—100
percent reserves. M r . Eccles suggested that before the Banking and
Currency Committee. That would completely stop the inflationary
condition and save interest.
The CHAIRMAN. DO you think a bank could live and pay its stockholders any dividends i f it were forced to keep such large reserves?
They couldn't make any money.
M r . PATMAN. Oh, they would make money. I provide i n this b i l l
that they shall be allowed to take and hold a reasonable amount of
bonds. L e t them have enough bonds to live and render the fine
service they are now rendering, but not let them have unlimited bonds
on the Government credit i n an unusual critical situation like we are
i n now, where the war debt must be increased by hundreds of billions.
That is just going too far. B u t I provide in this bill, M r . Doughton,
that they may have as many bonds as they had December 31, 1941,
and they had a pretty good supply of bonds.
The CHAIRMAN. HOW would they get those bonds?
M r . PATMAN. They could buy them i n the open market, or directly
from the Treasury.
The CHAIRMAN. Wouldn't they have to draw on their reserves to
buy them?
M r . PATMAN. That would be all right.
The CHAIRMAN. Wouldn't that cut their reserves down?
How
could you go on the market and buy bonds, and at the same time
hold up your reserves?
M r . PATMAN. I respectfully submit that is no problem i n this
plan.
The CHAIRMAN. That is not the question I asked. Y o u say they
have to have a reserve, and they go into the open market and buy
bonds. I say they can't go into the market without reserves.
M r . PATMAN. They have the money.
The CHAIRMAN. They can't have the bonds and the reserves both.
Y o u know that.
M r . PATMAN. They have plenty of reserves, M r . Doughton, and I
would be i n favor of having plenty of reserves. I f they want more
reserves, they could sell a million dollars' worth of bonds to the openmarket committee and get a million dollars in Federal Reserve notes,
and then buy $10,000,000 of United States Government bonds. They
w i l l have no trouble i n getting reserves.
The CHAIRMAN. W o u l d they be interest-bearing or non-interestbearing?




97 FEJDEiRAL

REiSiERVE ACT

AMENDMENT

M r . PATMAN. They would be interest-bearing. There is no trouble
about reserves. That could be changed up or down, and I am presenting i n my testimony here, which I w i l l not take the time to read,
evidence along that line.
T h e CHAIRMAN. Let me see i f I understand it. The bonds that the
Federal Reserve banks hold would bear no interest, but the bonds
that the commercial banks hold would bear interest.
M r . PATMAN. Yes; you see the commercial banks are entitled to
a profit.
The CHAIRMAN. W h a t percentage of the total loan now outstanding
would the Federal Reserve have and what percentage would the commercial banks have?
M r . PATMAN. That depends on how much we spend in the war and
on how much the public w i l l buy and the insurance companies and
other corporations that have money to buy the bonds with; and, in
addition, how much money can be collected i n taxes to retire part
of it.
The CHAIRMAN. I f they bought them all, then you wouldn't have
to get any loans from the Federal Reserve ?
M r . PATMAN. I would love to see it that way. I f the public and
the life-insurance companies and the other people having money
would buy it, that is the way to do it. B u t it w i l l not work, M r .
Chairman; we know it w i l l not worjj. They don't have the money.
I t has to be created; so, since it has to be created, should we always
pay interest on that part?
T h e C H A I R M A N . H O W m u c h d o y o u s a v e — s a y o n $200,000,000,000,

how much do you estimate the Federal Reserve banks would hold on
which there would be no interest paid?
M r . PATMAN. I estimate 50 billion, something like that.
The CHAIRMAN. That is one-quarter.
M r . P A T M A N . Y e s ; b u t i f y o u save a q u a r t e r

o f $4,000,000,000 a

year and you have saved $1,000,000,000, and after this war is over,
my dear sir, and when we have industrial activity then the banks w i l l
want to unload these bonds, individuals w i l l want to sell their bonds,
and money w i l l have to be created i n order to take care of them.
Then the Federal Reserve could save more money—I am not trying
to hurt the commercial banks, but the chairman of this committee
knows
The CHAIRMAN. HOW would this money to take up all these bonds
be created?
M r . PATMAN. I n the same way and manner it is now created, by
just a flick of the pen, i f you want to call it that. That is the power
of the Federal Reserve banks, to create money. They are doing it to
the amount of $5,000,000,000 now by direct purchases.
The CHAIRMAN. W o u l d it be logical to just create money that way
now?
M r . PATMAN. NO, because you would have unlimited inflation,
ruinous inflation. I don't want to do that. I would love to sell all
the bonds to the public and the corporations having the money to
buy, but we cannot sell the bonds that way. The people do not have
the money and we have got to create it. I don't want the taxpayers
of this Nation to pay interest for the next two or three hundred
years. That is the point I am trying to make—just the part that must
be created anyway, on the credit of the Government.



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FEBEiRAL REiSflE'RVE ACT AMElNDMEBSTiT

The CHAIRMAN. W h y not create that independent o f the Federal
Reserve banks; just leave them entirely out of it?
M r . PATMAN. W e l l , that is the best way to do it, I think. Y o u
wouldn't have any control otherwise. Y o u have got to have a simple, desirable p l a n that is sound. I think that is the soundest way
to buy them. B u t it is impossible to sell enough bonds to the public.
M r . DISNEY. YOU mean through the Federal Reserve?
M r . PATMAN. T h e Federal Reserve. A l l the bankers tell you that
they shouldn't buy these bonds. T h e y know it is highly inflationary.
The bankers are patriotic people; they spend their own money to get
the public to buy them and they are doing their best to get the public
to buy them. B u t i t is impossible to sell enough bonds to the public
to finance this war, and a large part of i t must be created, and I say
the part that must be created on the Government's credit, the Government should not pay interest on.
L e t me read you just a few questions and answers, f r o m M r . Eccles's
testimony i n 1941, before the B a n k i n g and Currency Committee. I
am interrogating:
Mr. P A T M A N . The stock is less than $140,000,000 and you do several hundred
billion dollars' worth of business a year sometimes, and furthermore, when
you actuaUy hold and claim now over $2,000,000,000 in Government securities
which you claim you bought. How did you get the money to buy those $2,000,000,000 of Government securities?
M r . ECCLES. W e created it.
Mr. PATMAN. Out of what?

Mr. ECCLES. Out of the right to issue credit, money.
Mr. PATMAN. And there is nothing behind it, is there, except the Government's
credit?
Mr. ECCLES. We have the Government bonds.
Mr. PATMAN. That's right, the Government's credit.
Mr. ECCLES. That is what your money system is.
There is the highest authority i n the Federal Reserve bank. There
is no question about this, gentlemen. There is no dispute about what
I am saying. Y o u w i l l not find a witness who w i l l deny what I say.
I t is undisputed. There is no controversy about it.
M r . KNUTSON. Does M r . Eccles endorse your plan?
M r . PATMAN. Oh, I am sure he wouldn't, because he believes there
should be interest p a i d on a l l Government bonds. H e is opposed
to starting any other system. H e don't want a change. O r d i n a r i l y ,
that may be right, but when you have such an unusual condition,
when our national debt w i l l be 10 times as h i g h as it has ever been
i n the history of our country, don't you think we should consider
any plan that might save the taxpayers money?
M r . DEWEY. M r . Patman, you want to create some more money, or
funds for the Government i n these wartimes. W e have been hearing,
a great deal about this inflationary gap.
M r . P A T M A N . Y e s , sir.

M r . DEWEY. W h i c h is the excess funds i n the hands of the public
which may come into competition f o r a large amount of commodities.
M r . P A T M A N . Y e s , sir.

M r . DEWEY. F o r that reason we are considering increasing the tax
b i l l and enforced savings.
M r . PATMAN. T h a t is right.
M r . DEWEY. YOU want to create more.
Mr. PATMAN.




NO.

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FEJDEiRAL REiSiERVE ACT AMENDMENT

M r . DEWEY. W h y not exhaust that excess spending power of the
public before creating new money?
M r . PATMAN. T h a t is perfectly a l l right, my dear sir. I f you could
get the money to finance this war by selling bonds to the public who
have the money to buy them, and through the collection of taxes, such
as you propose, or i n any other way, I am f o r it. B u t
M r . DEWEY (interposing). I t is understood
M r . PATMAN. L e t me finish. B u t we have demonstrated we cannot
sell enough bonds to the public, we cannot levy enough taxes to balance
our expenditures i n this war and the difference, my dear sir, has got
to be created money on the Government's credit, and my point is what
we create on the Government's credit we should not pay interest on
for the next two or three hundred years.
M r . DEWEY. W h a t percentage of the debt was carried by the banks
d u r i n g the last war?
M r . PATMAN. I don't know, but the last war was merely a fist fight
compared to this one, so far as expenditures are concerned.
M r . DEWEY. I n proportion to the national income, the Government
bopds sold i n the last war was a very small percentage. W e sold
most of the bonds to the public and 1 don't see why we couldn't do
i t this time.
M r . PATMAN. W e l l , we can't do it, because the Government knows
the people do not have the money.
M r . DEWEY. W e just agreed that the public is i n possession of that
inflationary gap. T h a t has been brought out by every person that has
testified here, f r o m Treasury officials on down.
M r . PATMAN. L e t me read a little more of the testimony of M r .
Eccles, i n answer to questions asked h i m by M r . Dewey. I have had
an a w f u l time getting these things, M r . Chairman. T h e witnesses have
shown irritation, sometimes, i n being compelled to answer questions,
but over a period of years I have gotten the Secretary of the Treasury,
M r . Morgenthau, the U n d e r Secretary, M r . Bell, and M r . Eccles and
other h i g h officials of the Government to prove every statement that
I make concerning this. I mean not my own opinions or conclusions,
but statements of fact. I have other testimony to prove it. L e t me
read M r . Eccles' testimony when he was interrogated by M r . Dewey
on June 17,1942 (reading):
Mr. ECCLES. N O ; the Federal Reserve would buy in the open market. If the
Federal Reserve then bought a billion dollars of securities in the open market
that would be new Treasury issues. The banks would still hold them, and the
Federal Reserve would put into the banks another billion of excess reserves.
If they used that billion they could buy 5 billion more of Governments, and you
could keep the price up. For every billion of the Federal Reserve banks put in
the open market operations, the private banks could buy 5 billion.
Mr. DEWEY. That comes pretty close to some other ideas I have heard.
Mr. ECCLES. I mean they could buy 10 billion. I mean the Federal Reserve
when it carries out an open market operation, that is, if it purchases Government securities in the open market, it puts new money into the banks which
creates idle deposits.
Mr. DEWEY. There are no excess reserves to use for this purpose.
Mr. ECCLES. Whenever the Federal Reserve System buys Government securities in the open market or buys them direct from the Treasury, either one, that
is what it does
Mr. DEWEY. What are you going to use to buy them with?
Mr. ECCLES. What is who going to use?
Mr. DEWEY. The Federal Reserve to make these purchases.
Mr. ECCLES. What do they always use?




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FEJDEiRAL REiSiERVE ACT AMENDMENT

Mr. D E W E Y . Y O U are going to create credit?
Mr. ECCLES. That is all we have ever done. That is the way the Federal
Reserve System operates. The Federal Reserve System creates money. It is
a bank of issue.
W h a t better evidence do you want than that, gentlemen? There
is no dispute about what I say, and I insist i t is absolutely wrong
for this committee to permit this condition to continue and saddle
the taxpayers of this Nation w i t h a burden of debt that they w i l l not
be able to liquidate i n a hundred years or two hundred years.
D o you know that we are carrying a m i l l i o n dollars' worth of
bonds that were issued d u r i n g the W a r between the States and we
have paid 4 billions i n interest for every $1 that was borrowed?
W e are still paying on them and still owe them. D o you know that
on the Panama Canal convertible 3's, we have already p a i d more
than $50,000,000 i n interest and we w i l l soon have p a i d $75,000,000
i n interest and still owe the $50,000,000 principal on those bonds?
I f you judge the future by the past, the people w i l l be compelled to
pay a dollar, $2, and $5 i n interest for every $1 they borrow. Does
any man, then, say that we shouldn't seriously consider any plan that
w i l l enable the taxpayers of this Nation to make that payment on the
principal of the debt and not on the interest? T w o and a half
million each year, and i n 40 years liquidating the entire debt, and
removing that inflationary condition that we w i l l have by reason of
the expenditures d u r i n g this war.
W . L . Hemingway, president of the American Bankers' Association
and of the Mercantile-Commerce B a n k & Trust Co., St. Louis, i n a
speech on our national debt before the Chamber of Commerce of the
State of N e w Y o r k , i n N e w Y o r k City, said:
The war must and will be financed. It can be done in one of three ways—
first, by printing paper money, Uncle Sam's demand I O U's. Fortunately this
generation has seen the evils of that route and will have none of it. The
second is by borrowing from the Federal Reserve banks directly, but that is
but little removed from the paper money way because the Reserve banks would
issue the money against the Government's notes or give credit on their books
to the Government, which would pay it out for war purposes. It would then
flow into the commercial banks increasing their legal reserves, thus inviting
further inflation. So we come to the third and least objectionable way, and
that is by borrowing from the public and the banks.
Both the Treasury and the banks want to see the banks buy as small a part
of the succeeding issues as possible, because both understand that when the
banks buy the bonds new bank credit or money is created and remains in circulation until their bonds are paid or taken by the public—an inflationary act
to be avoided as much as possible. The banks should be only underwriters and
distributors and not permanent investors.
I invite your attention to the f o l l o w i n g w i t h reference to M r .
Hemingway's statement:
First, he says that banks should not be permanent investors of
United States Government bonds.
Second, that i t is h i g h l y inflationary for banks to buy U n i t e d
States Government bonds.
T h i r d , i n the second way, he says the war can be financed b y borrowing f r o m the Federal Reserve banks directly, he also says that is
but little removed f r o m the paper-money way because the Eeserve
banks would issue money against the Government's notes or give
credit on their books to the Government, w h i c h would pay it out f o r
war purposes. H e could have very w e l l added that the sale o f
Government bonds to commercial banks is no further removed f r o m



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FEDEiRAL REiSE'RVE ACT AMEiNDMENT

paper money than the sale to Federal Reserve banks i f the excess
reserves of banks are properly handled.
Reasons w h y commercial banks should not purchase bonds are
contained i n a statement of the Secretary of the Treasury issued
A p r i l 25, 1942. I t is as follows:
If the Government is compelled to go to the commercial banks for the bulk
of these funds, the result will be to increase inflationary tendencies which are
already serious. This is true because when commercial banks buy Government
bonds they do not pay for them with actual cash taken from their vaults, but
by placing on their books newly created deposits to the credit of their Government. When the Government draws upon those deposits to pay for the goods
and services it buys, the purchasing power of those to whom these payments are
made is increased without any decrease in the purchasing power of those from
whom the money is borrowed.
W h e n M r . Eccles, chairman of the B o a r d of Governors of the
Federal Reserve System was before the B a n k i n g and Currency Committee, September 30, 1941, I interrogated h i m at length about the
banks creating money on the Government's credit.
W h e n M r . Morgenthau, Secretary of the Treasury, and M r . Bell,
his U n d e r Secretary, were before the B a n k i n g and Currency Committee on September 24, 1941, testifying on the price-control bill,
I interrogated M r . Morgenthau about banks creating money. H e
suggested that M r . Bell, his U n d e r Secretary, answer the questions.
M r . B e l l was sitting by M r . Morgenthau's side and the following
questions were asked and the following answers were given, as
disclosed on page 1132, volume 2, of the printed hearings on that
bill:
Mr. PATMAN. In other words, when you sell a Government bond to a commercial bank, you allow the bank then to create the money.
Under Secretary BELL. That is right. We want to avoid that, as far as we
can.
Mr. PATMAN. By a bookkeeping transaction?
Under Secretary BELL. Yes, sir; in the first instance.
Mr. PATMAN. And that increases the supply of money, just as much as if
the country issued greenbacks directly?
Under Secretary BELL. It increases the supply of money, but I would not
say it has the same effect.
Mr. PATMAN. It increases the supply of money to exactly the same amount
as if the Government issued the credit directly?
Under Secretary BELL. That is probably right.
I doubt that anyone would want any higher authority on the
question of commercial banks creating money to buy Government
bonds than the testimony just quoted.
W h e n M r . M a r r i n e r S. Eccles, chairman of the B o a r d of Governors of the Federal Reserve System, testified before the B a n k i n g
and Currency Committee of the House, J u n e 24, 1941, the following
questions were asked and the f o l l o w i n g answers given, at page 68
o f the printed hearings on S. 1471, a b i l l to amend the Federal
Reserve A c t .
Mr. PATMAN. Going back to this issue as to the Government's credit, is it
a fact that the $20,000,000,000 that the commercial banks of the country hold
today in United! States Government bonds were purchased with created
money?
Mr. ECCLES. IS it not a fact that what?
Mr. P A T M A N . The $20,000,000,000 of Government bonds, approximately, that
they purchased these bonds with created money.
Mr. ECCLES. What 20 billion of bonds?
Mr. PATMAN. That the banks hold today; approximately—between 19 and
20 billion dollars.



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FEJDEiRAL REiSiERVE ACT AMENDMENT

Mr. ECCLES. I do hot know exactly what the banks hold.
Mr. PATMAN. Well, that is not the main point. In other words, the bonds
that the banks hold today—they created the money to buy those bonds, did
they not?
Mr. ECCLES. The banking system as a whole creates and extinguishes the
deposits as they make loans and investments, whether they buy Government
bonds or whether they buy utility bonds, or whether they make farmers' loans.
Mr. P A T M A N . I am thoroughly in accord with what you say, Governor, but
the fact remains that they created the money, did they not?
Mr. ECCLES. Well, the banks create money when they make loans and investments.
Mr. PATMAN. All right; and these Government bonds were one of the
investments.
Mr. ECCLES. That is jcorrect.
Mr. P A T M A N . N O W we are back to where we were. The banks created the
money to buy $20,000,000,000 or whatever it was in Government bonds. Therefore it has increased the available money supply by $20,000,000,000 did it not?
Mr. ECCLES. Yes; that is true, if those are the figures representing the increase in commercial banks. I think those figures are excessive.
Mr. PATMAN. It is over 19 billion, anyway?
Mr. ECCLES. I think those figures represent a large investment of savings
funds.
Mr. P A T M A N . I believe they do. Anyway, the commercial banks when they
buy bonds or anything else, create the money, so to speak, to buy them with?
Mr. ECCLES. That is right.
M r . Eccles testified before the B a n k i n g and Currency Committee
June 17, 1942, on a b i l l to amend the Federal Reserve A c t .
His
testimony which appears at page 15 of the hearings, discloses that
commercial banks can buy a l l the bonds they desire to buy and i f
they are called on for money to pay their depositors the nearest
Federal Reserve bank can always furnish them the money they need.
H i s testimony is as follows:
Mr. P A T M A N . IS it not a fact that you did send out letters to the banks which
made the statement that the Federal Open Market Committee was ready to buy
all the bonds at par?
Mr. ECCLES. NO, sir; not buy, but we adopted a policy, each bank did, that
would loan par on them.
Mr. PATMAN. That would loan par on Government securities?
M r . ECCLES. Y e s .
Mr. P A T M A N . D O you

charge the interest rate that is effective in that particular
Federal Reserve district?
Mr. ECCLES. One percent.
M r . PATMAN. One percent?
M r . ECCLES. Y e s .

Mr. PATMAN. Have you ever told all the banks that you stand ready to make
loans at par at a 1 percent interest rate?
Mr. ECCLES. Each Federal Reserve bank has done that.
Since M r . Eccles testified, the interest rate has been reduced to onehalf of 1 percent. I t is doubtful that the banks w i l l need the money,
but i f they do the Government, through the Bureau of E n g r a v i n g
and P r i n t i n g , w i l l furnish i t to them. T h e Federal Reserve banks
w i l l pay 30 cents per $1,000 approximately, for the currency, and the
commercial banks w i l l pay $50 per $1,000 interest per year, but w i l l
continue to receive interest on the bonds that they deposit w i t h the
Federal Reserve banks to obtain the money at one-half of 1 percent.
M r . Eccles' testimony before the B a n k i n g and Currency Committee,
June 17, 1942, commencing at page 16 of the hearings on the b i l l to
amend the Federal Reserve A c t , is as follows:
Mr. PATMAN. What are the excess reserves on the money market at the present
time?
Mr. ECCLES. They are running around two billion five hundred million.




103 FEDEiRAL REiSE'RVE ACT AMEiNDMENT
Mr. P A T M A N . H O W much could they buy in Government bonds if they were to
use the excess reserves to the limit?
Mr. ECCLES. About $12,000,000,000.
M r . P A T M A N . $12,000,000,000?

Mr. ECCLES. Yes, sir; that is, assuming that the deposit structure and the
present structure does not change.
Mr. PATMAN. It would be about $12,000,000,000.
Mr. ECCLES. Yes; you see, the Federal Reserve requirement is about 20 percent.
M r . PATMAN. Yes, sir.

Mr. ECCLES. For the country it is 14, and for the central Reserve cities it is 20,
and for the Reserve cities it is 26, so that we figure in about a 20-percent reserve
requirement, so that on the basis of $2,250,000,000, if that were all fully utilized
on the fractional reserve basis, I would estimate that they could buy about
$12,000,000,000 worth of Governments, that is, if it were utilized fully and completely through the entire reserve, all the banks.
Mr. P A T M A N . Suppose today they bought those $12,000,000,000 of bonds, what
would they have back of those bonds to support them in addition to what they
have now? In other words, what increased assets would the bank have except
the Government bonds?
Mr. ECCLES. They would have the Government bonds themselves, which would
be an asset, and they would have a liability, however, in the form of a deposit.
Mr. PATMAN. That is right.
T h e n further:
Mr. P A T M A N . Let us suppose that the banks are called upon to buy $12,000,000,000 of Government bonds today. That consumes all their excess reserves.
If you wanted to increase their excess reserves in order to buy another $12,000,000,000 of Government bonds, how would you do that, through the Federal Open
Market Committee?
Mr. ECCLES. We might decrease the reserve requirements.
Mr. PATMAN. How would you decrease them?
Mr. ECCLES. I think it runs between $5,000,000,000 and $6,000,000,000.
Mr. PATMAN. Between $5,000,000,000 and $6,000,000,000?
Mr. ECCLES. Yes; somewhere between $5,000,000,000 and $6,000,000,000.
Mr. PATMAN. If it were decreased as you suggest, that would enable you to
buy how many bonds?
Mr. ECCLES. If we decreased it to the full amount, then the reserve requirements are 10 percent instead of 20 percent, and you can buy about 10 to 1.
Mr. KEAN. What does change it from 5 to 1 to 10 to 1? Would you explain
that again?
Mr. ECCLES. A S it is, the requirements of the Federal Reserve Bank System of
the country as a whole are about 20 percent. If we changed the reserve requirements to the full amount we could then say the Reserve requirements are only
10 percent instead of 20 percent, and you can get about 10 to 1, and that would
be about $50,000,000,000.
Mr. PATMAN. After you have already reduced the reserve requirements of the
banks and have bought these $50,000,000,000 in bonds, if you need to buy still
more, how would you handle the others? Suppose you wanted to call upon them
to buy $25,000,000,000 more in bonds?
Mr. ECCLES. We would carry it on then, if it were necessary, by an openmarket operation.
Mr. PATMAN. In other words, you would buy a billion dollars' worth of bonds.
What would be the effect of that billion doUars on the banks?
Mr. ECCLES. If they could get a billion dollars they could buy up about $10,000,000 in bonds.
J u n e 19,1942, M r . Eccles testified before the B a n k i n g and Currency
Committee of the House on the amount of Government bonds that any
bank could purchase. H i s testimony is as follows, at page 41 of the
hearings on the b i l l to amend the Federal Reserve A c t .
Mr. PATMAN. In the bill we passed here a few days ago, creating the Smaller
War Plants Corporation, there was an amendment offered by the gentlewoman
from Illinois, which was adopted and it is now a part of the law, providing that
there should be no limitation on the amount of a loan to any person or corporation by any bank, providing, of course, that the loan is guaranteed by the
Government, or some agency of the Government.
Have you given consideration to that amendment, Mr. Eccles?



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FEJDEiRAL REiSiERVE ACT AMENDMENT

Mr. E C C L E S . Are you referring to the technical aspects of it?
Mr. P A T M A N . No; I am talking about—suppose a bank had a capital stock of
$250,000, should they, under this amendment, negotiate a loan for say $5,000,000
if it is guaranteed by the Government or some agency of the Government?
Mr. E C C L E S . It would take the limit off. There is no limit to the amount of
Government bonds, for instance, that a bank can buy. Its only limit 'is its
supply of funds.
Mr. P A T M A N . Y O U mean there is no limit now?
Mr. E C C L E S . That is right.
Mr. P A T M A N . This amendment did not cause that—it was already that way.
Mr. E C C L E S . N O ; the difference is—there has been no question about direct
obligations of Governments. This was simply a case of recognizing the loans
which were guaranteed as having the same status as a direct Government
obligation.
O n the same day M r . Eccles testified, at page 25 of the hearings:
Mr. P A T M A N . Mr. Eccles, the day before yesterday I had gotten down to
the point where, if we needed more money, one way to give the banks extra
reserves to purchase Government bonds would be for the Open Market Committee to buy Government bonds in the open market, and I suggested if you
bought for the Federal Reserve bank one billion dollars' worth of bonds, that
would automatically create a billion dollars of reserves in the banks, and,
after the reserves had been reduced to 50 percent, the maximum that would
enable the banks to purchase $50,000,000,000 worth of bonds. Now, let us
assume that has happened
Mr. E C C L E S . $10,000,000,000 worth by the purchase of a billion dollars' worth
of bonds in the market?
Mr. P A T M A N . I got the two mixed up. The purchase of a billion dollars'
worth of bonds in the market, after the excess reserves had been reduced, will
enable the banks to buy ten billion ?
Mr. EOCLES. That is right.
Mr. P A T M A N . Where the fifty billion came in was if you would automatically
reduce the reserves now, which you have a right to do, that would give them
$5,000,000,000 of excess reserves, which they could use to purchase $50,000,000,000
worth of bonds.
Mr. E C C L E S . That is right.
Mr. P A T M A N . N O W let us assume that we not increase the reserves in the
banks, and you go into the market and buy a billion dollars' worth of bonds;
you buy them with Federal Reserve money, do you not?
Mr. E C C L E S . Well, we buy them with Federal Reserve credit.
Mr. P A T M A N . I know; but suppose the banks call for the money, you issue
Federal Reserve notes, do you not?
Mr. E C C L E S . What we do, if we purchase Government securities in the market,
is we credit the account of the bank that turns them in. They usually come
through the banks.
Mr. P A T M A N . That is right.
Mr. E C C L E S . Even though they may be individuals who are selling the securities; and we debit the bond purchase account, showing that the Federal Reserve has a liability to the banks to the extent of $1,000,000,000, which represents their reserves on the one hand, and that they own $1,000,000,000 of
bonds in what we call the portfolio, on the other hand.
Mr. P A T M A N . I know in practice that is exactly the way it is done, Mr. Eccles,
but suppose the banks want the billion dollars in currency, you would pay it in
Federal Reserve notes, would you not?
Mr. E O C L E S . That is right.
Mr. P A T M A N . Those Federal Reserve notes, as we have often discussed, are
obligations of the United States Government?
Mr. E C C L E S . That is right.
Mr. P A T M A N . Then you use those Government obligations to buy interestbearing Government obligations and you place them with the Federal Reserve
banks—12 of them?
Mr. E C C L E S . That is right.
Mr. P A T M A N . And they would continue to receive interest on those Government
obligations as long as they were outstanding?
Mr. E C C L E S . That is right.




105 FEDEiRAL REiSE'RVE ACT AMEiNDMENT
O n June 17, before the same committee, at page 21 of the hearings
on the b i l l to amend the Federal Eeserve A c t , M r . Eccles testified:
Mr. ECCLES. N O ; the Federal Reserve would buy in the open market. If the
Federal Reserve then bought a billion dollars of securities in the open market
that would be new Treasury issues. The banks would still hold them, and the
Federal Reserve would put into the banks another billion of excess reserves.
If they used that billion they could buy five billion more of Governments, and
you could keep the price up. For every billion of the Federal Reserve banks
put in the open market operations, the private banks could buy five billion.
Mr. DEWEY. That comes pretty close to some other ideas I have heard.
Mr. ECCLES. I mean they could buy ten billion. I mean the Federal Reserve
when it carries out an open-market operation, that is, if it purchases Government securities in the open market it puts new money into the banks which
creates idle deposits.
Mr. DEWEY. There are no excess reserves to use for this purpose.
Mr. ECCLES. Whenever the Federal Reserve System buys Government securities in the open market or buys them direct from the Treasury, either one, that
is what it does
Mr. DEWEY. What are you going to use to buy them with?
Mr. ECCLES. What is who going to use?
Mr. DEWEY. The Federal Reserve bank to make these purchases.
Mr. ECCLES. What do they always use?
Mr. D E W E Y . Y O U are going to create credit?
Mr. ECCLES. That is all we have ever done. That is the way the Federal
Reserve System operates. The Federal Reserve System creates money. It is
a bank of issue.
M r . A l l a n Sproul is president of the N e w Y o r k Federal Reserve
Bank, which is manager of the open-market system for the Federal
Reserve System. O n J a n u a r y 18, 1943, he addressed the bankers of
the State of N e w Y o r k and stated:
Reserve banks are backing the commercial banks in investing to the limit
in war financing.
F u r t h e r i t was said i n his speech:
President of New York bank tells bankers of New York State that the Federals
are here to save them from embarrassment if withdrawals reduce reserves.
I n other words, the Federal Reserve System w i l l continue to furnish
a l l the money that the private banks need to pay their depositors i n
the event that i t is needed and then they can purchase a l l the bonds
they want to purchase w i t h the assurance that the Government printi n g presses w i l l protect them.
T h e Federal Reserve B a n k of N e w Y o r k is acting as the manager
of the Federal Reserve's open market system. T h i s system is the most
powerful factor i n the money market i n the U n i t e d States. Washing- 4
ton authorities often do not know of important rules and regulations
that the N e w Y o r k bank has put into effect u n t i l l o n g afterward. /
I n connection w i t h the question of how excess reserves are manipulated i n order to permit commercial banks to buy additional bonds,
the f o l l o w i n g is quoted f r o m the bulletin published by the National
C i t y B a n k of N e w Y o r k , October 1942.
In order to provide the additional funds required, the Federal Reserve banks
have bought over $1,000,000,000 of Government securities in the open market
since April, and have twice reduced the percentages of required reserve against
deposits of member banks in the central reserve cities of New York and Chicago.
The latter action followed enactment of legislation in July authorizing the Reserve Board to reduce reserve requirements for the rest of the country; and the
reductions were confined to New York and Chicago by reason of the drain imposed
upon these centers by the steady flow of funds to areas where war industries are
located.
The first reduction, from 26 to 24 percent against net demand deposits, came on
August 20, and released approximately $345,000,000 of reserves in New York City



106

FEJDEiRAL REiSiERVE ACT AMENDMENT

and $70,000,000 in Chicago. Within less than a month—on September 14—the
second reduction, from 24 to 22 percent, was ordered, adding about the same
amounts to excess reserves, on September 23, the "excess" totals in the two main
financial centers were again approaching their earlier lows, while the total of
slightly over $2,000,000,000 reported for all member banks was the lowest since
1938.
When D r . E . A . Goldenweiser, Director of Research and Statistics
for the B o a r d of Governors of the Federal Reserve System, testified
before the B a n k i n g and Currency Committee of the House on October
1, on the price-control bill, the f o l l o w i n g questions were asked and the
following answers given, page 1538, volume 2, of the hearings.
Dr. GOLDENWEISER. The total reserves of the Federal Reserve are about 20%
billion, not 23 billion.
Mr. PATMAN. I am talking about the total gold supply that is either owned by
the United States Government or claimed by the Federal Reserve banks through
the
Dr. GOLDENWEISER. The amount of the stabilization fund is not available to the
Federal Reserve.
Mr. P A T M A N . N O ; but I am presuming that it will be available. That will be
23 billions?
Dr. GOLDENWEISER. A l l right.

Mr. PATMAN. That leaves 16 billions unattached?

D r . GOLDENWEISER. Y e s .
Mr. P A T M A N . H O W much

bonds could the Federal Reserve Open Market Committee buy in the United States, Government bonds, based upon that?
Dr. GOLDENWEISER. It depends on how mmch of it will be in deposits and how
much in notes. But, roughly speaking, about three to three and a half times.
Mr. PATMAN. Three and a half times?
Dr. GOLDENWEISER. N O ; not three and a half times. From two and a half to
three times.
Mr. PATMAN. That would be about $40,000,000,000?
Dr. GOLDENWEISER. That is right.
Mr. PATMAN. When that money is paid out, suppose they pay it to the commercial banks, they could expand about five to seven to one on that, couldn't they?
Dr. GOLDENWEISER. If they paid that much assessment.
Mr. PATMAN. Yes; they would have the power to under the existing law?
Dr. GOLDENWEISER. That is right.
Mr. PATMAN. That means that, say, an average of six times—that is about
right now, isn't it—about six?
Dr. GOLDENWEISER. Approximately.

Mr. P A T M A N . That means that they could inflate about $240,000,000,000 more?
Dr. GOU>ENWEISER. That is right.
I t w i l l be noted that the Federal Reserve banks and the commercial
banks could expand their deposits sufficiently to purchase $240,000,000,000 worth of Government bonds at the time D r . Goldenweiser
testified. W h e n the reserves are reduced to the l i m i t that they can
be reduced, these banks may purchase as much as $480,000,000,000
of Government bonds without h a v i n g any more capital stock or
assets than they now have except, of course, as M r . Eccles always
adds, that they w i l l have the Government bonds.
The taxpayers have p a i d at least $4 for every dollar that was borrowed on the $1,000,000 now outstanding on the debt created during
the W a r between the States. I t is possible that the taxpayers w i l l
pay several dollars for each dollar borrowed before the debt is f u l l y
liquidated.
I n the hearings on the price control bill, i n 1941, volume 2, commencing on page 1354, the f o l l o w i n g testimony appears:
Mr. Chairman, I desire to insert in the record two questions that I have
submitted to Mr. Morgenthau, under date of February 4, 1941, and his answers
under date of February 15, 1941.
The CHAIRMAN. They will be incorporated in the record.



FEU'EKAL RESERVE ACT AMENDMEfNT

107

Mr. P A T M A N . I asked Secretary Morgenthau the following question:
"Your annual report for the year ending June 30, 1940, on page 780 discloses
that there are outstanding now $758,945,800 in Treasury bonds that were issued
October 16, 1922, and bearing 4% percent interest. Please advise how much
interest the Government will have paid on these bonds by October 15, 1947,
and also by October 15,1952."
Mr. Morgenthau's answer was as follows:
"The annual interest charge on the 759.9 million dollars of 4% percent
Treasury bonds of 1947-52 outstanding on June 30, 1940, is 32.3 million dollars.
For the 25-year period from their date of issue to their first call date, October
15, 1947, the total interest payments with respect to the amount of bonds outstanding on June 30, 1940, would be about 806.4 million dollars; and for the
30-year period from date of issue to final maturity on October 15, 1952, would
be about 967.7 million dollars."
Mr. PATMAN. Then I asked this question:
"On the same page of the same report it is disclosed that there are
$49,800,000 of Panama Canal loan bonds outstanding, which were issued June 1,
1911, and are redeemable or payable June 1, 1961, with a rate of interest of 3
percent. Please advise how much interest has been paid on these bonds to date
and how much will have been paid by June 1, 1961."
And his answer was:
"The annual interest charge on these 49.8 million dollars of 3 percent Panama
Canal bonds of 1961 outstanding on June 30, 1940, is about 1.5 million dollars.
For the 29%-year period from their date of issue to December 1, 1940, the
total interest payments with respect to the amount of bonds outstanding on
June 30, 1940, would be about $44,000,000; and for the 50-year period from date
of issue to maturity on June 1, 1961, would be about $75,000,000."
I t w i l l be noticed that i n each of the cases inquired about the interest charges w i l l be considerably i n excess of the principal amount
borrowed. T h i s is typical of long-term bonds. Almost invariably
the taxpayers are compelled to pay more interest than the amount
of the p r i n c i p a l on a l l long-term bonds, not only Federal, but also
States and cities. I n the case of the P a n a m a Canal bonds, the
taxpayers w i l l be required to pay $75,000,000,000 i n interest by the
time the bonds are due and w i l l then still owe the $49,800,000 originally borrowed. Other similar instances could be cited.
M r . ROBERTSON. M r . Chairman, I would like to ask a question.
M r . Patman, as you probably know, some have been unkind enough
to refer to your plan as the issuance of printing-press money. Now,
i n order to get the difference between your p l a n and printing-press
money, w i l l you give us a p l a i n and concise 'definition of printingpress money?
M r . PATMAN. T h a t depends on which plan you are talking about.
T o u know, you couldn't have any more printing-press money than
you are using today. I f you think we are slipping into greenbackism, you can say we have already slipped, because that is what we
are using now f o r money. I t is just one of those obnoxious terms
that people are wont to use against any p l a n they do not favor.
M r . KNUTSON. M r . Patman, I have heard i t charged—I don't
know but what I have heard you say it, that up to 1862 some
similar p l a n to what you propose was before the Treasury Department i n this country.
M r . PATMAN. NO, I don't think so, M r . Knutson, but I w i l l say
this; that i n 1861-65 there were $356,000,000 of money issued, and
on a 5-percent annual-interest basis, more than $11,000,000,000 of
interest on that money has been saved and the money is still outstanding, and that is just an example of what can be saved i f you
adopt this plan instead of committing the taxpayers to forever payi n g interest on this debt.



108

FEJDEiRAL

REiSiERVE A C T

AMENDMENT

M r . KNUTSON. I am asking for information. W h a t was the market history of that money?
M r . PATMAN. YOU mean the United States notes?
M r . KNUTSON. Y e s ; the greenbacks.

M r . PATMAN. Well, they went down when they had no support
behind them at all, and when they could be used only for a limited
purpose.
M r . KNUTSON. HOW far down d i d they go?
M r . PATMAN. I don't know. They went down
M r . KNUTSON. Thirty-five cents?
M r . PATMAN. Then the Government made them good for all purposes and placed some gold behind them. O f course, there is no
danger on earth of any money outstanding. Take Federal Reserve
notes, there is some criticism about those. There is no danger of
those notes going below par. They w i l l always be worth a hundred
cents on the dollar. Those notes happened to be issued because they
had them printed over there—I am g i v i n g you my opinion only.
They may have had a different reason for it—and it is true they are
obligations of the Federal Reserve banks. The Government permits
the Federal Reserve banks to issue notes on the Government credit
to the extent of tens of billions of dollars, so why should the
Federal Reserve banks object to these notes being i n circulation,
which are obligations of the Federal Reserve banks to the extent ox
two-thirds of a billion dollars?
M r . KNUTSON. I t is my recollection those notes went down to
thirty-five cents, around 1864.
M r . PATMAN. I am sure they went down.
M r . K N U T S O N . B e t w e e n 1864 a n d 1867.

M r . PATMAN. There was nothing to keep them from it, when they
were only good for a limited purpose.
M r . KNUTSON. W h a t was the limited purpose?
M r . PATMAN. I don't know, it has been so long since I read their history, but I know they were restricted i n use, and they went do^n.
Senator Owen could tell you.
M r . KNUTSON. They were currency. The greenbacks that were issued during the W a r between the States were currency and circulated
as such. I don't think there was any restriction on its use, how the
money could be used.
M r . PATMAN. Well, I hope the gentleman would not want to use
that as a reason why this plan should not be adopted.
M r . KNUTSON. The only reason I inquire is that I was i n Germany
immediately following the war, and I w i l l never forget that I had to
pay 1,250,000 marks, that had a normal value of one-quarter i n dollars,
which would be about $300,000, for a breakfast consisting of half an
orange, a very small piece of ham, one egg, dry toast, and a cup of
coffee that I couldn't drink. I thought it was a little bit excessive.
I don't need to argue with you that we all want to get out of this debt
as easily as we can. I am not saying you haven't got a plan, because
I don't h o w enough about it. I t is my understanding, or at least I
have read somewhere, that Germany went into this war with about
$28,000,000,000.gold reserves; is that correct?
M r . PATMAN. I t couldn't have had that much gold reserves; there
isn't that much i n the world, 28 billion.
M r . KNUTSON. Twenty-eight million, I meant.



FEDERAL RESERVE ACT AMEtNDMEuVT

109

M r . PATMAN. Excuse me, I thought you said billion. I wouldn't be
surprised. T h e y had a small gold reserve.
M r KNUTSON. I f that be true, and they financed the war through
taxing resources to the utmost, as against wealthy nations like America, Great B r i t a i n , Russia, and China, i t does look to me as though
we should be able to find a way of w o r k i n g out of this thing without
placing too great a strain upon our economy. I can't say you haven't
got a good plan, M r . Patman, because I don't know. I have been listening to you w i t h a great deal of interest, and I am sure I represent
every member of this committee when I say we want to finance this war
i n the very easiest way possible.
M r . PATMAN. I i o i n you i n that hope.
M r . KNTJTSON. A n d we appreciate your taking the time to come before us this morning and explain your plan.
M r . PATMAN. M a y I suggest about this German money; Germany
doesn't have any gold reserve, hardly. G o l d reserve is not so important now as the integrity of the nation and the taxing power and the
ability of the people to pay taxes and debts. T h a t means more than
any metallic substance that may be behind any government obligation.
W n e n the war was over, Germany was a conquered country. W e don't
have to go to Germany to find out about money or currency. Go to
the Confederate States of America, after the W a r between the States,
and you w i l l find currency just as worthless.
M r . KNUTSON. Germany isn't a comparable country
M r . PATMAN. NO ; but Germany is financing her debt without gold
by only the credit of the Nation. T h a t is a l l that is behind money,
the integrity of the nation, the ability of the people to pay taxes.
M r . ROBERTSON. Doctor Hanson, of H a r v a r d , agrees w i t h that
theory. H e said Germany financed its war without money, but added
that i t took over the manpower and resources of the nation.
M r . PATMAN. Manpower would have no connection w i t h this, I w i l l
say to the gentleman f r o m V i r g i n i a .
M r . ROBERTSON. T h a t is the way Germany proposed to finance its
war without money, and some economists say we could do it.
M r . PATMAN. W e are fortunate i n that we can finance i t i n a way
just as convenient and not take over the manpower, as Germany did.
W e can get a l l of the benefits, without any of the liabilities.
(The f o l l o w i n g matter was submitted f o r the record by M r .
Patman.)
EDISON'S V I E W S O N T H I S S U B J E C T

About 20 years ago Mr. Thomas A. Edison was inspecting Muscle Shoals. He
remarked that the Government should operate that great project in the interest
of the people. He was asked if he favored the Government borrowing the $30,000,000 necessary to make repairs. His answer substantially was: "No; why
should the Government borrow its own credit? If it issues tax-exempt interestbearing bonds and sells the bonds to Wall Street bankers to get the money, by the
time the bonds are paid the bankers will have collected as much in interest as the
Government received on the bonds. In other words, the bankers, who will not
furnish an ounce of material or a lick of labor, will get as much out of it as the
men who do the work and furnish the material.,, Mr. Edison also said at the
same time: "Any government that can issue a dollar bond, interest bearing, that
is good can issue a dollar bill, noninterest bearing, that is good; the only difference is the bill is easier to redeem because it does not draw interest." No one
can answer Mr. Edison's argument. This same argument can consistently be
made on our preparedness progra!m.




FEJDEiRAL REiSiERVE ACT

110

AMENDMENT

ECCLES A G A I N QUOTED ON M O N E Y CREATION

Chairman Marriner S. Eccles, the top authority of the Federal Reserve Board
here in Washington, testified before the Banking and Currency Committee of the
House during the hearings on the Banking Act of 1935, on private banks creating
deposits and thereby becoming virtually private individual mints, as follows:
"In purchasing offerings of Government bonds, the banking system as a whole
creates new money or bank deposits. When the banks buy a billion dollars of
Government bonds as they are offered—and you have to consider the banking
system as a whole, as a unit—the banks credit the deposit account of the Treasury
with a billion dollars. They debit their Government-bond account a billion dollars, or they actually create, by a bookkeeping entry, a billion dollars."
By a sort of magic the money is created.
CONSTITUTIONAL

MANDATE

The framers of the United States Constitution, in article I, section 8, very
wisely said:
"Congress shall have the power to coin money and regulate the value thereof."
This provision of the Constitution is mandatory. A l l Members of Congress are
sworn to uphold the Constitution. Why has this provision never been carried
out? The answer is simple. In the early days of our national existence the
people were deceived into believing that the subject of money was so mysterious
and intricate that only a few of the financiers understood the subject, and therefore the great privilege of issuing and distributing money should be farmed out
to them. This was done, and it has never been changed, except to give them more
power and authority. The strange part of it all is that the ones who are the
beneficiaries of this great privilege are not even charged with the duty of furnishing the people a sufficient circulating medium.
L E O N HENDERSON'S T E S T I M O N Y ON N O DEBTS, NO M O N E Y

In the hearings before the House Banking and Currency Committee on the
price-control bill, the following questions were asked by me and the following
answers given by Mr. Leon Henderson (pp. 981-982) :
"Mr. P A T M A N . * * * You stated yesterday that everybody should take advantage of this period of rising prices to pay their debts. You really don't
believe everybody should pay their debts, do you? If you mean that, what would
we do for money, since our money is based on debt?
"Mr. H E N D E R S O N . I have been through that, the same as you have, and I don't
believe our economy would come to a halt if people paid their debts.
"Mr. P A T M A N . If everybody paid their debts?
.„ "Mr. H E N D E R S O N . If you are going to say that I have discounted the trade
acceptances which the Federal Reserve has created by a couple of bookkeepers,
that is not the connotation debt has for me.
"Mr. P A T M A N . Y O U had in mind individual debts, personal debts?
" M r . HENDERSON.

Yes.

"Mr. P A T M A N . And if the policy is good for individuals, why isn't it good for
corporations?
"Mr. H E N D E R S O N . I think it is.
"Mr. P A T M A N . A l l right. If everybody paid their debts, where would you get
money to carry on business?
"Mr. H E N D E R S O N . Y O U would get into debt and come out again. I assume the
healthy process of credit is that you do liquidate debt as you do the trade acceptances."
Mr. Speaker, Mr. Henderson's very clever reply was, in effect, that it is all right
to pay the debts, but you should get right back into debt again in order for the
country to have this circulating medium.
C H A I R M A N M A R R I N E R S. ECCLES' T E S T I M O N Y O N NO DEBTS, N O M O N E Y , I N H I S T E S T I M O N Y
ON T H E PRICE-CONTROL B I L L BEFORE T H E B A N K I N G A N D C U R R E N C Y C O M M I T T E E

Chairman Eccles, of the Federal Reserve Board, testified as follows, page 1338
of the hearings, September 30, 1941:
"Mr. P A T M A N . * * * You made the statement that people should get out of
debt instead of spending their money. You recall that statement, I presume?
"Mr. ECOI.ES. That was in connection with installment credit.
"Mr. P A T M A N . D O you believe that people should pay their debts generally
when they can?




111 FEDEiRAL REiSE'RVE ACT AMEiNDMENT
"Mr. ECCLES. I think that depends a good deal upon the individual; but, of
course, if there were no debt in our money system
"Mr. P A T M A N . That is the point I wanted to ask you about.
"Mr. ECCLES. There wouldn't be any money.
"Mr. P A T M A N . Suppose everybody paid their debts, would we have any money
to do business on?
"Mr. ECCLES. That is correct.
"Mr. P A T M A N . In other words, our system is based entirely on debt."
Mr. Speaker, there can be no dispute about the statement that our system is
based entirely upon debt, and if a person and corporation paid their debts we
would not have sufficient money to do business on.
If we were to change that system the Government would pay its own money
into circulation, and the people would be saved billions of dollars a year in
interest.
The Federal Reserve Banking System is privately owned. Not $1 of the stock
is owned by the Government or by the people; it is owned by private banking
corporations. It is a corporation owned by corporations. Many people believe
that the Federal Reserve Banking System is owned by the Government because
it is named Federal, but of course this is not true.
CREATE M O N E Y , B U Y BONDS, A N D COLLECT INTEREST

When the Honorable Marriner S. Eccles, Chairman of the Federal Reserve
Board, was before the Banking and Currency Committee of the House, of which
I am a member, on Tuesday, September 30, 1941, I interrogated him about how
he obtained for the 12 Federal Reserve banks the $2,000,000,000 in Government
bonds, which the System is now holding and charging the Government interest
thereon. The questions and answers appear in the printed testimony, volume 2,
page 1342, and is as follows:
"Mr. P A T M A N . * * * How did you get the money to buy those $2,000,000,000
of Government securities?
"Mr. ECCLES. We created it.
"Mr. P A T M A N . Out of what?
"Mr. ECCLES. Out of the right to issue credit, money.
"Mr. P A T M A N . And there is nothing behind it, is there, except the Government's
credit?
"Mr. ECCLES. We have the Government bonds.
"Mr. P A T M A N . That's right; the Government's credit."
Mr. Speaker, the Government is now paying between forty and fifty million
dollars a year to the Federal Reserve Banking System as interest on these bonds.
The expenses, dividends, and profits of the System are paid in that way. It would
be just as reasonable for each department of our Government to be allowed to
purchase enough Government bonds to pay their expenses the same way. It
would be just as reasonable for the Government to set aside enough interestbearing bonds to each Federal employee to pay the Federal employee interest
sufficient to pay his salary as it is for the Federal Reserve Banking System to
get their expenses paid in that way.
Under our present system the Federal Reserve banks can purchase twenty-five
or fifty billion, a hundred billion, or an unlimited amount of Government bonds
the same way they purchased and then held the $2,000,000,000. The System now
owns about $6,000,000,000 in United States securities acquired the same way.
Officials of the Federal Reserve System are paid salaries up to $50,000 a year.
Commercial banks that obtain a large part of their earnings from United States
bonds bought with created money paid their officials up to $175,000 a year.
(Article from the Congressional Record submitted b y M r . P a t m a n
follows:)
W A R D E B T C A N B E PAID I N 40 YEARS W I T H O U T UNBEARABLE B U R D E N ON T A X P A Y E R S
B Y CONGRESS U S I N G T H E G O V E R N M E N T ' S CREDIT A N D I D L E GOLD I N S T E A D OF C O N T I N U I N G TO F A R M I T O U T TO S P E C I A L P R I V A T E CORPORATE I N T E R E S T S

"[II. R. 1, 78th Cong., 1st sess., Jan. 6, 1943]
"A BILL Providing for the issuance of nonnegotiable United States bonds to Federal
Reserve banks and terminating the authority of the Treasury to issue other interestbearing obligations of the United States to commercial banks, and for other purposes
86330—43




8

112

FEJDEiRAL REiSiERVE ACT

AMENDMENT

"J5e it enacted by the Senate and House of Representatives

of the United

States

of America in Congress assembled, That the Secretary of the Treasury, with the
approval of the President, is authorized to issue from time to time United States
bonds, the proceeds of which shall be available to meet any public expenditures
authorized by law and to retire any outstanding obligations of the United States
bearing interest or issued on a discount or on a combination interest-bearing and
discount basis. Such bonds shall be issued in such form or forms and in such
denominations, and mature at such times (not in excess of 40 years from the date
of issue) as the Secretary of the Treasury may prescribe. Such bonds shall not
bear interest or be issued on a discount basis and shall not be negotiable or transferable.
"SEC. 2. Bonds issued under the provisions of this act shall be issued solely to
Federal Reserve banks and shall be subscribed for by the various Federal Reserve
banks in such proportions of the entire issue as may be agreed upon by the Secretary of the Treasury and the Board of Governors of the Federal Reserve System.
The Secretary of the Treasury shall pay, out of any funds hereafter appropriated
for such purpose, to each Federal Reserve bank subscribing to bonds issued under
this act, such amounts as he deems necessary to reimburse such bank for any
expenses incurred by it in connection with such bonds.
"SEC. 3. The authority of the Secretary of the Treasury to issue any interestbearing obligations of the United States (including obligations issued on a discount basis or on a combination discount and interest-bearing basis) under any
other provisions of law is hereby terminated insofar as the issuance of United
States bonds to any bank receiving demand deposits is authorized hereby. Except in accordance with such regulations as the Secretary of the Treasury may
prescribe in order to provide for the orderly disposition of United States bonds
held by any bank receiving demand deposits on the date of the enactment of this
act, no such bank shall at any time hold any amount of United States bonds in
excess of the amount held by it on December 31,1941.
"SEC. 4. The first two paragraphs of section 7 of the Federal Reserve Act, as
amended, are amended to read as follows:
" 'SEC. 7. After all necessary expenses of a Federal Reserve bank have been
paid or provided for and a surplus equal to the paid-in capital stock of such
bank accumulated, the annual net earnings of such bank shall be paid into the
general fund of the Treasury.
" 'Should a Federal Reserve bank be dissolved or go into liquidation, any surplus remaining, after the payment of all debts and the par value of all stock,
shall be paid to and become the property of the United States/ "
W I L L STOP F A R M I N G O U T G O V E R N M E N T CREDIT A N D U S E OF I D L E GOLD F R E E TO
BOND B U Y E R S

Section 1 of the bill will permit the Secretary of the Treasury, instead of
selling Government interest-bearing bonds, to receive the money necessary to
meet any public expenditure by issuing and depositing with the 12 Federal
Reserve banks bonds that provide for no interest. These bonds will not be sold
to the public, as the public generally would probably not be interested in buying
them since they will not draw interest, but the Federal Reserve banks can keep
them, and each year the Government can make a payment on the bonds to the
Federal Reserve banks.
Under our present system the Treasury, when it needs money, sells bonds
that provide for interest through the Federal Reserve banks, and in that way
the Treasury receives credit at the Federal Reserve banks, which is checked
upon in order to pay the debts of the Government. This proposal will permit
the Treasury to receive the same amount of credit as on interest-bearing bonds
and the Treasury may check upon this credit in the same manner that it is
checked upon today when interest-bearing bonds are sold. In other words,
when this proposal is enacted, the Treasury will give the same kind of checks
to the same people for the same service, or in payment of the same debts. The
people receiving these checks under the new proposal will deposit them or receive
the money on them in the same way and manner that they now receive credit at
the local banks, or receive the money in return for their checks.
This will not cause the distribution or circulation of one extra dollar of actual
currency. Therefore, it cannot be considered a greenback or printing-press
proposal. It is strictly an orthodox banking method, which will permit the
Government to finance the war debt without paying tribute to a few people who
are using the Government's credit and idle gold absolutely free.




FEE'EiRAL RElSiEKVE ACT

AMENDMENT

113

H O W NON-INTEREST-BEARING BONDS DISTRIBUTED

Section 2 of the bill provides the method by which the bonds, which w i l l be
noninterest bearing, will be distributed among the 12 Federal Reserve banks.
The method that will be agreed upon will doubtless be according to the capital
stock or resources of the particular bank. If the Treasury needs a million
dollars, it will distribute the bonds among the 12 Federal Reserve banks, which
will aggregate a million dollars. The largest Federal Reserve bank, of course,
will take much more of the bonds than the smallest Federal Reserve bank.
The distribution will be made by the Treasury and the Board of Governors
of the Federal Reserve System.
B A N K S W I L L B E P A I D FOB SERVICE

This section also provides that the Federal Reserve banks will not lose any
money by reason of servicing these loans to the Government without interest
since the bill provides that each bank shall be reimbursed for any expenses incurred in connection with the bonds. The expenses, of course, will be practically
nothing (not as much as one-twentieth of 1 percent interest) compared with the
huge amounts of bonds that will necessarily be issued to finance the war debt.
I F M O N E T IS TO BE CREATED I T S H O U L D B E CREATED B Y T H E GOVERNMENT A N D
INTEREST PAID ON IT

NO

Section 3, the first sentence, provides that no more interest-bearing obligations of the United States shall be issued and sold to commercial banks, or
banks receiving demand deposits. The reason for that is that such a bank does
not have anything to give the Government in return for its bonds. It merely
receives the bonds and gives the Government credit in bookkeeping transactions,
or pencil-mark or fountain-pen money. Every informed person admits that
under such circumstances, the commercial banks create the money outright. If
money is to be created outright it should be created by the Government and no
interest paid on it.
BANKS

CANNOT F U R T H E R

INCREASE

HOLDINGS

OF G O V E R N M E N T

BONDS

Section 3, in the second and last sentence, provides that no bank which receives
deposits, in other words a bank that must create the money in order to buy
bonds, shall at any time hold any amount of United States bonds in excess
of the amount held by it on December 31, 1941. In other words, if a bank held
$2,000,000 in Government securities on the date mentioned, it can sell any
amount of those bonds that it desires to sell, and may in turn purchase other
United States Government securities up to, but not in excess of the $2,000,000,
which was the amount held December 31, 1941.
B A N K S NOW L E N D $10 TO E V E R Y

OWNED

The stockholders in all the banks in the United States have invested and
would lose if the banks should be forced into bankruptcy or liquidation and
there should be no recoveries, the total sum of $8,000,000,000. About three and
one-half billion dollars of this is capital; about three and one-half billion dollars
is surplus, and about $1,000,000,000 in undivided profits, making about $8,000,000,000. That is all the stockholders in banks in America have invested in these
banks. Notwithstanding, only $8,000,000,000 are invested in all these institutions,
they have purchased more than $40,000,000,000 in United States Government
securities, and now hold these securities and receive interest on them annually
and expect to hold $112,000,000,000 by the end of the next fiscal year. Without
stating or discussing how much the banks should be allowed to expand, it is
evident that orthodox banking methods, safe banking methods, and logical
banking methods should prohibit any bank from expanding more than $10 for
every one that it owns. Let us presume, for the sake of discussion, that it is right
for a bank to be allowed to lend $10 for every one it has, and thereby receive
interest on $10 for every $1 invested by the stockholders and still we cannot
escape the logical conclusion that no bank should be allowed to expand more
than $10 for every one.
CONGRESS SHOULD NOT SIT I D L Y B Y

This being true, why should Congress sit idly by and allow the banks to expand
$20 to every one, or $50 to every one, in order to finance the war and the other
•expenditures of our Government when it is nothing more nor less than Congress




FEJDEiRAL REiSiERVE ACT

114

AMENDMENT

permitting the credit of this Nation to be farmed out for the selfish benefit of
private banking corporations?
G O V E R N M E N T CREDIT F A R M E D OUT

The Government of the United States, under the Constitution, has the power,
and it is the duty of the Government, to create all money. The Treasury Department issues both money and bonds. Under the present system it sells the bonds
to a bank that creates the money, and then if the bank needs the actual money,
the actual printed greenbacks to pay the depositors, the Treasury will furnish that
money to the banks to pay the depositors. In that way, the Government farms out
the use of its own credit absolutely free.
B A C K I N G FOR

NON-INTEREST-BEARING

BONDS

If the Federal Reserve banks provide the credit to finance the war, as proposed
in the bill, inserted herewith, these bonds will be backed by the credit of the Nation, which includes the taxing power of the Nation, and also the $23,000,000,000
in gold that is now idle and unused, except that portion that is used free by the
private banking system of this country.
BONDS B A C K E D B Y T A X I N G POWER, TOO

A bond issued by the Government carries with it an obligation that Congress
will pass laws levying taxes which will be sufficient to cause the taxpayers to
pay money in taxes to pay the interest on the bonds, and to eventually retire them
when due. The history of the issuance of long-term bonds by our Government
is conclusive that the Government invariably pays $2 to every $1 that it borrows.
In other words, it pays $1 in interest and $1 in principal.
G O V E R N M E N T TO P A Y DOUBLE

A $100,000,000,000 debt means, under the present system, that the taxpayers
w i l l eventually have to pay $200,000,000,000. With a huge debt of $300,000,000,000, which is estimated by many Government authorities as being the amount
that the public debt will reach before the war is over, it will probably be impossible
for the taxpayers to pay enough money each year to liquidate any part of the principal of the bonds. Therefore they will remain in bondage for centuries because
they will be unable to pay any more each year than is sufficient to provide for the
interest on the bonds.
$1 P A I D M O N E Y CREATES FOR E V E R Y $1 P A I D A SOLDIER

Viewing the situation from the most optimistic viewpoint, the taxpayers will be
compelled to pay at least $2 for every $1 borrowed. For every $1 that is paid
to a soldier, the money creators have nothing to offer except the Government's
credit, which has been given to them free, will also receive $1. For every $1 that
is paid to every person for materials furnished, the money creators will receive
$1 in interest for no service whatsoever in the form of interest for furnishing the
Government's credit, which has been furnished to the money lender free. For
every $1 that is paid out for any purpose, in this war or for peacetime pursuit, the
interest will amount to at least $1, and the result will be that the taxpayer must
pay $2 in order to liquidate every $1 debt.
I cannot understand why anyone should insist that the credit of this Nation
and the use of the Government's gold should be farmed out absolutely free to
the private banking corporations of this country, and require the taxpayers to
pay at least $2 in order to obtain $1 in our war preparation.
R E P A I R H O P E L E S S N E S S OF P E O P L E

Let us repair the hopelessness that is now being felt by the people on account
of what they think will probably happen after the war with a $300,000,000,000
public debt by changing the system so that the Government can use its own credit
and its own gold and not pay $2 for every $1 that is borrowed.
W A R DEBT C A N B E PAID I N 40 T E A R S

If our national debt for the war is $300,000,000,000, it can be paid over a period
of 40 years without an unbearable burden on the taxpayers by the Government
borrowing money from the Federal Reserve banks and paying it back 2 y2 percent




115 FEDEiRAL REiSE'RVE ACT

AMEiNDMENT

•each year. This 2% percent will be no more than interest that is being charged
today, and the amount will be sufficient to entirely pay off the bonds in 40 years.
'Whereas if we continue the present system of paying interest on these bonds, at
the end of 40 years, after paying 2y2 percent each year, we will still owe the
principal amount of the bonds, and the debt will be just as large at the end of 40
years as it is today or when the debt is the largest.
W I L L REDUCE C H A N C E S OF I N F L A T I O N

If we borrow the money to finance the war from the Federal Reserve banks
and it is paid 2% percent each year and entirely paid off ancl liquidated in 40
years, there will be no likelihood of inflation during that time. Whereas, if we
continue paying tribute to a few for the use of the Government's own credit, we
will in all probability have inflation unless it is possible to prevent it by price
•control and other methods.
D U T Y OF CONGRESS TO M A K E C H A N G E

It occurs to me that the duty of making this change is on Congress. It is not
-on the executive, the judiciary, or any department of our Government. It rests
solely and alone upon the Congress of the United States to change the system
that causes our credit to be farmed out and enormous interest burden paid unnecessarily and uselessly on its credit.
A B U S E OF POWER TO T A X

If Congress continues to require the people to pay billions of doUars a year
unnecessarily as interest on Government bonds it occurs to me that it is an abuse
on the part of Congress of the power to tax. Congress has the power to tax and
is exercising that power to the limit, but certainly Congress should not abuse the
power by levying taxes to pay a debt that is extravagant, wasteful, and unnecessary in every way.
NOW T I M E TO M A K E T H E C H A N G E

One of these days, the American people are going to wake up and realize the
situation, and they will blame this very Congress for not making the change at
this time, when we are entering upon a $300,000,000,000 war program. Now is
the time to make the change. It is not a change that will involve unorthodox
^banking methods. It is a change that will save the Government interest on the
public debt hereafter contracted, but will not be in any way dangerous to the general welfare of the country. On the other hand, it will be greatly in the interest
of the general welfare of the country because the war debt will cost the taxpayers only 50 percent, at least, of what it will cost under the present system.
BOND SALES TO P U B L I C S H O U L D C O N T I N U E

I am not proposing that bond sales to the public be stopped or impeded in any
way. It is my belief that bond sales to the public should be encouraged because
they are calculated to prevent or stop inflation to a certain extent. At the same
time we know that the bonds that the public are buying at this time, will, when this
-emergency is over, be in the market one way or another and, that being true, the
money creators will be in a position to purchase them by using the Government's
-credit free and the idle gold free, and receive interest from the Government for
no service whatsoever.
$1,000 INTEREST PER CAPITA

TO B E P A I D ON T H T S Y E A R ' S

BUDGET

The Budget for next year is $108,000,000,000. This nif ans that it will cost
the American taxpayer by the time the $108,000,000,000 debt is paid, under our
present system of farming out our credit free, twice that amount, or $216,000,000,000. This means that every man, woman, and child in America, on this
$108,000,000,000 debt, wiU have to pay about $1,000 in interest and $1,000 on the
principal, presuming that the debt can be paid in 40 or 50 years. It is not right
for Congress to make the people pay that $1,000 for every man, woman, and
child in America as interest for the use of the Government's own credit and for
the use of the Government's own idle gold by farming out the Government's great
.privilege and right to create money to private banking interests of the Nation.




116

FEDERAL RESERVE ACT AMENDMENT
PERPETUAL DEBT

The current estimate of what the war, whole war, is going to cost us
$300,000,000,000. I f we spend $300,000,000,000 on this war, it will cost about
eight or nine billion dollars a year to pay the interest on the $300,000,000,000.
I n all probability, that is all the taxpayers of this country will be able to pay,
and will, therefore, be unable to make any payment on the principal of the debt
each year. That being true, all the money that will be raised in taxes to pay on
the national debt will go to the people who are using the credit of the Nation
absolutely free, and who have had farmed out to them the use of the idle gold
free, and the people will thereby be caused to pay a debt that is useless, wasteful,
extravagant, and unnecessary.
IT IS WRONG FOR THE GOVERNMENT OF THE UNITED STATES THAT I s SOVEREIGN To*
PAY PRIVATE CORPORATIONS TO CREATE MONEY ON THE GOVERNMENT'S CREDIT
UNITED STATES SOVEREIGN
No city is sovereign because it has superiors, the State and the National Government. A State is not sovereign because it has a superior in the National
Government. The National Government is sovereign because it has no superior
in the form of a government, and the National Government has the power to
create its own credit upon which no interest should be paid instead of farming
out that great privilege to the private banks of the country.

The CHAIRMAN. Have you finished your statement?
Mr. PATMAN. Yes, Mr. Chairman.
The CHAIRMAN. We thank you.
Mr. PATMAN. I want you to hear from the Honorable Robert Latham Owen, a Member of the United States Senate from the State of
Oklahoma from 1907 to 1925. He was chairman of the Committee on
Banking and Currency of the Senate and was coauthor of the OwenGlass Federal Reserve bill when the Federal Reserve Act was enacted
into law December 23, 1913.
Senator Owen is one of the best informed men in the world on our
United States monetary system. He organized and has been a director
of a successful national bank for 50 years. When President Woodrow
Wilson signed the Federal Reserve Act December 23, 1913, he wrote
Senator Robert L. Owen a beautiful letter that he was entitled to the
gratitude of the country and gave him one of the gold pens with which
he signed the bill.
The CHAIRMAN. How much time will he require?
Mr. P A T M A N . I assure the chairman he can make a great contribution to this subject, or any other subject, and I hope you will hear him
with consideration. I know he will be conservative in time. He
never did take up much time. I assure you he will take no more than
the subject justifies.
The CHAIRMAN. Very well; we will hear him.
STATEMENT OF H O N . ROBERT L . OWEN, FORMER U N I T E D STATES
SENATOR F R O M THE STATE OF OKLAHOMA, BEFORE THE COMMITTEE
ON W A Y S AND M E A N S , HOUSE OF REPRESENTATIVES, FEBRUARY

13, 1943

Mr. O W E N . My name is Robert L . Owen. Mr. Chairman and gentlemen of the committee, it is not what I might say to you, but what
you receive, that is a matter of importance now before your committee.




117 FEDEiRAL REiSE'RVE ACT

AMEiNDMENT

Y o u are proposing a bill to expand the credit outstanding, the
indebtedness of the United States, up to $210,000,000,000, as I understand it. M r . Patman suggests that i n doing so you hold down, as f a r
as you can, that indebtedness by protecting the taxpayers from unearned interest on that debt. I have some familiarity w i t h the
banking system. I regard our free competitive system of industry
and our banking structure as the best i n the world, and the services
of our bankers to the country have been very great. I have been a
director of a bank for 53 years, i n recent years, I think, purely complimentary, but I am familiar w i t h the banking system, and I am
familiar with its history, and I manufactured money myself i n that
capacity in a few little ways that I think might interest you, i f I may
take a moment.
When, in a great pressure one time for currency, with the consent
of the citizens of the town, the bank of which I was president issued
cashier's checks payable to bearer, $5 each. They circulate as money,
perfectly good money. They functioned i n exchanging commodities
and services from one person to another i n that locality.
I might give you another instance, or instances. The Chase National Bank has 2,000 forms of script money, issued by the citizens o f
this country without interest for the same purpose, of facilitating the
exchange of commodities and services from one person to another.
O n one occasion, as the president of a national bank, 1 wired to
our New Y o r k correspondent to place an order and buy $500,000 o f
bonds, place them with the Comptroller of the Currency, make a
deposit from our account of 5 percent, and receive from the Comptroller of the Currency national bank notes to the extent of $500,000*
on which my bank received the interest for many, many years, and of
which I was a beneficiary as a stockholder, without shame. I t was
the practice of the country.
But we are now facing a great W o r l d W a r , i n which the resources
of this country w i l l be taxed to the utmost, to such an extent that this
honorable committee has found it advisable to tax the little citizen o f
the country who is receiving $13 or more a week as compensation.
That tax w i l l be employed i n defending the interests of our country
on the battlefield and i n furnishing our soldiers w i t h the weapons o f
war.
B u t I call your attention most earnestly to the fact that when you
expand this credit to $210,000,000,000 of indebtedness of the U n i t e d
States, as we must do—you have got no option about i t ; you have
got to do it—when you do that, do not add to that burden, as a part
of it, unearned interest money.
When I say it is unearned, I must justify that statement, i f it is t o
have any force. Our forefathers had some experience with money.
One of the contributing causes to the Revolutionary W a r , as recorded
by Benjamin Franklin, was the fact that the E n g l i s h Parliament
stopped the circulation of the colonial money, i n order to put E n g l i s h
money i n circulation i n the United States, and caused a tremendous
depression, and idleness, and contributing to the distress of our forefathers at that time.
I t was done by contracting the volume of money i n circulation,
which stopped the people from the free interchange of commodities
and services, because they didn't have the medium of exchange.




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FEJDEiRAL REiSiERVE ACT

AMENDMENT

W h e n I say unearned interest, gentlemen, I go back to the Constitution of the U n i t e d States, where our forefathers put into the
first section of the Constitution a provision that.the Congress of the
United States was exclusively authorized to coin money and regulate
the value thereof.
The Supreme Court of the United States, i n the
Legal Tender cases, held i n substance that the term "coin" covered
printing paper money. They also held that the Congress of the
U n i t e d States was exclusively authorized to create money, and that
that right was withheld f r o m the States, and when we come to
creating money, and the question is asked, "what w i l l be paid for
a Government bond?" let us look at that transaction.
The Government sells to a bank a million dollars of Government
bonds. Does the bank pay for it i n currency or coin? A r e they expected to pay for it i n currency or coin? Certainly not. Well, what
do they pay for it with? They pay for it with their individual
banking credit, by an entry on the ledger of the banking house,
whether a national bank or any other bank, and against that credit
the Treasury Department can draw checks, and the same thing is
done w i t h the Federal Reserve banks as an agency of the United
States, established for the express purpose of exercising supervisory
control over the monetary system of this country.
Precisely the same thing takes place as when $5,000,000,000 was
recently sold to the Federal Reserve banks against the credit on the
books of those banks. Nothing strange about it. Everybody understands i t who pays any attention to this question. B u t I realize, M r .
Chairman, and gentlemen of the committee, that a great many people
i n the U n i t e d States have had no particular time to study the monetary science, there has been a general understanding that money
was a mysterious thing, and nobody understood what made the value
of money. That has been proclaimed from the housetops by some
persons of rather h i g h authority—that nobody knew what made the
yalue of money.
Oh, well, we have learned now what makes the value of money,
and we have learned that when we expand the credit of the United
States by the issuance of bonds up to the present moment that we
have created money and put that money in the banks and into the
hands of private citizens, and we have learned that we must contract that amount of taxations so far as we can without destroying
our productive processes, and we have found that we must contract
i t by selling bonds to individuals and corporations who have money
on deposit i n banks as demand bank deposits.
W h y certainly we have got to do that. There is no doubt about
it. N o doubt about it. Otherwise, the volume of money i n circulation would rise to a point where it would be impossible to fix prices
and hold those prices down to a reasonable point.
A s i t is, w i t h great skill, with great patriotism, the Treasury Department has been enabled to sell bonds to the extent necessary to
h o l d the dollar index down to approximately par. I t is true that i n
February a year ago i t was 124, but then it came down approaching
par, and those efforts on the part of our Government and on the part
o f this honorable committee and the Congress of the United States
and the cooperation of the people have brought that dollar index
down again, very, very slowly i n the recent months, only a m i l l or
t w o a week, only two mills last week. I t is now 98 as compared
to 1926.



EEDE.RAL RElSlE'RVE A C T

AMENDMENT

119

I f you w i l l examine the volume of money i n circulation through
the banking system i n the device of individual accounts on the books
of the banks, not including interbank checks, you w i l l find that i n
1926 the volume of money turned over i n that way by check, amounted
to $845,000,000,000, and had a turn-over approximately 40 times a
year the amount that was being circulated. I t is not far from that
now. A n d the circulation of money has been kept down by this
process of taxation and of selling bonds, so that the dollar index
has been held down.
There is one feature, with your permission, I would like to comment upon, and that is this; that it should be true at all times that
whether our industrial production is engaging i n war products or
domestic products, the ratio of the income arising from it corresponds
to the amount actually employed i n turn-over, the income being three
times the amount of the money actually employed i n actual circulation. So that it is of importance, particularly i n this connection,
that our domestic production, to be kept up to the maximum, w i l l
require the amount of money i n circulation to be according to that
formula.
I mention that because we are now being concerned about raising a
sufficient amount of production to feed Europe as well as ourselves
and our soldiers on the front. Therefore, the question of domestic
production needs attention by the Congress of the U n i t e d States, and
i n that connection, it needs to consider the employment of money as
one of the agencies in expanding that domestic production.
Coming back, therefore, to the Constitution of the U n i t e d States,
where Congress was exclusively authorized to create money, and the
process by which Congress has been creating it, I express the hoj>e
that this committee w i l l consider with the greatest care the proposition submitted to it by M r . Patman, of cutting down the expansion
of the payment of unearned interest to anybody, including myself, as
a stockholder i n a bank.
I do not wish to take the time of the committee, further than to
express these opinions. I f there are any questions which any of the
committee would like to ask me to comment on, I shall be glad to do
it. ^ M y only purpose i n coming here is to serve the people of the
United States, and because I was urgently invited to come, thinking
that my experience might be of interest or value to the committee. I
pause, M r . Chairman, for any questions that you or any member of
the committee might care to ask me.
M r . KNUTSON. Senator, would the plan that M r . Patman proposes
tend to bring on uncontrolled inflation?
M r . OWEN. It would have A tendency to prevent, to the extent i t is
employed to prevent the expansion of the money which w i l l produce
inflation. I am not going to use the term "uncontrolled inflation."
I know that inflation can be controlled by an intelligent and strong
government, and I am i n favor of it. I have always demanded stability i n the purchasing power of money, and when I had been i n the
Senate less than 90 days I made an address before the Senate making
that demand, and I based the address I made on the A l d r i c h bill, on
the grounds of stabilizing the purchasing power of money because it
would itself stabilize the industrial activities of this country and
stabilize the productive power of the greatest people i n the world,
and I have been deeply disappointed i n the administration of the act,



FEJDEiRAL

120

REiSiERVE ACT

AMENDMENT

which ought to have accomplished that result i n a way i n which I
pointed out from time to time i n the public press, and to which I
have the right to refer now. I t could have been prevented. The
contraction which took place i n 1920-21 was over my vehement protest and w i t h my statement on the floor of the Senate that i t would
cause a depression, which it d i d cause immediately afterwards.
Mr.

KNUTSON. T h a t

depression you

are r e f e r r i n g to i n

1920-21

was caused altogether by the Federal Eeserve calling their agricultural loans, was it not, Senator?
M r . OWEN. N O ; not altogether.

Mr.
Mr.
ture.
Mr.
Mr.

KNUTSON. Largely, then?
OWEN. NO; not largely. I t had a ruinous effect on agriculKNUTSON. F r o m which it has never recovered.
OWEN. F r o m which it has never recovered.

M r . KNUTSON. Y o u are r i g h t .

M r . OWEN. O f course, I am right, and everybody knows it. What
d i d take place at that time was a deliberate policy of contraction for
the purpose of cutting down the market price of commodities and
services and thereby increasing the purchasing power of money, and
benefiting creditors and those having their investments i n money,
without giving time to the people to adjust themselves to it. Therefore, they created a panic.
M r . KNUTSON. Well, i t had the effect, up i n our country, of bringi n g about forced sales of cattle and grain, and as a result the markets
became glutted and it further accelerated the movement downward.
Isn't that right?
M r . OWEN. Yes; that took place. What took place in 1929-32 was
an occurrence on the other side of contraction, that is, inflatipn of
credit—about $14,000,000,000 i n the security market. There was a
gross expansion of credit i n the security markets, so that billions of
dollars of foreign money and billions of dollars of domestic money
created by the sale of stocks of our great industrial companies which
flowed into the security market, and caused the market price of securities to rise beyond reason, to rise beyond the point where they could
possibly earn interest on the investment, rise to a point which showed
to the thoughtful, prudent bankers of the country that there would
be a collapse, and i n M a y 1929 I wrote a memorandum of 16 pages to
President Hoover, w i t h 12 charts, and took it in my hands and presented it to h i m at lunch and urged him to study the matter for the
purpose of meeting what was going to happen. What took place afterward, I w i l l not comment on, except to observe that a credit convulsion
and violent bear movement occurred i n October 1929 resulting i n
enormous contraction of the money supply with panic and bankruptcy
following.
The CHAIRMAN. W h a t d i d he say about your charts?
M r . OWEN. H e said, i n answer to my prayers, that i f he interfered
w i t h the Federal Eeserve B o a r d or the Federal Eeserve banks he
would be accused of using politics in the System and it would injure
the System, i n his opinion. I replied to him that he, as President of
the U n i t e d States, was charged with the responsibility of leadership
and of protecting the people of this country against what would
inevitably happen unless the f u l l powers of this Government were
used to meet the crisis that was impending, and that i f he d i d not do



121

FEDEiRAL REiSE'RVE ACT

AMEiNDMENT

it, it would ruin him politically and ruin his party. A n d I put that
i n writing and I gave a copy of it to the chairman of the B a n k i n g
and Currency Committee of the House, i f any of you want to see it.
The CHAIRMAN. Have you brought the same situation to the attention of President Roosevelt ? I f so, what was his reply ?
M r . OWEN. President Roosevelt had his attention called to the violence of this depression by some very important occurrences which
preceded his election, and which had been brought about by the very
things I was protesting to Hoover. H e came i n after 1932, at which
time I am telling you this country was manufacturing its own money
from one end of the country to the other and establishing barter
exchanges i n order to exchange products where there was no money
available for exchange. M r . Roosevelt came i n when this country was
facing the greatest disaster, financially, it ever had faced i n its history,
and when he came in he had to declare a public holiday for the banks
of the country. W h y ? Because the people of this country were so
disturbed there was danger of runs on the banks from one end of the
country to the other. Ten thousand banks failed under this depression
of 1932 by the destruction of the value of their securities. Then Congress took steps to stabilize, authorized the issuance of money and of
credit. A s a matter of fact, the Federal Reserve B o a r d and Federal
Reserve banks, instead of expanding credit, contracted it during the
next 18 months, to the extent of approximately $3,000,000,000. T h e
record shows that and I pointed it out, and I pointed it out i n w r i t i n g
to the proper authorities, with proof, and the proof of it can be found
by anyone interested i n it, by looking up the weekly statements of the
Federal Reserve banks of March 14,1933, and the corresponding week
i n 1934. I have been deeply interested i n these matters and have made
a most resolute effort to understand them.
The CHAIRMAN. I didn't quite get clear how far you had gone i n
prosecuting this matter proposed i n M r . Patman's b i l l and discussi n g it with Secretary Morgenthau and M r . Roosevelt as i t relates
to our present situation, borrowing large amounts of additional
money. Have you had any discussion w i t h the administration about
it?
M r . OWEN. Oh, no; I have not been invited to discuss it, and I
do not feel quite justified i n imposing my personality upon the
authorities of the Government. W h e n I am called on to answer,
I am glad to do the best I can to help solve these problems. B u t
I want to say this, and say i t very plainly; regardless of anybody's
opinion, this committee now has the opportunity of saving the taxpayer's 2 or 3 billion dollars a year i n unearned interest to be p a i d
to the stockholders of the banks of this country. T h a t is what I
have got to say, and I am opposed to any further expansion of the
debt for that purpose, and I wish my opposition to be put i n the record. I did not come here for that purpose, but now that I am here,
I feel like expressing my opinion, because I have no reason not to,
and because I think it may be useful. I think i t is a very grave responsibility on any member of this Congress to be taxing $13 a week
and giving away unearned interest to the extent of billions per
annum. I w i l l not approve that, as a citizen of the U n i t e d States;
and, as a citizen, I speak.
The CHAIRMAN. YOU always speak very interestingly, Senator.
M r . OWEN. I have a very determined view about it.



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REiSERVE ACT

AMElNDMEtNT

T h e CHAIRMAN. M a y I ask you this question, just for my own
guidance. I f the administration and the Secretary of the Treasury
have a great responsibility i n guarding the credit of the Government
at this time, during the war, do you think before we take any further
action on this that they should be called i n to give their viewpoint?
M r . OWEN.'I certainly do, and I would like them to answer the
questions I am putting to you—why billions of dollars i n unearned
interest to stockholders and taxes on $13 a week? A s k them to
answer that and I w i l l be content to hear it.
The CHAIRMAN. I believe M r . Patman has a bill, H . R . 1.
M r . P A T M A N . Y e s , s i r ; H . R . 1.

T h e CHAIRMAN. I t was thought this matter would more properly
come up here, rather than have protracted hearings
M r . OWEN. YOU don't need any protracted hearings, i n my opinion.
T h e CHAIRMAN. W e a l l have respect for M r . Patman. There is
no man i n Congress we think more highly of, and I listen very attentively to what he presents. I was wondering whether, on this bill, we
would have time to get all the needed information.
M r . OWEN. YOU don't require much time.
The CHAIRMAN. A n d call the various witnesses.
M r . OWEN. YOU don't need very much time.
T h e CHAIRMAN. I know i n your opinion, and the opinion of M r .
Patman, you wouldn't require very much time.
M r . OWEN. Either what I have said is true and just, or it is not.
A n d i f M r . Morgenthau can come here and show i t isn't, that can be
done i n a few minutes.
The CHAIRMAN. I know, but there is hardly ever a question comes up
here that there is not a difference of opinion. W e have had scores
of witnesses here on this other matter, and hardly any two of them
agreed, and each one said that what they said was true.
M r . OWEN. I t is for the intelligence and judgment of this committee to determine what is just and true.
T h e CHAIRMAN. W e don't know until we hear both sides of a question, do we? I f you have a case in court, you wouldn't hear the
plaintiff and not the defendant.
M r . OWEN. I have just said to you that I suggest M r . Morgenthau
answer what I have told you.
T h e CHAIRMAN. I just ask you whether you think the committee
should do that before we attempt to decide this matter. This b i l l
M r . Patman introduced should be considered seriously, but whether
or not, at the same time, we should go into lengthy hearings—the
banks w i l l want to be heard, the administration w i l l want to be
heard, the representatives of all kinds of people w i l l want to be heard.
T h i s is a rather sweeping change, and the committee could hardly be
expected to come to a satisfactory decision until it heard all the facts
from the people who wish to be heard. A n d it would require a long
time to hold a hearing and hear all the witnesses.
M r . OWEN. M r . Chairman, may I make this suggestion?
T h e CHAIRMAN. A n y suggestion you want to make is welcome.
M r . OWEN. T h e legislative processes are well understood by most
men who have had any experience with legislation, and it is well
known how difficult it is to get a b i l l considered and passed when
there are powerful self-centered interests opposed to it. Therefore It
think an amendment to the b i l l you have is important, i n a legislative
sense, i n order to get action upon the prayer which M r . Patman haa



FEIEIEIRAL R E S E R V E

ACT

AMENDMENT

123

been submitting to you. That is what I think. That can be obviated,
I think, by the committee itself agreeing to pass upon the b i l l introduced by M r . Patman immediately they dispose of the present
bill.
The CHAIRMAN. Have you concluded your statement, Senator?
M r . OWEN. I have.

The CHAIRMAN. W e don't want to cut you off.
M r . OWEN. I have said all I think is necessary. I w i l l be glad to
answer any questions. A man often says things which he thinks are
understood, and afterward finds they were not understood.
The CHAIRMAN. M r . Disney wishes to inquire, Senator.
M r . DISNEY. Senator Owen, i n response, I think, to M r . Knutson's
question a little while ago, you rather implied that we now have the
legal means i n our fiscal system to prevent uncontrolled inflation.
M r . OWEN.

Yes.

M r . DISNEY. IS that your view?
M r . OWEN.

Yes.

M r . DISNEY. A n d that with our further law on the subject?
M r . OWEN. I think the laws could be improved, but I think even
as it stands they have very great power.
M r . DISNEY. YOU believe an uncontrolled inflation could be prevented by processes we already have, i f they are used?
M r . OWEN. Yes; I think, of course, they could be improved, and I
think the United States ought to unhesitatingly put itself absolutely
behind the Federal Eeserve System and make itself responsible for
all indebtedness and liabilities of the Federal Eeserve System. I n
other words, the Federal Eeserve System should be recognized, i n
explicit terms, as an agency of the U n i t e d States, behind which is the
sovereign power of the United States. One of the reasons why I felt
disposed to appear before the committee w i t h regard to this matter of
what I call unearned interest was this: That, i n my opinion, the sovereign power of the United States was involved, and it is i n the exercise of the sovereign power only that money is created by Congress,
or through its authority, and I am opposed to any private interest
taxing the sovereign power of the U n i t e d States to make credit for
the protection of the people of this country i n a great war i n which
we are involved, or even in peacetimes.
M r . DISNEY. I have heard it suggested that would put the Government i n the banking business.
M r . OWEN. P u t the Government i n the banking business?
M r . DISNEY. I have heard that statement i n connection w i t h M r .
Patman's bill.
M r . OWEN. The Government should leave the banking business to
the banks, most emphatically, and the banks should leave the governi n g business and the exercise of sovereignty to the Government and its
Bepresentatives i n the Congress of the U n i t e d States. T h a t is my
opinion.
M r . DISNEY. B u t the suggestion about the Federal Eeserve System,
as you may well know, brings out that suggestion, that that may well
put the Government i n the banking business.
M r . OWEN. The only thing that w i l l put the Government i n the
banking business is the failure of the Congress to protect the people
of the United States against harm and injury that would come f r o m
an unwise administration of our banking system and the creation of



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another great panic. W e have had three. I remember the one of 1907
very distinctly, and that I know was deliberately caused. I was told
so i n terms most explicit by a very well-informed man in the marble
room of the Senate of the United States in January 1907, when he
whispered i n my ear a great secret, that there was going to be a big
squeeze put on in stocks and bonds. I t came about, but it didn't
squeeze me. I had my bank protect itself by taking additional security
without squeezing other people.
M r . DISNEY. Senator, i n a word, give me your understanding of the
practical aspects of M r . Patman's proposal under H . E . 1, i f you are
familiar with that. H o w would it operate?
M r . OWEN. I t would operate simply by the United States Government, through the Treasury Department, putting its bonds, or certificates of debt, which is better—you are not going to sell these bonds
anyway. I t would be just a certificate of indebtedness against which
the U n i t e d States would take credit, and pass those credits through
the Eeserve System, just as it would through any bank, and then the
Government could liquidate that indebtedness without penalty as rapidly as the people of the United States could pay the taxes i n without
suffering. I t has been supposed that we are going to have great difficulty i n meeting the terrible cost of this war, $210,000,000,000. I beg
the committee to look at the letter I wrote to M r . Spence, of Kentucky,
a year or so ago, pointing out the money we lost directly from the
panic of 1932-33, and indirectly. Take it all together, it amounted
to above $600,000,000,000. Nobody ever questioned the facts. I stated
I took it from the record. The potential loss was nearly $400,000,000,000; the actual loss dropping from $81,000,000,000 per annum to
$38,000,000,000 per annum, which made a total i n 10 years of about
$200,000,000,000. T h i s country has the capacity to meet the cost of this
war, great as it is, and to liquidate the debt, and to go through it and
come out of i t the industrial, commercial, financial, and moral leader
of the world. O f that I haven't the slightest doubt.
M r . KNUTSON. Senator, this question is purely for information,
and I hope you treat it as such, because I frankly confess, as I told
M r . Patman, that I am a novice i n the field of finance. I am purely
seeking information, that is all. W h a t is the difference, Senator,
between non-interest-bearing notes, such as I understand the Patman
b i l l contemplates—that is what your b i l l contemplates, is it not, M r .
Patman, non-interest-bearing notes?
M r . PATMAN. TO the Federal Eeserve banks only.
M r . KNUTSON. W h a t is the difference between non-interest-beari n g notes and printing-press money?
M r . OWEN. I am glad you asked me that question, M r . Congressman. W h e n you speak of the notes to which M r . Patman refers,
the notes of indebtedness of the United States Treasury to the Federal Eeserve banks, it merely represents an indebtedness of the United
States Government to be liquidated as soon as it can be conveniently
done out of the incoming revenues provided by legislation passed
by your committee. W h e n you talk about printing-press money,
it is a term of derision employed by those who use the term "greenbacks" and use the term "fiat money" i n order to express contempt
of our currency on the ground that there is nothing behind it. Such
criticism ignores the vital fact that our currency daily liquidates itself
by exchange from one hand to another and that it is backed by the



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taxing power of the United States and the sovereignty of Congress
with its power to contract and expand and to regulate the value of
money. The taxing power that goes into untold billions on the productive energies and income of the greatest people i n the world. T h e
idea of printing-press money and greenbacks is to discredit what
Abraham Lincoln did to save the U n i o n when he issued $386,000,000
of greenbacks i n 1862, which were promptly discredited by having a
provision put into the law that they were not receivable for interest
on the public debt or for the payment of duty on imports, and therefore led the people into the belief that that money ought to be sold at
a discount and thus permit a racket by which a few profited at the
expense of the many.
M r . KNUTSON. W o u l d it be your thought that such notes as might
be issued, such non-interest-bearing notes as you might issue and
place with the Federal Reserve, should be to all intents and purposes
negotiable money?
M r . OWEN. It is credit, M r . Knutson, which is i n the Federal Reserve banks, and against which a check would be drawn by the United
States Government.
M r . KNUTSON. Well-:

M r . OWEN. Just a minute; let me conclude. W h e n that check is
passed through a commercial bank, the commercial bank would
deposit it in a Reserve bank for payment and it would function
exactly as i f it were money, exactly as i f i t were currency, for that
matter.
Mr.

K N U T S O N . S e n a t o r , s u p p o s e t h a t w e i s s u e d $5,000,000,000

in

non-interest-bearing notes and deposited them with the Federal Reserve banks, suppose the holders of those notes were to immediately
pay them back to the Government for income-tax purposes.
M r . OWEN. The Federal Reserve banks holding that credit would
not be called upon to pay income tax to the Government.
M r . KNUTSON. The member banks would.
M r . OWEN. The member banks would not have the credits to which
we are referring.
M r . KNUTSON. Wouldn't the member banks be able to draw on
t h i s $5,000,000,000 d e p o s i t ?

M r , OWEN. NO, they wouldn't be able to draw on it, as belonging
to them. They could not check on it, i f that is what you mean. I t
belongs to the United States Government.
M r . KNUTSON. YOU would freeze them?
M r . OWEN. I don't freeze them at all. I simply put them to the
credit of the United States and check on them, because it belongs to
the United States. That is all. I t is simply a bank credit created by
Uncle Sam and Uncle Sam checks on it.
M r . KNUTSON. The only experience I have had w i t h banking is to
pay interest. I have never been
M r . OWEN. AS a stockholder of a bank, I congratulate you.
M r . KNUTSON. I

wouldn't say I

a m not a stockholder, but I

am

not posted on banking. That is all, M r . Chairman.
M r . ROBERTSON. Senator Owen, you w i l l no doubt recall that T o m
Paine, of revolutionary fame, said that credit is suspicion gone to
sleep-—
M r . OWEN. Credit is what?

M r . ROBERTSON. That credit is suspicion gone to sleep.



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M r . OWEN. T h a t is a very interesting epigram. I would like
to say this; that at present we have issued billions of Federal Reserve notes that are not i n circulation and have gone to sleep and are
not paying any interest, but are held by the people i n reserve for
their own purposes at a time which w i l l follow this war. There are
billions of that money issued, i n large denominations.
M r . ROBERTSON. B u t the reason for that unprecedented amount of
Government obligations outstanding i n currency, which you say has
been issued on the faith and credit of the Government, is that the
people have confidence i n the credit of the Government, they think
the Government is sound and w i l l stay sound, and they have not
gotten suspicious of Government credit. Y o u have told us that i f
we proceed to finance a substantial part of the war cost by the present
method of issuing Federal Reserve notes, we w i l l pay a substantial
price i n interest for that method of financing. On the other hand,
i f we adopt the plan recommended by you and M r . Patman, and the
banks of the country should call that new issue printing-press money,
let us say, or whatever term they want to use to indicate they do
not think i t is sound money, it would be possible for them, I fear,
to create a psychology of fear and suspicion, which once aroused I
feel we could never bring within bounds again.
M r . OWEN. There isn"t the slightest possibility of such a thing.
N o bank would dare do it, for one thing. No bank would want to
do it, for another thing, and it would be against the interest of the
bank to create a condition that would destroy the value of its own
collateral and cause a panic to occur i n the country through his expressing suspicion and distrust of the Government.
M r . ROBERTSON. Well, you may be right.
M r . OWEN. I am right.

M r . ROBERTSON. A n d yet the fact remains, I believe by your own
testimony, and likewise that of M r . Patman, that all the bankers
have consistently i n the past opposed this method of issuing money.
M r . OWEN. The banks have not had this particular proposition
before them. I think the bankers of this country are just as patriotic
as anybody else. W h a t i f they are pursuing the natural policy,
and following the teachings of the past? That does not argue that
they are unpatriotic or unintelligent or unfair i n any way, but here
we are dealing with the sovereign power of the United States, and
you are the custodians of the sovereignty of the United States, and I
am telling you that the sovereignty ought not be taxed for the benefit
of private individuals, however honorable and worthy they are, and
certainly there are no people i n the country that deserve more respect
than our honored bankers to whom the people entrust all their savings.
They are worthy of trust, too. I honor them and I am their friend.
B u t I also believe i n the sovereignty of the United States. I believe
we ought to cut down this expense by cutting out unearned interest
on any more credits extended.
M r . KNUTSON. Senator, you say, as did M r . Patman, that the credit
of the United States would be behind these notes.
M r . OWEN. W h y , certainly.

M r . KNUTSON. T h a t being true, why have the Federal Reserve
issue these notes? W h y not have the Federal Treasury issue them
rather than the Federal Reserve?
M r . OWEN. T h e Federal what?



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M r . KNUTSON. The Federal Eeserve. W h y not have the Federal
Treasury issue the notes and put them i n circulation.
M r . OWEN. The Treasury would, i n effect, be using this agency
as its place of deposit and would be using it so as to distribute its
activities throughout the 12 districts according to the respective demands in each of those districts. They need the mechanism and the
mechanism has been extremely useful for that purpose. The notes oi;
indebtedness to the Eeserve banks proposed by me are i n very large
denomination and not currency but the basis of bank credit. Over
90 percent of our business is thus transacted by checks.
M r . KNUTSON. W o u l d the Treasury be unable
M r . OWEN. The Treasury would have to set up similar mechanism.
They have already got all they need i n the Federal Eeserve System for
that purpose. A n d it should prove the extreme value of the checking
system. I t is much better than currency. T h i s Federal Eeserve
System would take your check in California, without you paying
postage, or charging you collection or anything else, and it is transferred at par, so that when you write a check on a valid bank, you
just send that as money and it functions as money because it transfers
money and can be converted into legal tender on demand.
M r . KNUTSON. A n d we have travelers' checks
M r . OWEN. That is another form of it.
M r . KNUTSON. I understand, it is a form of negotiable paper that
is good all over the country.
M r . OWEN. A l l over the world.
M r . KNUTSON. B u t you do feel it is necessary to operate the plan
proposed i n H . E . 1 through the Federal Eeserve?
M r . O W E N . O h , yes.

M r . KNUTSON. I t couldn't be done through the Treasury?
M r . OWEN. I t could be, but it would be expensive and awkward and
require a reorganization. I t is unnecessary to do that, because they
have a wonderful organization now.
The CHAIRMAN. Thank you, Senator.
M r . OWEN. Well, I am much obliged to you gentlemen, for your
patience with one of your old brothers, and I appreciate coming in and
having a little chat w i t h you. I know you w i l l act with patriotism
and with intelligence.
The CHAIRMAN. W e thank both you and M r . Patman for your
appearance and the information given the committee.
M r . PATMAN. Thank you, M r . iChairman. M a y I express the hope
that i f you do not pass on this in connection with this bill that you
give me a hearing on it some time i n the future ?
The CHAIRMAN. M r . Voorhis said he would like about 10 minutes.
S T A T E M E N T OF H O N . J E R R Y VOORHIS, A EEPRESENTATIVE I N CONGRESS
F R O M T H E S T A T E OF CALIFORNIA B E F O R E T H E C O M M I T T E E ON W A Y S
A N D M E A N S , H O U S E OF REPRESENTATIVES, F E B R U A R Y 1 3 , 1 9 4 3

M r . VOORHIS. I would just like to say that I agree i n substantial
part with what has been said by M r . Patman and Senator Owen. I
want to read first, i f I may, two sentences from a little pamphlet
written by Winthrop W . Aldrich, chairman of the board of directors
86330—43




9

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F E D E R A L REiSE'RVE ACT AMEtN DMEJNTT

of the Chase National Bank. M r . A l d r i c h says i n this pamphlet,
which is entitled "Economic Implications of Internal P u b l i c Debts
Through 1942 commercial banks absorbed about $19,000,000,000 of Government
obligations, which represented 38 percent of the increase in the total debt;
through 1943 it is estimated that the commercial banking system, that is the
commercial banks, plus the 12 Federal Reserve banks, may have to absorb
$40,000,000,000 of Government obligations, an amount equal to about 60 percent
of the estimated increase in the total Federal debt.
Now, M r . Chairman, I submit that that means (1) that 3.8 percent
i n 1943 and 60 percent i n 1944 of the increase i n debt o f the Nation
w i l l be the result of the increase of brand new money by the commercial banks of the country. I t w i l l not be the result of the transfer
of actual money possessed by the people f r o m them to the Government i n the purchase of obligations. I n the second place, it w i l l
mean a very h i g h degree of concentration of ownership of this public
debt i n the hands of the commercial banks; and, i n the t h i r d place,
I agree thoroughly w i t h what has been said to the effect that interest
Eaid upon obligations p a i d for w i t h new money created by private
anking institutions is unearned interest. I f the public debt, as M r .
Patman pointed out, is $210,000,000,000 i n June of 1944, the interest on
that at 2y 2 percent would be $5,250,000,000, and the interest on 40 percent of that, roughly the amount held by commercial banks, would be
$2,100,000,000. T h a t amount can be saved by the general method
proposed by the gentleman f r o m Texas, M r . Patman.
M y conception is that the ideal banking and monetarv system is
one i n which banks lend money, but do not create it, and i n w h i c h
the Government creates money, but does not lend it. I think the
p i l i n g up of huge amounts of Government obligations i n the banks
makes a tendency f o r the banks to create money for the Government
instead of engaging i n the commercial banking business, and I think
that tendency has been present for quite a long time. T h i s is an
inflationary proposition as long as these bonds are sold to commercial
banks, and it seems to me of tremendous consequence.
I might say that I have a b i l l almost exactly similar to that by M r .
Patman, which I introduced on the first day of the session. T h e
thing that would happen were this policy pursued, would be this:
T h e Treasury would issue non-interest-bearing certificates and sell
them to the Federal Reserve banks. T h e Federal Reserve banks
would purchase them w i t h exactly the same credit they now use to
purchase interest-bearing obligations. T h e Government would then
secure a credit w i t h the Federal Reserve against which i t would draw
checks to pay its bills.
Ideally we should pay for as much of this war as possible out of
taxes and the sale of bonds to individuals and nonfinancial corporations, or even financial corporations, i f they can pay for them w i t h
their own money and not w i t h the credit of the people.
M r . ROBERTSON. W i l l you yield for a question there?
M r . VOORHIS. Certainly, M r . Robertson.
M r . ROBERTSON. DO you contend the sale of bonds to a commercial
bank has an inflationary trend, even more inflationary than the issuance by our Government of the same amount of money?
M r . VCORHIS. I think it might, for this reason: W h e n you sell to a
bank an interest-bearing obligation, that bond then becomes collateral
for the issuance of Federal Reserve notes i f the bank wants to use it




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for that purpose. I t can, i n effect, be reserves i n the hands of that
bank. I f , on the other hand, you adopt the plan that is proposed here
this morning and sell non-interest-bearing obligations to the Federal
Reserve banks, it would be at the same time quite possible to provide
for an increase i n the reserve requirements i n the banks, and thus control inflation by that means, and that has been suggested and outlined
by Senator Owen in testimony before another committee.
I n other words, the control of inflation is one question which must
be dealt with, as the Senator pointed out. I t is true to the extent anybody creates new money it is inflationary, of course, and substantially,
therefore, I would agree with you, but I wouldn't agree, i f by your
question, you mean that the adoption of the proposal advanced here
this morning by M r . Patman and Senator Owen would be any harder
to control, if, indeed, as hard, as the present system.
What I was about to say when you asked your question was that my
own view is that we should get as close as we can to paying for this war
out of taxes and legitimate bond sales. That is the only real way we
can control inflation, and the extent to which we f a i l to do that, is the
real inflationary danger, rather than farm prices, for example. But
i f we are to let anybody create new money the people of this Nation
ought not be charged an interest burden of $2,100,000,000, by 1944 on
that new money, because that credit belongs to the people in the first
place.
M r . ROBERTSON. Isn't it true that for many years the theory of sound
money has been that currency, whether anchored to gold or not, is
sound i f money is issued solely with relation to the amount of money
work that is to be done ?
M r . VOORHIS. Right. I agree thoroughly with that.
M r . ROBERTSON. Y o u r proposal w i l l issue money to be used for the
payment of debt.
M r . VOORHIS. No, sir. M a y I, first of all, agree a little more i n
detail with your first statement, that the soundness of money depends
upon the relationship of the volume of that money with the work it
is to do, which, stated i n other words, means the soundness of money
depends upon the relationship between the volume of money and the
amount of goods and services produced i n the Nation. A t the present
time we are i n a war; we are in a war which requires colossal expenditures, and to the extent we are i n that war the kind of monetary policies
which I would advocate i n peacetime should be precisely reversed. I n
other words, whereas i n peacetime I would urge that the Government,
as a deliberate policy, put i n circulation and create enough money to
keep up with the expansion of production, today the expansion of
production of supplies, civilian goods, is partially restricted, so that
sound monetary policy means we should keep down to the greatest
possible extent the creation of new money, and we should, on the
contrary, tax and sell bonds to the greatest extent possible, i n order
to prevent the volume of buying power from exceeding the supply
of civilian goods, consumer goods. But the fact remains, as M r .
A l d r i c h himself has pointed out, that that has not happened, that it
is not likely to happen, that we are likely to let the commercial banks
create a huge amount of money for the purchase of Government obligations, and then draw interest on that credit, which was the people's
credit. M y contention is that to the extent that we fail to pay for




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AMENDMENT

the war out of taxes or legitimate bond sales, the people should not
be charged with the interest-bearing debt for the margin between the
cost of the war on the one hand and the degree to which we come u p
to paying for it currently.
M r . ROBERTSON. DO we have a lot of hoarding of money at the
present time?
M r . VOORHIS. I couldn't answer that. M a n y people feel that there
is a considerable amount of hoarding of money.
M r . ROBERTSON. A n d is it not also true that bank deposits are at an
unprecedented height?
M r . VOORHIS. That is true.
M r . ROBERTSON. That is check money, is it not?
M r . VOORHIS. T h a t i s c o r r e c t .

M r . ROBERTSON. I f we have enough money i n the amount of check
money and plus an unprecedented amount of money i n circulation,
and the hoarding of money that is not i n circulation, I feel it is a fair
conclusion that we already have outstanding more money than is
necessary to do the money work of the Nation, and that the issuance
of further money is money issued to pay debts and not to do money
work.
M r . VOORHIS. B u t , M r . R o b e r t s o n , e v e r y d i m e o f t h e $19,000,000,-

000 of bonds mentioned by M r . A l d r i c h here as having been sold to the
commercial banks i n 1942, every dime of that was additional deposits
created by the banks.
M r . ROBERTSON. That makes it inflationary.
M r . VOORHIS. That is true, so that the inflationary question is
neither here nor there so far as this proposition is concerned.
M r . ROBERTSON. I b e l i e v e i t i s h e r e .

M r . DISNEY. M r . Knutson asked a question of Senator Owen a
minute ago. H e inquired why not let the process of issuance be the
Treasury of the United States, of notes without interest. W h a t have
you to say about that?
M r . VOORHIS. Well, there would be two difficulties. I n the first
place, it is conceivable that i n the future we may have a condition i n
the Nation where it would be desirable to reduce the volume o f
money outstanding. I earnestly hope we are not going to go i n
for a program of deflation after this war, like we d i d after the
last war, because I think i t was disastrous. B u t we may conceivably
have a situation where we do have a surplus of revenues coming
into the Treasury over the needs of the Government. I f that happened, and i f we had non-interest-bearing certificates i n the hands o f
the Federal Reserve, you could then pay off some of those certificatesy
as it was sound fiscal policy to do so. O f course, you could also retire currency and accomplish the same result, i f you wanted to, but
1 think the best reason for doing it the way M r . Patman suggested
and that I have suggested—with modesty I w i l l say—the best argument for it is, it is customary in this country for us to do businessnot with a huge volume of cash money, but to do it by means ot
bank deposits and check money, and people are more accustomed to
that than they are to the use of very large amounts of cash.
Furthermore, the amount of cash that w i l l actually be used by people is determined by their convenience. I mean, i n other words, they
w i l l deposit it i n the bank i f they don't want to use it, and the




FE.DEIRAL RElSE'RVE ACT AMENDMENT

131

amount of cash currency that circulates is determined by the convenience of our trade, rather than any other circumstances, so that
I do not think i t would particularly make sense to put out many
billions of dollars of currency when you don't need to; there isn't
any use going to the expense of p r i n t i n g it. A n d , furthermore, I
t h i n k i t is a much more understandable method to use precisely the
method that y o u now use f o r the sale of interest-bearing bonds,
when you- handle the non-interest-bearing securities. M r . Patman
has suggested that is what you would be d o i n g — y o u would be selling
them to the Federal Reserve i n precisely the same way you sell interest-bearing bonds to them, and they buy them w i t h the credit of
the American people.
T h e CHAIRMAN. T h a n k you, M r . Voorhis.

M r . PATMAN. M r . Chairman, I am inserting herewith excerpts
from the hearing before the Committee o n Banking and Currency,
U n i t e d States Senate, 78th Congress, 1st session, on S. 700, February 17, 1943, as follows:
Mr. E C C L E S . * * * Now if there had been any desire to create an inflationary process on the part of the Government, or the Federal Reserve, we did
not have to use this particular mechanism. The Thomas amendment has been
on the books since 1933, and has never been used. We n, er had any thought
or intention of using it.
Senator T O B E Y . At the same time when you try to repeal it, they protest very
bitterly. They say they will not use it, but do not repeal it.
Mr. E C C L E S . So far as I am concerned, I have no objection to repealing it.
Senator TOBEY. It is still a sword of Damocles handing up there?
Mr. E C C L E S . Yes. But inflation will never come from the issuance of currency.
Senator TOBEY. I think you are right.
Mr. E C C L E S . The only way inflation can come is through the Congress of the
United States appropriating money. Now, there is no other way you can get
inflation, except the way that Congress appropriates money and fails to provide
means of collecting it.
Senator T O B E Y . It seems to me, Mr. Eccles—and I make this prediction, that
some of our printing-press money friends, flat-money friends, will use your words
this morning to plague you, wherein you speak of these notes and the Government's promise to pay. If we put behind them Government bonds, that would
have been a promise to pay. Taking that away from the context entirely, they
will quote Marriner S. Eccles and say that is the law.
Mr. E C C L E S . I have a statement, if you would like to have it. I wrote Mr.
Patman and I have debated this issue with him time and time again
Senator T O B E Y . I know you have.
Mr. E C C L E S . On the subject of orthodox means offinancing,and you can see
just what Mr. Patman proposes and then what is the effect of it. That in itself
would not create inflation if you did just what Mr. Patman proposes. That is
not the inflationary route.
The objection to what the Patmanites propose is that you would create a huge
volume of deposits; you would create a like amount of excess funds on the part
of the banks; but you would have the banks without any earnings assets. With
all of the present work and time and expense involved, you would either have to
provide the banks with an income to replace the bond interest, or you would not
have any banks. So the point is whether you provide them with the income
through orthodox means, which is the cheapest and the easiest and the best way
to do it. Mr. Patman cannot save the Government anything by his proposal.
I t w i l l be noticed that M r . Eccles states that m y proposal will not
cause inflation. H e contends that the banks should be paid for
servicing money that is put into circulation and that the interest
method is a good way to do it. I n other words, if a bank buys a
$1,000,000 bond, providing for 2 percent interest, the bank under




132

FEDERAL

REiSERVE ACT

AMElNDMEtNT

present methods creates the money to buy this $1,000,000 bond.
The bank will thereafter collect $20,000 a year interest from the Government on the bond. M y suggestion is that instead of having the
banks collect this interest from the Government each year, which
will put the Government in a position of never being able to pay out,
it would be much better for the Federal Reserve banks to take noninterest-bearing bonds and create the money for the Treasury. T h e n
when the money is transferred to the banks, let the depositors and
others, who obtain services from the bank, pay the cost of the service.
I t is true it will be more expensive to those who now obtain the
services of the banks, but at the same time it will enable the Government to get out of debt; and after all we should look at it from the
Government's standpoint.
1 want to ask one or two questions that won't take so much time.
We hear a lot about the debt limit. D o you know when this
country or Congress first adopted the policy of fixing a debt limit,
M r . Eccles?
M r . ECCLES. N o ; I do not.

M r . PATMAN. I never could see why a debt limit was necessary to
be fixed by Congress, as long as Congress makes appropriations.
A n d even though it exceeded the debt limit, it would be the latest
expression on the subject and would automatically increase it. Have
you given consideration to that?
M r . ECCLES. I agree with you it does not make much sense to have
a debt limit when Congress makes the appropriations that make
necessary the public debt.
M r . PATMAN. Therefore, you cannot understand why all this talk
about a debt limit?
M r . WOLCOTT. W i l l you yield to me there?
M r . P A T M A N . Y e s , sir.

M r . WOLCOTT. When the first debt limit bill was passed, there was
a differential between the amount of bonded indebtedness and total
indebtedness and it was undoubtedly passed as a check upon the
Treasury, to limit the Treasury in the issuance of bonds. W i t h the
removal of that differential back in 1936, when the debt was converted,
from that time on our action each year has been nonsensical.
M r . PATMAN. I n raising the debt limit?
M r . WOLCOTT. Yes. When we removed the differential, we destroyed the whole effectiveness of the act.
M r . PATMAN. Now, one question on this Trans-America Corporation. Have you given consideration to that set-up, M r . Eccles?
M r . ECCLES. I n what way?
M r . PATMAN. I n the way of it being a menace to the country?
M r . ECCLES. Well, I would not want to say it has been a menace to
the country.
M r . PATMAN. Or it adopts a bad policy that, if pursued, would
eventually become a menace?
M r . ECCLES. Are you referring to the Trans-America policy, or the
B a n k of America?
M r . PATMAN. I mean just exactly what I said—Trans-America.
M r . ECCLES. I have given considerable thought to the operations
and the development of Trans-America.
M r . PATMAN. DO you look upon that as a wholesome undertaking?




FEDERAL

RElSERVE A C T

AMEINDMEINT

133

M r . ECCLES. NO, I do not. I agree that Trans-America, in their
purchase of stock of banks and i n their purchase of stock of corporations that have nothing whatever to do with banks is pursuing what, to
my mind, is an improper and unsound policy.
M r . PATMAN. DO not you have some power and authority to deal
with that situation?
M r . ECCLES. W e do not.

M r . PATMAN. Have you ever asked for any?

M r . ECCLES. NO, w e have not.
M r . P A T M A N . O r do y o u expect to?

M r . ECCLES. Well, so far as the Board is concerned, I would think,
if any power were asked for to deal with that situation, it should not
be done by the Reserve System alone, but the Comptroller's office,
having supervision over national banks, and the F . D . I. C., carrying
the insurance of all member banks should be included in the program.
M r . PATMAN. Have you ever had any discussion of any program
along that line?
M r . ECCLES. Several years ago we discussed this whole situation
with the Trans-America people. T h e three Federal supervisory
agencies met and discussed the whole question of the operation of
Trans-America with the Trans-America people.
M r . GIFFORD. Governor Eccles, we have heard a good deal about
this. If I give my note or bond to my local bank and they finally discount it with you, you have to pay them the money for it, whatever
i t is worth?
M r . ECCLES. Have to what?
M r . GIFFORD. If my local bank comes to you, you have to create the
credit or give them the money for that, do you not?
M r . ECCLES. T h a t IS the Federal Reserve banks?
M r . GIFFORD.

Yes.

M r . PATMAN. A member bank.
M r . ECCLES. Yes; they have to provide them with credit.
M r . GIFFORD. A n d we say " w e " create money when it is created
by the banks. Well, they create money on my note; if the Federal
bank does not have money enough on hand, they create money.
A n d when the Government wants money and comes to you, you create
money or you give them credit and the Government spends the money
i t has i n that greater amount or uses it in canceling bonds.
W h a t I want to know is, M r . Patman, some years ago, felt like they
should issue printed money without giving a note or a bond for that
same debt, and I want to ask, M r . Patman, are you now willing at least
to give the Federal Reserve a bond when you get the money?
M r . PATMAN. Oh, that is a matter that does not make any difference; you give credit on the books just like when you pass'the amount
to the credit of the bank.
M r . GIFFORD. DO you not know the bond is going to be the same;
that would be the whole obligation?
M r . PATMAN. Yes; there should be a certificate of indebtedness,
which is commonly what we call bonds.
M r . GIFFORD. I am talking about the due date.
M r . PATMAN. Yes; I want a due date so that we will pay off this
national debt in 40 years.




134

FEDERAL

REiSERVE ACT

AMElNDMEtNT

M r . GIFFORD. I am going to ask Governor Eeeles about the 3%
billion dollars. I do not know why our Government, which is now
so much i n competition with private folks in business, can borrow b y
printing, or get its money for nothing, when I have to pay interest;
I do not know why we should give them any power that the citizens
do not have.
M r . PATMAN. There is a difference.
M r . GIFFORD. There is no difference, except they have better credit
than I do; that is all.
M r . PATMAN. When the miners went out i n the hills and mountains
and dug out the gold and silver with their hands, they worked for that
gold and silver and, if the Government wanted to borrow and use it,
the Government should have paid interest on it, because they actually
worked for it. I t was theirs. B u t now, when you need more money
you just artificially create it.
M r . GIFFORD. They created gold and silver i n such great quantity
that they wanted the Government to buy it; they went i n daily to
work the lode and send it in. B u t what has the Z% billion of capital
stock got to do with the expense of the large banks? Governor
Eccles has shown you that the interest is declining and. their 3%
billions would not get so much interest from the Government.
M r . PATMAN. B u t what has that to do with the banks' activities?
M r . GIFFORD. It is what they get on their capital stock.
M r . PATMAN. L e t me pursue that view. If we borrowed money
from a foreign government, we should pay interest on it; but here is
the Government of the United States that is solvent, that creates the
money it has, and we place ourselves in the idiotic position of giving
the banks Federal money and bonds—in practice that is what it
means—both Government obligations, and tell the bank " N o w , you
pay out the money upon which there is no interest and keep the bonds
and you will draw interest on those bonds from now on."
M r . GIFFORD. W h e n I give my note, the Federal Reserve bank
creates money.
M r . PATMAN. Or creates Government credit.
M r . GIFFORD. A n d when the bank collects the money on that
credit, it has to pay it back again.
M r . PATMAN. B u t it is paying the money to the Government itself.
M r . FORD. T h e United States Government, we will say, takes over
the Federal Reserve, and it issues money and there is no interest or
anything else. T h a t money goes out into circulation and the Government spends all the money it wants to and has nothing to pay, and
it expects i t to lay there and the Treasury pay back 2 V2 percent a year
and, in 40 years, it is paid off. B u t here is the State of California
which goes out into the market and wants to get $5,000,000; it has to
pay 3 or 4 percent, or whatever the rate is, and i t begins to wonder
"why the United States Government is getting its money for nothing;
why cannot we get it?" T h e n the city of Los Angeles comes along and
it has to borrow $5,000,000. I t finds the State has clearance on its
State obligations and says " W h y cannot we; why should the Federal
Government get money for nothing when we cannot?" T h e n i t
comes down to the individual " W h y cannot I go and get money?"
A n d if you are suggesting we eliminate the cost of it, then it is just a
question of making money and giving it to use to anybody who needs it.
M r . PATMAN. T h a t is not the question at all.
M r . FORD. T h a t is what it amounts to.



FE.DEIRAL REiSERVE. A C T A M E N D M E N T

135

M r . PATMAN. The Government creates; the Government is sovereign, and the State of California is not sovereign.
M r . F O R D . O h , y e s ; i t is, a n d T e x a s is.

M r . PATMAN. I t is a sovereign State, but it is not the sovereign allpowerful government with money creating powers like the United
States Government.
M r ; WOLCOTT. M i g h t I say for the record that this whole matter is
very thoroughly covered and very intelligently discussed in Samuel
Crowther's new book entitled " T i m e to Inquire" i n chapter 3. I
would suggest to the committee that they read that, and that is
probably an answer to the whole question.
M r . PATMAN. I apologize to the committee for taking so much time,
and I thank M r . Eccles for his patience w i t h me.
M r . WOLCOTT. I do not think you need to apologize. I think we
have enjoyed this very much. F o r once i n the last 5 years we are
talking about finance banking. W e have not had much finance
banking in the last 3 or 4 years, and it is very interesting.
M r . PATMAN. W i t h this observation, I will give up the witness.
I
will ask M r . Eccles to use that same diligence i n trying to find a plan
to save the taxpayers' money on a large part of this debt that he has
used on trying to get Congress to pass tax laws, and I hope when he
does that, he will be able to submit a plan pretty soon that will
enable us to pay off this debt in 40 years.
M r . FORD. If Congress would pass some tax laws, y o u would not
have to borrow so much money.
M r . SMITH. I wonder if M r . Eccles would care to explain the cause
for the reduction of interest, or earnings, of 1942 as compared w i t h
1941, that is, of the banks.
M r . ECCLES. I think I can only express an opinion, and of course
the causes would vary with different banks, but the smaller banks, the
middle-sized banks in particular, have lost loans. T h e loans bore a
substantially higher interest rate than the Government bonds which
they purchased.
T h e farmers have been able to reduce their debts w i t h the country
banks. Installment credit has declined very greatly. M a n y banks
were carrying installment paper, and the amount of installment credit
outstanding has declined over the past 2 years close to $4,000,000,000.
Home mortgage lending has likewise been declining. Loans on the
books of the banks are being reduced. Business concerns, many of
them, are paying off their indebtedness as a result of the reduction i n
the accounts outstanding, and as a result of reductions i n their inventories. A l l this reduction of debt by private borrowers has been
made possible by the large expansion of expenditures financed by the
increase in the debt on the part of the Government which has created
a large amount of deposits.
I n other words, the Government's borrowing from the banks d i d
create a lot of money, and that money as disbursed went into the
hands of corporations and individuals who i n turn used those funds
to pay off indebtedness to the banks where they had indebtedness to
the banks. The reduction i n the aggregate indebtedness bearing a
higher rate of interest was a large factor, I think, i n reducing their
net earnings. A d d to that factor the increased cost factor due to
increase in the number of personnel, increase i n compensation, and
decreased efficiency.




136

FEJDEiRAL REiSiERVE ACT

AMENDMENT

M r . SMITH. It is your opinion, then, that there has been an absolute
shift as well as a relative shift from private financing by banks to
Government financing. Would that be a fair statement?
M r . ECCLES. That is right.
M r . SMITH. Absolute shift as well as a relative shift. Just one
more question. I wonder if you would insert in the record figures
showing Government securities as of—I thipk you gave the date,
December 31, 1942, classified as to commercial banks; that is, member banks and nonmember banks taken together, commercial banks
and savings banks; No. 2, as to direct and indirect, or guaranteed
Government obligations; No. 3, as to interest charges and maturities
on these several securities. Would that be advisable?
M r . ECCLES. I do not know. Will you repeat that?
M r . SMITH. Classified as to commercial banks and savings banks.
Now, commercial banks would include both member banks and
nonmember banks.
Then as to direct and indirect, or guaranteed Government obligations.
M r . ECCLES. Y o u mean as to those separately?
M r . SMITH.

Yes.

M r . ECCLES. What difference would that make? I do not know
whether we could get that separately.
M r . SMITH. I believe that you have that.
M r . ECCLES. Maybe they have the statistical information, but you
want it separately, the amount guaranteed and the amount of direct
obligations by the various kinds of banks, groups of banks?
M r . SMITH. That is right, and then as to interest charges and
maturities of the several obligations held by the banks. Would that
be feasible?
M r . ECCLES. I do not know whether that information is available
or not. I have not seen it. We might get an estimate of it, but the
portfolios of the banks are changing very rapidly, and at some particular date I suppose it would be possible to figure out what the
interest income on those bonds is, but that interest income on the
bonds might not reflect the earnings that the banks would get on
those bonds.
M r . SMITH. I do not care about the earnings, just so it is stated,
the interest paid and all the particular securities and the maturities.
I imagine that you have that classified in that manner.
M r . ECCLES. If it is available we will put it in the record.
(The information referred to is as follows:)
Holdings

of United States Government obligations, direct and guaranteed, by all
banks except Federal Reserve banks

Member banks:
Direct
Guaranteed

[In thousands of dollars]

Nonmember banks excluding mutual savings banks
M u t u a l savings banks excluding 3 member b a n k s - A l l banks

$35,006,436
2, 539, 753

37, 546, 189
8, 832, 865
4, 562, 143
45, 941, 197

A break-down of nonmember bank holdings of Government securities according
to direct obligations and guaranteed obligations, respectively, is not available.
Interest income from securities.—Bank reports do not distinguish between interest on Government securities and interest on other securities. The accompany-




FEUiElRAL REiSE'RVE ACT AMElNDMEfNT

137

ing table, however, gives some estimates of the amount of income derived from
these two classes of securities by all insured commercial banks and by member
banks for the years 1941 and 1942. It should be noted that the figures for 1942
represent a compounding of estimates, since the banks' reports of earnings for the
year 1942 have not yet been tabulated, and the rough estimate for the year 1942
is based largely on reports of member banks for the first half of the year.
Although bank reports do not distinguish between earnings on Government
securities and earnings on other securities, a rough estimate has also been made
of the average rate of return that banks received in 1941 and 1942 on Government securities. As nearly as can be figured United States Government security
portfolios of all banks at the end of 1941 were producing revenue at the rate of
about VA percent. The average rate on those acquired during 1942 was about
1 percent, or possibly slightly more. It should be noted that the securities held
by banks at the end of 1941 were a mixture of partially tax-exempt and taxable
issues but that those acquired during 1942 were all taxable. This fact tends to
minimize the disparity between the two rates which otherwise would be greater,
of course, because of the large proportion of Treasury bills and certificates sold
to banks during 1942. The securities bought by banks in the December campaign had an average yield of 1.14 percent, but other securities, particularly the
bills and certificates, sold at other times during the year reduced this average.
Interest income from securities
[In millions of dollars]
1 4 (partly estimated)
91

Total
Insured commercial banks
Member banks
Insured nonmember
banks

1 4 (roughly estimated)
92

U. S. Government Other sedirect aid
curities
guaranteed

U. S. GovOther seernment
curities
direct and
guaranteed

Total

59
0
445

34
0
272

205
13
7

610
540

410
370

200
10
7

6
4

32

32

70

40

30

M r . SMITH. I have one more question. Does this matter of the
banks handling so much of Government securities place a considerable
burden upon the banks? It does, does it not?
M r . ECCLES. Y O U mean handling the securities that are sold to the
public?
Mr. SMITH. The bonds and the securities which the banks take
directly, that is, those securities that are financed through the banks.
That is a considerable burden on the banks, is it not?
M r . E C C L E S . I would not say it is a burden. No; it is no burden to
the banks to buy these Government securities and hold them.
M r . SMITH. N O burden at all?
M r . ECCLES. NO.
M r . SMITH. The only

reason I asked the question, in connection
with M r . Patman's questioning as to the actual work of handling these
bonds—what is it worth to the banks—and it is your idea, M r . Patman, that they get this interest without doing a great deal of work,
is that your idea?
M r . P A T M A N . I did not get that question.
M r . SMITH. They get this interest without really doing much work
for it, is that your idea?
M r . P A T M A N . A large part of it is unearned interest.
M r . SMITH. I do not know myself. I am merely asking for
information.
M r . FORD. M a y I ask a question. T o what extent is it unearned?
If a bank buys $1,000,000 of bonds, what does it buy with? It is a



138

FEJDEiRAL REiSiERVE ACT

AMENDMENT

bookkeeping transaction, that is true, and it puts the bonds away, but
i t has to take out of its deposits, or something, that $100,000, does it
not?
M r . E C C L E S . It creates the $100,000 and it buys the $100,000 of
bonds, but there is no assurance that the deposits might not be shifted
somewhere else, and the bank then may have to sell the bonds, as
they did in the last war at substantial losses.
M r . PATMAN. They cannot do it under the present situation.
M r . ECCLES. A t the end of the last war, of course, the bonds that
they did purchase, the long-term bonds, were sold by many banks at
substantial losses. But it is not any burden to the banks to purchase
and hold the securities. Where the burden to the banking system
comes in is that where the Government spends the money represented
by the deposits created when the banks buy the securities, that money
goes out and increases the volume of deposits which the banks handle.
For instance, today, the banks of this country are handling twice,
or more, I suppose, the volume of business that was true 3 or 4 years
ago. Take the Federal Reserve banks, for instance, which reflect the
activities of the commercial banks, and the commercial banks reflect
the employment and general activity of the country. The personnel
of the Federal Reserve banks has increased approximately 50 percent
in the last 2 or 3 years. Now, the personnel of the private bank has
likewise increased. The compensation paid to their employees has
increased and the efficiency of the employees, as a general rule, has
decreased. Now, that is merely one item of increased expense that
the banks have had to incur as the result of this increased activity.
M r . SMTTH. That ties in again with the first question I asked about
the cause of this reduction in earnings. I am just wondering. M y
question naturally implied the carrying through of the entire transaction. I mean all that is involved in the taking over by the banks
of these Government securities. That will include their redeposit
after they are checked out by the Government, finding their way back
into the banking system again. It is that point that I think is rather
important here so far as these deposits are concerned. Y o u already
indicate that there is less private business; consequently, less opportunity for earning the normal earnings than previously, and consequently it would seem to me if you figured that out, carried that clear
through, you would find a considerable burden placed upon the banking system as the result of that financing of Government obligations
through the banks.
M r . ECCLES. I agree with you that if you carry it through
M r . CRAWFORD. Governor Eccles, we have had an enormous amount
of correspondence with banks out through the country, at least I have,
particularly the north and central west and the northwest, to the
effect that the R . A. C. C. was greatly interfering with their earnings
through absorbing away from them first-class loans, we will say, in the
agricultural areas in particular. Have your studies brought you to
where you care to make a comment on that, what effect it has had?
M r . ECCLES. We have received a good many letters from bankers
throughout the country complaining about that competition, and I
think there is considerable justification in the complaints. I received
a letter from a committee of Congress which is considering a bill with
reference to the R . A . C. C., and I expect to reply to that letter
stating my views, or possibly the Board's views with reference to this
question.



FEDEIRAL RElSE'RVE A C T A M E N D M E N T

139

I would like to supplement what I said to Congressman Patman
with reference to the banks' increased costs and the reduction in their
earnings. The banks, as you possibly all know, have undertaken to
sell bonds and stamps, and in many cases they are handling the pay
roll allotment plans. Many of these War Saving bonds are issued
and distributed through commercial banks. That has greatly increased, that one item alone, the expense of the personnel of the banking system as a whole. The banks get no compensation whatever for
that service. They were recently requested to handle ration coupons
for which they are supposed to be compensated at their actual out-ofpocket cost. That would not include, of course, the distribution of
overhead expenses, taxes, rentals, and such expenses as that.
They cash without cost millions of Government checks. I would
say that in the great majority of cases the people that cash those
checks carry no accounts with the banks. That is a very big item
of expense, the handling and the collection of all those checks.
The banks have been subject to the foreign-funds control of the
Treasury. You will recall they froze all foreign funds in the banks,
and these funds could only be disbursed on the basis of regulations
issued by the Treasury. That required considerable extra cost on
the part of the banks, particularly the larger banks where there was a
substantial amount of foreign funds held.
Those are some of the items of service that the banks are rendering
to the Government in the war effort without compensation and which
are responsible for a considerable amount of increase in costs.
M r . SMITH. The Government has to pay for this service in one way
or another, either by direct appropriations, or through interest.
That is correct, is it not?
M r . ECCLES. That is right.
M r . PATMAN. Oh, no; you don't agree with that. The Government has to pay it, you don't agree with that. The people that have
the deposits pay it.
M r . E C C L E S . A S a practical matter, I do not think that is possible.
M r . HULL. Are we going to have the committee here in time to
act on this bill or not?
The CHAIRMAN. We cannot vote on the bill today. The members
are insisting on going to the House. We will have to meet tomorrow.
Governor Eccles, will you be available for the meeting tomorrow?
M r . ECCLES. I will be available, if we can get this bill out. I
hope, M r . Chairman, that we can conclude this tomorrow.
The CHAIRMAN. I am hoping that we can. I do not see any way
of getting it up to the House before Friday.
Mr. ECCLES. The passage of this bill promptly, if possible, is quite
urgent. If it is passed, it would immediately have the effect of reducing the reserve requirements by quite a substantial amount.
M r . P A T M A N . Y O U have the power to do that now.
M r . E C C L E S . I was going to say, it would reduce the reserve requirements on these Treasury balances, and it would make it unnecessary
for the System to buy $400,000,000 or $500,000,000 of securities, possibly, which would be the equivalent of the effect it would have. The
uncertainty of this thing makes our operation extremely difficult.
There is an other point that I want to make on a question that M r .




140

FEJDEiRAL REiSiERVE ACT

AMENDMENT

Patman raised the other day when I did not make it, and I want it to
be in the record because it is very important, and it is this:
The policy of the Open Market Committee of the Reserve System
is to keep the excess reserves of the banks down, to provide the banks
with just sufficient reserves to enable them to purchase the securities
which are not placed outside of the banks, and not to give to the
banks the larger reserves, the redundancy of reserves, which might
become necessary if this bill is not passed, and which might put the
banks in a position where they would be trying to buy a lot of securities on the market. Just as soon as this drive was over, and the
funds started to go back to the public, let us assume that this bill
had not passed and that the proceeds from this financing were not
deposited in the war loan accounts with the banks but came directly
from the community to the Treasury. The Federal Reserve would
offset the loss of those funds in the community by reducing reserve
requirements or by an open-market operation. Then as these funds
were disbursed by the Treasury and went back into the community
the banks would have excess reserves of substantial proportions which
they would, no doubt, immediately want to use in the purchase of
securities in the open market.
The Open Market Committee would have much less control than
they should have in order to exercise an adequate influence upon the
reserve positions of the banks. In other words, we do not want the
banks to have reserves in excess of what they need to finance that part
of the war expense that cannot be financed outside the banks.
The CHAIRMAN. Gentlemen, I do not think this bill can be gotten
out sooner than Friday of this week, and the members desire to have
another day for consideration.
M r . PATMAN. And I want to hear Mr. Morgenthau, because the
Treasury is more interested in this than anyone else.
M r . ECCLES. That is not true, Mr. Patman. As far as the Treasury
is concerned, they make the offering and it is up to the Open Market
Committee to so manage the market as to assure the success of the
drive. Now, the real burden is on the Federal Reserve. The Treasury will get the funds one way or the other, and they have much less
concern than we do in this.
The CHAIRMAN. I am sure the members of the committee fully
appreciate the responsibility that the Federal Reserve has; there is
no question about that; and the members of the committee want to
report this bill as soon as we can, but we have to get away now and
will come back tomorrow at 10:30.
(The committee thereupon adjourned until tomorrow, April 6, 1943,
at 10:30 a. m.)




FEDERAL BESERYE ACT AMENDMENT
W E D N E S D A Y , A P R I L 7, 1 9 4 3
H O U S E OF R E P R E S E N T A T I V E S ,
C O M M I T T E E ON B A N K I N G AND C U R R E N C Y ,

Washington, D. C.
The committee met, pursuant to adjournment, at 10:45 a. m.,
Hon. Henry B. Steagall (chairman) presiding.
The CHAIRMAN. The committee will come to order.
M r . Smith has a matter to which he wishes to call our attention for
just a moment.
S T A T E M E N T OF HON. FREDERICK C. SMITH, A REPRESENTATIVE
I N CONGRESS F R O M T H E S T A T E OF OHIO

M r . SMITH. M r . Chairman and gentlemen, before the commiittee
proceeds with consideration of H . R . 1699, I wonder if the committee
would take up H . R . 2206 and possibly consider disposing of it by
an amendment.
When H . R . 2206 first came up for consideration by the committee,
it appeared to me that it did not provide as much security for the
veteran as it should. I was inclined to think that a provision might
be added to the bill providing for some relief to the veteran with
respect to accrued interest charges on the mortgages that might
take place during his service. It was my thought that the veteran
should be entitled to at least some substantial extension of time in
which he might pay such accrued interest.
I have taken this matter up with M r . Ketchum, who represents
the Veterans of Foreign Wars, and with M r . Sullivan, who represents
the American Legion in matters of this kind. It seoms that they are
inclined to agree with me that the veteran could be given more protection than the bill as at present written provides. However, they
both seem to think that if anything is done along this line, it should
be done by an amendment to the Soldiers' and Sailors' Civil Relief
Act rather than to H . R . 2206.
I, therefore, ask that this bill be considered by the committee and
recommended for passage immediately.
M r . PATMAN. This does not relate to the bill we have under consideration this morning?
M r . S M I T H . N O . I think we are all agreed on this.
The CHAIRMAN. I think I can explain briefly what this is. If you
will remember, it is to amend the Federal Housing A c t so as to take
care of any delinquent payments by the mortgagor for the protection
of the mortgagee in extending mortgages of that kind for members of
the armed forces as long as they are in the service. Dr. Smith raised




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a question about it. It is a little difficult to understand from a
practical viewpoint, but I think it can be handled, and everybody, I
think, will agree to it.
M r . PATMAN. That is the one about which M r . Kean wrote a
letter?
M r . KEAN. Yes. I did not think it was coming up so soon.
The CHAIRMAN. Dr. Smith wanted to make known his position on
account of his suggestion the other day.
M r . SMITH. M y point the other day was that it gave protection to
the man holding the mortgage but possibly did not give such protection as I thought was deserving to the serviceman involved, and
my thought was to offer an amendment to take care of that phase of it.
After going into the matter carefully with the veterans7 organizations,
I find that this is perhaps not the proper place for an amendment.
There is an inclination on their part to wish to do that which I would
wish to accomplish under this bill, but they think it should be offered
as an amendment to another bill. Therefore, I am calling up this
bill and asking for its passage immediately.
The CHAIRMAN. Unless the committee wishes to report it by agreement, we will pass it over. Dr. Smith just wanted to make known
his position about it. We will take it up when we have time. We
do not wish to keep these gentlemen waiting. If we can report it by
consent immediately, we had better report it.
A t this time we will hear from Governor Eccles.
STATEMENT

OF

MARRINER

S. E C C L E S ,

GOVERNORS, F E D E R A L

CHAIRMAN,

RESERVE

BOARD

OF

SYSTEM

The CHAIRMAN. Governor Eccles, the proposition is: Should we
place State banks in the same category as national banks and member
banks with respect to the practice of the Federal Reserve System
in taking over any bonds that the banks purchase? In other words,
with respect to Government bonds, should the Federal Reserve offer
the same cushion and protection to State banks, as to Government
bonds, that it does to member banks?
M r . E C C L E S . W e l l , i t does n o w .
T h e C H A I R M A N . W e l l , n o w , does i t ?
M r . ECCLES. Y e s .

M r . PATMAN. It does not have to in practice.
M r . E C C L E S . N O ; but; it does as a matter of practice. What the
Federal Reserve is interested in is not so much the member banks or
the State banks; we are interested in sustaining the Government bond
market and getting wide distribution of Government securities.
T h e CHAIRMAN. I a m sure of that, b u t let me ask y o u : Y o u

are

doing this by regulation? There is no law requiring it?
M r . ECCLES. There is no law requiring that we do it for national
banks either.
The CHAIRMAN. That is what I mean. There is no law requiring
it to be done for anybody. It is a question of monetary management?
M r . ECCLES.

Naturally.

The CHAIRMAN. It is purely a regulation of the Federal Reserve?
M r . ECCLES. It is a matter of policy that is adopted by the Open
Market Committee in some instances; in other cases it is a matter
of policy adopted by the Board. For instance, take the establishment
of what we call a buying rate for Treasury bills. The Open Market



FEDERAL RESERVE ACT AMENDMENT

143

Committee established a buying rate for Treasury bills and instructed
every Federal Reserve bank to buy bills o n the basis of three-eighths
whenever those bills were offered. I n the ease of borrowing rates on
Government securities, every Reserve bank right after the war started
i n E u r o p e i n 1939 agreed to loan to any bank an amount equal to
par o n Government securities. It was not only to member banks; it
was to all banks. T h e rate to both member and nonmember banks
for loans secured b y Government bonds is 1 percent. Now, that is a
matter of policy; it is not a matter of statute at all. I t seems to me
that it cannot be otherwise than a matter of policy to be adopted b y
the Federal Reserve banks w i t h the approval of the Board. B u y i n g
policy must be directed, of course, b y the Open M a r k e t Committee,
T h e CHAIRMAN. TO what extent have State banks availed themselves of this privilege?
M r . ECCLES. I do not think that either members or nonmembers
have availed themselves to any substantial extent of the privilege of
borrowing from the Reserve banks. T h e y have preferred, if they
needed funds, to sell their Government securities i n the market; and,
of course, the Open M a r k e t Committee has purchased Government
securities offered i n the market, so there has been a ready market for
their securities, and all banks have preferred to sell their securities,
if they needed to, rather than borrow. T h e very fact, however, that
they k n o w they can borrow has, I am sure, helped stabilize the
Government market and has, I think, given the banks greater confidence i n their holdings of Government securities.
I think that some of the nonmember banks—I do not have the
information available—have sold to the Reserve banks of their districts bills at the three-eighths buying rate. T h e y are given an option
to b u y those bills back on the basis of the three-eighths rate at any
time during the life of the bills. So, they can sell a bill to the bank
today and b u y i t back tomorrow, if today they are short of funds and
tomorrow they have funds. T h a t makes it a very elastic means of
enabling a bank to meet its reserve needs, whether the bank is a
member or nonmember.
T h e CHAIRMAN. YOU say there has been no discrimination?
M r . PATMAN. T h e point is that they have not had occasion to use
that privilege. There has been no necessity for its use. B u t suppose
that when this war is over there should be an emergency. T h e
regulation could be changed to where the national banks or member
banks would be favored i n the way that the regulation now provides,
and the State banks might be excluded from purchasing.
M r . ECCLES. D O y o u mean a State nonmember bank?
M r . PATMAN. T h a t is right; a State nonmember bank.
T h e CHAIRMAN. T h i s bill would take care of that b y saying that
there should be no discrimination and that the privileges should be
b o t h as to bills and other obligations.
M r . PATMAN. AS far as Government obligations are concerned.
T h e CHAIRMAN. Yes; make it all obligations.
M r . PATMAN. NO, not all; all Government obligations.
M r . ECCLES. T h e minute you do that, y o u are going to give to the
nonmember bank the privileges of membership.
T h e CHAIRMAN.

NO.

M r . PATMAN. NO; just as to Government bonds only.

S30 4 1
63—3 0




144

f e m r a l

reserve

act

amendment

M r . E C C L E S . Just as to their ability to borrow on Government
bonds.
The C H A I R M A N . Just for the war financing program; the Government's own obligations. I understand how the Federal Reserve feels
about extending the ordinary privileges of member banks to nonmember banks that do not assume any of the obligations. What we
are talking about is giving them the same facilities that are extended
to member banks in connection with Government obligations.
M r . E C C L E S . I am perfectly sure that there is no need to put any
such provision in the statute because, as a practical matter, no Federal
Reserve bank or Open Market Committee would do otherwise. The
whole purpose of the special provisions for advancing funds against
Government securities or for establishing a buying rate for securities
is to stabilize the Government's credit in the securities market.
The C H A I R M A N . We understand that fully. Perhaps in the present
situation there would not be a necessity for any action at all. But let
me remind you of what happened following the other war. I know of
instances in which little State banks that really were not able to carry
Government obligations at all at the rate that they received, were
caught with a lot of those bonds on hand, that they disposed of at
elose to 80 cents on the dollar. We do not want a thing like that
ever to happen again. We know you do not.
M r . E C C L E S . That was true not only of the State banks or nonmember banks; that was true of the member banks likewise. Y o u
must remember that at the end of the last war there was no such
thing as open-market operation. It was a technique of central banking that was unknown in this country.
The C H A I R M A N . That was in the law then, was it not?
M r . E C C L E S . N O , it was not in the law. There was no Open Market
Committee then.
M r . P A T M A N . I may suggest that the Open Market Committee
would run to the Federal Reserve, and if you had a Federal Reserve
Board or Open Market Committee that wanted to force all the banks
to the Federal Reserve System, they would have a mighty good hammer after this is over by saying, " Y o u will not have the rediscount
privilege. The Open Market Committee will not buy your bonds at
certain rates."
M r . E C C L E S . Let me answer that, M r . Patman, because I think
that that just is not an accurate statement of what the facts are.
Just assume a nonmember bank could not borrow from the Reserve
System. It could sell its securities in the open market.
M r . P A T M A N . That is, with the Open Market Committee?
M r . E C C L E S . The Open Market Committee would have to withdraw completely from the market and let the Government bond
market go to pot.
M r . P A T M A N . The national banks would be taken care of through
the rediscount privilege?
M r . E C C L E S . That is right; but it does not seem to me to make
sense to say that the Open Market Committee would refuse to buy
securities to stabilize the market while the member banks could obtain
loans at par on Government securities. I n the first place, banks are
loath to borrow from the Reserve banks. There has been practically
no borrowing since 1932 from the Reserve banks. Banks would
prefer to liquidate their securities or other assets rather than show bills




FEDEIRAL

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145

payable in their statements. The experience that banks had from 1929
to 1933 in borrowing, and the effect that the showing of bills payable
in their statements had on the public in bringing about runs on the
banks, has caused the banks to resist all borrowing from the Reserve
banks.
M r . PATMAN. If there is no objection, and you say it will always be
done
M r . ECCLES. In the first place, it would require that the matter
go over to the Senate, and that would delay this bill.
M r . PATMAN. There would not be any delay. They could accept
an amendment in 10 minutes.
M r . ECCLES. What you are proposing is very controversial; and
it would, in effect, I think, kill the bill. I think it is unnecessary.
M r . P A T M A N . D O you mean to say that if something that you say
is going to be done anyway by regulation—there is no doubt about i t —
is proposed to be officially enacted into law, it cannot be passed?
M r . ECCLES. I do not say it is going to be done; that the Reserve
banks would always give this privilege of special borrowing on Government bonds to nonmember banks. I do say that, so far as the market
for Government securities is concerned, nonmember banks could sell
their securities in the market, and the Open Market Committee would
have to purchase those securities. It may well be that the special
borrowing privilege given to nonmember banks, that now exists,
would not be continued indefinitely.
M r . P A T M A N . A 1-percent reduction in the price of Government
bonds will wipe out the capital structure of every bank in this Nation
today. They hold more than $35,000,000,000 in Government bonds.
No, I am incorrect; that would be 10 percent. It would take a 10percent reduction to do that.
M r . ECCLES. That is right. Of course, that is looking at it on the
basis that everything is going to be sold tomorrow.
M r . PATMAN. When this war is over, everyone will have Government bonds. Probably everybody will be loaded up with Government bonds. Of course, people will be cashing their bonds. The
State nonmember banks can be placed in a veiy embarrassing position
if the Open Market Committee and the Federal Reserve Board are
not in/ sympathy with them, so I think we ought to provide against
that now. We do not know who will be in charge of the Open Market
Committee, and we do not know who will be in charge of the Federal
Reserve Board. I think that we should provide against that possibility now by law.
M r . E C C L E S . Y O U are taking a position here that the Open Market
Committee, which is, of course, the authority that determines the
purchase and sale of securities on the open market, could discriminate
against one class of banks. As a matter of fact, in buying in the
market, we have not the remotest idea of who has sold the securities.
The securities may come from individuals, corporations, member
banks, or nonmember banks.
M r . PATMAN. But, M r . Eccles, do not overlook the fact that they
would not have to discriminate; they could just fail to buy for a few
days.
M r . ECCLES. Buy anybody's securities?
M r . PATMAN. Yes; and they would not be discriminating; but the
effect would be to discriminate against the nonmember State banks.




146

FEJDEiRAL

REiSiERVE A C T

AMENDMENT

Miss S U M N E R . But would your amendment prevent that?
M r . P A T M A N . Yes. They would be required to permit a nonmember State bank to have the rediscount privilege on Government
obligations only, on the theory that they have induced them to load
up with Government bonds during this emergency. Therefore, we
should give them some protection.
Miss S U M N E R . What is the advantage, then, of being a member of
the Federal Reserve System if everybody else has that privilege?
Mr. P A T M A N . There" are many other advantages.
Miss S U M N E R . •That is the principal advantage.
Mr. P A T M A N . N O ; not on Government obligations. Other obligations will not be included. This will be on Government securities only.
Miss S U M N E R . This is the principal obligation they use, is it not,
Mr. Eccles?
Mr. E C C L E S . They do not use much of any kind. They have not
done any substantial borrowing for 10 years.
Mr. K U N K E L . Under your philosophy of this proposal, does it not
mean that we here today are deciding that we know more about
what should be done in the future than a board or an Open Market
Committee and the Chairman of the Federal Reserve, who have been
studying the matter, will know, in the light of everything that has
transpired between now and the time this situation might arise?
M r . P A T M A N . I think it is more a question of whether we are
willing to trust these people with the State banks or nonmember
State banks when we fairly well know that they are not in sympathy
with them and there is strong possibility that we might have someone
on the Open Market Committee wipe out the securities, and Congress
would not have time to act before it was done, because it would be
done so quickly. I think that common prudence should dictate to
us that we should guard against any such possibility, especially when
we are inducing the State banks to load up with these bonds during
the emergency.
M r . E C C L E S . M r . Patman, it is discretionary on the part of 12 different Reserve banks whether or not they will make a loan to a member
bank or a nonmember bank. If a Reserve bank feels that a bank is
borrowing funds on Government securities for the purpose of supporting some other speculative activity, it may decline to loan a member
bank on Government securities; it may decline likewise to loan a
nonmember bank on Government securities.
M r . P A T M A N . That is right.
M r . E C C L E S . SO, the whole question of whether or not a Federal
Reserve bank will make an advance on Government securities or on
any other paper to a member or nonmember bank is left up to the
discretion of the board of directors of each of the 12 banks. Their
rate of discount is subject to the approval of the Federal Reserve
Board.
M r . P A T M A N . Right there is where we do not want discrimination.
When the directors of a Federal Reserve bank, as in Dallas, Tex.,
agree to accept the paper—the Government paper—of the national
bank, we want to require them to give the same privilege to the
State banks or nonmember banks only to the extent of Government
securities.




FEDERAL

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AMElNDMElNT

147

M r . ECCLES. But what if they make a loan to a bank, and they
find that that bank is using the credit it is getting on Government
securities to support stock market activity?
M r . P A T M A N . Y O U would not do that. Y o u are saying something
that is not material.
M r . ECCLES. The whole thing is discretionary with the banks.
M r . PATMAN. If they let the national bank have it, they will let
the State bank have it under their rules—under the same rule—on
Government paper only, and they exclude this speculative paper.
M r . ECCLES. They are permitted to do it. I n other words, the
Federal Reserve Board has approved a program, which is national in
scope, which is permissive as to making advances on Government
securities to member banks as well as to nonmember banks at the
uniform rate.
M r . P A T M A N . D O you think that is a good rate?
M r . ECCLES. Yes, I do.

M r . PATMAN. We want to write it into law to protect these banks
when the emergency is over; you want it to remain only as a regulation.
M r . E C C L E S . I think it is desirable to leave it that way. The
Federal Reserve Board is an agency of Congress, and at such time as
the Federal Reserve Board fails to perform its duty in what is considered by Congress to be in the public interest, Cdngress can certainly
remove them and change the law at any time it sees fit. But I certainly feel that this is not the time or the place to inject this matter,
which I think should be given more consideration than I feel can be
given at this time. I would like to see this bill passed as it is, and the
matter that you are proposing be discussed as another bill, because I
do think there are many angles to it that I, not contemplating this
discussion, may have overlooked, and I do not feel prepared today to
say that it should be made a part of this bill.
The CHAIRMAN. If I understand the situation, it is all embraced in
the realm of regulatory provisions by the Federal Reserve bank and
the open market committee. While these securities are being sold,
and during the period when the difficulties of that problem may become accentuated, you propose to put the State banks on the same
basis as member banks with respect to all transactions where Government securities or Government obligations are held.
M r . E C C L E S . A S I say, I see no reason to put, we will say, a State
nonmember bank as a matter of statutory requirement in that position
any more than we would put other public lending institutions, such as
mutual savings banks, insurance companies, and building and loan
companies, in that position. They all have public funds and are
encouraged to invest their funds in Government securities.
The CHAIRMAN. I think I need not remind you that it is important
that all our banks—and, of course, those in charge of the banks recognize it is important and are going to be governed by it in their transactions—be kept more liquid than other lending institutions and
individuals, because banks are trustees of public funds that they must
account for on demand—their deposits. That puts them in a different
category. If they are caught with unusual investments—investments




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in unusual amounts—to aid the Government in its financing program,
it seems to me that you are doing the right thing in treating them as
you do member banks for that purpose. If you are going to do that
and recognize that right, why should we not say, not that you shall not
do anything for a State bank or make any advance or loan to a State
bank or accord it any rediscount privilege, or anything like that, but
that insofar as advances upon the obligations of the Government are
concerned they shall have the same privilege f as member banks,
without discrimination? It seems to me that that would help in
financing the war program. We feel some responsibility toward all
the banks of the country in this program.
If I understand the situation, the banks are carrying something like
half—that is, they are taking care of something like half—of the
Government financing activities at this time. If one class of our
banks found themselves lacking the ability to secure privileges another
class of our banks have, it would throw things out of joint, and it
might become troublesome.
M r . E C C L E S . A S a practical matter, all institutions that carry the
funds of the public and invest in Government securities—such as
insurance companies, mutual savings banks, building and loan societies, and also individuals—are entitled to some protection on their
investment. Now, the Banking Act of 1935 gives to a public body
the power and, likewise, it seems to me, the authority and the obligation to stabilize, so far as they are able to do so, the money-market
situation. That can, it seems to me, be done only through their
operation in the Government security market. I am sure that the
nonmember banks as well .as the member banks will use the open
market to dispose of securities to meet any withdrawal of deposits,
and the open-market committee will have to assume responsibility
for the stabilization, it seems to me, of that market. It is not likely
to be stabilized through the amount of money that either the member
or nonmember banks are likely to borrow from the Federal Reserve
banks.
The CHAIRMAN. But is it not desirable that the nonmember banks
participate in this program to a larger extent than they are doing?
M r . ECCLES. It is desirable, M r . Chairman, that not only the nonmember banks but the public generally and all institutions should
participate in it just as rully as possible.
The one element of danger in the Government security market would
be a failure to prevent inflation—that is, an undue inflation. To the
extent that prices are permitted to go up and the purchasing power of
the dollar diminishes, to that extent is the entire Government security
market jeopardized, just as any fixed-income investment would be
jeopardized. There possibly is no way of overcoming the inflationary effects of a greatly increased living cost on any fixed-interestbearing obligations.
M r . ROLPH. In the event the policy in the future should go against
the nonmember State banks, could they not achieve the same end
through their correspondent relations with banks which are members?
M r . ECCLES. That is where they would go. That is where they
have gone in the past, and I am sure that that is exactly where they
would go in the future, rather than to the Federal Reserve bank, because they have had little or no relations with the Federal Reserve




FEDERAL

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149

bank. They do not know the personnel, and they have had no dealings with them. Should they decide to borrow rather than to sell
their securities, they very likely would go to the city correspondent
where they carry their reserves.
M r . ROLPH. Should they choose to turn their Government securities over to a correspondent bank, could not the correspondent bank
furnish them to the Federal Reserve bank?
M r . ECCLES. I t could.

Mr. CRAWFORD. Without having any thought of bringing this
phase of it into the banking machinery, I think it is important to
bring it out at this moment. The Treasury has laid down the proposition that if we are to avoid inflation, the securities issued by the
Treasury, necessary to finance our dollar appropriations, and after
we have paid our taxes, must be purchased by the private citizen,
the proprietorship, the partnership, the corporation, and lending
institutions other than commercial banks. T o that end, these
sources have been investing their reserve funds in Government
securities.
I have been watching the balance sheets of our industrial corporations—large, intermediate, and small—with a great deal of interest
from this standpoint, because it appears to me that our industrial corporations are going to put literally billions of dollars into Government
securities, and the possibility of these corporations adjusting themselves to the postwar operations will be subject to their ability to
finance themselves out of, we will say, the ownership of Government
securities. So, Government securities are spread over all these institutions in such manner as to present to us problems very dissimilar to
what, we have had heretofore, as we move into the postwar period. I
just want to mention that in connection with the fact that you have
pointed out that these lending institutions that are not member or
nonmember banks are filling their portfolios with Government
securities.
The CHAIRMAN. It occurs to me that we have embarked on a
discussion here that had better be held in executive session. I just
make the suggestion to you, Governor Eccles, that perhaps we should
conclude discussion of this bill in executive session.
Mr. ECCLES. That is all right with me. I would like to make this
point; that the proposal that the chairman and M r . Patman have
made is something that should be given more thought and consideration than c e r t a i n t y I have had time to give it while sitting here. It is
a matter that I think the other members of the Board should have
an opportunity to give some thought to. It may be that the suggestions you have made may be acceptable, but I do feel that to bring
them in at this time, in connection with this bill; that I think is
rather urgent and should be gotten out, is a mistake. I do not want
it to appear that I am opposing necessarily your proposal. I might,
if I had an opportunity to consider all the aspects of it, not have an
objection to it. A t first thought, as I have tried to express my views
today, it does not seem to be necessary or called for.
The CHAIRMAN. I am going to express the hope that we will get
this bill out today, and I now make the suggestion that the committee
go into executive session.
(At 11:40 a. m., the committee went into executive session.)
X