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FEDERAL RESERVE ACT AMENDMENTS
(Sections 14 and 16)

HEARINGS
BEFORE T H E

COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
EIGHTY-THIRD
SECOND

CONGRESS

SESSION

ON

H. R. 8729
A B I L L T O A M E N D S E C T I O N 14 (b) O F T H E
R E S E R V E ACT, AS

FEDERAL

AMENDED

AND

H. R. 9143
A B I L L TO R E P E A L
OF T H E

FEDERAL

T H E P R O V I S I O N S O F S E C T I O N 16
RESERVE

ACT W H I C H

PROHIBITS

A F E D E R A L RESERVE B A N K F R O M PAYING OUT NOTES
OF A N O T H E R F E D E R A L R E S E R V E

BANK

M A Y 26 A N D 27, 1954

P r i n t e d for the use of the Committee on B a n k i n g and Currency




U N I T E D STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1954

COMMITTEE ON BANKING AND CURRENCY
J E S S E P . W O L C O T T , Michigan,
R A L P H A . G A M B L E , New Y o r k
H E N R Y O. T A L L E , Iowa
C L A R E N C E E . K I L B U R N , New Y o r k
G O R D O N L . M C D O N O U G H , California
W I L L I A M B. W I D N A L L , New Jersey
J A C K S O N E . B E T T S , Ohio
W E S L E Y A . D ' E W A R T , Montana
M Y R O N V. G E O R G E , Kansas
W A L T E R M . M U M M A , Pennsylvania
W I L L I A M E . M c V E Y , Illinois
D. B A I L E Y M E R R I L L , Indiana
C H A R L E S G. O A K M A N , Michigan
E D G A R W . H I E S T A N D , California
D O U G L A S R. S T R I N G P E L L O W , U t a h

Chairman

B R E N T S P E N C E , Kentucky
P A U L B R O W N , Georgia
W R I G H T P A T M A N , Texas
A L B E R T R A I N S , Alabama
A B R A H A M J . M U L T E R , New Y o r k
C H A R L E S B . D E A N E , N o r t h Carolina
G E O R G E D. O ' B R I E N , Michigan
H U G H J . A D D O N I Z I O , N e w Jersey
I S I D O R E D O L L I N G E R , New York
R I C H A R D B O L L I N G , Missouri
W I L L I A M A. B A R R E T T , Pennsylvania
W A Y N E L . H A Y S , Ohio
B A R R A T T O ' H A R A , Illinois
E U G E N E J . M C C A R T H Y , Minnesota

W I L L I A M K . V A N P E L T , Wisconsin
W i l l i a m J. H a l l a h an, Clerk
Orman S. F i n k , Professional Staff
J o h n E . B a r r i e r s , Professional Staff
II




CONTENTS
Page

H . R. 8729, a bill to amend section 14 (b) of the Federal Reserve Act, as
amended
1
H. R. 9143, a bill to repeal the provisions of section 16 of the Federal Reserve Act which prohibits a Federal Reserve bank from paying out notes
of another Federal Reserve bank
1
Statement of—
Burgess, W. Randolph, Deputy to the Secretary of the Treasury
64
Cherry, Alfred K., Legislative Counsel, Board of Governors of the
Federal Reserve System
44
Leonard, Robert F., Director, Division of Bank Operations, Federal
Reserve System
29
Martin, William McC., Jr., Chairman, Board of Governors of the
Federal Reserve System
2, 31
Young, Ralph A., Director, Division of Research and Statistics,
Federal Reserve System
43
Additional date submitted to the committee by—
Board of Governors, Federal Reserve System:
Comments and suggestions for consideration
32
Dates of examinations of Federal Reserve banks by examiners
for the Board of Governors—February 8, 1915, to May 3, 1954_
6
Distribution of total assets of insured commercial banks in United
States, selected years, December 31, 1935 to 1953
55
Estimated breakdown of $750,000 savings
10
Excerpt from the minutes of meeting of April 22, 1954
32
Explanations of differences between statements appearing in
Board's Annual Report and in report submitted by Arthur
Anderson & Co
63
Financial statements as of December 31, 1953, together with
auditor's certificate—Arthur Andersen & Co
59
Balance sheet, December 31, 1953
59
Statement of income and expenses for the year ended December 31, 1953
60
Expenses, by divisions, for the year ended December 31,1953.
61
Income and expenses
57
Names and titles of persons in charge of examinations of Federal
Reserve banks
7
Payments of interest on Federal Reserve notes
64
Reconciliation of the statements of income and expenses for the
year ended December 31, 1953, in the Board's annual report
for 1953 and in the report submitted by Arthur Anderson & Co_
62
Summary of interest payments on Federal Reserve notes by the
Federal Reserve banks, 1947-53
53
Treasury Department:
Direct borrowing from Federal Reserve banks
66
Method of accounting for issue and retirement of Federal Reserve
notes
82
New cash capital brought into the commercial banking systems
of the United States over the 10-year period ending December
31, 1953
71
National banks
71
State chartered banks, members of Federal Reserve System. _
71
State chartered banks not members of Federal Reserve System but members of Federal Deposit Insurance Corporation
72
Recapitulation
72




in

FEDERAL RESEBVE ACT AMENDMENTS
(Sees. 14 and 16)
WEDNESDAY, M A Y 26, 1954
HOUSE
COMMITTEE

OP

REPRESENTATIVES,

ON B A N K I N G

AND

CURRENCY,

Washington,

D.

C.

The committee met at 10 a. m., the Honorable Jesse P . Wolcott,
chairman, presiding.
Present: Chairman Wolcott, Messrs. Gamble, Talle, Kilburn,
McDonough, Widnall, Betts, Mumina, McVey, Merrill, Oakman,
Stringfellow, V a n Pelt, Spence, Brown, Patman, Rains, Multer,
Addonizio, Dollinger, Boiling, Barrett, O'Hara, and McCarthy.
T h e CHAIRMAN. The committee will be i n order.
W e are met this morning to consider H . R . 8729 and H . R . 9143,
which are as follows:
[H. R . 8729,83d 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 House 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".

|H. R . 9143,83d Cong., 2d sess.]
A B I L L T o repeal the provisions of section 16 of the Federal Reserve Act which prohibits 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 pf

America in Congress assembled, That the third paragraph of section 16 of the
Federal Eeserve 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. No Federal Reserve bank shaU pay out notes issued through
another under penalty of a tax of 10 per centum upon the face value of notes so
paid out."

T h e CHAIRMAN. W e have w i t h us M r . Martin, Chairman of the
Federal Reserve Board, and M r . Burgess, deputy to the Secretary
of the Treasurer.
Y o u gentlemen may agree on who will go first.
M r . MARTIN. I would like to go first, M r . Chairman.
T h e CHAIRMAN. Very well, M r . Martin, y o u may proceed.
l




2

FEDERAL

R E S E R V E ACT

AMENDMENTS

STATEMENT OF WILLIAM McC. MARTIN, JR., CHAIRMAN, BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
M r . MARTIN. I am glad, M r . Chairman, to have this opportunity
to testify on behalf of the Board of Governors of the Federal Reserve
System relative to the proposed legislation which you have before you.
The Board of Governors endorses both of these proposed bills.
H . R . 8729 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.
Without 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
Treasuiy 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
in the Board's annual report. We believe that this authority, under
existing safeguards, should remain available.
H . R . 9143 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 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. In 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. It
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 in 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 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. Accordingly




3

FEDERAL

RESERVE

ACT

AMENDMENTS

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.
The C H A I R M A N . With respect to H . R . 8729, how long has the
Federal Reserve had the authority to make such purchases?
M r . MARTIN. Since 1942, M r . Chairman.
The CHAIRMAN. And it has been continued every 2 years, or
something like that?
M r . M A R T I N . Y e s , sir.

The CHAIRMAN. Are there questions?
M r . PATMAN. On which bill, M r . Chairman? On both of them?
The CHAIRMAN. Well, he covered both, so, without objections, we
can take up both.
M r . P A T M A N . I have a question, M r . Chairman.
T h e CHAIRMAN. M r . P a t m a n .

M r . PATMAN. When did you first present this proposal, Mr. Martin,
to repeal that section of the act which requires the Federal Reserve
notes to be returned to the Federal Reserve bank issuing them?
M r . MARTIN. T o the Congress, M r . Patman?
M r . P A T M A N . Y e s , sir.

M r . MARTIN. A t the time of the Banking Act of 1935.
M r . P A T M A N . D O you mean it was presented then?
M r . MARTIN. It was presented then. The Banking Act of 1935,
as originally proposed in the House, contained a provision that would
have deleted the provision restricting recirculation of notes of other
Reserve banks. So it was in 1935, M r . Patman.
M r . PATMAN. A l l right. A t what other times?
M r . MARTIN. In the spring of 1943 we requested the chairman of
the Senate and House Banking and Currency Committees to introduce
a bill incorporating the repeal of this provision. Then in 1944, the
Presidents' Conference of the Federal Reserve Banks accepted and
approved a report of a special subcommittee, and it was decided at
that time not to go forward with it until we had some other minor
changes in the Federal Reserve Act that might be included with it.
And so nothing was done.
M r . PATMAN. Had you ever presented the matter to the Congress
and called their attention at the same time to the enormous savings
involved?
M r . MARTIN. A t the time of the Douglas questionnaire, in 1949,
M r . Patman, we did.
M r . PATMAN. Well, of course, that is not exactly presenting it to
the Congress, that is presenting it to a subcommittee of a joint committee. I wouldn't think so.
D i d you ever ask the Banking and Currency Committee of either
House to amend this law before?
M r . M A R T I N . W e d i d i n 1943.

M r . PATMAN. D i d you point out how much money it would save?
M r . MARTIN. That I do not know, whether that was actually put
into the record.




4

FEDERAL.

RESERVE ACT

AMENDMENTS

Mr. PATMAN. The other day was the first time I ever heard that
there were any savings to amount to three-quarters of a million
dollars involved. I just didn't know. But I am sure if the Congress
has been told in the past that it involved a half million dollars, or
three-quarters of a million dollars, they would have saved that money
over a long period of time. I just wondered why it had not been
presented.
Who first called that to your attention? Did any audit call it to
your attention? I am talking about the Board of Governors of the
Federal Reserve System now. When was the matter first brought up?
M r . MARTIN. During my administration, M r . Patman, it was
brought up at the time that we were discussing your questionnaire.
You see, I was a new man in the System and was reviewing aU of
these matters, and it was discussed at that time.
Mr. P A T M A N . D i d any audit ever bring it up?
M r . MARTIN. On the expense side? I don't know whether we
had any specific references to it.
" M R . PATMAN. H O W many audits have you had in the System?
This is the 40th year, I believe, of the Federal Reserve System. You
have had audits all along of the different banks during the years?
M r . M A R T I N . That is correct.
M r . PATMAN. H O W many audits in all would you say you have
had? A number of audits?
M r . MARTIN. Under the law each Federal Reserve bank has to be
examined at least once a year and that requirement has been met.
M r . P A T M A N . NOW, here is what I would like to do, without asking
you a lot of questions about it: I would like you to file, for the record,
a statement showing, we will say, in the first paragraph—I am just
giving it out in this order in order to make plain what I want—first
paragraph, the bank that was audited, when it was audited, which
bank, the date, the auditors, and the instructions given to the auditors
by the Board of Governors, of the Federal Reserve System. Then
somewhere I want you to state whether or not any of those audits
brought out this particular point.
M r . M A R T I N . We will review the matter.
M r . PATMAN. A l l right. Now, that will include all audits from
the beginning of the System.
When was this filed [indicating] with the Banking and Currency
Committee?
The CHAIRMAN. M r . Patman, don't you think that would be too
voluminous?
M r . PATMAN. The way I asked for it it should not be too voluminous. I am not asking for any detail, except the instructions given
the auditors.
The CHAIRMAN. Could that be furnished, M r . Martin?
M r . MARTIN. We can work up something on that, M r . Chairman.
(The data referred to above is as follows:)
The 12 Federal Reserve banks opened for business in November 1914, and in
each year, beginning with 1915, each of the banks has been examined at least
once as required by the Federal Reserve Act, by examiners for the Board of
Governors of the Federal Reserve System. Attached is a table showing the




5

FEDERAL.

RESERVE ACT

AMENDMENTS

dates of these examinations, together with the names and titles of the respective
persons who were in charge of the examinations.
These examinations are made under instructions of the Board to the effect
that the examination of a Federal Reserve bank shall determine its financial condition, proper discharge of its responsibilities as fiscal agent of the United States,
and compliance by management with applicable provisions of law, regulations of
the Board, and any other applicable requirements. The examiners are instructed
also to develop pertinent facts and opinions which will enable the Board to
appraise the condition, operations, and administration of each bank. In conjunction with each examination of a Federal Reserve bank, the accounts of the
Federal Reserve agent with respect to Federal Reserve notes and the collateral
thereto also are verified. The instructions issued to the examiners set forth the
minimum required to be accomplished and they do not operate as a limit upon
the extent of the investigation made by the examiners when confronted by an
unusual situation.
The reports of examination of the Federal Reserve banks submitted to the Board
by its examiners are carefully reviewed by the Board, and the recommendations of
the examiners requiring further action are taken up and followed to conclusion by
the board of governors with the chairman of the board of directors of the
Reserve bank. The examiners' recommendations do not include recommendations for changes in the law; as stated in the preceding paragraph, the function
of the examiners in this regard is, rather, to determine compliance by management
with applicable provisions of existing law.
In addition to the annual examinations of the Reserve banks by the Board's
field staff of examiners, discussed above, all phases of each bank's operations are
subjected to comprehensive and thorough audits throughout the year by the
resident general auditor and his staff. The general auditor is an officer of the
Federal Reserve bank, responsible directly to its board of directors through the
chairman and the audit review committee. The general auditor submits reports
of his audits to the board of directors, and copies of these reports from each
Reserve bank are furnished to the board of governors, where they are carefully
reviewed.

47918-54




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8

FEDERAL.

RESERVE ACT

AMENDMENTS

M r . P A T M A N . I have before me an audit and financial statement
of December 31, 1953, together with auditor's certificate, filed byAnderson & Co., auditors, of Washington. When was this filed with
the Banking and Currency Committee?
M r . M A R T I N . I am sorry, I do not know the date.
M r . PATMAN. W i l l it be all right to ask the clerk that, M r . Chairman?
M r . HALLAHAN. We will have it in a minute, M r . Patman. We
have a letter accompanying the audit from M r . Martin. I think it
was the 28th of April.
M r . PATMAN. I think this marks a milestone in the history of the
Federal Reserve System.
Has any audit ever before been filed with any Congress or any
congressional committee, involving the Federal Reserve System?
M r . M A R T I N . I do not know, sir. We will have to check that.
M r . PATMAN. Well, don't you know?
M r . M A R T I N . I would want to check it before I stated categorically.
M r . PATMAN. The Federal Reserve System is an agency of the
Congress, yet never before has any audit of either the Board of
Governors or any one of the Federal Reserve banks, ever been filed
with a congressional committee until this. And this audit is not
complete and does not mean anything, the way I see it.
It says:
We have examined the balance sheet of the Board of Governors of the Federal
Reserve System, and related statement of income and expenses for the year
ended, and our examination was made in accordance with generaUy accepted
auditing standards and included such tests of the accounting records and such
other auditing procedures that we considered necessary under the circumstances.

Now, do you have a statement that would show the instructions
that you gave these auditors when you employed them to make this
audit of the Federal Reserve System?
M r . MARTIN. I do not think I have any written statement, M r .
Patman.
M r . PATMAN. Could you furnish it to us in this testimony?
M r . MARTIN. A written statement that we gave the auditors?
We gave the auditors complete scope. We did not limit them in any
way.
M r . P A T M A N . I know the statement doesn't indicate any limitations
or restrictions, but the point is, just according to generally accepted
auditing standards, they could satisfy that by counting the petty
cash and verifying the balances on the balance sheet, couldn't they?
M r . MARTIN. Well, the auditors were given complete discretion to
audit any way that they saw fit.
M r . PATMAN. Any way, there are no recommendations here of
any kind? W h y didn't they recommend this, if it saves three-quarters
of a million dollars a year, and it is wholly unnecessary and useless, and
has been so for a period of 40 years. Why didn't these auditors
recommend it lastyear?
M r . M A R T I N . Well, this is an audit of the Board's accounts.
M r . P A T M A N . I know, but that involves the whole System. Y o u
get your money from the 12 Federal Reserve banks, with which to
operate, and the 12 Federal Reserve banks get their money in ways
that we understand, but this $750,000 enters into it.




9

FEDERAL.

RESERVE ACT AMENDMENTS

M r . M A R T I N . Well, the auditors, of course, would be interested in
the policy of the Congress, as they approached it also, and the policy
of the Congress did not provide for any other treatment of these
particular notes.
M r . P A T M A N . I will get to something more important, M r . Chairman, since you are going to furnish me that statement, which I
think will bring us up to date.
I would like to have any specific recommendations. I do not
think that would be asking too much, in another column or paragraph.
The C H A I R M A N . It might be helpful, M r . Patman, if you would
read the present law.
M r . P A T M A N . D O you mean section 16 of the act?
T h e C H A I R M A N . Y e s , sir.
M r . P A T M A N . I am pretty well familiar with it.
The C H A I R M A N . This is with respect to H . R . 9143.

Existing law
which H . R . 9143 would seek to amend, reads 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.

Parenthetically, I might say that the language isn't too good,
but that is the way it reads. [Continues reading:]
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.

M r . P A T M A N . That is right. Now, the trouble—and I know it has
caused a lot of trouble—has resulted evidently in a bank such as
Richmond down here, which gets Federal Reserve notes from all over
the country every day, having to bundle them up and send them to the
banks—how, by mail, special messenger, or how?
M r . M A R T I N . Any one of those devices, M r . Patman.
M r . P A T M A N . And do they do that every day or every week?
M r . M A R T I N . It depends upon the amount assembled.
M r . P A T M A N . Well, when it reaches a certain volume they send
them. "What is that volume?
M r . M A R T I N . I can't say. Shipments are being made daily.
M r . P A T M A N . They are made daily?
M r . M A R T I N . Yes, sir. Each bank will have different operating
techniques on this. There is no uniform pattern.
M r . P A T M A N . Where does this $ 7 5 0 , 0 0 0 come in? How do you
make that up? Break it down for us. Is most of it postage, express,
messengers, or personal help in doing the work, assorting the bills?
How is it made up?
M r . M A R T I N . It is made up of all of those items, M r . Patman, and
this matter was studied very carefully by the presidents of the
12 banks.
M r . P A T M A N . Could you give us some breakdown of it? Suppose
you do that for the record.
M r . M A R T I N . We will do the best we can with it, but each bank has
a different operating technique, and this is the best estimate we could
come up with as to savings.
Y o u can see what happens when the same notes will circulate in a
given area, and as long as they don't get to the Federal Reserve bank
they just go on circulating.



10

FEDERAL.

RESERVE

ACT

AMENDMENTS

M r . P A T M A N . I understand that, M r . Martin, but somebody arrived at this figure of $750,000 annually. That is not a small figure.
Over 10 years that is $7,500,000. Y o u used someone's figures in order
to arrive at that. That is what I want, a breakdown of how you
arrive at it.
M r . MARTIN. We will do the best we can for you.
(The data referred to above is as follows:)
A reasonable estimated breakdown of the $750,000 savings mentioned would
be as follows:
Shipping costs (postage and expressage on fit notes returned to bank of
issue)
$500,000
Labor costs (sorting and handling fit notes by bank of issue)
250, 000
Total

750, 000

M r . PATMAN. A l l right, sir. But no audit has ever recommended
this change, to your knowledge?
M r . MARTIN. I do not think that an auditor would be within his
prerogatives to take over the policy side of the Board.
M r . PATMAN. Don't you think that an auditor should, if it comes
to his attention, or if he discovers something whereby you could save
an enormous amount of money, such as $750,000 a year, on something
that is being done in a sort of idiotic fashion such as this, that he
should recommend a change?
M r . MARTIN. I wouldn't want to say that the statutory provision
of the Congress was idiotic.
M r . PATMAN. Well, it became idiotic in 1935, then, when you
changed the system from a regional system to a central bank system,
a hundred percent central bank system. That is when it became
idiotic?
M r . MARTIN. I am sorry; I cannot concede that it was changed to
that in 1935.
M r . P A T M A N . Y O U cannot concede that?
M r . MARTIN.

NO.

M r . PATMAN. Of course, before that time, M r . Martin, the regional
banks had some power. Now they have none.
M r . MARTIN. Well, that is where you and I disagree, M r . Patman.
M r . PATMAN. What power does a regional bank have now, that
the Board of Governors cannot overrule?
M r . MARTIN. We have discussed this before at considerable length.
I think that the presidents of the individual banks, when they serve
on the Open Market Committee, serve as equals.
Mr. PATMAN. Well, now, you are talking about a different thing
entirely. I said the regional banks. The Open Market Committee,
that is what we call down South "tall cotton" there, because they can
really do something. But you are talking about the Open Market
Committee and I am talking about the regional banks.
M r . MARTIN. Well, I do not think you can separate them out.
M r . PATMAN. What authority does a regional bank now have that
is of any importance that cannot be overruled or changed by the
Board of Governors?
M r . MARTIN. I think that you have to look at the System in terms
of the Board of Governors, the Open Market Committee
M r . PATMAN. A l l right, let us look at it. Just name the power that
they have.




11

FEDERAL.

RESERVE

ACT

AMENDMENTS

M r . MARTIN. Well, they have a president of an individual bank
M r . P A T M A N . I know they have a president and a vice president
and a managing director.
M r . MARTIN. Who sits on this Open Market Committee.
M r . PATMAN. Well, you are getting back to this tall cotton deal,
you see. Let us leave that, and stay with the regional banks.
What power does a regional bank have now, that cannot be overturned or changed by the Board of Governors here in Washington?
M r . MARTIN. Well, the Board of Governors—we have discussed
this endlessly—accepts the recommendations. We are not in a
position to operate. We are not in a position to get out in the field
and determine whether each of these requests for discounts should be
granted or not.
M r . PATMAN. Well, I am asking you to name one power.
M r . M A R T I N . I cannot name one power in the sense that you are
asking it.
M r . P A T M A N . I know you cannot. It is just not there.
M r . M A R T I N . N O , I just don't agree with you on that. That is a
matter of judgment, and we could discuss it endlessly, but I think
you can recognize the power of the Open Market Committee!
M r . PATMAN. Certainly I recognize their power, because they are
running the country right now. They have more power than the
Congress.
M r . MARTIN. This system which you took a look at with great care
at the time of the Patman questionnaire, is a unique organization,
and it may need changes from time to time, but it has been constantly
reviewed by the Congress, and by the public, and we welcome all
inquiry into it, but it is not a Board operation alone, it is not an Open
Market Committee operation alone, it is not an individual bank
operation alone.
M r . PATMAN. Well, then
M r . MARTIN. It operates as a unit.
M r . PATMAN. In actual practice, though, M r . Chairman, you know
that the 7 members of the Board, when there are 7 members, have
looking over their shoulders and directing and advising and suggesting
to them, at all times, in the performance of their duties, the 12 presidents of the Federal reserve banks who are elected by the private
banks, private commercial banks, and also 12 members of the Federal
Advisory Committee. Those 24 men are right there looking over their
shoulders and helping, and suggesting, to these 7 members of the
Board of Governors of the Federal Reserve System.
That is correct, isn't it? They have power to advise you and
suggest to you, and ask you what you are going to do and how you
are going to do it, and to say " D o it this other way," or to suggest
to you how they think it should be done.
M r . MARTIN. I am sorry, I cannot concede that, M r . Patman.
That is a concept of management.
M r . PATMAN. Well, let me ask it in another way.
M r . MARTIN. I like to emphasize the word "System."
M r . PATMAN. A l l right, we are talking about the System. Here
are the seven members of the Board of Governors. Of course they
sit on this Open Market Committee, the 12 members, 5 members of
the presidents of the Federal Reserve banks, and they alternate
except New York. New York is on that committee all the time.




12

FEDERAL.

RESERVE

ACT

AMENDMENTS

The others have about a third year each, I imagine, in all banks
except New York, and that is on it all the time.
Now, the 7 members of the Board of Governors must listen to these
12 presidents of the Federal Reserve banks, under the laws, requirements, and regulations. Y o u cannot escape that. That is correct,
isn't it? Y o u listen to any suggestions or recommendations they
make?
M r . MARTIN. Certainly, we welcome it.
M r . PATMAN. Then you also have another group. Twelve members
known as the advisory group. They are selected by the commercial
banks, too. One from each Federal Reserve district. That makes
24 of the finest and best and brainiest men of our entire Nation,
standing right over that Board of 7 members, to help them do their
work for the public good.
Now, the only ones that are absolutely charged with handling this
system in the public interest are those seven members. The rest of
them are not obligated to do that, because the presidents of these
banks are elected, just as Members of Congress are elected. They do
not call them constituents, but they are constituents. They are
elected to their places. The big banks elect 2 of them, the mediumsized banks elect 2 of them, and the small banks elect 2 of them.
And those six directors, naturally, have the balance of power, and
they can elect the presidents and the vice president and run the show.
Naturally they would. Y o u would expect them to.
M r . M A R T I N . N O , M r . Patman; I challenge that concept.
M r . PATMAN. Well, what part of it is it that you challenge?
M r . MARTIN. I challenge all of it.

M r . P A T M A N . Y O U don't challenge the way they are selected; do
you?
M r . KILBURN. M r . Patman, would you yield?
M r . P A T M A N . I yield for a question.
M r . KILBURN. Just for a very respectful suggestion, and that is to
let the witness answer. He started to answer, and I would like to
hear what he said.
M r . P A T M A N . I appreciate your suggestion and I will be very glad
to let him answer. I yielded a while ago by asking him to tell me one
power that the Federal Reserve System could not overturn and he
couldn't tell me. Now, he can answer anything he wants to.
M r . MARTIN. I would like to discuss this System set up. Naturally,
we are talking about money and credit. So we have to relate our
activities to the banking business.
M r . PATMAN. That is right.
M r . MARTIN. The banks own stock in the Federal Reserve System.
M r . P A T M A N . N O W , wait. Is it stock, M r . Martin?
M r . M A R T I N . N O W , wait a second. Let me finish that.
M r . P A T M A N . Y O U know that is not stock.
M r . MARTIN. Just a second. This stock ownership, as I have said
repeatedly to you, is not proprietorship, is not ownership in the ordinary sense of the word, but it is a device
M r . PATMAN. It is an investment, isn't it?
M r . MARTIN. It is a device that makes possible in a democratic
society participation in the management.
Now, this participation in the management was arrived at by
9 directors, 6 of whom are elected through this device of representa


13F E D E R A L .R E S E R V E

ACT

AMENDMENTS

tion, 3 of whom really represent the lenders—the banks, small,
medium, and large banks, and 3 of whom represent the borrowers.
If you think the president of X corporation that is borrowing
from this bank is necessarily dominated by the bank, why, he has his
interest as a borrower.
M r . P A T M A N . N O W , let's
M r . M A R T I N . N O W , let me finish.
And then the public interest was put in, in a very proper way, as
the evolution of the country developed, by having 3 directors appointed by the Board of Governors in Washington, and those 3 men
can frequently be the controlling influence in the bank.
But if you go back to the early stages of this country and see the
evolution of this system, you will find, as we pointed out repeatedly
at the time of your hearings, that from the first bank of the United
States on you had a shift, which attempts to keep a balance between
private and public. The first emphasis was to keep the public out
entirely, because that was the heritage on which the country was
founded, a fear of Government. Then gradually you shifted into a
period where the public interest was more and more recognized—not
that it wasn't always there, but in terms of representation.
And today you have a balanced setup in the individual Reserve
banks that, in my judgment, is not banker dominated.
M r . PATMAN. Well, M r . Martin, you brought in something that I
had never known you to bring in before. When you said that these
9 directors, 3 of them representing the banks, 3 of them the borrowers,
and 3 of them appointed by the Board of Governors—did I understand you correctly in that?
M r . MARTIN. Tnat is what I say the original intention, as I understand it, was, and
M r . PATMAN. Well, they are still set up in the same way, those nine,
are they not?
M r . MARTIN. Those nine, and if you will take a look at the directors—and I am not trying to avoid your question by this—I think
you will find that the caliber of the men is a warranty that
M r . P A T M A N . I am not questioning the caliber of the men. They
are the finest and best people in our country. I agree with that. But
I don't agree with you in this, and here is where I differ with you, and
I have never known you to use the statement before that three of them
represent the borrowers. I had never heard of that before. I have
heard that 3 of them represent the banks, and 3 of them the business
and industrial interests of the country, and 3 of them
M r . MARTIN. Well, are not the business and industrial interests
the borrowers?
M r . PATMAN. Well, I think that you will find that those three that
you refer to as representing the borrowers are also bank stockholders.
I think you will find that almost without exception that they are
interested in banks, and that they are not directors or officers of the
banks, because they cannot be officers and be 1 of those 3. But you
will find six in there selected by the private banks.
Mr. MARTIN. They are prohibited by law from owning any stock.
M r . PATMAN. Are you sure about that?
M r . MARTIN. I think that is the law, but I am not sure. They are
certainly not officers or directors of any kind.
47918—54




3

14

FEDERAL.

RESERVE

ACT

AMENDMENTS

Mr. P A T M A N . I explained that. I know they are not officers or
directors. They cannot be. But 3 of them are officers or directors,
and 3 of them the banks select, and although they are not officers and
directors, they are certainly not unfriendly to the banks or they
wouldn't be selected by the banks. So that gives the banks 6 out of
9 directors to run that show. Did you find that?
Mr. MARTIN. I don't concede that. We will have to check on it.
Mr. PATMAN. Your contention is that they cannot own stock?
Mr. MARTIN. I am not sure about owning stock, M r . Patman, but
for the most part they don't. They certainly cannot be an officer
or director or employee of a bank. That I am sure of.
Mr. PATMAN. Well, I will not go too far on that.
Right now you speak about this Open Market Committee, which
1 think is the most important committee in the United States. I
think it is more important than the Congress, because the Congress
had the power and the Congress delegated it to the Open Market
Committee to determine the volume of money in the country, and the
interest rates.
That is right, isn't it?
Mr. MARTIN. I think it is an important committee. I do not think
it is quite as important as you think it is.
Mr. PATMAN. Well, of course, Congress can change it, that is the
only difference. And if they were to get too much out of line I
imagine there would be changes.
But as it is now, the 160 million people of this country delegated
to this Congress 435 members of the House and 96 members of the
Senate, the power to regulate money. This Congress has delegated
that power to you, the seven members of the Board of Governors,
and the five Federal Reserve bank presidents who were selected by
the commercial banks of the country. So that the 12 make up the
most powerful group in the United States, and more powerful than the
United States Congress today, and yet this Congress has never taken
a look at those 12 men. I have never seen any except you and 1 or
2 others. I am sure they are fine fellows and handsome men and
brilliant, and that they possess all the qualifications that every good
American should possess, but this Congress has never interested
itself in even interrogating those 12 men, except just the chairman.
Y o u always speak for the group, I assume, Mr. Martin, do you?
Mr. M A R T I N . I cannot say truthfully that I always speak for the
whole group, M r . Patman. Occasionally we have disagreements, but
I am quite sure of one thing, and that is that you don't intend by your
remarks to cast any aspersions on the character of the presidents
that serve on the committee.
Mr. PATMAN. That is the second time you have said that. I never
said that.
Mr. M A R T I N . I just wanted to be sure.
Mr. P A T M A N . I never said anything about the character of anybody connected with this, and I am not going to, or any private banker.
I be]lieve in the private banking system.
Mr. M A R T I N . I did not want the inference to stand. That is the
reason I was pointing it up. Because they are not subservient to the
banks, I can assure you.
M r . P A T M A N . W h o is n o t ?

Mr. MARTIN. These presidents.




15

FEDERAL.

RESERVE

ACT

AMENDMENTS

M r . PATMAN. Well, I believe they are because their actions are
that way.
M r . MARTIN. Well, they are not here today, and that is why I
wanted to be certain that you didn't want to ascribe to them
M r . PATMAN. Well, I think the banks are running the Federal
Reserve System.
M r . MARTIN. Well, that I just happen to disagree with.
M r . PATMAN. Back when the act was passed certain big banks
violently opposed it, and fought for years. Now, representatives of
that same big bank in this country are the greatest defenders of the
system, because it has changed around. A t first the banks did not
have charge of it. Now they have charge of it. They should be
pleased with it because the action of the Open Market Committee
has meant hundreds of millions of dollars of profit to the private
banks of the country each year. That is my view of it, Mr. Martin.
M r . MARTIN. M r . Patman, I have to say here, in the friendliest
spirit, that I consider it a very real honor and privilege to serve as
Chairman of the Board of Governors of the Federal Reserve System,
and I am quite confident that I am not subservient to the banking
interests of the country, nor to political interests.
I am trying, to the best of my ability, to do what I believe to be
right and consonant with this statute. Y o u can take this away from
me at any time. But it is a very real honor and privilege, and I don't
want to disgrace that honor and privilege in any way by being subservient to anyone or anybody. That is my concept of service, and
that is what I will attempt to carry out.
I say this in the friendliest spirit, because I ascribe to you a friendly
spirit also in wanting to get the right answer. But there is an inference in what you are saying with respect to banker domination.
M r . PATMAN. Well, there is no inference, there is a direct charge,
M r . Martin.
M r . MARTIN. A l l right, you make the charge and I deny it. I
would like to deny it personally for the record, and I would like to
deny it on behalf of the absent presidents of the Federal Reserve
banks who are not here this morning to deny it themselves.
M r . PATMAN. And I suspect if I were in your place I would be overpersuaded by these 24 fine big American citizens that are looking over
your shoulder all the time, too. I just don't believe I could overcome
that pressure. I think that is the biggest pressure group in America.
M r . MARTIN. I am extremely sorry that you have such a poor
opinion of me, but that is unfortunate.
M r . PATMAN. It is not that. I am not talking about personal
matters, M r . Martin.
M r . MARTIN. But it cannot be on any other basis.
M r . PATMAN. Well, you are just 1 of 12, you know.
M r . MARTIN. Well, that is true.
M r . P A T M A N . Y O U say that there are differences on the Board. I
notice from reading your report, your annual report, that at one time
that the private members, the presidents, actually outvoted the
public members last year on a question. What question was that?
M r . MARTIN. That was a matter of technique of operations in the
open market.
M r . PATMAN. Did that involve enlarging the instructions to the
New York bank in carrying on open-market operations to also include
long-term Government bonds?



16

FEDERAL.

RESERVE

ACT

AMENDMENTS

M r . MARTIN. That was what the matter was about. It involved
denying to the New York bank discretion.
M r . PATMAN. Denying them the opportunity of dealing in longterm Government bonds?
M r . MARTIN. We had a discussion about whether we should delegate the authority, and to what extent the Open Market Committee
should retain, in itself, the ability to determine that question.
M r . PATMAN. Well, now, that brings up another question. Now,
these 12 men that I have talked about, being so powerful, they have
done some delegating, too. They have delegated the power that
Congress gave them down to 5 members. The 5 members are
yourself and the Federal Reserve bank president of New Y o r k —
permanent members—and who are the other 3?
M r . MARTIN. Well, there are 2 other members of the Board, and
there are 2 representatives of the presidents. So that it is a 5-man
executive committee.
M r . P A T M A N . N O W , those 5 have delegated down to 1, haven't they,
the president of the Federal Reserve Bank of New York, to actually
run the show?
M r . M A R T I N . N O ; they have delegated to the manager of the openmarket account
M r . P A T M A N . IS he in charge of it?
M r . MARTIN. Yes, sir; he happens to operate in the New York
bank.
M r . PATMAN. Well, the law fixes it that way permanently,
doesn't it?
M r . MARTIN. Yes, sir; it does. I see no reason to quarrel with
that, as long as New York is the money market.
M r . P A T M A N . I am just quoting the statute.
M r . MARTIN. That is right.
M r . P A T M A N . SO the 12 delegate it to 5, and the 5 delegate the
execution powers to 1 and that happens to be the president of the
New York bank?
M r . M A R T I N . N O ; it happens to be the manager of the open-market
account.
M r . PATMAN. Well, he is under the president of the Federal Reserve
Bank in New York, isn't he?
M r . MARTIN. He is under the president, but he also has a special
responsibility to the open-market account.
Now, in operating, you have to delegate at some point to individuals.
M r . PATMAN. That is right. Now, last year, according to the
figures that your organization has furnished to me, you must have
done about $16 billion worth of business through the Open Market
Committee, is that approximately correct?
M r . MARTIN. W e d i d a lot of business.

Mr. PATMAN. Does that mean purchases, unrestricted, without
limitation, or does that figure also include purchases with restrictions
tied to them, so that they coundn't be repurchased?
M r . MARTIN. I think the repurchase agreements are carried separately in the report.
I am wrong. They are listed as purchases of securities. The
report shows the distinction.
I think we have given you figures, M r . Patman—at least I saw them
go across my desk




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M r . PATMAN. Yes, sir; I just don't have them before me, and I will
not proceed further along that line because I can get the information
myself from your organization which has already furnished them to
me.
M r . MARTIN. The weekly statement, M r . Patman, has the re
purchase agreements.
M r . PATMAN. Yes, sir. But the point is there are about $15 or $20
billion worth of transactions a year. That is a lot of business, in
anybody's book, and that is done through that one New York bank.
I just wonder how many dealers do you deal with in making those
transactions? Y o u used to have a specific number, and I think some
criticism came up before the joint committee about it, and I think it
was changed. How many dealers do you deal with now?
M r . MARTIN. We have listed for you in the report for 1953 the
number of dealers as 18.
M r . PATMAN. Eighteen dealers?
M r . M A R T I N . Y e s , sir.

M r . PATMAN. What do they make out of this, M r . Martin? Do
you have any way of determining that? Do they get any fees or
charges or commissions?
M r . MARTIN. We don't get into that. We are dealing with them
on a dealer basis.
M r . P A T M A N . Y O U don't have any idea at all?
M r . MARTIN.

N O , sir.

M r . P A T M A N . Y O U don't have the least idea?
M r . MARTIN. Well, the least idea—I have from time to time
talked to people about what they have made and what they have
lost, but we have no record of it.
M r . P A T M A N . Y O U have no record of that at all?
M r . M A R T I N . N O , sir.
M r . P A T M A N . N O W , on

this difference between M r . Sproul and you,
is that difference still pending?
M r . MARTIN. M r . Patman, that is a difference of detail, not of
objective. M r . Sproul and I have very close relations, and I was
asked recently, when that was revealed in the press, whether I was
going to do something about it, and I replied to the newspapermen
that asked me by telling them about the story of B. G. Wrigley and
the chewing gum empire. He said that when he had two men in his
organization who agreed on everything he began to wonder if he
couldn't dispense with one of them.
I am glad that the Federal Reserve System has a man of M r .
Sproul's character and capacity who, when he has a point of view,
will express it vigorously.
Now, if he were subservient to the banks, or dominated by the
bankers, why, I doubt very much whether he would be the type of
individual he is, and I am very proud of the character and capacity
of M r . Sproul.
M r . PATMAN. In 1952, before the end of the year, what were your
instructions to the one in charge of open-market operations in the
New York bank? What was he supposed to do during the month
of December 1952?
M r . MARTIN. I have no idea offhand. We have a meeting of the
executive committee every 2 weeks. There have been very few exceptions to that, and we change our instructions every 2 weeks.



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Mr. P A T M A N . Y O U change your instructions every 2 weeks. But,
generally, you were not buying bonds in 1952, in December, were you?
You were not buying bonds?
Mr. MARTIN. A t the tail end of 1952?
M r . P A T M A N . Y e s , sir.

Mr. MARTIN. I don't think we were.
Mr. PATMAN. What were your instructions in 1953, in the early
part of the year? Were your instructions to tighten up, or to loosen
up, on money?
Mr. MARTIN. In the early part of 1953, as you well know, our policy
was one of general restraint.
Mr. PATMAN. Why did you do that? Why were you putting on
the brakes so?
Mr. MARTIN. A t that particular time?
M r . PATMAN.

Yes.

Mr. MARTIN. Because we feared, as I have testified repeatedly, a
bubble on top of a boom, and we felt that the money supply should
be permitted
Mr. PATMAN. Well, in December 1952, you said the danger of
inflation was over.
M r . MARTIN. M r . Patman, you are not quoting me correctly.
Mr. PATMAN. Well, the papers misquoted you, then.
Mr. MARTIN. Well, the papers frequently misquote people. Not
that I am attacking the papers, but
Mr. PATMAN. Well, that was verified by your action in February
reducing the margin requirement on stock-market transactions. I f
that is not in the direction of fighting deflation, I would like to know
what it would be.
Mr. MARTIN. The speech to which you refer, M r . Patman, in 1952,
was an address which I gave to the Investment Bankers Association.
Mr. PATMAN. That is right.
Mr. MARTIN. Without benefit of manuscript.
Mr. PATMAN. Well, I am just quoting what the papers said, and I
haven't seen it denied.
Mr. MARTIN. Well, I am not denying all of the implications of this,
but I believe that the danger of drastic inflation was coming to a halt
at the end of 1952, but it would have been—could have been—a very
serious matter for us if the bubble that developed, the resurgence of
business enthusiasm, if I may term it such, following President
Eisenhower's election, in 1952, had been permitted to run itself into a
speculative fever, and, therefore, we permitted interests rates to
reflect the force of supply and demand.
M r . PATMAN. For how long did you do that, how many months?
Mr. MARTIN. We did that roughly until the early part of May.
M r . P A T M A N . M a y 11?

Mr. MARTIN. Well, M a y 6 the Open Market Committee had its
meeting and decided that we would reverse ourselves.
Mr. PATMAN. When did you reduce reserve requirements?
Mr. MARTIN. We reduced reserve requirements effective July 1,
and July 9, in two bites. The announcement was made on June 24.
Mr. PATMAN. When did you reduce margin requirements for stockmarket transactions?
Mr. MARTIN. Margin requirements were reduced about Washington's Birthday of 1953.




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M r . PATMAN. Weren't they authorized about the middle of February, and actually announced the 20th day of February, that you were
reducing the requirements?
M r . MARTIN. They were announced at the same time they were
authorized.
M r . PATMAN. Well, how can you justify saying that you were fighting a bubble on top of a boom all that time when you were making
it easy for people to speculate than had been true for a long time
before?
M r . MARTIN. Unfortunately this matter of money management is
not always reducible to precise logic.
Now, what I am trying to make clear here is that when you come
out of 10 years of a pegged market you have a lot of things that need
to be altered, revised, reorganized.
M r . P A T M A N . I am not asking you about that, M r . Martin. I am
asking one simple thing.
M r . MARTIN. Unfortunately
M r . PATMAN. W e l l

M r . MARTIN. Unfortunately, this isn't one simple matter. This is
a collection of activities. If there was one simple formula by which
by which we could adjust the money supply of the country our job
would be quite simple and quite easy. Unfortunately we cannot
find any formula or any device or any way in which this can be done,
except by constantly evaluating the changes in the situation and
relating them to a flow of money.
Now, I visualize this money supply, as I have said a number of
times, as a river, or spring, or stream, and we want that stream to
be maintained in such a way that it won't slop oyer its banks and
drown the crops on either side of the riverbed.
We also don't want the stream to run dry. We want it, when it
increases its volume, to dig its way, have a b.ed in which it resides.
Now, in order to do that we have got to constantly be evaluating
all of these factors, and we certainly are not going to be a hundred
percent perfect.
M r . P A T M A N . H O W long has it been since you have supported longterm Government bonds?
M r . MARTIN. I think we stopped about the first month—around,
I would say, the last purchases, in M a y of 1951.
M r . P A T M A N . M a y of 1951?

M r . MARTIN. I would like to correct the precise timing of that.
M r . PATMAN. That is the time of the so-called accord. Now, it
was your theory and the theory of the Open Market Committee, was
it not, that by directing the interest rate on the short term, that would
reflect the interest rate on the long term?
M r . MARTIN. I believe

M r . PATMAN. In other words, by governing the short-term rate
that would necessarily govern the long-term rate?
M r . MARTIN. I think that what we are trying to do is to have as
free a market as it is possible to have, without abdicating the responsibility which you gentlemen placed on us to supply reserves and
absorb reserves.
Now, I don't think you gave us instructions to establish the relationships between the long end of the Government market and the
intermediate end of the Government market and the short end of the




20

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Government market, and take over the market process, but I think
you did, at the time of the Federal Reserve Act, give us a responsibility to see that there were adequate reserves in the banking system.
That was when we changed—at the time of the Federal Reserve
Act—to a managed currency, and that is why a lot of people have
worried about whether we weren't going too far in the way of trying
to regulate markets, and were not depending sufficiently upon the
interplay of market forces. The decision to unpeg the Government
securities market returned to that market not all of the forces, but
some of the influences which had been precluded in that market by
Government policy for a period of 10 years, and it brought into play
once again the business judgment of deciding whether you wished to
take a loss in order to make a loan, or whether you wanted just to
rely upon the central bank to print sufficient currency to continue a
fixed interest rate.
Mr. P A T M A N . N O W , M r . Martin, of course I am glad to have you
make the explanation you are making. It is interesting to me, but
I feel it causes me to take up a lot of time that I do not think is required.
I still want to ask this simple question. This is a simple question.
Y o u have not supported the long-term bond market since M a y 1951.
Has it been your theory and the theory of the Board that the market
could be properly handled through the manipulation—I think the
word is probably wrong—by handling the short-term rate, that that
would be sufficient without handling the long-term rate?
M r . MARTIN. We have tried to supply reserves which are required
by the business community
M r . PATMAN. Well, that is my objection to the Federal Reserve
System. They are always thinking about profits to the banks, it
seems, and not thinking about the general welfare, and I think there
is more to do than just furnishing reserves to banks. That helps the
banks to make a lot of money and gives them the power, you might
say, to print and manufacture more money, and they like, it; they love it.
It is fine. And sometimes it is in the interest of the country. But I
certainly don't think that the Federal Reserve System is charged with
the duty primarily of furnishing reserves to the private banks. I
think they have a duty of looking at the Employment Act of 1946 and
carrying out other mandates oi the Congress and considering the
human budget along with the dollar budget.
Don't you agree with that?
M r . MARTIN. M r . Patman, I must deny the charge that you are
making, that we are interested in supplying reserves for the benefit of
the banks.
M r . PATMAN. Well, I don't know that I would be justified in sayiftg
that you are doing it wholly for that purpose, but the result of it is the
same. It does help the banks do that.
M r . M A R T I N . N O , sir; I deny that.
M r . P A T M A N . Y O U deny doing it for that purpose. I am sure
you are stating what you believe is correct.
About the reserves: If you reduce the reserve requirements—
the banks have no excess reserves now—and you reduce the reserve
requirements, say, one point, how much excess reserve would that
make available?




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M r . M A R T I N . I would have to check one point. I would say it
is about 7 or 8 hundred million dollars. Perhaps about a billion
dollars.
M r . PATMAN. About a billion dollars?
M r . MARTIN.

Yes.

M r . PATMAN. What is the difference in you saying that all the
banks of the country, without putting up an extra dime of capital,
without putting up anything in the way of security at all, you can
just create a billion dollars more money, and on that you can create
about $6 billion—what is the difference between that and printing
press money?
M r . MARTIN. The forces of the market are at play.
M r . P A T M A N . I know, but it is the creation of money, is it not?
M r . MARTIN. We have the power to create money. That is the
strength of the Federal Reserve System.
M r . PATMAN. Well, the private banks have it, too, don't they?
M r . MARTIN. Not in that sense.
M r . PATMAN. On their reserves don't they create it on an average
of 6 to 1 now?
M r . MARTIN. If they lend the money, or create the loans or investments, they can do that.
M r . PATMAN. That is right. But under your capitalistic system,
which I believe in, and which we all believe in, we think it is the
finest and best system on earth, you cannot do business in this country
unless people go into debt, can you?
M r . MARTIN. I think it is possible to do business without going
into debt.
Mr. PATMAN. Under our system?
M r . MARTIN. Yes, sir; I think it is possible.
M r . P A T M A N . H O W would you do it? Suppose everybody paid
their debts, what would you do for money?
M r . MARTIN. Well, now, debt is an important part, I don't want
to debate that. Debt is an important part of our business.
M r . PATMAN. Of our economy. Could we do business without
debt?
M r . MARTIN. Well, theoretically, I think you could. Y o u would
have to change the system.
M r . PATMAN. Well, you would have to pay out money into circulation, instead of borrowing it into circulation?
M r . MARTIN. Y o u would have to change your system.
M r . PATMAN. Y o u would have to change from your capitalistic
system entirely. But under a system as we have now, if everybody
paid their debts, all the money you would have left would be the
$346 million Lincoln greenbacks, and the silver certificates, and the
silver, and the copper coins; is that right?
M r . MARTIN. Well, I don't know your figures, but
M r . PATMAN. Well, I am just giving them from memory. But
your memory on that is better than mine.
M r . M A R T I N . Y O U would have gold.
M r . PATMAN. B u t i t is not i n circulation.

If everybody paid their debts, we would not have money to do
business on, and we would be reduced to barter, wouldn't we?
M r . MARTIN. Well, we could certainly go back to the stone age
and engage in barter.
47918—54




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Mr. PATMAN. But the point is, M r . Martin, the importance of
your agency, and the Open Market Committee particularly, in
handling credit. Don't you think, for the reason that people have
to pay interest on the money that is in circulation, and the money
that is available—somebody is paying interest on that money all the
time—that the interest rate should be a low rate, and along the
pattern fixed during World War II, and after that, rather than a high
rate?
Mr. MARTIN. M r . Patman, I testified before your committee and
I sincerely would like to see interest rates as low as it is possible to
have them without producing inflationary pressures, if it adds to
capital formation. And I believe by and large that it does.
I think there are times, however, where we have to consider the
saving and investment fabric of the economy also, and that we don't
just create cheap money for the purpose of forcing people into debt,
because you do not do people any favor by pushing them into debt.
Mr. P A T M A N . I agree with you on that.
M r . MARTIN. People that are sound will not ask to borrow unless
they see an opportunity to make a profit out of it, or to derive a
benefit.
Mr. PATMAN. That is right. That is the reason on a declining
market people won't take money even if you pay them to take it.
Were you consulted about the issuance of these 3& percent bonds
last-April?
M r . M A R T I N . Y e s , sir; I was.

M r . PATMAN. D i d y o u agree to it?

Mr. MARTIN. I agreed that it was in line with Federal Reserve
policy, yes.
Mr. PATMAN. Aren't you sorry that you did?
M r . M A R T I N . N O , sir.

Mr. PATMAN. Well, there has been a difference, within 1 year's
time, in the high and low, on those particular bonds, of 11% points.
In other words, eleven and a half dollars on a hundred dollars, and
then with the three and a quarter percent interest for that 1 year,
that makes 14% percent in 1 year, on a riskless Government bond.
M r . MARTIN. I regret that fluctuation. I wish it had not happened.
Mr. PATMAN. Well, don't you think it had something to do with
managing money that cause it?
M r . MARTIN. I have already testified, M r . Patman, that we made
a miscalculation in the spring.
Mr. PATMAN. In other words, you made a mistake?
M r . MARTIN. A l l right, a mistake, yes. I do not apologize for
making a mistake.
Mr. PATMAN. And if it was to be done over again it wouldn't be
done under the same facts and circumstances?
Mr. MARTIN. I don't want to impinge on the Treasury's problem,
which is debt management, but so far as monetary policy and credit
control policy is concerned
Mr. P A T M A N . D O you agree with the credit policy that has been
announced by Dr. Burgess, that we should get these bonds out of the
banks by issuing more long-term bonds?
Mr. MARTIN. I think it would be desirable to have more of our
debt in longer-term securities than we have today.




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M r . PATMAN. Well, do you think we should take all the bonds out
of the banks?
M r . M A R T I N . N O , I don't think so.
M r . PATMAN. It was never intended that the banks should create
money to buy Government bonds, anyway, was it, M r . Martin?
M r . M A R T I N . N O , but that could be arrived at in a number of ways.
Y o u could transfer securities out of our portfolio into the hands of
the banks. That is a process,
M r . PATMAN. Well, the banks have been forced into that position,
not made to buy bonds. I do not agree, and I am not very patient
with the banker who says he was forced by the Treasury to buy bonds.
Nobody was forced to buy bonds. I do not agree at all.
But hasn't the economic situation facing each separate institution
forced them into the business of being Government bondholders and
brokers and commercial bookkeepers, to the extent that they could
make more money with riskless securities and have no worries, and
they have great earnings because last year they had the greatest
earnings in all history, and a large part of it was from Government
bonds—in fact, over a billion dollars of it was from Government bonds.
Isn't it a fact that that policy has been causing the local banker to
get out of the banking business, just by investing in Government
securities, and that is a lot easier for him than dealing with a lot of
local people on small loans, and then isn't it a fact that it is aggravating
the situation right now, at this time, while we are talking, right here
in this committee room, by the policies in effect that are feeding out
to the different banks these R F C certificates of interest, Commodity
Credit Corporation certificates of interest, and housing loans?
In other words, are not banks being persuaded too much in the
direction of getting into outside paper and particularly Government
1>aper, and Government-guaranteed paper, and getting away from
ocal loans that the local banks were really intended to deal in, and
the kind of service they were chartered to perform?
M r . MARTIN. Well, now, you are again in what I call the realm of
judgment, and I cannot make a blanket judgment on all of the banks
of the country. There have been some tendencies from time to time
which we have observed and wished had not moved in the direction
that they did, but, generally speaking, credit and monetary policy and
Treasury debt management policy have been moving side by side, as
they should, to try to contribute to stability in the economy.
M r . PATMAN. Well, are they, M r . Martin? And the reason I am
bringing this up, I think your organization has a lot to do with it.
Now, there are about 14,000 commercial banks in the United States,
and the bankers render no service when they buy Government bonds.
They render no service to the Government at all. Y o u couldn't cite
any service they render. Y o u don't have to have the banks buy them.
Of course, as we said, during the war, first the individuals should buy
the bonds, next the corporations and insurance companies. We
shouldn't sell them to the banks except as a last resort because they
create or manufacture the money to buy it. It was never intended
that they should do that, and then that they should draw interest on
it. It was never intended.
Now, if you were to use the standards that we usually use, and
definitions, in determining what a subsidy is, wouldn't you consider
that at least an indirect subsidy to the banks?




24

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Mr. M A R T I N . N O , sir; I do not consider it an indirect subsidy to
the banks.
Mr. PATMAN. And isn't it a fact that—now, understand, I am for
the private banking system, and I am for a profitable banking system,
I want them to make money, and although I am criticizing all these
things I would not take them away from them quickly, or immediately, or until they had time to recoup their losses by making local
loans, as they used to do, and as they should do
Mr. KILBURN. Will the gentleman yield?
Mr. P A T M A N . I yield.
Mr. K I L B U R N . I was wondering how you felt about this bill that we
have before us.
Mr. PATMAN. Well, I can decide that myself and I am going to
decide that when I get through interrogating this witness.
Mr. MULTER. Isn't that for executive session?
Mr. KILBURN. This is on this bill, I presume.
Mr. P A T M A N . I don't know whether I can trust these fellows on
these bills or not. I want to find out. I am going to ask them about
the overall picture so as to know whether I should be willing to trust
them on this particular bill.
At any rate, M r . Martin, I wouldn't do anything to hurt the banking system, as such, because I believe in the private banking system,
privately operated for profit.
But take that billion dollars a year that they received last year on
Government bonds, for which a bank cannot render any service when
it buys Government bonds, that is an indirect if not a direct subsidy,
if you use the same standards that you would use in determining
whether or not a farmer got a subsidy, and then the $100 million a
year they get through your System for clearing checks, and then they
get other subsidies the same way, including free use of Government
deposits that run up to about $500 million, aggregating about a billion
and a half dollars a year, subsidies that the bankers of the country
get each year—I mean if you use the same standards and definition
m determining what is a subsidy that is used to determine whether
or not a farmer gets a subsidy, or a shipping line, or a railroad, or
somebody like that.
I am not advocating taking it away from them. I am just criticizing
for the purpose of directing the system from here on out and getting
the bankers back into the banking business where they will serve their
local communities, as they were intended to serve.
That means, on an average, $100,000 for each bank in the United
States a year, on a $1,500 million subsidy. So that is a lot of money.
M r . MCDONOUGH. Will you yield?
M r . P A T M A N . I yield.
M r . MCDONOUGH. In reference to your criticism of this so-called
subsidy, what neglect was created by the banks in their local loans,
in their advancing money to local interests? Didn't they carry that
on in addition?
M r . PATMAN. To a limited extent, yes.
M r . M C D O N O U G H . H O W much more could they have carried it on
if they had not had these Government bonds?
M r . PATMAN. They would have been eager to do something. They
would have been hungry for loans. When you go out hunting you
don't feed your dogs before you start out. If you fill these banks up




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with plenty of riskless securities on which they make plenty of money
there is not much incentive for them to hunt or be on the alert to
make loans and be patient with the small-business man who wants to
come in and get a loan, because they already have plenty of earnings.
M r . M C D O N O U G H . H O W much of that local financing was neglected?
Y o u have the figures on the subsidy pretty well. B y comparison,
give us some idea of the other.
M r . PATMAN. W h y was the R F C so necessary? Why did they do
billions of dollars of business? Why are the small-loan companies
springing up around every bank in the United States today? It is
because those banks are not performing their local service, and there
is a demand for local small-business loan offices around them, and they
are springing up all over the country.
M r . MCDONOUGH.

W e are l i q u i d a t i n g R F C .

M r . P A T M A N . I know we are, but, I say, there was a need for R F C
because the banks were not making these loans, and there was such a
clamoring that something had to be done to give the small man a
chance to get a loan.
Now, we are liquidating the R F C and that makes it harder because
the banks are still not making these loans because they are still not
anxious, they still have plenty of securities, they still have enormous
incomes and don't have the incentive to deal with local people and
make small loans.
M r . MULTER. W i l l you yield, M r . Patman?
M r . P A T M A N . I yielcl.
M r . MULTER. I think the trouble is that you use the word "subsidy," because of a misunderstanding about basic economic philosophy. When you let a man who cannot afford to buy a house or
rent a house use public housing, that is a subsidy, but when you let
the banks use all the Government's money without paying for it,
that is free enterprise, because the banker is using the taxpayer's
money free?
Y o u are using the word "subsidy" in the wrong way. We shouldn't
do that.
M r . MUMMA. M r . Patman, isn't it a credit to the banking business
for all banks to have small-loan departments? I know the banks in
my community are giving a lot of attention to it.
M r . PATMAN. Certainly a lot of them are, and are to be commended for it. I think the National City Bank started out about 20
years ago and they have been making a lot of small loans. A lot of
banks have, and they are to be commended for it, but, generally,
there is a failure somewhere, or you would not find where there are
2 or 3 banks in a town 25 small loan offices around them and doing a
big business. They would not be there if those banks had been performing the service.
M r . MUMMA. The interest rate may enter into that a little bit.
M r . PATMAN. Well, if the banks performed that service there won't
be the demand for that many loan offices.
Furthermore, take the credit unions. They are taking this country like wildfire, and there is a reason for it, because they are rendering
a great service locally.
M r . KILBURN. The banks couldn't handle the kind of loan that
credit unions are.
M r . P A T M A N . A lot of them are.



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M r . K I L B U R N . I mean the individual loans.
Mr. PATMAN. Of course, the credit unions are very necessary and
separate and apart from the banks, but right now we have 17,000
credit unions, whereas a year or two ago you only had 6,000 or 7,000.
The CHAIRMAN. I think we are anticipating credit union legislation
coming up next week.
Mr. MARTIN. I would just like to introduce our April 30 release,
M r . Patman, which shows as of March 31, 1954, loans and discounts
as $67 billion of all commercial banks, and United States Government
obligations $60 billion, and other securities $15 billion.
Mr. PATMAN. That is right, and if they hadn't had that $60
billion in United States securities they would have been hungry
enough for loans, so that the local man would have gotten more consideration on the application he made for a loan. But as long as
they are well fed, with Government securities and Governmentguaranteed securities, and can create money on the books of the
banks to buy them, it is just such a fine deal that you cannot blame
them for not doing it.
Mr. KILBURN. It could be that credit unions can make loans that
banks cannot make because of Federal and State bank examiners.
Mr. MERRILL. M r . Chairman, I would like to have the witness
answer that question. He started to and didn't get a chance t o —
the charge that it is drying up all the credit available to business in
America.
Mr. P A T M A N . I don't say it is drying it all up. I stated that the
incentive is not as great for a banker to make loans when he has his
portfolio filled with riskless securities, as when he doesn't have those
securities, and he has to go back to the business that he was chartered
to do, to make loans and serve local communities.
Mr. MERRILL. I would like the witness' answer to that.
Mr. MARTIN. I would like to have an opportunity to answer
because we are pursuing, as you know, a policy of active ease, and
we have been encouraging
Mr. PATMAN. That is something else I never heard of until recently ;
what is active ease?
Mr. MARTIN. It seems to me it is fairly self-explanatory, M r .
Patman. I don't think it is a very difficult phrase. We don't
know any better way of saying it.
What we are saying by active ease is that we want to see that there
are sufficient reserves in the banking system so that this incentive—
and don't forget that interest rates are lowered, which is a part of
incentive, but this incentive to go out and get loans will be very real
with the banks and bankers, and I think that as long as we keep a
volume of reserves you will see the banks doing what they can to
solicit loans. That is the policy that we are pursuing. We try to lean
against the wind whichever way it is blowing.
Mr. PATMAN. If you reduce reserve requirements by one point
across the board that says to the banks of the country " Y o u are
loaned up, but we are giving you the power to use a billion dollars
more in reserves, and on that billion dollars you can issue $6 billion
of money."
M r . MARTIN. I f y o u can get the loans.

Mr. PATMAN. If you can get the loans. Well, you give them the
power. If they don't, they can buy Government bonds, can't they?



27

FEDERAL.

RESERVE

ACT

AMENDMENTS

M r . MARTIN. Interest rates are declining and, of course, you can
just go ring around the rosy; if we didn't have to finance the Government it would be a lot simpler, too.
M r . P A T M A N . Y O U have to finance the Government. That is no
burden on the banks. Why, the Federal Reserve could buy up every
Government bond that has been issued and it would be no strain at
all, would it?
M r . MARTIN. A l l that would be produced would be inflation.
M r . PATMAN. Well, what is the difference between the Federal
Reserve having a Government bond and a commercial bank?
M r . MARTIN. What is the difference?
M r . PATMAN.

Yes.

M r . MARTIN. Well, it is perfectly obvious, M r . Patman.
M r . PATMAN. Of course the commercial bank would have that
money and that would be excess reserve, but you could cure that by
increasing reserve requirements, couldn't you? Y o u have doubled
reserve requirements in this country, at one time?
M r . M A R T I N . Y O U have set limits within which we can adjust reserve requirements, and you can change that—Congress can change
that at any time that it sees fit.
M r . P A T M A N . I am not advocating buying them up, understand,
but I am stating the Federal Reserve could buy up all that is offered
in the market without any strain or trouble?
M r . MARTIN. It certainly could. The Federal Reserve can peg
securities at a given price, and it can let the purchasing power of your
dollar just go completely to pot.
M r . P A T M A N . N O W , M r . Martin, since you knew that you were going
to change this hard money policy last year, why didn't you gentlemen
let the housing people know it before they raised the veterans' housing
rate from 4 to 4% percent? They raised it just about the same time,
didn't they? In other words, they had been persuaded, by an argument which was unanswerable, that the traditional rate, the difference
in the spread between long-term Government bonds and long-term
housing loans, was
percent, and when that 4 percent rate was fixed
the long-term rate was fixed the long-term rate was 2% percent; therefore, 4 percent was reasonable.
But under the policy of the first 6 months of 1953 the returns on
Government bonds went up to 3, as the bonds went down, of course,
and they had an unanswerable argument, that since these bonds had
gone up to 3, you had better make that rate 4% percent, and they had it
just about the very time that you took an about-face and changed the
monetary policy to where the bonds went back, and the same argument
that was used to put the rate up should now be used to put it back.
Don't you think so?
M r . MARTIN. I want to say right there, that we don't want to get
into semantics on this. If the demand for credit, if business activity
had been maintained and expanded, interest rates would have tended
to go up even from that particular period.
If business had stayed relatively stable in that period interest rates
would have been stable.
Now, what actually happened was that business began to decline,
and demand for credit declined, and as the demand for credit declines
very naturally interest rates decline.
M r . PATMAN. M r . Chairman, I am taking entirely too much time.
I apologize to the committee. I would like to yield until other mem


28

FEDERAL. RESERVE

ACT

AMENDMENTS

bers at least have asked all the questions they want to and I have
one other question I want to ask later.
The CHAIRMAN. Are there further questions?
M r . OAKMAN. M r . Martin, is it correct that the Post Office has
given up the job of selling the savings bonds, that that job has been
taken over by the banks of the country, and that there are presently
outstanding approximately 36 billions of dollars of savings bonds
owned by approximately 36 million Americans, and that the banks
issue these bonds and keep the records of them and buy them back,
without charge?
M r . MARTIN. The banks do a very good job. I would prefer you
asking Dr. Burgess as to the procedure on that, if you don't mind;
he is more familiar with it.
M r . O A K M A N . I think Dr. Burgess would answer that in the
affirmative.
Is that right, Doctor?
M r . BURGESS. That is substantially correct.
M r . OAKMAN. In my town of Detroit, the banks collect our city
and county taxes for us and turn the money over to the city and
country treasuries without charge. M r . Patman refers to this as a
one-way street, that the banks are on the take and never give any
public service at all, which is an erroneous supposition.
Mr. P A T M A N . I have conceded all the time, and I am glad to give
the banks credit for doing a great job, in time of war in particular,
as well as in time of peace, and I have never said a word against the
private bankers. They are among our finest and best and most
patriotic citizens in America. I am not doing anything against the
private banking system. I am trying to do something to help them
by criticizing them for their weak points and doing things which I
believe would not encourage them to ride for a fall, as they are doing,
and to have them back on the track to render local service, which is
what they were chartered to do.
Mr. MERRILL. What was the reason for each Federal Reserve bank
to have its own notes returned in the first place?
Mr. MARTIN. The original concept, M r . Merrill, was that it would
support the regional system. Y o u see, at the time the Federal Reserve
System was established there was a great deal of worry that you would
centralize authority too much in Washington, and I think that worry
was one that was quite real and quite justified, and, therefore, one of
the provisions was that in tying in the issuance of notes they would
be tied to the local communities more by this process of going through
the individual regional banks.
Now, as the system developed, through the years, this as a check
is something which has proved to be less and less effective in those
terms, and I am quite certain that I would not be here advocating
a change today if the presidents and boards of directors of the individual reserve banks had not recommended it.
Mr. MERRILL. They feel that this is no longer of any value at all,
or at least that there are other ways of doing it?
M r . MARTIN. That is correct, sir.
M r . MCCARTHY. M r . Chairman.
T h e CHAIRMAN. M r . M c C a r t h y .




29

FEDERAL.

RESERVE

ACT

AMENDMENTS

M r . MCCARTHY. What is done with the currency that is in bad
condition? How is that handled? You are going to reissue that
which is suitable for circulation?
Mr. MARTIN. I will ask M r . Leonard to give you the process.
STATEMENT OF ROBERT F. LEONARD, DIRECTOR, DIVISION OF
BANK OPERATIONS, FEDERAL RESERVE SYSTEM
M r . R O B E R T F. L E O N A R D . The Federal Reserve agent issues Federal
Reserve notes to the Federal Reserve banks, against collateral. The
Federal Reserve banks pay these out on demand. When the Federal
Reserve notes come back to the bank of issue a certain amount of
those are held as current working cash and are shown as a deduction
from note liability. When they are paid out they again become a
liability.
When the notes of other Federal Reserve banks are received those
are returned to the bank of issue, and there are held as part of that
bank's working stock, unless and until that stock becomes excessive,
when part of it is turned back to the agent then it ceases to be
outstanding.
M r . MCCARTHY. I don't think that is quite my question.
M r . LEONARD. Oh, the old bills. The old bills are sent in
Mr. MCCARTHY. A t the present time all bills are sent back, aren't
they?
Mr. L E O N A R D . N O , sir. The unfit bills, bills that are unfit for
circulation, are sent in here by the various Federal Reserve banks to
the Treasury Department, where they are retired and burned. The
fit bills are sent back to the bank of issue.
For instance, if the Federal Reserve Bank of New York, as a result
of the day's operations, winds up with fit bills of Boston, it sends
those fit bills back to Boston. If it has unfit bills of Boston, it sends
those bills into the Treasury for destruction, for the account of
Boston.
Mr. BURGESS. The unfit bills would now be destroyed by the local
banks.
Mr. MCCARTHY. That is what I asked, really.
Mr. LEONARD. All unfit Federal Reserve notes are sent in to
Washington where they are counted by the Treasury office and then
burned here, under the supervision of the Treasury Department.
Mr. MCCARTHY. The Treasury then notifies the bank of issue?
M r . LEONARD.

Yes.

Mr. PATMAN. Didn't you make the policy last year to the extent
that small bills could be destroyed by the local Federal Reserve banks?
Mr. BURGESS. That is with respect to silver certificates and notes.,
which the Treasury is responsible for. They can be destroyed at the
local Federal Reserve bank and save the postage and insurance.
Mr. PAYMAN. I saw where some of them got in a windstorm up in
Pittsburgh and were scattered all over the place.
Mr. BURGESS. That is right.
M r . MULTER. M r . Chairman, I would like to ask M r Martin some
questions. I cannot possibly do it at this time. The House is now
in session. It will take much more than just a few minutes.
The CHAIRMAN. M a y I ask Dr. Burgess what his convenience is
47918—54




5

FEDERAL. RESERVE

30

ACT

AMENDMENTS

with respect to this afternoon? There is a general debate on the
military-naval public works authorization bill this afternoon. I
thought we might be able to meet during the general debate on that
bill. M r . Halahan is checking into that.
Mr. Martin, am I correct in stating that you are not available this
afternoon?
M r . MARTIN. I have an executive committee meeting this afternoon. It is a pretty important committee, as M r . Patman has
stated.
M r . MULTER. M r . Chairman, I will have to object to the committee
meeting this afternoon while the House is in session. I am sorry to
do it, but I have to.
The CHAIRMAN. There is a point of order that we cannot meet
while the House is in session.
M r . MULTER. I don't make the point of order, and don't want to
deprive anyone from going on now, but I can't be here while the
House is in session.
The CHAIRMAN. I hoped that we could finish with M r . Martin this
morning. If you withdraw your point of order you can continue here
and perhaps finish.
M r . MULTER. I am not raising a point of order so as to preclude
anybody else from continuing with M r . Martin, but I cannot be here
and I don't want to lose my right to examine M r . Martin.
The CHAIRMAN. Well, what are the wishes of the committee?
When can you be here?
Mr. MULTER. I can resume tomorrow morning at 10 o'clock, if M r .
Martin can be here at that time.
The CHAIRMAN. We have three other bills tomorrow morning.
M r . MULTER. I don't want to rush through these bills, M r .
Chairman.
The CHAIRMAN. The Chair doesn't want to rush anything through.
We want to expedite the business of the committee as much as
possible. M r . Martin has been on the stand now an hour and 35
minutes.
Mr. MULTER. I haven't yet asked M r . Martin a single question.
The CHAIRMAN. Well, if it is convenient for the committee we will
proceed as far as we can until a point of order is made and the House
is in session or the bells ring, in the hope that we may be able to
finish M r . Martin's testimony this morning. If you are going to
object to meeting this afternoon while the House is in general debate,
then, of course, that is your prerogative, so we cannot meet this
afternoon.
M r . Martin, would it be convenient for you and Dr. Burgess to
come back tomorrow morning?
M r . M A R T I N . Y e s , sir.

The CHAIRMAN. The committee will stand in recess until tomorrow
morning at 10 o'clock.
(Whereupon, at 12:06 p. m., the committee adjourned.)




FEDERAL RESERVE ACT AMENDMENTS
(Sees. 14 and 16)
THURSDAY, M A Y 27, 1954
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 A N D C U R R E N C Y ,
Washington,
D.

C.

The committee met at 10 o'clock a. m., Hon. Jesse P. Wolcott,
chairman, presiding.
Present: Chairman Wolcott (presiding), Messrs. Talle, Kilburn,
Betts, George, McVey, Merrill, Oakman, Stringfellow, Van Pelt,
Spence, Brown, Patman, Multer, and O'Hara.
The CHAIRMAN. The committee will be in order.
We will resume the hearings on H. R. 8729 and H . R. 9143.
When we recessed yesterday we had not yet concluded the questioning of M r . Martin, Chairman of the Federal Reserve Board of
Governors. We will proceed to further questions.
M r . PATMAN. Mr. Chairman, I want to ask a question but I would
prefer that other members ask their questions before I resume, if you
please.
M r . MULTER. May I proceed, Mr. Chairman?
T h e CHAIRMAN. M r . M u l t e r .

TESTIMONY OF WILLIAM McC. MARTIN, JR., CHAIRMAN, BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM—Resumed
M r . MULTER. With specific reference, first, to H . R. 9143, Mr.
Martin, I don't know whether I have the wrong act or the wrong
bill. I have the act in front of me which has a section 16 in it, and
it only has 1 paragraph and does not have the language sought to be
stricken by the bill from Section 16 of the act.
The C H A I R M A N . I think if you will get a more recent print of the
act you will find it, Mr. Multer.
M r . M U L T E R . T h a n k you.

M r . Martin, yesterday Congressman Patman addressed some
questions to you with reference to the so-called independent audit.
Was that audit furnished to this committee—audit of 1954 for the
year 1953, by your Board, if you know?
M r . MARTIN. Yes, sir; that has been furnished. I believe it was
under date of my letter to the committee, April 28.
M r . MULTER. And are you going to furnish to the committee a
copy of the letter of instructions to the Andersen Co.?
M r . MARTIN. We are going to work up the material along the lines
that Mr. Patman requested yesterday. There were no instructions




31

32

FEDERAL.

RESERVE ACT AMENDMENTS

to A r t h u r Anderson. W e gave them complete freedom to do whatever they felt was warranted b y the situation.
M r . M U L T E R . W a s there any written agreement or retainer employing them? A n y t h i n g i n writing employing them to do this
work?
M r . MARTIN. Yes, I think there was.
T h e CHAIRMAN. I don't know whether M r . M a r t i n understands
what y o u mean b y retainer.
M r . M U L T E R . A n y t h i n g i n writing employing them to do this
work.
M r . MARTIN. Whatever we have we w i l l furnish, M r . M u l t e r .
(The data referred to is as follows:)
E X C E R P T F R O M T H E M I N T J T E S OP T H E M E E T I N G OF T H E B O A R D OP G O V E R N O R S
OP T H E F E D E R A L R E S E R V E S Y S T E M O N A P R I L 22, 1954

At this meeting Mr. Johnson commented on each of the firm's suggestions and
the plans for putting them into effect. In the ensuing discussion of the report
and memorandum, Chairman Martin stated that when arranging for the audit he
made it clear to representatives of Arthur Andersen & Co. that they should make
the audit as extensive or in such a manner as appeared to them to be desirable
and that the Board would not want to place any restrictions on the firm as to the
scope of the audit or the manner in which it was conducted.
There was unanimous agreement that a similar understanding should be had
in connection with future audits.
T h e CHAIRMAN. I was thinking of a retainer i n the sense of more
tangible instructions.
M r . MULTER. I am sure we w i l l get whatever relates to the
situation.
I may be unduly suspicious, M r . M a r t i n , but the forwarding letter
of the accountants opens w i t h the sentence " W e have examined the
balance sheet of the B o a r d of Governors and the related statement of
income and expenses for the year ending December 1953."
D o y o u k n o w whether or not their examination was limited to the
balance sheet and statement of income and expenses, or d i d they go
beyond that?
M r . MARTIN. T h e y covered everything that they thought was a
normal auditing procedure. T h e y didn't go into all the policies and
procedures of the Board.
M r . MULTER. I wouldn't expect an auditor to go into the policies.
I wouldn't think that would be their function. B u t I wonder, since
the language that they use as to what they did is so limited, I wonder
whether or not they did more than examine the balance sheet and
statement of income and expenses?
M r . MARTIN. T h e y made some recommendations to us, most of
which have been carried out and which we are going to supply y o u
w i t h on M r . Patman's request of yesterday.
(The data referred to above is as follows:)
BOARD

OP

GOVERNORS

OP T H E F E D E R A L R E S E R V E S Y S T E M — C O M M E N T S
SUGGESTIONS FOR CONSIDERATION

AND

In connection with our examination of the accounts of the Board of Governors
of the Federal Reserve System for the year ended December 31, 1953, we continued our general review of the system of internal control and accounting procedures. The following comments are not the result of a detailed studv, and thev
should not be construed as an indication of a lack of internal control but as suggestions which might improve the already existing controls and procedures.




33FEDERAL.RESERVE ACT

AMENDMENTS

PREVIOUS MEMORANDUM

POINTS

We were pleased to note that the comments and suggestions set forth in our
memorandum of April 17, 1953, received full consideration, and that most of the
recommended procedures have been adopted. The following suggestions have not
yet been adopted and we present them for further consideration:
1. Use of an imprest bank account.
2. Use of a mechanical check signer for payroll checks.
3. Use of continuous form I B M card checks.
4. Adoption of a smaller inventory requisition form with blank spaces for writing
in the items desired.
P E T T Y CASH

We noted that petty cash slips for the cafeteria market fund were prepared in
pencil. We recommend that the slips be prepared in ink to prevent any subsequent alterations.
CHECK

REGISTER

We noted an instance in the December check register where one page was
underfooted and the next page overfooted to compensate for a voided check.
The check register should be footed so that each page reflects only the items listed
on that page.
VOUCHERS

PAYABLE

We noted several vouchers which did not show the account distribution on the
face of the voucher. We recommend that the account distribution be shown on
the face of all vouchers in order to present a complete picture of the transaction.
AUTHORIZED

SIGNATURE

FILE

The file of signatures and initials of persons authorized to approve requisitions,
etc., has not been kept current. We recommend that this file be brought up to
date and kept current through a periodic review.
PURCHASE

AND

RETIREMENT

OF F I X E D

ASSETS

In the past, the purchase of fixed assets has been charged to an expense account
net of trade-ins received. We recommend that all purchases be recorded at the
gross price, and that items retired be removed at gross cost from the asset account
and charged to the related reserve for depreciation. Any allowances received
should be credited to the reserve for depreciation.
In this connection, we also recommend that memoranda authorizing the retirement of fixed assets be approved by an authorized officer in the Division of
Administrative Services.
P U R C H A S E O F I T E M S ON E X E M P T

LIST

We recommend that the cost of minor "Furniture and equipment" items not to
be capitalized be charged to the expense account "Stationery and supplies." We
also recommend that items of this nature be provided for in the budget under
"Stationery and supplies" instead of under "Furniture and equipment.
We shall be pleased to discuss with you any of the foregoing points or any other
ints on which you may have questions. The Board and members of the staff
ve consulted with us during the year as questions or problems arose. We wish
to repeat that we welcome this for we consider our obligation a year-round one
and not limited to the year-end-audit date.
We acknowledge, with appreciation, the fullest cooperation which we received
from your entire organization during the course of our work.

There follows, for the record, the disposition of the comments and suggestions
made by Arthur Andersen & Co. in connection with that firm's examination of
the accounts of the Board of Governors of the Federal Reserve System for the
year ended December 31, 1953, in continuation of its general review of the
Board's system of internal control and accounting procedures. It should be
noted that Arthur Andersen & Co. stated that these comments and suggestions




34

FEDERAL.

RESERVE ACT AMENDMENTS

were not to be construed as an indication of a lack of internal control but as
suggestions which might improve the already existing controls and procedures.
Use of an imprest bank account.
An imprest bank account was instituted by the Board at the Federal
Reserve Bank of Richmond (where the Board's bank accounts are maintained) on May 12, 1954, and is now in use as recommended by Arthur
Andersen & Co.
Use of a mechanical check signer for payroll checks.
A mechanical check signer for payroll checks has been selected, and the
Board is prepared to purchase and place it in operation when the present
supply of paper checks is exhausted. This is expected to be about January
1, 1955.
Use of continuous form I B M card checks.
A continuous form of I B M card checks has been designed for use by the
Board and will be used when the present supply of paper checks is exhausted.
As stated above, this is expected to be about January 1, 1955.
Adoption of a smaller inventory requisition form with blank spaces for writing
in the items desired.
A smaller inventory requisition form has been adopted as suggested and
will be placed in use effective July 1, 1954. This date was selected because
it is the beginning of a quarter, and time was required to prepare a supply
catalog for use in connection with the revised requisition form.
That petty cash slips for cafeteria market fund be prepared in ink to prevent
any subsequent alterations.
This suggestion was placed in effect immediately upon being made by
Arthur Andersen & Co.
The check register should be footed so that each page reflects only the items
listed on that page.
The instance noted by Arthur Andersen & Co. was the result of a clerical
inadvertence, as it is normal procedure to foot the check register so that each
page reflects only items listed on that page. This error was corrected
immediately.
That the account distribution be shown on the face of all vouchers in order to
present a complete picture of the transaction.
This suggestion was also placed in effect immediately.
That the file of signatures and initials of persons authorized to approve requisitions, etc., be brought up to date and kept current through periodic review.
A current file of signatures and initials of persons authorized to approve
requisitions, etc., has been prepared and is in use.
That all purchases of fixed assets be recorded at the gross price and that items
retired be removed at the gross cost from the asset account and charged to the
related reserve for depreciation. Any allowances received should be credited to
the reserve for depreciation.
This suggestion is now in effect.
That memoranda authorizing the retirement of fixed assets be approved by an
authorized officer in the Division of Administrative Services.
There has been no retirement of fixed assets sincfe this suggestion was
received; however, the suggestion will be followed whenfixedassets are retired
in the future.
That the cost of minor furniture and equipment'items not to be capitalized
be charged to the expense account "Stationery and supplies", and that items of
this nature be provided for in the budget under "Stationery and supplies" instead
of under "Furniture and equipment."
The suggestions will be followed effective with the accounting and the
budget of the Board for the calendar year 1955. It was, of course, not
feasible to adopt this suggestion immediately as the accounting and budget
procedure had been in operation for 1954.
M r . MULTER. H a v e y o u observed that there are some discrepancies between their statement, as submitted i n this audit, and your
own statement for the same period, as contained i n your report for
the year 1953, which was released on M a r c h 5, 1954?
M r . MARTIN. I would be very interested i n those discrepancies.
M r . MULTER. Well, taking the two balance sheets, we have a total
of expenses listed i n your report that total $4,239,515.74, and their
report indicates expenses of $4,572,479.04.




35

FEDERAL.

RESERVE

ACT

AMENDMENTS

There are other differences in the details and items of the expenses
that I haven't been able to reconcile by trying to add some of the
items together, where you seem to have 1 item, retirement contributions, for instance, they have 3 items. N o matter whether you take
2 or 3 and add them together you don't get the same figure that
you have.
Then there are other differences in the itemizations, under the
expenses.
Has no one called those differences to your attention, M r . Martin?
M r . M A R T I N . I would have to study the differences, M r . Multer,
but I can assure you we welcome any comments of that sort and I
will be very glad to have them gone over and see what the explanation
is. B u t I am quite confident of the soundness of the figures.
M r . MULTER. Well, one set of figures must be wrong. They cannot
both be right for the same period.
M r . MARTIN. Well, until I analyze them and have them in front
of me I can't possibly go into it.
M r . MULTER. DO you have a copy of the annual report available,
M r . Martin?
M r . MARTIN.
Mr. M U L T E R .
Mr. OAKMAN.
Mr. M A R T I N .
Mr. MULTER.

Y e s , sir.
D O you also have a copy of the audit?
IS there more than one copy of the audit available?
I don't know.
I think, M r . Martin, for the purposes of the record at

the moment, it is sufficient to indicate on the record that these discrepancies do exist, and that they do need some explanation. I am sure
that when you make a comparison of the audit with your report you
will find those discrepancies. They should be explained.
I do think that having gone to the trouble of having the audit made
that someone in the organization on your staff should have compared
these two statements and tried to reconcile them to give us an explanation as to what the differences are.
I think you will find, too, that there is a difference in the amounts
of the operating fund as set forth in that statement for the same period,
and in your annual report, as it appears at page 54 of the annual report.
Now, I haven't had the time to make any detailed analysis. I just
picked up the two here yesterday and went through them quickly, and
picked out these items. I do not pretend to be an accountant, but the
very fact that there are these differences in these very important items
should have been called to your attention, and I do hope you will have
an explanation furnished to the committee to be made part of the
record with reference not only to the discrepancies which I have
pointed out to you now, but to all of the discrepancies between the
report, as published, and the statement of audit, as submitted.
M r . MARTIN. I will be very glad to go into the report very carefully
and analyze all the so-called discrepancies.
(For data referred to see pp. 62 and 63.)
M r . M U L T E R . I am sure the committee will appreciate that, M r .
Martin.
W i t h reference to the saving of $750,000 in the event that this bill
is enacted, who will save that money?
M r . MARTIN. The Federal Reserve banks will save the money.
The Federal Reserve System.




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M r . M U L T E R . IS that money that will be saved because of the fact
that it would be no longer necessary for them to transport these notes
back and forth between the various banks of issuance?
M r . M A R T I N . That is correct.
M r . M U L T E R . There can be no other savings as a result of transmitting them because you will still have to report back to the bank
of issue as to any notes that may be canceled or any notes that will
be received and held for future issue; am I right?
M r . M A R T I N . Well, there is labor and transmittal. That is what is
really involved, M r . Multer. That has been carefully analyzed by
each of the banks, and we think that the figure is a sound one, a fair
one, based on operating procedures and techniques, and it was the
recommendation of all 12 of the presidents of the Federal Reserve
banks that this be done, and that it would arrive at a saving of the
amount that we have stated.
M r . M E R R I L L . W i l l the gentleman yield?
M r . MULTER. Yes.
Mr. M E R R I L L . D O I

understand this, that the only difference will
be that at the present time whenever a Federal Reserve note from,
say, Boston, comes into the New York bank, they immediately take
it up and ship it back?
M r . M A R T I N . That is correct.
M r . M E R R I L L . Under the new system, as long as that note is usable,
or fit, it will just come in and be considered a part of the currency
as if it were a New York note or a Treasury note, and will just be
handed out again without that requirement; isn't that it?
M r . M A R T I N . Exactly right.
Mr. M E R R I L L . SO all you are doing is eliminating this whole
machinery of looking for notes that are not from the particular bank
in question, and you are just using these notes as if they were currency
of that bank or the Treasury; is that right?
Mr. M A R T I N . That is exactly right.
Mr. M E R R I L L , That would save a lot of money, then. Y o u don't
have to have machinery for detecting them, first, and then sorting
them out and sending them out; is that it?
M r . M A R T I N . That is right; yes, sir.
M r . B E T T S . Would you yield?
M r . M U L T E R . I yield.
M r . B E T T S . That excepts the ones that are canceled, doesn't it?
M r . M A R T I N . Yes; the ones canceled as unfit are in a different
category.
M r . M U L T E R . And that is the sole purpose that is sought to be
accomplished by this bill?
M r . M A R T I N . That is correct, sir.
M r . M U L T E R . Well, then, haven't you gone too far in what you
have done here? Y o u seek to strike this language and don't put in
any language in lieu of some of the language you are striking. W h y
not simply add to the section a sentence which would eliminate the
necessity of transporting these notes back and forth? Y o u have gone
much further than that. Each of these banks originally are authorized and are still authorized to issue these notes against certain definite
reserves in certain specific percentages; am I right? They are not
given carte blanche to issue notes as they please. The notes must
be issued against certain definite reserves and in certain limited
amounts.



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M r . M A R T I N . The only thing that we are attempting to change
there is the statutory requirement that when a note is paid out it
must be paid out through the Federal Reserve bank whose note it
represents. That is the only thing.
M r . M U L T E R . I have no objection to that being done, if you stop
there. But you are going much further. These banks are banks of
original issue of these notes, right? And eventually these notes are
intended to be redeemed. Am T right?
M r . M A R T I N . We are not changing the redeemability feature at all.
M r . M U L T E R . But the language you are striking from the statute:
Whenever Federal Reserve notes issued through one Federal Reserve bank,
they shall be promptly returned for credit or redemption to the Federal Reserve
bank through which they were originally issued or—

and so forth. That is the language you are striking out.
In other words, these notes will never be redeemed or returned for
credit?
M r . M A R T I N . Oh, no, we are just eliminating the statutory requirement that they have to be returned every time they are received by a
bank.
Right here in Washington, D . C., you may have 10 Federal Reserve
bank notes circulating at any given time; the public does not note any
difference in them. But the minute they get to a Federal Reserve
bank they have to be returned to San Francisco, Minneapolis, or St.
Louis, wherever the note was originally issued. If you have one in
your pocket you don't return it.
M r . M U L T E R . Of course I don't. But the point I am making is
that if you strike this language and don't put any other language in,
these Federal Reserve banks become mints. They issue currency
forever and a day that will never be redeemed.
The C H A I R M A N . I think probably the next sentence in the act will
cover what you arc getting at, M r . Multer.
M r . M U L T E R . Suppose they are never turned back to the Treasury.
Suppose the Federal Reserve Bank in Richmond gets a note issued by
the bank in New York. The Treasury does not get it. How is it
going to be redeemed?
M r . S P E N C E . IS that provision for redemption mandatory? Or can
they continue in circulation?
M r . M A R T I N . A t the present time, M r . Spence, they can only
continue in circulation if they are returned to the bank of issue.
M r . S P E N C E . That is not mandatory that they should redeem them?
M r . M A R T I N . O h , no.
M r . S P E N C E . They can continue to circulate?
M r . M A R T I N . Oh,' certainly, through their machinery,

their facilities.
M r . S P E N C E . Why was that provision originally put in the law?
What fundamental purpose did you have in mind?
M r . M A R T I N . Well, in the early days of the System, the idea was
that you would limit the amount of notes in circulation to the needs of
the economy by confining the base of these notes to the regional
district, and by having the notes presented frequently to the issuing
bank, even though they might be paid out again. And it was intended
to be a bulwark of the regional system of the Federal Reserve, and to
control the total issue of notes as well as safeguard the regional
autonomy, shall we say, of the bank of the district.
47918—54




C

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Well, now, through the years that, in our judgment, has come to be
a safeguard that has not performed any function whatever, except this
additional expense of this crisscross sorting and sending these notes
back and forth.
Mr. SPENCE. Well, that was a provision for control, wasn't it?
Mr. MARTIN. That is right.
Mr. SPENCE. Why isn't control just as important now as it was
then?
Mr. MARTIN. Because in terms of the total volume of currency we
think we have adequate control here in Washington, and that this
recommendation would not be presented to you if it were not a recommendation of the regional banks themselves.
Mr. SPENCE. But has your control in Washington been changed,
through the years, so that it gives you greater power here than you
have had heretofore?
M r . MARTIN. I think under the Banking Act of 1935 we do have
more control than we had in the early days of the System. But as
far as we can see, on the volume of notes issued, we can't see that this
is any active safeguard in terms of the amount of currency that we
have. The important thing is that the currency supply respond to
the needs of the public, and from that standpoint it does not matter
whether the New York Federal Reserve Bank, for example, paid out
its own note, or that of the Richmond bank.
Mr. SPENCE. What proportion of these notes that have been returned to the bank of issue have been put out of circulation and what
proportion have been redeemed?
Mr. MARTIN. M r . Leonard may be able to answer that.
Mr. LEONARD. M r . Spence, last year, about $2,800 million of fit
notes were returned by 1 Federal Reserve bank to another Federal
Reserve bank. During that same year, something over $6% billion
in notes were redeemed.
I might say, if I could, M r . Spence, that this is purely a mechanical
proposal, that the notes are redeemed when they become unfit for
use. That is the present practice, and that will be the practice. So
long as a note is outstanding, regardless of where it is held, regardless
of who issues it, it is secured by collateral. This does not change the
collateral requirements.
Mr. S P E N C E . H O W could the bank release that collateral except by
redemption of the note?
M r . LEONARD. It can't, unless and until—unless and until the fit
note comes back to the bank of issue, and the bank returns that note
to the Federal Reserve agent. I t ceases to be an outstanding note
and then the bank withdraws its collateral.
Mr. SPENCE. That provision has been in the law ever since the
Federal Reserve Act was passed, hasn't it?
M r . L E O N A R D . Y e s , sir.

Mr. SPENCE. In the original Federal Reserve Act?
Mr. LEONARD. That is my recollection.
Mr. SPENCE. Excuse me for taking up your time, M r . Multer.
Mr. MULTER. That is all right, M r . Spence.
I can understand, M r . Martin, that the individual Federal Reserve
banks may have made this recommendation but, frankly, I am not
satisfied that this is solely accomplishing the one thing and cutting
out the unnecessary expense of transmitting notes back and forth.




FEDERAL RESERVE ACT AMENDMENTS

39

I think by taking out this language you are destroying the original
intent of the section, and you are putting these banks in a position to
issue these notes, and you lose all control over the situation.
I don't think this is the way to save that expense, if that is the sole
purpose to be accomplished.
Mr. MERRILL. Will you yield?
M r . MULTER. Yes.
Mr. MERRILL. AS I

understand it, this provision, when it was
first put in the law, was not put in there for the purpose of trying to
make these notes more easily redeemable; redemption of the notes
was not one of the functions of this section; am I right on that?
Mr. MARTIN. That is substantially correct.
Mr. MERRILL. It was solely designed so that you would keep
releasing money from all of the 12 Reserve districts, through their
bank; is that it?
Mr. MARTIN. That is correct.
Mr. MULTER. I most respectfully disagree with both of you. The
title of the section is "Reserves Against Deposits of Notes, and
Redemption of Notes, Exchange for Gold Certificates."
Show me another section of the law which covers that or even
refers to redemption of notes.
Mr. MARTIN. There is no change in the provisions on redemptions
of notes contemplated in this. As Mr. Leonard has pointed out,
this is purely a mechanical operation.
Mr. MULTER. Am I right, Mr. Martin, that there is no other section
of the Federal Reserve Act dealing with redemptoin of notes?
Mr. MARTIN. I am sorry, Mr. Multer, maybe I ought to know the
Federal Reserve Act by heart, but I don't.
Mr. MULTER. I know you can't know all these details, but is there
anyone here who knows?
Mr. LEONARD. This is the principal section dealing with the
redemption of the Federal Reserve notes and the collateral in back
of them.
Mr. MULTER. Right. Now, you are going to take out of this section the words dealing with redemption of notes, beginning with
"Whenever a Federal Reserve note issued through one Federal
Reserve bank shall be received," right on down to the sentence
"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."
Why do you have to take the penalty out if the redemption provisions are going to continue and you are just going to save money
in transporting notes back and forth?
Mr. LEONARD. The sentence which is proposed to be deleted does
not relate to the redemption process of Federal Reserve notes and
the transfer of collateral behind Federal Reserve notes.
The penalty is imposed upon a Federal Reserve bank for paying
out a fit Federal Reserve note which has been issued by another
Federal Reserve bank. The penalty does not relate to the redemption of the Federal Reserve note.
Mr. MULTER. If you take these two sentences out how are you
going to continue to control the issuance and reissuance, as they must
go together, of these Federal Reserve notes?




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M r . MARTIN. There will he 1 0 change under the procedure for
1
issuance or reissuance of Federal Reserve notes except that they will
not have to be returned to the bank of issue when they arrive at a
given bank, other than the bank of issue. That is the only change
contemplated and proposed.
M r . MULTER. If you take out these two sentences show me another
sentence in the law which will then provide for the redemption of
Federal Reserve notes.
M r . MARTIN. M r . Leonard will speak to that, Mr. Multer.
Mr. LEONARD. M r . Multer, the pressure for redemption of Federal
Reserve notes comes from the fact that the note, so long as it is outstanding, must be secured by collateral, regardless of where held, and
regardless of whether fit or unfit.
Most notes redeemed or a great proportion of the notes redeemed
are sent in by the bank of issue to Washington itself for redemption.
It is constantly doing that.
The rest of redemption is whether the note is clean enough, whether
it is fit for circulation. When it ceases to be fit it is forwarded into
Washington for redemption.
When a Reserve bank has an cxcess of Federal Reserve notes for its
use, and it wants to regain its collateral or if the reserve were getting
low, it would return those notes, those fit notes, back to the agent and
the collateral would be freed.
So it is the pressure of the collateral requirement and the reserve
requirement which is effective.
Mr. MULTER. I follow what you say, but what is bothering me is
this: When the note is unfit for further use it is canceled, the issuing
bank is notified, and if its reserve requirements are still the same as
they were when that note was issued they may issue a new note in
its place; is that right?
Mr. LEONARD. Correct, if they put up the collateral.
M r . MULTER. The reserve requirements are not changed, and they
are still authorized to issue $10 million worth of Reserve notes, and a
million dollars worth are no longer fit to be used. They can cancel
those notes and issue new notes for the same million dollars; is that
right?
M r . L E O N A R D . Y e s , sir.

Mr. MULTER. If they were authorized to issue $10 million in Reserve notes a year ago, and they are all still fit today, but the reserve
requirements have changed, and they are now, according to the standards of the law and the regulations of the Board of Governors, authorized to have outstanding only $9 million dollars, how would they get
back that million dollars in Reserve notes, if vou take this sentence
out?
Mr. LEONARD. The saving grace, I think, to the question which
you raised, is this: That the notes do wear out.
Mr. MULTER. Lot us forget about the notes wearing out. Let us
assume they are good forever and a day and will never become unfit.
Let us assume that $10 million face value of notes is going to be good
forever and a day. For the purpose of my question, let us assume
that. But the $i0 million that the Federal Reserve bank has issued
is against certain reserves, and if those reserves have diminished that
bank must call in a part of the $10 million; am 1 right?
M r . LEONARD. If your premise were right; yes.



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M r . MULTER. If the reserves go down under the standards set by
the law and the regulations, and they no longer have the right to have
$10 million outstanding, the difference must be called in and
redeemed?
M r . LEONARD. In the extreme case you cite the reserve ratio could
be restored by one Federal Reserve bank discounting with another,
under provisions of the Federal Reserve Act. So that there are other
provisions which take care of it. However, if I mayM r . MULTER. The other provisions provide that the Federal Reserve bank may increase its reserve requirements so it can continue to
have the right to have those notes outstanding; is that what you are
saying?
The CHAIRMAN. M r . Multer, if you will read the balance of the section, that is covered to me very specifically, as to how this operates.
M r . MULTER. I have read the language. It has not helped me
understand the situation.
The CHAIRMAN. It seems very clear to me.
Perhaps I am a little naive.
MR. MULTER. Perhaps I am naive. I have had a little banking
experience, not too much, but if I can't understand it, I think those
who have had no banking experience will not understand it.
The CHAIRMAN. Maybe I can understand it because I haven't had
any banking experience.
M r . MULTER. Well, then, you had better help out me and my friends
who have had banking experience. As I recall it, the original purpose
of giving the Federal Reserve banks the right to issue these notes was
to permit them to issue currency to meet the demands for currency;
that is right?
M r . L E O N A R D . Y e s , sir.

M r . MULTER. In other words, they had certain reserve requirements, and they were permitted to issue notes, as currency, legal
lender, against their reserves?
M r . LEONARD. Against collateral and subject to reserve requirements.
M r . MULTER. Yes, that is correct. That collateral and those
reserve requirements—the reserve requirements won't change, but
the reserves set up in accordance with the requirements will change
from time to time.
M r . LEONARD. The reserve requirement is 25 percent, against the
notes in circulation.
M r . MULTER. Yes, and when value of those reserves fall under the
25 percent the bank no longer has the right to have outstanding notes
which were issued against 25 percent.
M r . LEONARD. It cannot permit its liabilities to exceed that position, but
M r . MULTER. Let us stop there a moment. When the 25 percent
against its deposits and reserves falls to 20 percent the Federal Reserve
bank has the choice of 1 or 2 things, and I think only 1 of 2 things:
Either to supply the deficiency and bring it back to the 25 percent,
or call in its notes that are issued against that 5 percent deficiency.
A m I right?
M r . LEONARD. It has only one choice. It has no control and cannot
call in the notes. Therefore, it has to keep its reserve from falling low,
and under the provisions of the law it can do that by borrowing from
another Reserve bank.



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M r . MULTER. What happens if it cannot borrow or cannot restore
the 25 percent?
M r . LEONARD. That is a matter, I suppose, that would have to be
submitted to Congress.
M r . MULTER. I don't think so.
M r . LEONARD. The Board has power to reduce reserve requirements
under certain provisions, but if there were to be a change, a continuing change in circumstances, the matter would be submitted to
Congress, but
M r . MULTER. Before we submit it to Congress, the Congress in
enacting this very statute under which you are operating certainly
never intended that the Federal Reserve banks should be in position
where they could have outstanding more than could be set by law.
M r . LEONARD. It is inconceivable that the situation you describe
can arise because of the fact, which is an essential part of this whole
operation, that the notes do wear out and constantly, day in and day
out, old notes are being sent in for destruction, and new notes are
being issued keeping the amount in circulation essentially in balance.
M r . M U L T E R . SO that the amount of currency in circulation is
practically always the same. As fast as you cancel a note because it
is unfit you put in a new note in circulation in its place?
M r . LEONARD. Yes, sir. The total amount. There will be a
change over the years, in the total level, whether it is $29 billion or
$30 billion, but during a period, those 2 roughly do correspond, the
amount of notes redeemed and the amount of new notes issued back
to the bank, balance out approximately, year after year.
M r . M A R T I N . Y O U will see, M r . Multer, that the reserve ratio in
each of these banks is published, on a weekly basis. This is the ratio
of gold certificates to total deposit and note liabilities of the Federal
Reserve bank. That is one of the things we watch. Now, in the
unlikely contingency that the system as a whole would be facing a
decline below the legal reserve requirements, the only recourse in that
situation would be to come to Congress. But that is our major
responsibility as the Board of Governors. We are watching those
reserve ratios all the time to see that the law is complied with. And
so far as this particular provision for the mechanical operations of
the system are concerned, it is certainly not a life or death matter,
but it is a definite saving, and it is not affecting the total volume of
currency, to permit us to keep general control over the whole situation,
but not require each of the banks to go through a crisscross sorting
operation for the sake of maintaining the status of their particular
issue.
M r . MERRILL. W i l l you yield, M r . Multer?
M r . M U L T E R . I yield.

M r . MERRILL. I won't put this in the right language, but assuming
that the condition did arise where you are going to have to reduce the
amount of notes outstanding, we will say, for the original bank. Is
there some mechanism available whereby you could block the recirculation of a Richmond banknote without having that note first
shipped back to Richmond?
D o I make myself clear?
W e will say that you are going to have to cut down 10 percent on
the amount of notes that Richmond has outstanding. That is what
M r . Multer is worrying about.
M r . MULTER. That is right.



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M r . M E R R I L L . We know we have got to cut it down 10 percent.
Is there some mechanism available so that a note, on the Richmond
bank, that comes into the Washington bank, or comes into New York,
could be blocked and not reissued without this cumbersome mechanism
which we now have of shipping every one of them back to Richmond
Mr. M A R T I N . On the specific note, 1 don't think there is any.
I will ask Mr. Young to comment.
STATEMENT OF RALPH A. YOUNG, DIRECTOR, DIVISION OF
RESEARCH AND STATISTICS, FEDERAL RESERVE SYSTEM
Mr. R A L P H A . Y O U N G . Y O U have to think of the total money supply, deposits subject to check and currency. The total of that will
run at the present time in the neighborhood of $126 billion. I could
be wrong on that figure. It is thereabouts. The public decides how
it wants to hold its money. Whether it wants to hold its money in
the form of demand deposits, or in the form of currency, and it is the
problem of the system to be in a position to supply the currency which
the public needs, subject to the limitations which Congress has imposed with respect to the issuance of money.
Now, when there is a public demand for currency which is so great,
let *us say, that it is drawing down the reserve ratio of the banks, a
public demand for bank deposits which is causing banks to expand
credits, and to build up deposits at the same time—the total is
expanded—the Federal Reserve has a drain, both in terms of providing
reserves and providing currency.
It is then the problem of the System to meet that situation by
making its funds less available through the several devices that it has
for doing that—open-market operations, the discount mechanism,
and the discount rate mechanism, and perhaps changes in reserve
requirements.
So that the growth of the money supply will be restrained.
Mr. M U L T E R . N O W , with approximately $ 2 9 billion or $ 3 0 billion
in currency in circulation, and if the demands of the public become
greater for currency—things get a little shaky and they start hiding
their money in vaults instead of the checking accounts or savings
accounts—and you find you need $35 billion to meet that demand, you
can control that situation very easily, can you not? If the demand
should arise, and they needed another $5 billion in currency, you
could change the situation very easily by issuing the additional
currency?
Mr. Y O U N G . If it is a matter of shifting from deposits in banks and
into currency, and that is what the public wants to do at the time,
that can be provided for very simply as long as the Reserve banks
have sufficient reserves.
Mr. M U L T E R . Right.
Now, having gone to the $35 billion, and we want to cut back to
$25 billion in currency, how do you accomplish that?
Mr. Y O U N G . Well, the public, if it decides that it wants less currency, there is some contraction in the currency outstanding and in
circulation, from the present time, against a year ago, say around a
billion dollars. The public brings that money to the banks, the
banks in turn take this money and deposit it with the Federal Reserve



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banks i n their reserve accounts. T h e Federal Reserve banks, no
longer having a demand for currency, take the currency and turn i t
over to the Federal Reserve agent and redeem the collateral which
has been pledged against it, and their liabilities are reduced, their
reserve ratio is up, and so forth.
M r . M U L T E R . Isn't this very sentence y o u are trying to take out
of the l a w intended to permit you to accomplish just that?
M r . YOUNG. I don'T quite understand your question, but I think
if I do understand it your understanding is incorrect.
M r . M U L T E R . Well, what does this sentence accomplish, then?
M r . YOUNG. A l l that this bill does is to remove from the statute
the requirement as to the return of currency received b y one Federal
Reserve bank, which has been issued b y another bank to that issuing
bank, for cancellation or reissue, as that bank may see fit, i n accordance w i t h the demands of the public at the time, for the use of currency.
M r . M U L T E R . A m I right i n saying that if we take this sentence out
of this section that the only redemption of Federal Reserve notes
thereafter w o u l d be b y the U n i t e d States Treasury?
M r . MARTIN. Oh, no, there won't be any change i n the redemption.
D o y o u have the provision there?

STATEMENT OF ALFRED K. CHERRY, LEGISLATIVE COUNSEL TO
THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
M r . ALFRED K . CHERRY. There are about seven pages of that section relating to the issuance of Federal Reserve notes: W h a t is the
nature of the obligation, where they are redeemable; the procedures
spelled out w i t h reference to the application for notes b y Federal
Reserve banks; h o w the bank goes to the agent; places collateral;
receives notes i n amount equal to that collateral; long paragraph relating to the reserves
M r . M U L T E R . W i l l y o u give me the numbers of those paragraphs?
M r . CHERRY. T h e y commence w i t h section 16, sir.
M r . M U L T E R . I have i t i n front of me. Just indicate the numbers.
M r . CHERRY (reading):
Section 16, Federal Reserve notes, to be issued at the discretion of the Board
of Governors of the Federal Reserve System for the purpose of making advances
to the Federal Reserve banks—
and so forth.
Shall I continue to read the whole sentence?
M r . M U L T E R . NO, I have i t in front of me.
M r . CHERRY (reading):
The said notes shall be obligations of the United States of America and shall
be receivable by all national and member banks and Federal Reserve banks and
for all taxes, customs, and other public dues. They shall be redeemed in lawful
money on demand at the Treasury Department of the United States, in the
city of Washington, District of Columbia, or at any Federal Reserve bank.
M r . M U L T E R . Y o u might just as well take out of that section the
words "or at a n y other Federal Reserve bank," as take out this
sentence.
M r . C H E R R Y . N o t a t all, sir.

M r . M U L T E R . H o w w i l l they get back to the Federal Reserve bank
for redemption if they don't send them back? H o w w i l l the R i c h -




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mond Federal Reserve Bank redeem notes of the New Y o r k Federal
Reserve Bank?
M r . CHERRY. When they are unfit, the Federal Reserve note, we
will say, of the Federal Reserve Bank of New York, turns up in the
Federal Reserve Bank of Richmond, who sends
M r . MULTER. I am not concerned about the unfit notes, because
you are just taking a piece of paper that is close to being useless and
substituting another piece of paper. Y o u are taking one bill that is
no longer fit and substituting for it another bill that is fit. I am not
concerned about that. I am concerned about what happens to notes
that should be redeemed, which are still fit for physical transmittal
but are no longer good currency in accordance with the requirements
of law, because there has been a change in requirements, or the amount
of requirement has fallen below the required amount and that bank
has no longer the right to have outstanding its original issue?
M r . CHERRY. If the Federal Reserve Bank in New York wants to
redeem or restore some of its fit Federal Reserve notes, it gives them
over to the Federal Reserve agent located at that bank and receives
in return an equal amount of collateral which it has deposited with
the agent. The agent then holds those Federal Reserve notes in his
custody and they are no longer in circulation.
M r . MULTER. Well, you are assuming, of course, that that bank
l a d the right to issue and did originally issue $10 million of Federal
Reserve notes, and because of a change in circumstances, or regulations, or what have you, it now only has the right to have outstanding
$9 million; you are assuming that m order to cancel the $1 million of
notes that it has them on hand.
But if the notes are all over the country how is that bank going
to get back a million dollars in notes to cancel, when it no longer
has the right to have them outstanding?
M r . MERRILL. Would there be anything wrong if the Richmond
l a n k — I don't think this would ever happen, but assume it did
happen—if the notes were not wearing out and the Richmond bank
found it had to call some of them in. Wouldn't it have the right to
send a note or message to other banks and ask them to forward to
them a certain number of the Richmond notes that they might have
received from their transactions? Won't that be possible?
M r . L E O N A R D . Y e s , sir.
M r . C H E R R Y . Y e s , sir.

M r . MERRILL. Couldn't they do that?
M r . L E O N A R D . Y e s , sir.

M r . MERRILL. Then there is no reason for spending $750,000 a
year to take care of a situation, which if it happened, and it is not
going to happen, could be taken care of with a 3-cent stamp; isn't
that right?
M r . M U L T E R . H O W is the Bank of Richmond going to know who
has the million dollars of notes?
M r . MERRILL. Well, suppose they have to spend 33 cents. They
can send a letter to each of the 11 banks.
M r . MULTER. And ask each bank to send them a million dollars in
currency?
M r . M E R R I L L . Y O U are assuming that something is a fact that can
never be a fact.
In the first place




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M r . MULTER. Oh, no, we assumed we would never have a depression in this country, and we had it. We assumed we would never
have another recession in the country, and we are in it. We can't
control the economics of the country. This statute is set up against
any foreseeable accident, if we can call those things accidents.
M r . MERRILL. Assuming this thing happens, which I don't think
it will ever happen, that the notes can't be redeemed because of the
fact they are not wearing out fast enough, then there is available to
the bank the very simple procedure by which they could get those
notes back into their own hands simply by requesting them from other
banks in the form of a letter. There is no need for this cumbersome
procedure to guard against it because you have got a method of getting
those notes back to the Richmond bank if you want them, and that is
simply to write to the other banks and ask them to return to the
Richmond bank a certain amount of Richmond notes they may
have on hand.
M r . MULTER. I t is a very simple procedure for the bank to write
and ask for it. H o w are you going to enforce compliance with the
request?
Suppose the recipient of the letter doesn't comply. How are you
going to get that million dollars of notes out of circulation?
M r . MERRILL. I don't think we should spend $750,000 a year on a
bunch of darn fool assumptions that never happen, and that is not
said with respect to your assumption. I don't think we should
continue a procedure as awkward as this merely to guard against
eventualities that just couldn't happen.
M r . M U L T E R . H O W anybody can sit here and say that that can't
happen, to the extent of a million dollars or $5 billion, or $10 billion,
is beyond me, because you just can't sit here and say it can't happen.
We have seen our currency contracted and expanded, and we have
heard all sorts of demagoguery about the expansion and contraction,
and it is going to happen again, and you have got to have something
in this law to compel compliance with a situation such as this.
These Federal Reserve banks have been given the right to issue
these notes as legal tender, as a matter of convenience, and, as I see
it now, and nobody has yet convinced me to the contrary, to take
this sentence out is to convert those Federal Reserve banks into
United States mints, to send out that currency and have no control
of it when the currency must be contracted.
I am willing to be convinced. M y mind is still open on it. But
I say this bill will operate to do more than just save $750,000, and I
don't mean that you are intentially trying to do something other
than to save the $750,000. But despite all that anyone has yet said
On this subject, I say, taking out that sentence converts all your
Federal Reserve banks into banks of issuance without control over
recall.
M r . MERRILL. They don't have any control over recall now except
as by accident they come to the bank.
M r . YOUNG. That is correct.
M r . MULTER. There is no accident about it now. The bank that
gets it must return it under penalty of 10 percent of the face amount.
M r . YOUNG. Only if it comes back to the bank from circulation.
The Federal Reserve banks are handling millions of pieces of paper,
currency, per annum, and the turnover of currency, in the stream of



FEDERAL

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47

transactions at the Federal Reserve banks is very large, so that as a
matter of practice if there were a letter written, such as M r . Merrill
has suggested, by the Richmond bank to the other Federal Reserve
banks, with respect to getting back some of its notes from circulation,
the normal movement of currency, through financing institutions,
through banks, and through the Federal Reserve banks, would enable
such a retirement to be accomplished within a very short time.
M r . O A K M A N . M r . Multer, would you answer a question? Do
you approve of the present archaic system? Let us take as an
example, a man who has to commute back and forth between San
Francisco and New York, let's say, on a monthly basis. He cashes a
check in New York before he goes. That money lands out in the
Federal Reserve bank in San Francisco. Under the present law they
have to return that money to New York. While in San Francisco
he cashes another check. For this check he gets Federal Reserve
notes on the Federal Reserve bank of San Francisco. A man likes to
have a little extra money with him when he is traveling. He gets
back to New York and he spends those. So the money he left in San
Francisco is returned to New York, the money he spends in New
York is returned to San Francisco, and he does the same thing once
or twice a month, so his money is constantly either pursuing him or
traveling with him on the same plane, or the same train, going back
and forth from coast to coast.
Does that make sense? Does that make for simplicity or economy
of operation?
It seems to me to be a stupid, incongruous situation.
M r . M U L T E R . I will agree with you, but in order to change that
you don't throw the whole system out of the window. Y o u put
something else in its place. That is the point I make.
M r . O A K M A N . There is no reason that you can set forth why one
Federal Reserve bank would want to hoard the notes of another?
M r . M U L T E R . B y trying to save money and destroy that archaic
system, as you term it, you are simply making these banks banks
with the permanent right of issuance of currency, with no control
over the recall of the currency.
I say if you want to accomplish that, let us put some other language
into this law so that there will be some central control. If you don't
want control to rest in each of the banks of issue—how many banks
of issue are there?
M r . M A R T I N . Twelve Federal Reserve banks.
M r . M U L T E R . Twelve?
M r . MARTIN.

Yes.

M r . M U L T E R . A l l right.
If you don't want each of these 12 required to make their own
redemptions, let us write something into the law and give somebody
here in Washington the right to control that situation. But don't
just take it out of the law so that there is no redemption any more
of these notes.
M r . O A K M A N . D O you know that there are more unregistered,
that is coupon, municipal bonds outstanding in the United States
today than there are of notes of all the 12 Federal Reserve banks
put together?
M r . M U L T E R . But they don't take those bonds into the restaurant
or hotel and offer those coupons as currency. We are talking now
about currency.



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M r . O A K M A N . Y O U can take a matured bond coupon to any bank
and get your money for it.
M r . MULTER. Yes, but unlike those coupons, these notes are currency, they are legal tender. It is no different than a promissorynote. Now, the promissory note, eventually, must be redeemed.
It has a due date. Or if it hasn't a due date it is payable on demand
and somebody eventually presents it and says "Give me my money."
If you want to change the currency system and have these banks
given the right to issue currency and let it ride through the country as
currency the same as United States Treasury currency, let us say so.
Let us not continue to have them issued as notes against collateral,
with no right of redemption of the note, when the collateral may
change. And it may change for any number of reasons.
M r . MARTIN. There is no change, Mr. Multer, in the collateral, or
the redemption provisions whatever.
M r . M U L T E R . Y O U say there is no change in the collateral?
M r . MARTIN.

N O , sir.

M r . M U L T E R . Y O U can never foresee a change in the collateral?
M r . MARTIN. I didn't say that; I said in this contemplated proposal
there is no proposal to change the collateral or redemption requirements.
M r . MULTER. But the amount of collateral that a particular issuing
bank has will change, in dollars; will it not?
M r . MARTIN. Well, those changes are all provided for. They can
borrow from another bank, if they need to.
M r . MULTER. They may borrow, and if they can't borrow?
M r . MARTIN. Then they can't issue the notes. They are stopped
right there.
M r . MULTER. But the notes are already out. I am looking at a;
time when you may have to contract the amount out. How are you
going to do it? The reserve requirements in dollars has fallen, let us
say, and there is no longer the right to have outstanding the notes out.
How are you going to get the notes back and cancel them?
M r . MARTIN. If there is no need for the currency, and the currency
is not being used by the public, it will be returned to the banks and
the banks will return it to the Federal Reserve bank.
M r . MULTER. I am talking about when there is still need for the
currency, and the currency is out, but the bank that issues that note
has no longer the collateral behind it that is required, and cannot
borrow the money to make up the collateral. What are you going to
do with those notes then?
M r . MERRILL. Will you yield, Mr. Multer?
M r . MULTER.

Yes.

M r . MERRILL. If you have ever issued a note, there is collateral
back of it or you wouldn't have issued it.
M r . MULTER. I have issued a thousand-dollar note against $2,000
in collateral, and my $2,000 in collateral-depreciates to $500. You
who are holding my thousand-dollar note originally issued against
$2,000 collateral, have a right to say "Increase your collateral to
$2,000."
M r . Martin says I can go to another bank and borrow $1,500.
The bank won't lend it to me. What am I going to do about it? I
should either retire that note or I should reduce it to $250.
The CHAIRMAN. M r . Multer, the gold collateral behind a Federal
Reserve note is set by law.



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M r . M U L T E R . T h e percentage is set b y law.
T h e CHAIRMAN. T h e value is set b y law.

M r . MULTER. Does the law also fix the value so it can't depreciate?
The CHAIRMAN. That is correct.
M r . M U L T E R . I would like to see the law that controls economics to
the extent of saying that a thousand dollars in securities today is worth
a thousand dollars in securities tomorrow.
The CHAIRMAN. Have you read the Gold Act of 1934? Y o u will
find it there.
M r . MULTER. I have an open mind. If anybody can give us any
additional facts I would like to have them.
The CHAIRMAN. Unless Congress changes the dollar value of an
ounce of gold there is a fixed value for collateral.
M r . MULTER. Shall we now get into an argument on the gold
standard?
M r . Martin, you told us about the membership of the Board of
Governors, and indicated, I think, that three of the members are
supposed to represent the public. Was that your statement?
M r . MARTIN. I discussed yesterday the composition of the Board
of Directors of the individual Reserve banks, and I said there were
nine directors. I said 3 were appointed by the Board of Governors
in Washington, and 6 of them are elected through the procedure of the
banking system that provides for 3 of them representing the banking
community, small, medium, and large banks, and 3 of them, the class
B directors, which represent, as I said yesterday, the borrowing
interests—that is, the business interests of the community, that are
not officers, directors, or employees of banks.
M r . MULTER. Would you say, by and large, that those three
directors that represent the borrowing community are fairly representative of the general public outside of the banking interests?
M r . M A R T I N . I think that we have been successful in getting pretty
wide representation; yes, sir.
M r . M U L T E R . I think that concludes my examination.
M r . TALLE. M r . Chairman.
T h e CHAIRMAN. D r . Talle.

M r . TALLE. Dr. Burgess has been waiting here patiently now for
2 days. He is a very busy man. Couldn't we move along a little
faster?
M r . P A T M A N . I have some questions to ask M r . Martin, M r .
Chairman. I don't think it will take long.
M r . T A L L E . Y O U took all of it on yesterday, M r . Patman.
M r . PATMAN. Well, I felt it was justified.
M r . T A L L E . I hope that is correct.
M r . P A T M A N . I think it is correct. I think the record will show
it is along material lines and justified.
The CHAIRMAN. Are there further questions of M r . Martin by
other members of the committee?
M r . SPENCE. I would like to ask M r . Martin, what control does
the Board of Governors of the Federal Reserve System have over the
volume of Federal Reserve notes issued by the banks?
M r . MARTIN. Well, we have the requirements, M r . Spence. The
amount outstanding is limited by the requirement that gold certificate reserves equal, at least, 25 percent of the notes and deposits of
the Federal Reserve banks. We have supervision of that, and this




FEDERAL. RESERVE

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reserve ratio that I called attention to, that is published for each
bank, weekly, gives us an indication of how those are being used.
Now, we have all of our instruments, reserve requirements, open
market operations, and the discount mechanism, to make adjustments
around this requirement which is given us by law.
The CHAIRMAN. The law compels you to make that weekly
statement?
M r . MARTIN. That is correct.
M r . SPENCE. Other than that you would have no power over the
expansion or contraction of the notes?
M r . MARTIN. Not of the notes per se. Our power relates to the
total supply of money-demand deposits and currency in circulation
outside the banks.
T h e CHAIRMAN. M r . P a t m a n .

M r . PATMAN. M r . Martin, who is really the head of a Federal
Reserve Bank, such as, for instance, the Richmond or New York?
Is it the president of the bank or the chairman of the board?
M r . MARTIN. M r . Patman, the board of directors elects the president, and the salary of the president, and the selection of the president
is approved by the Board of Governors here in Washington.
Now, the operating head of the Reserve bank is the president.
M r . PATMAN. In other words, he is in charge?
M r . MARTIN. He is the full time operating head of the bank.
M r . PATMAN. He is over the chairman of the board?
M r . M A R T I N . N O , I wouldn't say that at all.
M r . PATMAN. Well, can we put it this way: On any matter except
that affecting his duties as Federal Reserve agent, which, of course,
requires him or permits him to deliver Federal Reserve notes to the
bank—in other words, he operates in a dual capacity, if I understand
it correctly. I n one capacity he represents the Board of Governors,
and the United States Government, and in that capacity he has his
vault, with all the Federal Reserve—new Federal Reserve—notes
that came direct from the Bureau of Engraving and Printing, right
to his vault, and he has them there. He is the one in charge of that.
A n d he has a duty to perform, and when the bank wants Federal
Reserve notes, of course he is on the board and requests Federal
Reserve notes, and when they request Federal Reserve notes he
transforms himself back into an agent of the Board of Governors, and
goes in there and gets the notes and delivers them to the bank.
Now, in that capacity he is representing the Board of Governors,
isn't he?
M r . MARTIN. He is appointed by the Board of Governors.
M r . PATMAN. That is what I say, but in everything else about that
bank the president is the head of it, isn't he, and in charge of it?
M r . MARTIN. He is the operating head, but
M r . PATMAN. Well, that means he is in charge, doesn't it?
M r . MARTIN. He has to report to his board of directors.
M r . P A T M A N . I know he has to report to them, and the Federal
Reserve agent is one of the directors to whom he has to report?
M r . MARTIN. That is correct.
M r . PATMAN. But for all practical purposes, and, in effect, and
really, the president of the bank, except in the operation that I have
just mentioned, the president of the bank is actually the head and the
supervisor in charge of that bank, put there by the board of directors?
M r . MARTIN. He is the operating head of the bank.



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M r . P A T M A N . Well, you construe that to mean the head of the bank,
of course the operating head is the head of the bank. A l l right. We
have got that straight.
Now, M r . Martin, we have about a half billion dollars surplus i n
these Federal Reserve banks now, don't we, perhaps a little better
than that?
M r . M A R T I N . I think so.
M r . P A T M A N . Why is there any such need for big surplus in those
banks? Y o u don't operate on surplus, do you? It is not needed in
your operation?
M r . M A R T I N . Are you suggesting we have no capital, no surplus?
M r . P A T M A N . I am not suggesting, I am asking you a simple question. Why should you have such a large surplus when you don't
use this surplus in your operation?
M r . M A R T I N . I don't think it is a very large surplus, M r . Patman.
M r . P A T M A N . Over half a billion dollars, isn't it?
M r . M A R T I N . I think that.is a matter of judgment, and with respect
to the operations that are engaged in.
M r . P A T M A N . Well, isn't it a fact that the only reason you need that
surplus is to take care of lean times, if lean times should ever come,
to make sure that you could pay that 6 percent on the investment of
the commercial banks, and also to take care of the salaries and operating expenses of the bank without having to go to the Congress for
an appropriation?
M r . M A R T I N . N O , I wouldn't say that, M r . Patman.
M r . P A T M A N . What other reason would you have for having that
surplus? What do you need it for except that?
M r . M A R T I N . Well, theoretically we don't need any.
M r . P A T M A N . Y O U don't need any surplus?
M r . M A R T I N . Theoretically, we don't need any capital and surplus.
M r . P A T M A N . That is right. Y o u don't need any capital at all?
M r . M A R T I N . But you wouldn't have a business operation then, of
course. You might just eliminate the necessity for any capital, any
surplus, just make it entirely a bookkeeping operation.
M r . P A T M A N . Well, that is all it is now. Y o u see, your only power
that really counts is the power to create money, isn't it?
M r . M A R T I N . Oh, no. We do a great deal more than that.
M r . P A T M A N . Well, that is where you get your money, you create
it. Y o u don't create it from any investment of the private banks,
you don't create it from any reserves of the private banks, you don't
create it from any surplus of the Federal Reserve banks, you create
it because you have the power of a bank of issue. That is the central
banking system. That is the capitalistic system, isn't it?
M r . M A R T I N . Well, the capitalistic system is considerably more
than that, but we have the power to create money, which has been
given us, by the Congress, and the system that we have permits us
to supply bank reserves and absorb reserves as needed by the community.
We also hold the reserves of the member banks. They are deposited
in the Federal Reserve banks. It is a system which has been developed
on a decentralized basis, as far as possible, to avoid the type of money
panic that we had up until the establishment of the Federal Reserve
bank.
M r . P A T M A N . I knew that was the purpose of it, M r . Martin.
What I am leading up to is, you have testified before that you believe



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that the law should be restored that was repealed i n the 1935 act,
providing that after the exepnses of the Federal Reserve bank had
been paid, and the 6 percent on the investments by the private
banks, that 90 percent of the earnings would be paid into the Treasury.
T h a t was, I think, inadvertently repealed in the 1935 act, without
any consideration by either party. Somehow or another it went in
there. I don't think it was deliberately done. B u t it was repealed.
A n d you said you were i n favor of restoring that act, haven't you?
M r . MARTIN. I said that I would have no objection to seeing the
franchise tax stay.
M r . PATMAN. Well, that is approval.
M r . MARTIN. The procedure under which we have been operating
was cleared, so I understand, by Chairman Eccles, with both committees of the Congress at the time it was put in.
M r . PATMAN. That is right. I n other words, you said that you
would voluntarily put in 90 percent.
M r . MARTIN. We have been operating as though there were a
franchise tax.
M r . P A T M A N . I know you have, that is the reason I cannot understand why you did not put it in this particular bill, when you sent it
up here to be introduced, why you didn't put that provision in there
to restore the law that would require you to put the 90 percent back
into the Treasury.
M r . MARTIN. There are a number of changes in the Federal Reserve
A c t that I hope
M r . PATMAN. Well, that is a very important one.
M r . M A R T I N . N O , I don't think that it is of overriding importance
because no losses are being caused by that; whereas this is an outof-pocket expense that is proceeding from day to day.
M r . PATMAN. Well, why is it that every year, instead of putting i n
90 percent you just put in nearly 90 percent, 89 percent or 86 percent?
M r . MARTIN. We have written you several times explaining this.
M r . PATMAN. N o t that particular point. I am asking you something new.
M r . MARTIN. I don't believe so.
M r . P A T M A N . I am asking you something new.
M r . MARTIN. I don't think so, M r . Patman.
M r . PATMAN. A l l right. I would like to see it.
A t any rate, you have not been putting in 90 percent. Y o u have
been putting in nearly 90 percent.
M r . MARTIN. W e have provided for building of a little contingency.
D o you have the figure on it, M r . Leonard?
M r . LEONARD. The interest has been figured as if the franchise
tax were in effect. When the franchise tax was in effect to provide
that after the surplus had been built up to a hundred percent of the
subscribed capital
M r . PATMAN. That has already been done.
M r . LEONARD. B u t that is not the case. It is a continuing provision.
M r . PATMAN. DO you mean it has not been built up?
M r . LEONARD. I n two cases, because of the growth of the bank, the
capital had increased more than surplus had.
M r . PATMAN. A n d that is the reason you didn't put in 90 percent
because you were letting that surplus in that particular bank build
up to a hundred percent?
M r . L E O N A R D . Y e s , sir.




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M r . PATMAN. Well, that is news to me.

I didn't know that before.

M r . M A R T I N . W e w i l l p u t this i n t o the record, i f i t is a l l right, M r .

Patman. I think we sent this to you, but this table will cover it.
M r . P A T M A N . I would like to have it in. I had overlooked that
particular point. I didn't know that you had explained that before.
The

CHAIRMAN. W i t h o u t

objection, i t m a y

record.
(The material referred to is as follows:)

be inserted

in

the

The Board's press statement of April 23, 1947, announced adoption of a policy
under which the Peserve banks would pay approximately 90 percent of their net
earnings after dividends to the Treasury. The question has been raised as to
why the interest payment for the year 1953 was not 90 percent of net earnings
after dividends. (It was 89.465 percent.)
The whole tenor of the Board's statement of 1947 was that the interest payment
was in lieu of payment of a franchise tax. The franchise tax provision of the law,
which was repealed in 1933, read as follows:
"After the aforesaid dividend claims have been fully met, the net earnings shall
be paid to the United States as a franchise tax except that the whole of such net
earnings * * * shall be paid into a surplus fund until it shall amount to 100
percent of the subscribed capital stock of such bank, and that thereafter 10 percent of such net earnings shall be paid into the surplus."
The surplus of two of the Federal Reserve banks, Dallas and San Francisco,
was below their subscribed capital stock at the end of the year 1953. Accordingly,
in computing the interest payments to be made by these two banks, amounts
sufficient to bring their surplus up to 100 percent of subscribed capital were
deducted. A summary of the interest payments for 1953 follows:
Net earnings after dividends
$382, 905, 824. 95
Deduct amounts necessary to bring surplus to
100 percent of subscribed capital at—
Dallas
$1, 177, 144. 51
San Francisco
1, 095, 700. 02
2, 272, 844. 53
Amount subject to 90 percent payments
380, 632, 980. 42
90 percent of this total would be
342, 569, 682. 38
Interest payments made totaled
342, 567, 984. 63
The difference of about $1,700 between payments made and exactly 90 percent
of net earnings after dividends and after allowing for building up the surplus of
the Federal Reserve banks of Dallas and San Francisco arises from the fact that
the interest rate established is carried four places beyond the decimal point.
This interest rate is then applied to the average daily amount of Federal Reserve
notes outstanding in excess of gold certificates pledged with the Federal Reserve
agent as collateral.
Summary of interest payments on Federal Reserve notes by the Federal Reserve banks,
1947-58

Year

1947
1948
1949
1950
1951

Amount

$75,223,818
166,690,356
193,145,837
196,628,858
254,873,588

Percentage to net
earnings
after dividends
189.9
90.0
90.0
90.0
90.0

Year

Amount

$291,934,634
342, 567,985

1952
1953
Total..

1,521,065,076

Percentage to net
earnings
after dividends
2 86.3
3 89.5
89.1

1 In 1947 payments were still being made to the U. S. Treasury under the provisions of sec. 13b of the
Federal Reserve Act relating to industrial loans. These payments ($35,605) and additions to sec. 13b surplus
($86,772) were deducted along with dividends before computing the interest payments.
2 Before computing the interest payments, $6,265,359 at Dallas and $7,629,052 at San Francisco were
deducted from net earnings to bring surplus to 100 percent of subscribed capital stock, in accordance with
provisions of the franchise tax when it was in effect.
3 Before computing the interest payments, $1,177,145 at Dallas and $1,095,700 at San Francisco were
deducted from net earnings to bring surplus to 100 percent of subscribed capital stock, in accordance with
provisions of the franchise tax when it was in effect.




54

FEDERAL.

RESERVE

ACT

AMENDMENTS

M r . PATMAN. M r . M a r t i n , don't you have a lot of complaints from
banks now about the interest rate being restrictive to them on savings?
M r . MARTIN. I haven't had any to come to my attention.
M r . PATMAN. None have come to your attention? Don't you hear
complaints about the competition they are having with the savings
and loans associations?
M r . MARTIN. Well, I have heard, from time to time, i n casual conversation complaints; yes, but no official representations.
M r . PATMAN. Suppose a bank that is chartered, a national bank,
chartered to serve a community, and instead of serving that community they are investing practically everything i n Government
securities and rendering no local service, would you take any action
on that? Is there any agency in your Government that is charged
with the responsibility of supervising a situation of that kind, whereby
the local people could get some benefit from their bank?
M r . MARTIN. M r . Patman, you have raised that point a number of
times before
M r . PATMAN. B u t I never got A satisfactory answer. That is
why I asked it again.
M r . MARTIN. Well, you probably won't get a satisfactory answer
this time. B u t we are not operating the banks of the country.
M r . PATMAN. T h a t is right. A n d there is no agency of our Government to cover that.
Don't you think that is a weak point i n our banking system, that
everything is done for the banks and nothing against them? I n other
words, they can go against their charter, they can do anything they
want to, they can abuse their charter, they can refuse to render local
service, and yet there is no agency of our Government whose duty it
is to point that out and make sure that they get on the track and render
local service?
M r . MARTIN. Well, as I indicated at the time of the joint committee
hearings, we accept responsibility for compliance with the law, and
we try to watch out for the general interests of the community, but I
happen to believe i n free enterprise, and I do not think it is the prerogative of the Federal Reserve System to dictate to the banks how
they should treat their customers, as to whether they should lend
money or not lend money. I don't think we are charged with that
responsibility.
M r . PATMAN. Well, I am for free enterprise, too, but I didn't know
that you would be against free enterprise if you required people to
carry out their sworn duty and obligations in getting a charter to
render local banking service.
M r . MARTIN. T h e provisions of the charter are carried out. Y o u
are now talking about the matter of judgment.
M r . PATMAN. W h o is going to supervise them, from the standpoint
of the people?
M r . MARTIN. W e are accepting general supervisory authority, but
y o u are putting into this our judgment against their judgment with
respect not to compliance of the law but with respect to conduct of
the banking business.
T h e ChAiRMAN. M r . Patman, will you yield to me?
M r . P A T M A N . Y e s , sir.




55FEDERAL.RESERVE ACT

AMENDMENTS

The CHAIRMAN. If a national bank is violating its charter doesn't
the Comptroller of the Currency have some jurisdiction?
M r . M A R T I N . Y e s , sir.

The CHAIRMAN. And if a State member bank is violating its State
charter, the State banking commissioner would have jurisdiction over
the operations of that bank?
M r . MARTIN. That is correct.
M r . P A T M A N . NOW, you use the phrase the Comptroller of the
Currency will do it. Have you ever heard of a case when he did it?
M r . MARTIN. M r . P a t m a n

M r . PATMAN. That I am talking about? I can show you statements
all over this country where they are just loaded down with Government bonds and not making any local loans. They are just living
on the fat of the land by having riskless securities in their portfolio,
and rendering no local service at all, and yet the Comptroller of the
Currency, or no other agency of the Government, takes any standard
against them.
M r . MARTIN. M r . Patman, I would like to introduce into the
record, if it is agreeable with the chairman, a statement that shows
the amount of loans that the banks are making, which shows that
about one-third
(The data referred to above is as follows:)
Distribution

of total assets of insured commercial
banks
years, Dec. 81, 1985-58

in

United

Statesf

selected

1950

1953

[Amounts in millions]
1935
Loans:
Commercial and industrial
Agricultural
Real estate
Other loans to individuals (largely consumer)
Other»
Valuation reserves (deduct)

0)
0)
3,323
(2)
11,396

Total loans.
TJ. S. Government securities
Other securities—
Cash and other assets

. . . .

Total assets

1940

1945

7,178
1,281
4,468
(2)
5,467
(«)

9,461
1,314
4,677
2,361
7,951

21,776
2,823
13,389
10,049
4,359
-672

27,082
4,867
16,566
14,373
5,154
-960

14,719
13,275
6,841
16,092

18,394
17,063
7,099
28,163

25,765
88,912
7,131
35,736

51,723
60,986
12,113
41,730

67,082
62,381
14,333
46,841

50,927

70,720

157,544

166,552

190,638

(*)

Percentage of total assets
Loans:
Commercial and industrial
Agricultural
Real estate
Other loans to individuals (largely consumer)
Other 3
. .
Valuation reserves (deduct)
Total loans
XT. S. Government securities
•Other securities
Cash and other assets
Total assets

(4)

10.2
1.8
6.3
2
()
7.7

<)
«

6.0
.8
3.0
1.5
5.1

(<)

13.1
1.7
8.0
6.0
2.6
-.4

14.2
2.6
8.7
7.5
2.7
-.5

28.9
26.1
13.4
31.6

26.0
24.1
10.1
39.8

16.4
56.4
4.5
22.7

31.0
36.6
7.3
25.1

35.2
32.7
7.5
24.6

100.0

100.0

100.0

100.0

100.0

i Not reported separately before 1938.
Not reported separately before 1942.
Includes loans for purchasing and carrying securities, to banks, and all other loans.
* Not reported before 1948; valuation reserves were deducted previously from each class of loans.
8
8




56

FEDERAL. RESERVE

ACT

AMENDMENTS

M r . P A T M A N . Y O U didn't understand me to say all the banks. 1
said certain banks over the country.
The CHAIRMAN. I think, M r . Patman, that the aggregate might be
important.
M r . PATMAN. Certainly, I know what it is, it is about $69 billion
of loans and $60 billion of Government securities. But if they
didn't have those Government securities they would be anxious to
make more loans.
Anyway, I won't pursue that further.
The CHAIRMAN. M a y I suggest that you yield to me further? I
found out the other day, in talking with my own banker, how they
are facing the competition of Federal savings and loan associations
on that matter of 2% percent interest. Y o u can order at a bank a
hundred dollar savings certificate, which bears, I think, 2 percent
interest, if it is less than 90 days, and if it is more than 90 days it
draws 2% percent. They are doing a splendid business on that. It
has brought in millions of dollars of savings. Of course, none of
us have anything against the Federal savings and loans, but I think
we have had a little concern about this competition, and the banks
seem to be meeting it all right.
M r . PATMAN. Certificates on their savings?
The CHAIRMAN. Yes, and it is insured. Much to my surprise and
pleasure it is insured by the F D I C .
M r . P A T M A N . I knew that at the time that time deposits went up
greatly demand deposits hardly increased, in the last few months.
Time deposits have greatly increased, have they not, M r . Martin?
M r . MARTIN. Time deposits are up.
M r . PATMAN. The system explained by the chairman is considered
a time deposit, I assume, where they make that investment in that
certificate?
M r . MARTIN.

Yes.

M r . MARTIN.

Yes.

M r . PATMAN. Thait is a time deposit?

The CHAIRMAN. I think that this particular bank is paying 1%
percent on time deposits, but you may leave an order with the bank
that when you have accumulated, say, a hundred dollars in your
savings account that you can purchase a certificate.
M r . P A T M A N . IS 2% percent permitted under your regulations?
M r . MARTIN. That is correct.
M r . PATMAN. U p to 2%, but not beyond that?
M r . MARTIN. That is right.
M r . PATMAN. Thank you, Mr. Chairman.
There is one thing about this investment. For a bank to claim
that it has an interest and owns a part of the Federal Reserve System,
or Federal Reserve bank, because it has an investment in the Federal
Reserve bank, which it was permitted to make, and on which it
earns 6 percent annually and cumulative, is just as unreasonable as
to say that because M r . Wolcott, the chairman, has invested in his
own bank in his own hometown, that he owns a part of that bank.
That is not true. H e doesn't.
There is one other point. A n investigation of tax-exempt securities was made while you were working with our committee, M r .
Martin, and it was disclosed that a large part of the investments
made by the Federal Reserve bank were tax-exempt and at that time
it was felt that you were going to change those tax-exempts to taxable.



57FEDERAL.RESERVE ACT AMENDMENTS
W a s that ever done, where banks now pay taxes like anyone else
o n their investments i n the Federal Reserve banks?
M r . MARTIN. I don't know what the status of that is.
M r . CHERRY. W e found a peculiar situation through an enactment
<of a statute back i n 1942, certain stock certificates issued b y Federal
Reserve banks, after that date, were taxed, and those issued before
that date were untaxed.
M r . PATMAN. T h a t is right.
M r . CHERRY. T h e Congress has never seen fit to change that.
M r . PATMAN. W h a t about the Federal Reserve B o a r d calling them
and changing it?
M r . CHERRY. I t is not a matter of regulation.
M r . PATMAN. I think probably it is. W e discussed it at the time,
a n d I was convinced that the Federal Reserve B o a r d could change it
a n y time they wanted to.
M r . MARTIN. W e w i l l pursue a study of that.
M r . PATMAN. A l l right, sir; although I a m not asking that y o u take
a n y action. The only interest I have is that some people holding
these nontaxable certificates or investments have been raising sand
about tax exemptions of the other fellow, and it just doesn't seem
reasonable or consistent. I thought perhaps the holders of this taxexempt privilege would be clamoring to give it up so they would be
i n a more consistent position i n opposing others who have similar
privileges. I am not asking that anything be done about it.
The
object of m y questions was for information only i n view of prior
discussions.
M r . MULTER. M r . Chairman, m a y we have made a part of our
hearings pages 54 and 55 of the report of the B o a r d of Governors of
the Federal Reserve System for the year 1953, as released i n M a r c h
1954? I t is headed " B o a r d of Governors Income and Expenses."
T h e CHAIRMAN. Without objection, it w i l l be included i n the record.
(The data referred to above is as follows:)
BOARD

OP G O V E R N O R S — I N C O M E

AND

EXPENSES

The following table, showing the income and expenses of the Board for the
year 1953, has been prepared from the Board's accounts, which are maintained
on an accrual basis of accounting:
Operating fund, Jan. 1, 1953
$557, 962. 86
Income:
Assessments on Federal Reserve banks
$4, 099, 800. 00
Sale of Federal Reserve Bulletin
13, 446. 12
Sale of other publications
15, 707. 99
Miscellaneous
7, 234. 72 4, 136, 188. 83
Total
4, 694, 151. 69
Expenses:
Salaries
i 3, 033, 930. 61
Retirement contributions:
Regular
i 230, 875. 97
21, 906. 80
Special
14, 730. 22
Supplemental death benefit
223, 213. 11
Traveling expenses
26, 203. 67
Postage and expressage
60, 331. 76
Telephone and telegraph
156, 342. 05
Printing and binding
34, 037. 50
Stationery and supplies
44, 735. 14
Furniture and equipment, including rental. _
13, 543. 26
Books and subscriptions
37, 039. 80
Heat, light, and power
See footnote at end of table, p. 58.




58

FEDERAL.

RESERVE ACT AMENDMENTS

Expenses—Continued
Repairs and alterations (building and
grounds)
Repairs and maintenance (furniture and
equipment)
Medical service and supplies
Insurance
All other:
Surveys of Consumer Finances. $149, 960. 22
Other survey and research
projects
15, 350. 00
Cafeteria (net)
41,145. 27
Legal and consultant fees and
expenses
16, 804. 52
Borrowed Federal Reserve
bank personnel
2, 831. 37
Official dinners, receptions, etc_ 2 2, 960. 30
Miscellaneous
19, 044. 90
Operating fund, Dec. 31, 1953

$76, 972. 20
10, 750. 27
1, 516. 02
5, 290. 78

248, 096. 58 $4, 239, 515. 74
454, 635. 95

i Salaries and retirement contributions exclude approximately $81,500 and $8,240, respectively, which
were charged direct to cafeteria and leased-wire operations.
*Includes expenditures of $1,120.42, contributed by the Board of Governors for 2 luncheons and a dinner
at meetings of Treasury Department savings bond program volunteer workers.

In addition to the foregoing, the Board received the following reimbursements
in 1953 for expenditures which it makes on a reimbursable basis:
Printing Federal Reserve notes
$10, 721, 441. 80
Leased-wire service (telegraph)
232, 541. 97
Currency Redemption Division (Office of the Treasurer of the
United States)
200, 000. 00
Federal Reserve Issue and Redemption Division (Office of the
Comptroller of the Currency)
140, 300. 27
Leased telephone lines
9, 658. 79
Miscellaneous
10, 666. 38
The accounts of the Board for the year 1953 are being audited by the public
accounting firm of Arthur Andersen & Co., whose certificate was not available in
time for publication in this annual report. When this audit is completed, copies
of the certificate will be forwarded to the Banking and Currency Committees of
the Senate and of the House of Representatives, respectively.
M r . M U L T E R . M a y we also have made part of our record the report
of A r t h u r Anderson & Co., dated M a r c h 5, 1954?
M r . PATMAN. I t is not very long, M r . Chairman.
T h e CHAIRMAN. W h a t part of the report, M r . M u l t e r ?
M r . M U L T E R . I think we ought to have the whole report.
M r . PATMAN. I t is such a milestone i n the history of the Federal
Reserve System, being the first audit that has ever been filed b y a
Federal Reserve bank or the B o a r d of Governors, or the Federal
Reserve B o a r d during the 40 years, that I certainly think it deserves
to be included.
M r . M U L T E R . T h e last sentence on page 55 of the report reads:
When this audit is completed, copies of the certificate will be forwarded to the
Banking and Currency Committees of the Senate and House, respectively.
I think that report should be included i n the record to complete the
picture, along w i t h M r . M a r t i n ' s explanations of the discrepancies.
T h e CHAIRMAN. I assumed that the requirements had been met b y
transmittal to the B a n k i n g and Currency Committee. However, the
report m a y be inserted i n the record.
M r . M U L T E R . T h a n k you, sir.
T h e CHAIRMAN. I think perhaps, also, i n view of the fact that the
audit is going in, that we should also include the explanatory matter



59

FEDERAL.

RESERVE ACT

AMENDMENTS

offered by M r . Martin in connection with the discrepancies to which
you called attention.
M r . M U L T E R . I assumed that t h a t w o u l d be done.
T h e CHAIRMAN. W i t h o u t objection, t h a t w i l l be inserted i n

record when received.
(The material referred to is as follows:)

the

B O A R D OF G O V E R N O R S OF T H E F E D E R A L R E S E R V E S Y S T E M , F I N A N C I A L S T A T E M E N T S AS OF D E C E M B E R 31, 1953, T O G E T H E R W I T H A U D I T O R S ' C E R T I F I C A T E
ARTHUR

To the Board of Governors of the Federal

ANDERSEN

Washington,
Reserve System:

&

Co.,

D. C., March

5, 1954-

We have examined the balance sheet of the Board of Governors of the Federal
Reserve System as of December 31, 1953, and the related statement of income and
expenses for the year then ended. Our examination was made in accordance with
generally accepted auditing standards, and accordingly included such tests of the
accounting records and such other auditing procedures as we considered necessary
in the circumstances.
In our opinion, the accompanying balance sheet and statement of income and
expenses present fairly the financial position of the Board of Governors of the
Federal Reserve System as of December 31, 1953, and the results of its operations
for the year then ended, and were prepared in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN

Balance

sheet—Dec.

CO.

81, 1958

ASSETS

Cash in Federal Reserve Bank of Richmond
Petty cash
Miscellaneous receivables and travel advances
Stockroom and cafeteria inventories, at cost
Property and equipment:

$711, 921. 29
800. 00
24, 346. 58
15, 505. 39
Reserve for
depreciation

At cost

Land
Land improvements
Building
Furniture and equipment
Automobiles
Total
Total
LIABILITIES

$737, 180. 30
10, 939. 15
3, 794, 645. 24
451, 230. 89
15, 388. 36
,
5, 009, 383. 94
AND

FUND

$234, 507. 84
10, 091. 25
244, 599. 09

BALANCE

Accounts payable
Employee Federal income taxes withheld
Accrued payroll
.. _ _
Fund balance:
Property and equipment fund
$4, 764, 784. 85
Operating fund:
Balance Dec. 31, 1952
$444, 039. 33
Excess of expenses over
income, per accompanying statement
035, 890. 91
Balance Dec. 31, 1953
Total

408, 148. 42

4,764,784.85
5,517,358 11
$123, 622. 62
109, 942. 75
110, 859. 47

5, 172, 933. 27
5, 517, 358. 11

NOTE.—The Board provides for depreciation of furniture and equipment and
automobiles, but depreciation of the building has not been recognized in the
accounts inasmuch as the Board deems a provision for such depreciation as
unnecessary since funds for replacement of the building will be obtained, when
required, from outside sources.




60

FEDERAL.

RESERVE ACT AMENDMENTS

Statement of income and expenses for the year ended Dec. 81, 1953

Income:
Assessments against Federal Reserve banks
Bulletin sales
Other publications sales
Miscellaneous receipts
Total

Expenses (see exhibit):
Salaries
Petirement contributions
Traveling expenses
Postage and expressage
Telephone and telegraph, including leased wire operations
(net)
Printing and binding
Stationery and supplies
Equipment rental
Provision for depreciation
Books and subscriptions
Heat, light, and power
Repairs, maintenance, and alterations
Insurance
Consumer Finances Surveys
Corporate Financial Trends
Retail Credit Survey
Legal and consultant fees and expenses
Borrowed Federal Reserve bank personnel
Audit expenses applicable to Board's accounts
Loss from operation of cafeteria (net)
Other
Total
Excess of expenses over income

$4, 099, 800. 00
13, 446. 12
15, 707. 99
7, 234. 72
4, 136, 188. 83
2, 948, 850. 92
260, 842. 29
223, 213. 11
26, 203. 67
60, 331. 76
156, 342. 05
37, 933. 02
23, 103. 01
23, 598. 17
13, 543. 26
37, 039. 80
87, 722. 47
5, 290. 78
168, 413. 05
5, 000. 00
10, 000. 00
16, 804. 52
2, 831. 37
2, 693. 55
41, 145. 27
21, 177. 67
4, 172, 079. 74
35, 890. 91

Salaries and retirement contributions exclude approximately $85,000 and $8,500,
respectively, which were charged direct to cafeteria and leased wire operations.




1

j

GG




£

C
N
rh
cc
of

6,261.92

2,084.37

552.28

111.20

1,441.37

3,630.47

s
g

8
O
S

0

w

os

of

w
rH

si
C
O

i

S
3
O
S
os
3

I

i

i*

o

616,107.35 298,973.64

177.64

136.67

487.52

538.66

41,145.27
4, 796.19

2,693.55

3,016.53
5,154.65

126.77

10,286.74

10,295.49
22,995.01

1,150.34 .34,532.57
503.97 124,437.51

260,842.29
196.55
25,726.32

Office of
Defense
Loans

7.05

77,496.26

4.00
37,039.80

6,947.04

607.45 .
84.80

Office of
the Controller

180.70
220.55
164.39
445.13
6.50
101.08
40.25

290.05
91.33
54.77
84.79
.46
27.19

311,261.83 29,972.61 27,178.84

of

138.042.51

2,687.04

400.00

5,000.00
10,000.00

Building

o

4,172,079.74 297,591.29

536.19

2,062.98

15.85

188.27

481.60

144.33

204.98

7,931.20

8,058.23

199.44 1
95.88

1,017.43

4,430.08

1
80.00

00
<
M
551.11

S
3
4,164.40

U
5

59.25

§s

1,716.92

8
26.59

0
0

580.92

00® O
S
rHCC 0
0
O
WC ^
3O
t^cc" V

2,268.09

3,064.47
6,285.47

t>

113.35
915.43

SS
t^ *
0
•t N
f
O<
S
oo

£

1,624.58
501.12
(N c5 1d
1
OfoT i
H

1,953.71
1,649.02
3S8 8

£ '
<
N

168,413.05

General

Division of Administrative Services

$276,194.38 $88,661.22 $368,811.60 $187,069.39 $29,424.02
5,588.93
11.70

$165,175.37 $129,804.28 $6,793.67 $742, 727.19
SS
1

£8 s
s
oioo
£r
§85 8 8
<
N

j

Total

00
gg
odoi

2,867.16

a
u
KK
«5c4
S3
gf

509.97

a
s
S3
00
fe
cT
s

2, 501.18

«o
<X>
eo
§
Th
C
O
8

5,142.66

5
8
£
O
s
o

4,469.81
1,212.08

0
0

s

$2,948,850.92
Retirement contributions
260,842.29
223,213.11
Traveling expenses
26,203.67
Postage and expressage.
Telephone and teleeranh
60,331.76
Printing and binding..
156,342.05
Stationery and supnlies
37,933.02
23,103.01
Equipment rental
Provision for depreciation
23, 598.17
Books and subscriptions...
13.543.26
Heat, light, and power.
37,039.80
Repairs, maintenance,
and alterations
87,722.47
Insurance _
5,290.78
Consumer Finances
Survevs _
16&, £13.05
Corporate
Financial
Trends
5,000.00
Retail Credit Survey..
10,000.00
Legal and consultant
fees and expenses
16,804.52
Borrowed Federal Reserve Bank personnel .
2,831.37
Audit expenses applicable to Board's
accounts
2,693.55
Loss from operation of
f»afifitAria ftiAtl
41.145.27
21,177.67

•.
2
co
i

Division of Division of
Division of Division
Office of Research Interna- Division of
Of PerBank
the Solic- and Stasonnel
Examinational
Operaitor
Admintions
tistics
Finance
tions
istration

I

Legal
Division

£
**

Office of
the Secretary

1

Offices of
members
of the
Board

-r
«

Total

F E D E R A L RESERVE ACT A M E N D M E N T S

TI
J
e
£
o
ic
O
S
O
S
r
H

S
3
£

£

i>

O
S
0
0
0
01

£
£

os

£
g

)

i

62

FEDERAL

RESERVE

ACT

AMENDMENTS

T h e r e f o l l o w s , f o r t h e record, a r e c o n c i l i a t i o n of t h e s t a t e m e n t s of i n c o m e a n d
expenses of t h e B o a r d of G o v e r n o r s of t h e F e d e r a l Reserve S y s t e m f o r t h e y e a r
e n d e d D e c e m b e r 3 1 , 1 9 5 3 , as a p p e a r o n p a g e 5 4 o f t h e a n n u a l r e p o r t o f t h e
B o a r d f o r 1953 a n d as s h o w n i n t h e r e p o r t s u b m i t t e d b y A r t h u r A n d e r s e n & C o .
t r a n s m i t t e d t o t h e c o m m i t t e e b y C h a i r m a n M a r t i n ' s l e t t e r of A p r i l 28, 1953.
I n a d d i t i o n , t h e r e is a t t a c h e d a s t a t e m e n t c o n t a i n i n g e x p l a n a t i o n s f o r t h e
differences between these statements.
T h e s t a t e m e n t a p p e a r i n g i n t h e 1953 a n n u a l r e p o r t w a s p r e p a r e d f r o m t h e
B o a r d ' s books p r e l i m i n a r y t o t h e c o m p l e t i o n of t h e e x a m i n a t i o n m a d e of t h e
B o a r d ' s b o o k s f o r 1953 b y A r t h u r A n d e r s e n & Co.
D u r i n g t h e course of t h i s examination, A r t h u r Andersen & Co. suggested
o r a l l y t h a t t h e Board's f o r m of accounting be revised t o enable t h e m t o s u b m i t
a r e p o r t o n as n e a r l y a c o m m e r c i a l t y p e b a s i s as p o s s i b l e , i n c l u d i n g p r o v i s i o n f o r
depreciation.
This suggestion was reviewed and adopted.
The Board thereu p o n r e v i s e d i t s a c c o u n t i n g as o f D e c e m b e r 3 1 , 1953, so t h a t e x p e n s e s f o r a l l
account classifications were reconciled w i t h t h e amounts i n t h e certified statem e n t s s u b m i t t e d b y A r t h u r A n d e r s e n & Co.
I t s h o u l d b e p o i n t e d o u t t h a t t h e suggested changes w e r e n o t i n t e n d e d b y
A r t h u r A n d e r s e n & C o . as a c r i t i c i s m o f t h e m a n n e r i n w h i c h t h e B o a r d m a i n t a i n e d i t s a c c o u n t s o n t h e f o r m e r basis b u t r e p r e s e n t e d o n l y a c h a n g e i n t h e
f o r m of accounting, n a m e l y t o a f o r m w h i c h w o u l d better lend itself t o t h e cert i f i c a t i o n o f a c o m m e r c i a l - t y p e b a l a n c e sheet f o r t h e B o a r d .
Other t h a n t o
effect t h e revised f o r m of a c c o u n t i n g , A r t h u r Andersen & Co. suggested no m a t e r i a l
adjustments i n t h e Board's books.
Reconciliation
of the statements
of income and expenses for the year ended Dec. 31.,
1953, in the Board's
annual
report for 1953 and in the report submitted
by
Arthur
Andersen
& Co.
Differences

Statement
I n Board's
annual report
$4,136,188.83

Income

Submitted by
auditors
$4,136,188.83

3,033,930.61
267,512.99
223,213.11
26,203.67
60,331.76
156,342.05
34,037.50

2,948,850.92
260,842.29
223,213.11
26,203.67
60,331.76
156,342.05
37,933.02

Increase

=

Expenses:
Salaries
__
_
Retirement contributions
Traveling expenses
Postage and. expressage
Telephone and telegraph
Printing and binding
__
Stationery and supplies
Furniture and equipment (including
rental)
Equipment rental
Provision for depreciation
Books and subscriptions
Heat light, and power
Repairs maintenance, and alterations
M edical service and supplies
Insurance
- _All other:
Surveys of consumer finances
Other survey and research projects
Cafeteria (net)
Legal and consultant fees and expenses.
Borrowed Federal Reserve bank personnel
Official dinners receptions etc
Audit to expenses applicable to Board's
accounts
IVt iscellaneous
Other




13.543.26
37,039.80
87,722.47
1,516.02
5,290.78

23,103.01
23,598.17
13,543.26
37,039.80
87,722.47

=

=

=

$85,079.69
6,670.70

$3,895.52

1,966.04

1,516.02
5,290.78

149,960.22
15,350.00
41.145.27
16,804.52

168,413.05
15,000.00
41,145.27
16,804.52

2,831.37
2,960.30

18,452.83

2,831.37

2.960.30

2,693.55
19,044.90

350.00

2,693.55

21,177.67

21,177.67

19,044.90

4,239,515.74

Total expenses
Excess of expenses over income

44,735.14

=

Decrease

.

4,172,079.74

67,436.00

103,326.91

35,890.91

67,436.00

63

FEDERAL.

RESERVE ACT

AMENDMENTS

EXPLANATIONS OF DIFFERENCES B E T W E E N STATEMENTS APPEARING IN BOARD'S
ANNUAL REPORT AND IN REPORT SUBMITTED B Y ARTHUR ANDERSEN & CO.
Salaries

(decrease of $85,079.69)

This decrease is due to an adjustment covering the 1952 portion of the biweekly payroll for period December 21, 1952, through January 3, 1953. This
adjustment was necessary to place the Board's accounts on an accrual basis for
salaries, reducing salary expense in 1953 by that part of the payroll earned by the
employees of the Board during the calendar year 1952.
Retirement

contributions

{decrease of $6,670.70)

This expense is related to salary expense, and the adjustment was necessary
for the same reason as stated in "Salaries," above.
Stationery

and supplies

(•increase of $3,895.52)

This amount was transferred from "Furniture and equipment" expense in
order to exclude from that account all expense for items not to be depreciated.
Furniture

and equipment

(increase of $1,966.04)

A separate account was set up in the report submitted by the auditors for
equipment rental ($23,103.01) for the same reason as the adjustment in "Stationery and supplies," above, i. e., to eliminate from "Furniture and equipment"
the expense of items not to be depreciated.
The balance remaining in the amount shown in the Board's annual report
($21,632.13) was then eliminated from this account, $17,489.61 being capitalized
as items to be depreciated, $3,895.52 being transferred to "Stationery and supplies," as explained above, and $247 being adjusted out as it was a 1952 expense
under the accrual basis of accounting.
The amount of the depreciation provision for 1953 ($23,598.17) was then established as an expense in the report submitted by the auditors, thus completing
the step necessary to place furniture and equipment expense on a depreciation
basis.
Repairs,

maintenance,

and

alterations

These expenses are shown in two accounts in the Board's annual report, whereas
the report submitted by the auditors shows a combined figure. There is no difference in amount between them.
Medical

service and supplies

{decrease of

$1,516.02)

This expense was combined in "Other" expenses on the report submitted by the
auditors, with no change in amount.
Surveys of consumer finances {increase of

$18,452.88)

This increase results from adjustments at the beginning of the year and at the
end of the year to place this expense on an accrual basis. The amount shown in
the Board's annual report represents the actual cost of the 1953 survey whether
the cost was incurred in 1952 or 1953. The amount in the auditors' report includes the cost of the 1953 survey that was actually incurred in 1953 and the
amount of the 1954 survey that was incurred in 1953.
Other survey and research projects {decrease of $350)

The report submitted by the auditors transfers $350 of this expense to "Other,"
as they considered that part of the expense as not being strictly a survey or research project.
Official

dinners,

receptions,

etc. {decrease of

$2,960.30)

The report submitted by the auditors included this in "Other" without change
in amount.
Audit

expenses applicable

to Board's

accounts

{increase of

$2,698.55)

This amount was included in "Miscellaneous" in the Board's annual report.
The report submitted by the auditors set this expense up as a separate item
without change in amount.
Miscellaneous

{decrease of $19,044-90)

This appears in the Board's annual report statement. It is also included
in the report submitted by the auditors but under different headings. Of the
total, $2,693.55 was transferred to "Audit expenses applicable to the Board's
accounts" (see above), and $16,351.35 was included in "Other" without change
in amount. These changes were made as a matter of preference, only.




64

FEDERAL.

Other (iincrease of

RESERVE ACT AMENDMENTS

$21,177.67)

This appears in the report submitted by the auditors, and results from the
retitling, without changes in amounts, of accounts appearing in the Board's
annual report, as follows:
Medical service and supplies
Other survey and research projects
Official dinners, receptions, etc
Miscellaneous

$1, 516. 02
350. 00
2, 960. 30
16, 351. 35

Total

21, 177. 67
PAYMENTS

OF

INTEREST

ON FEDERAL

RESERVE

NOTES

The Board's press statement of April 23, 1947, announced adoption of a policy
under which the Reserve banks would pay approximately 90 percent of their net
earnings after dividends to the Treasury. The question has been raised as to
why the interest payment for the year 1953 was not 90 percent of net earnings
after dividends. (It was 89.465 percent.)
The whole tenor of the Board's statement of 1947 was that the interest payment was in lieu of payment of a franchise tax. The franchise-tax provision of
the law, which was repealed in 1933, read as follows:
"After the aforesaid dividend claims have been fully met, the net earnings
shall be paid to the United States as a franchise tax except that the whole of such
net earnings * * * shall be paid into a surplus fund until it shall amount to
100 percent of the subscribed capital stock of such bank, and that thereafter
10 percent of such net earnings shall be paid into the surplus."
The surplus of two of the Federal Reserve banks, Dallas and San Francisco,
was below their subscribed capital stock at the end of the year 1953. Accordingly,
in computing the interest payments to be made by these 2 banks, amounts
sufficient to bring their surplus up to 100 percent of subscribed capital were
deducted. A summary of the interest payments for 1953 follows:
Net earnings after dividends
$382, 905, 824. 95
Deduct amounts necessary to bring surplus to 100 percent of
subscribed capital at—
Dallas...
$1, 177, 144. 51
San Francisco
1, 095, 700. 02
2, 272, 844. 53
Amount subject to 90-percent payments
90 percent of this total would be
Interest payments made totaled

380, 632, 980. 42
342, 569, 682. 38
342, 567, 984. 63

The difference of about $1,700 between payments made and exactly 90 percent
of net earnings after dividends and after allowing for building up the surplus
of the Federal Reserve Banks of Dallas and San Francisco arises from the fact
that the interest rate established is carried 4 places beyond the decimal point.
This interest rate is then applied to the average daily amount of Federal Reserve
notes outstanding in excess of gold certificates pledged with the Federal Reserve
agent as collateral.
T h e CHAIRMAN. A r e there further questions of M r . M a r t i n ?
I f not, t h a n k y o u v e r y much, M r . M a r t i n .
W e w i l l n o w c a l l D r . Burgess, w h o has a brief statement.
Y o u m a y proceed w i t h your statement, w i t h o u t interruption, a n d
t h e members m a y h a v e some questions at the conclusion of y o u r
statement.
S T A T E M E N T O F W. R A N D O L P H BURGESS, D E P U T Y T O T H E
S E C R E T A R Y OF T H E

TREASURY

M r . B U R G E S S . I believe copies of the statement have been distributed.
O n behalf of Secretary H u m p h r e y , I a m glad to appear before y o u
t o d a y to present the views of the T r e a s u r y D e p a r t m e n t i n support of
H . R . 8729. T h i s b i l l w o u l d extend u n t i i J u n e 30, 1956, the present




65

FEDERAL.

RESERVE

ACT

AMENDMENTS

authority of the Federal Reserve banks to purchase securities directly
from the Treasury in amounts not to exceed $5 billion outstanding
at any one time.
Secretary Humphrey requested the enactment of this bill in his
letter to the Speaker of the House of Representatives on March 9,
1954. The bill has been endorsed by the Board of Governors of the
Federal Reserve System.
T o give a word of history about this particular piece of legislation,
prior to 1935, Federal Reserve banks could purchase Government
obligations either in the market or directly from the Treasury. From
1935 until 1942, however, this authority was restricted to open-market
transactions under the Banking Act of 1935. I n 1942 the authority
of the Federal Reserve banks to purchase securities directly from the
Treasury was restored, but a limit of $5 billion was placed on the
amount outstanding at any one time. The $5 billion authority was
granted initially only through 1944, but the Congress has extended
it from time to time so as to provide continuous direct borrowing
authority ever since. The present authority was granted for 2
years and expires June 30, 1954.
The purpose of this direct borrowing authority is to help the
Treasury and the Federal Reserve System work together in minimizing
the disturbing effects on the economy of short-run peaks in Treasury
cash receipts and disbursements, particularly around the time of
quarterly income-tax payments. These short-run movements of
funds are large, and precise estimates of their day-to-day patterns
are often difficult. During the last 2 weeks of March, for example,
Treasury deposits totaled $10 billion—a figure larger than the entire
Federal budget for the full year 1940. Sound financial management
requires that such a tremendous flow of funds be handled as smoothly
as possible. This direct borrowing authority represents a useful
fiscal mechanism for the Treasury and the Federal Reserve and its
use has avoided unnecessary financial strains on the money market
on a number of occasions.
Treasury borrowing from the Federal Reserve banks under this
authority is used infrequently and then only for short periods. During the past 12 months, for example, direct borrowing has been confined to three periods. Outstanding borrowing exceeded $1 billion
on only 1 day and the securities were retired just as soon as tax receipts came in. A table showing the recent use of the direct borrowing authority is attached.
The Treasury and the Federal Reserve have never used the direct
borrowing authority on any other basis than to meet temporary requirements of this nature, and have no intention of doing so. While
it has never been necessary to use as much as $5 billion, we recommend continuation of the present $5 billion authority to give the
Federal Reserve and the Treasury sufficient flexibility to cover
emergency situations as they arise.
Thank you, Mr. Chairman.
The CHAIRMAN. I assume, M r . Burgess, that you desire to include
in the record the appendix with respect to direct borrowing from
Federal Reserve banks that you appended as a part of your statement
and, without objection, it may be inserted in the record.
M r . BURGESS. We thought it might be helpful, M r . Chairman.
(The material referred to is as follows:)



66

FEDERAL RESERVE ACT
Direct

borrowing from Federal

AMENDMENTS
Reserve banks

[Certificates of indebtedness special series bearing interest at the rate of H of 1 percent per annum]
[In millions]
Date
T o t a l from
1942-51
1952—January 22
January 23
January 24
March 17
March 18
March 19
March 20
March 21
March 22 1
March 23
March 24
March 25
March 26
March 27
March 28
June 16
June 17
June 18
June 19
June 20
June 21 1
June 22
June 23
June 24
June 25
September 15__
September 16. _
September 17
September 18..
September 19
September 20
September 21 K
September 22
September 23
1953—March 18
March 19-March 20
March 21 1
March 22
M a r n h OQ

Amount Amount
borrowed retired

$5,388
55
811
27

109
472
64

103
154
21

$5,388
33
22
369
131

149
19
156
123
123
164
18
61
96
27
47
36
108

110
85
144

Balance

128
6
6

$55
22
811
442
311
338
338
338
338
189
170
14
123
472
536
413
249
231
170
170
74
47
103
257
221
242
134
134
134
6
no
104
189
189
189
333

Date
1953—March 24
March 25
March 26
March 27
June 5
June 6_ _
June 7 1
June 8
June 9
June 10.
June 11.
June 12
June 13.
June 141
June 15
June 16
June 17
June 18
June 19 _
June 20
June 211
June 22
June 23
June 24
June 25
1954—January 14
January 15
January 16
January 171
January 18
January 19
January 20
January 21
January 22
January 23 1
January 24
January 25
January 26
January 27
March 15
March 16
March 17
Total to date-

Amount Amount
borrowed retired
$147
123
14
49
$196
178
117
148
493
173
628

22
147
154
101

134
56
10,090

40
93

349
459

84
300
312
296

lol
17
23
80
200
3
190

Balance
$186
63
49
196
196
196
374
491
451
358
506
506
506
999
1,172
823
364
992
992
992
908
608
296
22
169
169
169
323
424
323
306
283
283
283
203
3
134
190

10,090

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—Thesefiguresare 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 amount as the
ease may be. The reason for stating on a net basis is to avoid a padding of thefiguresdue to this method of
handling the account.
i Sunday.

T h e CHAIRMAN. Are there questions?
M r . MULTER. M r . Chairman.
T h e CHAIRMAN. M r . M u l t e r .
M r . MULTER. M r . Burgess, have you had an o p p o r t u n i t y to review
the w a y this a u t h o r i t y was used i n the years prior to your coming
w i t h the Treasury?
M r . BURGESS. I t j u s t happens, M r . Representative, t h a t I was 18
years as an operating officer of the Federal Reserve bank i n N e w
Y o r k , and d u r i n g the years f r o m 1930 to 1936 I was the manager of
the system open m a r k e t account, so that this was m y particular
responsibility. So I have i t very v i v i d l y i n mind.
M r . MULTER. IS i t safe to say that i n the time t h a t you have been
w i t h the Treasury this a u t h o r i t y has been used approximately and
generally speaking the same as i t had been before?



FEDERAL RESERVE A C T
M r . BURGESS.
Mr. MULTER.

AMENDMENTS

67

Yes.

And I am sure you wouldn't be here urging i t if you
didn't think this was an authority that should be granted?
M r . BURGESS. That is right.
M r . M U L T E R . I S there any reason w h y we should continue doing i t
on a temporary basis rather than writing i t into the law permanently^
M r . BURGESS. I wouldn't feel very strongly about that. The only
thing is that an authority of this sort gives an opportunity for us to
come before this committee, which I always enjoy, M r . Multer, and
to review our operations and tell you what we are trying to do.
This kind of authority could be misused. This is the kind of thing
that central banks in other countries have gotten into trouble over,
and I think i t is a good thing to review i t once in a while, that is all.
M r . M U L T E R . Let me ask you the question that I am sure M r .
Patman will ask if I don't: The banks today, pursuant to an expressed direction of the Congress, are no longer paying interest on
demand deposits?
M r . BURGESS. That is correct.
M r . M U L T E R . The United States Government has very large
demand deposits with all the banks?
M r . BURGESS. Well, not with all, but w i t h most of them; that is
right.
M r . M U L T E R . W i t h most of them?
M r . BURGESS. That is right.
M r . M U L T E R . I trust you won't think i t is a snide remark when I
say that during the Democratic administration funds were left on
deposit both in Democratic-controlled and Republican-controlled
banks, and when the administration changed, in some instances these
funds were taken from Democratic-controlled banks and placed i n
Republican-controlled banks.
M r . BURGESS. M r . Congressman, to the best of m y knowledge and
belief, that is not true.
M r . M U L T E R . I f I gave you some specific examples will you look
into i t and find out why i t was done?
M r . BURGESS. I will be very happy to.
M r . M U L T E R . I don't have any instances i n New Y o r k C i t y , but
I do have as to the Middle West. I know you wouldn't stand for
that, nor do I think, would any other high official of the Department
of the Treasury.
M r . BURGESS. That is correct.
M r . M U L T E R . B u t I don't think our Government deposits, or any
other deposits, should be handled on that basis.
M r . BURGESS. M a y I explain how these deposits are created and
withdrawn? They are created as a result of actions that the banks
take, either in collecting taxes from their customers, in behalf of the
Government, and the Government leaves them on deposit on a formula, on a regular mechanism, or when the bank purchases Government securities, either for itself or on behalf of its customers, those
deposits are left in. They are then withdrawn ratably, on a percentage
basis, so that there can be no discrimination in the character of
withdrawals.
Now, there are certain other deposits that are given banks, general
depositaries, on the basis of special service that they render, either as an
operating facility for an A r m y camp or something of that sort, where



68

FEDERAL.

R E S E R V E ACT

AMENDMENTS

it is a matter of negotiation as to how much deposit you leave with
them as compensation.
But if you have cases, M r . Congressman, we would be very happy
to look into them and give you a report on them.
M r . MULTER. I know that some banks have lost their Government
deposits and others have all of them. I know there is nothing wrong
with the financial condition of the banks from which the funds were
taken.
M r . BURGESS. There must be some explanation; if you will give me
the case I will look into it.
M r . MULTER. Coming back to the question of interest on demand
deposits: These deposits are used in large part by the banks to purchase
Government bonds from time to time, are they not?
M r . BURGESS. About not quite half of them arise in that manner.
That is, they subscribe to Government bonds, and then they give the
Government a deposit credit on their books. That is, the liabilities
go up here and the assets up here.
M r . M U L T E R . SO while at the same time the deposits they have in
Government funds pay no interest, they are getting interest on
Government bonds which they purchase in effect with those deposits?
M r . BURGESS. M y only qualification of that is the word "bonds."
These all have to be short term, because these deposits turn over
very rapidly. They don't hold them more than 10 days to a month,
so they cannot employ them in anything except pretty short securities
unless they sell them again as soon as the funds are drawn.
M r . MULTER. What is the average daily balance of the United
States Government in banks?
M r . BURGESS. Well, I can give it to you for 2 years, M r . Congressman.
In the calendar year 1953 these balances averaged $3,839 million.
In 1952, the figure was $4,268 million. That is, we have been operating
with rather smaller balances than was true with the previous administration.
M r . M U L T E R . D O you have any opinion as to whether or not we
ought to take out of the law that prohibition against interest on
demand deposits?
M r . BURGESS. M y own personal view is that I would leave it as it
is. Of course, it applies to all demand deposits across the board.
M r . MULTER. That is right.
M r . BURGESS. The reason the Congress took that out was following
the great mass of bank failures in 1933, and before that, and the Congress felt that banks were competing so much for deposits that they
were paying higher rates of interest than they could afford, so they
didn't accumulate enough surplus and capital to protect them when
the time of pressure came, and so some of the bank failures were
probably due to that fact, and they felt also, I think, that if the banks
didn't pay interest on demand deposits that the borrower would get
his money a little cheaper, and I think that is probably true.
M r . MULTER. Since we enacted the law we have set up the F D I C ,
and although I was in the minority, the majority of this committee
and the majority of the Congress cut down the assessments for F D I C
because they felt the reserves were adequate.
W i t h that protection, don't you think we can go back to letting the
banks compete freely as to whether they will or will not pay interest,
and, if so, how much?



69

FEDERAL.

RESERVE

ACT

AMENDMENTS

M r . BURGESS. Well, one could question whether the reserves are
adequate. The F D I C has about a billion and a half dollars of funds.
The capital position of the banks of the country, while it is adequate
at present, is not as large as it used to be in relation to their deposits.
I think the average for the country as a whole is around 8 percent
of the deposits. That isn't a very big capital ratio.
M r . MULTER. Would you say that we ought to go back to what the
assessment was originally in F D I C instead of continuing at the lower
rate?
M r . B U R G E S S . Y O U are up against this problem there: If you increase the assessment and take more money away from the banks
that way, you leave them less money to accumulate capital. So
where you put it in one cushion you take it out of another.
M y own belief is that the primary cushion for the protection of
banks is their own capital funds, and that depends on their earnings.
M r . M U L T E R . A S a matter of fact, since we cut the assessment,
instead of that going into the capital funds most of the banks have
been paying it out as dividends?
M r . B U R G E S S . I think it would be very interesting to put the figures
in the record on that because my recollection is different from yours.
M r . M U L T E R . I would like to have them.
M r . BURGESS. The average bank is paying out something like 50
percent of its earnings, and, of course, that works two ways, too: A s
the country grows, banking facilities to serve the country have to
grow, so bank capital has to grow along with it.
Now, some of that growth comes from retention of earnings. Other
capital has to come from the sale of your capital stock in the market.
Now, if you don't pay adequate dividends you cannot sell more stock,
and, as a matter of fact, banks have had a good deal of difficulty in
selling the amount of stock in the market that they would like to to
build up their capital position. So there again you are between the
two horns of a dilemma.
M r . MULTER. I think there is one place where we certainly ought
to lean to the conservative side.
M r . B U R G E S S . I agree.
M r . MULTER. It is not the same as the average business enterprise.
This is a quasi-public, if not actually public, enterprise, with a very
decided public interest.
M r . B U R G E S S . I think the Comptroller of the Currency and the
Federal Reserve System and the State bank examiners criticize a
bank to their directors, if they pay out too much of their earnings in
dividends, so the public does have some check on that.
M r . MULTER. Thank you, M r . Burgess.
The CHAIRMAN. Are there further questions?
M r . PATMAN. Mr. Chairman, I wonder if you want to continue
now? It will take me 30 minutes or an hour.
The CHAIRMAN. Then I think we had better recess until next week.
M r . PATMAN. Can't we work this afternoon or tomorrow?
The CHAIRMAN. Why don't we see how far we can go, M r . Patman?
M r . OAKMAN. Mr. Patman, would you yield for just one question?
M r . PATMAN. Certainly.

M r . OAKMAN. Are not the banks now handling the sale and redemption of all savings bonds?
M r . BURGESS.




Yes.

FEDERAL. RESERVE

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ACT

AMENDMENTS

M r . OAKMAN. And are the banks allowed a fee or charge for this
service?
M r . BURGESS. M r . Oakman, I am glad you raised that question.
The banks do a great deal of service.
M r . O A K M A N . I know they do.
M r . BURGESS. For these deposits. They collect income-tax checks,
they do sell savings bonds, they don't get any pay for selling savings
bonds, they do get a fee for redeeming them, with a maximum of 15
cents a bond, and it goes down as the quantity increases. But they
do an enormous amount of service for the Treasury and for other
Government agencies. It amounts to a very substantial amount of
work.
M r . OAKMAN. They get nothing for the sale?
M r . BURGESS. That is right.
M r . OAKMAN. But when they redeem them they get a maximum
of 15 cents per bond, and that drops down?
M r . BURGESS. That is right.
M r . OAKMAN. These savings bonds now total about $36 billion in
the hands of the public?
M r . BURGESS. Yes, the series E .

M r . OAKMAN. Aren't they held by close to 36 million different
people?
M r . B U R G E S S . I think 4 0 million would be a better figure.
M r , OAKMAN. A n d the sale of bonds is now exceeding redemption
by a considerable amount?
M r . BURGESS. That is correct.
M r . OAKMAN. Thank you, M r . Patman.
M r . PATMAN. If the amount received by the banks is not sufficient
I hope it is raised because I certainly want to see the banks properly
and justly compensated for every service they render.
I believe in the private banking system, and I want to see them
make a profit, because without a profit they cannot continue very
long.
Now, you mentioned capital of the banking system a while ago,
Dr. Burgess. Isn't it a fact that most of the capital comes from
retained earnings?
M r . BURGESS. That is true.
M r . PATMAN. A n d over a long period of time that has been true,
hasn't it?
M r . BURGESS. Yes; although the amount obtained from the sale
of stock has been a substantial element in it.
M r . PATMAN. Would it be asking too much of you to give us a
statement, say, over a period of 10 years, showing the additional new
money that has been put into the private banking system?
M r . B U R G E S S . I think we can do that. We can make a good estimate, anyway.
M r . P A T M A N . A S distinguished from retained earnings?
M r . BURGESS.

Yes.

(The information requested above is as follows:)




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N E W C A S H C A P I T A L B R O U G H T I N T O T H E C O M M E R C I A L B A N K I N G S Y S T E M S OF T H E
U N I T E D STATES O V E R T H E T E N Y E A R P E R I O D E N D I N G D E C E M B E R 31, 1953

During the 10-year period ending December 31, 1953, new cash capital derived
from the sale of new issues of capital stock was brought into the commercial
banking systems of the United States in the amount of $1.2 billion. This amount
is exclusive of new capital stock issues sold by State chartered banks which were
not members of either the Federal Reserve System of the Federal Deposit Insurance Corporation. Such banks, commonly referred to as nonmember, noninsured
State banks, are relatively few in number (577), had total resources as of December 31, 1953, of only $2.7 billion, and it is believed that the amount of new cash
capital raised by them over the past 10 years may safely be considered as negligible.
The new cash capital coming into the commercial banking system from the sale
of new stock over the 10-year period under review amounts to about 20 percent
of the total increase in capital accounts. The remainder of the increase, $4.6
billion, represents retained earnings.
The following schedules provide data on the amounts of new cash capital raised
in each of the past 10 years by types of banks, and reveal whether the shares were
sold by operating banks to augment existing capital structures or by newly
organized banks to provide their initial capital structures. The figures include
the premiums in excess of par value, i. e., the full price at which the shares were
marketed.
National

banks

Number of national banks in the national banking system
Total resources of all national banks as of Dec. 31, 1953

4, 864
$110,100,000,000

[Amounts i n thousands of dollars]

Year

Capital stock Capital stock
sold by
sold by newly
operating
organized
banks
banks

Total

80,458
68,677
51,469
18,974
27,628
19,163

1,364
3,542
5,112
3,703
2,647
2,782

81,822
72,219
56,581
22,677
30,275
21,945

State chartered

1944
1945
1946
1947
1948
1949

banks,

members

Year

Capital stock Capital stock
sold by
sold b y newly
operating
organized
banks
banks

Total

110,519
153,373
93,112
80,776

Total

of the Federal

2,870
2,310
3,372
6,580

113,389
155,683
96,484
87,356

704,149

1950
1951
1952
1953

34,282

738,431

Reserve

System

Number of State chartered member banks
1, 887
Total resources of all State chartered member banks as of Dec.
31, 1953
$54,200,000,000
[Amounts i n thousands of dollars]

Year

1944
1945
1946
1947
1948
1949

Capital stock Capital stock
sold by
sold by newly
operating
organized
banks
banks
10,164
50,697
15,452
8,868
16,163
17,858




765
2,010
1,423
1,215
1,580
2,785

Total

10,929
52,707
16,875
10,083
17,743
20,643

Year

1950
3951.
1952
195 3
Total

Capital stock Capital stock
sold b y newly
sold by
organized
operating
banks
banks

Total

22,115
31,847
44,001
43,299

1,618
200
772
4,555

23,733
32,047
44,773
47,854

260,464

16,923

277,387

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banks

RESERVE ACT

AMENDMENTS

not members of the Federal
Federal Deposit Insurance

Reserve System
Corporation

but members of the

Number of nonmember insured State banks
6, 685
Total resources df all nonmember insured State banks as of
Dec. 31, 1953
$27, 000, 000, 000
[Amounts In thousands of dollars]

Year

Capital stock Capital stock
sold by
sold by newly
operating
organized
banks
banks

1944
1945
1946
1947
1948
1949.

$6,433
16,929
16,649
12,792
10,254
9,971

$2,140
5,019
8,301
6,717
4,712
6,701

Total

$8,573
21,948
24,950
19,509
14,966
16,672

Capital stock Capital stock
sold by
sold by newly
operating
organized
banks
banks

Year

1950
1951
1952
1953

Total

$8,788
10,503
14,709
18,382

Total.—

$6,517
7,501
7,314
10,887

$15,256
18,004
22,02$
29,269

125,360

65,809

191,169

Recapitulation
[Figures in thousands]

Type of bank

National banks
State member banks
State nonmember insured banks
Total.—

Capital sold
by operating banks

Capital sold
by newly
organized
banks

$704,149
260,464
125,360

$34,282
16,923
65,809

$738,431
277,387
191,169

1,089,973

117,014

1,206,987

Total

M r . PATMAN. Mention was made a while ago of the fact that one of
the reasons that the interest rate was taken off of demand deposits
was because of the cutthroat competition existing between banks at
the time, and I well recall that. But wasn't the main reason for changing the law to compensate the banks for the premium they would have
to pay on insuring bank deposits? Wasn't that a consideration at the
time? Y o u know it was argued then that the banks were going into
a new program, and the banks were going to have to pay premiums for
the insurance of their deposits. As a part compensation for the banks
in doing that we relieved them of paying interest on demand deposits.
I n other words, the two arguments were used. One was cutthroat
competition, which is not a good one, because of all the people who
should not complain about cutthroat competition it should be the
banks.
Y o u agree to that, don't you?
M r . B U R G E S S . N O , I don't.
M r . PATMAN. They can solve that.
M r . BURGESS. Of course, I am all for competition.
M r . PATMAN. Yes, but now you are in a position to make it soft for
the bankers, and you say they are not capable of competing.
M r . BURGESS. Well, here is the thing they are competing on now:
The banks are now competing, the banks I know, to get loans and to
make loans at favorable rates. And that is a pretty good thing for
them to be competing on.
M r . PATMAN. That is principally in large amounts, isn't it?
M r . B U R G E S S . N O . There are undoubtedly some banks of the sort
you mentioned to M r . Martin, who sit back and don't go after loans,.



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but most of the fellows I know are competing as hard as they can to get
business.
M r . MERRILL. Will you yield?
M r . P A T M A N . I yield.
M r . MERRILL. Isn't it true that small-loan departments of banks
and consumer credit departments in many banks are two of the
fastest growing branches of the banking industry?
M r . BURGESS. That is correct.
M r . MERRILL. And they are definitely small loans to small people;
right?
M r . BURGESS. That is correct. The bank I was associated with
was one of the first to do a good big job on that. But that has grown
very rapidly, so that I would say that certainly two-thirds of the
banks of the country have these small-loan departments.
M r . MERRILL. And the competition is very keen there, isn't it?
M r . BURGESS. Very keen.
M r . MERRILL. In other words, the banks are fighting hard to
serve the little people on these small loans, as I understand it?
M r . BURGESS. That is correct.
M r . PATMAN. That is a very fine, healthy thing. I am glad to see
them do that.
Of course, in the aggregate I don't think it runs into too much
money. But, Dr. Burgess I am anxious to get your answer to this
question: Isn't it a fact that in changing the law, making it unlawful
for banks to pay interest on demand deposits, that one of the principal
considerations for that was that the banks were taking on a new obligation with the F D I C , which would require them to pay a premium
charge each year to protect those deposits, and for that reason they
shouldn't be required to pay interest on deposits?
M r . BURGESS. Well, now, you are asking me to draw on my somewhat distant memory, on the motives of the distinguished Senator
Carter Glass.
Frankly, I would have to go back and look over those records before
I could answer that question truthfully.
M r . P A T M A N . I think you will find that that was the principal consideration.
Now, if that is true, since the banks have gotten their assessments
reduced to practically nothing now, there would be some reason why
you should restore the payment of interest on demand deposits, which
I am not advocating at this time. I am not sure it would be the right
thing to do. But the reason that prompted it, I think, has been removed, the principal reason.
M r . BURGESS. Well, I would have some question about that.
M r . PATMAN. I have read a lot of your speeches, Dr. Burgess, and
you have made some mighty fine speeches.
M r . BURGESS. Thank you very much.
M r . PATMAN. In one speech you made in 1952, towards the end of
the year, you referred to the fact that—
The usefulness of the bank of issue is exactly i n doing unpopular things at the
right time. The wise Government knows this and leaves these unpopular jobs
to the bank of issue.

Y o u remember that statement, I assume?
M r . BURGESS.




Yes.

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M r . P A T M A N . Y O U made it in more speeches than one, I notice,
and it is a fine statement.
Y o u also stated, in this particular speech:
The Reserve System was created because the experience of other countries had
shown that the management of money carried huge power for good or evil and
was not something to be left wholly i n private hands or made a football of politics.

Now, you were really placed in charge of the monetary policy of
this administration, were you not, Mr. Burgess?
M r . B U R G E S S . N O , sir.

M r . PATMAN. Isn't it a fact that you came to Washington in the
latter part of 1952 and conferred with a lot of people around here
and told them you would be the principal one in charge of monetary
policy?
M r . B U R G E S S . N O , sir; I took a position as adviser to the Secretary
of the Treasury on certain rather specific monetary matters.
M r . PATMAN. Well, you did come to Washington, though, in
December, and yoxj caused an announcement to be made here on
December 19, I believe, that the present Federal Reserve Board, of
course, would stay on, and M r . Martin would remain on as Chairman?
M r . B U R G E S S . I am sure, sir, I never made any such statement.
M r . PATMAN. Well, the President announced it but didn't you
authorize or request it?
M r . B U R G E S S . N O , sir.

M r . PATMAN. I shouldn't use the word "authorize" with the
President, but I mean it was on your recommendation that that was
done?
M r . B U R G E S S . N O , sir.

M r . PATMAN. But, anyway, you did confer with M r . Martin and
you conferred with him at different times and over a long period of
years, I assume, because I assume from your connection and his
that you must have been thrown together frequently?
M r . B U R G E S S . I am an old friend of M r . Martin.
M r . PATMAN. What is your position now in the Treasury? What
is your position with reference to the Secretary of the Treasury?
M r . B U R G E S S . I am Deputy to the Secretary, and I do the jobs
that he assigns to me.
M r . PATMAN. H e wrote me a letter and told me what your duties
were.
M r . BURGESS. Y e s .
M r . P A T M A N . Y O U have

the same duties that he has, the way he
outlined it. So you must be right up at the top of the Treasury
totem pole.
M r . BURGESS. Well, I have a chart of the organization, if you would
like to have it in the record.
M r . PATMAN. I n other words, it is the Secretary and then you and
M r . Folsom are on an equal rank, I believe?
M r . BURGESS. More or less. We don't go in for
M r . P A T M A N . Y O U don't go in for rank?
M r . BURGESS. F o r protocol.

The CHAIRMAN. Just a minute. Your question assumes M r . Burgess says that he is on equal rank with the Secretary and M r . Folsom
and he and the Secretary are of equal rank. That is according to
your question.




75

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M r . P A T M A N . N O ; I didn't put it that way. It is easily explained.
He referred to a chart. And I happen to know about the chart.
The CHAIRMAN. Well, I wanted it explained before it went into the
record in that wav.
M r . PATMAN. Anyway, when he referred to the chart, I read the
chart, and the chart put the Secretary first, and M r . Burgess and
M r . Folsom next, over certain departments, and I was referring to
that.
Now, last year you did confer closely with the Federal Reserve on
monetary policies being put into effect?
M r . BURGESS. That is correct.
M r . PATMAN. And the Federal Reserve carried out the policies that
you recommended?
M r . B U R G E S S . N o , sir.

M r . PATMAN. In what respect did they fail?
M r . B U R G E S S . N O , sir. We didn't recommend a policy to the Federal Reserve System. That is their job. Our job is debt management, and we were very careful to keep within our respective prerogatives.
M r . PATMAN. D i d they fail to do things that met with your approval
in the first part of 1953?
M r . B U R G E S S . I was in general sympathy with what they did.
M r . PATMAN. The Open Market Committee, in particular?
M r . B U R G E S S . I wouldn't say in particular. I would say the whole
system.
M r . PATMAN. The whole system?
M r . BURGESS. They were carrying forward, M r . Congressman, exactly the same policies they carried forward in 1952, on credit restraint.
I n fact, they had begun to exercise more vigorous credit restraint in
1951, they carried that forward into 1952 and into 1953.
M r . PATMAN. In your statements you have often said, too, and I
refer back to the statements you made that the unpopular thing should
be done by somebody else. Y o u referred to that several times, and
you also referred in some of these speeches to the fact that every one
of these members of the Board were appointed by President Truman,
in most instances; you say the preceding administration, and M r .
Martin, the present Chairman, was appointed by M r . Truman.
D i d you have in mind these other statements that you were making
that the unpopular thing should be done by the other crowd?
M r . BURGESS. N o t specifically; no, sir.

M r . PATMAN. But M r . Martin, suppose he had changed his policy
and was not in favor of going forward on this hard-money policy, would
you have recommended his continuance as Chairman?
M r . B U R G E S S . I don't think that would have been within my prerogative.
M r . PATMAN. I think it would, Dr. Burgess. I think that you
would have been called upon. If you knew that he had changed his
policy and was not going to continue the policy of letting interest
rates go up and the bonds down, would you have recommended his
continuation as Chairman of the Board?
M r . B U R G E S S . I think that is a very hypothetical question.
M r . PATMAN. A l l right, but they carried forward the same policies,
you said. The truth is the policies started back in 1947; isn't that




76

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right, when they broke the short-term rate? The short-term rate
was three-eighths of 1 percent over a long period of time?
M r . BURGESS. That is right.
M r . PATMAN. The first break on that was in early 1947, wasn't it?
M r . BURGESS. That is right.
M r . PATMAN. A t that time you organized that Federal-debt-policy
committee, didn't you?
M r . BURGESS. Well, I have forgotten exactly the time.
M r . P A T M A N . I think it was. I wondered if you had anything to
do with them breaking that rate? Were you in favor of it?
M r . B U R G E S S . I don't think I had the slightest thing to do with it.
M r . PATMAN. Were you in favor of them making the rate higher?
M r . B U R G E S S . I think it was a wise thing to do.
M r . P A T M A N . T O make it higher?
M r . B U R G E S S . N O W , wait, to begin a process of some restraint on
credit expansion. That was a time of great inflation.
M r . PATMAN. I n other words, that permitted the interest rates to
go up on short term, but didn't interfere with long term at that time?
M r . BURGESS. That wasn't the point of it. The point was that the
value of money in the United States was cut in half, from before the
war until last year, and a lot of that took place after the war, a postwar
inflation, and any central bank that didn't do something about that
was derelict in its duty.
M r . PATMAN. Anyway, they commenced a policy in 1947 and in
1948 I believe they did some more, and M r . Eccles said in his book
that he was promised by M r . Truman that he would be reappointed
Chairman of the Board of Governors, and he wondered why he was
not appointed Chairman of the Board of Governors. D i d you know,
Dr. Burgess, that the reason why he wasn't was because he had violated
what M r . Truman felt to be las understanding and promise that he
would hold that rate?
M r . B U R G E S S . I am sure I knew nothing about that.
M r . P A T M A N . Y O U didn't know that?
M r . BURGESS.

NO.

M r . PATMAN. Well, I didn't get it from M r . Truman either, and I
didn't get it from M r . Eccles. But putting 2 and 2 together and
adding them all up I think the conclusion is inescapable that when
M r . Eccles permitted that rate to go up against M r . Truman's instructions, why, naturally, he didn't feel obligated to reappoint him Chairman of the Board and he didn't, when the question came up in 1948.
B u t you do know that M r . Truman opposed the so-called accord in
the early part of 1951, do you not, Dr. Burgess?
M r . B U R G E S S . N O , I don't know that.
M r . P A T M A N . Y O U don't know that?
M r . BURGESS. N O .
M r . P A T M A N . I thought

the statements that he made would
indicate that.
M r . BURGESS. Well, I know that before that time there was a
meeting of the Federal Reserve Board with the President, but M r .
Truman never told me certainly that he opposed the 1951 accord.
I never heard that precisely.
M r . PATMAN. Of course I knew that you were in close touch with
the situation because that was your business, and I thought that was
your general understanding at the time, from what you read in the




77

FEDERAL.

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AMENDMENTS

press, and statements from the President and from the Board, that
there was a conflict of opinion.
M r . B U R G E S S . I appreciate the compliment as to my all-wisdom,
but I wasn't that close to the situation.
M r . PATMAN. Well, I think if anybody in the United States was
close to it you would be, Dr. Burgess. 1 think you have been close
to the Federal Reserve System now for about 30 years.
M r . B U R G E S S . I was with them for 18 years and tried to keep in
touch with the System after that time.
M r . P A T M A N . Y O U have made some statements recently, in fact
beginning about 18 months ago, about extending the debt, long-term
debt. Do you have in mind there extending the debt to the extent
that you will eventually get the bonds out of the banks?
I believe in one of your speeches you mentioned they should not be
in the banks.
M r . B U R G E S S . N O , I don't think I ever said they should be out of
the banks. I did indicate that I thought we would have a more
wholesome situation if the banks held somewhat less of the debt and
more of it were more widely distributed. I think that coincides with
what you have expressed yourself. That can't be done too rapidly,
and I don't think you will ever get to a point where the banks don't
hold some of the public debt.
M r . PATMAN. But you think they hold too much of it now?
M r . B U R G E S S . I think somewhat too much. That is a relative
matter. I wouldn't want to try to pin it down too closely.
M r . PATMAN. But don't you think there is something in what I
said in my questioning of M r . Martin, that the banks have gotten
so much of the debt that they are less anxious to render service to
people who want loans for small amounts considered?
M r . BURGESS. I think that may be true of a few banks, M r . Patman.
I don't think it is true of very many. I t is a danger. I t is one of
the dangers of having too much of the debt in the hands of the banks,
that some banker wrho is a bit lazy would sit back and not do his job,
but I think that competition takes care of that in 99 percent of the
cases.
M r . P A T M A N . D O you anticipate any payment on the national debt
soon?
M r . BURGESS. Any decrease in the debt, downpayment?
M r . PATMAN.

Yes.

M r . BURGESS. Of course, that is a question of the budget.
M r . P A T M A N . I know it is, and Congress in particular.
M r . BURGESS. And we budgeted for a deficit this year, and a
deficit for next year. Of course, we hope we will get to the time when
there is no deficit and when we begin paying something off on the debt;
that depends on a great many different circumstances, the world situation, and our defense program particularly.
M r . PATMAN. Evidently you were not too anxious to make any
payments on the debt or you would have permitted some of the
taxes to remain in effect and use that money to pay on the debt.
M r . BURGESS. Well, M r . Congressman, that is a question of judgment as to how much, how fast you can do these things. W e have
cut spending $5 billion in 1 year and $7 billion in another. It is a
very considerable influence on the business situation. A n d it was the
judgment of the administration that in order to keep the thing from



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FEDERAL. RESERVE

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AMENDMENTS

hitting business too hard it was wise to let the people have some of
that money back in the form of reduced taxes rather than to go all the
way and balance the budget and start cutting down the debt.
M r . PATMAN. Alexander Hamilton is credited with saying that a
national debt is a national blessing, and Andrew Jackson is credited
with saying that a national debt is a curse to the Republic.
D o you agree with either one of those statements and, if so, which
one?
M r . BURGESS. Well, I think it is rather academic. We will have
a national debt for a long time to come. I wouldn't worry about our
situation, if we didn't have any; I think we would get along pretty
well.
M r . PATMAN. Suppose we were to issue a capital levy and pay off
the national debt over a period of 10 years. What would be the
effect on our economy?
M r . B U R G E S S . I think that would be very destructive of people's
initiative and incentive, to feel that we felt it was right to take away
people's capital. That is going pretty far.
M r . PATMAN. Of course, I was just using that—that is a rather
brutal way of doing it—but suppose we raised income taxes and paid
it off over a period of 10 years, or 15 years. Don't you think it would
be in the direction of a severe deflation?
M r . B U R G E S S . I agree with you, yes.
M r . PATMAN. And isn't it a fact, Dr. Burgess, that our capitalistic
system being as it is, that we might as well be realistic and recognize
that without debt we cannot have prosperity?
M r . BURGESS. Well, I wouldn't make as broad a statement as
that, but I think I would say, from where we are now, we cannot
undertake to pay off this debt in 10 years or any such period, beause
it would be too much of a shock.
M r . PATMAN. In fact, if we didn't have debts we wouldn't have
any money.
M r . B U R G E S S . N O , I wouldn't—you mean if there weren't any
debts, public or private?
M r . PATMAN. That is right.
M r . BURGESS. Well, we would find some other way to do it.
M r . PATMAN. We would be reduced to barter?
M r . B U R G E S S . I think we could still have a money system.
M r . PATMAN. We would have to change our system. What I am
talking about is our present capitalistic system, which we are all in
favor of—I am in favor of it, you are in favor of it—yet under that
system, without debts, we could not expand our economy.
M r . BURGESS. Well, without getting into great flights of imagination, I quite agree, that under our system as it works if we are going
to have progress and move along, people have to borrow to go ahead
and do things.
M r . PATMAN. A n d then if the people don't borrow money, and the
banks do not lend money, and the local governments do not borrow
money, it might be that the Federal Government would have to have
deficit financing for the purpose of creating debts to expand our
economy; is that right?
M r . BURGESS. That is possible.
M r . PATMAN. I n other words, somebody has got to create debts,
either public or private.



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I have a lot of things here, M r . Chairman, but Dr. Burgess has
been so gracious about answering questions that I don't think I will
burden the committee or Dr. Burgess by asking questions on these
other matters.
The present Federal Reserve System, the bank directors, being
elected, 6 of them, by the private banks—which gives them the
balance of power, there being 9 in all, 3 of them elected by the Board
of Governors—don't you think that gives the private banking system
too much power over the volume of money and interest rates?
M r . BURGESS. N O , sir; I don't. In the first place, the powers of
the local Reserve banks, as you indicated, are limited by the Board
in Washington.
Also I sat for 15 years at the meetings of the board of directors of
the Federal Reserve bank in New York, and I had a chance to watch
it. And the businessmen, who are elected by the banks, in fact,
don't regard themselves as under obligations to carry out any policies
that the banks dictate. In the first place, to get the right kind of
man you have to be pretty persuasive. They don't go in with any
obligation at all. The obligation is all the other way
Then these businessmen, generally speaking, like easy money.
Businessmen like low money rates. Bankers tend to like higher
rates. But you have always had, on those boards of directors—
and I saw it work—you have always had a majority of businessmen
including some college professors, and so on—the bankers are always
i n the minority there, so that you have a balance on the question
of whether to raise the discount rate or not. The majority of those
boards would be on the side of making credit freely available.
So that you have a balanced point of view on those boards. A n d
I think, watching it in action, that is a very wholesome kind of thing.
They represent a variety of businesses, of points of view, so that they
bring together really a public point of view rather than just the banker
point of view.
M r . PATMAN. Don't you agree, Dr. Burgess, that the 1935 act
substantially changed the Federal Reserve System?
M r . BURGESS. Yes; but it is easy to exaggerate that. I operated
in it as an operating officer before that act, and afterward, and the
difference in actual operation wasn't very great.
M r . PATMAN. Well, before the act, the local banks really had some
power, and since the act the power is in the Board of Governors.
M r . BURGESS. I don't agree with that.
M r . PATMAN. Well, name me a power.
M r . BURGESS. First of all the discount rate. The act says the
discount rate shall be fixed by the local Federal Reserve banks,
subject to review and determination by the Board.
Mr. PATMAN. That is right.
M r . BURGESS. Just what that law means has always been a matter
of dispute, but, in practice, the local board acts and then the Federal
Reserve Board approves.
Now, another power is the question of loans to member banks, the
definition of what is eligible collateral, that is always a question of
judgment, and as a matter of fact, the bank can at times refuse to
make loans—they very seldom do, but they do the equivalent, of
getting a bank in, and saying "No'w, you are overborrowing, you have
got to cut back." That is a very substantial power.



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M r . PATMAN. Sure, i t is.

M r . BURGESS. That is a very substantial power.

M r . P A T M A N . N O W , N O . 3.

M r . BURGESS. Of these powers?
M r . PATMAN.

Y e s , sir.

M r . BURGESS. Well, there is the power of bank supervision. They
have the power to examine these banks and to make recommendations
to their boards of directors if they think something needs to be done.
M r . PATMAN. But you mean they send out examiners?
M r . BURGESS. Yes, with the national bank examiner or with the
State bank examiner, when he does his job.
M r . PATMAN. That is three. Do you know of another one?
M r . BURGESS. Well, they make recommendations to the Comptroller of the Currency, with respect to new bank charters. That is a
recommendation, not an action.
They handle this great mass of currency that we spent so much time
discussing today, under system rules and regulations, it is true, but it
leaves them still an optional area as to how those things work out. On
check collections, they have similarly an administrative power, all of
which is done by the operating officers of the bank subject to the
determinations of its own board of directors.
These are all subject to regulations by the Federal Reserve Board.
On the major policy matters, the Federal Reserve Board has a veto
power, or power of control.
M r . P A T M A N . Y O U mentioned the handling of the currency. Now,
as I understand the actual handling of the currency, the money that is
i n the vaults of the Bureau of Engraving and Printing, in the form of
Federal Reserve notes, issued for the 12 Federal Reserve banks, that
is only gotten out under order of the Comptroller of the Currency; is
that right?
M r . BURGESS. The Comptroller of the Currency actually issues the
currency to Federal Reserve agents, but he has very little authority
regarding its issue.
M r . PATMAN. Well, doesn't he actually approve of it?
M r . BURGESS. Well, it is the Comptroller who technically releases
that.
M r . P A T M A N . T O the Federal Reserve banks?
M r . BURGESS. That is right. Releases it first to the Federal Reserve
agent i n the Federal Reserve bank, who represents the Government,
and so far it is still in the possession of the Government.
M r . PATMAN. Until he takes it out and delivers it to the bank?
M r . BURGESS. Until he delivers it to the bank and takes collateral
for it.
M r . P A T M A N . I understand that, Dr. Burgess. But from the time
that that money is delivered to the bank and put into circulation is
there ever any report made back to the Treasury, as to what happens
to that money from then on?
M r . BURGESS. Well, each Federal Reserve bank has a daily statement of its currency outstanding, and so forth.
M r . PATMAN. That is their statement. Does any audit include
that? Does any audit follow that money? For instance, last year,
there were $7 or $8 billion delivered to the Federal Reserve banks.




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Is there any audit made, in subsequent years, to determine what
happened to that money?
M r . BURGESS. In the first place you have the daily reports.
M r . PATMAN. That is not an audit.
M r . BURGESS. That shows how much money is outstanding.
M r . PATMAN. That is right.
M r . BURGESS. Nobody knows precisely who has money in actual
circulation.
Now, the Federal Reserve banks are each of them subject to a very
careful audit by the agents of the Federal Reserve Board who go into
each bank and very carefully examine it, count the cash and securities,
and so forth. Is that what you meant?
M r . PATMAN. Yes, I wanted to know if anybody makes a report
back to the Treasury, that released the money. Here, for instance,
over a period of years, let us say the Treasury released a hundred
billion dollars to the Federal Reserve banks. What kind of reports
have they gotten back to give an accounting for that money?
M r . BURGESS. These statements would show how much is put into
circulation. Then the money that is unfit, is retired, and comes
back to us, so we have a trace of that. So we really follow that thing,
and follow it pretty much through.
M r . PATMAN. But there is no audit by the Treasury, or any Government agency?
M r . BURGESS. Oh, yes; the Federal Reserve Board
M r . P A T M A N . I know, but they don't make a report to Congress
on it.
M r . B U R G E S S . I wouldn't dare say about that.
M r . P A T M A N . N O , they haven't made any report to Congress on it.
I n other words, I suspect over $ 1 5 0 or $ 2 0 0 billion worth of Federal
Reserve notes have gone from the Bureau of Engraving to the Treasury, to the Federal Reserve banks, and so far as I am able to ascertain
there has never been any accounting of that money back to the
Treasury that released it.
M r , BURGESS. Oh, yes, we know what has become of that.
M r . PATMAN. Except from their statements.
M r . B U R G E S S . N O , when it is worn out it comes back to us for
redemption.
M r . P A T M A N . I know, but that is
M r . B U R G E S S . SO that of the $ 2 0 0 billion, say, $ 1 7 0 billion, or
what have you, has come back, and we have checked it off, we have
destroyed it.
M r . PATMAN. That is the only accounting you have, is where it
becomes useless as money?
M r . BURGESS. What more do you want? We know when it is
issued to the Federal Reserve bank, we know when the Federal Reserve bank issues it to the public, we know when the public brings it
back to the Federal Reserve bank, we know when the Federal Reserve
bank puts it back in the agent, and we know when the agent sends
it back to us for redemption, so we have pretty good control.
Mr. PATMAN. I was talking about the auditing part solely.
Mr: BURGESS. Well, we count this money. We make a count of
the money when it comes in. And the Federal Reserve Board sends
its examiners to these banks and makes a check count of all the money
they have. So it is pretty comprehensive.



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M r . PATMAN. The powers which you mentioned here, which are
important that the local banker performs, is the discount rate?
M r . BURGESS.

Yes.

M r . BURGESS.

Yes.

M r . PATMAN. Which can be, of course, overridden by the Board
of Governors?
M r . PATMAN. A n d the other is the supervision of collateral and loans
to banks. Is that right?
M r . BURGESS. Well, of the loans, themselves.
M r . PATMAN. But it happens, Dr. Burgess, that you named two
powers that are not in use at all, now, you might say, are they?
M r . B U R G E S S . T h e y a r e i n use.

M r . PATMAN. The discounts are practically nil.
M r . BURGESS. Very small, but they were up to a billion dollars last
year.
M r . PATMAN. Even that is small. What I mean is it is not enough
of a tail to wag the dog, or anything like that. It is not enough to
have any bearing. The only bearing, the way I view it, of a discount
rate now, is strictly psychological. Do you agree to that?
M r . B U R G E S S . N O , I think it has a very important psychological
effect, but it has a real effect, because these people know that if they
do borrow it will have to carry certain rates, so that affects the actual
rates they charge. Of course, psychology gets into the practice, as
well.
M r . PATMAN. M r . Chairman, would it be all right if I asked Dr.
Burgess some questions in written form, and have him answer them
that way?
The CHAIRMAN. I am sure it would be.
M r . P A T M A N . I know it is getting late, and I sympathize with the
chairman. He has been patient to stay here and listen to this, I know
what he has gone through all during this year, and I don't want to
impose on him or the witness, and the hour is late, so I will do that.
Thank you, M r . Chairman, and Dr. Burgess.
The CHAIRMAN. If there are no further questions, we want to express our appreciation to you, Dr. Burgess, for your patience in standing by and waiting to give us your views.
We will stand in recess until 2:15, in the hope that we might be able
to get a quorum so as to be able to go into executive session on these
bills at that time.
(The following data was submitted to the committee by W. Randolph Burgess, Deputy to the Secretary of the Treasury:)
METHOD

OF

ACCOUNTING

FOR

ISSUE AND R E T I R E M E N T
NOTES

OF

FEDERAL

RESERVE

1. Notes printed b y the Bureau of Engraving and Printing are delivered to a
vault i n the Treasury Department under the joint custodianship of the Secretary
of the Treasury and the Comptroller of the Currency.
2. T h e Comptroller of the Currency establishes an accounting control over the
notes by Federal Reserve bank of issue and by denomination.
3. Notes are shipped b y the Comptroller of the Currency to the Federal
Reserve agents upon acquisition approved by the Federal Reserve Board.
4. When the notes are shipped for the account of a Federal Reserve agent the
Comptroller of the Currency charges the account of the Federal Reserve agent
a n d reduces the reserve stock account.
5. T h e Reserve bank obtaining notes must pledge w i t h the Federal Reserve
agent an amount of collateral at least equal to the amount of notes issued. This




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collateral may consist of gold certificates, United States Government securities,
and eligible short-term paper discounted or purchased by the Reserve bank.
The amount of notes which may be issued is limited by the statutory requirement
that the Reserve bank maintain gold certificate reserves of not less than 25
percent of its notes in actual circulation.
6. Federal Reserve agents issue notes to the Reserve banks upon application
and deposit of collateral and submit reports of such transactions to the Comptroller, who records the transactions in his accounts, which are maintained
according to (1) Reserve bank of issue and (2) denomination.
7. Notes unfit for further circulation are sorted by the Reserve banks according
to bank of issue and denomination, canceled, cut in two longitudinally, and
shipped to the Treasurer of the United States for redemption. The lower halves
are shipped first. On advice of receipt of the lower halves, the upper halves are
shipped to the Treasurer for delivery to the Comptroller.
8. The Treasurer notifies the appropriate Reserve agent and the Comptroller
of the notes redeemed. The Comptroller records the redemptions by bank of
issue and by denomination.
9. Reserve agents furnish daily reports to the Federal Reserve Board of transactions in Federal Reserve notes. These reports are forwarded by the Board to
the Comptroller of the Currency, who checks such reports against the accounts
maintained by him. The accounts maintained by the Comptroller insure his
ability to account for the amount of notes from time of receipt by him to time of
destruction. Federal Reserve Board examiners and Reserve bank auditors audit
notes held by Federal Reserve agents at which time they procure verification of
related transactions from the Comptroller of the Currency based on his accounts.
10. As required by law, unissued notes held by the Federal Reserve agent are
under joint custody and control of the Federal Reserve bank and the agent.
Federal Reserve agents are agents of the Federal Reserve Board. Therefore, the
responsibility for securing and maintaining sufficient collateral, and for the issuance
of notes by Reserve agents, is in the final analysis a responsibility of the Federal
Reserve Board.
11. Information regarding the amount of outstanding Federal Reserve notes
and collateral pledged with the Federal Reserve agents is published weekly by
the Federal Reserve Board. Data on Federal Reserve notes are included in the
monthly Federal Reserve Bulletin and in the Circulation Statement of United
States Money, published monthly by the Treasury Department. They are also
included in the balance sheets of the several Federal Reserve banks, as published
i n the Federal Reserve Board's annual report to Congress.

(Whereupon, at 12:50 p. m., the committee adjourned.)
x