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FEDERAL
RESERVE ACT
AMENDMENTS
HEARING
BEFORE A
SUBCOMMITTEE OF THE
COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
E I G H T Y - T H I R D
C O N G R E S S
SECOND SESSION
ON
S. 3206
A B I L L TO E X T E N D A U T H O R I T Y OF F E D E R A L R E S E R V E
TO P U R C H A S E O B L I G A T I O N S D I R E C T F R O M
TREASURY
AND
S. 3268
A BILL
TO R E P E A L
PROVISIONS
WHICH
PROHIBIT
F E D E R A L R E S E R V E B A N K F R O M P A Y I N G O U T NOTES
OF ANOTHER FEDERAL RESERVE BANK
M A Y 13, 1954
Printed for the use of the Committee on Banking and Currency
U N I T E D STATES
GOVERNMENT PRINTING OFFICE
47423
W A S H I N G T O N : 1954
A
C O M M I T T E E
ON
BANKING
A N D
CURRENCY
H O M E R E . C A P E H A R T , Indiana, Chairman
J O H N W . B R I C K E R , Ohio
B U R N E T R . M A Y B A N K , South Carolina
I R V I N G M . I V E S , New York
W A L L A C E F . B E N N E T T , Utah
P R E S C O T T B U S H , Connecticut
J. G L E N N B E A L L , Maryland
F R E D E R I C K G. P A Y N E , Maine
B A R R Y G O L D W A T E R , Arizona
J. W I L L I A M F U L B R I G H T , Arkansas
A . W I L L I S R O B E R T S O N , Virginia
J O H N S P A R K M A N , Alabama
J. A L L E N F R E A R , JR., Delaware
P A U L H . D O U G L A S , Illinois
H E R B E R T H . L E H M A N , New York
IRA DIXON, Chief Clerk
RAY S. DONALDSON, Staff Director
S U B C O M M I T T E E ON F E D E R A L R E S E R V E
MATTERS
J O H N W . B R I C K E R , Ohio, Chairman
W A L L A C E F . B E N N E T T , Utah
B U R N E T R . M A Y B A N K , South Carolina
F R E D E R I C K G. P A Y N E , Maine
A . W I L L I S R O B E R T S O N , Virginia
B A R R Y G O L D W A T E R , Arizona
P A U L H . D O U G L A S , Illinois
n
CONTENTS
Page
S. 3206
S. 3268
Statement of—
Burgess, W. Randolph, deputy to the Secretary of the Treasury
Martin, William McC., Jr., chairman, Board of Governors, Federal
System
Spahr, Walter E., professor of economics, New York University;
executive vice president, Economists' National Committee on
Monetary Policy
Letters, statements, etc., submitted for the record by—
Economists' National Committee on Monetary Policy of 60 members
who recommend power of treasury to sell securities direct to Federal
Reserve banks not be extended
Federal Reserve System:
Letter on S. 3268
Memorandum on proposal
Treasury Department:
Letter on S. 3206
Direct purchase authority holdings of special short-term treasury
certificates by Federal Reserve banks
Direct borrowing from Federal Reserve banks
Letter to Senator Bricker on direct borrowing
m
1
1
7
5
9
12
4
5
2
3
4
8
FEDERAL RESERVE ACT AMENDMENTS
T H U R S D A Y , M A T 13, 1 9 5 4
U N I T E D STATES SENATE,
S U B C O M M I T T E E ON F E D E R A L R E S E R V E M A T T E R S OF T H E
B A N K I N G AND CURRENCY
COMMITTEE,
Washington, D. C.
The subcommittee met, pursuant to call, at 10:15 a. m., room 301,
Senate Office Building, Senator John W . Bricker (chairman) presiding.
Present: Senator Bricker.
Senator B R I C K E R . The subcommittee will come to order. There
are two bills before us. They were requested bills. They are S. 3206
and S. 3268. Without objection, the bills w i l l be made a part of the
record.
(The bills referred to follow:)
[S. 3206,83d Cong. 2d sess.]
A B I L L To amend section 14 (b) of the Federal Reserve Act, as amended
Be it enacted by the Senate and Home of Representatives of the United States of
America in Congress assembled, That section 14 (b) of the Federal Reserve Act,
as amended (U. S. C., 1952 edition, title 12, sec. 355), is amended by striking out
"July 1, 1954" and inserting in lieu thereof "July 1, 1956", and by striking out
"June 30, 1954" and inserting in lieu thereof "June 30, 1956".
[S. 3268,83d Cong. 2d sess.]
A B I L L To repeal the provisions of section 16 of the Federal Reserve Act which prohibit a Federal Reserve
bank from paying out notes of another Federal Reserve bank
Be it enacted by the Senate and House of Representatives of the United States of
America in Congress assembled, That the third paragraph of section 16 of the
Federal Reserve Act, as amended, is amended by striking out the sentences thereof
which read as follows: "Whenever Federal Reserve notes issued through one
Federal Reserve Bank shall be received by another Federal Reserve bank, they
shall be promptly returned for credit or redemption to the Federal Reserve bank
through which they were originally issued or, upon direction of such Federal
Reserve bank, they shall be forwarded direct to the Treasurer of the United States
to be retired. N o Federal Reserve bank shall pay out notes issued through
another under penalty of a tax of 10 per centum upon the face value of notes so
paid o u t / ' .
Senator B R I C K E R . We have as witnesses this morning M r . William
McC. M a r t i n , M r . Randolph Burgess, and D r . Walter E. Spahr.
A t this point in the record we m i l insert a copy of a letter from the
Secretary of the Treasury, dated March 9, 1954, addressed to the
President of the Senate. Attached to that are sheets headed, Direct
Purchase Authority Holdings on Special Short-Term Treasury Certificates b y the Federal Reserve Banks, 1945 to Present and Direct
Borrowings From Federal Reserve Banks. We also have a letter
from M r . William M c C . M a r t i n , Jr., dated March 31, 1954, addressed
1
2
FEDERAL RESERVE ACT AMENDMENTS
to the Honorable Homer E. Capehart, chairman, Committee on
Banking and Currency, w i t h enclosures. Without objection those
will be made a part of the record at this point.
(The material referred to follows:)
TREASURY
DEPARTMENT,
March 9, 1954.
SIR: There is transmitted herewith a draft of a proposed bill to amend section
14 (b) of the Federal Reserve Act, as amended.
The purpose of the proposed legislation is to extend for 2 years the authority
of Federal Reserve banks to buy directly from the Treasury, rather than in the
open market, direct obligations of the United States or obligations fully guaranteed by the United States in an amount not to exceed $5 billion held at any one
time. Under the terms of the present law, the authority will expire on June 30,
1954, and a 2-year extension of the authority is considered desirable.
This direct purchase authority furnishes the Treasury an important instrument for smoothing out the effect of short-run peaks in Treasury cash receipts
and disbursements so that the disturbing effect of their flow through the banking
system may be held to a minimum. Also, the Treasury, if the direct purchase
authority did not exist, would be required to maintain larger cash balances than
is now the case in order to meet unanticipated redemptions of public debt obligations on demand and without notice at the option of the owner or other large
cash outlays of which the Treasury has not received previous notice.
While the authority is used only occasionally, it represents an essential fiscal
mechanism to the Treasury in handling the distribution and utilization of its
cash balances and holding them to a minimum. Any borrowing under the
authority would, of course, continue to be subject to the statutory public debt
limit.
There is attached a table showing the holdings by the Federal Reserve banks
under the direct purchase authority from 1945 to the present time. There is
also enclosed a comparative print showing the changes the proposed bill would
make in existing law.
I t is respectfully requested that you lay the proposed bill before the Senate.
A similar bill has been transmitted to the Speaker of the House of Representatives.
The Department has been advised by the Bureau of the Budget that there is
no objection to the submission of this proposed legislation to the Congress.
Very truly yours,
G. M .
HUMPHREY,
Secretary of the Treasury.
T h e P R E S I D E N T OF T H E
SENATE.
3
FEDERAL RESERVE ACT AMENDMENTS
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4
FEDERAL RESERVE ACT AMENDMENTS
Direct borrowing from Federal Reserve banks (certificates of indebtedness special
series bearing interest at the rate of % of 1 percent per annum)
[In millions]
Amount
Amount Balance
borretired
rowed
Date
Total from 1942 to 1951.
1952—Jan. 22
Jan. 23
Jan. 24
Mar. 17
M a r . 18
Mar. 19Mar. 20
M a r . 21
Mar. 22 1
Mar. 23
Mar. 24
M a r . 25
,Mar. 26._
Mar. 27
M a r . 28
June 16
June 17
June 18
June 19
June 20.
June 21
June 22 1
June 23
June 24
June 25
Sept. 15
Sept. 16
Sept. 17
Sept. 18
Sept. 19
Sept. 20 1
Sept. 21
Sept. 22
Sept. 23
1953—Mar. 18
M a r . 19.
M a r . 20
M a r . 21—..M a r . 221
M a r 23
M a r . 24
$5,388
$5,388
55
33
22
811
369
131
27
149
19
156
109
$55
22
811
442
311
338
338
338
338
189
170
14
123
123
472
64
123
164
18
61
96
27
47
103
154
36
21
108
128
6
110
6
...
85
144
147
472
536
413
249
231
170
170
74
47
103
257
221
242
134
134
134
6
110
104
189
189
189
333
186
Date
1953—Mar. 25
M a r 26
M a r . 27
—
June 5 _ . . .
June 6 1
__
June 7
June 8.
. . .
June 9
June 10
June 11
June 12
June 13
June 141
June 15
June 16
Jufie 17
June 18
June 19
June 20 1
June 21
June 22
June 23
June 24
June 25
1954—Jan. 14
Jan.15
Jan. 16
Jan. 17 1
Jan. 18
Jan. 19
Jan. 20
Jan. 21
Jan. 22
Jan. 23
Jan. 24»
Jan. 25
Jan. 26
Jan. 27
M a r . 15....
M a r . 16
M a y . 17.Total to date
Amount Amount
Balance
borretired
rowed
$63
49
$123
14
49
$196
178
117
40
93
148
493
173
349
459
628
84
300
312
296
196
196
196
374
491
451
358
506
506
506
999
1,172
823
364
992
992
992
908
608
296
22
147
154
101
loi
17
23
80
200
3
134
56
22
169
169
169
323
424
323
306
283
283
283
203
3
134
190
190
10,090
10,090
1 Sunday.
Public Law 405, approved June 23,1952, extends until July 1,1954, the authority granted Federal Reserve
banks to buy Government securities directly from the Treasury Department.
NOTE.—These figures are net. During the period prior to June 15,1943, it was the custom for the Treasury to take up a security daily and to issue a new security for either the increased or decreased amoynt as
the case may be. The reason for stating on a net basis is to avoid a padding of the figures due to this method
of handling the account.
B O A R D OF GOVERNORS OF T H E F E D E R A L R E S E R V E
SYSTEM,
Washington, March 31, 1954*
T h e H o n o r a b l e H O M E R E . CAPEHART,
Chairman, Committee on Banking and Currency,
United States Senate, Washington 25, D. C.
M Y D E A R M R . C H A I R M A N : The Board of Governors of the Federal Reserve
System respectfully recommends the repeal of those provisions of the third
paragraph of section 16 of the Federal Reserve Act (12 TJ. S. C. 413) which
prohibit a Federal Reserve bank from paying out Federal Reserve notes issued
by another Federal Reserve bank. For the consideration of your committee,
there is enclosed a draft of a bill which would accomplish this purpose.
The provisions in question were enacted as a part of the original Federal Reserve Act (and amended in 1917) for purposes which are briefly described in the
enclosed memorandum. Experience over the years, however, has shown that
these requirements do not contribute to the accomplishment of the objectives
for which they were intended, and that they serve no useful purpose.
5
FEDERAL RESERVE ACT
AMENDMENTS
The cost of sorting "fit" Federal Reserve notes according to the banks of
issue and of shipping such notes from one Reserve bank to another is estimated
to exceed $750,000 a year. The repeal of the provisions in question would
eliminate this valueless expenditure.
A similar letter is being sent to the chairman of the Committee on Banking
and Currency of the House of Representatives.
The Budget Bureau advises that it has no objection to the submission of this
proposal.
Sincerely yours,
W M . M C C . M A R T I N , Jr.
M E M O R A N D U M O N PROPOSED A M E N D M E N T OF T H E F E D E R A L R E S E R V E A C T T o
P E R M I T E A C H F E D E R A L R E S E R V E B A N K T o P A Y O U T C U R R E N C Y I S S U E D BY
OTHER FEDERAL RESERVE BANKS
The third paragraph of section 16 of the Federal Reserve Act (12 U. S. C. 413)
provides that "Whenever Federal Reserve notes issued through one Federal
Reserve bank shall be received by another Federal Reserve bank, they shall be
promptly returned for credit or redemption to the Federal Reserve bank through
which they were originally issued or, upon direction of such Federal Reserve
bank, they shall be forwarded direct to the Treasurer of the United States to be
retired. No Federal Reserve bank shall pay out notes issued through another
under penalty of a tax of 10 per centum upon the face value of notes so paid out."
As a result of these provisions, it is necessary for each Federal Reserve bank
to sort all of the millions of Federal Reserve notes fit for further circulation which
are received by it from member banks, according to the Reserve bank by which
each note was originally issued. I n addition, it is necessary for the Reserve bank
to return such notes to the Reserve banks that originally issued them.
Such sorting and crisscross shipping of currency are expensive. I t is estimated
that the annual cost of these activities, which would not be necessary except for
the statutory provisions quoted above, is in excess of $750,000 annually.
These statutory provisions (except for one clause, not important for this purpose) were enacted in 1913 as a part of the original Federal Reserve Act, with the
purpose of contributing to the adjustment of the amount of Federal Reserve
notes in circulation to the requirements of business and industry. I t was expected that since such notes would be issued to member banks against the rediscount of the notes of customers of such member banks, the amount of Federal
Reserve notes in circulation would automatically fluctuate as borrowings by
business enterprises increased or decreased in accordance with seasonal and
cyclical changes in business.
Experience over the years, however, definitely indicates that the requirement for
the return of fit Federal Reserve notes to the Federal Reserve banks of issue has
no effect on the amount of Federal Reserve notes in circulation. The notes that
are returned to the Federal Reserve banks of issue, in accordance with the requirements of the law, are again placed in circulation as demand for currency appears.
Outstanding currency which is not needed by the economy is returned to the
Reserve banks for credit to the reserve accounts of the member banks. I n other
words, the amount of currency in circulation rises and falls in accordance with
changes in the demand for currency on the part of the public, and is in no way
affected by the return of fit notes to the bank of issue.
From the foregoing, it appears that the restrictions upon a Federal Reserve
bank's paying out currency issued by other Federal Reserve banks serve no useful
purpose, and their elimination would effect a substantial reduction in the annual
expenses of the Federal Reserve banks. Accordingly, the repeal of these provisions is clearly advisable.
Senator B R I C K E R . M r . M a r t i n , if you w i l l take the stand.
have a prepared statement, I think?
You
STATEMENT OF WILLIAM McC. MARTIN, JR., CHAIRMAN, BOARD
OF GOVERNORS, FEDERAL RESERVE SYSTEM
M r . M A R T I N . I have, sir.
Senator B R I C K E R . Y O U may proceed.
M r . M A R T I N . I am glad to have this opportunity to testify on
behalf of the Board of Governors of the Federal Reserve System rela47428—54
2
6
FEDERAL RESERVE ACT
AMENDMENTS
tive to the proposed legislation which you have before you. The
Board of Governors endorses both of these proposed bills.
S. 3206 would extend for another 2 years the authority, continuously
provided since 1942, of the Federal Reserve to purchase up to $5
billion of United States securities directly from the Treasury. W i t h out this authority the Treasury and the Federal Reserve on occasions
would be unable to prevent the disturbing effects on the money market
of the sudden drains that occur at tax-payment periods. The use of
this authority prior to tax-payment dates avoids creating unnecessary
financial strains that would otherwise occur if the Treasury had to
draw heavily on its accounts. Temporary Treasury borrowing
through this means followed by prompt repayment from the proceeds
of tax payments provides a smooth operating mechanism, without the
abrupt money market fluctuations that would otherwise occur, and
thus is helpful in the conduct of Federal Reserve policy. Use of this
procedure as required by law is reported each year in detail i n the
Board's annual report. We believe that this authority, under existing
safeguards, should remain available.
S. 3268 would repeal the provisions of section 16 of the Federal
Reserve Act which prohibit a Federal Reserve bank from paying
out notes of another Federal Reserve bank. Under present law i t is
necessary for each Federal Reserve bank to sort all of the millions of
Federal Reserve notes fit for further circulation which are received
by i t from member banks, according to the Reserve bank by which
each note was originally issued. I n addition, i t is necessary for the
Reserve bank to return such notes to the Reserve banks that originally
issued them
Such sorting and crisscross shipping of currency are expensive. I t
is estimated that the annual cost of these operations, which would
not be necessary except for the statutory restriction, is in excess of
$750,000 annually. The pending legislation would remove a provision of law which was thought to be important in the early days of
the system but which i n practice has not proved to be so.
Experience over the years definitely establishes that the requirement for the return of fit Federal Reserve notes to the Federal Reserve
banks of issue has no important economic effect on the amount of
Federal Reserve notes in circulation. The notes that are returned
to the Federal Reserve banks of issue, in accordance w i t h the requirements of the law, are again placed i n circulation as demand for
currency appears. Outstanding currency which is not needed by the
economy is returned to the Reserve banks for credit to the reserve
accounts of the member banks. I n other words, the amount of
currency i n circulation rises and falls i n accordance w i t h changes i n
the demand for currency on the part of the public, and is in no way
affected by the return of fit notes to the bank of issue. Accordingly
we think no useful purpose is served by retaining the restriction upon
a Federal Reserve bank's paying out of currency issued by other
Federal Reserve banks. This matter has been thoroughly studied by
the presidents of the Federal Reserve banks and has their approval.
Senator B R I C K E R . Thank you very much. I do not think there
are any questions in regard to that. They are simple bills. What
was the reason for the prohibition, in the first place?
M r . MARTIN. Well, I think the idea was that we wanted to have
a regional system. The theory in those days was that you would
7
FEDERAL RESERVE ACT
AMENDMENTS
have i t related directly to the operations of each individual district.
I think it was a desirable safeguard. I don't want i n any way to
impair the regional system, the regional grouping of the system.
B u t now that we are trying to be as economic as we can, i t doesn't
seem very feasible to have 2 notes i n m y pocket on 2 Federal Reserve
banks. As long as they circulate i n one given city, and don't get
back to the Reserve bank, they could circulate indefinitely.
Senator BRICKER. They could circulate i n any area?
M r . MARTIN. Yes. When they get back to the Reserve bank, they
have to be shipped back home again. So i t just seemed to us that this
was a
Senator BRICKER. A sort of needless restriction?
M r . MARTIN. That is right.
Senator BRICKER. Thank you very much, M r . M a r t i n . M r .
Burgess.
STATEMENT OF W. RANDOLPH BURGESS, DEPUTY TO THE
SECRETARY OF THE TREASURY
M r . BURGESS. M r . Chairman, I w i l l address m y remarks to S. 3206
and appreciate the opportunity to present the Treasury's views on
this bill.
I am sorry I haven't mimeographed copies of this statement.
There will be some a little later for the press.
The enactment of this bill was requested by Secretary of the
Treasury Humphrey in his letter to the President of the Senate,
dated March 9, 1954. I t has been endorsed, as you just heard, b y
the Board of Governors of the Federal Reserve System.
The purpose of the bill is to extend for 2 more years the authority
of the Federal Reserve banks to purchase securities directly from the
Treasury in an amount not to exceed $5 billion outstanding at any
one time.
Under the original Federal Reserve Act, the Federal Reserve banks
had authority to purchase Government obligations, either in the
market or directly from the Treasury. The Banking A c t of 1935
limited this authority, however, to open market transactions. I n
1942, the Second War Powers Act restored the authority of the Federal
Reserve banks to make purchases directly from the Treasury, up to
$5 billion outstanding at any one time.
This authority, which was initially granted only through December
31, 1944, was subsequently extended b y the Congress from time to
time. The most recent extension was for 2 years and w i l l expire on
June 30, 1954, unless i t is extended further b y the Congress.
This direct purchase authority permits the Treasury, in cooperation
w i t h the Federal Reserve, to smooth out the effect on the economy
of short-run peaks in its cash receipts and disbursements, especially
at quarterly tax dates. These short-run peaks involve large figures.
Total Treasury deposits in the month of M a r c h 1954, for example,
exceeded $13 billion, of which $10 billion were concentrated in the
last half of the month. Sound financial management requires that
the disturbing effect of such a tremendous flow of funds be held to a
minimum. This direct borrowing authority is one of the tools that
the Treasury and the Federal Reserve use for this purpose.
8
FEDERAL RESERVE ACT AMENDMENTS
The authority is used only occasionally and only for short periods.
On March 15, 1954, for example, the Treasury borrowed $134 million
from the Federal Reserve and the next day an additional $56 million.
A l l of this was paid back on March 17, as tax receipts became available.
The Treasury has never used this borrowing authority on other than
a temporary basis and has no intention of doing so. When I say
that, I don't mean just while we have been i n power but right back to
the time when i t was authorized. There has been only 1 day since
the end of World War I I when the amount of such borrowing outstanding has exceeded $1 billion, and typically the borrowing has been
repaid within 2 weeks. The attached table indicates the amounts of
this borrowing since January 1952.
I f the Treasury did not have this authority i t would have to maintain larger cash balances i n order to meet its disbursement requirements just before heavy tax receipts.
The direct borrowing authority is a useful mechanism in handling
Treasury funds economically and with least economic disturbance.
I n addition, i t provides flexibility to meet possible emergency situations.
Senator B R I C K E R . Thank you very much. I f you will send down
the written or typed copy
M r . BURGESS. Yes, that will be here i n a few minutes, Senator.
Senator B R I C K E R . The material that you refer to has already been
made a part of the record. Thank you very much.
(The following was received for the record:)
TREASURY
DEPARTMENT,
May 21, 1954.
H o n . JOHN W .
BRICKER,
Chairman, Subcommittee on Federal Reserve Matters,
Committee on Banking and Currency,
United States Senate, Washington 25, D. C.
D E A R M R . C H A I R M A N : After I had concluded my testimony regarding S. 3 2 0 6
on M a y 13, 1954, the suggestion was made that the authority for Treasury direct
borrowing at the Federal Reserve be limited to $1% billion of 1-day certificates,
since the Treasury has never used any more than that. As I pointed out in my
statement to the committee, however, a very important reason for seeking continuation of the present broader authority is to give the Treasury some flexibility
to cover emergency situations as they arise. The §X% billion limit would not give
that flexibility.
A t a time when Federal Government receipts and expenditures are running $5
to $6 billion a month on the average, tremendous swings in the movement of funds
throughout the economy are involved. The present broad direct borrowing
authority is desirable to meet any emergency without carrying a much larger cash
balance.
I would appreciate it if this letter could be made a part of the record.
Sincerely yours,
W.
RANDOLPH
BURGESS,
Deputy to the Secretary.
Senator B R I C K E R . D r . Spahr, we are glad to see you again.
w i l l testify on one or both of these bills?
You
9
FEDERAL RESERVE ACT
STATEMENT
NEW
AMENDMENTS
O F W A L T E R E. S P A H R , P R O F E S S O R O F
YORK
UNIVERSITY,
ECONOMISTS' N A T I O N A L
AND
EXECUTIVE
COMMITTEE
VICE
ECONOMICS,
PRESIDENT,
ON MONETARY
POLICY
D r . SPAHR. Both, please.
Senator B R I C K E R . Please be seated.
D r . SPAHR. M r . Chairman, the bill, S . 3 2 0 6 , tends to weaken,
rather than increase, the soundness of our monetary system, and,
consequently, should not be passed.
I t provides for direct monetization of Federal debt b y a procedure
that is only one step removed from issuance of fiat money.
Under the amendment of March 27, 1942, the life of which i t is
proposed, by S . 3 2 0 6 , to extend for another 2 years, the Treasury has
been able to finance itself legally up to $5 billion at any time by selling
its securities directly to the Federal Reserve banks at artificially low
rates of interest, thus avoiding the pressures of interest rates i n the
open market and obtaining Federal Reserve credit i n exchange for its
I O U's.
M a y I say there, Senator, that further on i n m y testimony I am
calling your attention to the statement b y 60 members of the Commerce Committee which recommended that this provision be limited
to this 1-day, so-called, or special overdrafts that I understand they
have been buying, the Federal Reserve, from the Treasury from time
to time. On that point, apparently the Federal Reserve Board, and
the Treasury, as M r . Burgess and M r . M a r t i n have pointed out, have
confined their remarks to these special overdrafts.
We are i n agreement and I am i n agreement of the wisdom of continuing that provision. B u t why do they want to continue this $5
billion limit when apparently their total purchases of these special
certificates have never exceeded, so far as I recall, over $1.3 billion
at any one time. Everything they have said about those special
certificates I personally would agree with, and our members have
stated that they approve that sort of procedure. Here, however, is an
opportunity to clean up an undesirable provision that was written i n
i n 1942, which would open up the Federal Reserve banks as a dumping
ground to $5 billion of any type security.
Neither M r . M a r t i n nor M r . Burgess, if I heard this correctly, dealt
w i t h that topic. Tt is toward that point that m y remarks are directed,
chiefly. The cleanup does not press this provision as i t is, b u t gets
r i d of everything except provision for these overdrafts, which apparently are quite desirable. So I want to make that clear as to the
burden of this testimony here.
I f the Federal Reserve banks are going to be opened up as a dumping ground, I should like to point out that i t was b y this process of
direct monetization of Government debt that the German mark was
driven to a level of practically zero i n value during and after W o r l d
War I . The history of this procedure, when employed b y the central
banks, provides a sad commentary on the lack of intelligence of mankind i n modern times i n the use of credit. The lesson is clear that no
central banking system should be permitted to finance a government
b y converting its I O U's into currency except when, as possibly i n
time of invasion by an enemy, a government cannot finance its needs
b y taxation or by borrowing the savings of its own or other people.
I n such an urgent and dangerous situation, a government may be
10
FEDERAL RESERVE ACT AMENDMENTS
forced to use fiat money or direct monetization of government debt as
a means of national survival and to count the destruction i n the value
of its currency as one of the costs of the war. B u t when a government
is able to employ the proper means of financing its activities, there is no
valid justification for employing fiat money or direct monetization of
government debt.
Besides the fact that the $5 billion amendment should be required
to expire on June 30, there is the further consideration that as the
reports b y the Board of Governors of the Federal Reserve System
are made to Congress there is apparently no way i n which Members
of Congress can determine from these reports what proportion of
Government securities held by Federal Reserve banks is a consequence
of direct purchases.
On that point I should like to call to your attention how the table
is set up i n the annual report of the Board, using the last one for 1953,
and referring to page 65. The heading of that table is "Federal
Reserve Bar^k Holdings for Special Short-Term Treasury Certificates
Purchased Directly From the United States, 1949 to 1953." I understand that that is all they have purchased directly, and that refers to
these certificates. The caption isn't what i t ought to be. I t ought
to say that this is all the direct purchases.
The table leaves the thought, at least to me, that perhaps there are
other direct purchases which are permitted under the law that are
not included i n this particular table, and consequently i n m y judgment
that table ought to have a footnote stating "This is the total of these
direct purchases." T h a t is why I make that reference that that
information as i t stands is not clear, at least to me. I have been
informed by one of the staff members of the Board that that represents
the total so far as he knows.
I should like to read as a part of m y observation a statement signed
b y 60 monetary economists who, on March 29, 1954, urged that this
$5 billion amendment be terminated. They said:
I n the interests of sounder management of this Nation's monetary and fiscal
affairs we, the undersigned, members of the Economists' National Committee on
Monetary Policy,, recommend that those provisions of section 14 of the Federal
Reserve Act, which permit the Treasury, until July 1, 1954, to sell directly to the
Federal Reserve banks up to $5 billion of "any bonds, notes, or other obligations
of the United States or which are fully guaranteed by the United States as to
principal and interest," not be renewed.
I n lieu of the present authority of the Federal Reserve banks to purchase
Government securities, of any type or maturity up to $5 billion, directly from the
United States Treasury, and in the interest of orderly money markets, particularly
during taxpaying periods, the Federal Reserve banks should be authorized to
purchase from the United States Treasury so-called 1-day Treasury overdrafts.
The maximum period during which these overdrafts, special certificates, might
run probably should not exceed 5 days.
I understand, M r . Chairman, that they run on the average of
about 2% or 3 days. So 5 days would probably be a safe l i m i t ; at
least, the Federal Reserve authority should know how much time
they actually need.
Apparently the maximum amount of such certificates which the Federal
Reserve banks should hold at any one time could safely be put at $1.5 billion,
judging by the common stipulations of the Federal Open Market Committee, for
example in the Annual Report of the Board of Governors of the Federal Reserve
System for 1948, pages 96 to 97.
As a stabilizing mechanism in the money markets and in respect to bank reserves,
these Treasury overdrafts are particularly useful during quarterly taxpaying
11
FEDERAL RESERVE ACT
AMENDMENTS
periods when tax receipts do not match Treasury outlays, as, for example, those
required for the redemption of Government securities scheduled for retirement
at quarterly taxpaying periods. Such limited overdraft accommodation, which is
wholly consistent with the fiscal agency functions of the Federal Reserve banks
performed on behalf of the United States Treasury, would in no way jeopardize
the independence of the former. The establishment and firm maintenance of
this independence is a basic condition for sensitive contact w i t h the needs of the
money market. Sound procedure in this respect requires termination of present
practices.
T h a t is true only if i t refers to anything else other than these 1-day
or special certificates, 1-day-old drafts or certificates.
The names of those who signed that statement are attached as an
appendix to my observations.
As one of the signers, I should like to urge that the Senate and
House follow the recommendations made i n that well-considered
statement.
M a y I repeat, if I understand the points being made by M r . M a r t i n
and M r . Burgess, they were dealing w i t h these special certificates but
they wanted the $5 billion limit left as i t was inserted i n 1942. This
recommendation here, which would be mine, would be to pull that
down to $1% billion and restrict i t to these special certificates.
Now, I am ready to go on to the next bill, if y o u are ready.
The bill, S. 3268, which proposes to remove the 10 percent tax
provision of the Federal Reserve Act, section 16, designed to prevent
any Federal Reserve bank from paying out Federal Reserve notes
issued by other Federal Reserve banks, is unsound i n principle and
should not be passed.
The purpose of existing law is to provide, and properly so, one of
the desirable features of a money originally designed to be responsive
to the needs of business. This law, which i t is proposed to repeal,
tends to force Federal Reserve notes home to the issuing bank after
they have been paid into Federal Reserve banks.
Repeal of that provision of existing law would remove a correct and
needed provision for the return of these notes to the issuing banks.
I t would convert what is i n nature uncollected items into cash which
each Reserve bank could then pay out as money.
As I listened to and read M r . Martin's statement, this point that
I am making here was really not dealt with.
To the degree that this were done, each Federal Reserve bank would
be able to expand the volume of Federal Reserve notes i n circulation
without being called upon to supply the reserve and collateral now
required if i t issues Federal Reserve notes.
Proper pressure of reserve requirements against the issuance of
Federal Reserve notes would be removed to the extent a Federal
Reserve bank should pay out the notes issued by other Reserve banks.
The b i l l is designed to remove pressure for the retirement of these
notes while all the arrangements for their expansion are left intact.
This proposed legislation would weaken, rather than enhance, t b *
soundness of our monetary system.
Senator B R I C K E R . Then you have appended the list of the signers
of the statement?
D r . SPAHR. Y e s .
Senator B R I C K E R .
Without objection, that w i l l be made a part of
the record.
(The material referred to follows:)
12
FEDERAL RESERVE ACT AMENDMENTS
APPENDIX
S I X T Y M E M B E R S R E C O M M E N D T H A T T H E P O W E R OP T H E T R E A S U R Y T O S E L L
S E C U R I T I E S D I R E C T L Y TO T H E F E D E R A L R E S E R V E B A N K S N O T B E E X T E N D E D
John F. Adams,1 Temple University
Charles C. Arbuthnot, Western Reserve University
John W. Beck, Oklahoma Publishing Co.
James Washington Bell, Northwestern University
Douglas H . Bellemore, Boston University
H . H . Beneke, Miami University, Oxford, Ohio
William A. Berridge, Metropolitan Life Insurance Co., New York, N. Y.
Ernest L. Bogart, New York, N. Y.
Frederick A. Bradford, Lehigh University
Cecil C. Carpenter, University of Kentucky
Arthur W. Crawford, Chevy Chase, Md.
William W. Cumberland, Ladenburg, Thalmann & Co., New York, N. Y .
Rev. Bernard W. Dempsey, S. J., St. Louis University
Raymond de Roover, Wells College
James C. Dolley, the University of Texas
William E. Dunkman, the University of Rochester
William F. Edwards, Brigham Young University
D . W. Ellsworth, E. W. Axe & Co., Inc., Tarrytown, N. Y .
Fred R. Fairchild, Yale University
Charles C. Fichtner, Buffalo, N. Y.
Major B. Foster, Alexander Hamilton Institute and New York University
Roy L. Garis, University of Southern California
Alfred P. Haake, economic consultant, Park Ridge, 111.
E. C. Harwood, American Institute for Economic Research
Hudson B. Hastings, Yale University
Harold J. Heck, the Tulane University of Louisiana
George H . Hobart, High Point College
John Thom Holdsworth, the University of Miami
Harold Hughes, economic consultant, Fort Worth Tex.
Frederic A. Jackson, Morgan State College
Montfort Jones, the University of Pittsburgh
Donald L. Kemmerer, University of Illinois
Arthur Kemp, Claremont Men's College
J* L. Leonard, Culver City, Calif.
Edmond E . Lincoln, Wilmington, Del.
A. Wilfred May, executive editor, the Commercial and Financial Chronicle, New
York, N . Y.
David H . McKihley, the Pennsylvania State College
Austin S. Murphy, Seton Hall University
Fred R. Niehaus, Stanford University
Melchior Palyi, Chicago, 111.
Frank Parker,1 University of Pennsylvania
Robert T . Patterson, New York University
Clyde W. Phelps, University of Southern California
Frederick G. Reuss, Goucher College
O. H . Ritter, Stockton, Calif.
Leland Rex Robinson, 76 Beaver Street, New York, N. Y .
R. G. Rodkey,1 University of Michigan
Olin Glenn Saxon, Yale University
R. Harland Shaw, Conference of American Small Business Organizations, Chicago,
111.
Murray W. Shields, University of Florida
Walter E. Spahr, New York University
William H . Steiner, Brooklyn College
Gilbert R. Stonesifer, Mount Union College
Charles S. Tippetts, Mercersburg Academy_
James B. Trant, Louisiana State University
John V. Van Sickle, Wabash College
V. Orval Watts, economic consultant, Altadena, Calif.
Edward J. Webster, Clearwater, Fla.
G. Carl Wiegand, University of Mississippi
Edward F. Willett, F. Eberstadt & Co., New York, N\ Y .
i W i t h reservations.
13
FEDERAL RESERVE ACT
AMENDMENTS
Senator BRICKER. Thank you very much, Doctor. I t is good to
see you again.
D r . SPAHR. Thank you very much.
Senator BRICKER. I f there are no other witnesses on these bills,
the hearing will be adjourned. I will ask the secretary if he will get
to the members of the subcommittee—Mr. Bennett, M r . Payne, M r .
Goldwater, M r . Maybank, M r . Robertson, and M r . Douglas—copies
of his testimony. The meeting is adjourned.
(Whereupon, at 10:40 a. m., the hearing was adjourned.)
X
@FedFRASER