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MONETARY, CREDIT, AND FISCAL POLICIES

HEARINGS
BEFORE THE

SUBCOMMITTEE ON MONETARY, CREDIT,
AND FISCAL POLICIES OF THE

JOINT COMMITTEE ON THE ECONOMIC KEPORT
CONGRESS OF THE UNITED STATES
EIGHTY-FIRST CONGRESS
FIRST

SESSION

P U R S U A N T TO

SEC. 5 (A) OF PUBLIC LAW 304,
79TH CONGRESS

S E P T E M B E R 23, N O V E M B E R 16, 17, 18, 22, 23,
A N D D E C E M B E R 1, 2, 3, 5, 7, 1949

P r i n t e d for the use of the J o i n t Committee on the E c o n o m i c R e p o r t

U N I T E D STATES
GOVERNMENT PRINTING OFFICE
99076




WASHINGTON : 1950

JOINT

COMMITTEE

ON T H E

ECONOMIC

REPORT

(Created pursuant to sec. 5 (a) of P u b l i c L a w 304, 79th Cong.)
UNITED STATES SENATE
J O S E P H C. O ' M A H O N E Y , Wyoming, Chairman
F R A N C I S J. M Y E R S , Pennsylvania
J O H N J. S P A R K M A N , Alabama
P A U L H . D O U G L A S , Illinois
R O B E R T A . T A F T , Ohio
R A L P H E'. F L A N D E R S , V e r m o n t
A R T H U R Y. W A T K I N S , Utah

HOUSE OF REPRESENTATIVES
E D W A R D J . H A R T , N e w Jersey, Vice

Chairman

W R I G H T P A T M A N , Texas
W A L T E R B . H U B E R , Ohio
F R A N K B U C H A N A N , Pennsylvania
J E S S E P. W O L C O T T , Michigan
R O B E R T F. R I C H , Pennsylvania
C H R I S T I A N A . H E R T E R , Massachusetts

THEODORE J. KREPS., Staff
Director
Director
GROVER W . ENSLEY, Associate Staff
JOHN W . LEHMAN, Clerk

SUBCOMMITTEE ON MONETARY, CREDIT, AND F I S C A L POLICIES
HOUSE OF REPRESENTATIVES

UNITED STATES SENATE
P A U L H . D O U G L A S , Illinois,
Chairman
R A L P H E . F L A N D E R S , Vermont

W R I G H T P A T M A N , Texas
F R A N K B U C H A N A N , Pennsylvania
J E S S E P. W O L C O T T , Michigan

LESTER V. CHANDLER,
II




Economist

CONTENTS

Pa e
Statement o f —
£
Bopp, K a r l R., vice president, Federal Reserve Bank of Philadelphia— 27-75
Brown, E. E., chairman of the board, F i r s t National B a n k of Chicago. 247-264
Burgess, W . Randolph, chairman of the executive committee, National
City Bank of New Y o r k
173-202
Clark, J o h n D., Council of Economic Advisers
531-544
Colm, Gerhard, Council of Economic Advisers
531-544
Considine, James W., comptroller, Reconstruction Finance Corporation
145-171
Cramer, Edison H., chief, Division of Research and Statistics, Federal
Deposit Insurance Corporation
105-144
Dougherty, James L., general counsel, Reconstruction Finance Corporation
t
145-171
Eccles, M a r r i n e r S., Board of Governors, Federal Reserve System__ 213-247
Foley, Raymond M., Administrator, Housing and Home Finance
Agency
202-212
Grede, W i l l i a m J., chairman, Federal debt management committee,
National Association of Manufacturers
356-386
Gunderson, Harvey J., director, Reconstruction Finance Corporation 145-171
Haas, George C., director, technical staff, Department of the Treasury 387-430
Harl, Maple, chairman, Federal Deposit Insurance Corporation
105-144
Johnson, G. Griffith, Fiscal Division, Bureau of the Budget
501-530
Kassalow, Everett M., executive secretary, Congress of Industrial
Organizations
299-311
Keyserling, Leon H., Acting chairman, Council of Economic Advisers 531-544
Kline, A l l a n B., American F a r m Bureau Federation
336-356
Lawton, Frederick J., assistant director, Bureau of the Budget
501-530
Leland, Dr. Simeon E., professor of economics and dean of the College
of Liberal Arts, Northwestern University
2-26
Lutz, Dr. H a r l e y L., tax consultant, National Association of Manufacturers
356-386
Lynch, Thomas J., general counsel, Department of the Treasury
387-430
McCabe, Thomas B., Chairman, Board of Governors, Federal Reserve
System)
461-500
Pace, Frank, Jr., Director, Bureau of the Budget
501-530
Reeve, Joseph E., F i s c a l Division, Bureau of the Budget
501-530
Richards, F r a n k l i n D., Commissioner, Federal Hiousing Adm/inistration
202-212
Riefler, Winfield W., assistant to the Chairman, Board of Governors,
Federal Reserve System
461-500
Robertson, J. L., Deputy Comptroller of the Currency
75-104
Ruml, Beardsley, vice chairman, research and policy committee, Committee for Economic Development
265-298
Ruttenberg, Stanley H., director of education and research, C I O
299-311
Smith, Russell, legislative secretary, National Farmers Union
317-336
Smithies, Dr. Arthur, professor of economics, H a r v a r d University
2-26
Snyder, Hon. John, Secretary of the Treasury
387-430
Sonne, H . Chistian, chairman of the board of trustees, National Planning Association
2-26
Sproul, Allan, president, Federal Reserve Bank of New Y o r k
430-460
Staats, Elmer B., Executive Assistant Director, Bureau of the Budget 501-530
Thomas, Woodlief, economic adviser to the Board of Governors, Federal Reserve System
461-500




m

IV

CONTENTS

Statement of—Continued
Thomson, J. Cameron, president, Northwest Bancorp., Minneapolis, Pa ^ e
Minn
265-298
Warren, Ulysses Grant, A. S. Riecke & Co., investments, Philadelphia
311-316
Williams, Alfred H., president, Federal Reserve Bank of Philadelphia- 27-75
Supplemental statements:
Statement on fiscal and credit policies by the Chamber of Commerce
of the United States
544-548
Statement of W i l l i a m Green, president, American Federation of
Labor
548-552
Satement of Conference of American Small Business Organizations,
submitted by Fred A. Yirkus, chairman
552-555
Statement of Francis H . Brown well (retired), former chairman of
the board of directors, American Smelting & Refining Co
555-568
Statement of F r a n k Lilly, Spokane, Wash., statistician, Mines Research Bureau
568-570




MONETAEY, CREDIT, AND FISCAL POLICIES
FRIDAY, SEPTEMBER 23, 1949
UNITED

STATES

SENATE,

SUBCOMMITTEE ON M O N E T A R Y , CREDIT, AND FISCAL POLICIES
OF T H E

JOINT

COMMITTEE

ON THE

ECONOMIC

REPORT,

Washington, D. C.
T h e subcommittee met, pursuant to call, at 10:35 a. m., i n the
caucus room, Senate Office Building, Senator P a u l H . Douglas (chairman of the subcommittee) presiding.
Present: Senators Douglas (presiding), and Flanders; Representatives Patman and Buchanan.
Also present: Senators J o h n J. Sparkman and Arthur V . Watkins
and D r . Grover W . Ensley, associate staff director; M r . J o h n Lehman,
clerk; and D r . Lester V . Chandler, economist to the subcommittee.
Senator DOUGLAS. Gentlemen, I wonder if we might come to order.
M r . Sonne, M r . Leland and M r . Smithies, please come forward.
Among the functions of the Joint Committee on the Economic
Report, which was created under the Employment A c t of 1946, are
those of making a continuing study of matters relating to the Economic Report, and of studying means of coordinating programs i n
order to further the policy of the act.
I n line with these responsibilities of the committee, the Congress,
i n M a y of this year, passed Senate Concurrent Resolution 26, authorizing and directing the joint committee to make full and complete
studies of four very important subjects: First, the problem of investment; second, the problem of the effectiveness and coordination of
monetary, credit, and fiscal policies i n dealing w i t h general economic
policy; third, the problem of low-income families i n relation to economic instability; fourth, the problem of unemployment trends and
their significance in current economic analysis.
Senator O'Mahoney, the chairman of the joint committee, has
appointed four subcommittees to make these studies.
T h i s subcommittee, dealing w i t h the second subject, namely,
monetary, credit and fiscal policies, includes, i n addition to its chairman, Senator Flanders and Representatives Wright Patman, F r a n k
Buchanan, and Jesse P. Wolcott.
W e have, of course, invited all members of the full Committee on
the Economic Report to attend the hearings, and we are very pleased
to have Senator Sparkman and Senator Watkins w i t h us this morning
I think it would be difficult to overestimate the importance of
these closely related policies. We have very little chance of achieving
the purposes of the Employment Act, namely to achieve maximum
production, maximum employment, and maximum purchasing power,
if we cannot maintain an appropriate and relatively stable flow of
money and credit, and if our taxing, spending, and debt-management
policies do not make for stability rather than instability.




1

2

M O N E T A R Y , CREDIT, AND FISCAL

POLICIES

It is our duty, therefore, to find out what types of monetary,
credit, and fiscal policies are capable of contributing most to the
purposes of the Employment Act, to appraise their effectiveness for
these purposes, to see whether or not they have in the past been
appropriately coordinated with each other and with other economic
policies, and to discover what changes, if any, would be both feasible
and desirable.
One of the major problems that we face is that of the Government's
revenue, expenditure, and debt-management policies. F i f t y years
ago, when the annual Federal budget was only half a billion, and the
national debt was less than a billion, the Government's fiscal policy
had little effect on the over-all behavior of the economy.
Now, with the Federal budget at about $40,000,000,000, and the
national debt at more than $250,000,000,000, our policies relative to
taxes, Government spendings, and debt management are a powerful
force, capable of promoting either stability or instability.
It is for this reason that we are glad to receive today two reports on
fiscal policy which have been drawn up and unanimously approved
by a group of 14 of the Nation's leading economists.
I am very happy to find such a degree of unanimity among the
economic brethren, because we are all aware of the wisecrack that was
once uttered, that if you laid all the economists in the country end to
end they would not reach a conclusion.
There is another variant of that wisecrack, that if you were to lay
all the economists in the country end to end, it would be a good thing.
[Laughter.]
B u t we are very happy indeed to welcome this group which is
presenting these reports.
The conference which produced these two reports was sponsored by
the National Planning Association, at the request of Senator Flanders
and myself; and I understand that the reports are to be formally
transmitted to the subcommittee by M r . H . Christian Sonne, chairman
of the board of trustees of the National Planning Association.

STATEMENT OF DR. SIMEON E. IELAND, PROFESSOR OF ECONOMICS, AND DEAN OF THE COLLEGE OF LIBERAL ARTS, NORTHWESTERN UNIVERSITY; ACCOMPANIED BY H. CHRISTIAN SONNE,
CHAIRMAN OF THE BOARD OF TRUSTEES, NATIONAL PLANNING ASSOCIATION, AND DR. ARTHUR SMITHIES, PROFESSOR
OF ECONOMICS, HARVARD UNIVERSITY
M r . SONNE. I am H . Christian Sonne, chairman of the board of
trustees of the National Planning Association, 800 Twenty-first
Street N W . , Washington, D . C.
Senator Douglas, and members of the committee, the National
Planning Association has for several years been interested in fiscal
and monetary policy, because we realize it is an important part of the
problem of stabilizing our economy, and of achieving full employment.
W e were, therefore, very glad to comply with the request of Senator
Douglas and Senator Flanders to arrange for a meeting of prominent
economists, with a view toward seeing whether there was an area of
agreement on fiscal policy.




3 M O N E T A R Y , CREDIT, AND FISCAL POLICIES

We made a condition that when it came to the invitations to the
Conference of Economists, the responsibility should rest with the
National Planning Association. We had special reasons for doing so.
Just as Senator Douglas explained, citizens are a little skeptical about
all these differences of opinion among economists, and sometimes they
wonder whether there is really such a thing as economic science.
The answer is, in part, that the economic profession has a difficulty
in that it is a social science, and economists have to gage human behavior, which very often can upset the best calculations.
Another difficulty is that the social sciences are faced with problems
very similar to those which were faced by the medical profession some
generations ago. I refer to "quack" doctors. M a n y people, today,
call themselves economists who are not qualified to so so, but we know
that it takes much longer for the economic health of a strong country
to show visible signs of mistreatment by inexperienced doctors than
it does for the human body to collapse. Consequently, I am afraid
that the economic profession will still work for some time under , a
handicap. This was our reason for carefully picking the participants
invited to the conference.
We invited economists from the point of view of their geographic
distribution. W e selected economists from the point of view of their
economic and human philosophy, representing all shades of economic
opinion. W e invited economists who are recognized for their ability
and their standing in the community.
We did not succeed in getting together all the economists whom we
invited. B u t we so nearly succeeded that I think it is fair to say that
even if the additional three or four who were invited had been able to
attend, the final result would be practically the same as that which we
now present to you.
We decided to confine ourselves in this conference to fiscal policy,
because we felt that if we were going to take in monetary and credit
policy, the problems would become too complicated for one meeting
of only 3 days.
Now, since I am about to transmit these statements on fiscal policy
to you, I should like, without going into detail, to make it clear that
the members of the conference unanimously approve of the so-called
anticycle budget. That means that we recognize that there are certain phases in bad times when a deficit in the budget is not only
permissible, but helpful.
I think the economists would approve my saying that they do not
mean that a deficit is justified at all times and in all countries. F o r
instance, if the permission to have a deficit in any one year should
result in reckless spending, or in squandering the Nation's fortune,
i t might be a lesser evil to demand an annual yearly budget.
Y o u may compare this condition to that of a doctor who knows that
he can shorten the pain and the illness of his patient by giving him
3ertain drugs. But, if the patient's character is too weak, the doctor
may fear that even if the patient is cured he may go on taking drugs
and become a dope fiend. It may be a lesser evil for the doctor to
insist on the patient's recovering in a slower and more painful way.
So, an economist may well favor deficits occasionally in a wellmanaged democracy but not necessarily favor the same policy in a
country that is run by an administration, let us say, of the type of a
Chiang Kai-Shek-.




4

MONETARY,

CREDIT, A N D FISCAL

POLICIES

It follows that there is no inconsistency whatsoever in citizens being
in favor of an occasional unbalanced budget today in the United
States, even though a decade or two ago they believed in a balanced
budget. There is no change of position in agreeing today that occasionally we may have an unbalanced budget. It is a recognition of
the fact that the United States has so developed in the last few
decades that now occasionally an unbalanced budget is justified.
Just one word, in conclusion, on fiscal policy in general: N o
measures under this heading can have their full effect on the economy
unless they are understood by the citizens as a whole. If leaders of
agriculture, business, and labor do not understand the measures of
government and do not cooperate with them, they can, through lack
of confidence, undo many times what these measures try to accomplish.
Hence, it is important that the country, as a whole, understand this.
That is why we in the National Planning Association appreciate that
the Congress, through the Joint Economic Committee, has taken up
the subject of fiscal policy for very serious study.
The committee will, unquestionably, as the hearings go on, apprise
the country of the details of fiscal policy.
We i n the National Planning Association have for years tried i n
an educational way to carry such knowledge to the people, and we
shall continue to do so. When requested, we are at all times ready
to cooperate to the fullest extent with the Congress.
D r . Simeon E . Leland was chairman of the Princeton conference
when the two statements were drafted and unanimously adopted.
B o t h are signed by university economists and myself. I t is my
pleasure to transmit these reports to the subcommittee, and to ask
D r . Leland to present them to you.
Senator DOUGLAS. Thank you very much, M r . Sonne.
Y o u speak of the conference being held under the auspices of the
National Planning Association. I wonder if you would state briefly
for the record what the National Planning Association is, who its
principal officers are, and so forth.
M r . SONNE. The National Planning Association is a nonprofit,
nonpolitical organization, which was formed some 15 years ago-—in
1934-—for the purpose of planning for democracy.
Those were the days when planning was not quite understood.
Some thought it directed toward "totalitarian, planned economies."
W e have tried to emphasize that American citizens must plan to avoid
a planned economy.
We came to the conclusion that we should always try to find the
main area of agreement, and that no measures could, in the long run,
be recommended unless they were approved by agriculture, business,
labor, and the professions. We therefore have operated through
standing committees—agriculture, business, labor, and international
policy committees—on which outstanding leaders serve. Whenever
the National Planning Association comes out with a joint statement,
there is a guaranty to the Nation that the recommendations do not
favor one selfish interest or special group, because it is underwritten
and approved by agriculture, business, and labor.
Senator D O U G L A S . I wonder if you would give the names of some
of the principal officers and members of the board of trustees of your
association.




5 MONETARY,

CREDIT, A N D FISCAL

POLICIES

M r . SONNE. I should have given that. F r o m labor we have
people like M a r i o n H . Hedges and Clinton S. Golden; from agriculture we have Donald R . Murphy, Prof. Theodore W . Schultz, and
Allan B . Kline.
Senator DOUGLAS. M r . Kline is president of the American F a r m
Bureau Federation?
M r . SONNE. That is right.
Senator D O U G L A S . Y O U may continue, M r . Sonne.
M r . SONNE. W e have among businessmen people like William L .
Batt of S K F , Beardsley Ruml, and Fowler McCormick.
Senator DOUGLAS. M r . McCormick—the president of the International Harvester?
M r . SONNE. That is right. Then you have a few who represent
agriculture, business, and labor. I can go over the list. There is
Laird Bell of Chicago-——
Senator DOUGLAS. Member of one of the leading Chicago law
firms, chairman of the board of directors of the Weyerhauser Co.
M r . SONNE. A n d there is Harry Bullis, chairman of the board, of
General Mills.
Then, we have Robert Heller, whose report on Strengthening the
Congress, you may remember, had effect on the reorganization of
Congress.
Then there is Luther Gulick, who is an authority on Government
organization.
Then, we have Philip Murray, of the CIO.
Among our agricultural people is James G. Patton.
Senator DOUGLAS. President of the National Farmers' Union.
M r . SONNE. Then we have Clarence Pickett of the American
Friends Service Committee and Wayne Taylor, who now happens to
be with Paul Hoffman in E C A .
I think I have given you a list representing all shades of opinion.
Senator DOUGLAS. Thank you very much.
Dr. Leland, we are very happy to welcome you. Y o u are going to
present both of these reports?
D r . LELAND. Yes.
Senator D O U G L A S . I

would suggest that D r . Leland be permitted
to complete both reports before we start questioning him, so that we
may get the recommendations as a whole into the record before we
start on piecemeal questioning.
Dr. LELAND. O n behalf of the group of economists who prepared
these reports, I should like to say that we were greatly appreciative
of the invitation that came to us from Senator Douglas and Senator
Flanders. We were glad to attempt to work up statements on economic policy that would make some contribution to economic stability
and that would be of service to the committee and to the Congress
generally. The reports deal only with fiscal policy; they do not cover
everything that Congress might do to contribute to economic stability.
The reports are as follows:
F E D E R A L E X P E N D I T U R E AND R E V E N U E POLICY FOR ECONOMIC

STABILITY

INTRODUCTION

Although our economic system accords a dominant role to private enterprise,
Government expenditures and receipts have now reached a scale that make them
crucially important factors in our national welfare. In 1949, w i t h a gross national
production of $250,000,000,000, the Federal Government is spending more than




6

M O N E T A R Y , CREDIT, AND FISCAL

POLICIES

$40,000,000,000, while Federal, State, and local governments together are spending
around $60,000,000,000.
Government programs of this size make it more than ever desirable that every
dollar of Government expenditures be used as efficiently as possible. We are
not rich enough to afford waste of resources by government any more than by
anyone else.
It is equally important that the expenditure and revenue programs of government, in their formulation and execution, be consistent with the progress and
stability of the private economy. The fiscal policy of the Government must
make useful positive contributions to the maintenance of high levels of employment and income—the goals declared in the Employment Act of 1946 to be a
national objective.
Government affects business through both sides of its budget. Payments t a
Government employees, bondholders, veterans, the aged, and the needy all constitute income that can be used to buy consumption goods from business; Government procurement affords a direct market for business. On the other side of the
budget, taxes capture funds that consumers might have spent or that business
firms might have invested in improved facilities. Taken by themselves, tax
collections tend to shrink the market of private business, contract employment,,
and lower prices; just as, taken by themselves, Government expenditures tend
to expand the market for business, increase employment, or raise prices.
It is not only the size of revenue and expenditure that counts; their composition
must also be considered in any appraisal of the effects of Government policy.
The economic effects of a billion dollars collected in the form of income taxes
will be different from those of a billion dollars collected in excise taxes. Spending
to build roads may stimulate private investment in automobiles, trucks, and
garages; there are other forms of expenditure that may have adverse effects on
private investment. Rationally or irrationally, Government spending and taxing
may greatly affect the climate within which families and businesses make their
decisions.
T H E PRINCIPLE

OF A N A N N U A L L Y

BALANCED

BUDGET

The traditional goal of fiscal policy was to secure a balanced budget in every
single year. But that objective has now proved impracticable and, besides, has
serious disadvantages in principle. There is not even a clear or unique concept
of "budget" to which the requirement of balance could be applied. For instance^
in the regular budget, bookkeeping transfers to the social security trust account
are classified as expenditures. As a result of this, that budget may show a deficit
at a time when the cash budget shows an excess of receipts over outgo. But even
the cash budget may not be adequate to portray the effects of fiscal policy; taxes
may have their impact when tax liabilities are incurred rather than when payment
is made; purchases may have their impact when contracts are entered into rather
than when disbursements are made. However, where a single budget concept is
used in economic analysis bearing on stabilization policy we prefer the cash
budget to any available alternative.
Compared to the full span of the business cycle, a year is a short period of time.
T o insist upon a balance in every single year is certainly undesirable and to attain
it is probably impossible. T o attempt to raise tax rates every time there is a
decrease in national income will only result in discouraging private consumption
and investment at a time when these are most in need of expansion; on the other
hand, to try to eliminate a tax surplus by cutting tax rates or expanding Government activities would serve to increase inflationary pressures at a time when
they are already acute.
If the budget were balanced in good years as well as bad, there would have t a
be either big fluctuations in expenditure programs or severe and perverse changes
in tax rates. T o vary expenditures in this manner would disrupt the essential
services provided by government. Applied to military expenditures, it would
mean a large defense program in boom years and a small defense program in depression years. This is both ineffective and wasteful. Government would be increasing its employment of resources when they were scarce and cutting down on
their use when they were abundant. This, of course, would aggravate the fluctuations in private business.
THE

P R O B L E M OF CONTROLLING

GOVERNMENT

EXPENDITURES

Annual budget balancing is, thus, both difficult in practice and unsound i n
principle. But one great merit it does have: It provides a yardstick by which
legislators and the people can scrutinize each activity of government, testing i t




7

MONETARY,

CREDIT, A N D FISCAL

POLICIES

both for efficiency of operation and for its worthwhileness in terms of cost. Every
Government program undertaken has to be paid for in a clear and unequivocal
sense. The legislature and the Executive are required to justify additional taxes
equal to the cost of any new program. This is a principle every citizen can
understand. If dropping the principle of annual budget-balancing were to mean
dropping all restraints to unwise and inefficient expenditure, grave damage would
be done to our economic and political system.
Were expenditures divorced entirely from the need for taxation, political
opposition to extension of the Government's expenditure programs would largely
disappear. The scale on which the public sector absorbs resources would grow
beyond what was really desired by the people as a whole; sooner or later the
country would find itself in a state of chronic inflation. Such inflation is a
sign of weak government and comes from eagerness to spend without a willingness
to tax. Accordingly, other general principles, other habits of thought and of
action must be set forward to insure the standards of judgment and the selfdiscipline of Government's activities and to do better what the principle of annual
budget policy attempted—though imperfectly—to accomplish.
Experience shows that business activity has its ups and downs. There is thus
a strong case for countercyclical fiscal action—surpluses in good times and
deficits in bad. If we do not adopt such a policy deliberately we are likely to be
forced into an imperfect version of it through the pressure of events. One of the
major questions for the future is how such a policy can be administered with the
restraint and efficiency that is supposed to be achieved through the balanced
budget rule. If a flexible policy is to win acceptance, it must not be used as an
excuse to introduce expenditure or tax programs that cannot be justified on their
merits. Boondoggling should have no place in a rational fiscal program.
We doubt whether it would be possible, or even desirable, to rely exclusively on
fiscal action to offset fluctuations in private business. That course could easily
involve changes of impractical magnitudes in taxes and expenditures; it would
mean placing excessive reliance on one measure for achieving economic stability
and growth; it would involve problems in forecasting beyond the reach of present
knowledge and techniques.
We can, however, reasonably expect that the budget be formulated in the light
of economic judgment available that takes full acount of the actual course of
events and should contribute to economic stability rather than aggravate instability. In view of uncertainties, part of the planning process should be preparation for quick adaptation of fiscal operation to changing circumstances. Certain
automatic devices for bringing remedial forces quickly into play are in a stage
where they deserve consideration.
GUIDES TO FISCAL

POLICY I N N O R M A L

TIMES

When the economy is prosperous and stable and there is no clear-cut reason to
expect a change in any particular direction, the objective of policy should be to
adapt the budget to changes in the Government's requirements but to leave its
economic impact on total employment and purchasing power unchanged. This
could be approximately achieved if newly planned increases or decreases in expenditures were to be matched with corresponding changes in planned tax receipts.
The net expansionary or contractionary effect of the budget would then remain
roughly the same. Thus, in conditions of continued prosperity, a modified version
of the balanced-budget rule could be used as a guide: Taxes should grow or shrink
corresponding to desired changes in expenditures. Thus, proposed increases in
expenditures would be exposed to the traditional test of whether they are worth
their cost in terms of taxes.
However, if recent events and the outlook for the near future pointed, on
balance, toward unemployment and deflation in the private sector of the economy,
then budgetary changes should be made in the direction of producing a moderately
expansionary effect. New Government expenditure programs should still be
considered on their merits, but the additional taxation that in prosperous times
would accompany them should now be deferred. Taxes that are deferred in these
circumstances should be put into effect as soon as that can be done without
impeding recovery. There should be no delay in making the tax reductions
warranted by any reductions in Government expenditures; and if expenditure
requirements are expected to decline in the future, anticipatory tax reductions
could be enacted.
On the other hand, if the weight of the evidence appeared to be on the inflationary side, the opposite policy should be followed. The rule that increased




8

MONETARY,

CREDIT, A N D FISCAL

POLICIES

expenditures should be accompanied by increased tax yields should be rigidly
followed. Tax reductions that would normally be in order should be deferred;
and tax increases should anticipate expected increases in expenditures.
G U I D I N G PRINCIPLES I N T I M E

OF ACUTE RECESSION

OR

BOOM

Where there is a definite expectation, justified by events, of serious recession
or inflation, more strenuous fiscal measures would be called for, and the policies
described above should be supplemented by emergency fiscal action.
In the event of severe recession, it is not only politically necessary, but economically desirable to provide additional employment projects that can be
started and ended quickly. Temporary tax relief should be given in order to
stimulate private spending and employment. Other incentives for private
investment, such as guaranties, should be considered. There can be no social or
economic justification for allowing mass unemployment to persist for extended
periods at a time when there is abundant need for roads, schools, hospitals, and
other useful objects of public expenditures. However, we recognize that there are
difficult questions of extent and timing connected with any such program.
An
overambitious Government program may impede the course of recovery in the
private sectors of the economy by dislocating resources and delaying needed price
adjustments. On the other hand, a program that was overcautious could needlessly fail to advance recovery by not stimulating the demand for the products of
private industry. M u c h skill and judgment are required to move from depression
to stable prosperity. We must not rely on the private economy, unaided by
Government action, to perform that task. The Government must not shirk the
responsibility placed on it by the Employment Act, and fiscal policy is one of
the most promising instruments it possesses.
On any occasion when serious inflation is in prospect, emergency measures
would be needed to curtail expenditures and increase taxation. Wartime and
postwar experience provides convincing evidence that the political obstacles to
a fiscal policy adequate to combat inflation are so great that there is little practical danger of going too far. The survival of a relatively free and stable price
system depends heavily on our willingness to fight inflation by fiscal methods.
A policy that helps to maintain stable prosperity will be no more likely in
practice to result in an upward trend in the national debt than one that does
not. The course of events may in fact be such that stabilization requires steady
reduction in the debt. Budgeting surpluses to fight inflation will provide for
the reduction of the public debt in a helpful rather than a painful fashion. Surpluses are not feasible in times of depression. They are desirable where the private economy is strong enough for the Government to tax more than it spends
without causing unemployment. The private economy is not likely to possess this
strength if Government policies aggravate rather than offset business fluctuations.
A D D I T I O N A L POSSIBILITIES FOR A F L E X I B L E FISCAL POLICY

While we consider these guides for budget policy essential to a stabilization
program, the annual budget cannot, in the nature of things, be based on precise
forecasts; nor can it be expected to compensate for sudden and short-run fluctuations in business that occur within the period of its operation. Even though the
budget can and should be amended in the light of changing circumstances, the
legislative process is necessarily too cumbersome to make delicately timed adjustments in fiscal policy. Therefore, we consider whether further flexibility can be
achieved by two devices which may be called "automatic flexibility" and "formula
flexibility."
"Automatic flexibility" means a tax system such that revenue under a given
set of tax rates will fall sharply if unemployment develops, and rise sharply in
the opposite case of inflation; and expenditure programs under which increased
outlays arise from increased unemployment.
"Formula flexibility" means a system under which preannounced tax cuts and
upward revisions of spending programs will come into force if unemployment
exceeds a certain figure or production falls below a certain level, and preannounced
changes in the opposite direction if price indexes rise at more than a certain speed.
AUTOMATIC F L E X I B I L I T Y

Automatic flexibility is exemplified by the unemployment compensation
system. If unemployment increases, employers' contributions at once decline,
while the unemployed begin almost immediately to draw more in benefits. Thus




9 M O N E T A R Y , CREDIT, A N D FISCAL

POLICIES

the Government finds itself automatically taking less money out of the public's
pockets and putting more in.
There are now many such flexible elements in Federal taxes and revenues, and
they have greatly increased in importance with the growth of the budget. Besides
the unemployment compensation system, there is, for example, substantial
automatic flexibility in personal- and corporate-income taxes.
Automatic flexibility can slow down and perhaps halt a decline of activity or a
rise of prices; it can give time for restorative forces to come into play, but it will
not, by itself, pull activity back to a full-employment level or restore prices to a
pre-inflation level.
We feel strongly that the existing automatic flexibility makes an important
contribution to economic stability, which should not be frittered away, as it
would be, for instance, by rigid application of the annual-balanced-budget rule.
But we do not believe it prudent for policy to regard automatic flexibility as more
than a first line of defense; more must be done to cope with serious economic
fluctuations.
FORMULA

FLEXIBILITY

The enactment by Congress of rules under which tax rates, and perhaps of
rules under which expenditure programs, will shift in certain contingencies specified in advance is a possibility that deserves further exploration. For example,
the period during which unemployed workers can draw unemployment compensation might be extended according to a flexible schedule based on the volume of
unemployment. The withholding rate under the personal-income tax for any
calendar quarter might rise by a stated amount above a standard rate whenever,
say, the index of retail prices has increased by over a certain amount in the preceding 6 months. The withholding rate might be lowered whenever standard
indexes of production and employment drop below stated levels or trends.
The question of formula flexibility shades off into the question of granting to the
Executive wider discretionary authority than it now possesses to initiate changes
in the timing or extent of the fiscal program. This raises difficult issues of political
principle and administration responsibility. We can here do no more than call
attention to them.
CONCLUSION

In this statement we have confined ourselves to fiscal policy of the Federal
Government. But, while essential, that is only one element in a stabilization
policy. The policies of State and local governments can make useful contributions within their more limited spheres. Monetary and credit policies including
debt management must play an active role in their own right and must be properly
coordinated with fiscal policy. A l l necessary measures must be taken to preserve
and stimulate competition. Supported by such measures, Federal fiscal policy
offers the best prospect of achieving sustained prosperity within the framework
of our existing economic system.

Senator DOUGLAS. M r . Leland, perhaps I should ask one question
before you go on.
Is this statement approved by a group of economists who represent
a rather wide range of opinion?
Dr. LELAND. That is correct. As a matter of fact, when the conference first started, I had no hope that the assembled group would be
more likely to reach a unanimous conclusion than all the economists
you mentioned in your opening wisecrack about economists. T h e
shades of opinion were really quite variant.
This second statement is an attempt to apply the principles which
we first formulated to the economic situation now prevailing or which
is on the horizon.
This statement, too, was unanimously agreed upon by the entire
group:
FISCAL POLICY I N T H E

NEAR

FUTURE

A t present, September 1949, the economy exhibits no clearly discernible
swing—either toward a resumption of inflation or toward increasing unemployment—which would call for a major change in tax rates or expenditures. If any
substantial change were made, it might accentuate an inflationary or deflationary
movement in 1950 instead of countering it.




10

MONETARY,

CREDIT, A N D FISCAL

POLICIES

Past decisions on taxes and commitments on expenditures have resulted in a
current deficit in the cash budget. We regard those decisions as unfortunate, in
particular the decision in 1948 to reduce taxes; it would have been the course of
sound policy to have revenues exceeding or, at the least, equaling expenditures at
the present level of business activity. The latter, if lower than levels of a year
ago, is still high and a modest cash surplus at the present time would probably be
consistent with stability. But it is one thing to deplore past mistakes and
another to correct them on short notice. It would be unwise to increase taxes at
this time. Such action might in itself be unduly deflationary. There is a possibility that the step might soon have to be reversed to counter a business downturn.
While we do not doubt that there are expenditures that can and should be reduced—and we do not regard those of any agency or department as sacred—this
reduction must be part of a constant and continuing effort. Economy efforts
cannot be turned on and off at will.
Although no major change in fiscal program is indicated for the immediate
future, the country should have positive assurance that the Government will be
prepared to act promptly either if prices should display a sharp and continuous
upward swing, or if unemployment should increase substantially. Congress should
plan ahead and announce the actions to be taken in either contingency. It should
enact preliminary legislation to be effective when needed.
Congress should act in case of a decline in activity involving a genuine increase
in unemployment of more than 1,500,000 persons above present levels. This
would mean total unemployment of about 5,000,000 according to present methods
of computation. The extent, combination, and sequence of its actions should
depend upon the severity of the recession.
The appropriate steps include, first, the repeal of the special wartime excise
taxes. These taxes were enacted for various special reasons during the war and
are not appropriate to peacetime. A second step is the temporary abatement of
the lower-bracket rates or a temporary increase in the exemptions of the personal
income tax. This should be done according to prearranged legislation to become
effective when economic activity declines to a specific level. The revenues from
other taxes would be allowed to decline, without a change in rates, as business
activity fell off. If these actions were insufficient, additional measures should be
taken.
The period of unemployment benefits might be temporarily lengthened, with
appropriate provisions for Federal reinsurance of the emergency risks. The plan
to do this should be arranged and announced in advance so that workers could
count on this protection. B y this measure, the system of unemployment compensation would be made adaptable to its differing role in times of prosperity and
in times of depression.
Public works might be expanded. The Congress should already have arranged
for a stand-by shelf of planned and ready-to-start projects, including Federal
assistance for State and municipal projects. We approve the principle, expressed
in pending legislation, of a shelf of public works. We recommend the prompt enactment of legislation to this end. On the shelf would be only projects that are
economically desirable, and that can be started promptly when the need for additional governmental spending arises, and completed or stopped promptly when
this is no longer needed. Examples of projects of this nature are: Road construction, residential housing, and construction and rehabilitation of public
buildings.
Should there be a resumption of inflation, marked by a persistent upward surge
of prices in general, Congress should be prepared to take effective counteraction.
In this case increase of lower-bracket rates or lowering of exemptions in the personal income tax would be in order. Repeal of the wartime excise taxes might
appropriately be postponed. If these taxes were already repealed, or their repeal were deemed necessary for reasons of equity, they should be replaced by
equivalent sources of revenue. Finally, such inflation would be an occasion for
strong measures to reduce public expenditures. T o cite specific examples, the
starts of civil public works of all categories should be held to the practical minimum. The test should be whether there is serious economic loss from delay.
M i l i t a r y construction should also be closely measured against the urgent present
needs of the armed forces. Large farm benefits, either through support prices or
in the guise of soil conservation payments, should not be tolerated at a time when,
in any case, farm income is likely to be high.




11

MONETARY,

CREDIT, A N D FISCAL

POLICIES

TAX REFORM

A time like the present when no emergency exists should not be allowed to go
b y without consideration of fundamental tax reform. This has two sorts of
relation to stabilization policy: (1) Adjustment of the tax structure so as to
make private business more nearly self-stabilizing—for instance, by providing
more complete averaging of losses and gains.
(2) Planning tax measures whose
impact w i l l be stimulating or depressing so that they can go into effect at times
when short-term policy calls for additional stimulants or depressants.
For
example, if we are to move toward integration of corporate and individual income
taxes in a way which would reduce revenue, the effective date would appropriately come in depression.
It is now, and doubtless always w i l l be, impossible to forecast more than a
year in advance the revenue-expenditure policies best suited to varying economic
conditions. It is our final recommendation that Congress be prepared both now
and in the future to make prompt alterations i n the policies adopted for any
fiscal year. I t must be recognized that this w i l l involve important changes in
the organization and procedures of Congress for fiscal management. 1

Senator DOUGLAS. Thank you very much, Dr. Leland.
Dr. LELAND. Thank you, Senator Douglas.
Senator D O U G L A S . I wonder if for the sake of completeness, you
would put into the record the names of the economists who have
signed these reports.
Dr. LELAND. I will be glad to do that.
Dr. Howard R . Bowen, dean of the college of commerce, University
of Illinois.
Dr. Howard S. Ellis, professor of economics of the University of
California, and now president of the American Economic Association.
Dr. J. Kenneth Galbraith, department of economics, Harvard
University.
Dr. James K . Hall, professor of economics, University of Washington, Seattle.
Dr. Albert G. Hart, professor of economics, faculty of political
science of Columbia University.
Dr. Clarence Heer, professor of economics, University of North
Carolina.
Dr. E . A. Kincaid, professor of finance, University of Virginia.
Dr. Simeon E . Leland, professor of economics and dean of the
college of liberal arts, Northwestern University.
Dr. Paul A . Samuelson, professor of economics, Massachusetts
Institute of Technology.
Dr. Lawrence H . Seltzer, professor of economics and sociology,
Wayne University, Detroit.
Dr. Arthur Smithies, professor of economics, Harvard University.
Dr. Tipton R . Snavely, professor of economics, University of
Virginia.
M r . H . Christian Sonne, chairman of the board of trustees, National
Planning Association.
Dr. Jacob Viner, professor of economics, Princeton University, and
the past president of the American Economic Association.
Dr. Donald H . Wallace, professor of economics, school of public
and international affairs, Princeton University.
I might say that the document was sent to both Professor Ellis
and Prof. Sumner Slichter, Thomas Lamont professor of Harvard
University—the president and a past president of the American
1
Since the original release of these two reports they have been submitted to the N a t i o n a l
P l a n n i n g Association labor and agriculture committees, which unanimously approved them
" i n principle, but not necessarily i n detail."




12

M O N E T A R Y , CREDIT, AND FISCAL POLICIES

Economic Association. The document on policy was signed by both
Ellis and Slichter. Slichter did not sign the document on advice
with respect to the near future, but Ellis did.
Senator DOUGLAS. M r . Leland, do you mind if I address a few
questions to you and I understand Dr. Smithies is here with you, so
that you can parcel out the questions between you as you wish.
I wonder if you would state for the sake of the record why you approve
of the deficit financing in periods of depression.
D r . LELAND. We have tried to make those statements i n the
document, and I think that any statement that we might make in
words or phrases that are not those of the document had better be
taken as our own personal opinions
Senator D O U G L A S . I understand that.
Dr. L E L A N D (continuing). And not standing for the opinions of
our colleagues, who are not here to speak for themselves. So much
of the statement is a matter of personal wording that I would hate
to speak for any of them.
M y own position is that whether we will it or not, every dollar of
money taken in taxes, or every dollar of money spent, or dollar
borrowed, has some effect upon the economy, so that irrespective of
whether we intend to have a surplus or intend to have a deficit in
any particular period, the action of the Government will have an
important effect in determining, or helping determine, the volume of
income flow and the volume of production; that unless the policies are
conceived in advance, and are determined so as to direct those flows
in proper directions, results which are neither desired nor anticipated
may occur.
If, then, you are interested in a government that has volumes of
expenditures of the size that we now have, where they represent
something like 20 to 25 percent of the total spending or the total of
the purchasing power flows i n the economy, it is desirable that the
effects of those operations be the kind that are needed to help maximize
human well-being and economic welfare, so that when private business
is unable to provide all the employment, or produce on its own all
the goods that are desired, and there remains substantial numbers of
unemployed, it is desirable to have the Government, through its
taxing and spending policies, influence the total volume of production
and employment.
Y o u cannot let the task fall completely to the private sector of the
economy at a time when unemployment is growing, and the result is
that a deficit which will finance that employment is desirable in the
interest of maximizing economic welfare.
M r . Smithies can undoubtedly give you a shorter statement as to
why we would prefer that very policy.
D r . S M I T H I E S . I can give a shorter statement, but I do not think it
will be a better one, M r . Chairman.
I would like to say two things: First, it seems to me that experience
in the past has demonstrated that it is impractical to avoid a deficit in
times of depression. B o t h the Hoover administration in the 1930's,
and the Roosevelt administration in its early months, made strenuous
efforts to balance the budget, and found that it was quite impractical.
The second point is that it is desirable not to have a balanced budget
in times of depression because it is important that the Government
generate more purchasing power by spending money than it contracts



13 M O N E T A R Y , CREDIT, A N D FISCAL

POLICIES

purchasing power by taking money away in the form of taxes. A t a
time when economic resources are unused, we do not see any justification for leaving them unused for extended periods of time when the
Government could put them to work.
Dr. LELAND. M r . Sonne might have a statement of his own on that.
Senator DOUGLAS. M r . Sonne, would you like to comment?
M r . SONNE. I would say that there is, first, the question of why
this problem arises. W h y can we not have a stable economy all the
time?
It is interesting to contemplate that if you had a country with ideal
laws, antitrust laws, stable prices, and so forth, for a certain period,
it could not remain like that because of increased productivity.
Man, by using his ingenuity, learns to do things better and better
in a shorter time as each year goes by. So there would invariably
come a period when prices would begin to fall, and then human
nature would dictate that citizens abstain from buying because they
think prices would fall further. Then you would find that they
would save, would not spend; the result is unemployment. There
would be a further drop in prices until the developments rectified
themselves.
Now, what should we do in such circumstances? It seems to me
clear that when a large group of citizens withhold their savings for
a period of years, and then suddenly, when they think it is all over
and begin to buy, let us say, motorcars, that you cannot expect the
motorcar factory to keep pace with this sudden demand. After 5
years of no business the manufacturer would not be able to produce
suddenly all the cars the public wants.
Consequently, it seems that the Government ought, during such a
period, to see to it that enough purchasing power is distributed
amongst those who will consume to keep the economy going—in this
case a motorcar factory. There is nothing unsound in it as long as
the Government pumps into the economy no more than what private
individuals have saved. The Government would be able to get back
its expenditures when people again were willing to spend their past
savings.
I can put it in another way, as a farmer—which I happen to be
originally. A farmer will hire 100 men to work pretty hard when
he sows and when he harvests. Then in the old days when the winter
came there was a period where there was little to do. H e would not
throw the workers out. H e would say, "Boys, I will feed you and
will use the winter months to paint the barn and get our machinery
in shape, but instead of working 50 or 60 hours a week, like we did
in the summer, we can all work less."
Now, he can afford to spend the money to keep the barn in shape
and keep those boys employed even if, perhaps, they are not fully
employed, because he knows that very soon there will be another
spring and another crop.
Now, this can be compared to the cycles in depressions and booms.
If we have a depression, it is equivalent to the winter. W e should
fix the barn, and that means we should build roads and Government
buildings.
T h e farmer can do this normally because he knows exactly when
the crop is coming, but the unfortunate thing with private industry
is that when it comes to booms and depressions, businessmen do not
99076—50

2




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M O N E T A R Y , CREDIT, AND FISCAL POLICIES

know with the same certainty when the depression will be over.
Hence, the Government, in some form, must take a hand in it.
Senator D O U G L A S . I noticed that in dealing with depressions, you
favor a double-barreled program. On the one hand, you favor decreasing tax rates or eliminating certain taxes, and also, on the other
hand, expanding governmental expenditures.
D i d you reach any rough agreement as to the relative emphasis to
be given to each of these?
Dr. L E L A N D . I do not think we had any agreement, or even attempted to get an agreement, as to the magnitudes of one or the other.
Senator DOUGLAS. There are certain groups who feel that the sole
method of dealing with a depression is an expansion in governmental
expenditures, while on the other hand, there are others who say that
the sole way of dealing with a depression is by a curtailment of taxes.
Y o u apparently advocate both, and I wonder if you could give advice
to hard-pressed legislators as to the relative importance to be given
to each of these.
D r . Smithies, do you have anything to say on this topic?
D r . S M I T H I E S . I do not think any formula would meet the needs
of the case, M r . Chairman. I think decisions must rest on a broad
economic judgment of what is required.
Reductions of taxes will leave more money in the hands of the taxpayers, and will stimulate spending by them on the goods produced
for private consumption or investment; whereas Government expenditures, for instance, on public works and projects, will benefit
the community through the results of the projects. I think the
correct policy depends very heavily on the economic judgment as
to what the community really needs.
If it needs more dams and roads, then it may be appropriate to stress
expenditures.
If it is the judgment, say, of your committee that we are relatively
well supplied with public works, it would be more appropriate, I
think, to lay stress on tax reduction, and allowing private consumers
to get the benefits of the recovery policy.
Senator DOUGLAS. It is sometimes said, however, that while a reduction of tax rates, particularly in the upper income brackets, would
release purchasing power to potential consumers, this purchasing
power would not be fully utilized because of the fact of hoarding, and
that therefore reductions, let us say, of 5 billions in taxes would not
reflect themselves in 5 billions of expansion in private purchasing
power; whereas, in public expenditures, each dollar that is spent, in
the main, going to lower-income groups, would result in a higher rate
of expenditure by those receiving the amounts.
D r . SMITHIES. I think this is a difficult question which must be the
subject of further statistical research. I know it used to be the
commonly held belief that reductions in high-bracket income taxes
would not stimulate more spending; I think more recent research into
consumer expenditures has thrown some doubt on that conclusion
and has more or less tended toward a conclusion that reductions of all
taxes might help. This, I might emphasize, certainly was not discussed in our committee, and it is a highly controversial matter.
Senator DOUGLAS. A l l the budgetary studies that I have seen seem
to indicate that as income increases the increase in the rate of savings
is greater than the rate of increase in income; so that the income



15 M O N E T A R Y , CREDIT, AND FISCAL POLICIES

elasticity of savings is greater than unity. If the savings are not
translated into investments, as is frequently the case during a depression, then would not that mean that the reductions in taxes would not
be as effective as an increase in expenditures?
Dr. S M I T H I E S . I think you would have to draw a distinction between what people do on the average out of their incomes and what
they do when their incomes increase or decrease. Undoubtedly highincome people save more than low-income people. That is an unquestioned fact, but from that it does not necessarily follow that a highincome person would spend less of an addition to his income than a
low-income person. A high-income receiver might save, on the average, 50 percent of his income because of, say, life insurance commitments and other savings commitments, but if he got an additional
thousand dollars, he might spend almost 100 percent of that addition.
A low-income person might be spending a hundred percent of what
he already had and might spend a hundred percent of any addition to
his income. But, as I say, I do not want to commit myself on that
point; I want to keep an open mind on it.
Senator D O U G L A S . The advocates of deficit spending are sometimes
accused of proposing policies that lead to a secular rise of Government
taxes and spendings. It is said that they favor an increase of spendings during depression, but when prosperity and boom come around
they favor a rise of taxes and no decrease of expenditures. The
result is therefore said to be a continuous expansion in Federal expenditures, with the compensatory device of added expenditures being used
in periods of depression, but with no tapering off of expenditures in
periods of prosperity, and instead merely added taxes at that period.
Then, when the next depression comes, that is sometimes used as a
jumping-off place for added expenditures, so that in the long run you
get a tremendously accelerated secular trend in expenditures which
eats into the private economy.
I wondered if any of you wanted to make statements on that
question.
Dr. L E L A N D . I certainly do. I want to call your attention to the
fact that the entire group of economists was agreed that a cyclical
fiscal policy requires attention to both sides of the Federal taxing and
spending program in each phase of the cycle. B u t when it came to a
depression, we not only advocated increases of expenditure where
necessary to increase employment and production, but likewise
decreases in tax rates.
A n d conversely, in periods of prosperity, we advocated not merely
increased taxation, but decreased expenditures, with some hard words
in here, as hard as we could get in, to the effect that we did not think
that the ideals in this respect had yet been achieved.
Senator D O U G L A S . Well, I am delighted to have that statement,
because I think that point has not been sufficiently stressed by the
advocates of a compensatory fiscal policy in the past.
Dr. L E L A N D . A n d I think one other thing ought to be added to that:
If you are going to have a compensatory fiscal policy, all of the other
policies of the Government should, if they are to have the greatest
impact upon the economy, be consistent with it, and that means that
you have a countercyclical policy not merely with respect to taxes and
expenditures but also with respect to money and credit policies, with




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M O N E T A R Y , CREDIT, AND FISCAL POLICIES

respect to administration, with respect also, let us say, to regulation of
certain other activities.
Senator FLANDERS. M r . Chairman, may I ask a question just at
this point?
Senator DOUGLAS. Y e s .

Senator FLANDERS. Would you say that it would be good policy for
the Treasury to start or continue a heavy E bond campaign during
a period of depression?
Dr. L E L A N D . I do not think the E bond campaign in a period of
depression makes any sense whatever. I would say likewise I am not
too much sold on it in a period of prosperity.
I would much prefer compulsory saving at that time to a voluntary
effort—I would prefer compulsory saving to voluntary saving. B u t
whatever the policy is, it ought to be consistent. T o try to increase
savings in a depression when the desideratum is increased spending, is
wholly inconsistent, Senator.
M r . SONNE. M a y I add, Senator Flanders, that this is more in the
area of monetary policy.
Senator FLANDERS. That was not within the framework of reference
which would
M r . SONNE. I believe all economists would entirely agree with
M r . Leland.
Senator F L A N D E R S (continuing). Be under which you worked.
I realize that.
M r . SONNE. I would just like to say that although economists did
not put down any particular rule about the order in which events or
these measures should be taken, there was one very definite thing on
which they all agreed—automatic flexibility. If you do not increase
the tax rates as things get worse, you get automatically a deficit.
As they say in the report, they regard that as "more than a first line
of defense," meaning that knowing that this automatic thing was
working, there should be a breathing spell within which Congress
could decide which of all these other steps ought to be taken, with
due regard, as Dr. Smithies said, to what the country needs. There
was unanimous agreement on that.
Senator D O U G L A S . N O W , we have briefly gone over the recommendations for cases of depression and for cases of boom.
What would you advocate in the intermediate periods which can,
I suppose, be designated as recessions or mild prosperity?
Dr. LELAND. Well, at that point, the group tried to formulate a
statement that no major changes should take place
They did say
two things: On the taxation side, that such a period was an ideal time
in which things that ought to be done that did not have material
fiscal impact ought to be undertaken. I t is an appropriate period
for improving the tax system for its own sake.
Similarly, it is also a period when efficiency and improvements in
efficiency might well be emphasized, although the committee was
agreed that any time, irrespective of the cycle, was an appropriate
time for such activities. B u t when there was no perceptible trend,
then the action should be such as would not make any material impact
upon the economy, either in the direction of producing conditions
which might tend to have an expansionary effect or, conversely,
those which would tend to have a deflationary effect,




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POLICIES

Senator DOUGLAS. It is very difficult to pick out the dividing lines,
but we have to make decisions here in the midst of circumstances,
and I think what puzzles a great many of us is this: When does a
recession become a depression? When does mild prosperity become
a boom? It is all well and good to lay down these general rules, but
are there any specific guides that you can set up as to that?
Dr. SMITHIES. Could I touch on that, M r . Chairman?
Senator DOUGLAS.

Yes.

Dr. SMITHIES. That, of course, is the essential and difficult problem
from the point of view of the Congress and we struggled with that in
our statement, and we have three possible cases.
The first one is:
When the economy is prosperous and stable and there is no clear-cut reason to
expect a change i n any particular direction, the objective of policy should be to
adapt the budget to changes in the Government's requirements but to leave its
economic impact on total employment and purchasing power unchanged. T h i s
could be approximately achieved—

and we underline the word "approximately"—
if newly planned increases or decreases in expenditures were to be matched w i t h
corresponding changes in planned tax receipts.

Our group did not go into the question of procedures in the Congress, but if I might give a personal view on that, it seems to me that
the practical way in which such a rule could be implemented would
be essentially through the operation of your committee.
I imagine your committee, in its hearings, would make a judgment
on the economic situation. If it found that there was no clear-cut
reason to expect a change we would recommend that you suggest
to the financial committees of the Congress that if they increase
expenditures they should enact corresponding increases in taxation.
Senator DOUGLAS. Well, we held such hearings i n February, and
certain very reputable economists appeared before us and testified
that the danger was acute inflation, and that we should take steps
to reduce inflation by a high-tax policy, and various other methods.
Now, within a period of 2 months, those prophecies were clearly not
borne out by facts, and exactly the opposite happened.
M r . SONNE. I think you will find, Senator Douglas, that in the
second document we give a certain guidance there. We, first of all,
say, " A t present"—which was last week end—"the economy exhibits
no clearly discernible swing." A n d then we say that Congress should
act in case of a declining activity involving a genuine increase in
unemployment of more than a million and a half.
Senator DOUGLAS. A total of 5 million.
M r . SONNE. Meaning, as a guide, 5 million.
Senator DOUGLAS. I was very much interested in that figure of
5 million, because it so happens that it was the rough benchmark
which I have used in my mind. It comes to about 10 percent of the
nonagricultural working force, or about 8 percent of the total agricultural and nonagricultural working force.
M r . P A T M A N . M r . Chairman, may I ask a question here?
Senator DOUGLAS. Please do, and do not let me monopolize the
questioning.
M r . P A T M A N . That is all right.




18

MONETARY, CREDIT, AND FISCAL POLICIES

Early i n your statement on Fiscal Policy in the Near Future you
say, " T h e country should have positive assurance that the Government will be prepared to act promptly either if prices should display a
sharp and continuous upward swing, or if unemployment should
increase substantially."
Now, you place No. 1 there, the upward swing, and the No. 2,
unemployment. D o you consider that there is danger of inflation at
this time more than unemployment?
Dr. L E L A N D . Y O U are asking me my personal opinion?
M r . PATMAN. Well, you explained a moment ago that any opinion
you expressed would be a personal opinion.
Dr. LELAND.

Yes.

Well, I do not see any marked signs that prices are likely to move
sharply upward or that we are in danger of much in the way of inflation at this juncture, or that it is to be a likely event in the months
immediately ahead of us. Y o u understand that is my own personal
opinion.
M r . PATMAN. But, do you believe that there is more danger of an
inflationary condition than there is a deflationary condition?
D r . LELAND. Well, that depends, I think, in part upon the general
effect of the demands for increased wages, and the continued high cost,
high unit cost levels, with respect to labor. M y own general feeling
is that if conditions are not much different than they are now, the
general drift is down, with some pick-up in the volume of business
activity this fall.
M r . PATMAN. I would like to know if these other two gentlemen
would like to express their views on that subject, too.
M r . SONNE. I would like to just answer your question here. Y o u
mentioned that we said first, upswing, and then, unemployment.
M r . PATMAN.

Yes.

M r . PATMAN.

Yes.

M r . SONNE. I would like to confine myself to the document. Where
we stated that there was no clearly discernible swing I think we felt
that Congress should be ready to act, in the case of either alternative,
either an upward swing or downward swing. W e suggested that a
downward swing be judged by the number of unemployed people,
whereas with regard to the upward swing, we suggested using price
indices as a guide for.
M r . P A T M A N . N O W , the second question, would you mind commenting on it? Are we more in danger of deflation or inflation?
M r . SONNE. There you ask for a personal opinion, and I may say
that we were careful to put in the statement, "September 1949."
I would have preferred having the date fixed as that of the last week
end, because no sooner was this statement made, than sterling went
down to $2.80, and it is difficult to know what the repercussion would
be.
M r . P A T M A N . Y O U are not expecting any repercussions in this country to amount to that, bad repercussions?
M r . SONNE. Repercussions about sterling?
M r . SONNE. That remains to be seen. Y o u see, the answer is
that when it comes to prices we, in this country, may well know that
this had to be, but the people who determine the price of a number of
commodities, such as burlap, coffee, cocoa, are not the Americans,
but the people who sit in Africa, India, and South America. The




19 M O N E T A R Y , CREDIT, AND FISCAL POLICIES

question is, W h a t repercussions will the drop of the pound sterling
have on these business decisions and outlook? Whether we wanted it
or not, commodity prices in certain instances have dropped materially.
I t is very likely that there will be only a short period until we will
know the outcome, but I would have said, with more confidence last
week than this week, that there is no discernible trend.
M r . P A T M A N . N O discernible trend?
M r . SONNE. Either up or down, we said last week.
M r . PATMAN. Either way?
M r . SONNE. E i t h e r w a y .

Today, if I sat in Congress, I would say " L e t us be a little more
prepared on the downward side than the upward side because the
chances are that if there is a change, it will be downward."
M r . P A T M A N . Y O U think that is more likely than upward?
M r . SONNE. Yes; but I say both are within the realm of possibility.
M r . P A T M A N . I would like to have this gentleman's opinion with
respect to that.
Dr. SMITHIES. I would agree with that possibility. I agree there is
a possibility of further inflation, and there are further possibilities of
recession. I believe that the possibilities of recession rather outweigh
the possibilities of further inflation.
Incidentally, I do not happen to agree with M r . Sonne on the effects
of the depreciation of the pound, but to go into that would lead us too
far afield today.
However, I do feel that the possibilities of depression do not sufficiently outweigh the possibilities of expansion and prosperity to
warrant any emergency action or any change in policy at the present
time. B u t I fully agree with this report that advance preparation
should be made.
Could I just revert for a moment to your initial question, because
I think this illustrates the basic difficulty?
We have gone at great pains in this document to stress the inability
of people to forecast, and we know that some of us, as economists,
have frequently been wrong. Nevertheless, someone has the task of
preparing a budget at this time of the year to take effect over the
following fiscal year. A l l we can say here is that it has to be prepared
on the basis of the best economic judgment available, and I imagine
it is one of the functions of your committee to take what economists
say to you with the necessary grains of salt. Something has to be
done, and we cannot hope that those forecasts or that judgment will
always be correct. That is why we say that the judgment that is
applied to the annual budget this time of the year to take effect the
following fiscal year has to be supplemented by preparations for these
emergency and extraordinary measures that may have to be taken
during the year.
M r . PATMAN. Just one other suggestion that I want to make here,
to be more practical and to be more specific: D o you not think this
$2,800,000,000 paid to veterans the early part of the year, commencing
in December, will have a tremendous effect on our economy?
Dr. SMITHIES. I believe it will have a strong stimulating effect.
M r . PATMAN. Concerning the payments being made to World
War I veterans, I have not seen any mention of it in the newspapers.
Dr. SMITHIES. The veterans' bonus in 1936 did have a powerful
stimulus.




20

MONETARY,

CREDIT,

AND

FISCAL

POLICIES

M r . PATMAN. A n d that was only less than one-half, about 40
percent.
Dr. SMITHIES. Payment of the dividend enters into our judgment
on this matter. That is one of the expansionary factors that offset
the possible deflationary factors.
M r . PATMAN. There is another factor that I have never seen discussed i n the newspapers or the radio. There are between four and
five hundred thousand veterans of World War I who kept their policies,
and who have been receiving an enormous increase i n their spending
power. One veteran had two $5,000 policies, and he received $225 on
one and $120 on the other, $345 on those two policies, and that has
gone on all over the country recently. I have not seen that in the
newspapers. That is bound to be an enormous amount of money,
and the $2,800,000,000 is bound to have an influence on our economy.
I believe you agree with that?
D r . SMITHIES.

Yes.

M r . BUCHANAN. M r . Chairman, relative to military expenditures
in the budget for fiscal '50, was there any agreement or climate of
opinion so far as that subject is concerned as to present Government
policy?
Dr. LELAND. We did not discuss what you do with the present
military budget or what you should do with it, but everyone was
certainly agreed that military expenditures are no more sacred than
any other expenditures, and one of the places to look for economy at
all times is in the military budget.
There is an adage, you know, that if you want either to cut expenditures or to operate upon revenues, you have to look where the money
is. Y o u do not find money either where it is not possessed or it is not
being spent, and there was agreement that those budgets and those
requests should be looked at in the light of the policies indicated with
the necessary qualification, of course, that the defense and the international position of the country has to be considered.
Senator FLANDERS. M r . Chairman, I would like to ask D r . Leland
whether the net result of this document would indicate, perhaps, a
long-term reduction in the national debt rather than a long-term
increase in it or a long-term balance.
D r . LELAND. Well, I think—and this is purely a personal opinion—
that the document itself would indicate over the long run some
decrease in the public debt. It implies, of course, that there will be
expansion in the public debt during periods of depression, and at
times when there are budgetary deficits. But, conversely, it implies
although it does not say so definitely and specifically, that this is a
part of the field of fiscal policy that needs to be more comprehensively
covered by a specific inquiry into the money and credit policy, but I
think that the implication of the recommendation for a surplus is to
the effect that those surpluses would in the end be used to finance
reductions in the national debt.
Senator FLANDERS. Perhaps, it is outside the task to which you
set yourself to answer this question, but I will ask this also: D o you
feel that there is anything in the secular decrease in the debt that is
a worthy objective in itself?
Dr. L E L A N D . T O state now whether or not I think that debt payment, irrespective of the cycle is worth doing?




21 M O N E T A R Y , CREDIT, AND FISCAL POLICIES

Senator F L A N D E R S . N O ; I am talking about a secular decrease.
Is that a worthy objective, and does it have a determining effect on
these policies?
Dr. LELAND. If that means a reduction of the debt in good times,
and its expansion in poor times, I think you will find that there is
some disagreement of opinion among the economists as to the way it
ought to be handled.
The general statement is to the effect that you run deficits in depressions, and you retire the deficits during booms.
M y private opinion is that if you take that as the policy, the payment of the debt in the boom contributes to the boom, and adds to
the inflation.
M y feeling is that prosperous periods are the times to impose
taxes for the purpose of debt retirement, and that the money collected
for that purpose should be sterilized and kept out of the monetary
system, and that during the depression and the beginning of the
depression, is the time to pay the debt, and that this policy will
lessen the total amount that necessarily must be borrowed. So that
it really means the imposition of high taxes in boom times, the sterilization of the funds collected during the boom, and then the initial
repayment of the funds, and the payment of the debts to the holders
of the debt during the depression.
Senator F L A N D E R S . I S this sterilization which }rou are talking about
to be accomplished by preference retiring of bank indebtedness rather
than privately held indebtedness, or are there other means?
Dr. LELAND. That is one way. The other way, of course, would
simply be to sterilize the fund and put it in an independent treasury,
which is not connected with the banking system. Y o u could ship
that down to Fort Knox, along with the gold.
Senator F L A N D E R S . Y O U could ship paper as well as gold.
Dr. L E L A N D . Y O U might, yes, that is right. [Laughter.]
Y o u asked for another possibility—understand, I am not recommending that; I just added that to the sum total of things that might
be done—but the action on the bank-held debt is the most hopeful
way of meeting that situation.
Senator F L A N D E R S . Y O U regard the principles of your report as
following the Keynesian theory of economics?
Dr. SMITHIES. I would like to add a word about what Dr. Leland
has said about the national debt. I think there we are entirely in the
field of personal opinion. Our group certainly did not consider what
the course of the national debt would be in the future, and I would
not like to give the impression that we are trying to provide anyone
with an easy way to reduce the national debt.
It seems to me that the future course of the national debt will be
determined by events. I t will not be determined by the budgetary
policies followed by the Government. If we have more depressions
in the future than we have booms, I think we will inevitably have an
increase in the national debt. If we have more periods of inflation
in the private economy than periods of depression, we shall have
retirement of the national debt. B u t it seems to me it is quite impossible to forecast what the course of the national debt will be in the
future.
We do feel, as we say i n this document, that we feel reasonably
confident that the policy we recommend here will not result in any




22

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CREDIT,

AND

FISCAL

POLICIES

reater increase in the national debt than any other policy that might
e adopted.
We believe that if you adopt a prosperity policy, you may in fact
have periods of prosperity in which you can retire the debt, whereas,
if you do not do it, you may have periods of chronic depression where
you will inevitably have large deficits.
Senator FLANDERS. What you are saying is if the purposes set up
in the statute by which the joint committee was set up are successfully effected, then the national debt will be reduced.
Dr. LELAND. Over a period of time.
Senator FLANDERS. Over the long time. I n other words, if we are
successful, on the whole, in maintaining high employment and production, then probably the national debt might conceivably diminish
cyclically—not cyclically, I mean secularly.
D r . SMITHIES. I think it has to be put rather carefully. It seems
to me that you can say that, if the inherent strength of the private
part of the economy is sufficiently great, the Government may be
able to afford to tax more than it spends without impeding prosperity.
B u t that is a different thing from saying that the policies of the
Employment Act, if they are carried out, will result in debt retirement, because you may, in fact, need deficits to attain the objectives
of the act.
Senator FLANDERS.

Yes.

Dr. LELAND. I want to add to that point. I want it to be perfectly
clear to all those present that in replying to that question I was replying for myself alone, and, secondly, I would reply to part of the question that was asked with respect to the cyclical aspect and not to the
secular aspect that you put to M r . Smithies, because there I happen
to believe in the necessity for the secular long-term reduction in debt,
and M r . Sonne
Senator FLANDERS. I was going to say that M r . Sonne looks to me,
M r . Chairman, as if he might have an idea in his mind, and I would
like to ask him to make an observation.
M r . SONNE. I felt that I would like to report what I think was the
consensus—although not necessarily a hundred percent. I think it
is fair to say that the majority of economists at the meeting do not
like debt for debt's sake.
Dr. SMITHIES. I do not think any economist likes it for its own sake.
M r . SONNE. If for no other reason than that interest charges would
come back in taxes.
Now, they say it is impossible, as D r . Smithies says, to engage over
the years in a discussion as to whether there are going to be long
periods of recession or good times, but it is conceivable that at the
end of, let us say, a 30-year period, under this policy our debt will be
reduced. It is also conceivable that it will be larger. If it is enlarged,
it will be regarded as a lesser evil than to have unemployment and
bad times.
They also go so far as to say that if it is enlarged through the exercise of this policy, it would also have been enlarged as a result of the
old-fashioned idea of balancing the budget, because we simply would
not be able to do it.
I think that is a pretty fair statement, as I say, but I think most of
them expressed the hope that over the years it will be reduced, although
they do not necessarily think that it will happen.



23 M O N E T A R Y ,
D r . SMITHIES.

CREDIT,

AND

FISCAL

POLICIES

Yes.

Senator F L A N D E R S . I started to ask another question, and that was
as to whether the ideas in the report followed the, what we have come
to consider as, Keynesian philosophy in economics.
D r . L E L A N D . I would like to say on that score that I do not think
that M r . Keynes is entitled to credit for the belief that the budgets
of governments ought to be cyclically unbalanced. I think he is
entitled to considerable credit, along with other people, for having
argued that way, and seen the consequences of it, but most of M r .
Keynes' contributions to economics fall in the field of monetary,
banking, and employment policy rather than particularly with respect to the fiscal operations of the Government.
It happens that in this particular case they coincide, and the
reasons are harmonious, but the general belief in unbalancing budgets,
I think, was prevalent before M r . Keynes wrote his first book upon
this topic, and many others have pointed to the intimate connection
between the public and the private economy and the role that the
Government plays in.influencing the effect of business activity. So,
it is both in the tradition of the Keynes' doctrine, and it is completely
apart and outside of it.
Senator FLANDERS. Dr. Smithies, I have had the general impression that Keynesian ideas were rampant in the institution of which
you are a part. D o you want to give your comments on that?
[Laughter.]
Dr. SMITHIES. W e are inhabited by all shades of opinion. I
would like to say that I deplore the practice of labeling people as
Keynesians or anti-Keynesians. However, certain fiscal ideas have
been labeled "Keynesian," and I think this document is undoubtedly
indebted to those ideas, but it does stress an aspect of the matter that
has been insufficiently stressed in the literature—the necessity of
keeping adequate control over the size of Government expenditures.
That leads me back to one of the questions that Senator Douglas put
before, whether the kind of a policy we suggest leads to high expenditures in depression times and high taxes in boom times.
For all that has been said in this so-called Keynesian literature,
that problem, so far as I know, has never been adequately dealt with.
We believe the essential budgetary principles must be maintained if
we are ever going to get rational consideration of fiscal policy. I
think, therefore, our report differs from what is usually labeled—
perhaps wrongly, as M r . Leland says—as Keynesian, by stressing
that point.
Senator FLANDERS. Of course, that leads up to the practical question
of how we are going to put the principles mentioned into operation
here in a politically minded Congress. Have you any suggestions
to make on that?
Dr. SMITHIES. It seems to me, as I said earlier, that it depends
very heavily on the success of your committee. I do not think
there is any magic, from what I know of the Congress, in reorganizing
the Congress because, whatever the organization adopted, most
Members of Congress are chiefly concerned with particular programs
of government. I n my opinion, it is necessary to get an economic
point of view superimposed on the consideration of the particular
programs, and I think every economist who feels the way we do
welcomes very heartily the Employment Act, the establishment of




24

M O N E T A R Y , CREDIT, AND FISCAL POLICIES

this committee and the establishment of the legislative budget under
the Legislative Reorganization Act. I feel that the ideas we express
here can only be brought into play by a sort of educational process
which, I am very happy to see, your committee is making strenuous
efforts to carry out.
Senator F L A N D E R S . Y O U also spoke of examples of projects which
could be started and stopped, increased or diminished, and you
mentioned residential housing. I think one of our achievements has
been in introducing the idea of flexibility into the public housing plan.
D r . LELAND. T h a t is right.
Senator FLANDERS. A n d that is a definite step in the direction of
your report.
I note in the report, before the subheading of " T a x reform," your
statement with regard to large farm benefits. There, of course, you
strike a field in which there is intense political thinking at the present
time, and it is an example of the difficulty that Congress has i n
coming to an economic conclusion in the face of strong political forces.
I do not think it would be proper for me to ask you how we are
going to handle that political problem, but I think we will have to
recognize that it is there.
Dr. LELAND. I think it would be equally inappropriate, Senator, if
we gave you advice. We faced that problem squarely. W e recognize
that this is a document on economic policy, prepared for a branch of
the Government that is our most important political instrumentality.
W e are familiar with the difficulties that face Congress at any
phase of the cycle.
For instance, in the depression, I think there is ample evidence to
indicate that during the last depression Congress did not spend
enough; just as during the period of prosperity recently passed, they
did not tax sufficiently, and we are familiar with the difficulties which
face the Congressmen in increasing taxes, which are notoriously unpopular at any time; and similarly decreasing a spending program
which may equally be unpopular at another time, so there is no
counsel of perfection to be given here at all.
We are mindful of the problem, but unless the consequences are
clearly realized, we will never get to a point where we can get movements, at least in the right direction.
Senator FLANDERS. M r . Chairman, I have finished the questions
I wanted to ask. I just want to comment that it seems to me that
these two documents are extremely valuable. I do not know when
we have had anything since the committee has been in active service
that is more simple or more clear or more useful than these documents
that have been presented to us this morning.
Senator DOUGLAS. Congressman Buchanan?
M r . BUCHANAN. M r . Chairman, I believe that since the document
is so warm at the present time, it should be brought to the attention
of the entire membership of the Congress, and I would like to
request that you, as the chairman of the subcommittee, see to it
that it is incorporated in the record, if you will, and if it meets with
the wishes and comments of the other members of the subcommittee.
Senator D O U G L A S . D O you have questions?
M r . B U C H A N A N . N O questions.




25 M O N E T A R Y , CREDIT, AND FISCAL POLICIES

Senator D O U G L A S . I must apologize to both Congressmen Buchanan
and Patman for taking up so much of the time.
M r . PATMAN. That is expected of the chairman.
Y o u mentioned blocking off of a part of the national debt a while
ago and you suggested that we could just put it down in Kentucky
where we have gold, and it might be a good thing and get it out
of the way. Could you not do the same thing by having the Federal
Reserve banks buy up a part of the national debt, especially that
which is owned by the different local banks, that is so inflationary,
and freeze it, not put it in circulation?
Dr. LELAND. Certainly, if other measures were taken to prevent
the Federal Reserve funds from adding to excess bank reserves.
M r . PATMAN. That would be the same thing.
Dr. LELAND.

Yes.

M r . SONNE. A n d save some interest, by the way.
Dr. LELAND. Oh, yes. Those are possibilities that a group considering money and credit policies ought to consider.
M r . PATMAN. This gentleman here, being a farmer himself and
having given a great deal of thought and study to the different farm
plans, I wonder if he has come to any conclusion on the Brannan
plan?
M r . S O N N E . I would be happy to discuss that question with you
unofficially, because it is slightly outside the sphere of this hearing.
M r . P A T M A N . I will not insist on it.
That is all, M r . Chairman.
M r . SONNE. I am very much interested.
Senator D O U G L A S . I was puzzled by Congressman Patman's
question and your reply. Suppose the Federal Reserve, with a surplus, were to buy Government bonds held by member banks i n the
open market. Would that not give to the member banks a credit
deposit with the Federal Reserve System which could also operate
as an inflationary device, and that, therefore, it would not be deflationary?
M r . PATMAN. Which could be easily corrected b y raising the reserve
of the banks.
Senator DOUGLAS. D r . Leland, do you want to make any comments?
Dr. L E L A N D . I think the question of whether it is deflationary or
inflationary is determined by the sources of funds that are used to
retire the debts. It is the taxes that are imposed that get the money
that are deflationary, whereas, the very fact of retirement, as you
point out, may put money into the hands of the banking system
unless accompanied by changes i n the reserve ratio and voluntary
abstinence i n the use of those funds. Y o u cannot get a complete answer
without tracing through all of the effects, first, from where the money
comes; then, second, the effects of what it is used for, and how the
purchasing power either is withheld or goes back into the total
economy. The mere payment may simply restore the purchasing
power at a different spot and may offset all the good that is accomplished by the taxes imposed.
Senator DOUGLAS. Well, as we move on into money and credit
policy, I see that we will have some ticklish problems there.
Congressman Patman, do you have any questions?
M r . P A T M A N . N O questions.



26

M O N E T A R Y , CREDIT, AND FISCAL POLICIES

Senator DOUGLAS. Congressman Buchanan?
M r . B U C H A N A N . N O questions.
M r . PATMAN. Remember, I am not criticizing you for taking the
time that you did. Y o u r questions were very constructive.
Senator D O U G L A S . I have a guilty feeling of taking more time than
I should have, and I want to apologize
M r . P A T M A N . N O apology is needed.
Senator DOUGLAS. A l l right, gentlemen. Thank you very much.
(Whereupon, at 12:30 p. m., the subcommittee adjourned, subject
to the call of the Chair.)




MONETABY, CREDIT, AND FISCAL POLICIES
WEDNESDAY,

NOVEMBER

16,

CONGRESS OF T H E U N I T E D

1949

STATES,

SUBCOMMITTEE ON M O N E T A R Y , CREDIT, AND F I S C A L POLICIES,
JOINT COMMITTEE ON THE ECONOMIC REPORT,

Washington, D. C.
The subcommittee met, pursuant to notice, at 10 a. m., i n the caucus
room, Senate Office Building, Senator P a u l H . Douglas (chairman of
the subcommittee) presiding.
Present: Senators Douglas (chairman of the subcommittee) and
Flanders; Representatives Buchanan and Wolcott.
Also present: Dr. Grover W . Ensley, acting staff director, and Dr.
Lester V . Chandler, economist to the subcommittee.
Senator D O U G L A S . Ladies and gentlemen, as the Subcommittee on
Monetary, Credit, and Fiscal Policies reopens its hearings, we are
happy to have as our first witness, M r . A l f r e d H . Williams, president
of the Federal Reserve Bank, Philadelphia.
M r . Williams, I believe you have brought along an associate, who
may assist you with certain technical questions. I wonder i f you want
to identify him at this time for the record.
M r . W I L L I A M S . H e is M r . K a r l R . Bopp, vice president, Federal
Reserve Bank, Philadelphia.
Senator D O U G L A S . I assume you will, yourself, want to answer questions relating to the fiscal policies of your bank and the Federal Reserve System as a whole, but I hope you w i l l not hesitate to refer any
questions to M r . Bopp i f you care to do so.
Senate Concurrent Resolution No. 26, which authorized the establishment of this subcommittee, directed us to make "a thorough and
complete study and investigation of the effectiveness and the coordination of the monetary, credit, and fiscal policies i n dealing with
general economic policy."
This is obviously a very broad subject, and i n your written statement to the subcommittee, which I have here, you have already dealt
with many aspects of it. I think perhaps it would be best this morning i f we started off with having your own judgment as to what are
the most important and urgent problems i n the field, so that we may
narrow the range of consideration at the beginning of our hearings.

STATEMENT OF ALFRED H. WILLIAMS, PRESIDENT, ACCOMPANIED
BY KARL R. BOPP, VICE PRESIDENT, FEDERAL RESERVE BANK,
PHILADELPHIA, PA.
M r . W I L L I A M S . M r . Chairman, perhaps I should at the outset make
the point that I am speaking as president of the Federal Reserve Bank
of Philadelphia and not as a representative of the President's Con-




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ference of the System or of the Board of Governors. Y o u have the
record of replies to your questionnaire which indicates the general
point of view. That record was created by appointing a committee
of economists from the 12 banks, who met and discussed the questions
and formulated replies. Individual deviations from those replies,
either i n the way of supplement or disagreement, are i n the record.
I think it might be helpful i n this initial hearing to discuss the
broad aspects of the problem of coordination and effectiveness of monetary and fiscal debt-management policies. I am glad to do this, because it seems to me that the area under consideration by the subcommittee is an extremely vital area, a very important one. I t is
especially important to the System, because we are under a legislative
mandate to use the techniques attached to monetary policy to bring
about improved economic stability i n the public interest.
I would like to make the general point that i n my judgment the
problems of economic instability are becoming increasingly difficult,
and that the basic ground swells may well be inflationary. A s I
reflect and digest developments, it seems to me that in considerable
measure these stem from a zeal for social justice. There are many
observers who think of this as arising only i n the United States. I n
my judgment, it is world-wide.
Roughly, there are 65 sovereign powers on the planet, and I think
a survey of these would indicate that the zeal is at work i n almost
every one of these groups. I suspect that at some future time, when
a historian sits down to record the developments, he w i l l think of this
as the period i n which the Zeitgeist, the spirit of the age, is one of
getting a greater amount of what we may term social justice.
I n the United States, that is taking the form of conscious efforts
on the part of the state to achieve a larger measure of equity i n every
specific situation where trouble appears. I t would be presumptuous
for me to go into this i n any detail. I take it that the experience of
the members of the committee i n specific provinces that f a l l within
their assignments would furnish us all the material we need.
Senator DOUGLAS. M a y I interject for a moment?
M r . WILLIAMS.

Surely.

Senator D O U G L A S . D O I take it that you are somewhat afraid that
the expenditures on so-called welfare purposes w i l l result i n unbalancing the budget and, therefore, exert a steady inflationary pressure
on the economy %
M r . W I L L I A M S . I think that is a fair statement of my feeling.
Senator DOUGLAS. O f course, about 78 percent of the Federal budget
goes for either preparation against a future war or payments incurred
as a result of past wars or nearly 33 to 34 billion dollars of the total of
43 to 44 billion dollars that w i l l be spent for the current fiscal year; and
I wondered i f you would not add to this feature that you have mentioned the fact that the world is i n a state of uncertainty and that h i g h
military preparations are being made, and that these exert an even
greater inflationary pressure than the so-called welfare measures.
The specific welfare measure appropriations by the Federal Government amount to only about 2.2 billion dollars out of the total of 44
to 45 billion dollars i n the budget.
M r . WILLIAMS. I quite agree, and these expenditures are highly inflationary because they are i n essence wasteful, except as they produce
real or fancied security.



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Senator DOUGLAS. W i l l you proceed? I merely wanted to correct
the record a bit so that the so-called welfare state would not be charged
with responsibility for unbalancing the budget.
M r . WILLIAMS. There are other aspects that w i l l tend to produce
economic instability, and I think, as I proceed, they w i l l be brought out
and result finally in a more balanced picture than I give when developing this first point, Chairman Douglas.
What we have is an attempt to give to each aggrieved part of the
economy, to each claimant, a cure. W e look at agriculture, at veterans' affairs, at housing, at local depressed areas. M y native birthplace, a town i n Pennsylvania, is added to the list as of this past week.
The danger is that we give to each and assume there shall be no
losers. This, of course, is impossible unless we can expand output
with each gift, and this i n turn soon comes to an end because of the
impossibility of indefinite expansion. The Germans have an adage
that trees do not grow to the sky.
W e tend to shore up the weak points as they appear rather than
view the development of weakness as a process by which resources are
redistributed.
I turn for a moment and contemplate the small-business scene.
Without taking the position that more of these claimants deserve all possible aid, I think of the philosophizing of a Danish
economist, who says, "Thank God for the bankruptcies." B y that he
was thinking of the bankruptcy as a process by which individual enterprises are sloughed off and resources are redistributed. This is not
to say that we should not make every effort to see that, for example, a
depressed area is given some aid; but we should raise the question as
to whether we ought not to make an orderly transition from the type
of economy that exists there to something that is more balanced and
w i l l not continue the difficulties that are occupying our current interest.
This zeal for social justice reflects itself also i n the form of our efforts to obtain f u l l employment with ever-rising wage rates. The
postwar record is one of successive demands and pretty much of successive acquiescence.
A second force that is likely to make our economy more unstable
is the changed character of economic action.
It seems to me that economic movements are more pronounced; they
are more powerful; they are more unpredictable. Decisions are no
longer made by large numbers of participants in the economic process
where you get the operation of the law of large numbers.
I referred a moment ago to the 65 sovereign powers. A l l of them
are now entering into the actions of the market place. One gets by
reason of state action—and for other reasons, too, of course—gyrations in all forms of economic activity. F o r example, before us at
the moment is the price of coffee.
Now, these are in some cases unpredictable because they grow out of
political influences and not the give-and-take of the buyer and seller
i n an open market place. I am not saying we ought to return to the
days of so-called free competition. I am discussing what seem to me
to be realities at the moment in the light of achieving economic stability. This w i l l bring us ultimately to the question of what we can do
via fiscal policy, in the management of the public debt, and through
the operations of the Federal Reserve System.
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I would cite as a second illustration of the changed character o f
economic action what is happening in the field of collective bargaining.
A t the outset I would make the point that I am not against collective
bargaining and that what I am about to say ought not to be construed
as antiunion.
W e have had a development i n the labor movement which is of the
utmost significance from the standpoint of wage rates, pensions, et
cetera. I enter this field, M r . Chairman, with some diffidence because
of your own professional interest and competence i n the area; but,
as I read it, we had up to 1934 a relatively slow growth of tradeunions. A t that time there were 3,000,000 members. I f one looks at
the composition of the unions, we find for the most part they were
the elite of the labor movement. The A . F . of L . and the brotherhoods dominated the situation. The general public was not conscious
of the results of their collective-bargaining efforts.
B u t suddenly there came forth i n 1934 and continued to grow a
democratization of the labor movement. W e brought i n not only the
craftsmen, the men with technical skills, but went down into the ranks
of labor and organized those. Today we have not 3,000,000 members
of trade-unions but 16,200,000.
Now, these new members differ from those that peopled these smaller
unions. They have zeal for social justice. They set up demands;
and, because they are unskilled for the most part, or have highly
specialized skills, and for other reasons, we have the development of
industry-wide bargaining. So, as a result of contractual negotiations,
we have wage rates that cut right across an industry. If, as a result
of strong bargaining, a leader in one industry achieves a wage increase^
perforce the leader in every other industry must get it, too. H e must
bring the bacon home to his men. Y o u have here a force that is very
pervasive. One contract permeates until it soon influences an entire
industry, and that industry influences the others. I f a mistake is
made i n the initial contract, it is transmitted to others and becomes
a major mistake for the whole economy.
There is a witticism concerning Nazi Germany to the effect that it
was so well organized that it could make only major mistakes. I n a
sense, that conveys something of the thing I am trying to put across
at the moment.
Another aspect of these major factors making for economic instability is the fact that this country has been catapulted into a position
of world leadership by virtue of a long chain of events that need not
be analyzed here.
I t seems to me that this position of world leadership and responsibilities which are attached to it reinforce the drive to see that we shall
not fail, because of the consequences of any untoward domestic action
on us in the international scene. This tends to make us less flexible,
less willing to suffer defeat on one front because we fear it may go to
others.
I am leading to the conclusion, M r . Chairman, that we must redouble
our efforts to achieve stability and to achieve it under conditions of
high levels of employment and production and at reasonably stable
prices. This i n the minds of able students is the only way i n which i n
the long run, you are going to be able to achieve social justice.
The problems are not only complex; they are on the increase. The
stakes are larger.



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The question is, H o w do you achieve this stability ? Broadly speaking, there are two ways in which it can be achieved. One is by a series
of specific controls, and the other is by attempting to get some general
influences that w i l l be impartial, that w i l l be impersonal, that w i l l be
pervasive.
T o select the former route is to begin to go down a road where one
control leads to another. I suspect that the British Labor Government
finds itself i n a position where it cannot very well go back and, therefore, is going on, perhaps very reluctantly.
I think we have to be very careful about that. I think the period
that we are now i n is one in which we are going to make some basic
choices. I shall attempt to tie this in to the attitudes that exist now
within the field of banking and within the field of bank administration. I refer again to the fact that the area you are exploring here is
i n my judgment a very important one.
I take it you are interested i n our judgment as to the inherent effectiveness of work i n this area of general controls. What is our judgment as to the way we are organized and some of the results that we
are failing to achieve because of lack of organization ? A r e the tools
that are at our disposal ones that needed to be added to or
resharpened ?
I stop to say at this point that my own choice is for general instruments of control and influence. They can be few i n number i f they
are well chosen.
Senator DOUGLAS. M a y I interject a question there ?
M r . W I L L I A M S . Y e s , o f course.

Senator D O U G L A S . I take it what you are saying that i f we could have
a sound monetary, credit, and fiscal policy, reasonable stability of
prices, but with prevention of depressions, then i f that can be effected
through monetary, credit, and fiscal policies, you would prefer to use
that; and that specific controls over given areas, such as an industry,
and so forth, should be discarded or abated and that you would trust
instead to the forces of competition i n fixing individual prices within
the framework of the general stabilized price system; is that right ?
M r . WILLIAMS. The question is an extremely difficult one to answer,
M r . Chairman. I n agriculture the Government has a bull by the tail.
I n agriculture we have 6y2 million business enterprises—I call the
modern farm a business enterprise—subject to unusually unstabilizing factors. I would not go so far as to say we ought to begin
now and by a process of orderly liquidation over a period of years get
out of agriculture completely, but I think we ought to ask ourselves
the questions: T o what extent can we get out of agriculture ? H o w
rapidly can we accomplish this reduction i n commitment ? W h a t are
the ways in which we can bring this about? I t ought not to be a
separate approach to a problem which ramifies out i n all directions
and which has essential unity.
Senator DOUGLAS. The presumption, however, should be i n favor of
a general solution rather than a series of specific measures ?
M r . WILLIAMS. Quite so, and the presumption should be that everyone who is affected by a general policy ought to be informed about that
policy.
Senator FLANDERS. M a y I ask a question ?
S e n a t o r DOUGLAS.




Yes.

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Senator FLANDERS. M r . Williams, does what you are saying also
apply to credit control itself ? D o you feel that credit control by the
Government through the Federal Reserve System or by any other
means should be general rather than applied to specific areas of business operation ?
M r . WILLIAMS. I would go into specific credit areas with the greatest reluctance. W e w i l l come to that question later.
S e n a t o r FLANDERS. T h a n k you.

M r . WILLIAMS. This background focuses attention upon the role
of the Congress, of the Treasury, and of the Federal Reserve System
i n this drama, i f I may use the term, the social drama that I am attempting here to sketch.
I consider first the role of the Congress i n the fiscal policy. Here
again I may be presumptuous in bringing up the question. I do so
only because it is such an essential part of it.
The role of fiscal policy i n economic stability is one that i n broad
outline is easily handled by students of the subject under the general
term of compensatory fiscal policy.
The Government achieves economic balance by putting funds i n and
taking them out of the spending stream. Question is raised as to how
frequently you must be i n balance. There are several schools of
thought with respect to it. Do you attempt to achieve it annually?
D o you attempt to achieve it over a longer period of time? Theoretically, the scholars say you achieve it over a longer period than a
year. These economic recessions and swells do not occur according
to the calendar.
When you turn to compensatory fiscal policy, i n practice, you step
out of the closet into the world of men who are sensitive to political
values—and I do not use that invidiously. I mean Congressmen are
locally elected, and I may say reelected or rejected; and that influences
their actions.
I n 1948 we had tax cuts, which increased the money available for
spending by $5,000,000,000. There were probably many considerations which led to the action, but the chances are that not many of them
centered around—let me put it this way: there were some that d i d not
center around the question of achieving economic balance. I am not
saying this critically, because there are a great many limitations to
the effectiveness of the role that Congress can play i n this question
of achieving economic balance, and I hope i f I am i n error here that
you w i l l set me right.
T o be successful, there must be some fairly accurate predictions,
sometimes far i n advance, because the economic effects of congressional
action may be delayed for a considerable time. Fiscal policy as carried
out by Congress is not a flexible tool. Y o u cannot change tax and expenditure policies quickly.
Also, as important as anything, when the decisions are made, frequently the aggregates are not in view. B y focusing attention on one
aspect, particularly i f a person is politically motivated, you get a total
result which you would not accept i f you knew i n advance that it was
coming. Y o u do not get the discipline that frequently arises i n other
fields of action, notably business, where the penalties are pretty direct
and pretty immediate and pretty close at hand.




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I think that the most we can hope for in the consideration of what
Congress can do in this whole area—that is, fiscal policy—is that it w i l l
not seriously aggravate the problem. That is a pretty mild statement.
A t the same time, the effects of fiscal policies are large and growing.
F o r example, during the twenties Federal and governmental expenditures were in the magnitude of $5,000,000,000, compared to a gross national product of $90,000,000,000. Today we have $40,000,000,000 of
governmental expenditures and gross national product of $250,000,000,000.
Now, the Government can waste resources just as readily as can the
individual citizen or the business enterprise. I think it would be helpf u l if we were constantly reminding ourselves that the responsibilities
that are set forth broadly in the Employment Act of 1946 contain implied responsibilities for Congress as well as for the Treasury Department or the Federal Reserve System. It involves the art as well as the
economics of government and, I think, deserves the fullest possible
attention.
That brings me to a consideration of Treasury and the Federal
Reserve System responsibilities and relations. The Treasury, of
course, aside from advising the Congress in tax matters, has certain
operating responsibilities that we can pass by—collecting tax revenues,
making Government disbursements, managing the operating balance.
The last of these, that is to say, building up or drawing down the
operating balance for regular payments to meet maturing issues, and
so forth, does gear in pretty closely to the work that we do.
The major field, however, is management of the public debt. This
involves Treasury decisions as to refunding, as to maturities, as to
marketable and nonmarketable issues, and importantly as to price.
These operations are closely geared into the Federal Reserve's responsibilities and opportunities.
We turn to the Federal Reserve System for a moment. Here the
basic responsibility is one of adjusting the money supply to the flow
of goods and services. The most important manner in which we influence this situation is the way we work in changing the amount, availability, and cost of actual reserves, and the level of reserve requirements. We have three tools in our kit. The first is discount rates.
Initially, it was the most important instrument when banks were
acquiring reserves by discounting. It is now less important because
reserves are influenced through open-market operations, although I
think we can underestimate the influence of the discount rate because of
the psychological aspects of this tool.
Open-market operations are a tool of major importance at the
present time in the matter under consideration, because through our
purchases of securities we supply additional reserves, and by our sale
of securities we reduce reserves.
Senator DOUGLAS. M r . Williams, I wonder i f you would state for the
record of what open-market operations consist.
Mr. W I L L I A M S . I w i l l ask M r . Bopp to answer that question.
Mr. BOPP. They consist, Chairman Douglas, of the purchase by the
Open-Market Committee of the Federal Reserve System for the account of the Federal Reserve banks' Government securities of such
maturities and at such prices, and so on, as may be determined by the
Open-Market Committee; and, correspondingly, sales of securities in




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the open market. A n adjunct to sales involves the redemption of
securities as they mature on the part of the Treasury.
Senator DOUGLAS. When the Federal Reserve System purchases the
Government securities from banks, what are the banks given i n return ?
M r . BOPP. The Open-Market Committee deals with a list of Government security dealers, so that typically a bank would operate through a
dealer. The purchase would be made by payment of a check drawn
on the Federal Reserve bank itself, which would be given to the seller
of the Government securities.
This seller in turn would deposit that check i n his bank, and his
bank would send it up to the Federal Reserve bank and get credit for
it on the books of the Federal Reserve bank i n the form of an increase
i n its deposit account. The deposit account of a member bank is also
its reserve account. The result of the purchase of the security by the
Open-Market Committee is an increase i n the private deposit account
of the seller of the security at his local bank; and that bank i n turn
would have an increase not only in its deposits but a corresponding
increase i n its reserve account at the Federal Reserve bank. A sale
would have the opposite effect.
Senator DOUGLAS. A Federal Reserve bank creates a credit w i t h
which it purchases Government bonds ?
M r . BOPP. That is correct, and that credit initially is i n the form
of a deposit i n the Federal Reserve bank.
Senator DOUGLAS. What proportion of the earnings of the Federal
Reserve System come from this type of credit operation ?
M r . BOPP. Virtually all. There are a few small types of other
earnings, but virtually all come from ownership of Government
securities.
Senator DOUGLAS. Is this a type of transaction which was not originally contemplated when the Federal Reserve System was set up ?
M r . BOPP. I think that is probably a fair statement of it, Chairman
Douglas. Initially the Federal Reserve System was considered rather
a more passive institution. I t was assumed that with an increase i n
the general level of economic activity there would be an increase i n
what at the time was called and still is called eligible commercial paper
arising out of the increased activity. I f a businessman needed additional credit, he would take that paper to his bank for discount to
secure a deposit for it. I f the bank i n turn needed funds, it would
take that paper to the Federal Reserve bank for discount.
The Federal Reserve would pay for that paper by an increase i n the
deposit account of the bank. However, at the time it was also f e l t —
and this is trying to recollect the history of the time or the reading
of the history—that there might be times when the Federal Reserve
System would have inadequate earnings, and when business might
be depressed, and, therefore, the System should have some authority to
put funds into the market of its own violition.
Therefore, it was given authority to deal i n the open market i n
Government securities and certain specified other securities, but initiallv it was not considered a basic instrument of policy. I t became so
i n the 1920's.
I think it is, therefore, a correct statement to say that the ultimate
development of open-market policy was not contemplated by the
framers of the Federal Reserve Act.




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M r . WILLIAMS. W o u l d you comment on the matter of initiative on
the part of the bank, on the one hand, and of the System on the other ?
M r . BOPP. I n the case of open-market operations the System is
enabled to take the intiative to put funds into the market or to take
them out. I n the case of discounting, the initiative is on the part of
the prospective borrower. If, however, the System, as during the war
and postwar periods, establishes a price i n the market at which it
w i l l deal i n Government securities, then the initiative may be taken by
the market rather than by the Federal Reserve System so far as
amount is concerned.
Senator FLANDERS. M a y I ask a question ?
S e n a t o r DOUGLAS.

Yes.

Senator FLANDERS. M r . Bopp spoke of the open-market operations
as affecting the available bank reserves. I would like to inquire
whether in its actual operation the purpose of open-market operations
is directed toward increasing or decreasing bank reserves, or is it
directed toward maintaining the price level of the bonds themselves ?
M r . BOPP. D u r i n g the war period and for a considerable period
after the war, as I mentioned, the Federal Reserve System established
the yield structure on Government securities and bought or sold securities so as to maintain that yield structure. The effect on reserves
was incidental to that.
However, with the announcement by the Open Market Committee
i n June of this year, it was stated that i n the future the Open Market
Committee w i l l be concerned with the general level of economic activity, which I would interpret to mean that it would be more concerned
with the level of reserves than it had been hitherto.
Senator FLANDERS. Does that mean that as a result it w i l l be paying
less attention to the maintenance of an interest rate, which I presume
means the maintenance of price because the earning rate is dependent
on the price—that it would be less concerned with that i n the future
than it has been i n the past ?
M r . BOPP. The exact interpretation is one I cannot personally give.
I t is a matter of the individuals who have prepared the statement.
However, I think one can get some impression as to the meaning of
it by following the Federal Reserve holdings of Government securities.
I f one looks at the holdings of the United States Government bonds,
for example—these are the long-term securities held by the Federal
Reserve System—the volume remains unchanged week after week.
There were a few very small changes and one large change which
happened to come at the time of the maturity of a bond issue. T h a t
would mean, it seems to me, that the Federal Reserve open market
committee was not i n the market i n the long-term issues. That is evidenced also by significant changes in the prices of long-term issues
since the statement was issued.
Senator FLANDERS. Has the history of yields of Government securities and the market prices on which those yields are based actually
shown more flexibility since that decision was arrived at than was
the case before ?
M r . BOPP. W i t h respect to long terms, I am quite sure that is the
case. I w i l l have to check with the chart book.
Senator FLANDERS. Specifically, are there any issues which have
been allowed to go below par ?




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M r . B O P P . N O ; with the release of reserves and this policy statement, the pressures all were i n the other direction, and prices have
gone up very significantly, which means that yields have gone down.
When I express the judgment that the variations i n yield on long
terms have been significant since that time, I meant not an increase
i n yields, but a decrease i n yields of a significant amount. M y hunch
would be a quarter of a percent i n yields.
Senator FLANDERS. The effect of that policy has not been detrimental so far to the policy, i f you want to call it policy, of maintaining the price of Government securities, but has been the reverse
so far ?
M r . BOPP. Well, I should say that it is evidence that there is no
ceiling at the present time.
Senator FLANDERS. B u t the floor is still there ?
M r . B O P P . A S I say, that is a question that
M r . WILLIAMS. W e are floating i n the air and have not explored
the floor yet.
Senator FLANDERS. W h a t w i l l happen when you hit the floor i f
reserve requirements should indicate that prices should go below
the floor ?
M r . WILLIAMS. I think that question w i l l come up again later,
M r . Flanders.
S e n a t o r FLANDERS. A l l

right.

Senator D O U G L A S . N O W , you have mentioned two weapons that
the System has—the rediscount rate and the open market operations.
M r . WILLIAMS. Reserve requirements being the third.
S e n a t o r DOUGLAS.

Yes.

M r . WILLIAMS. Just one more point to supplement what M r . B o p p
has said about the operations of the Open Market Committee. T h i s
is a force in the money market that has great leverage. B y that I
l^iean that i f used with deftness, with psychological astuteness, it
can work results that are far beyond the magnitudes here involved.
One i n effect sits there shooting with a rifle and not with a shotgun,
and you have the entire market revealed before you. Y o u come to
know it, and the task of managing the account, which is one of great
importance, is in my judgment one that has been superbly carried
out, i f one goes back especially to the postwar period.
Senator D O U G L A S . I wonder i f either of you would briefly sketch
for the record the effect upon the general supply of credit when the
System sells securities i n the open market,
M r . WILLIAMS. I think you have traced i n more detail the effect
of the System buying, M r . Bopp.
M r . BOPP. The sale of securities would require payment by the purchaser of the security to the Federal Reserve bank for that security.
I n making this payment, the Federal Reserve bank i n turn would
collect the check for payment from the bank whose customer had
purchased the security, and that would result i n a reduction i n this
bank's deposit account, which is its reserve account at the Federal
Reserve bank, and also a reduction in this bank's deposit account
with its customer; so that you would have initially a reduction i n
both reserves of all member banks of the Federal Reserve System and
a corresponding reduction of the accounts of private customers i n
their commercial banks.




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Senator DOUGLAS. A n d hence a reduction i n the potential lending
capacity of member banks ?
M r . BOPP. Yes, sir; unless offset by excess reserves. I f it d i d not
have excess reserves, it would be short of reserves and could force a
retraction through the banking System.
M r . WILLIAMS. This brings me back to the topic of relations between
the Treasury and the Federal Reserve System. I think M r . Bopp's
explanation and the connotations of it indicate that the task of the
Treasury i n managing the public debt and its working balance and
the task of the Federal Reserve System in using its monetary authority
to achieve stability are very closely meshed.
M r . WOLCOTT. M a y I ask a q u e s t i o n ?
S e n a t o r DOUGLAS. Y e s , o f course.

M r . WOLCOTT. What M r . Bopp said a moment ago just registered
with me. Y o u made a statement that i f the bank sells out its reserves, in answer to a question asked by Senator Douglas, that it
decreased the amount of money which was available for loaning by
the bank.
Is it the practice to reduce reserves sometimes to make available
more money for loaning—private loaning ?
M r . BOPP. T o reduce reserve requirements ?
M r . WOLCOTT. Reserves. I f thev are above the requirements, there
is a tendency to liquidate their reserves?
M r . BOPP. Provided they have excess reserves, they w i l l use that
for lending purposes. If, however, the Federal Reserve System has
sold securities, that w i l l initially reduce the reserves of the bank whose
customer bought the securities. That bank w i l l then have less reserves
available for lending, purchasing securities, or whatever purpose it has.
Not only that, i f it began the process without excess reserves it
would then be short of reserves because the reduction i n reserves is as
great as the reduction in deposits. I t is required by law to keep only
a percentage of reserves against deposits, and it would then have to
restore the deficiency of reserves by the sale of some assets.
M r . WOLCOTT. When there is a movement on the part of a great
many banks to liquidate a great many excess reserves, then is it the
function of the Federal Reserve, i f they have flexibility enough i n
their reserve requirements, to increase the reserve requirements to stop
that practice?
M r . BOPP. I should say it is contingent on whether, i n the judgment
of the Reserve authorities, an expansion should take place. I f so, they
would encourage it. I am thinking of the thirties, when banks had
large volumes of excess reserves and when the Federal Reserve System
was interested i n having expansion. I f banks had expanded, that
would have been to the good.
On the other hand, i f this process is going on at a time of inflationary
pressure when the desire is to restrict, then you would have the question of whether to restrict by sales of securities or by changing
requirements.
M r . WOLCOTT. Previous to the Banking A c t of 1935 the Open Market Committee functioned i n more or less an advisory capacity. They
were given power i n the Banking A c t of 1935; they did not have the
power to initiate purchases and sales previous to that.
M r . BOPP. I should say it was a voluntary arrangement prior to
that, and any individual Reserve bank could refuse to participate i n



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the open-market operations which the committee itself had recommended for the System as a whole.
I f , however, the committee felt that a specified volume of securities
should be bought or sold and a particular Reserve bank should have
refused to participate, they might have distributed that amount among
the other banks.
However, so far as I know, no bank refused, i n fact, to participate
i n them. B u t your question concerned the power of the System itself.
I t had the power. However, by law it was lodged in the individual
banks who collectively had an open market committee to advise with
respect to and to engage i n open-market operations subject to the rules
and regulations of the Board of Governors, but the individual bank
had the power not to go along i f it desired.
Senator DOUGLAS. A n d now ?
M r . B O P P . A n d now it is a System operation and no individual Federal Reserve bank may refuse to go along.
Senator DOUGLAS. A n d the amounts which each bank must take or
must sell are specified by the Open Market Committee ?
M r . B O P P . Actually it is a single account for the entire System, and
the actual ownership of the securities by the individual Reserve bank
is distributed from time to time.
A s to the exact formula, I confess you have every right to expect
me to know that. I have known it for as long as a half hour after reading it, but for the long run I have considered the burden on my memory
to be greater than the value of the information. I can, however, supply
you with it.
Senator DOUGLAS. W e w i l l ask someone to make it a matter of
record.
(The formula referred to above is as follows:)
F O R M U L A FOR ALLOCATION OF SECURITIES I N THE SYSTEM O P E N M A R K E T ACCOUNT

Securities i n the System open market account are allocated by the F e d e r a l Open
M a r k e t Committee among the individual Federal Reserve banks on the basis of
their expense and dividend requirements. The formula is based on estimates
for the year of each Federal Reserve bank's expenses, dividends, and earnings
f r o m sources other than securities i n the System open market account. R a t i o s
of the estimates for each Federal Reserve bank to those for the 12 F e d e r a l
Reserve banks combined are then computed and securities i n the System open
market accounts are allocated on the basis of these ratios.
Adjustments may be made in the allocations f r o m time to time i f the reserve
position of a particular Federal Reserve bank indicates that an adjustment is
desirable or i f the allocations on the basis of the original estimates are no
longer appropriate.

M r . W O L C O T T . I n that connection, perhaps affiliated with the subject
with respect to rediscount rates, previous to the Banking A c t of 1935
Federal Reserve banks could initiate increases i n rediscount rates, but
they would not become effective without approval of the Federal Reserve Board, and now the Federal Reserve Board may initiate increases or decreases in rediscount rates.
M r . B O P P . That particular provision, Congressman Wolcott, has
had an interesting history. A s I gather it, the provisions i n the initial
draft of the Federal Reserve A c t contained a provision that the Federal Reserve banks shall establish from time to time rates of rediscount, subject to review by the Federal Reserve Board.




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A t some time during the process of hearings and subsequent reports
this wording was changed to read, "Subject to the review and determination by the Federal Reserve Board."
Now, it is a question as to what those words mean. I n my own
judgment, and I can be i n error, I think the Congress intended to be
somewhat vague, and time would tell. Y o u would see how the thing
worked out.
The Attorney General was asked, and it is my recollection it was i n
1919, as to a judicial interpretation of these words. H e said that
going through the legislative history it is clear that the words "and
determine" were added, and since they were added, attention was
specifically called to them and they meant something. I f they meant
something, they meant something other than "review" and, therefore,
it meant that the Board had the power to determine rates. H e interpreted the words to mean that, i f necessary, the Board could initiate
a change i n the rate, and it did prior to the Banking A c t of 1935 i n the
case of the Federal Reserve Bank of Chicago. I think the year was
1927.
So the Board did, as a matter of fact, prior to the Banking A c t of
1935 initiate and require the Federal Reserve bank to change a rate
which the bank did not want to change. Senator Douglas may remember that Chicago incident.
M r . WILLIAMS. I return now to the question of relationships between
the Treasury and the System, starting with the war period.
The
prime consideration from the standpoint of the Treasury and the
System was to w i n the war; and management of the debt and the
changing policies with respect to reserve requirements and open market operations were in the light of this prime consideration of achieving military victory.
Looking at the economy as a whole, I take it that to the extent we
were interested i n stability we relied pretty much on direct controls.
The system's task during the war was to facilitate the operations of
the Treasury. The Treasury had a number of important decisions
to make. One of them had to do with the interest rate pattern, and
there I would rather rely on M r . Bopp's memory than my own as to
what happened during the thirties to bring us up to the point of entrance into the war with a plethora of funds and low interest rates.
The general point is that we froze the interest rate structure into a
pattern beginning at three-eighths of 1 percent and ending at 2% percent.
I think it may be interesting for the record to outline what had
transpired during the thirties which had resulted i n this situation.
M r . BOPP. Although this is not the ultimate beginning of it, one
may begin with the change i n the price of gold on the part of the
United States from $20.67 to $35 an ounce. A t any rate, following
that we had very large importations of gold into the United States,
and a very great plethora of funds and the absence of a demand for
funds to any considerable extent.
Banks having these large excess funds and no very great demand
for credit desired to keep their funds i n short-term assets; and as a
consequence, one had a superabundance of funds, particularly shortterm funds. A t one time the United States Treasury was able to borrow 90-day money at a zero rate of interest, and for some peculiar




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tax provisions i n the city of Chicago, on rare occasions, at a negative
rate of interest.
However, i n part because bankers, and others felt that these rates
were excessively low and that it was merely a matter of time until
they would rise, investors were unwilling to commit themselves at
the long-term rate then prevailing.
I n a period i n which anticipations are for a rise in interest rates,
one gets a rate structure with short-term rates below long-term rates.
Incidentally, we have had other periods i n which people have anticipated declines i n interest rates and when the short-term rate has been
above the long-term rate.
Because of the plethora of funds and institutional habits w i t h respect to investments and anticipation of ultimate increases i n rates,
we had a rate structure and a period of depression and lack of demand i n which the short-term rates were very low relative to the longterm rates, with all rates being low relatively on a historical basis.
Those circumstances, however, are quite different from the circumstances into which we were going once the war broke out.
M r . WILLIAMS. I n an attempt to avoid the mistakes of W o r l d W a r I,
when there was a reluctance on the part of some to participate i n war
loans i n view of the fact that the next loan might carry a more favorable rate, we froze the structure, and it became known that we had
frozen the structure.
There were, I think, relatively good results from the operation of
the Treasury and Federal Reserve System during the war period.
Roughly, we raised 40 percent of the needed funds by taxation.
T h i s could have been higher, but I think Canada's record was 43 percent or thereabouts. I t was slightly above. Great Britain, where the
capacity to endure taxes, is, I think, pretty highly developed, d i d not
do a much better job.
W e got good results from our distribution of the 60 percent we
borrowed; the distribution of that among the nonbank market was 35
percent of the total, roughly.
The position of the banks—I think they all understood it—was
they were to be the residual buyers of anything and they were to provide the funds we could not obtain by taxation and borrowing from
the rest of the economy. They came forward and took 25 percent,
and it would be my judgment that that is a pretty good result. K a r l ,
is that your opinion?
M r . BOPP. Y e s .
Senator DOUGLAS. I

wonder i f you would describe the process by
which the individual banks subscribed to this 25 percent, or I believe
somewhere around $70,000,000,000.
M r . WILLIAMS. Karl, w i l l you do that ?
M r . BOPP. I n order to facilitate the sale of securities banks were
permitted to open what is technically called a war-loan account,
which is a deposit account i n the bank to the credit of the Treasury.
There were some changes during the period, but the general process
was that a bank could pay for its securities to the Treasury by simply
giving it credit i n the war-loan account, which meant that initially
the bank picture would be an increase i n its holdings of the Government securities and an increase i n the Treasury's deposit at that bank.




41 M O N E T A R Y , CREDIT, AND FISCAL POLICIES

Senator DOUGLAS. Then it was a private creation of purchasing
power made available to the Government through the creation of deposits, and the Government drew checks upon these accounts ?
M r . BOPP. That is correct.
Senator DOUGLAS. And, therefore, the money supply, i f you include
checks as a portion of money, was inflated ?
M r . BOPP.

Yes.

Senator DOUGLAS. This portion was not financed out of the current
savings or current taxes.
M r . BOPP. That is correct.
Senator DOUGLAS. B u t through a creation of monetary purchasing
power, which had an inflationary effect.
M r . BOPP.

Yes.

Senator DOUGLAS. A n d which i n turn you tried to restrain by
specific controls.
M r . BOPP. That is correct.
M r . WILLIAMS. The next period was the postwar period.
M r . WOLCOTT. Just a minute. I n connection with those accounts,
purchases by the banks—or sales, rather, by the banks—which the
money got into that account, were deflationary. Is that right, and
would that offset the inflationary tendencies incident to the creation of
this account ?
I mean by that that when a bond was sold by a bank, sold to an individual, that came out of that individual's earnings or savings, it was
a bond which could not be monetized—payment of that bond into this
account—and the Treasury would draft on that account for what the
individual had put into the account.
W e were told when the drives were on that to avoid inflation we
should get as many as possible of the E bonds and other savings bonds
out to the people and encourage them to hold them as an influence
against inflation.
M r . BOPP. T h a t is quite correct. A s individuals bought Government
securities, they would pay for them with a draft on their own deposit
accounts; and you then would have a shift from that purchaser's
account to the war loan account of the Treasury. T h a t resulted i n
neither an increase nor a decrease in the total money supply. The
banks in these war loan drives were selling Government securities out
of their own holdings, but they were selling fresh issues which the
Treasury brought out.
M r . WOLCOTT. W o u l d it reduce the pressures which would otherwise
be on prices?
M r . BOPP. Quite right.
M r . WOLCOTT. W h i c h is a reflection of the depression of the value of
the dollar by making that much less money available, creating a demand for consumer goods.
M r . BOPP. Roughly 60 percent of the total cost of the war was met
by borrowing. O f that 60 percent, roughly 60 percent again or 35 or
36 percent of the total was purchases of securities by nonbank investors,
but the other 25 percent was purchases by banks, so that you had the
two processes going on at the same time; and yet over the war period
banks expanded their Government security holdings by the 25 percent
of the total volume issued.
Senator DOUGLAS. Their deposits went up correspondingly, too.
M r . BOPP. That is correct.



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Senator F L A N D E R S . W h e n you say individual purchasers, you include also corporate purchasers ?
M r . B O P P . A l l nonbank purchasers.
Senator F L A N D E R S . Insurance companies, business firms, and so on?
M r . B O P P . Yes; all nonbank purchasers.
M r . WILLIAMS. Every effort was made to induce nonbank buyers to
acquire i n order to thus channel off the purchasing power that otherwise would be reflected on a diminished supply of goods. W e were
seeking to curb these inflationary pressures i n this manner and relying
also on direct controls to help take the pressure off by means of allocation and rationing. W e had a period here of 4 or 5 years when monetary and debt management considerations were focused on a military
objective. Now, since then we have had a period of 4 years, and the
question comes up as to what our objectives have been during this
period. I f I were asked to describe this i n one phrase, I would say i t
was to make an orderly transition from w^ar to peace.
Now, I call your attention to the fact that at the height of the war
the* Government was spending a billion dollars every 4 days, and for
the most part was spending it for destruction.
I f we may revert to the war period—as an incident to war finance,
a great deal of purchasing power was built up. B u t the psychology of
the situation after the war was such that we forgot about that purchasi n g power and focused our attention on what would happen when the
Government ceased to spend $90,000,000,000 a year. T h i s was the
underlying psychology of it.
People said that the Federal Government, the principal buyer of the
goods of manufacturing and mining, is going to step out of the market
and we w i l l get a collapse of Government spending to $30,000,000,000
a year, and that is going to bring on depression. There was a surprising amount of agreement among professional students of the situation that we were not going to be able to get through this transition
without severe depression, and estimates of unemployment went from
8 to 10 to 12 million—I do not know i f any got above that, Senator
Douglas.
Senator D O U G L A S . I believe there was only one man who made a
forecast that there would not be a depression.
Senator F L A N D E R S . W h o was he ?
Senator D O U G L A S . M r . Woytinsky i n the Social Security Board.
Senator FLANDERS. Also a group that goes under the name of the
Committee for Economic Development.
Senator DOUGLAS. A l l right, there were two.
M r . W I L L I A M S . There certainly was the possibility of depression.
It was i n the picture.
Senator F L A N D E R S . I t was entirely possible.
M r . W I L L I A M S . Yes, Well, it didn't materialize.
Senator F L A N D E R S . W i l l you tell us why it didn't?
M r . W I L L I A M S . Well, I w i l l make an effort, Senator Flanders.
I t didn't materialize primarily for two reasons, in my judgment.
One was that we had, beginning with the home, empty linen closets,
empty pantry shelves—someone said that we got guns and butter both
during the war, but there wasn't much butter. There was a lot of soft
goods which make it appear that total personal consumption didn't
greatly diminish. B u t this is one of these deceptive totals. T o make
i t significant you have to take it apart and see what composes it. W h e n



43 M O N E T A R Y , CREDIT, AND FISCAL POLICIES

you take it apart you see there an unsatisfying craving for a lot of
goods, durable consumer goods. A n d when you go back beyond that,
to the department store, the storerooms had to be filled. When you go
beyond that, back to the wholesaler, the storerooms had to be filled.
A n d , beyond these, to the manufacturer, warehouses and storage yards
had to be filled. Throughout the 4-year period as a whole, Senator
Flanders, there were some unusual demands set up for filling the pipe
lines and refurbishing the plant of our economic system.
Shortly after the cessation of hostilities we set about preparing for
war. W e were not only preparing but assisting some of our allies.
I n referring to preparing for war, I include all of the economic efforts
of maintaining a front against the Russians i n western Europe.
Senator D O U G L A S . It is an exercise in semantics but I would prefer
to say that we were preparing against war rather than preparing for
war.
M r . W I L L I A M S . Yes; I accept the amendment.
Senator FLANDERS. Didn't you also have a good money supply ?
M r . W I L L I A M S . Well, yes. There existed the capacity to take the
goods and the desire to take them.
Senator DOUGLAS. There was a tremendous accumulation of purchasing power, built up in the form of these bank reserves, credits,
savings accounts of individuals, Government bonds, and so forth, so
that there was a tremendous latent purchasing power, there; isn't that
true ?
M r . W I L L I A M S . That is right.
Senator D O U G L A S . A n d that, combined with the desire, created an
effective demand?
M r . W I L L I A M S . Yes; I think your thumbnail description there contains the broad details. I n addition, there was a psychological element that I think needs to be taken into consideration. I w i l l refer
to this later in a discussion of our policy with respect to use of the
open-market instrument as a mechanism.
I f you look back at the period, this expected depression—if I can
use a John L . Lewis phrase—reared its ugly head every spring, almost.
K a r l , your memory is better than mine. Sketch this potential setback, the series of set-backs that appear in this period.
M r . BOPP. W e had one in 1946, just after the war. W e had another in the spring of 1947, in the spring of 1948, and in the spring of
1949. I t seems to be an annual affair. It is a matter that I think
merits some study. I must confess that I haven't studied it. It happens also that the Federal budget, even though balanced over a given
calendar year, w i l l have a very large surplus of cash receipts i n the
first half and then a deficit i n the second half of the year. Whether
this periodic spring recession which we have had is related to that
or not I am not altogether sure. I t merits inquiry, I should think.
I must confess I felt the inflationary forces would be much stronger.
Unless, however, one is awfully dogmatic, and is sure he is right with
respect to the future, he is influenced by such periodic recessions.
Every spring there would be a gradual decline and one would say,
perhaps we had better take another look. W e did have this little
uncertainty throughout.
M r . W I L L I A M S . That result, as you look back over the period, worked
i n our favor. What was potentially a situation which could have
developed into runaway inflation, just as it could have developed a



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depression, turned out to be a period of action, where, by fits and starts,
we have come through, i n my judgment, with remarkably good results.
There are others who disagree. But, M r . Bopp and I would have you
look at the chart on commodity prices.
I t would be unfortunate i f there would be lack of confidence because
of a lack of understanding of what transpired during this period.

M r . BOPP. D u r i n g the war period, as President Williams has mentioned, we had inflation which was, i n a sense, suppressed via direct
controls. These controls were removed i n the summer of 1946. Immediately you had a very strong upsurge i n prices.



45 M O N E T A R Y , CREDIT, A N D FISCAL

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I t seems to me that much, i f not indeed all of that was merely bringing to the surface what had hitherto been held under the blanket of
direct controls. M u c h of that initial post war rise i n prices was, i n a
sense, bringing to the surface what you really had.
I f one takes that initial upsurge i n prices to the spring of 1947 as
merely bringing out the hidden inflation, we find the wholesale price
level, relative to 1926, at roughly 150. Subsequent to that the highest
point reached was, roughly, 170. So you have 20 points, or 12 to 15
percent, which, it seems to me, is the general order of magnitude we
are talking about at being subject to more restrictive credit action.
Since then we have had the subsequent decline to roughly 154 at the
present time.
M r . W I L L I A M S . I would say then, Senator Flanders, that we came
through this period in a manner such as to avoid depression, avoid
runaway inflation, avoid undue harm to international relations, and
without undue disturbance to the internal economy, and with a public
debt that was not dislodged, although it had the possibilities of dislodgment.
Now, there is a result, I think, to which the system contributed by
means of its powers, and they were modest powers; remarkably good
over-all results have been achieved.
W e did it by a close intermeshing of the Treasury and the System.
Some students w i l l raise the question as to why the support, to the
extent that it was given to the Government bond market, was not
withdrawn and why we did not allow these forces to have free reign
so as to determine, i n the market, what the price of money should be.
Now, my friends ask me that question. Well, I serve only intermittently, as do the other presidents under the plan of rotation on the
Open Market Committee. I say that as I look back at it, and realize
what the responsibilities were, that I think if I were to relive that
period, I wouldn't do anything substantially different, especially now
that I have knowledge of what the results have been.
There were a great many debates on the part of all of us who were
i n the System as to what we should do and what we should not do;
debates between each other and internal personal debates. I was conscious of the fact that we had a volume of public debt that had increased very greatly, that we had a tense international situation, that
we had difficulties of labor adjustment in bringing into a wage structure the realities of power. Someone said that a labor arbitrator is
one who unctuously gives to the lion the lion's share. Well, the lion
here was demanding a lot. There is no question that we were closely
intermeshed. I wouldn't w^nt to debate the question as to who led
the parade, but we were going down the road together here.
Let us now turn our backs on this wartime period and the four postwar years, and ask the $64 question: Where do we go from here ? That
is the question.
M r . WOLCOTT. M r . Williams, how much of the thinking, or has the
thinking of the men in your position, been influenced by the fact
that we are i n a de facto war, and possibly because of our defense efforts—our economy being affected by it as much as it would be during
a war—we must approach our problems with about the same spirit as
we approached them during the war. H o w much has that influenced
your thinking?
99076—50

4




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Have I made myself clear ? I n other words, we are spending a good
many billions of dollars for defense, as we were spending a good
many billions of dollars during the war for defense. H o w much
has your thinking on economic matters been influenced by the fact
that* the Government has got to make these continuing expenditures
over a period of years—to make these tremendously large expenditures
for the defense effort ?
M r . WILLIAMS. I might answer the question in this manner, Congressman Wolcott, that two considerations weigh heavily i n my own
personal thinking. One is that this is a period of potential war, as you
have just said. The other is that, undoubtedly, it is a period of great
social struggle. There are at work within the American social f abric
forces that w i l l produce results that I think we are not in a position
to predict. There is going on here a social struggle which can take
a variety of forms. I think that is all right. That is what life is.
W e get about what we want. W e are trying to work out what we want.
I t doesn't do to rail against the New Deal or the square deal. Our task
is to find out what the problems are and to take an intelligent position
and try to use our personal influence there.
Now, it is those two forces that are influencing my judgment w i t h
respect to what we ought to be doing. I am trying not to use any of
my personal predilections in the decisions that I make with respect to
the operation of the Federal Reserve System.
Have I answered you? What you have said is a very important
factor.
M r . WOLCOTT. I t does have influence on your thinking ?
M r . WILLIAMS. V e r y

definitely.

M r . WOLCOTT. Apparently we are going to have the problems w i t h
us for some time to come.
M r . WILLIAMS.

Yes,

M r . WOLCOTT. W o u l d it be possible to divorce that from our money ?
F o r instance, previous to some date i n the thirties, you had a certain
amount of commercial paper. W e amended the law to make that no
longer necessary. So at the present time, with the exception of 25
percent of the gold which is put up, all of the rest of it can be put up
i n debt, Government bonds. That seems, to many people, to so wed
debt to our money as to create instability in the value of the American
dollar. Unfortunately as the debt increases and decreases there is
such an affiliation between the national debt and the money that fluctuations i n debt cause fluctuations in the value of the currency. Is there
some way to offset that by, perhaps, segregating—or what term do you
use—quarantining—a certain amount of debt, so that it could not be
monetized, and by that remove the threat of these constant fluctuations,
incident to fluctuations i n debt?
M r . WILLIAMS. Well, Congressman, there are many rational plans
that can be devised and have been devised. The difficulty with them
is that they are designed to affect adversely our private banking system, our commercial banking system, on the score that the banks reap
where they haven't sown.
I have a great reluctance here to give any aid or comfort to consideration of these plans because of my conviction that American free
enterprise owes a great deal of its strength to the presence i n the structure of 14,000 banks; and, when I look at the return on invested capital
i n banking and compare it with the returns from other fields, I say



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the evidence that banks are reaping where they haven't sown doesn't
appear in what is either distributed as dividends or added to capital
accounts.
Now, i f I may stop and digress for a moment. W h a t I say later
may be interpreted—improperly interpreted—as being critical of commercial banking. I want here to put in a plug for commercial banking because of the service that it renders. W e have i n American
business a condition whereby there wells up from underneath every
year a lot of Joe Dokeses who have unusual capacities to go into business and rub one dollar against another and produce a third. Now,
we have got to preserve that. W e all benefit by the presence of these
people. A great many of them go by the boards. I don't know how
many cousins have been put in the grocery business and their failure
accepted philosophically by the family providing the funds. The
family relatives say: "Well, we guess Joe isn't a good groceryman."
But a lot of these fellows are good grocerymen and we need them.
H o w does banking fit into this picture? I t works i n this way.
We have i n these 14,000 institutions a group of loan officers who
every day are making thousands of judgments as to whether they
ought to put the bank's credit into business ventures. T o the extent
that these banks are close to the local scene and flexible i n their policies,
they are picking the people who have managerial talent and are backing them. So you have a screening process at work which brings
to the fore these people with talent. There is a social service which
banking contributes. I think it ought to be recognized. I mention
it to get it i n the record.
Senator DOUGLAS. M i g h t I return to a line of questioning which
Congressman Wolcott started. I t is this: The banks have enormous
quantities of Government bonds i n their portfolios; and, as I understand it, i f the banks present these bonds to the Federal Reserve
System, the System must accept them and give them credit i n the
form of reserves?
M r . WILLIAMS. T h a t is right.
Senator DOUGLAS. N O W , i n view

of these enormous amounts of bonds
held by the banks, doesn't that take away from the Federal Reserve
System the power of controlling inflation, because banks can present
the bonds, have the accounts credited as reserves, and then can expand
their loans to other sectors of business correspondingly; so that doesn't
this weaken the amount of control which the System can exercise
over the total loan funds of the country ?
M r . WILLIAMS. That is true. The extent or the effect w i l l turn
entirely on the price at which we are w i l l i n g to accept the bonds, Senator Douglas, which is leading directly into the question of the support
of the Government bond market, I take it.
I can answer it in this way—and this brings me, incidentally, to the
next fundamental point that I want to present: I think that from
here out, or at some reasonably near time, we, as a system, ought to
be i n a position to use fully any of the tools that are necessary on our
part to stem the inflationary forces i f they develop, and I said at the
outset I expect them to develop. Therefore, I think that we are right
up against the alternative of whether we are going to regain the use,
the flexible use, of the tools at our disposal, which means essentially
open-market operation in both directions, buying and selling, as con-




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trasted with a policy of fixed interest rates, where we supply funds
i n boom times and withdraw them i n depression times.
Now, I have indicated before the advantage of use of a general tool.
I think that the sharpening of our tools, the regaining of their use, is
important. I don't mean to imply that they haven't been used. Perhaps my phrasing is in error. The fuller use of the tools than we
have made is entirely compatible with freedom, with the attainment
of freedom.
One of the great instruments among the general instruments to
which I refer is this device of open-market operations. That has implications for the commercial banks, implications for the Treasury,
and implications for the System. I f circumstances call for the use of
reserve requirements, there must not be a feeling on the part of any
bank that this is an improper control. W e have weathered the four
difficult years. I f the circumstances call for a flexible interest-rate
structure, there ought not to be any grave doubts about the stability
of the credit of the United States Government.
This calls for an understanding of monetary policy on the part of
commercial banks and a willingness to accept changes i n policy. I
think, i f we are to obtain that willingness, it calls for a degree of skill
i n maintaining and creating good banking relations that w i l l bring
that acceptance.
Senator DOUGLAS. M i g h t I ask, M r . Williams, what relationship
these statements that you began with would have to the support program of the Reserve System and of the Treasury ?
M r . WILLIAMS. I think they are directly related, M r . Chairman.
Senator D O U G L A S . I wondered i f you would itemize them and i f you
would state specifically what they are.
M r . WILLIAMS. Well, for the Treasury the implications are that
we ought to continue to work together closely. Here are two agencies
that had a close degree of cooperation during the war period and the
postwar period. I think relations were never more satisfactory than
they are at the moment, but the mere size of the debt and the mere
size of the fiscal operations of the Government are such as to call at
all times for study of their implications for general economic stability.
A n overriding consideration ought not to be low cost of servicing the
debt. Uncle Sam is spending $40,000,000,000 and the cost of servicing is about $6,000,000,000, roughly. I n other words, we have $34,000,000,000 which is being paid for other things.
Both of these agencies, as indicated at the outset and i n our reply to
questionnaire, are really under the mandate of the Employment Act,
and I think it would not be out of order to get specific reference to that
fact i n legislation.
Senator FLANDERS. M a y I inquire i f what you are saying is that you
can conceive of conditions i n the not distant future in which you think
the desirable action would be one which would raise the interest rate
to the Government ?
M r . WILLIAMS.

Yes.

Senator D O U G L A S . H O W would you do that ?
M r . WILLIAMS. Well, one way would be via open-market operations.
I am assuming now that conditions would arise which would indicate
that we ought not to be supplying funds to the market at the initiative of the market so as to build up already developed inflationary
tendencies.



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Senator DOUGLAS. W o u l d you describe i n some detail the changes
i n open-market procedures which would be necessary i f this policy
were to be carried out ?
M r . WILLIAMS. That would depend entirely on the circumstances
that arose. I take it that it would not be a step from support to nonsupport. I indicated at the outset that open-market operations are
very subtle; they have to be handled very deftly. Y o u use your leverage i n ways that vary greatly according to specific circumstances. W e
have a large number of onlookers and participants i n the Governmentbond market who are seeking to understand.
Senator DOUGLAS. Suppose we were to get out of the recession and
move into a period of f u l l employment, and then prices started to move
upward, so that we would be i n danger of inflation. Have you thought
about what changes, i f any, you believe should be made i n the openmarket operation ?
M r . WILLIAMS. Well, I think we ought to be siphoning funds out of
the market.
Senator DOUGLAS. A n d how would you do that, by selling
Governments ?
M r . WILLIAMS.

By

selling.

Senator FLANDERS. That might reduce the price of Governments
and thereby increase the yield and also increase the interest which the
Treasury w i l l be forced to pay on any new issues.
M r . WILLIAMS. That is right. A n d I realize, of course, we are entering a period of refundings, in which the volume of refundings are
very large, but it is a question of relative costs.
Discuss the matter of relative costs for a moment, Karl.
M r . B O P P . Y O U have the present interest charge on the Government
debt
Senator DOUGLAS. M a y I follow up this point ?
M r . BOPP.

Yes.

Senator DOUGLAS. Suppose you do sell Governments to the banks
and the banks have more Governments. Under your present provisions the banks can then come back and voluntarily present the Government bonds and you have to accept them. A r e you proposing now
that the Reserve System should not have to accept them ?
M r . WILLIAMS. F r o m the standpoint of the commercial bank, it has
a choice as to where it employs its funds. Is it going to invest its funds
i n Governments, or is it going to employ its funds i n the extension of
credit. ? D u r i n g the postwar period we exerted a considerable snubbing influence by .the management of the short end of the maturity
structure; namely, bills and certificates. I t may well be that we can
operate this account i n such a way as to lure banks away from the
extension of credit during the inflationary trends i n business. W e
have, also, of course, the tool of reserve requirements.
Senator D O U G L A S . I know. That is always in the background.
M r . WILLIAMS.

Yes.

Senator DOUGLAS. But I was primarily interested i n the movement
i n the open-market operations.
M r . WILLIAMS. I t is a case of alternative choices on the part of the
banks.
Senator D O U G L A S . I want to follow up this line of questioning that
Congressman Wolcott started some minutes ago, as to whether you




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think it should continue to be an obligation of the System upon the
request of the banks to accept Government bonds and credit that to
the reserve accounts of the member banks, thus creating a much greater
potential loan capacity, and whether you can have an effective system
of control, i n your judgment a total system of control, i f these powers
still remain for the member banks ?
M r . WILLIAMS. Well, it is a question, of course, of using your tools
i n combination, and it is a question of the price you set on the Governments that are outstanding. W e have been pegging the price thus
far. A departure from a policy of a fixed price structure is going to
bring about an adjustment of market values, and it may well be that
banks would prefer to remain i n Governments rather than to enter into
the field of commercial credit extension.
Senator FLANDERS. M a y I ask a question ? Supposing that it seemed
desirable some time before long to allow bond prices to go down and
interest rates to go up. That affects our responsibilities here i n Congress i n the way of searching for a balanced budget. I don't want to
say that we are searching with f u l l earnestness and determination.
But it is always an ideal that is fluttering around us. D o you see
anything in its effect on general business conditions, i n which such
a policy, appropriately applied at an appropriate time, might have
the effect of increasing national income so that it wouldn't have a
harmful effect i n the long run on the Government income ? I n other
words, that the increased cost of servicing the debt would, by any
means, be counterbalanced by the increased return from taxation, or
would it be a net loss ?
M r . BOPP. There is another aspect to the problem, because the Government is interested, so far as its budget is concerned, in total expenditures, one item of which is the interest cost on the debt. Suppose we
take $5,000,000,000 as the interest cost at present. A n increase of
20 percent in that is $1,000,000,000. If, through that increase i n the
interest charge of $1,000,000,000 you prevent prices from rising, the
Government may profit because it is buying 35 or 40 billion dollars'
worth of goods and services. A 3-percent increase i n prices of the
goods and services purchased by the Government would cost the
Government as much as a 25-percent increase i n the total interest cost
to the Government. So far as the Government budget is concerned,
it is the total that really interests Congress.
Senator F L A N D E R S . I am glad that point has been brought out. I
would like to follow that up with one further question.
H o w direct is the influence of the money supply on prices? I raise
that question because, as I remember, during the thirties, we increased
the debt to some extent, the free money supply along toward $15,000,000,000, and its effect on prices was not very great.
I wondered i f you feel that there is a direct and usable relationship
between the money supply and the prices.
M r . WILLIAMS. M r . Bopp has handed me a page that I had copied
out of D r . Goldenweiser's book on Monetary Management
Senator FLANDERS. M a y I just make an inquiry of the staff? I was
told that when he was furnished with this questionnaire he sent i n
his book. I don't know whether that is significant or not.




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M r . WILLIAMS. I t is a book that has some delicious gems i n it,
Senator Flanders. Here is one which M r . Bopp, with a twinkle i n
his eye, passed along. H e is discussing money. [Reading:]
I n certain respects money, one of the most concrete of economic entities, is
nothing but a state of mind. I t means something entirely different to different
people, depending on their state of mind. T o the miser it is an end i n itself.
T o the spendthrift i t is a means of enjoying the process of spending, and to
the thrifty, industrious citizen, it is a means of obtaining the necessaries of
l i f e and of providing for emergencies and old age. T h e same amount of money
represents plenty f o r some and penury f o r others, peace of m i n d for one group
and worry f o r others. N o r is this entirely a matter of l i v i n g standards. I t
differs i n its significance for persons w i t h roughly identical standards and
economic responsibilities.
There are people who always have enough money and some to spare, almost
independently of the size of their income, provided it is not below an irreducible
minimum necessary for the maintenance of decent standards. There are others
who are always short of money regardless of the size of their income. T h e difference between the two is not entirely i n the magnitude of their wants nor i n
the degree of their competitive vanity or of appreciation of finer and more costly
things, It is i n the whole gamut of almost imperceptible minutiae, i n habits about
gratuities, i n preferences about diet, i n responsiveness to others' needs, i n sensitiveness about criticism, i n aptitude for arithmetic, i n willingness to take pains,
i n relative appraisals of the cost of effort, i n relative knack for knowing the ropes,
i n relative degrees of affection for money i t s e l f — i n a word, i n differences more
closely associated w i t h the mind than w i t h the pocketbook.
In discussing the economic role of money, the cardinal fact that the forces
w h i c h affect its functions are not a l l concrete or easily definable, but are to a
considerable degree intangible and psychological, needs to be recognized. It is a
negation of the economic man and a recognition of men w i t h different natures,
habits, and states of mind. It is a caution signal for the rash generalizer.

Senator F L A N D E R S . I S there a general average statistical economic
man?
M r . WILLIAMS. Well, we find, Senator Flanders, that bankers who
are professionals i n the field of money, are motivated i n many of the
ways that are mentioned here, and that they are psychologically
affected. I t is difficult, Chairman Douglas, to point out the extent to
which uncertainty with respect to the maintenance of par on Government bonds would influence the actions of commercial bankers i n the
extension of credit. W e stand ready takers and sellers, and it may
well be that a continuance of this—whereby in periods of business
upsurges we are providing funds, and i n periods of business recessions
we are acting in an opposite way—will render ineffective this important tool that has been placed at the disposal of the System to use i n
this field to help to reduce economic instability.
So that my general philosophy here is that we are i n this period of
the rise of governmental action and we have to be careful because
ambition w i l l overleap itself and f a l l on the other side.
Senator D O U G L A S . I don't want to push you too far, but I just want
to follow out these questions that I have been attempting to ask.
T o what degree are the open-market powers of the System i n the
period of inflation really effective as long as the banks can then take
back to the System the bonds which the System has sold to them and
get reserves ?
M r . WILLIAMS. That is a matter of their attitude toward disposing
or holding the bonds and that in turn is geared into the price.
Senator FLANDERS. I f you sold them to them low enough they might
keep them ?




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M r . BOPP. Yes. That is, I think the banks and others could be discouraged from selling by the price they w i l l receive when they do sell.
Hence they prefer to hold on rather than sell at the lower price; and
hence the System is not asked to buy because of the low price which
it offers for those securities.
( W i t h the permission of the committee, M r . Williams subsequently
inserted the following amplification of the discussion of a flexible
open-market policy:)
T h e purpose of a flexible open-market policy involving flexible, but not erratic,
interest rates would be to promote economic stability by influencing the flow of
expenditures through adjustments i n the volume, availability, and cost of reserves. T h e relationship between reserves and the flow of expenditures is not
r i g i d or invariable. F o r this reason it is not possible to give a precise blueprint
f o r the day-to-day administration of a flexible open-market policy. I t is possible,
however, to give some implications of such a policy.
Fundamentally, i t implies the possibility of movement of both directions—that
is, more restrictive as w e l l as less restrictive—as circumstances warrant. T h i s
means that there would not be inflexible support at any specified level of prices.
It does not, however, mean that the Government securities market w o u l d be
abandoned to its own fate. Indeed, unanimity does not exist as to the meaning
of a "free" market i n such securities under existing conditions. Of the $17,000,000,000 of Government securities owned by the Federal Reserve banks, $10,000,000,000 mature w i t h i n a year; some mature every week. Does a free market
mean that maturing issues w i l l be replaced w i t h other issues or that they w i l l
be redeemed? I f they are to be replaced, w i t h what other issues? I f they are
to be redeemed, what w i l l happen to the money market f r o m which $10,000,000,000
is w i t h d r a w n by the central bank i n a year? A n d what is "natural" about
having the rate of w i t h d r a w a l determined by the particular maturities of issues
acquired previously?
Consideration of the maturities of issues i n the System account reveals also
t h a t the System need not, as is sometimes supposed, sell long-term bonds to
w i t h d r a w funds f r o m the market. It can do so by not replacing some of its
maturing issues. It can reduce reserves also by sales of short-term issues.
T h e day-to-day operations of the open-market account are influenced not
only by the securities i n the portfolio but also by market forces whose strength
varies a great deal. F o r example, if investors sell securities because of panic
or fear, the appropriate action may be for the System to purchase i n order to
allay that fear. On the other hand, i f owners are selling i n order to invest or
lend elsewhere, the appropriate action may be to permit yields—long, term,
short term, or both—to rise and correspondingly to allow prices of securities
to fall.
T h e System is interested i n the volume of reserves not as an end i n itself
but as a means of influencing the flow of expenditures to promote economic
stability. I n my judgment, the most important w a y i n w h i c h the System can
make its contribution to stability is through operations i n an orderly and flexible
tout neither a rigid nor a completely free market f o r Government securities.

M r . WOLCOTT. M a y I ask what might be a foolish question. When a
member bank puts up its bonds as collateral for a Federal Reserve note,
the title of the bond is not transferred to the Federal Reserve bank,
is it?
M r . BOPP. I am sorry. The Federal Reserve banks put up the collateral for Federal Reserve notes which are issued to them by the
Federal Reserve agents. The bonds that are put up by the Federal
Reserve banks may have been bought from banks or from individuals
through open-market operations, namely, through Government securities dealers i n the first instance.
M r . WOLCOTT. W h o gets the interest on the bonds which are pledged ?
M r . BOPP. They are owned by the Federal Reserve bank and the
Federal Reserve bank gets the interest.




53 M O N E T A R Y , CREDIT, AND FISCAL POLICIES

M r . W O L C O T T . S O the interest is theirs. I was wondering what influence a higher yield on Government bonds would have on their
pledging the bonds for currency issues.
M r . B O P P . I think the way the matter operates, Congressman Wolcott, is that the Federal Reserve bank takes its own Government securities, and i f the commercial banks need Federal Reserve notes, they
draw down part of their deposit account at the Federal Reserve bank,
but they do not specifically send up Government securities to pay for
the Federal Reserve notes which they want.
M r . W O L C O T T . I t is taken out of the reserves deposited with the
Federal Reserve ?
M r . B O P P . That is correct. The commercial banks have nothing to
do with this collateral reserve requirement. O n the general relationship between debt and money, first, it has been historically true, ever
since the goldsmiths became bankers, that debt has been related to
money, although for a long period of time it was primarily private
debt. W h a t has happened is that now it is primarily public debt, but
the intimate relationship between the debt and money is the essence of
all banking.
M r . W O L C O T T . That is the point I bring out. The old goldsmiths
determined that there was a certain safe margin, the issuance of certificates against the gold which was in their keeping, and it kept increasing and increasing until the time that the Government came i n
and took over. W e are confronted, apparently, with the same situation today, with respect to Government debt. I t seems to me that we
have got, somewhere along the line, to get better control, better control of the volume of public debt which can be monetized. Now, as I
understand it, the objective of this committee is to find out the causes
of our dips and booms, and then recommend to the legislative committees ways and means of preventing them. A s I get it you have three
weapons, which we w i l l consider orthodox weapons: the manipulation
of the rediscount rates, manipulation of reserve requirements, and the
open-market operations.
Now, am I correct in the statement that when you increase the rediscount rate, and when the interest rate, or the yield rate on Government bonds is increased, there is a tendency on the part of the banks
to pass that on to the commercial borrowers, and does not that influence
the demand by commercial borrowers for credit ?
M r . B O P P . Yes, as well as
M r . W O L C O T T . Isn't that the orthodox way of controlling volume
and velocity of credit?
Senator D O U G L A S . I don't want to answer the question of my colleague, but is it not true that rediscounting has virtually ceased, and
that the amount of paper which the member banks present to the
Reserve banks and the System, is infinitesimal ?
M r . BOPP.

Yes.

M r . W I L L I A M S . That is the psychological tool which I referred to
before.
M r . B O P P . O n September 2 8 of this year the total amount of discounts and advances of all Federal Reserve banks combined was $ 3 0 0 , 000,000; at the same time the total United States Government securities held by the Federal Reserve System was $ 1 7 , 8 5 2 , 0 0 0 , 0 0 0 . So that
the order of magnitude is 3 out of 178.




M O N E T A R Y , CREDIT, AND FISCAL POLICIES

54

M r . WILLIAMS. I think, Congressman Wolcott, i t is also difficult to
generalize as to the effect of interest costs on the actions of businessmen, because a prospective profit may mean that the difference i n
the cost, with a rise of the interest rate, would not deter them f r o m
going ahead with their ventures.
M r . WOLCOTT. Last spring we were told, when we had hearings on
corporate profits and earnings, that there were very few stock and
bond issues by corporations. H o w are the people getting their credit
i f they don't get it from banks ?
M r . WILLIAMS. I think the amount put out varies from time to
time
M r . WOLCOTT. P u t out by whom ? T h e banks ?
M r . W I L L I A M S . N O , no; I am thinking of the amount of funds f r o m
the sale of stocks and bonds, that are issued, by investment bankers'
fields, i n anticipation
M r . WOLCOTT. L e t me clarify my own thinking on this. I don't
think I am clear on this matter now.
The banks, i f they are not rediscounting, where are they getting the money to make the commercial loans, and other loans, anything
that they are loaning on ? A r e they getting it out of earnings ?
M r . W I L L I A M S . Y O U have the figures there, K a r l , of the increase.
M r . BOPP. The loans of commercial banks, as a whole—just one
moment, t i l l I find the figures.
I have a chart of commercial loans at member banks i n leading cities.
I shall give you just three dates. Interpolating from the data here—at
the beginning of 1948, they were of the general order of magnitude of
$15,000,000,000. They fell bv the middle of the year to, roughly,
$14,000,000,000; and then rose to just under $16,000,000,000; and at
the present time are about $13,500,000,000. So you have had a reduction of something like 2% or 3 billion dollars i n the total loans extended by member banks i n leading cities, which roughly reflects what
has been going on.
So there has not been an increase i n bank loans i n the last year.
M r . WOLCOTT. The peak was $17,000,000,000?
M r . BOPP. F o r member banks, i n the leading cities, roughly $16,000,000,000.
M r . WOLCOTT. That was due to industrial expansion, perhaps, which
has leveled off somewhat?
M r . BOPP.

Yes.

Senator DOUGLAS. M r . Bopp, the real answer that the banks
such large reserves i n the Reserve banks is that they do not
to resort to the System for rediscounting of commercial paper,
they have built up these reserves by gold imports, which have
through their hands into the System, and into the Treasury.
that the answer ?
M r . BOPP.

have
need
that
gone
Isn't

Yes.

Senator DOUGLAS. A n d also by the sale of securities ?
M r . BOPP.

Yes.

Senator D O U G L A S . T O the banks ?
M r . BOPP. Yes; quite right.
M r . WOLCOTT. I t is to be noted that I coupled the manipulation of
Tediseount notes w i t h the increases i n yields on Government bonds.
Now, I assume that, because of the large holdings of Government
bonds by the banks, i f the new issues provided for a larger or higher
interest rate, and we do not make provisions for retroactively taking



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care of the present holdings, that there would be a tendency on the
part of the banks to liquidate their present holdings i n favor of new
issues ?
M r . BOPP.

Yes.

M r . WOLCOTT. W h i c h brings me down to this point, the point which
I started out to put forward: What is going to happen to all of this
when we have to retire the savings bonds, the E bonds, and so forth,
when we have to refund those, what is going to happen then to our
bond market, and this situation generally, when we have to pay off?
M r . BOPP. The first part, Congressman Wolcott, is technical, and I
w i l l take that, i f you don't mind, and then the other is more a policy
matter.
W i t h respect to the willingness of anyone to hold onto currently
outstanding issues, I think you are quite correct i n saying they would
like to dispose of them, except that for someone to dispose, someone
else must acquire,, and the other person w i l l not offer a price on the old
outstanding issue except one that is commensurate with the yield on
the new issue.
M r . WOLCOTT. B u t the Open Market Committee w i l l peg it. Won't
they maintain them in some manner ?
M r . BOPP. I misinterpreted the question. I thought you started out
by saying, what i f the Federal Reserve System, the Open Market
Committee, permits an increase in yield on Government securities,
which means they do not buy them at the former existing prices, but
at lower prices.
M r . WOLCOTT. That would be the way you would take care of the
outstanding issues, by pegging at a price comparable to the price of
the new bonds.
M r . BOPP. I f prices on outstanding issues were pegged at the old
level, you would not have the increase in the interest rate or yield that
you have mentioned.
M r . W O L C O T T . Y O U can increase the yield rate by pegging them at a
lower price.
M r . BOPP. B u y i n g at a lower price, not necessarily pegging.
M r . WILLIAMS. Increase the yield to the extent that it would be i n
line with the new issue.
M r . WOLCOTT. T h a t is r i g h t .

M r . WILLIAMS. O f course we have a structure here that is
M r . WOLCOTT. A l l of which brings me to this point, that, apparently,
where we are increasing constantly the reserves of the banks, so that
the banks don't even have to rediscount to the Federal Reserve, to get
enough credit with which to make their commercial loans, that being
the case, as the banks increase the size of their Government portfolios,
don't we increase the threat to the stability of our money proportionately as those bonds which are held by the banks might be monetized?
W h a t can we do to remove that influence, which I might say w i l l be
aggravated when we have to refund the E bonds that are outstanding?
M r . WILLIAMS. W e have a price mechanism here that has been i n
existence, and what I am inferring is that we now ought to get it out
and use it.
Senator DOUGLAS. A r e you proposing that you would successively
lower the support price on bonds, thus increasing the yields, and
therefore making it more palatable for the banks to hold the Government bonds which w i l l be sold to them?



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M r . W I L L I A M S . N O . I am proposing that we inject an element of
uncertainty into the structure here, i n such a way as to give rise to
decisions, alternative choices.
M r . W O L C O T T . Y O U don't need any new congressional authority to
manipulate rediscount rates, do you?
M r . WILLIAMS.

NO.

M r . W O L C O T T . Y O U don't need any new authority i n the Open M a r ket Committee to peg the price of Governments. That is a practice
among the System ?
M r . WILLIAMS.

T h a t is correct.

Senator FLANDERS. O r to unpeg them ?
M r . WILLIAMS.

NO.

M r . WOLCOTT. N o r to u n p e g them.

Now, we had some discussion this last year i n respect to whether
you had sufficient authority to manipulate reserve requirements i n
such manner as to reduce the demand for money or prevent the
monetization. Have you any recommendations to make i n that
respect ?
I might say that it has been the practice before congressional committees to make the first witness the "goat," so i f you don't care to
answer now, you don't have to.
M r . WILLIAMS. Well, of course, I said at the outset that I do not
speak for the System. I take it we w i l l have no hesitancy i n coming
back i f we think that additional authority is needed. The discussions
which ensued last M a y when we asked for renewal of the supplemental grant of 4 percent are clearly i n mind. Subsequent developments were such as to indicate they were not needed. I t is a matter
of judgment as to what is i n prospect, and developments have been
such as to bring about a decrease, a cession of upward pressures.
M r . W O L C O T T . D O you think it would be helpful to the stability of
our economy to give the Federal Reserve the authority to raise reserve
requirements, we w i l l say up to 10 percent, making them so flexible
that the Federal Reserve Board could, within its discretion, use them
up to that limit?
W h a t I have in mind is this: Wouldn't the fact that the Federal
Reserve has the authority to go up to 10 percent cause a great deal of
uncertainty which would or might offset all stabilizing influences?
M r . WILLIAMS. T h a t raises the question of our relationships with
the banks and the banking system, which is the last topic that I have
to present, and which is an important one, and stems right back to
this matter of understanding.
Senator DOUGLAS. Before you proceed to that—Mr. Buchanan.
M r . BUCHANAN. W o u l d you care to itemize the specific congressional directives to those responsible for policy i n the coordination
of fiscal-debt management and monetary policy ?
M r . WILLIAMS. I think it ought not to be i n terms of specific directives. W h a t I was proposing was a recognition on the part of Congress that management of the public debt is meshed into the operation
of the Federal Reserve System, having to do with general credit and
monetary policy, so that the two i n combination might work with a
view to achieving stability. I think it would be regrettable i f we
get into an attitude that we have a mechanical mechanism that can
accomplish results, and then say, thank God, we are organized and
can dismiss that question from mind. The situation would be even



57 M O N E T A R Y ,

CREDIT,

AND FISCAL

POLICIES

more regrettable i f we have that feeling on the part of one group and
a feeling on the part of another group—such as I fear is growing
among bankers—that here is just another governmental regulatory
body, and a plague on their house. When you get into that position
you find too much being expected of the System on the one hand and
a resentment for whatever is being done by the System on the other
hand. I t places you i n an impossible position.
We have a thoroughgoing job of public relations on our hands
with respect to the whole commercial banking structure. That is
what I was referring to a while ago when I gave a plug for commercial banking, when I said that my later testimony might be construed as critical.
Senator FLANDERS, I don't know whether this is what M r . Buchanan
had i n mind, but do you have any legislative, any restrictions of law
on your rates of rediscount ? Y o u can set them what you please, can
you?
M r . WILLIAMS.

Yes.

Senator F L A N D E R S . D O you have any legal restrictions on your openmarket operations?
M r . BOPP. There is one technical qualification with respect to rediscount rates. Section 10 (b) of the Federal Reserve Act, which
authorizes the Reserve banks to extend credit to member banks on noneligible assets, does require that the rate charged by the Federal Reserve bank for such advances be a half a percent higher than the highest
discount rate. I t is a curious circumstance i n which the System has
complete discretion with respect to the general level of rates, and with
respect to the interrelations of rates, except for this particular rate
which must be related to one other particular rate.
Senator DOUGLAS. But that is a minor thing ?
M r . BOPP.

Yes.

Senator FLANDERS. So you have no legislative restrictions, practically speaking, on the rediscount rates, you have no legislative restrictions, practically speaking, on the open-market operation, but you do
have legislative restrictions on the reserve?
M r . BOPP.

Yes.

M r . WOLCOTT. M a y I ask one other question. I was leading up to
this. I am trying to find out how much of the debt could be monetized
under present authority. I guess perhaps the best way of determining
that is to determine how much of the Government debt holdings by
Federal Reserve banks is i n a position where it could be pledged and
that would be approximately three-quarters of the potential, of the
possible volume, would it not?
M r . BOPP. The restriction on Federal Reserve bank acquisition of
assets is written i n reverse, namely, it is a requirement that the liability
on note and deposit accounts be backed by a minimum of 25 percent
of gold holdings. So the total liability on these accounts may be equal
to four times the gold holdings. Since the liabilities are offset by corresponding earning assets they could be roughly four times our gold
holdings. I f I remember correctly, our present gold holdings are
about $25,000,000,000 which means we could have liabilities i n the
order of $100,000,000,000 and earning assets of $75,000,000,000.
M r . WOLCOTT. That would be Federal Reserve notes. That is for
the Federal Reserve banks.
M r . BOPP. That is the Federal Reserve alone. However, i f the commercial banks and the public, i n their discretion as to the kind of



58

M O N E T A R Y , CREDIT, AND FISCAL POLICIES

liabilities they wanted, chose to have all of this increase i n the f o r m
of deposits of Federal Reserve banks, the total for the entire banking
system would be much larger. Deposits at the Federal Reserve banks
are the reserves of member banks, which i n turn enable them to increase
their purchases of Government securities. T h e order of magnitude
of the additional reserves would be: $ 7 5 , 0 0 0 , 0 0 0 , 0 0 0 of earning assets
minus $ 1 7 , 0 0 0 , 0 0 0 , 0 0 0 , which we now have, or $ 5 8 , 0 0 0 , 0 0 0 , 0 0 0 . I f the
average member bank reserve requirement is 20 percent, we m u l t i p l y
that by five and get 240 to 250 billion dollars. So the total for the
banking system, including the Federal Reserve, is about $300,000,0 0 0 , 0 0 0 . I n terms of legislative power it is, I should say, well adequate.
M r . W O L C O T T . M a y we sum it up this way, and would this be a f a i r
statement, that under existing authority it is theoretically possible to
raise the volume of our money to—what would you say ?
M r . B O P P . 4 0 0 or 5 0 0 billion dollars.
Senator F L A N D E R S . M a y I ask a frivolous question at this point, and
when I say "frivolous" I mean "frivolous": W h a t would happen i f
every debt i n the U n i t e d States, private business and Government,
were by some magic p a i d up, what would happen to money ?
M r . W I L L I A M S . W e would begin to acquire additional debt. T h e
sharp pencil boys would get it f r o m the rest of us.
I have discussed the relationship of the System, oil the one hand,
w i t h the Treasury. I would like to t u r n now and consider relationships w i t h the banking system as a whole.
Senator D O U G L A S . W i l l you discuss their reserve requirements, M r .
W i l l i a m s , i n this connection ?
M r . WILLIAMS.

Yes.

Senator D O U G L A S . I t is now 12:20 p. m. I wonder i f you w o u l d
return at 2 o'clock, and we w i l l ask the witness who was to appear at
2 o'clock to postpone his appearance u n t i l later i n the afternoon.
M r . WILLIAMS.

Yes.

Senator D O U G L A S . T h a n k you very much.
(Whereupon, at 12:20 p. m., a recess was taken u n t i l 2 p. m., of
the same day.)
A F T E R N O O N SESSION

Senator D O U G L A S . M r . W i l l i a m s , you had not completed your statement this morning, and I take i t you had about come to some definite
recommendations. W e would be very happy to have you proceed
now, i f you would.

STATEMENT OF ALFRED WILLIAMS, PRESIDENT, AND KARL BOPP,
VICE PRESIDENT, FEDERAL RESERVE BANK, PHILADELPHIA—
Resumed
M r . W I L L I A M S . I want to talk, i f I may, about System relationships
w i t h banks. I include this i n the presentation because i t seems to me
to be a problem of first-rate magnitude and affects the atmosphere
i n w h i c h we work. I find—and I think some of the other Federal
Reserve B a n k presidents do—that bankers are restive; they are skeptical; they are querulous; their morale is low. Some feel aggrieved;
feel that they are singled out unduly for attention i n this matter of
regulation and control.
W h e n one explores the question as to why this should be, the answer
divides itself into the attitudes of member banks and of nonmember



59 M O N E T A R Y ,

CREDIT, AND FISCAL

POLICIES

banks. I think to the extent that it exists among member banks it
arises from the upping of reserve requirements last year under inflationary conditions.
Senator DOUGLAS. W o u l d you state for the record the increase i n
the reserves which w^as put into eff ect last year and during this year %
M r . BOPP. T h i s is the record for 1948 and 1949: O n February 27,
1948, reserve requirements of central reserve city banks were increased
from 20 to 22 percent; on June 11 they were increased to 24 percent;
then on September 16 the reserve requirements for county banks against
net demand deposits were increased from 14 to 16 percent, and on time
deposits for the same group of banks from 6 to 7% percent. Effective
September 24, the reserve requirements against demand deposits were
increased from 24 to 26 percent for central reserve city banks and from
20 to 22 percent on reserve city banks, and at the same time the requirements against time deposits for both groups were increased from 6 to
7y2 percent. On M a y 3, 1949, the reserve requirements for country
banks were reduced by 1 percent on demand deposits and by % percent
on time deposits. On M a y 5 there was a reduction from 26 to 24 percent against demand deposits for central reserve city banks and from
22 to 21 percent on reserve city banks, and a reduction of l/2 percent
against time deposits at those two classes of banks.
On June 30 there was a further reduction at reserve city banks
from 21 to 20 percent against demand deposits and from 7 to 6
percent on time deposits.
O n J u l y 1 there was a reduction of 1 percent against both time and
demand deposits of country banks; on August 1, a further decrease of
1 percent on country banks against net demand deposits only. Then
a series of changes, a half percent at a time, followed through i n
August at these various banks.
We could insert the f u l l table i n the record, i f you want.
Senator DOUGLAS. W e would appreciate it i f you would.
(The table referred to above is as follows:)
M E M B E R I B A N K RESERVE REQUIREMENTS
[Percent of deposits]
Net demand deposits 1
Effective date of change

1948—Feb. 2
7
June 11
Sept. 16 .
.
Sept. 24..
1949—May 1...
-May 5
June 30.. _
July 1
_
Aug. 1
Aug. 11.
_
Aug. 16..
__
Aue. 18
Aug. 2
5
Sept. 1 . _
In effect Oct. 1, 1949

Central reReserve
serve city
city banks
banks
22
24
26

... ..

20
22

24

21
20

23 K
23
22K

22
22

19K

19
ISM
18
18

Country
banks

Time deposits (all
member
banks)

1
4

6

16

2m

1
5

27

1
4
13

3 7

36
26

12

35
25

12

5

1 Demand deposits subject to reserve requirements, i. e., total demand deposits minus cash items in
process of collection and demand balances due from domestic banks (also minus war loan and series E bond
accounts during the period Apr. 13, 1943-June 30, 1947, and all U. S. Government demand accounts Apr.
24,1917-Aug. 13, 1935).
2 Requirement became effective at country banks.
3 Requirement became effective at central reserve and reserve city banks.




60

MONETARY,

CREDIT,

AND

FISCAL

POLICIES

Senator D O U G L A S . D O I understand, M r . Williams, that member
banks feel these reserve requirements are too high ?
M r . WILLIAMS. Resistance to the increase, I think, grew out of two
reactions on the part of the member banks.
(1) A feeling that the timing was not good and not completely
understanding what the conditions of business were that brought about
the increases; and
(2) The problem of competitive relationship. Frequently we think
of this in terms of the low percentage of deposits i n nonmember banks
and say that this is a relatively minor matter, and is a low price for
the freedom that State banks enjoy for having the right to come i n the
System or stay out of the System and, therefore, we ought not to
disturb it.
Senator DOUGLAS. I had some figures prepared on this by the members of the staff. They show that, as of June of this year, of the 14,149
commercial banks, 4,987 were national banks and a little less than 2,000
were State banks inside the System, or a total of around 6,900 banks
inside the System, or about 49 percent.
But the deposits which these banks held amounted to 85 percent of
the total deposits i n the country. I wondered i f there is not a sufficient body to the dog to be able to wag the tail.
M r . WILLIAMS. Competitively, the placement of a nonmember bank
in a local situation can be such as to work a disproportionate influence.
Furthermore, quite apart from whatever advantages, real and fancied,
there are to nonmembership, you have a psychological factor. I f ,
when he is restive, the question of increase i n requirements comes up,
the member bank begins to raise
Senator DOUGLAS. A r e you saying this: That among the 2,000 State
banks, which, by their own choice are members of the Federal Reserve
System, but which may have the power, as I understand it, to withdraw
from the System at any moment, that there are rumblings that some of
them may get out of the System, at least ?
M r . WILLIAMS. There is talk. I think there is more talk than actual
intention. I n our own district two banks have raised the question, two
banks of considerable size. I n one instance the banker came down
and went over i n some detail the advantages i n dollars and cents of
getting out, and talked with us at some length about that.
Senator D O U G L A S . I wonder i f you would be willing to make a considered statement on the relative advantages and disadvantages to a
State bank as to whether or not it w i l l voluntarily join or stay i n the
System.
M r . WILLIAMS. M a y I have the privilege of working that out and
inserting it i n the record ?
Senator D O U G L A S . I wonder i f we could develop some of it by questions. W h a t is the situation on clearance? D o nonmember banks
have their checks cleared through the Federal Reserve System?
M r . WILLIAMS. Generally speaking, the nonmember bank is operating via a correspondent city bank; there are some exceptions.
Senator D O U G L A S . Their checks are cleared through their correspondent, which is a member of the System, you mean, rather than
directly ?




61 M O N E T A R Y ,

CREDIT,

AND

FISCAL

POLICIES

M r . WILLIAMS. That is right; and the correspondent i n turn may be
using our facilities, doing some of the work himself and not doing
other portions of it.
Senator DOUGLAS. W i l l the State banks have the privilege of clearing
directly through the System ?
M r . WILLIAMS. Only to a very limited extent.
Senator DOUGLAS. But, when they operate through a corresponding
bank, is any service charge made to the State bank not a member of the
System for having its checks cleared by the System ?
M r . WILLIAMS.

NO.

Senator D O U G L A S . S O that service is given to them free, although it
costs the Government naturally something to provide it. That is
not an advantage, then, for their joining the System, since they can get
the service without cost through a correspondent bank which is a
member.
M r . WILLIAMS. That is right. There is also a question as to relative efficiency of the two systems. Always we are attempting to improve our service and speed up delivery, but I would not want to
imply that we always do a better job than correspondent banks, because
that does not necessarily follow.
Senator DOUGLAS. But, i f correspondent banks clear through the
System, then they extend those privileges by that fact.
M r . WILLIAMS. The clearances are direct on the part of the correspondent bank, where they have relationships with other correspondent banks, and one cannot generalize about that situation.
Senator DOUGLAS. Have you ever tabulated the laws and regulations which apply to national banks and to State banks that are
members of the Federal Reserve System but which do not apply to
State banks not members of the System ?
M r . WILLIAMS. Our vice president i n charge of bank examinations
has. I would not feel competent to testify offhand.
Senator DOUGLAS. I have had a list prepared, which comes to 30
items, which are restrictions upon members of the System which are
not restrictions upon nonmembers of the System.
M r . WILLIAMS. They exist; there is no question.
Senator DOUGLAS. They are limitations on total loans to one borrower, regulations governing purchase of investment securities, prohibition against purchasing stocks, prohibition against engaging i n
underwriting of investment securities and stocks, restrictions on loans
to executive officers, restrictions on dealings with directors, restrictions on interlocking directorates or other interlocking relations with
other banks and with securities companies, prohibition against banks
having less than 5 or more than 25 directors, provision authorizing
supervisory authority to remove officers and directors for continued
violations of law or continued unsafe and unsound practices, prohibition against affiliation with securities companies, restriction on holding-company affiliates, restriction on bank stock representing stocks
of other corporations, limitations on loans to affiliates, requirements
of reports of affiliates and publication thereof, requirements for examination of affiliates, limitations on investment i n bank premises,
minimum capital requirements, minimum capital requirements for
99076—50
5




62

MONETARY,

CREDIT,

AND

FISCAL

POLICIES

branches, prohibitions against loaning on or purchasing own stocky
restrictions on withdrawal of capital and payment of unearned dividends.
I f this list is correct, there are a large number of restrictions which
are imposed upon members designed to safeguard the integrity of the
deposits which are not imposed on nonmembers.
M r . WILLIAMS.

Yes.

Senator DOUGLAS. A n d , therefore, nonmembers i n the absence o f
stringent State regulations are i n general able to get many of the advantages of the Federal Reserve System but without subjecting themselves to these limitations; is that correct ?
M r . WILLIAMS.

Yes.

Senator DOUGLAS. A n d would you develop the question of reserves,
namely, comparative reserves ?
M r . WILLIAMS. These vary widely from State to State, but I think
it undoubtedly is an accurate generalization to say that our requirements are higher than the State requirements. One can illustrate that
i n the statements that nonmember banks make to our field men when
we approach them. I could have M r . Bopp give you a few of those.
Senator DOUGLAS. I wish you would.
M r . BOPP. These relate primarily, M r . Chairman, to the objections
which nonmembers had to the question of the increase in reserve requirements i n the year 1948.
Senator DOUGLAS. W h i c h nonmembers had ?
M r . BOPP. Excuse me—which members had because the higher requirements were not applicable to nonmembers.
First, "opposed to any increase unless applicable to all banks"; second, "feels the increase i n reserves very unfair to member banks";
third, " i f a member bank's reserves are increased further, this State
bank member's board of directors w i l l undoubtedly consider withdrawing from the System."
Those are comments which our field men get; whether the bank
would actually withdraw, of course, is not demonstrated.
Continuing, "administration was wrong i n not subjecting nonmembers to the same reserve requirements as members"; "unfair, should
apply to nonmembers"; "opposed to giving Board more power i n this
direction"; "officer agrees with Federal Reserve policy curtailing credit
but recommended withdrawal of their State bank from the Federal
Reserve System because of the increased reserve requirements."
These are illustrative comments which we have received, which our
field men have received from member banks with respect to the difference i n requirements.
Senator DOUGLAS- I n connection with another matter, Senator F l a n ders and I had a comparative study made on State reserve requirements, and I should like to have that put i n the record at this time*




63

M O N E T A R Y , CREDIT, AND FISCAL POLICIES

(The study referred to above is as follows:)
State

reserve

requirements

for

commercial
1, 1949*

banks

and

trust

companies,

July

S E C T I O N A — R E Q U I R E M E N T S F O R S O - C A L L E D " C O U N T R Y B A N K S , " I. E., B A N K S
N O T D E S I G N A T E D OR A P P R O V E D AS R E S E R V E D E P O S I T A R I E S , N O T L O C A T E D
I N C E N T R A L R E S E R V E OR R E S E R V E CITIES, E T C .
Composition of reserve
required on demand
deposits

Required reserves

State

Uniform
Different reEither
require- quirements on—
balances
ments
with deon deVault positary
mand
cash
banks
and
Demand Time
or vault
detime
deposits
cash
posits 1
deposits
Percent of deposits
specified

Alabama
Arizona
Arkansas
California
Colorado
Comiecticut
Delaware
District of Columbia
Florida
Georgia
Idaho
...
Illinois (no statutory reserve requirements)
Indiana
Iowa
Kansas 6
Kentucky _
Louisiana
Maine
_
_
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
_
Missouri....
___
Montana
_
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma.

315.0
15.0

20.0
15.0

12.0

10.0
15.0
12.0

15.0
15.0
12.0

5

15.0
14.0
20.0

0
6
6

15.0

5

12.5
7.0
12.5
7.0
20.0
14.0
15.0
15.0

3
3
5
3
0
6
6
0

12.0
15.0
15.0

5
7
3

15.0

5

15.0
15.0

5
3

14.0
15.0
10.0
15.0
15.0

SecuriEither
ties, balbalances
ances
with dewith de- Vault
positary cash positary
banks
banks,
or vault
or vault
2
cash
cash

Percent of demand
deposits
4
10

6
5
5
10
5

7

0
5.0
0
4.0
^ 3.0
4.0
0
0
0
0
0
0
1.05
0
2.33
0
4. 67
0
3.0
0
0
0
3.0
0
0
0
0
3.0
0
0
0
0
0
0

15.0
10.0
15.0
8.0
12.0
9.0
14.0
5 20.0
0
15.0
10.0
12.5
5.95
12.5
4. 67
20.0
9.33
15.0
6.0
12.0
12.0
15.0
12.0
10.0
12.0
15.0
15.0
12.0
12.0
14.0
15.0
10.0
15.0
15.0

Composition of reserve
required on time deposits
Securities, balances
with depositary
banks,
or vault
cash 2

Percent of time deposits

0
0
0
0
(4)
2.0
0
0
20.0
0
5.0

0
2.5
0
1.0
4 3.0
0
0
0
0
0
0

0
0
0
0
0
0
0
6.0
0
0
0
0
0
3.0
0
0
0
0
0
0
0
0
0

0
.45
0
1.0
0
2.0
0
0
0
0
0
3.0
0
0
0
0
.6
0
0
0
0
0
0

4.0
7.5
15.0
0
12.0
0
6.0
5 6.0
0
0
10.0
3.0
2. 55
5.0
2.0
0
4.0
0
0
0
5.0
7.0
0
10.0
4.0
15.0
0
2.4
12.0
6.0
5.0
5.0
4.0
5.0

(4)

0
0
0
4.0

0
0
0
20.0
5.0
5.0
0
0
0
0
0
0
6.0
0
12.0
0
0
0
0
1
0
5.0
0
0
0
0
0
6.0
0

*In most cases the percentage requirements shown are prescribed in the State law itself. Where the law
empowers banking authorities to change reserve requirements, the percentages shown are those which were
actually in effect on July 1, 1949. The data in this table are based on Provisions of State Laws Relating to
Bank Reserves as of December 31,1944, published by the Board of Governors of the Federal Reserve System,
and on changes in State reserve requirements reported to the Board since that time; the data have not been
checked with the State banking authorities.
1
The reserve requirements shown in the "Time deposits" column for Arizona, California, Connecticut,
Massachusetts, Nebraska, Rhode Island, Utah and Wyoming apply only to deposits in the savings departments of commercial banks and trust companies. Other time deposits are subject to higher requirements, but inspection of State banking department annual reports indicates that such deposits in California4
Connecticut, Massachusetts, and Rhode Island State commercial banks and trust companies are relatively
small in comparison with deposits in their savings departments.
2
Securities eligible as reserves are United States Government obligations and, in some instances, State
and municipal obligations.
3
There is a 50-percent requirement for banks in places with less than 1,500 population, with capital of
$10,000 or more but less than $25,000.
4
The required 3 percent vault cash reserve may be held "in cash and/or obligations of the United States."
5
Vault cash may not be counted as part of the required reserve.
6
For trust companies the reserve requirements are 25 percent of demand and 10 percent of time deposits,
but there are only four trust companies (with little or no deposits) in the State.
* There is a 10-percent requirement on "secured savings deposits."




64
State

MONETARY, CREDIT, AND FISCAL POLICIES
reserve

requirement

for

commercial

banks

and

trust

companies,

July

1, 19J$ (Section A)—Continued
Composition of reserve
required on demand
deposits

Required reserves

State

Uniform
Different rerequire- quirements on—
ments
on deVault
mand
cash
Demand Time
and
dedeposits
time
posits 1
deposits
Percent of deposits
specified

Oregon
P ennsyl vania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah..
Vermont
Virginia. . _
_
Washington
West Virginia
Wisconsin.
Wyoming

17.5

15.0
12.0

Either
balances
with depositary
banks
or vault
cash

Securities, balances
with de- Vault
positary cash
banks,
or vault
cash 2

Percent of demand
deposits

15.0
14.0
15.0
7.0

8 5
6
0
3

10.0
»15.0
15.0
20.0
10.0

3
5
5
7
3

10.0

5

20.0

10

0
0
6.0
0
0
0
0
1.88
0
0
0
2.0
0
0

15.0
8.4
9.0
7.0
7.0
10.0
15.0
13.12
8.0
10.0
15.0
8.0
8.0
20.0

Composition of reserve
required on time deposits

0
5.6
0
0
10.5
0
0
0
12.0
0
0
0
4.0
0

Either
balances
with depositary
banks
or vault
cash

Securities, balances
with depositary
banks,
or vault
cash 2

Percent of time deposits
0
0
0
0
0
0
0
1.25
0
0
0
1.0
0
0

5.0
3.6
0
3.0
7.0
3.0
5.0
3.75
2.8
3.0
15.0
4.0
8.0
10.0

0
2.4
0
0
10.5
0
0
0
4.2
0
0
0
4.0
0

1
T h e reserve requirements s h o w n i n the " T i m e deposits" c o l u m n f o r A r i z o n a , C a l i f o r n i a ,
Connecticut, Massachusetts, Nebraska, Rhode Island, U t a h , a n d W y o m i n g a p p l y o n l y to
deposits i n the savings departments of commercial banks a n d t r u s t companies. O t h e r t i m e
deposits are subject to higher requirements, but inspection of State b a n k i n g d e p a r t m e n t
a n n u a l reports indicates t h a t such deposits i n C a l i f o r n i a , Connecticut, Massachusetts, a n d
R h o d e I s l a n d State commercial banks a n d t r u s t companies are r e l a t i v e l y s m a l l i n comp a r i s o n w i t h deposits i n their savings departments.
2
Securities eligible as reserves are U n i t e d States G o v e r n m e n t obligations and, i n some
instanues, State a n d m u n i c i p a l obligations.
8 There is a 10-percent requirement on time deposits i n noninsured banks, but there was only one such
bank on July 1,1949, and it had no deposits.
» There is a 20-percent requirement for banks with capital stock of less than $25,000.




65

M O N E T A R Y , CREDIT, AND FISCAL POLICIES
State

reserve

requirement
for commercial
banks and trust
1, 1949 (Section
A)—Continued

companies,

July

S E C T I O N B — R E Q U I R E M E N T S FOR BANKS D E S I G N A T E D OR A P P R O V E D AS R E S E R V E
DEPOSITARIES, ETC.**
Composition of reserve
required ou demand
deposits

Required reserves

State

Differ*3nt reUniform
Either
require- quireme nts o n balances
ments
with deon deVault positary
mand
cash
banks
and
Demand Time
or vault
detime
deposits
cash
posits 1
deposits
Percent of deposits
specified

Arizona
..
Arkansas
California, banks in
places with population of—
100,000 or more
50,000 to 100,000
Colorado .
Iowa
Kansas
Kentucky
Massachusetts
- Minnesota _
Mississippi
Missouri
Montana
Nebraska
Nevada
New York:
Manhattan Borough
Brooklyn, Bronx,
and Buffalo..
Oklahoma
..
Utah
Wisconsin

20

15
15

10

6.67
8.0

13.33
12.0

18.0
15.0
20.0
10.0
12.5
10.0
20.0
15.0
25.0
18.0

5 3 9.0
5 3 7.5
6 <4.0
1.5
3
5
0
3
3. 33
0
4.0
5
0
10
0
3
7.0
0
5
0
0

9.0
7.5
16.0
8.5
12.5
6.67
8. 0
15.0
25.0
11.0
15.0
16.0
15.0

20.0

SecuriEither
ties, balbalances
ances
with dewith de- Vault
positary cash positary
banks
banks,
or vault
or vault
cash
cash 2

Percent of demand
deposits

20.0

Composition of reserve
required on time deposits

0
0

0
0

(4)

0
0
0
8.0
0
0
0
0
4.0
0

Percent of time deposits
2.5
8.0

7.5
12.0

1.0
1.0
2
.45
0
1.0
0
0
0
3.0
0
0
0

0
0
4.8
2. 55
5.0
2.0
0
5.0
10.0
0
15.0
4.0
15.0

41.

24.0

20

Securities, balances
with depositary
banks,
or vault
cash 2

7

0

24.0

0

0

20.0
18. 0
20.0

7
5
5

0
0
2.5
0

20.0
18.0
17.5
13.33

0
0
0
6.67

0
0
1. 25
0

0
0

4.0
4.0

(<)

0
0
0
0
0
0
0
0
1.0
0

7.0

0

7.0
5.0
3. 75
13.33

0
0
0
6.67

*In most cases the percentage requirements shown are prescribed in the State law itself. Where the law
empowers banking authorities to change reserve requirements, the percentages shown are those which were
actually in effect on July 1,1949. The data in this table are based on Provisions of State Laws Relating to
Bank Reserves as of December 31,1944, published by the Board of Governors of the Federal Reserve System
and on changes in State reserve requirements reported to the Board since that time; the data have not been
checked with the State banking authorities.
**In States not listed in this section or in this footnote, the reserve requirements shown in section A are
applicable to all State commercial banks and trust companies. The requirements shown in this section
apply to banks designated or approved as Reserve depositaries, banks in central Reserve or Reserve cities,
banks in specified cities, and banks in cities with specified population, as follows: Arizona—the requirement
applies to banks in places with population of 50,000 or more. Arkansas—the 20-percent requirement applies
to banks designated as Reserve agents. California—the requirements for banks in places with population
of 50,000 to 100,000 apply also to Reserve depositaries in places with population under 50,000. Colorado—
the requirements apply to banks designated as Reserve agents. Iowa—the requirements apply to banks in
Reserve cities (designated as such under the Federal Reserve Act). Kansas—a 20-percent Reserve is required against demand deposits due to banks; the 12.5-percent requirement applies to other demand deposits. Kentucky—the 10-percent requirement on demand deposits applies to banks in Reserve cities. There
is a 13-percent requirement against demand deposits for central Reserve city banks, but there is no central
Reserve city in the State. Massachusetts—the requirement applies to trust companies doing business in
Boston and less than 3 miles from the State House. Minnesota—the requirements apply to banks in Reserve cities (designated as such under the Federal Reserve Act). Mississippi—the requirements apply to
banks in places with population over 50,000. Missouri—the requirements apply to banks in places with
population of 200,000 or more. Montana—the requirement applies to banks approved as Reserve depositaries. Nebraska—the requirements apply to banks in cities with population of 25,000 or more. Nevada—
a 25-percent Reserve is required against deposits due to banks: the 15-percent requirement applies to other
demand deposits. Oklahoma—the requirements apply to approved depositaries. Utah—the requirements
apply to banks in places with population of ^0,000 or more. Wisconsin—the requirement applies to banks
designated as Reserve depositaries.
1 The reserve requirements shown in the "Time deposits" column for Arizona, California, Massachusetts,
Nebraska, and Utah apply only to deposits in the savings departments of commercial banks and trust companies. Other time deposits are subject to higher requirements, but inspection of State banking department
annual reports indicates that such deposits in California and Massachusetts State commercial banks and
trust companies are relatively small in comparison with deposits in their savings departments.
2 Securities eligible as reserves are United States Government obligations and, in some instances, State
and municipal obligations.
3 The" vault cash" requirements (9 percent for cities with population over 100,000 and 7.5 percent for cities
with population of 50,000 to 100,000) apply only to reserve depositaries in such cities; for other banks in such
cities the vault cash requirement is 6 percent, and the balance of the required reserve may be held with
depositary banks.
4 The required vault cash reserve may be held "in cash and/or obligations of the United States."




66

M O N E T A R Y , CREDIT, A N D FISCAL

POLICIES

Basic statutory requirements, actual requirements on July i, 1949, and minimum
and maximum reserve requirements for State commercial banks and trust
companies in States in which banking authorities are empowered to change
reserve requirements
Percent of demand deposits
State
Basic
Alabama i
Arkansas 23
__
Connecticut4
Delaware...
__
District of Columbia
Kentucky:
Reserve cities 6
.
Elsewhere«
Maine
...
Maryland..
Massachusetts:4
Boston 7
Elsewhere
Michigan2
New Hampshire
New Jersey
New Mexico 2
New York:
Manhattan Borough
Brooklyn, Bronx, and Buffalo...
Elsewhere
North Dakota
Ohio
Oregon 9
Pennsylvania^
Utah:
Large cities
Elsewhere
Vermont.

Actual

Minimum

1
5
12
7
FR

1
5
15
1
4
20

15
12
FR
FR

10
7
1
5
15

1
0
7
14
1
5

(5) 5
1

20
1
5
12
1
5
1
5
12

20
15
12
1
5
1
5
12

13
10
7
10
1
5
1
5
1
5

24
20
14
10
1
5
15
14

20
15
1
5

20
1
5
20

Percent of time deposits

Maximum

Basic

FR
5
FR
FR

1
15
0
3
FR

4
15
0
6
6

1
15
0
FR
FR

3
3
0
3

3
3
6
6

3
3
0
3

6
6
FR
FR 6

0
0
12
5
3
12

0
0
12
5
3
12

0
0
12
85
3
12

0
0
24
85
6
1
5

0
0
0
5
10
5
7.5

6
6
6
5
10
5
6

0
0
0
5

(5)
4
(5)

(5)
(5)
10
(5) 10

5
5
3

5
5
7

5
5
2

10
10
8

()

10
7

20
14
FR
FR 30

(5)
(5)
12
(5) 5
1

(5)
(5)
24

12

FR
30
1
5

13 FR 26
10 FR 20
7 FR 14
20
1
0
5
5
12
30
5
30

()
()

20
1
5
9

()

40
30
30

Actual

Minimum

Maximum
FR
FR
FR

5
0

(5)

1
5

FR—This sumbol standing alone signifies that the State law provides that the basic, maximum, and/or
minimum shall be the same as prescribed by Federal authorities for member banks; where the symbol
appears with a percentage, the requirement prescribed by State authorities may not exceed either that
percentage or the corresponding requirement applicable to member banks.
1 The provision for changes in reserve requirements by the State banking board applies only to time
deposits.
2 In Arkansas, Michigan, and New Mexico, identical requirements apply to demand and time deposits.
However, in Michigan the entire reserve on time deposits may consist of United States Government
securities.
3 Neither these percentages nor the authority to change requirements extends to banks designated as
reserve agents.
4 In Connecticut a 7 percent requirement is applicable to time deposits in the commercial department,
•and in Massachusetts the demand deposit requirement applies to certain time deposits in the commercial
•department. This table, however, shows zero requirements against time deposits, because the deposits
in savings departments (of departmental banks) comprise all but a relatively small portion of their time
deposits.
6 None specified.
6 The State law prescribes higher requirements for banks in central reserve cities, but there are no such
cities in the State.
7 Applies to banks in Boston and within 3 miles of the State House.
8 The range of reserve requirements on time deposits in the commercial department is from zero (apparently) to the Federal Reserve maximum, but the reserve requirement on deposits in savings departments
of commercial banks is the same asfixedfor savings banks, namely, 5 percent.
6 Neither these percentages nor the authority to change requirements extends to noninsured banks, but
there was only 1 such bank on July 1,1949, and it had no deposits.
Banks in cities with a population of 50,000 or more.

Senator DOUGLAS. I n brief these tables show a general requirement
somewhere around 15 percent, although i n most cases this could be i n
the form of deposits i n correspondent banks as well as vault cash, but
there were certain States which fell even markedly below this standard.
M y own State of Illinois has no statutory reserve requirements.
Kansas has 123/2 percent, Kentucky has 7 percent, California has 12
percent, Minnesota has 12 percent, South Carolina has 7 percent, Tennessee has 10 percent, Washington has 10 percent, West V i r g i n i a has
10 percent.




67 M O N E T A R Y ,

CREDIT,

AND FISCAL

POLICIES

So that you think the conclusion is that in general the reserve requirements are lower under the State system for State banks not members of the System than in banks which are members of the System?
M r . WILLIAMS.

T h a t is

right.

Senator DOUGLAS. A n d that a considerable portion of this can be i n
the form of mutual deposits—A in B and B in A ?
M r . WILLIAMS. I think it is fair to say that there are competitive
disadvantages from the standpoint of reserve requirements i n membership in the System. These are offset in other ways.
Senator D O U G L A S . N O W , has this fact that the State banks can
always get out of the Federal Reserve System ever operated to deter
the System from raising reserve requirements? Is it a factor which
is present in your considerations ?
M r . WILLIAMS. I confess the statement i n the report submitted for
the record, which said that the Board might be reluctant to take action
because of the effect of the action on membership, escaped me. Personally, I doubt very much whether that is a factor i n the determination of Board policy. I think that is an overstatement. That would
be my judgment. We are living with the problem in other ways than
attempting to solve it by not acting. Do I make myself clear ?
S e n a t o r DOUGLAS.

Yes.

M r . WILLIAMS. I would doubt whether that was an important factor
in the determination of Reserve policy, hesitancy to act because of the
fear of withdrawals.
W e have had one withdrawal—that is, not associated with consolidation or merger—in 10 years. I checked on the matter for the third
district just before I left.
But that does not indicate that it does not have its effect through
the generation of a state of mind, because there is undoubtedly a
spirit of restiveness. I think it is apparent. I think you would
share that feeling, M r . Bopp.
M r . BOPP. Y e s , sir.

M r . WILLIAMS. Both of us get into the field very frequently because of the policy of the bank of going out some 30 times a year
to meet with bankers in our district i n small groups. E a c h of these
bankers brings a director with him. W e have a round-table discussion for a period of 2 hours before dinner and a period of an hour
after dinner i n an attempt to bring to the bankers and their directors—
and, incidentally, we bring nonmembers i n on this discussion—in line
with our general approach that one way to solve the problem is through
education and the increase of understanding.
I n the course of those discussions we get the feeling that the Federal Reserve is constantly i n their minds. W e get the feeling that
there is activity on the part of State organizations. I think there is
undoubtedly a wish to build a defense or to stem a tide that may
at any time start legislation.
F r o m the standpoint of public relations, it is an unhealthy situation. I t raises a question as to how you solve it. I have pondered
the question of legislation.
Y o u have before you a proposal from the chairman. I admire
the chairman's efforts i n attempting to divorce this problem of monetary policy operating through reserve requirements from the question
of the dual banking system, which always serves as a battle cry. H e
attempts to do that by stating that we are interested i n having some



68

MONETARY,

CREDIT,

AND

FISCAL

POLICIES

influence on bank policy and on national policy via your bank through
your reserve requirements, and he puts 'forward a plan which, as you
know, would compel all to come in, but I am firmly
Senator DOUGLAS. Just a minute. I do not think M r . McCabe's
proposal is to have all banks come into the Federal Reserve System,
but to rather require a uniform reserve requirement,
M r . WILLIAMS. I was using the term "banking system" i n a different sense; and, of course, he gives an alternative.
Senator DOUGLAS. H i s proposal is for uniform reserve requirements
for commercial banks the country over, whether or not members of
the System.
M r . WILLIAMS. That is right; I did not make my statement clear.
I do not think that an approach of that sort would be an acceptable
one to the nonmember banks. F r o m my contact with bankers, I conclude that they are thoroughly aroused, M r . Chairman, on this question of the long arm of the Central Government reaching out and
coming i n to the State banking system; and I think there is little
likelihood that one would be able to get M r . McCabe's proposal into
action.
I took the same position before the Senate Banking and Currency
Committee last May, where, as you w i l l recall, there was attached to
the application for renewal of the supplementary reserve requirement
this condition of applying it to nonmember banks.
The president of a State bankers association told me within 3 months
that i n his judgment the dual banking system i n the United States
was not a classification which separated national banks from banks
that received their charters from States, but it was a classification of
banks into member banks and nonmember banks.
Senator DOUGLAS. B u t the State banks always have the option of
withdrawing.
M r . WILLIAMS.

Surely.

Senator D O U G L A S . S O that makes the differentiation applicable, and
also the rules concerning the types of loans which can be made are different, so that there are very real differences on those points.
M r . WILLIAMS. T h a t is right, but I am citing this to indicate his
attitude of mind as to what the crucial problems were. T h e crucial
problem i n his mind was one of avoiding compulsion to get into the
Federal Reserve System.
Now, from our standpoint that poses a major problem of bank relations. I f a large number of banks out i n the country feel that way
about us, then we have an important problem on our hands as to how
to dissipate that attitude of mind, because i n my 10 years experience
with the Federal Reserve System, I have no inclination to work i n
any other way than in behalf of banking, both State and national.
T o have others judge your actions as being something inimical to
their interests is disturbing. So that I assume you cannot approach
the problem via coercive means because you w i l l not get the bill, i f you
attempt to approach it that way. I t has been suggested that we approach it via the route of self-discipline.
I f I recall correctly, the retiring president of the American Bankers' Association i n San Francisco has raised the question of State banks
and their forcible inclusion i n the system. H e takes the position that
although they are 50 percent in number of all banks i n the United
States, they have only 15 percent of the deposits and, therefore, they



69 M O N E T A R Y , CREDIT, A N D FISCAL

POLICIES

are unimportant. H e would rely on self-discipline. I reject the selfdiscipline approach just as I reject compulsory legislation. I reject
self-discipline, because it does not work because of competitive forces.
It cannot very well w^ork because of competitive forces.
I turn then to still another approach, and that is one of increasing
an understanding of the function of the System, and the way it operates—and not only increasing the understanding but increasing the
participation of the bankers i n making decisions through the process
of consultation and explanation in why we are doing what we are
doing. I n that way w i l l be stepped up the voluntary entrance into the
System.
Now, that may be a long procedure but I prefer to follow it. Should
it fail, then I am for the use of compulsory methods, maybe along
the lines that the chairman devised. I t is an important problem and
ought to be thoroughly studied and a plan worked out only after
study by both private banks and the central bank together. A thorough explanation of the problem is needed; because we are now suspect. W e hear in the field directly and indirectly that the System wants
"Power for the sake of power." W e get evidence on every hand of
a lack of understanding as to what the function of reserves is and as to
how they operate.
Senator DOUGLAS. I n your educational conference do you ever quote
from article 1, section 8, of the Federal Constitution, which gives to
Congress the power "to coin money, regulate the value thereof"—and
the verb "coin" has long since been broadened to include not merely
metallic coins and also printing paper money, but the general regulation of the money supply, and i f there is anything clearer than that
power I do not know what it is, do you ?
M r . W I L L I A M S . NO. I state the matter a little differently. I say
to bankers we have 3 y 2 million business enterprises i n the United
States. Only 14,000 are banks. Now, banks are peculiar in this capacity to create and extinguish credit. F r o m the days of the founding
of government, you have been subject to controls. Do not assume at
a time when the whole drift is toward totalitarianism that you are
going to swim in the opposite direction. Y o u r important problem is:
i f you do not like the system, devise a better one. I f you think we
ought to change it, come in and help us change it. B u t i f you do
not understand the way i n which reserve requirements operate, it is
high time you begin to understand this function, because you have
a very valuable task to perform in the operation of the economy and
you cannot perform it by assuming that you are just like the fellow
making sealing wax or shoes. Y o u are a different breed of cat. I
would add that i n addition to understanding it is a matter of confidence. That may give you, Senator Douglas, something of the spirit
of the way in which I am approaching the problem. A t the same time,
I repeat with equal vigor what I said earlier i n the testimony here
today. I say, let banking live. W e need it for the reasons that I
outlined earlier in my testimony.
I assume that the task of achieving understanding and confidence
is one not only on the part of the Federal Reserve Governors and the
12 Reserve banks, but of banking leadership throughout the commercial banks.
I had the same feeling when I listened to M r . Sproui make his speech
in San Francisco and heard M r . Woollen's reply, which, of course,



70

MONETARY,

CREDIT,

AND

FISCAL

POLICIES

was a very brief one, and listened to the conversations afterward i n
the lobbies of the hotels. It is d i s t u r b i n g * to one who is a well-wisher
of banking and who believes in general controls rather than a series
of specific controls.
Senator DOUGLAS. A r e you saying this: that you are somewhat
afraid that i f an inflationary movement should start or i n the opinion
of the Federal Reserve System it should start and that the Federal
Reserve System in order to check this increased its reserve requirements, that it would meet with terrific opposition or with great opposition from the banks inside the System and would be subject to competition from the banks that are outside the System ?
M r . WILLIAMS. A n d could result in withdrawals from the System.
Senator DOUGLAS. A n d you know, of course, that the b i l l which
passed the House of Representatives and was reported out by the
Senate committee—namely, making possible conversions of National
banks into State banks—has not yet been passed ?
M r . WILLIAMS. I think i t is highly unfortunate for the State banking departments and State banking commissioners to view with alarm
any change from State banks to National banks, any change from nonmembership to membership. I do not think they should look at this i n
terms of proprietary interest.
M r . WOLCOTT. T h i s is opposite.

Senator DOUGLAS. This is from National to State.
M r . WILLIAMS.

Yes.

Senator DOUGLAS. W h i c h was fostered by the State banking commissioners.
M r . WILLIAMS. Perhaps I ought to amplify my statement and say
some look with satisfaction upon a transfer from the National system
to the State system.
Senator DOUGLAS. I do not want to involve you i n an argument, but
the head of the State banking commission i n Pennsylvania has been
most active i n spearheading this drive of conversion from National
banks to State banks on the same basis that State banks can now convert to national banks and in trying to repeal the section of the
McFadden A c t which prohibits such conversions.
M r . WILLIAMS. M y problem has been made more difficult by what is
going on i n the States. There are complexities from a State standpoint because of the acquisition of branches by some of the larger
banks; so the problem is tied i n to the unit banking system. There is,
however, no doubt that my problems have been made more difficult as
a result of the development to which you just referred.
Senator DOUGLAS. Then you see dangers i n the so-called dual banki n g system or 49 systems of banking?
M r . W I L L I A M S . N O , I would not want to disturb the right of a State
to charter banks. I would not want to disturb the right of a State
banking department to set up standards, even though those standards
would be competitively lower. I do look with alarm on any attempt
to prevent banks from getting into the System on a voluntary basis
and voluntarily subjecting themselves. The problem also has geographic aspects. I n one district 70 percent of the banks are nonmembers. Y o u get a segregation because of that geographical distribution, and i n a time of crisis that might have effect.




71 M O N E T A R Y ,

CREDIT,

AND

FISCAL

POLICIES

W e ought not to be impeded i n our attempt to influence monetary
policy by lack of understanding or unwillingness to submit themselves
to the discipline of it.
I assume some of the responsibilities myself. A s an operator of
the Philadelphia bank I indicate to banks why they ought to subject
themselves to the discipline of Reserve requirements. I n the course
of a discussion i n one of these field meetings at which the Secretary
of Banking was present, I said to him that the best way that I know
for State banks to retain the privilege of staying out of the System is
for them to make it clear by their actions that they are not profiting by
being out of the System and not subjecting themselves to our restraints
because the more people who are subjected to restraints the more might
be the advantages of persons who are not subjected to it.
But I would explore and live with the problem i n a sincere effort
to solve it by other than coercive means before I went to coercive
means; but, f a i l i n g to solve it, I certainly would stand firmly for
compulsory Reserve requirements.
Senator D O U G L A S . H O W long wmild you carry on this educational
process ?
M r . WILLIAMS. I cannot answer that. W e have not made within
the System, it seems to me, a sufficiently vigorous, intelligent, and concerted effort to go after the problem.
Senator DOUGLAS. Have you put up to the nonmember banks the
fact that the System indirectly gives them greater stability because
i n a period of crisis though you do not have to take their bonds or
commercial paper, they can go to a correspondent bank which is a
member, and i f the correspondent bank accepts, then the correspondent
bank can present the bonds or paper to you and that, therefore, indirectly you add a great element of stability to the nonmember banks;
is that true?
M r . WILLIAMS. Yes. W e have pounded on the subject and w i l l
continue to do so; I have heard M r . Bopp, whose skilled exposition
you heard this morning, explain that all very clearly.
Senator DOUGLAS. Have you had any success to date?
M r . WILLIAMS. There is no doubt that we are making progress.
Senator DOUGLAS. A r e there a number of nonmember banks i n
your district who have become member banks ?
M r . W I L L I A M S . W e h a v e accessions.

M r . BOPP. State banks that have come into membership: I n 1942,
one; 1943, three; 1944, three; 1945, two; 1946, four.
M r . WILLIAMS. W e already have A pretty high proportion.
M r . B O P P . N O accessions in either 1 9 4 7 or 1948.
M r . WILLIAMS. There are cases we are now working oft, but it is a
case by case approach. I t is slow work.
M r . WOLCOTT. W o u l d it be objectionable at this point i f I were to
reminisce a little bit with respect to history of this question as I
remember it?
Senator D O U G L A S . G O ahead.
M r . WOLCOTT. I n 1935 a b i l l was introduced, which later became the
Banking A c t of 1935, which provided that all banks must become
members of the Federal Reserve System i n order to participate in the
Federal Deposit Insurance Corporation.
I t would have resulted i n the creation of a highly centralized banki n g system. There would have been no dual banking system. There



72

MONETARY,

CREDIT, AND FISCAL

POLICIES

would have been no State banks as such, because, of course, no State
bank, which was not a member, not having its deposits insured, could
prevail against a competing bank which d i d have its deposits insured.
The same bill, as it was originally introduced, provided that the
President would be empowered to remove all members of the Federal
Reserve Board at will. About that time the N R A was crumbling,
the Supreme Court later found it unconstitutional, and the charge
was made that i f the original bill was passed, that the Federal Government through the Federal Reserve Board, which was to be politicalized under the bill, could write into the loan agreements all of the
provisions of any of the codes, which had been in existence or might
be entered into, which were formerly known as N R A codes.
O f course, that contemplated that no bank would withdraw from
the Federal Reserve System when once it got in.
Well, we succeeded and, of course, it also follows that i f the Federal
Government got control over the lifeblood of the American economy,
which is credit, that they could successfully manage the entire economy.
American agriculture and industry and labor and business cannot
function without credit.
W e compromised on this b i l l by providing that the President could
remove the chairman of the Board of Governors of the Federal Reserve
Board but not the other members. W e provided also, as I recall it, a
2-year period in which the banks would come into the Federal Reserve
System. Otherwise, they would not have their deposits insured.
A t that time, as I recall it, we did give the Open Market Committee
these initiatory powers we have discussed here. Now, at about that
time the Federal Government, I assume through the Comptroller's
Office or the Federal Reserve, went to some, and perhaps most, of the
State banking commissioners and told them that i f their legislatures
would provide for a conversion from State banks to Federal banks,
they would recommend to the Federal Congress that it do likewise i n
respect to authorizing conversion from national banks to State banks.
The Federal Congress would provide for the reconversion or the
conversion, rather, of national banks to State banks.
Now, this question that we are discussing here today is to me as old
as that. I t goes back to 1935. The b i l l which was passed i n 1948
authorizing the conversion of national banks to State banks, passed
almost unanimously by the House, died i n the Senate, and the one
passed this year similarly was i n consequence of the implied promises
made by the Federal Government to the States i n respect to the conversion of national banks into State banks.
I thought it might be interesting at this point to review some of the
history of this question, and it is from memory only. I may not be
correct i n all my details, but i n principle and substance the statement
is correct.
So we apparently have with us then the only question remaining as
to whether you think there can be any greater degree of economic
stability i f all of the banks become through force or otherwise members of the Federal Reserve System.
M r . WILLIAMS. I think our effectiveness would be increased.
M r . WOLCOTT. Y o u r control would be increased.
M r . W I L L I A M S . A n d , t h e r e f o r e , effectiveness.

M r . WOLCOTT. Whether your effectiveness would be increased would
have to be proven i n practice. I t has not been proved yet.



73 M O N E T A R Y ,

CREDIT, AND FISCAL

POLICIES

M r . WILLIAMS. That is right, and I merely expressed a judgment,
and I quite agree that you could not debate that very profitably.
M r . WOLCOTT. I f I may follow up with one other question. Chairman Douglas read from the Constitution with respect to the power
of Congress to coin money and regulate the value thereof, concerning
which we get letters almost daily, and they provoke a discussion of a
very interesting question.
The contention has been made that the Congress, notwithstanding
general thinking that it does not coin money and regulate the value
thereof, does by the delegation of authority to the Federal Reserve.
Now, the Constitution also provides that the Congress shall provide
for the national welfare, and we are constantly enacting legislation
i n that respect. The Congress is not an administrative body. I t can
delegate the administration of its functions to departments of the Government or independent departments which it sets up. I may be wrong
i n this, but it always seemed to me that i n keeping w i t h the practice
and the authority which the Congress has to delegate the administration of its functions, the Congress has delegated to the Federal Reserve
System the authority within certain fairly well-defined limitations
and i n accordance with certain well-defined standards to coin money
and regulate the value of it.
Senator DOUGLAS. I am glad to have this statement by my very able
colleague, but I think the question is whether Congress has also provided the Federal Reserve System with powers adequate to carry out
this purpose.
M r . WOLCOTT. I was going to suggest that it seems to me to be perhaps the only question before us, as to whether we have set up sufficient standards or created such definite limitations that they can
execute the function of Congress i n that respect.
M r . WILLIAMS. I was attempting, M r . C h a i r m a n

M r . WOLCOTT. I t would be interesting i f you have suggestions as to
what the Congress should do in carrying out that function by way
of legislation to more clearly define the Federal Reserve Board's authority, delegated to it from the Congress, to coin money and regulate
the value thereof.
M r . WILLIAMS. Well, it is something to which we should give consideration. There are other ways of influencing the behavior of both
member banks and nonmember banks by the conference methods of
the sort we are experimenting with. I hesitate to build up psychological bars. I am trying to tear them down rather than constantly erect
new ones and have the charge hurled at us, "Power for the sake of
power."
Senator DOUGLAS. I n good Philadelphia fashion, you are attempting
to follow the methods of peaceful persuasion.
M r . WOLCOTT. I forgot an important chapter i n this history of this
subject. I n 1939 a b i l l — I think the number was H . R . 6940—was
reported out of the House Banking and Currency Committee which,
i n effect, would have compelled all savings banks to convert to Federal
savings and loan associations or go out of business.
That b i l l was passed by the House in a modified form with all of
these objectionable features taken out of it the latter part, as I recall
it, of that year, or possibly the following year, and never was considered by the Senate.




74

MONETARY,

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FISCAL

POLICIES

B u t at least two attempts have been made to centralize the control
of banking and the credit which emanates from banking i n the Federal
Government without any restrictions whatsoever.
M r . WILLIAMS. M r . Chairman, that concludes my presentation.
Senator DOUGLAS. I would like to ask another question, i f I may.
I n your written statement to our subcommittee and also in the statements which were made by most of the other presidents of the Reserve
banks you proposed that control, as I remember it, of member-bank
reserve requirements and also approval of rediscount rates should be
shifted from the Board of Governors to the Federal Open Market
Committee.
M r . WILLIAMS.

Yes.

Senator D O U G L A S . I can see why you would feel that all these powers
should be i n the same hands i n order to get concentrated and unified
policy, but why do you favor concentrating them i n the hands of the
Open Market Committee rather than i n the Board of Governors of the
Reserve System ?
M r . WILLIAMS. Well, concentration, of course, i n the Board of Governors would call for a transfer of the open-market operation from
the committee to the Board; but we have a Federal system. W e are
attempting i n all possible ways to bring about a representation from
the field, and I know it is a subject that is close to the heart of Chairman McCabe. The representation of the Board on the committee
which would handle these three instruments of banking would still not
disturb the locus of control, but would give to the committee the firsthand experience of all of us in operating our institutions; we are out
i n the field constantly.
Senator D O U G L A S . A S I understand it, the Open Market Committee
is also composed of seven members of the Board of Governors plus
five chosen from the presidents of the Federal Reserve banks, and
these are generally, as I infer from your statement this morning,
elected in some degree of rotation.
M r . WILLIAMS. Except one; he is the president of the New Y o r k
bank, where the presence of the bank in the principal money market
of the country gives him permanent representation. The manager
of the account is located i n his bank, and there is a close liaison. B u t
we undoubtedly can and do bring to the deliberations of the Board
here i n Washington a knowledge of the attitudes and values and of
problems.
Senator D O U G L A S . S O this proposal of yours would further federalize the System by giving the member banks a larger share i n these
larger policy determinations.
M r . WILLIAMS. That is right, and I think ought not to be construed
as a move that would result i n greatly increased influence by commercial banks because of the presence of Reserve bank presidents on that
committee.
Senator DOUGLAS. One further question. This morning you spoke
r>f the need for very close coordination between policies of the Federal
Reserve Board and policies of the Treasury. D o you consider the
present methods of coordination satisfactory or would you suggest
changes for this purpose?
M r . WILLIAMS. Chairman Douglas, my experience as an administrator causes me to rely increasingly on my capacity to work with my
fellow men rather than on administrative set-ups.



75 M O N E T A R Y , CREDIT, AND FISCAL POLICIES

I w i l l go along 100 percent with the dictum of some wise man who
said, " Y o u have power with people, not power over them." W e function with a minimum of administrative procedure i n my institution. I
think it would be unfortunate if we had an arrangement which would
call the Secretary of the Treasury over to the Federal Reserve Board
for a meeting where there was a lot of administrative minutiae passing
through the mill.
I think there is an opportunity for close liaison. They are both i n
the same city, the buildings are near to each other, they have the telephone at their elbows, they are meeting i n other organizational
meetings.
Senator D O U G L A S . I may remind you, but you are of course aware
that the A r m y and Navy are together in close physical proximity to
each other, and the immediate effect did not seem to be such as to make
them dwell together in complete peace and concord.
M r . W I L L I A M S . What I meant when I said we have power with people is that power is derived through understanding. I take it that the
great gap that exists between the A r m y and the Navy is due to a failure to solve what are essentially technical problems as to which arm of
the service should be dominant and the relative importance of the two.
When we concern ourselves with questions of status, with who are
the chief fiscal monetary officers of the Federal Government, we are
getting away from the realities of life. We ought to demean ourselves
before problems and say, "What must we do to solve them?"
Senator D O U G L A S . N O W , i f all men were as self-abdicating as you
seem to be, there would probably be no problem, but we are dealing
with imperfect human nature—all too imperfect.
M r . W I L L I A M S . I did not say that unctuously.
Senator D O U G L A S . I did not regard your statement that way.
M r . W I L L I A M S . I do not believe a change is necessary. I think the
problem can be solved in other ways. Y o u could bring them together,
and the problem would not be solved. Y o u could keep them apart and
it would be solved. There are other approaches to the problem. I
am giving you, of course, a strictly personal attitude toward it. Those
are the questions in the questionnaire that did not interest me a great
deal, Chairman Douglas.
Senator D O U G L A S . Congressman Buchanan?
M r . B U C H A N A N . N O questions.
Senator D O U G L A S . Thank you very much, M r . Williams and M r .
Bopp.
M r . W I L L I A M S . Thank you very much, indeed. W E were very glad
to be here.
Senator D O U G L A S . I S M r . Robertson here? W e are glad to welcome
you.

STATEMENT OF J. L. ROBERTSON, DEPUTY COMPTROLLER
OF THE CURRENCY
M r . Robertson, we understand you are the First Deputy Comptroller
of the Currency.
M r . ROBERTSON.

Yes.

Senator D O U G L A S . Y O U seem to have a good Scotch name and are,
therefore, presumably competent to handle our public moneys.
D o you want to make a prepared statement ?



76

MONETARY,

CREDIT,

AND

FISCAL

POLICIES

M r . ROBERTSON. Just a very short one.
Senator D O U G L A S . Y O U may proceed.
M r . R O B E R T S O N . I would merely like to say that we who represent
the Office of the Comptroller of the Currency are glad to have this
opportunity to make whatever contribution we can to the work of
this committee in its study of the effectiveness and coordination of
the monetary, credit, and fiscal policies of the Federal Government.
I n common with administrative agencies generally, we necessarily
perform our functions in constant and close contact with the details
of our job. Although we make every effort to relate our operations
to broad underlying principles, it is not always possible to achieve the
degree of detachment necessary for effective continuous examination
of those principles in the light of constantly changing conditions.
This committee, on the other hand, can make a general survey of
this important field free from such a handicap. Its members are i n
a position, by asking basic questions regarding matters of broad policy
and procedure, to open up lines of thought leading to major improvements.
Our organization is composed of a closely knit group of people who
confine their efforts to supervision and regulation of the national banking system. Perhaps unwisely, our Office does not maintain a publicrelations staff, information service, or even a congressional liaison
representative, to keep the general public and Congress informed of
our activities, accomplishments, and purposes.
Senator DOUGLAS. M a y I interject to say that is a unique distinction and one which is to your credit, and I hope that it has reflected
corresponding economies in your operating budget.
M r . ROBERTSON. W e think it has, sir. Furthermore, we are so busy
with the actual job of supervising banks that we probably do not sit
down often enough to think about the fundamental problems with
which this committee is concerned. Even i f we did, our thinking
might very well be narrow and prejudiced. F o r all these reasons, we
welcome a thorough and thoughtful study of our work i n its broadest
aspects.
The questions submitted to us center about the manner i n which
our bureau performs its duties regarding the structure and operation
of the national banking system, and the degree of coordination of the
work of all Federal bank supervisory agencies. A s you have seen from
our answers to the questionnaire, our guiding principle is the preservation of the national banking system which can and does perform
its f u l l share i n furnishing the Nation with every proper banking
service and convenience, including the supplying of credit adequate to
meet all legitimate demands. W e believe that i n view of the nature
of our work, we can make our greatest contribution to economic stability and progress through the maintenance of an independent banking system composed of sound individual banks, guided by principles
of public service as well as business profit.
I shall be very glad to try to answer any questions relating to the
work of our Office, and the principles i n accordance with which we
seek to conduct our activities.
Senator D O U G L A S . I wonder i f I might ask some questions to begin
with dealing with the chartering policy.
M r . ROBERTSON.

Yes.




77 M O N E T A R Y ,

CREDIT,

AND

FISCAL

POLICIES

Senator DOUGLAS. I n the statement M r . Delano submitted to our
subcommittee some time ago he pointed out that i n determining
whether or not to act favorably on an application for a national-bank
charter the Comptroller's office took into consideration at least five
principal sets of factors:
First, the general character and experience of the organizers and
of the proposed officers of the new bank.
Second, the adequacy of existing banking facilities and need for
further banking capital.
Third, the outlook for the growth and development of the town
or city in which the bank is to be located.
Fourth, methods of banking practices of the existing bank or banks,,
the interest rates which they charge customers, and character of the
service which these quasi public institutions are rendering to their
communities.
F i f t h , the reasonable prospects for success of a new bank i f efficiently
managed.
I t is also indicated that in recent years a fairly large percentage of
the applicants have been denied national bank charters, ranging from
13 percent, I think, in 1 year to a high of 41 percent in 1947.
Now, I wondered i f you could tell us the answers to a series of
questions that I should like to ask. I would like to ask, i n the first
place, about the policies of the State bank chartering authorities and
of your relationships with them, because i f the banks f a i l to get charters
from you, they sometimes go over to the State banking authorities.
M r . ROBERTSON. T h a t is t r u e .

Senator D O U G L A S . I S there any uniformity among the chartering
policies of the various State authorities or is there variety ?
M r . ROBERTSON. There is variety, but I would say from personal
knowledge of the individuals, most of the individuals, who are passing
upon State charters in behalf of the States themselves, that they are
being very conservative in the granting of new charters. They are not
granting charters unless they are satisfied that there is a need for additional banking facilities i n the community. I do not think there is
a single State supervisor that I know of today who is running wild
i n the granting of State charters.
Senator D O U G L A S . D O the State authorities apply the same kind of
tests which your office applies ?
M r . ROBERTSON. That I cannot tell you.
Senator DOUGLAS. I n general, are the States more or less liberal i n
granting charters for new banks than the comptroller ?
M r . R O B E R T S O N . I could not give a good answer on that, M r . Chairman. M y impression is that it w i l l vary with various States. I doubt
i f there is any State which is as conservative as we are i n the granting
of new charters.
Senator D O U G L A S . N O State as conservative ?
M r . ROBERTSON. M o r e

conservative.

Senator DOUGLAS. Therefore, some States are less conservative?
M r . ROBERTSON. I would say that is true.
Senator DOUGLAS. And, therefore, there are some States which are
more liberal ?
M r . ROBERTSON. I think that is true, but I would have to qualify my
answer because there are instances where a State bank could be
99076—50

6




78

M O N E T A R Y , CREDIT, AND FISCAL POLICIES

chartered with a smaller capital than a national bank, and that might
make the difference.
Senator D O U G L A S . I w i l l come to that. D o yon have any information
as to the number of cases where you have turned down an application
for a national bank charter where the organizers have subsequently
been able to get a charter from their State banking authorities ?
M r . R O B E R T S O N . I do not have that information available, and I
doubt i f it would be in the office, because once we turn it down we are
through with it and never follow through.
Senator D O U G L A S . D O you know of cases where the States have
turned down proposed banks for State charters where you have
later given the same group a national bank charter ?
M r . R O B E R T S O N . I know of no such case. That does not mean there
are not some.
Senator D O U G L A S . D O you have any agreements, written or explicit,
between your office and State banking authorities offices concerning
chartering policies?
M r . R O B E R T S O N . N O ; there is no written agreement. W e try to work
out understandings with individuals whereby we notify them when we
get an application for a charter, so they know it is there and they can
give us the benefit of their views so we can consider them i n passing
upon the charter, and we do likewise.
Senator D O U G L A S . W i t h how many States do you have such understandings ?
M r . R O B E R T S O N . I would have to guess, but I would say with approximately two-thirds, I would guess, we do have such understandings. A s new supervisors come into the field, there are instances where
we have not yet arrived at a new understanding.
Senator D O U G L A S . W o u l d you be willing to indicate some of the
States i n which you do not have such understandings ?
M r . R O B E R T S O N . N O ; because I would be guessing at them. I would
be very glad to give you that.
Senator D O U G L A S . Then this is all i n the heads of the comptroller
and yourself as to what States have informal agreements with you ?
M r . R O B E R T S O N . I would be very glad to give you some of the States
where we do have very good working arrangements, i f that would help.
Senator D O U G L A S . D O you find the Federal Reserve System or F D I C
or any other agency interested also i n the question of the chartering of
national banks?
M r . R O B E R T S O N . Definitely, they are interested i n such chartering.
F D I C , of course, must pass upon the chartering of State banks i f i t
is going to be an insured bank and, therefore, they are very definitely
interested. O f course, the Federal Reserve is interested,'too, to the
extent of seeing whether the bank as it comes into the System is going
to be a sound institution, and they are advised immediately.
Senator D O U G L A S . Does the Federal Reserve bank have the right
of veto?
M r . R O B E R T S O N . N O ; it does not.
Senator D O U G L A S . Y O U take their opinion as advisory only?
M r . R O B E R T S O N . That is all. Our responsibility is complete insofar
as the chartering of national banks is concerned.
Senator D O U G L A S . A r e there any instances where they have advised
against chartering a national bank where you have gone ahead?




MONETARY, CREDIT, AND FISCAL POLICIES

79

M r . ROBERTSON. Yes. Where one or the other would be opposed;
yes. W e feel we must rely upon our own findings. I f upon study of
those findings we think the people who are applying for that bank are
the kind who will operate a sound institution and there is a need for
new banking facilities in that community we grant it irrespective of
whether someone has been opposed to it. W e weigh carefully the
recommendation which they make.
Senator DOUGLAS. Would you speak now about the capital requirements for the national banks, versus capital requirements for the State
banks. W h a t is your minimum figure of capitalization?
M r . ROBERTSON. I t is $50,000 in places where there are less than
6,000 people. Then it goes up to $100,000. This is common capital;
the surplus has to be 20 percent of that. I t goes up to $200,000 in
places of over 50,000 population. W e think those capital requirements are not too harsh. We would not like to see them reduced
today.
Senator DOUGLAS. Have you ever made a comparative study of
the capital requirements of the various States?
M r . ROBERTSON. Somewhere along the line we have; yes. I remember seeing it but I haven't looked at it in some time.
Senator DOUGLAS. Would you submit that for the record ?
M r . ROBERTSON. I would be glad to do so.
(The material above requested is as follows:)
Minimum

capital

requirements

Jurisdiction citation

for banks and trust companies
Banks

(September

19^8)

Trust company

12 U. S. C., sees. 51 and Up to 6,000 population
From 6,000 to 50,000
248.
Over 50,000
20 percent surplus.
Alabama, sees. 78 and Up to 3,000
From 3,000 to 6,000
189.
From 6,000 to 50,000
Over 50,000
Arizona, sees. 51-202, 51- Up to 5,000
From 5,000 to 15,000
513.
From 15,000 to 50,000
Over 50,000
No bank may be required to
have over $2,000,000 capital
but there is no authority to
make any such requirement.
Arkansas, sees. 825 and Up to 2,500
From 2,500 to 6,000
858.
From 6,000 to 50,000
Over 50,000
California, sees. 23, 82, Up to 10,000
From 10,000 to 50,000
and 90.
From 50,000 to 200,000
Over 200,000
25 percent surplus may be required.

$50,000
100,000
200,000

Not below State requirements.

25,000
50,000
100,000
2 0C O
0, O
25,000
100,000
25,000
200,000

Up to 5,000 population
$25,000
From 5,000 to 30,000
75,000
Over 30,000
100,000
Bank may do a trust business.
Bank may do trust business.

25,000
50,000
100,000
200,000
50,000
100,000
200,000
300,000

Colorado, sees. 3 and 109. Up to 4,000
From 4,000 to 50,000
Over 50,000
1 percent surplus.
0

25,000
50,000
100,000

County population:
Up to 40,000
From 40,000 to 50,000
Over 50,000
Up to 100,000
From 100,000 to 200,000
Trust company plus bank:
Up to 10,000
From 10,000 to 50,000
From 50,000 to 200,000
Over 200,000
25 percent surplus may be
required.
Bank plus trust company:
Up to 500
From 500 to 2,500
From 2,500 to 15,000
From 15,000 to 50,000
From 50,000 to 100,000
From 100,000 to 150,000—
150,000 and over
Apparently only the last
category is operative.




50,000
75.000
100,000
100,000
200,000
150.000
200,000
400,000
500,000

10,000
15,000
20,000
30,000
50,000
100,000
250,000

80
Minimum

M O N E T A R Y , CREDIT, AND FISCAL POLICIES
capital

requirements

Jurisdiction citation

for

banks

and

1 9 4 8 ) — Continued

companies

(Septe?nber

Trust company

Banks

Connecticut, sec. 3875.__ Bank and trust company
Up to 50.000
$100,000
Over 50 090
200,000
100 nereent surplus.
50,000
Up to 3,000. .
Delaware, sec. 2382
100,000
From 3,000 to 100,000
200, 000
Over 100.000
25, 000
Up to 3,000 ..
Florida, sec. 652.06.
With permission of comptroller.
50,000
Over 3,000-25, 000
Up to 7,500- .
Georgia, sec. 13-901
50, 000
Over 7,500 ...
Up to 3,000...
25, 000
Idaho, sec. 25-201; 25-206.
50, 000
From 3,000 to 6,000.
100, 000
Over 6,000-...
10 percent surplus.
25, 000
Up to 2,500..Illinois, sees. 10.05; 10.11-.
50, 000
From 2,500 to 10.000
100, 000
From 10,000 to 50,000
200, 000
Over 50,000
10 percent surplus and 5 percent operating fund required.
25, 000
Up to 3,000 Indiana, sec. 18-412
50, 000
From 3,000 to 6,000
100, 000
From 6,000 to 75,000
200, 000
Over 75,000
10, 000
Up to 3,000-..
Iowa, sec. 528.1.
25, 000
From 3,000 to 6,000.
50, 000
From 6,000 to 15,000
100, 000
Over 15,000
Third class citv up to 2,000 — 25, 000
Kansas, sees. 14, 77
Second class city from 2,000 to 35, 000
3,000.
First class city from 3,000 to 50,000
6,000.
Over 75,000 from 6,000 to 75, 000
10,000.
100,000
From 10,000 to 50,000
200, 000
Over 50,000
20 percent surplus and 5 percent undivided profits.
25, 000
Kentucky, sees. 287.070; Up to 7,500
50, 000
From 7,500 to 25,000
287.080.
100, 000
From 25,000 to 100,000
200, 000
Over 100,000
20 percent surplus.
25, 000
Up to 3,000
Louisiana, sec. 568
50, 000
From 3,000 to 30,000
100, 000
Over 30,000
Bank plus trust company:
Maine, sees. 96, 98
50,000
Up to 5,000
75, 000
From 5,000 to 10,000
From 10,000 to 20,000
100,000
From 20,000 to 30,000
150,000
200,000
30,000 and over
50 percent surplus.
25,000
Maryland, sees. 29 and Up to 15,000
75,000
From 15,000 to 50,000
54.
100,000
From 50,000 to 150,000
500,000
Over 150,000
20 percent surplus.
Massachusetts, eh. 172, Bank and trust company:
50,000
Not over 6,000
sec. 18.
100,000
From 6,000 to 50,000
200, 000
Over 50,000
25,000
Michigan, sees. 40, 207— Up to 2,500
50,000
From 2,500 to 6,000
100, 000
From 6,000 to 30,000
200,000
From 100,000 to 300,000
300,000
300,000 and over
20 percent surplus.
Commissioner may increase or
decrease based on condition
of assets and adequate capital structure.




trust

Up to 50.000-.
From 50,000 to 150,000
Over 150,000

$50,000
100,000
250,000

$200,000 minimum.

Bank and trust company mini- 100, 000
mum.
Up to 6,000
50, 000
Over 6,000
100,000
Up to 100,000
Over 100,000

50,000
200, 000

Same.

Same.

100,000 and over.

Trust company plus bank
double the requirements.

Same.

Up to 25,000
From 25,000 to 100,000
From 100,000 to 250,000
Over 250,000
20 percent surplus.

100,000
150,000
200,000
750,000

Up to 50,000.
50,000 to 100,000....
100, ,000 to 1,000,000....
Over 1,000,000..

150, 000
200,000
400,000
500,000

81

M O N E T A R Y , CREDIT, AND FISCAL POLICIES
Minimum

capital

requirements

Mississippi, sec. 5159
Missouri, sees. 7944, 7949
and 8018.

Montana, sec. 6014.12—

8-205.

Nevada, sees. 1 and 8 —
New Hampshire, ch. 313,
sees. 21 and 25.

New Jersey, draft sec. 4_.

New Mexico, sees. 50501; 50-214.
New York, sec 90

North Carolina, sees.
53-2, 53-39, and 53-159.

North Dakota,
6-0203; 6-0503.
Ohio, sees. 710-37.

Oklahoma, sec. 68

sees.

banks

and

trust

companies

Up to 500 if no other bank:
Capital

$10,000
2,000

From 500 to 1,000:
20,000
Capital
4,000
Surplus
From 1,000 to 5,000:
25,000
Capital
5,000
Surplus
From 5,000 to 100,000:
40,000
Capital
8,000
Surplus
Over 100,000:
50, 000
Capital
10,000
Surplus.
25,000
Up to 6,000
35,000
From 6,000 to 10,000
50,000
Over 10,000
15,000
Up to 1,000
25,000
From 1,000 to 5,000
50,000
From 5,000 to 10,000
100,000
From 10,000 to 50,000
200,000
Over 50,000
25,000
Up to 2,000
30,000
From 2,000 to 4,000
50,000
Over 4,000
10 percent surplus.
10,000
Up to 1,000
25,000
From 1,000 to 2,000
35,000
From 2,000 to 5,000
50,000
From 5,000 to 25,000
100,000
From 25,000 to 100,000
200,000
Over 100,000
Minimum surplus, $2,500.
$50,000 minimum capital and
$10,000 minimum surplus.
Bank plus trust company:
25,000
Up to 4,000
50,000
From 4,000 to 10,000
100,000
From 10,000 to 50,000
Over 50,000
200,000
20 percent surplus.
No bank may have a capital exceeding $500,000.
50,000
Up to 10,000
From 10,000 to 50,000
100,000
150,000
From 50,000 to 100,000
300,000
From 100,000 to 200,000
Over 200,000
500,000
20 percent surplus.
If the bank serves outlying
areas the minimum capital
requirement may be increased.
$25,000.
20 percent surplus.
25,000
Up to 2,000
50,000
From 2,000 to 30,000
Over 30,000
_ _ _ _ 100,000
Up to 3,000
From 3,000 to 10,000
From 10,000 to 25,000
Over 25,000
50 percent surplus.
Up to 5,000
From 5,000 to 10,000
Over 10,000
20 percent surplus.
Up to 5,000
From 5,000 to 25,000Over 25,000
20 percent surplus.
Up to 1,000
From 1.000 to 2,000
From 2,000 to 6,000
From 6,000 to 20,000.
Over 20,000
10 percent surplus.




(September

Trust company

Banks

Jurisdiction citation
Minnesota, sees. 48.02,
48.36.

for

1948)— Continued

25,000
30,000
50,000
100,000
15,000
20,000
25,000
—

35,000
50,000
100,000

10,000
15, C O
O
25,000
— 50,000
100,000

Bank plus trust company:
Up to 25,000
From 25,000 to 100,000
From 100,000 to 200,000
Over 200,000

Banks may
powers.

exercise

$50,000
75,000
100,000
200,000

trust

Either for trust company or
trust company and bank:
50,00
Up to 10,000
100,000
From 10,000 to 50.000
200,000
Over 50,000
$100,000 to $10,000,000.

Up to 10,000
From 10,000 to 50,000
Grom 50,000 to 100,000
Over 100,000

25,000
50,000
100,000
200,000

Same.
Same.

Minimum capital

100,000

$100,000.
Up to 30,000
From 30,000 to 100,000..
From 100,000 to 250,000
Over 250.000
Bank may do a trust business.

$100,000 minimum.

$100,000 minimum.
Trust company plus bank.
Minimum capital required for
both.
Same.

100,000
150,000
200,000
500,000

82
Minimum

M O N E T A R Y , CREDIT, AND FISCAL POLICIES
capital

requirements

403.
Rhode Island
South Carolina, sees.
7833; 7834; 7838; 7831.

South Dakota,
6-0303; 6-0305.

Tennessee,
5936.

sees.

sees. 6019,

Texas, ch. 3, art. 3

Utah, sees. 7-3-10, 7-4-2.

Vermont, sec. 6650
Virginia, sees. 4149 (16),
4149 (67).
Washington, sec. 3226

West Virginia, art. 4,
sec. 4.
Wisconsin, sees. 221.01
and 221.04.

Wyoming, sees. 53-105-..

companies

$25,000
Up to 3,000
50,000
From 3,000 to 25,000
100,000
From 25,000 to 50,000
200,000
Over 50,000
If the bank is at least 2 miles
from the main post office,
then the minimum requirement does not exceed
$50,000.
50,000
U to 6,000
D
100,000
From 6,000 to 50,000
200,000
Over 50,000
50 percent surplus.
None.
10,000
Up to 5,000
20,000
From 5,000 to 20,000
Over 20,000
50,000
25 percent surplus.
Capital must be adequate for
F D I C membership.
If 5,000 or less population, only
1 bank may be chartered
under above provisions.
No dividend may be paid
and no branch may be established until capital increased to amount shown
below.
U p to 3,000
25,000
50,000
From 3,000 to 10,000...
Over 10,000
100,000
Up to 1,500
- 15,000
20,000
From 1,500 to 2,500 25,000
From 2,500 to 5,000
Over 5,000
50,000
10 percent surplus.
Up to 1,000
20,000
30, 000
From 1,000 to 2,500
50,000
From 2,500 to 5.000
75,000
From 5,000 to 20,000
100, 000
From 20,000 to 50,000
200, 000
Over 50,000
25,000
Up to 5,000-.
50,000
From 5,000 to 15,000
75, 000
From 15,000 to 30,000
100,000
Over 30,000
May require 25 percent surplus.
25,000
Up to 5,000
50, 000
From 5,000 to 25,000
75, 000
From 25,000 to 50,000.100.000
Over 50.000
Surplus 25 percent.
Bank plus trust company:
$50,000 capital.
$50,000 plus $5,000 every 10,000
population above 25,000.
U p to 5,000
25,000
50,000
From 5,000 to 25,000
100, 000
From 25,000 to 100,000
150, 000
Over 100,000
25,000
Up to 3,000
From 3,000 to 6,000
50,000
100,000
From 6,000 to 50,000
150,000
Over 50,000
Up to 5,000
30, 000
From 5,000 to 20,000
75,000
From 20,000 to 200,000
100, 000
Over 200,000
Up to 4,000
200,000
25,000
From 4,000 to 6,000
50,000
Over 6,000
100, 000
10 percent surplus.
Undivided profits amount
for expenses of first 90 days
(sumfixed by Commissioner).

(September

Trust company

Banks

Jurisdiction citation
Oregon, sees. 40-403

for
banks
and trust
1 9 4 8 ) — Continued

Up to 3,000
Over 3,000

$50,000
100,000

U p to 6,000
From 6,000 to 50,000
Over 50,000
50 percent surplus.

150,000
200,000
350,000

$25,000 minimum.

Up to 6,000
Over 6,000

-

50, O O
O
100,000'

$100,000.
20 percent surplus.

$50,000.

Cities other than first class
First class cities

25,000
100, 000

$50,000 minimum.
Up to 25,000
From 25,000 to 100,000
Over 100,000

50, 000
100,000
200, 000

$100,000.

The capital necessary for
national bank in that locality.

Same.

Senator DOUGLAS. I n general are the State requirements lower or
higher ?
Mr. ROBERTSON. In general they are lower.



83 M O N E T A R Y ,

CREDIT,

AND

FISCAL

POLICIES

Senator D O U G L A S . D O I remember your saying that in localities of
under 6,000 population your minimum capital requirement is $60,000,
$50,000 of capital plus $10,000 of surplus?
M r . ROBERTSON.

Yes.

Senator DOUGLAS. Might not that figure be excessive i n small localities?
M r . ROBERTSON. W e think not. W e think that today, with the volume of deposits which even a small bank has (a million-dollar bank
10 years ago may be today a $5,000,000 bank, or more, and $500,000
bank 10 years ago may be today $2,500,000, or may be $3,000,000),
$60,000 is the minimum with which a group of people should begin i n
starting off a new banking enterprise.
Senator DOUGLAS. B u t there are small communities and trading
centers which need the services of a bank, say a trading center of less
than a thousand people; would that bank have to have $60,000 of
capital ?
M r . ROBERTSON. That is right. W e think it should. There are many
banks in communities of that size today which are national banks, and
they operate profitably.
Senator D O U G L A S . I S it the size absolute of the capital and surplus
which is the protection or is it the ratio of capital and surplus to
deposits ?
M r . ROBERTSON. Neither would be correct. I t is really the type of
management you have in the bank.
Senator D O U G L A S . D O I understand you to say you do not think you
could get effective management on a smaller capitalization ?
M r . R O B E R T S O N . N O ; I merely wanted to eliminate the question of
management in passing upon your question. I t is the amount of capital funds you have i n the institution in relation to the volume and
the kind of business which that bank is conducting which determines
the adequacy of the capital structure of an institution.
Senator DOUGLAS. Isn't it quite possible that communities, say, of
500, 600, or 750 people could operate a bank with a capital, operate a
bank that had a capital of $25,000, plus $5,000 surplus, or $30,000, and
had deposits for somewhere around $300,000; might not that be the
most efficient size of bank for such a small community, and by imposing
your requirements do you not shut off access to the national banking
system in these small farm-trading centers?
M r . ROBERTSON. M y answer would be that I think you w i l l find very
few communities where there are banks with only three or four hundred thousand of deposits. Secondly, there was a time when the
amount of required capital for a national bank i n this size community
was $25,000. A f t e r considerable study, Congress concluded that that
was too low and raised the minimum to $50,000. W e have seen nothing
which would cause us to think the Congress was not wise i n raising
that minimum.
Senator DOUGLAS. Sometimes Congress makes mistakes.
M r . ROBERTSON. Oh, yes; definitely, but w e haven't seen any indi^
cations which w^ould warrant us in saying that Congress did make
a mistake in that instance. W e would not like to see the minimum
capital requirement for national banks reduced at this time.
Senator DOUGLAS. Couldn't you make another classification, instead
of lumping all communities under 6,000? I would agree that, with
a community of 6,000, you should have $50,000 capital, plus $10,000



84

MONETARY,

CREDIT,

AND

FISCAL

POLICIES

surplus; but I don't know that it follows at all that with communities
under 1,200, or under 1,500, you should have that amount, and there are
hundreds and perhaps thousands of such communities scattered over
the country. Aren't you therefore depriving these communities of the
advantages of the national banking system by this requirement?
Wouldn't it be better to have a separate classification; say, banks i n
communities of from 1,200 to 6,000, a minimum capital as at present,
but for the banks i n communities of less than 1,200 or X population,
whatever the figure is, it could go down to $25,000 ?
M r . ROBERTSON. The proposition, I think, would be worthy of
study, Senator, but I would offhand have very serious doubts about
it, because, i f you get a class as small as the one you have i n mind,
it is almost impossible to get satisfactory officers for that bank, because
the earnings are so small today, on the volume of deposits which
you speak of, as to make it very difficult to even get enough to pay
a good officer's salary.
Senator DOUGLAS. Aren't you saying that this community shouldn't
have a bank at all ?
M r . ROBERTSON. I t may be that it cannot support a bank. I f i t
cannot, it shouldn't have a unit bank.
Senator DOUGLAS. Then, what would you say about the fact that i n
most of these cases, where they can't raise the $60,000, that they go to
their State, and that the State, with lower capital requirements, w i l l
proceed to charter ? Now, a State bank is a bank as well as a national
bank. I f you think this bank would be unsafe w^ith a national charter,
do you have any greater assurance that it would be safe with a State
charter ?
M r . ROBERTSON. Not i n the least, but I would have to take the
responsibility for the safety of that bank i f it was not able to make
enough to hire an efficient man to run it.
Senator DOUGLAS. I n other words, you would like to see the State
banks come up to your minimum figure ?
M r . ROBERTSON.

D e f i n i t e l y so.

Senator DOUGLAS. Rather than your going down to this ?
M r . ROBERTSON.

Definitely.

Senator D O U G L A S . Y O U would depend on branch banking then i n
these communities to provide checking facilities, and so forth?
M r . ROBERTSON. There are many instances where branch banking
is the real solution today to meet the needs of people i n these very
small communities which cannot support an independent bank.
Senator D O U G L A S . Y O U would prefer to have the national banks
with branches i n outlying trading centers, I suppose not too far
removed, than to have separate State banks ?
M r . ROBERTSON. O r n a t i o n a l

banks.

Senator DOUGLAS. Or national banks.
M r . ROBERTSON. Either. Definitely so. That doesn't mean that
we favor branch banking over independent banking. I am saying
that there are communities which are too small to support an independent banking institution. I n those cases, branch banking is the
solution.
Senator DOUGLAS. W h i l e on the subject of branch banking, what
rules do you now observe in the case of State banks with branches
which might become national banks ?




85 M O N E T A R Y ,

CREDIT,

AND

FISCAL

POLICIES

M r . ROBERTSON. They may bring into the System, of course, any
branches which were i n existence i n 1927. Beyond that, they must get
new branch authorizations. I f they cannot have them under the State
law, they cannot have them under the national. So, i f a State bank was
operating i n a State which permitted branch banking, and i t has
branches, and it wants to convert, we would consider the entire
branch set-up i n determining whether to permit conversion.
Senator DOUGLAS. M a y I ask this, whether the Bank of C a l i f o r n i a
has ever been admitted to the national banking system ?
M r . ROBERTSON. The Bank of California, national association?
Senator DOUGLAS. Pardon me. The B a n k of America ?
M r . ROBERTSON. The Bank of America is a national bank.
Senator DOUGLAS. W i t h all its branches ?
M r . ROBERTSON. D e f i n i t e l y

so.

Senator DOUGLAS. W h e n was that admitted?
M r . ROBERTSON. The Bank of America was—I would have to guess
here and I would like to furnish the exact figures on that—but the
B a n k of America became a national association more than 20 years ago.
Senator DOUGLAS. W h a t happened to its branches ?
M r . ROBERTSON. I t h a s

branches.

Senator D O U G L A S . I know, but has it added no further branches
since 1927?
M r . ROBERTSON. I t has added many branches since 1927.
Senator DOUGLAS. W h a t power do you have on national banks establishing new branches ?
M r . ROBERTSON. Branches cannot be established by a national bank
without our consent.
Senator DOUGLAS. Then you have the veto power on the extension
of branches by national banks ?
M r . R O B E R T S O N . V e r y d e f i n i t e l y so.

Senator DOUGLAS. W h a t are the standards that you follow i n exercising this veto power?
M r . ROBERTSON. Before a national bank can have a branch it must
get our consent. I t puts i n an application for a branch i n a given
community. W e make an investigation through our field force of the
needs of that community for additional banking facilities. I f the
needs are there, i f the bank is i n a position, both capitalwise, managementwise, and assetwise, to operate additional facilities, an additional
branch, then we grant the branch. W e try to act on a basis which w i l l
provide adequate banking facilities for the people safely; we try to
avoid competition through branches. T h a t is, i f there are two banks
i n a given area, and both are competing through excessive application
for branches, we try to cut that off by restricting expansion branchwise. B u t i n a place where there is a definite need for banking facilities, and there isn't an independent bank there, or there is no one who
is going to put i n an independent bank i n this particular community,
so far as we can ascertain, and the people want a banking facility, we
grant the branch, keeping i n mind always the need for preventing a
monopoly or undue control over the banking facilities i n a given area.
M r . WOLCOTT. Don't you also always conform to State law ?
M r . ROBERTSON.

Yes.

Senator DOUGLAS. Suppose you had a potential group which wanted
to organize a national bank i n a community which conformed to all of




86

MONETARY,

CREDIT,

AND

FISCAL

POLICIES

your standards, and at the same time a bank which wanted to establish
a branch there—to which would you give the preference?
M r . ROBERTSON. Whether the proposed organizers wanted to have
a national bank or a State bank, we would give preference to the independent bank over the branch, even i f it were a State bank and not a
national bank.
Senator DOUGLAS. Have you been worried at all about the extent of
branch banking i n the Pacific Coast States and i n Nevada ?
M r . ROBERTSON. I t is a matter to which we have given careful consideration, and I would say we are concerned.
Senator DOUGLAS. Do you feel that the degree of concentration i n
California, Oregon, Nevada, Idaho, and U t a h has gone pretty far ?
M r . R O B E R T S O N . I think it has gone very far.
Senator D O U G L A S . D O }^OU think it has gone too far ?
M r . ROBERTSON. I f I could limit that to States, I would say that
there is a point beyond which further branch expansion by given
institutions i n California would not be i n the public interest.
Senator DOUGLAS. W h a t percentage of the bank deposits in California are held by the Bank of America ?
M r . ROBERTSON. I would want to check on my figures, M r . Chairman, but I think very close to 50 percent ; it may be one way or the
other.
Senator DOUGLAS. I n Nevada?
M r . ROBERTSON. Almost 70 percent i n Nevada. That is a very unusual situation.
Senator DOUGLAS. There are only five banks then, I believe.
M r . ROBERTSON. Very, very few banks. O f course, i n that particular
situation, the State itself asked the bank to come i n and set up banking
facilities back i n the days of the bank crisis.
Senator DOUGLAS. Branch banking has progressed i n Oregon, too %
M r . ROBERTSON. Very much, but you have a different situation there,
because you have separate branch systems which are sufficiently large
to provide competitive banking. Competition, i n my opinion, is the
best safeguard i n the whole banking field.
Senator D O U G L A S . H O W many competitors do you have to have ?
M r . ROBERTSON. Enough to afford competition.
Senator D O U G L A S . H O W many ? H o w many do you have to have to
get competition?
M r . R O B E R T S O N . Y O U have to have at least two to get competition.
Senator DOUGLAS. Naturally. Canada has two major banks, with
branches all over Canada. W o u l d you say that they had competition ?
M r . WOLCOTT. I think it is five.
Senator D O U G L A S . I S it five ?
M r . WOLCOTT.

Yes.

Senator DOUGLAS. B u t some of those are minor banks. I mean those
two major banks dominate, in Canada, the banking system; isn't that
true?
M r . R O B E R T S O N . I wouldn't answer that without being more sure
than I am.
Senator DOUGLAS. W o u l d you think that two sets of banks would
really provide competition ?
M r . R O B E R T S O N . I think it would be very undesirable to have all the
banking i n any State controlled by two organizations. I would much
prefer to have many banks and thus afford better competition, the



87

MONETARY, CREDIT, AND FISCAL POLICIES

kind which provides freedom to go to many sources instead of just one
of two sources for credit or any other banking service. I am not in
favor of permitting just two competitors in any given area. I merely
say that the situation in Oregon is different from that in some of the
States.
Senator D O U G L A S . H O W many chains—that is not the precise
term
Mr. ROBERTSON. Branch organizations.
Senator D O U G L A S (continuing). Branch organizations are there in
Oregon ?
Mr. ROBERTSON. In Oregon there are two large ones but many independent banks.
Senator D O U G L A S . What percentage of the total banking deposits in
Oregon are held by these two?
M r . ROBERTSON.

B y the two ?

M r . ROBERTSON.

Yes.

Senator D O U G L A S . Yes.
Mr. ROBERTSON. I wouldn't undertake to answer that but would
undertake to furnish that information.
Senator D O U G L A S . Will you, please.
Senator D O U G L A S . What is the situation in Idaho and in Utah ?
Mr. ROBERTSON. It is a much lower percentage. There again I
would like to furnish the figures, Mr. Chairman. It is around 80
percent.
(The information above requested is as follows:)
Percentage

of banking

offices and deposits held by largest
Western States, June 30, 1949
Number
of banking
offices

Arizona: Largest national bank
•California:
Largest national bank
2d largest national bank
3d largest national bank.
4th largest national bank.
Total
Idaho:
Largest national bank
2d largest national bank
Total...
Nevada: Largest national bank
-Oregon:
Largest national bank
2d largest national bank
Total....
Utah: Largest national bank
Washington:
Largest national bank
2d largest national bank
3d largest national bank
Total




Number
of banking
offices
in State

Bank's
percent
of all
banking
offices
in State

29

59

521
128
26
35

national

banks

in

Bank's
percent
of all
deposits
in State

Deposits

Total deposits in
all banks
in State

49.2

Thousands
$217,864

Thousands
$4.13,089

52.7

1,118
1,118
1,118
1,118

46.6
11.5
2.3
3.1

5,321, 607
1, 539,129
445, 289
317,117

12, 615,823
12, 615,823
12,615,823
12,615,823

42.2
12.2
3.5
2.5

710

1,118

63.5

7, 623,142 12, 615, 823

60.4

23
1
8

96
96

24.0
18.7

127,886
109,073

407, 249
407, 249

31.4
26.8

41

96

42.7

236,959

407, 249

58.2

12

25

48.0

105,268

154,303

68.2

39
45

162
162

24.1
27.8

505, 592
458,206

1, 222,008
1, 222, 008

41.4
37.5

84

162

51.9

963, 798

1, 222,008

78.9

1
5

77

19.5

120,687

525, 515

23.0

45
30
17

246
246
246

18.3
12.2
6.9

589, 616
328,411
97, 968

1,826, 796
1,826, 796
1,826, 796

32.3
18.0
5.3

92

246

37.4

1,826,796

55.6

1,015,995

88

MONETARY,

CREDIT,

AND

FISCAL

POLICIES

Senator DOUGLAS. A r e there any other States besides California,
Nevada, Idaho, and Oregon where branch banking has been carried
to such extremes ?
M r . ROBERTSON. None except Arizona.
Senator DOUGLAS. A n d the chain banking
M r . ROBERTSON. Chain banking is a little different thing. T h e
largest chain banks—there are only two i n the country which amount
to anything i n the way of size; one is i n Florida, and one is i n M i n nesota and the surrounding States there. The holding-company bank
system is a different proposition. Y o u are not referring to that as
chain banking?
Senator D O U G L A S . I was coming to that. What about holdingcompany banking?
M r . ]ROBERTSON. I t is generally spread over larger areas. They
go into different States. Y o u r principal holding-company operations
i n this country are Transamerica, which operates i n California as
well as i n Oregon, Washington, Nevada, and Arizona; and you have
the F i r s t Bknk Stock Corp. i n Minneapolis and the Northwest Bancorporation i n Minneapolis; they are the two large ones there. There
are not more than a dozen substantial bank holding-company set-ups
i n this country.
Senator DOUGLAS. W h a t has happened to these very strong holdingcompany groups of banks i n the State of Michigan ?
M r . WOLCOTT. There is one very large one. The Michigan N a tional has offices in five and possibly six cities. That is the only one
that I know of.
M r . ROBERTSON. It is a branch organization and is one that I would
consider small i n relation to the systems I have referred to, which
have 60 or 70 banking offices.
Senator D O U G L A S . D O I understand then that the holding-company
type of organization i n banking that flourished i n Michigan i n the
twenties has disappeared like the snows of yesteryear ?
M r . W O L C O T T . N O . There was the Guardian group, as I recall, about
which you heard so much during the crash, and I was going to say it
was replaced, but I shouldn't use that word, because there is no affiliation, but there is another organization known as the Michigan National
Bank.
M r . ROBERTSON. That is a branch organization, M r . Wolcott, rather
than a holding-company organization.
M r . WOLCOTT. I might say the Guardian apparently was not dissolved because it wasn't solvent. The fact is that since 1933 the Detroit
banks have paid off more than 100 percent on all of their obligations.
I would suggest i n that respect that you might read M r . Malcolm
Bingley's book entitled "Detroit, M y O w n Home Town," which w i l l
give you the history of the banking crash i n Detroit. I t is very
interesting.
Senator DOUGLAS. The Bank of the United States turned out all
right i n New York, too.
M r . WOLCOTT. I don't know anything about that.
S e n a t o r DOUGLAS.

Yes.

M r . WOLCOTT. There have been bank crashes there, I believe.
Senator DOUGLAS. M r . Robertson, M r . McCabe, chairman of the
Board of Governors, Federal Reserve System, has recently suggested




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certain changes i n the standards that banks are required to meet in
order to qualify for membership in the Federal Reserve System.
A r e you, in general, familiar with them ?
M r . ROBERTSON. I n general. I must confess that I didn't get a chance
to read all of that pamphlet.
Senator DOUGLAS. I quote from him [reading] :
A s a general rule, banks w h i c h are eligible for Federal deposit insurance should
not be debarred f r o m membership i n the Federal Reserve by a r b i t r a r y capital
requirements. T h e f o l l o w i n g proposed changes are desirable i n and of themselves and necessary i n order to eliminate unwarranted discrimination against
membership i n the F e d e r a l Reserve System.
Instead of the present capital requirements, w h i c h relate only to the amount
of capital stock and are based on population, there should be only one specific
c a p i t a l requirement for admission to membership—a m i n i m u m of $50,000 of
paid-up capital s t o c k — w i t h the exception that a bank organized prior to the
enactment of the proposed legislation might be admitted w i t h paid-up capital of
$25,000. T h e adequacy of a bank's capital structure should continue to be
included among the factors to be considered by the B o a r d of Governors i n passing
upon the application of a State bank f o r membership.

That is the end of his quotation. They refer to capital requirements for State banks which wish to become members of the Federal
Reserve System. W o u l d you like to pass judgment on the question
of whether you think such a change as this would be desirable ?
M r . ROBERTSON. Only to say that I think fundamentally a decision
on that matter is one which falls within the province of die Federal
Reserve. They are i n better position to judge whether a bank with
that size capital should be eligible for membership. W e in the Comptroller's Office say that we don't object to reduction of capital requirements for membership.
Senator DOUGLAS. F o r the Federal Reserve?
M r . ROBERTSON. N O ; we do not. We don't want to reduce our own.
W e don't think this is the time to do it. I f they wish to do so, we have
no objection on that score.
Senator DOUGLAS. Do you think that would have any undesirable
effect on the national banking system ?
M r . ROBERTSON. I think not at all.
Senator DOUGLAS. M a y I pass to a series of questions concerning
Federal examination of banks ?
M r . ROBERTSON. Yes. M a y I add one comment on the capital requirement for membership. There is i n conjunction with that suggestion, I think, M r . McCabe, a suggestion that the capital for the
establishment of branches by member banks be reduced likewise. W e
do object to that proposal. W e say i n that respect that State member
banks should be on a parity with national banks. Otherwise, national
banks are apt to leave the System and become member banks so they
can establish a branch system without having as much capital as we
must require under our statute. I must say that I am not i n complete
accord with the suggestion made by the Chairman of the Federal
Reserve with respect to capital.
Senator D O U G L A S . D O you think the national banks should have the
power to convert into State banks at w i l l ?
M r . ROBERTSON. D e f i n i t e l y so.

Senator DOUGLAS. Y o u think they should ?
M r . ROBERTSON. Definitely so. I think no national bank should be
told it has to stay in the national bank system. Banks are not national
banks because they are obliged to be so but because they have greater



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prestige, because of the quality of supervision, because of the fact that
they have uniform laws throughout the United States. National banks
are not going to leave the System because they are given the privilege
of converting into a State bank. They can now leave the System by
voluntary liquidation. The tax problem has' been thrown up. I t isn't
serious. Y o u are not going to find banks leaving the national system
because of the conversion privilege. W e do not object to it.
Senator D O U G L A S . Even though the reserve requirements of the
States tend to be lower ?
M r . R O B E R T S O N . Yes. That would have nothing to do with whether
an institution is a National bank or a State member bank. That goes
to the question of whether reserve requirements are to be extended to
nonmembers. I t may become a member bank, i n which case the reserve
requirement would be the same.
Senator D O U G L A S . I f the National bank becomes a State bank, then
it is optional upon them to withdraw from the Federal Reserve System?
M r . R O B E R T S O N . That is right. They might even become an uninsured bank. That is going a long way. Our immediate problem is
only whether or not they are to be a State bank or a National bank.
B u t we say that is a matter of choice in the banking set-up today.
Senator D O U G L A S . D O you think there is no greater safety to depositors in the National system than i n the State system ?
M r . R O B E R T S O N . I wouldn't say that. I think the quality of our
supervision is very high. I say under a system such as we have i n this
country, a dual banking system, where banks can come i n to either
system at will, they should be privileged to go out. There shouldn't
be a one-way street from a State bank into a National bank. They
can convert into a National bank. W e say i f they can do that certainly we are i n no position to say you can't go back out the other way.
Furthermore, just from a practical point of view, i f you say that
National banks cannot convert, it is only a short period of time until
you have every State legislature i n the United States saying, "State
banks, you can't convert," and i f they do that you have a fixed pattern
all down the line. Then it just depends on which way an institution
happens to spring when it enters the banking field, whether it becomes
a State bank or a National bank. That I do not think is healthful.
Senator D O U G L A S . A S I understand it, the arrangement which has
been made is that the Comptroller of the Currency examines the national banks ?
M r . R O B E R T S O N . National banks exclusively.
Senator D O U G L A S . A n d the Federal Reserve Board examines the
State banks which are members of the Federal Reserve System ?
M r . R O B E R T S O N . I n conjunction with the State bank supervisors and
examiners.
Senator D O U G L A S . A n d the F D I C examines State banks which are
insured but not members of the Federal Reserve System ?
M r . R O B E R T S O N . I n conjunction with the State bank supervisors.
Senator D O U G L A S . D O you know anything of the way i n which F D I C
and State banking authorities share the actual task of bank examination?
M r . R O B E R T S O N . A n y statement which I would make would be clear
hearsay, M r . Chairman. I think you should get more expert advice
on that from the F D I C itself. The coordination is very good.



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Senator DOUGLAS. W i l l you give us a picture of the methods now
used to coordinate the policies of the Comptroller, the F D I C , and the
Federal Reserve i n the fields of bank supervision and examination,
and I think you should subdivide your answer into coordination at the
top levels, at staff levels, and at the various regional offices.
M r . ROBERTSON. I can divide it but i f I do, M r . Chairman, it is going
to be just the same, because at the top level here i n Washington,
between the Comptroller, the Board of Directors of F D I C , and the
Board of Governors of the Federal Reserve Board, there is very close
coordination. A t the top staff level here i n Washington—that is, myself and other Deputy Comptrollers, the chief national bank examiner,
the chief examiner for the F D I C , the chief examiner for the Federal
Reserve—there is very close coordination on every major problem.
W e hold conferences and discuss ways and means of solving problems.
Even going one step further, the assistant chief examiners i n our
organization, the assistant chiefs i n the Federal Reserve, and assistant
chiefs in the F D I C , are on the telephone every day conferring about
given cases.
Senator D O U G L A S . D O you have uniform rules ?
M r . R O B E R T S O N . N O ; not uniform rules i n any sense that I can think
of. W e do have an understanding between the three agencies on
investment securities, on the appraisal of assets, that is, classifying
them, putting them into substandard, doubtful, or loss, and to that
extent, yes, there are uniform policies, but they are not rules i n any
sense of the word. The policies we have are, to a large extent, uniform.
Senator DOUGLAS. When you candle eggs you separate the rotten
eggs from the good eggs, and then you have an intermediate group
of, say, doubtful eggs. Do you have any uniform standards, or when
you hold an asset up, would it be pronounced rotten by you and by the
Federal Reserve and by the F D I C , or would some of you say it is a
moderately good asset, for example ?
M r . ROBERTSON. Even within our own force different examiners w i l l
come to different conclusions concerning the credit soundness of any
given asset, and that would certainly be true i f you would match up
the examiners of the F D I C , the Federal Reserve, and our Office. I t
would be true i f you took different examiners within the F D I C and
the Federal Reserve. No two men w i l l judge credits alike. What we
try to do is to instill in them a sense of credit judgment and expect
them to apply it. Each case stands on its own footing.
Senator D O U G L A S . Y O U have no manuals ?
M r . ROBERTSON. There isn't any such thing as a manual which can
be used in determining the credit soundness of a given asset, because
the factors i n every single situation w i l l vary. I t is impossible to
have manuals. Certainly we have books of instruction to our examiners ; so does the Federal Reserve; so does the F D I C . W e have copies
of theirs; they have copies of ours. I f you were to compare the.m,
as a layman, you would think they were pretty uniform, but that is
not an answer to your question. I t is the man i n the field who is
applying those instructions who is the large factor in determining the
credit soundness of any given asset. I t is impossible to obtain complete uniformity i n the examination of a bank.
Senator DOUGLAS. What about loans to new business ?
M r . ROBERTSON. L o a n s t o n e w b u s i n e s s ?
S e n a t o r DOUGLAS.




Yes.

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Mr- ROBERTSON. They w i l l be viewed exactly on their merits.
Senator DOUGLAS. B u t how can you tell what the merits are %
M r . R O B E R T S O N . Y O U can't have any general rules about loans to new
business. Y o u must look at what the credit factors are i n a given
situation and see whether or not that is the kind of asset i n which the
funds of the depositors should be invested.
Senator DOUGLAS. I t is sometimes said, and I hope you won't take
this amiss—it is sometimes said that the national bank examiners are
so tough that a good many banks are afraid to make loans, i n appreciable amount, to new business, lest you put them on the carpet.
M r . ROBERTSON- I n some cases I hope that is true; i n other cases it is
used as an excuse for not making the loans. I would say that national
bank examiners are, on the average, possessed of a very high degree of
credit judgment, and I am convinced they are exercising it soundly
today.
Senator DOUGLAS. I n other words, you give yourself a vote of confidence ?
M r . ROBERTSON. I give them a note of confidence; not myself.
Senator D O U G L A S . I see.
% M r . Robertson, i n your written statement, or the statement from your
office, your office opposed a unification of all Federal supervisory activities and their concentration i n the Federal Reserve. The principal
reason advanced i n support of this opposition was that such a move
might lead to a subordination of bank supervision to national credit
policy, to an excessive use of bank supervision as an instrument of
monetary and credit control. This raises several questions. First,
just what is the issue here ? W h a t is the essential difference between
the purpose of examinations as seen by your office and the purpose of
examinations as seen by the Federal Reserve System ?
M r . R O B E R T S O N . I can tell you what the purpose of ours is but I
would prefer that they tell you what the purpose of theirs is.
The purpose of our examination is, we think, to insure the soundness
of each individual bank. W e want that bank to be i n condition so
that it can meet any eventuality.
Senator D O U G L A S . D O you consider the soundness of the system of
banking as well as the soundness of the individual bank ?
M r . ROBERTSON. Definitely. W e think the soundness of the system
is dependent upon the soundness of the individual bank.
Senator DOUGLAS. The soundness of the individual bank, conversely,
may depend upon the soundness of the system ?
M r . ROBERTSON. It may very well, but I think it works the other
way.
Senator DOUGLAS. T h e definition once given of a banker is that he is
a man who loans you an umbrella when the sun is shining and asks for
it back when it begins to rain.
M r . ROBERTSON. There have been a lot of jests made about bankers,
but I think on the whole they have done a good job of carrying out
their responsibilities i n maintaining stability i n our economy.
Senator D O U G L A S . Y O U look to the individual bank, not to the total
situation ?
M r . ROBERTSON. W e look to the individual bank as being the determining factor in the over-all situation at any given time. W e don't
think one can sit up on a pedestal and say, " W e think the conditions




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are going this way at a particular time and therefore you have to gear
your supervision to that particular viewpoint," because the person who
makes the decision may be wrong. B u t i f we can look at each individual bank and determine that it is sound, that it is soundly managed, that the standards which it follows i n administering the people's
money, in investing that money, are sound, we can be far more certain
of obtaining—of having, at any time—a sound banking system, than we
can through any other means.
Senator DOUGLAS. Well, were you with the Comptroller during the
period from 1929 to 1933?
M r . R O B E R T S O N . N O ; I joined the office in 1 9 3 3 .
Senator D O U G L A S . Y O U heard the stories of bank examinations prior
to that time ?
M r . ROBERTSON. I have heard the stories.
Senator D O U G L A S . I S it possible that i f the bank examiners had been
somewhat more lenient there would have been fewer bank failures, and,
therefore, the banking system would not have collapsed to the same
degree, and some of the banks referred to by my esteemed colleague
here, i f they had been treated with greater gentleness, might not have
gone down ?
M r . ROBERTSON. That is a story that has been circulated to a large
extent and I think it is absolutely false. I think during the period, for
example, between 1930 and 1933, the examiners were tight. They had
to look at loans carefully, because they were made i n a down-trend
period, but i f they had been lenient the losses which would have been
sustained, would have been terrific, because the principal losses to the
banks which were closed i n 1933 were on loans made i n 1931 and 1932,
at a time when we were being tough, and i f we had been lenient the
story would have been entirely different, because there was no one
who knew that period would end at a given time.
Senator DOUGLAS. W o u l d the trend by the examiners be to judge the
worth of an asset by its market value ?
M r . ROBERTSON. The trend at that time, as I understand it, was to
take into consideration the market value, but that wasn't the only
criterion.
Senator DOUGLAS. Wasn't that the predominant consideration?
M r . R O B E R T S O N . N O ; I don't think that is right. That may be true
i f you refer to an investment security. I t isn't true as to a loan.
Senator D O U G L A S . I mean, an investment security.
M r . R O B E R T S O N . I think that is true.
Senator D O U G L A S . H O W about real estate ?
M r . ROBERTSON. Well, real estate would f a l l into an entirely different
category, because you have more than real estate behind any loaK:
you can only lend a limited percentage of appraised value. Y o u have
other safeguards behind most real-estate loans. Y o u have the financial
responsibility of the borrower. I don't think you can put those i n the
same category.
Don't misunderstand. There have been times I think, when bank
supervisors have been wrong. There have been times when, i f you
look at it by hindsight, you can see that you put the pressure on when
it should have been taken off, or that you were too lenient.
Senator D O U G L A S . Y O U don't feel, then, that the bank-examining
system was too tough on the national banks during the period from
1929 to 1933?
99076—50

7




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M r . ROBERTSON. I d o n o t .

Senator

DOUGLAS. D O

M r . ROBERTSON.

you think it was too lenient ?

NO.

Senator D O U G L A S . Y O U think it was just right?
M r . ROBERTSON. I f I had been the one making every decision they
wouldn't have been the same, but far be it from me to say, even by
hindsight, that they were wrong in what they did.
Senator DOUGLAS. Does judgment of assets by market value force
the liquidation of assets in a depression period and discourage the
granting of new credits ?
M r . ROBERTSON. There may have been instances where it did; there
may be instances where it did not. I don't think you can generalize.
Y o u have to take each individual case.
Senator D O U G L A S . Y O U can always swamp us on individual cases,
because we never know the individual cases. A civil servant can
always do that. H e can always stop a congressional committee by
saying everything must be judged on the individual case. But we are
trying to find general rules. Excuse the vehemence of my statement
but this is typically what a skilled Government official gives to a
congressional committee.
M r . ROBERTSON. I think it is a correct reply.
Senator DOUGLAS. Well, it is a very baffling one. It is a reply admirably calculated to retain control i n the hands of administrative
officials and deny to Congress the power of making any general rules.
M r . ROBERTSON. What we want to do is to help you i n the job you are
trying to do of determining what the general rule should b6,; Senator.
Senator DOUGLAS. That is what I am groping for, very painfully,
and I find only a statement that the bank examiners, i n individual
instances, are using their best judgment, and that no general rule can
be drawn.
M r . ROBERTSON. I f you can find a general rule, Senator, we w i l l be
delighted.
Senator D O U G L A S . I would like to have you help us.
M r . R O B E R T S O N . I would like to help you.
Senator DOUGLAS. Fine. What would you say on this question of
market value of assets then: Should you judge assets according to
what the security w i l l sell for at the moment i n the market ?
M r . ROBERTSON. Not exclusively, but that should be one of the
factors.
Senator D O U G L A S . H O W much weight would you give to it?
M r . R O B E R T S O N . I couldn't figure a percentage weight on it. A n y
investment security, Senator, has behind it the same credit factors
which any loan has, and we say that every banker should know as
much about the credit factors involved in an investment security as he
does i n a loan, because all it is is a "stranger loan" he is lending money
to a foreign corporation, that is, a corporation not doing business in
his home town, ordinarily. H e should only buy an investment security i f he would be w i l l i n g to lend to that borrower the same amount
of money, and he should know just as much about it in one instance
as in the other instance. One looks at the credit factors in determining whether or not despositors' funds should be invested in it. The
market value should be considered but it should only be looked at in
consideration with all other credit factors.




95 M O N E T A R Y , CREDIT, AND FISCAL POLICIES

Senator D O U G L A S . N O W , I take it that you do not want the Federal
Reserve System to take over the examination of national bank,*?
M r . R O B E R T S O N . I think it would be unwise. That is a matter
though for Congress to decide.
Senator D O U G L A S . I am sure that your decision on this point is not
swayed, though it may be, since you are human, it may be influenced
by the fact that you are now making examinations yourself, but what
considerations would you bring forward to tell us why the Federal
Reserve System should not do it ?
M r . R O B E R T S O N . I w i l l be glad to tell you why I think it should
remain, not necessarily i n our office, but it should remain i n an office
which is not concerned with over-all credit control.
Supervision, as I view it, and I can be wrong, should look to the
individual soundness of each individual bank, and that goes to the
assets i n that bank, the kind of management it has, and so forth. The
supervision should not be controlled by anyone who is trying primarily to provide general economic stability. There are certain
measures which should be used i n that respect: Rediscount rates, reserve requirements, and many others. But supervision is not one of
those. Supervision should be completely independent, with no conflicting motive, no conflicting duties. I t shouldn't be used as a
means of carrying out what is a Government economic policy of the
moment, whatever administration is in power. It should be independent, so that when anyone wants to see what the true condition
of the banks is at any given moment, the facts are there.
Now, the Federal Reserve has, you see, access to all of our reports
of examination. W e are an independent agency i n the sense that we
have no conflicting duties; just supervision of banks. They can see
what the status of each bank is. I think that is a much sounder basis
to operate on than it would be i f the examinations were being: made bv
one whose principal duty is not the safeguarding of the soundness of
that individual bank, but is providing the atmosphere for stable
economic conditions.
Senator DOUGLAS. Let's take a bank that has a widely distributed
set of investments and, therefore, has not shown undue favoritism toward plunging i n one set of businesses, but has a pretty well distributed
set of risks, and during a depression all of them go down. Y o u have
said that you do not take market value as the sole test. I take it that it
is a pretty strong test. Suppose you apply that test and you find a
bank in a very difficult position. Y o u give warning to the bank. The
bank therefore will, let us say, i n order to be safe, at least not make
loans which it might otherwise make. The effect of your examination
therefore w i l l be to exercise a constricting influence on credit, just
because you have these conditions as of the moment. But it is also a
law of life that just as things which go up must come down, so i n the
past things that have gone down come up, that is, on the general
average. Therefore have not banks been restricted in expansion of
credit and, therefore, recovery impeded by a tendency to take present
conditions almost exclusively into account and not have sufficient faith
i n the future?
M r . ROBERTSON. I t depends on how far you carry that. Certainly I
think you have to take into consideration the economic conditions.
Y o u just can't have supervision standing out here i n a vacuum. Y o u




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must have supervision geared to economic conditions because that goes
into the credit soundness of any given asset.
Suppose you had a depression which extended over, say, a 10-year
period. W o u l d you permit a bank to continue investing" depositors'
funds in risk assets, assets which held a high degree of risk, i f the
market value of the security portfolio was such that the loss would
wipe out everything the depositors had i f it continued going down?
I f so, how long would you permit it to carry those investments ? T h a t
is a pretty difficult decision. I t depends largely on whether the bank is
i n a position to carry the securities to their maturity.
Senator D O U G L A S . Coming to that, the danger of the depositors losing has certainly been reduced very much by the Federal Deposit Insurance Corporation law?
Mr.

ROBERTSON.

Oh,

yes.

M r . W O L C O T T . But the depositors lose when the Federal Government has to come i n and make good on the losses, don't they, because
most depositors are taxpayers. I t is just a transfer of the obligation
for the loss from the depositors to the Federal Government, The
point is, there is just as much necessity for maintaining sound banking,
regardless of F D I C , as i f we didn't have it.
Senator D O U G L A S . W e are, of course, all i n favor of sound banking,
just as we are all opposed to sin. The question is, W h a t is sound banking? M y inquiry is whether you can't be so strict on these banks as to
impede a policy of credit expansion, which is what the country as a
whole may need at the moment.
M r . W O L C O T T . I think 160 years of banking i n the United States,
a system which has contributed as much as it has to the standards of
living in the United States, the position which we hold in world affairs,
has proven itself to be a pretty good banking system. I surely wouldn't
want to see the Federal Government or the Congress try to write standards into the law for the examination of banks, which up to the present
time has done the splendid job they have in making this the greatest
Nation in the world. I think we can compare the American system
with the Canadian system. The concentration of credit power i n the
Dominion of Canada today obviously has prevented Canada from
making the economic strides that the United States has.
Senator D O U G L A S . That is what I was objecting to in the branch
banking system.
M r . W O L C O T T . I have been strongly opposed to branch banking, except as the States allow it. I am opposed to it principally because, as
seen in the Canadian system, in which the loans were manipulated
from one branch to another, to protect the loans of those banks, to the
prejudice of the communities. I would hate to see that system grow
up i n America, i n the United States. I would hate to see such a loose
system of examination on any of our banks that it would prejudice
the obligation which the taxpayers have assumed to protect bank
deposits.
M r . R O B E R T S O N . M a y I give you anothev rep son why I think the
supervision should be in an independent agency ? IT seems to me that
i f you put bank supervision in an agency which is responsible for
monetary and credit control, so that its primary functions is stabilization rather than individual banking, you w i l l destroy the effectiveness
of bank supervision, destroy it because you w i l l lose its effectiveness.




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Bank supervision today isn't effective because of the legal sanctions
which stand behind the supervisor. The effectiveness is there because
the banks of this country—all the bankers of this country—know
that the sole motive of the supervisor is the soundness of the individual
bank, or to aid in making it into a sound bank. I f the bankers of
this country thought that the supervisor or the examiner was going
to look at loans and other assets not in the light of what they are, but
i n the light of what someone in Washington happened to think existing conditions demand (either going down or up, depending upon
which individual is deciding that question) the bankers of this country are going to pull back, they are not going to cooperate with the
supervisor, I don't care who he is, and are not going to carry out, except
with force, the recommendations and suggestions of that supervisor.
When a suggestion is made the bankers of this country carry it out,
with rare exceptions, and there is no force behind it. They carry it
out because they know that our sole interest is in trying to make
their bank a good bank and a sound bank. Y o u are going to lose that
effectiveness.
Senator DOUGLAS. The protection against fraud could be handled
by one agency ?
M r . ROBERTSON. Yes; and the protection against fraud is an insignificant matter.
When we audit a bank we don't go i n with any idea of trying to
discover fraud but rather to build up the bank so that they can discover their own frauds. Our principal job is in seeing that the credit
standards applied by that bank are sound and that its management
.is sound and competent. It is a mistaken notion that bank examination
is designed to catch the crook. It isn't at all.
Senator DOUGLAS. That is one of its purposes.
M r . R O B E R T S O N . A very, very minor function, Senator, very minor.
I f that were all there is to it, you could wipe out bank supervision
and it wouldn't make much difference one way or another.
Senator D O U G L A S . D O you think that i n a period of depression it
would be a good thing for the company, for the banking system, as a
whole, to expand loans, i n order to give added employment, and added
production ?
M r . ROBERTSON. That is a difficult question. I t is one which I would
like to answer by saying that I think the banker who is on the spot i n
his locality is i n a better position to judge its credit needs than is
any one person sitting here in Washington.
Senator DOUGLAS. O f course, the individual bank, which expands
its loans, when other banks do not, has checks drawn against it,
which i n turn w i l l find their way, most of them, into other banks,
and you, therefore, draw down the reserves of the bank, and yet i t
is impossible for an individual bank to swim against the tide, and i f
all individual banks are afraid of the toughness of the examination,
then none of them w i l l stay in. Y o u have to have sort of a general
movement which proceeds by capillary attraction, so to speak, through
the system as a whole, to get expansion, no one bank can swim against
the tide; you know that. The vast majority of checks, I suppose,
drawn against a bank w i l l find their way into other banks and be
cleared, and you w i l l therefore draw down the reserves of the bank
i n question. It has to be the system as a whole which expands. W e
are debating a philosophic issue, but it has great importance.



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Y o u say that i n order to maintain the integrity of the System you
have to maintain the integrity of the individual bank. Isn't it also true
that i n order to maintain the integrity of the individual bank you have
to maintain the integrity of the System ?
M r . R O B E R T S O N . I think that is so. I think my point was misunderstood, Senator.
Senator DOUGLAS. Not merely the integrity of the System but the
soundness of the System.
M r . ROBERTSON. I think that is right, but I think my point was misunderstood. I t was just this, that I think the bankers of this country,
not taking one bank, but I am taking the bankers as a whole, they are
the ones who set the standards, and not the one which happens to be
off the beam. Taking the average of the bankers throughout the country, they are in a better position to determine what is best for their own
community than is any one single person sitting in Washington.
Senator DOUGLAS. On individual loans I grant you, of course, they
are better judges of credit risks, on those individual loans.
M r . R O B E R T S O N . N O ; I still don't make my point, Senator.
Senator DOUGLAS. That is the great advantage of having banks
which retail credit.
M r . R O B E R T S O N . I am speaking about general economic conditions.
I think that the influence which they wield through the exercise of their
own judgment, the judgment of their own officers, in determining what
is sound for that bank, realizing their bank is dependent upon the well
being of their community, and their nation, what they do i n the way of
extending credit, through the exercise of their own judgment, is a far
safer course for banking in this country, and for the economy of this
country, than to have their decisions either weighed down or pushed
up by the judgment of some economist i n Washington.
Senator DOUGLAS. Or some bank examiner ?
M r . ROBERTSON. It doesn't make any difference. I don't care who it
is. I say that power shouldn't exist. I would rather rely upon the
soundness of the judgment of the bankers of the country than on the
correctness of the opinion of anyone who happened to be i n power at
the time. Therefore I say that bank supervision should be geared to
the soundness of each one of those banks.
Senator DOUGLAS. M a y that not operate at times against the soundness of the System as a whole ?
M r . R O B E R T S O N . I think that the chances of it doing good are much
better and I w^ould prefer to risk my own stake i n this country on that
basis than I would in having it determined by someone at the top because I would be afraid he might be wrong.
Senator DOUGLAS. Fear is contagious too.
M r . R O B E R T S O N . I think that is right.
Senator DOUGLAS. There is no doubt there was a contagion of fear
amongst the members of the banking fraternity from 1930 to 1933.
M r . ROBERTSON. Yes; I think that is definitely so. O f course, they
weren't exclusive in this field. Fear was pretty general throughout the
country.
Senator DOUGLAS. B u t the fear on the part of the banking community resulted i n a cumulative contraction of credits and therefore
a progressively worsening of conditions which i n turn increased their
fear, and it is possible that the strictness of the bank examinations may
have contributed to that fear.



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W h a t would be your attitude toward a concentration of all Federal
examinations in one agency i f you were reasonably assured that this
examination would not be converted into an instrument for credit
management ?
Suppose we say we won't have anything to do with credit management, we w i l l just consider the soundness of the individual bank.
M r . ROBERTSON. Then I would have no objection to it whatsoever. I would say that you aren't gaining much by doing it but
one Federal agency can do it, can examine all those banks, just as
easily as the existing three. W h a t it would be doing is taking the
examiners from the other forces, putting them into one group, which
wouldn't do the job any faster, or any more effectively; but there
would be nothing wrong with one agency examining all those banks
and advising the F D I C , and so forth. I would have no objection to
that.
Senator DOUGLAS. Wouldn't it save expense ?
M r . ROBERTSON. Not at all. None of the three agencies are paid
out of public moneys at all. The banks pay
Senator DOUGLAS. W a i t ; just as Congressman Wolcott said, bank
failures have been paid out of taxes, these cross railroad fares have
to be met by someone, and i f not met by the public have to be met
by the bank authorities, so that we are anxious to save private money
as well as public money.
M r . ROBERTSON. That is true but I think i f you would make inquiry you would find, from bankers of this country, that they think
the examining functions are being carried on as economically as
can be done. W e w i l l be glad to have you, or anyone else, show us
ways of economizing. Y o u see we are i n a position where, to a
certain point, we are responsible to the bankers who pay the costs of
supervision. They aren't going to sit by and have us squander money.
Senator DOUGLAS. I am not charging you with squandering money.
This is a question of whether it is the most economical method of operation. It is obvious that on a division on the basis of concentric circles,
with you taking national banks and the Reserve taking State bank
members of the System, and F D I C taking insured State banks which
are not members of the System, it is quite obvious that you w i l l have i n
one community, let us say, three sets of examiners coming in, even
though you don't have three sets of examiners in the same bank, you
have three sets of examiners i n the same community, with separate
regional organizations; it would seem to me that that is obvious.
M r . ROBERTSON. I don't think it is obvious at all, Senator. I am
trying to be frank about this.
Senator DOUGLAS. Well, I guess I must be stupid.
M r . R O B E R T S O N . N O ; I don't think so at all.
Senator DOUGLAS. Where do I fall off ?
M r . ROBERTSON. They do examine different banks, as you know,
They are never all in the same bank.
Senator DOUGLAS. That is right. But wiiat I say is they w i l l be i n
the same town.
M r . ROBERTSON. They may be i n the same town but i f they are they
merely have to stay longer, and that raises your per diem. W e have
thought about that a lot. We have yet to have anyone show us or be
able to discover for ourselves where you wTould save any money by
pooling them all together.



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Senator DOUGLAS. Don't cross railway fares come into it; is there
no saving in railway fares?
M r . ROBERTSON. W e don't think so. Maybe it is possible. I would
say, i f it is possible and more efficient, let's do it.
Senator DOUGLAS. W o u l d there be no saving i n branch organization ?
M r . R O B E R T S O N . I don't think so, because in each of the agencies the
supervisory force in the field is small—cut right down to the core. W e
operate with a very limited force.
Senator DOUGLAS. I am quite prepared to believe that you are very
thrifty, but I have never yet found a Government agency that operated
right down to the core.
M r . R O B E R T S O N . Y O U come down and we w i l l show you one.
Senator DOUGLAS. Good.
M r . ROBERTSON* W e would be delighted to show you. W e think
we have one. Let me say this, i f there would be an economy of that
sort, i n that sort of an organization, I would be in favor of it. I f
any expert can show us where it is economical and efficient I w i l l
stand here and testify in favor of that sort of a consolidation.
Senator D O U G L A S . I haven't read all of the Hoover reports. What
do they recommend on that matter, do you remember ?
M r . ROBERTSON. The Hoover Commission itself, as I recall, not
having read it for a number of months, recommended only that the
F D I C be placed i n the Treasury, in some wa}^ the same sort of a
relationship that the Comptroller is in, that it operate under the
direction of the Secretary of the Treasury, and that is all.
Senator DOUGLAS. That might carry with it a consolidation of investigatory functions, so that you would take the inner circle, and the
outer circle, leaving the Federal Reserve with the circle in between
the two.
M r . ROBERTSON. I doubt i f that was contemplated, because i n the
staff report it was recommended that the examining functions of the
Comptroller, and I think the F D I C , be concentrated in the——
Senator D O U G L A S . Y O U mean the staff report did recommend a
consolidation ?
M r . ROBERTSON. Definitely so, and the Hoover Commission itself
did not.
Senator DOUGLAS. But did not reject it ?
M r . ROBERTSON. Yes; they did reject it, and advocated instead of
that that the F D I C be placed under the direction of the Secretary o f
the Treasury; but rejected entirely the staff report.
Senator DOUGLAS. D i d they reject it or simply f a i l to mention it?
M r . R O B E R T S O N . I w i l l have to go back and read the report but it is
my recollection that they rejected it.
Senator DOUGLAS. I t is my recollection that they failed to mention
it. Overburdened committee members sometimes f a i l to notice the
f u l l intricacies of staff reports, and their failure to include should not
be construed as an outright action.
M r . ROBERTSON. That is a matter easily ascertained by looking at
the record, Senator. I wouldn't say that I can repeat verbatim what
was i n the report. I haven't seen it since it was issued.
Senator D O U G L A S . N O W , these are some questions about the relationship between the Comptroller and F D I C . I n the absence of M r .
Delano, I don't know whether you want to reply to these questions or
not.



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M r . R O B E R T S O N . I would be glad to i f I am in possession of the
answers.
Senator DOUGLAS. The Comptroller is an ex officio member of the
Board of Directors of the F D I C ?
M r . ROBERTSON. That is correct.
Senator DOUGLAS. What do you think of the system of having
ex officio members of the Board of the F D I C ?
M r . ROBERTSON. I n this particular case I think it is good. Ordinarily I am opposed to ex officio members, and maybe I am being very
one-sided in this decision, but his membership in the F D I C does provide that Board with first-hand knowledge of the entire banking
system, you see, because they get virtually the entire banking system,
they get the national banks through him, they get the State banks
through their close contact with the primary supervisors of the State
banks. So that in this particular case I think it is worth while. A s
you may or may not know he is not an ex officio member who attends
just once in a while. H e attends every meeting. H e takes an active
part in the proceedings and the deliberations of the Board of Directors
of that Corporation.
Is that a sufficient answer, Senator ? A r e there any other facts you
would like ?
Senator DOUGLAS. What would you say to having the Chairman
or Vice Chairman of Federal Reserve as an ex officio member of the
F D I C Board?
M r . ROBERTSON. I wouldn't object. Y o u don't get additional
knowledge of a definite group of banks through such a member like
you get through the Comptroller with respect to national banks.
Senator DOUGLAS. W a i t a minute. Y o u get the State banks, which
are members of the Federal Reserve System. Y o u would get that
point of view.
M r . ROBERTSON. I didn't make the first point clear. The F D I C
works directly with the primary supervisors of both State and National banks. They coordinate with the State bank supervisors themselves. They make their examinations in conjunction with the State
bank supervisors and with respect to the State member banks they
still have the State supervisors with whom they coordinate and obtain
information. National bankwise they don't have contact with the
System except through the Comptroller. So you don't have that
same reason for placing a member of the Board of Governors on the
F D I C . That is the only reason. It may not be as valid as I think
it is.
Senator D O U G L A S . D O you think the primary basis of classification
is as between the national banks and State banks rather than between
members of the System and nonmembers of the System ?
M r . R O B E R T S O N . I would have to have the background for that
question.
Senator D O U G L A S . Y O U inspect national banks?
M r . ROBERTSON. That is right.
Senator DOUGLAS. But the responsibility for national supervision
of State banks is divided between the Federal Reserve System which
takes State banks which are members of the Federal Reserve System and the F D I C which inspects State banks insured but not members of F D I C ; isn't that true?
M r . ROBERTSON.

Yes.




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Senator DOUGLAS. W h a t I am t r y i n g to say is that we have a threelayer cake, so to speak. T h e middle tier is not represented.
M r . ROBERTSON. M y point is that the F D I C does not get their
knowledge of these State banks exclusively through their own examinations. T h a t isn't as important, i n some ways, as is the contact
that they have w i t h the State bank supervisors. They have close
contact with the State bank supervisors themselves, irrespective of
whether the banks are members or nonmembers. W i t h respect to
the national bank system, they have direct contact through the presence of the Comptroller on the Board. T h a t is my point.
Senator DOUGLAS. Well, may I ask one final set of questions on the
relationship of the Comptroller of Currency i n the Treasury Department ?
Have you found that the inclusion of the Comptroller's Office w i t h i n
the Treasury Department has i n any way tended to subordinate sound
examination and supervision policies to the fiscal policies or needs o f
the Treasury?
M r . R O B E R T S O N . I would say without any qualification, " N o . "
T h e Comptroller does operate under the general direction of the
Secretary of the Treasury. B u t that means general direction and not
special direction. There are very, very few cases i n which the Treasury takes any part i n deliberations w i t h respect to bank supervision.
Senator D O U G L A S . D O you think there is any reason to believe that
placing the F D I C under the general supervision of the Treasury Department would lead to a subjection or subordination of deposit insurance to the fiscal policies of the Treasury ?
M r . R O B E R T S O N . I don't think so. B u t I see no great gain to be
made by putting it under Treasury.
Senator D O U G L A S . Y O U don't see any harm ?
M r . ROBERTSON. N O ; I

do

not.

Senator DOUGLAS. Thank you very much. Congressman Wolcott.
M r . W O L C O T T . I have just one thought. A s to the reason why the
F D I C was not put under the Treasury i n the first place, when they
were not affiliated w i t h the Federal Reserve, it was the thought that it
Avasn't the proper thing to do, to turn the administration of the insurance over to those who were being insured, any more than i t would
be proper for a person who carries fire insurance being able to write
the terms under which his losses should be liquidated. T h i s is why the
F D I C was set up as i n independent agency of the Government, so that
it would be just that, independent of any influence which might be
brought to bear upon those who were vitally interested i n the manner
i n which the insurance would operate.
Senator DOUGLAS. W h a t is this identity of interest that you mention ?
M r . WOLCOTT. I didn't mention any identity of interest. W h a t
do you mean by it ?
Senator D O U G L A S . I thought you said that the people being insured
would also act as a supervisor.
M r . WOLCOTT. I w i l l explain it. I f you put the members of the
Federal Reserve Board, or the Chairman of the Federal Reserve Board,
on the Board of the F D I C , Federal Reserve member banks being insured by the F D I C , then you would have a situation where the Board
of Directors of the F D I C would be writing the regulations i n respect
to the operation of the insurance agency which insures deposits i n
the banks, and I used fire insurance as an example, of a man insured



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in a fire-insurance company, he being put i n a position of writing the
manner in which his losses should be liquidated.
I thoroughly disagree with the staff recommendations of the Hoover
Commission. I am not sure but what I thoroughly disagree with the
recommendation of the Hoover Commission that F D I C be transferred
to Treasury for that very reason.
These are not new questions. These matters were thoroughly discussed in 1933 when we set up the F D I C and when we set it up as an
independent agency of Government for that reason, to take any influence by the banks, by those who supervise the banks, out of the operation of the F D I C , and make certain that the regulations under which
depositors' deposits were to be insured, would be independent of any
other interest.
SO far as I am concerned, so long as I am in Congress I w i l l fight
to my last breath to keep the F D I C from being transferred to Treasury or Federal Reserve, because I don't think it is any place for it.
Senator DOUGLAS. I can understand the objection as applied to the
consolidation of F D I C and Federal Reserve, or possibly the question
of having the Chairman or Vice Chairman of Federal Reserve on
the Board of F D I C , but my questions were addressed to whether there
would be difficulty in having F D I C under the supervision of the
Treasury, and I didn't see that the people who were being supervised
would be hurt.
M r . WOLCOTT. The Treasury, as M r . Robertson has suggested, has
general authority over the Comptroller's Office, and there is an affiliation of interest between the Treasury and the Comptroller's Office.
1 remember when, just a few short years ago, a transfer was made i n
personnel from Treasury to the Comptroller's Office, to bring the
Comptroller's office into closer affiliation with the Secretary of the
Treasury himself, because the Treasury, under the law, did not have
what the Secretary considered sufficient supervision over the banks.
So one of his staff was transferred to the Comptroller's office, obviously
to bring the Comptroller's office in closer affiliation with the Treasury,
and give the Secretary of the Treasury more jurisdiction, i f I may put
it that way, over national banks.
So to put F D I C i n the Treasury would be no assurance that it would
continue to be as independent as the Comptroller's office is now. There
is a much closer affiliation there now than there was before.
This book, The Romance of Banking, gives a very interesting history.
I think we should all read that before coming to any conclusions as to
whether to consolidate these agencies. I have in mind also one very
bad mistake, in my opinion, which was made when we put the Secretary
of State on the Board of the Export-Import Bank, i n one of our weak
moments, thereby so affiliating the Export-Import Bank with the
dollar diplomacy of the State Department as to make it possible for the
State Department to dominate the loan policy of the Export-Import
Bank. I have seen just enough of these examples i n government so
that I do know that strong men in strong places do wield unusual
influences on subordinate agencies.
Senator DOUGLAS, Thank you very much, M r . Robertson.
M r . ROBERTSON. Thank you, Senator Douglas.
(Whereupon, at 4: 30 p. m., a recess was taken until 10 a. m., Thursday, November 17,1949.)







MONETAE Y, CEEDIT, AND FISCAL POLICIES
THURSDAY, NOVEMBER 17, 1949
CONGRESS OF T H E U N I T E D S T A T E S ,
SUBCOMMITTEE ON M O N E T A R Y , CREDIT, AND F I S C A L POLICIES,
J O I N T C O M M I T T E E ON T H E E C O N O M I C REPORT,

Washington,

D. C.

T h e subcommittee met, pursuant to adjournment, at 10 a. m. i n the
caucus room, Senate Office B u i l d i n g , Senator P a u l H . Douglas (chairman of the subcommittee) presiding.
Present: Senators Douglas (chairman of the subcommittee) and
Flanders; Representatives Buchanan and Wolcott.
A l s o present: D r . Grover W . Ensley, acting staff director, and D r .
Lester V . Chandler, economist to the subcommittee.
Senator DOUGLAS. Gentlemen, I think it might be well i f we would
get under way.
I wonder i f you would come forward, M r . H a r l . I f you would like
to have anyone w i t h you either to help you w i t h detailed material or to
testify directly we w i l l be very glad, indeed, to have them.

STATEMENT OF MAPLE HARL, CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION, ACCOMPANIED BY EDISON H. CRAMER,
CHIEF, DIVISION OF RESEARCH AND STATISTICS, FDIC
M r . HARL. Senator, as you know, the Comptroller of the Currency
is the Vice Chairman of our Board. So, i n addition to those members
of the B o a r d who spend their entire time at the F D I C , we have had
the benefit of the advice, counsel, aid, and assistance of the Comptroller of the Currency i n the preparation of our answers to the questionnaire. T h e three of us have worked very closely w i t h our staff
i n the preparation of the text. D r . Cramer and I w i l l be h a p p y to
answer such questions as you or other members of the committee want
to direct to me.
W e have brought along, i n addition to the text, a few charts which
we think w i l l be interesting to you, together w i t h a very brief report
to the insured banks of the Nation, which has been boiled down and
requires only 12 minutes to read. W e know that everybody connected
w i t h the committee is tremendously busy and has heavy demands on
his time, and therefore we have tried to do a thumbnail sketch of the
Corporation, which is the picture as it was on June 30 of this year.
Senator DOUGLAS. I n other words, you would like to introduce this
report and these charts and files them w i t h the committee ?
M r . HARL.

Y e s , sir.

Senator DOUGLAS. W e w i l l be very glad, indeed, to have them.




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(The report with the charts above referred to, entitled, "June 30,
1949, Report to Insured Banks, Federal Deposit Insurance Corporation," is to be found in the files of the committee.)
M r . HARL. The chart on the back of this is most unusual because it
shows the amount of disbursements that the Corporation had to make
from the period 1934 down through December 31, 1948. That is the
period since the Corporation was established.
I t is extremely significant, if you look at that chart, to see that in
that period of January 1934 to December 31, 1948, the number of
banks requiring aid has been reduced from year to year. However,
you w i l l notice that the amount of money up to 1940 had increased,
from 1934 through 1940.
I n other words, it would seem that W o r l d W a r I I , which came on in
1941, together with any inflation attributed to that war, saved the
Corporation a great many dollars from the standpoint of disbursement, because certain paper, due to inflationary processes, became
collectible, which might have resulted i n a disbursement from the
Corporation had not our economy started to enlarge or balloon i n the
1940 period.
Senator DOUGLAS. I think it is historically true that very few banks,
or comparatively few, f a i l during a period of inflation.. I t is i n a
period of falling prices that the strain comes.
M r . H A R L . Y e s , sir.

Then we would like to present a chart showing the percentage
composition of assets of insured commercial banks, December 31, 1934,
to June 30,1949; likewise a percentage composition of assets of insured
mutual savings banks, which shows the structure of these institutions
by years from 1934 to 1949. That is broken down into loans and discounts, other securities, United States Government obligations, and
cash reserves, and shows that on June 30,1949, the insured commercial
banks of this country had 65 percent of their assets i n cash and reserves
or i n Government obligations which could be converted to cash reserves almost instantaneously, and which shows the very fine condition
of our insured banks as of June 30. That condition, in our opinion,
prevails today.
W e thought that your committee would like to have the benefit of
these charts, which you w i l l find on pages 38 and 39, of our Report No.
31, showing the assets and liabilities, June 30, 1949, of all operating
insured commercial and mutual savings banks.
(The report above referred to, entitled "Assets and Liabilities, June
30, 1949, Operating Insured Commercial and Mutual Savings Banks,
Report No. 31," is to be found in the committee files.)
Senator DOUGLAS. W o u l d you begin your testimony then, M r . H a r l ?
M r . HARL. I t is my understanding that the testimony desired here
this morning is an amplification of our reply to the questions which
were propounded i n the questionnaire by your committee to the
Corporation.
Senator D O U G L A S . T O which you replied.
M r . HARL. W h i c h is set forth on page 207 of the committee print
on Monetary, Credit, and Fiscal Policies.
Senator DOUGLAS. That is correct.




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M r . HARL. Our answers are found on pages 207 through 215, inclusive. W e have endeavored to make them brief and at the same time
make them all-inclusive of the subject of the question.
One of these questions in which we are particularly interested is that
pertaining to the examination policies of the Federal Reserve System,
the Comptroller of the Currency, and the Federal Deposit Insurance
Corporation. The question is question No. 9, on page 212. I would
like to read the question:
9. I n your review of the examinations made by the Federal Reserve and the
Comptroller of the Currency, what have you found to be the principal differences,
i f any, between the bank-examination policies of the F D I C and those of the
F e d e r a l Reserve and the Comptroller of the Currency?

Our answer speaks for itself, to the effect that there are no important differences between the bank-examination policies of this Corporation and those of the Federal Reserve or the Comptroller of the
Currency. I t reads:
T h e existing differences are unimportant and are attributable mainly to the
difference i n the functions and the purposes of the three agencies. Complete
cooperation exists between a l l three agencies. U n i f o r m i t y of examination policy
is gradually being achieved and close liaison now obtains w i t h respect to a uniform
approach to connective programs.

I would like to amplify our answer to that question by stating that
we also work very closely with the National Association of Supervisors
of State Banks. A s you know, we have the 48 State bank supervisors
plus a supervisor in Alaska, as well as Puerto Rico and Hawaii, making
51. We meet with this group twice a year. I n addition thereto, in
the spring meeting, their executive committee comes in here and sits
down with our examination staff and we make every effort to coordinate the examination programs.
However, I would like to call attention to the fact that we, as an
insurance corporation, make our examination as to our hazard, or
exposure, as we call it. It consists of loans and discounts which are
reflected by the composition previously called to your attention on
pages 38 and 39 of our report No. 31. Experience has taught us that
the solvency, stability, and safety of the banks, as well as that of the
93,000,000 depositors, is wrapped up in that 28 percent of the assets
comprising loans and discounts. I f those loans and discounts are
good, then we have no exposure. Therefore we are constantly, i n examinations, looking at the exposure of the Corporation, and the bank's
ability to meet its commitments to the depositors.
Senator DOUGLAS. A S I understand it, you inspect those State banks
which are not members of the Federal Reserve System?
M r . HARL. That is true.
Senator DOUGLAS. W h i c h are insured with you.
M r . HARL. That is right.
Senator D O U G L A S . N O W , when you come to inspect the banks, do you
time your inspection so that it is at the same time as the State
examiner's?
M r . HARL. W e work very closely. I n some cases we examine with
the State bank commissioner. I n most of the States by State law
there is required two examinations per year on behalf of the State
bank commissioner. That is mandatory. I n some cases we make one
examination per year for the State bank commissioner and he makes
the other one. That is on the basis of requests from the State bank



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commissioner. I f he does not make that request, and we examine a
bank by ourselves, the examinations coincide, and we call them joint
examinations. I n some cases the bank commissioner and our examiner
sign reports together. I n others the report is signed by ourselves.
Senator DOUGLAS. A n d when you serve as a State examiner you are
deputized by the State authorities ?
M r . HARL. That is taken care of by the statutes of those respective
States, which provide that in lieu of the State bank commissioner
making two examinations per year, he can make one examination himself and accept our examination, in lieu thereof, for his second one.
Senator D O U G L A S . According to my figures, of the some 9 , 2 0 0 State
banks, about 2,000 of which are members of the Federal Reserve System, you examine about 6,500 State banks, since there are only about
700 noninsured State banks ?
M r . HARL. That is right. There were, as of December 31, 1948, a
total of 14,753 banks in the country, of which a total of 13,419 were
commercial banks insured by us. The balance were uninsured banks
and mutual savings banks, some of which are insured, and some of
which are not. However, the large mutual savings banks in New
Y o r k are insured. Over a third of the mutual savings banks, which
have 70 percent of the deposits in mutual savings banks are insured.
Senator DOUGLAS. I was speaking primarily of commercial banks.
M r . HARL. A l l right. Speaking of commercial banks, you are correct, Senator. I n other words, 6,504 are not members of the Federal
Reserve System.
Senator DOUGLAS. But members of the Deposit Corporation.
M r . HARL. Yes. On that date, December 31, there were 1,924 what
we call member banks, which are State banks.
Senator D O U G L A S . S O that, of the 13,400 commercial banks in the
System, you inspect just a little short of half of the total number.
M r . HARL. That is correct, sir.
Senator DOUGLAS. But the deposits at those banks, since they tend
to be smaller banks, are about 14 percent of the total deposits?
M r . HARL. That is correct. A large percent of all deposits are i n
Federal Reserve member banks.
Senator D O U G L A S . D O you want to say anything else in your direct
statement ?
M r . HARL.

NO, sir.

Senator D O U G L A S . A S I understand it, your insurance covers the first
$5,000 in each deposit account in an insured bank and the annual premium charge is one-twelfth of 1 percent on all deposits; that premium
charge is not merely on the insured deposits, but on all; is that correct ?
M r . HARL. That is correct.
Senator DOUGLAS. What is the total in the insurance account now ?
W h a t reserves do you have ?
M r . HARL. W e have brought that, and it can also go into the committee file (June 30,1949, Report to Insured Banks, F D I C ) .
• Senator DOUGLAS. $1,138,000,000; is that correct ?
M r . HARL. Yes, sir. Y o u w i l l notice the statement of assets on
June 30 shows we hold that amount of cash and Government obligations ; and i f you go to the second page, you see the capital account,
and the total capital account and reserves comes to $1,134,213,000.
Senator DOUGLAS. What is the sum total of the annual premiums
which you collect ?



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M r . HARL. That premium varies, Senator.
Senator D O U G L A S . H O W has it been running in recent years ?
M r . HARL. O n page 21 of our annual report for 1948 you w i l l see
a picture of that. O n page 19 you w i l l see the income from year to year
since the inception of the Corporation. W e would like to call the attention of everyone to page 21, which shows the ratio of F D I C capital
surplus to deposits in insured banks is now 69 percent.
Senator D O U G L A S . Y O U mean page 20, don't you ?
M r . H A R L . P a g e 21.

Senator DOUGLAS. Page 21 is the statement of assets, but page 20
is the statement of income. I was asking about the annual income.
Y o u r figures on page 20 show annual income as of the calendar year
1948 as $146,800,000.
M r . HARL. That is correct.
Senator DOUGLAS. A n d the reserve has been growing at the rate of
something not far from $100,000,000 a year.
M r . HARL. That is right. W e call attention, on page 21, the last
column to the right, i n 1934, when the Corporation began to insure
deposits, we had a 0.73-percent ratio of F D I C capital and surplus to
deposits of insured banks. That reached an all-high point of 0.83
percent in 1938 and then receded to a low point of 0.59 percent in 1945.
I t has now gotten up to 0.69 percent as of December 31,1948.
Senator DOUGLAS. I n other words, the ratio of the reserve to the
deposits has not increased, though the capital amounts have increased ?
M r . HARL. That is correct. Percentagewise we are not i n as good
a condition as we were in December, 1938. I n other words, on that
date it was 0.83 percent. O n December 31, 1948, it was 0.69 percent.
O r a difference of 0.14 percent.
Senator DOUGLAS. These ratios which you have given are ratios of
the reserve funds to total deposits. What about the ratio of the
reserve funds to the insured deposit? Y o u insure only the first $5,000
of each account.
Mr. HARL. I n practice, Senator, and we have checked a lot of techniques over the last 15 years, we are now i n the sixth year in which
there has not been a failure of a bank from the creditor's standpoint,
or the depositor's standpoint, because what we do i n effect is give
100 percent insurance. I f a bank gets involved we immediately restore
the losses of that bank and liquidate the remaining assets.
Senator DOUGLAS. That was not my question, M r . H a r l . Y o u have
the figures of total deposits i n insured banks. B u t I wanted to get the
ratio of your reserve to insured deposits, and that involves the question
as to what is the total of insured deposits, or, to get at it indirectly,
what is the ratio of the insured deposits to the total deposits.
M r . HARL. Dr. Cramer might speak on that.
Dr. CRAMER. That requires a special study and we have made four
such studies, the last one in October 1945.
Senator DOUGLAS. Good.
Dr. CRAMER. W e are now conducting another study.
Senator DOUGLAS. What does your October 1945 figure show ?
Dr. CRAMER. I t shows that 46 percent of all deposits were insured.
Senator DOUGLAS. Therefore, that 54 percent of the total deposits
were i n excess of the first $ 5 , 0 0 0 .
Dr.

CRAMER.
99076—50

Yes.
8




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Senator DOUGLAS. Therefore, as a rough figure, you should approximately double this ratio, to get the percentage of the reserve upon the
insured account, approximately that ?
Dr.

CRAMER.

Yes.

Senator DOUGLAS. I n other words, it looks as though it would be
around 1.4 percent on the insured deposits, i f this ratio holds.
Dr. CRAMER. That is correct.
M r . WOLCOTT. M a y we have the percentage of depositors?
Senator

DOUGLAS.

Yes.

Dr. CRAMER. The percentage of depositors that are fully insured,
and both of these figures include mutual savings banks as well as commercial banks, was, on October 10, 1945, 96.4 percent. I f you would
like the commercial bank figures separate, I have those.
Senator DOUGLAS. That would be fine.
M r . HARL. I n this connection, gentlemen of the committee, we have
a questionnaire out in the banks' hands now asking for the total
number of accounts they have. W e can then give you, when this comes
back, the number of bank accounts in the banks of this country,
as No. 1; and, as No. 2, the number of accounts of $5,000 or less, and
the number of accounts of $5,000 or over.
The figure that Dr. Cramer gave just now, that 96 percent, is the
number of accounts insured in f u l l by the Corporation at the present
time.
Senator DOUGLAS. M a y I ask one question. I noticed that you said
that i n most of the cases where the banks fell into trouble that you
would resort to a purchasing of assets, mergers, and consolidations,
and pay off the depositors in full.
Now, the inquiry I should like to raise is this: Is this developing
a precedent so that, in practice, i f we should have widespread bank
failures the Government would be committed, by precedent, not merely
to guaranteeing the first $5,000 of the accounts, but guaranteeing all
deposits ?
M r . HARL. I don't think so. The question has never been raised.
Senator DOUGLAS. But it would be raised i f there were to be widespread failures. A r e you not now establishing a precedent to pay off
all of the depositors and accounts in excess of $5,000 ? Suppose that
you get widespread failure and you decide merely to assume your legal
liability. I think we can be quite certain it would be said, well, why
are you changing your policy now, after you have given f u l l protection
up to this point ?
M r . H A R L . I would like to amplify my answer in considerable detail
on that.
W e have a very excellent review board, and as fast as the examination reports come over from the Federal Reserve and the Comptroller,
or from our field, those reports are studied, the results tabulated, and
a chart is maintained on every insured bank in this country. We have
the results of those examinations twice a year. W e have set up i n our
organization three categories of banks: The banks which we think are
sound, the banks which we think are problem cases, and the very serious problem cases. When a bank reaches the serious-problem case we
immediately contact, and have had the wholehearted cooperation of
the State bank supervisors, the Comptroller, and the examining officials of the Federal Reserve System. W e endeavor to stop the erosion
right then and there, and we have been successful in doing it.



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Therefore, we think that as a result of this system we w i l l be able
to, and are very sanguine that we w i l l be able to, meet this issue as it
comes along.
Senator D O U G L A S . Y O U have been sailing in very good weather for
these last 10 years—that is, good financial weather. There haven't
been many storms. B u t suppose we were to have a depression comparable to that of 1929-33. W o u l d you be able to maintain, or do you
feel a moral obligation to maintain, 100 percent guaranty, or would
you f a l l back on the legal liability ?
M r . HARL. I n answer to the Senator's first question, we believe
that we can prove, by studies i n conjunction with the Federal Reserve
Board, the State supervisors, and the Comptroller, that as the result
of F D I C we w i l l never drift into the situation i n which we found
ourselves from 1929 to 1933.
Senator D O U G L A S . I wish you would develop that.
M r . HARL. I n these years we have developed, for example, penicillin, the sulfa drugs, and so forth. W e still have sick people; but
what I want to say is that, as compared with physical ills, we believe
that we have made great progress in the correction of our economic
ills. W e still believe i n the old adage that coming events cast their
shadows before. W e are not a bunch of shadow dodgers, but are
watching those shadows to see that they do not lengthen in front of us.
When we stop to think that the first National Bank A c t was i n
1863, and it was only 70 years old when this thing hit us in 1933, we
feel that we have made great strides in the protection of the depositors
and in the solvency of the banks, through our review system and our
examination system, from 1933 to 1949, more strides than we made i n
the 70 years from 1933 back to 1863.
I n that respect I am satisfied that we have had the whole-hearted
cooperation of the banking fraternity.
When we get into these situations, when we see credit policies
expanding too rapidly, we have had the wholehearted cooperation
of the bankers association. N o more than a year ago all of us, the
Comptroller's office, the Federal Reserve, and so forth, felt as i f the
credit policies might be expanding too rapidly. The bankers association had a credit conference; they did a splendid job.
This chart is our criterion. A s this exposure goes up our exposure
becomes greater. A s long as we watch this factor we are not going
to get into trouble. I f you notice, back in 1934, 31 percent of the
assets of banks were loans and discount, while i n 1949 only 28 percent, and i n that 28 percent was F H A paper, V A paper, R F C participation, and commodity credit loans.
Therefore, i f we watch the exposure, and i f all agencies do so, we
can never drift into the situation we were in i n 1929.
I n that connection, i f you go back to 1929, you had a tremendous
percentage in brokers' loans. There was a lot of trading on the 10
percent basis. A s you know, the Federal Reserve last year exercised
its prerogatives and is controlling the brokers' loans.
Senator D O U G L A S . D O I understand from what you are saying that
in your belief depressions w i l l be impossible in the future ?
M r . HARL. It is our belief that we can control or meet any issue
with which the banks are confronted coming from a depression.
Senator DOUGLAS. I n other words, there w i l l be no problem in the
future of bank failures ?



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M r . H A R L . I am not that sanguine. I believe we w i l l have bank failures, but we believe we can control them.
Senator D O U G L A S . H O W do you control bank failures? A r e you
saying that you think the banks of the country are now completely
stable and that we w i l l never have any widespread problem of bank
failures in the future?
M r . H A R L . I w^ould like to say this: I do not think banks or bankers
cause depressions. I don't think that, at any time, we can attribute
the last depression to the credit policies of banks or bankers.
Senator DOUGLAS. But suppose that a depression breaks out—we
won't go into the question of whether the banks cause depressions,
but it is certainly true that the banks suffer from depressions, and suppose a depression breaks out and the security of the banks is imperiled.
A r e you saying the banks won't f a i l even though the economic condition of the country is deteriorating?
M r . H A R L . I do, because the failure of the bank is determined by
the note case, and i f the note cases are policed properly, we are i n
a sound situation. The thing a bank has to meet its obligations with
comes from reserves i n cash or Government securities. A s long as
bankers keep their loans and discounts i n line, and as long as the
supervisory agencies see that they do, and that they do not unduly
expand their credit or take chances, the banks w i l l not suffer from
depression, as they w i l l contract as rapidly as the circulation goes
down.
M r . B U C H A N A N . A S to the question of coverage, the smaller banks,
according to newspaper reports, seem to be advocating an increase of
coverage from the present figure to a figure of about $10,000 to $25,000,
w hereas the larger banks seem to want to continue the present figure.
W o u l d you care to express your opinion on that ?
M r . HARL. Congressman, there has been considerable agitation by
the smaller banks to increase their coverage, for this reason: They
say the chain stores, utilities, and so forth are foreign to the town but
do business in the town. Their comptrollers watch the accounts.
When they get to $5,000, they draw down.
Take North Dakota, for example, where you have a certain chainstore operation. W h e n the deposit gets up to $5,000, they w i l l p u l l
it down and then redeposit in a metropolitan bank.
The comptrollers of these large corporations are constantly calling
the metropolitan banks for their statements and analyzing them. T h a t
is what we call smart money—wise money.
I f you go back to the previous depression, you w i l l find that as a
rule smart money, or wise money, got out, because they watched these
statements, and they sent what we call a creeper through clearings,
and you had creeping runs, because it went through chains. Y o u
didn't see a line outside the bank.
T h e country bankers feel that i f this is elevated to $10,000, that
these large accounts, like the utilities and the chain stores, and so
forth, w i l l elevate their sights to where they w i l l carry $10,000 i n
that country bank rather than $5,000. So we have considerable agitation from that standpoint.
Senator DOUGLAS. Y o u r reply raises a very interesting line O£
thought. W h a t you are saying is that runs are initiated by withdrawals by the large depositors. I believe i n your written reply, on
page 208, you pointed out that i n a group of banks studied the average



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withdrawal was 40 percent in deposits, but i n accounts of more than
$100,000 the withdrawals were TO percent, and then the percentage
withdrawals diminished as the size of the account diminished, until
when you reached accounts of less than $500, the withdrawals there
were only 6 percent.
I n other words, your statement now bears out or is i n line with
the analysis that you presented that runs are initiated by withdrawals
of large accounts.
M r . HARL. I was referring to before the inception of the FDIC..
W e state that no bank runs of any consequence have occurred since
the F D I C . I f you go back and study what happened in Detroit and
in Cleveland prior to the advent of the F D I C , you w i l l find out the
large corporate balances were not hurt.
Senator D O U G L A S . I didn't understand that.
M r . H A R L . I say that these runs, these so-called creeper runs, took
place prior to the inception of F D I C .
S e n a t o r DOUGLAS.

Yes.

M r . H A R L . Y O U see, the big difficulty, i f you go back and analyze it,
started in the larger banks, primarily i n Cleveland, and then it spread
around the lake to Detroit. This is prior to 1933.
S e n a t o r DOUGLAS.

Yes.

M r . HARL. NOW

M r . BUCHANAN. W h y wouldn't that happen again ?
M r . HARL. The reason why we don't think it w i l l happen again is
because the average corporate balance, as I said, saws off at the $5,000
level.
M r . BUCHANAN. They are siphoning off funds ?
M r . HARL. That is right. That is the reason why the country bankers want the level raised to $10,000, which evidences the confidence
that the large corporation has i n the $5,000 level. Y o u remember,
prior to the F D I C , you had to have a depository bond for State funds.
A l l States now do not require a depository bond until after they hit
the $5,000 level. When they do, they require pledges and/or depository bonds to insure their funds above $5,000.
F o r example, i n the State of Pennsylvania, the treasurer deposits
tax money i n the various banks. I think you w i l l find, Congressman,
that he does not require any depository bond or pledge of any assets
until the deposit exceeds $5,000.
M r . BUCHANAN. Has the Board taken any position about the suggested increase?
M r . H A R L . A S yet, Congressman, we have not, because we are making this study. These studies have been made periodically about every
5 years. A s to how many accounts are now in the $10,000 category or
less—in 1945, 96 percent and a fraction of the accounts insured were
$5,000 or less, and 98 percent were $10,000 or less.
So, i f you raise the coverage to $10,000, you would almost insure in
full, because our study in 1945 shows 98 percent of the accounts were
$10,000 or less, which would leave a fraction of the accounts over
$10,000.
So, i f you went to $10,000, it is safe to say that you would insure in
f u l l 98 percent of the accounts.
Senator DOUGLAS. M r . Harl, what puzzles me i n your statement is
this: Y o u have said that i n the past runs have been initiated quietly
by the withdrawal of large accounts, so-called smart money. Now, it



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is these accounts which only get very partial insurance. The account
of $100,000 only has a $5,000 insurance. What is to prevent the withdrawal of the large uninsured accounts from the big banks ?
M r . HARL. The statement I made was predicated before the advent
of F D I C .
Senator D O U G L A S . The F D I C only insures the first $5,000. Suppose there is a depression and the large depositors take fright and
withdraw, knowing that they are not insured. W h a t is going to maintain the solvency of the bank ?
M r . HARL. The large accounts today, Senator, as I explained, i n
the country banks, are frightened off.
Senator D O U G L A S . Y O U could have runs on the big banks.
M r . H A R L . A S I said, the larger corporations are constantly asking
for statements of the larger banks, and they are constantly checking
on the condition.
Senator DOUGLAS. I f you get a depression, and i f the value of Government obligations, for example, which you have treated as being
completely solid, suppose those should shrink along with loans and
discounts, and the banks find themselves with declining assets, as
compared with the deposit liabilities which they have set up through
loans, and the big depositors take fright, knowing that they are not
insured, and withdraw, what is there to protect the solvency of the
bank?
M r . H A R L . Y O U have raised a policy question there which is beyond
the entire control of the F D I C .
Senator DOUGLAS. W e are all groping.
M r . HARL. We have labored under the policy that Government securities w i l l be supported at all times. I n 1940 and 1941, when the
war came on, I was a State bank commissioner. I was assured by
people i n high places that the Government bond market would be supported. I n that connection we went to our banks and asked them to
participate i n the war effort by making certain purchases. Naturally,
the bankers who were there in 1929 to 1933, in those days, and particularly i n 1920 and 1921, when Liberties dropped to, I think, 85,
were reluctant to participate until we, as State bank commissioners,
told them that we were told that the bankers of this country would be
protected on a stabilized Government market.
Senator DOUGLAS. Was that protection a guaranty for an indefinite
period of time, world without end, or was it for a stated period ?
M r . HARL. There was no statement made as to the length of guaranty or the time involved. W e were told that the Government bond
market would be protected. A s you remember very well, i n those
early twenties, Liberties went to 85. Therefore, you know, i f you
discount 15 percent of your Government holdings i n the banks of
the country, it would materially affect their capital structure.
Senator DOUGLAS. But suppose the Federal Reserve, for example,
should decide either to end the system of support price or to lower
the support price. Where would you be then ?
M r . H A R L . I think, if that were done, that good faith would have
been broken with the banking fraternity which has supported, by large
investment, Government bonds. I don't think we could have won the
war i f the bankers of the country hadn't gone i n and bought these
bonds like they did. I understand that it cost us one-tenth of 1 percent to dispose of our Governments. The bankers rallied and bought



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these bonds. I know, frankly, that I would have not recommended
to any bank under my supervision at that time that they invest heavily
i n Governments unless there was some assurance that they would be
protected.
A s you notice in the statement, on December 31, 1948, nearly half
of the resources of the banks i n this country were i n Governments.
That reached an all-time high i n 1945 when we had a total i n insured
mutual savings banks of 63 percent, and 56 percent i n commercial
banks. I n 1945 the insured commercial banks of this country had 56
percent of their assets in Government securities.
I think that the bankers of this country believed, and had a right
to believe, that their Government would see that the bond market was
supported at par, or they would not, as trustees of these large sums and
these large deposits, have invested 56 percent of their assets i n the
securities of this Government.
Senator DOUGLAS. But this is what puzzles me further, that the move
to have the Federal Reserve either discontinue or lower the support
price on Government bonds seems to be coming, i n large part, from
the bankers, who you say should be protected from such an action.
M r . H A R L . I think, frankly, that move is coming from a very few
bankers.
Senator DOUGLAS. What bankers do you think are initiating it ?
M r . H A R L . I would not care to say at this time.
Senator DOUGLAS. W i l l you meet me behind one of these pillars after
the session is over and whisper in my ear where this movement is coming from ? Y o u may not want to say it publicly, but you should not
conceal such a secret privately. Is this a date, that we may meet
behind one of the pillars ?
M r . HARL. A t your convenience, sir.
Senator DOUGLAS. A l l right.
Well, without identifying them, have you any surmise as to the
motives of these groups, why they should want to lower the support
price ?
M r . H A R L . I can't conceive of any reason why any banker would
want to reduce the support price of Government securities. I
frankly cannot see why.
Senator DOUGLAS. It would mean an increase i n the interest rate,
would it not ?
M r . HARL. Then I would say, i f that is the case, it is a profit motive.
Senator DOUGLAS. Profit motives are not necessarily bad. The question is whether they work for the benefit of the community or not.
M r . HARL. The profit motive is, naturally, a tremendous incentive
for anything you do. I n other words, the pocket nerve is the most
sensitive nerve the average man has.
Senator DOUGLAS. W h a t you are saying is this, i f you can maintain
the price of Government bonds at par there w i l l be no great runs on
banks, and that even i f we had future depressions, you would not have
widespread bank failures, and that therefore the F D I C present policy
is competent to deal wTith the situation %
M r . H A R L . Y e s , sir.

Senator DOUGLAS. There are a lot of "if's" i n that.
M r . WOLCOTT. M r . Chairman, I don't think we have i n the record
what the Government bonds are pegged at. They are pegged over par
now, are they not ?



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M r . H A R L . Y e s , sir.

M r . W O L C O T T . D O you know the exact price ?
M r . H A R L . N O , sir. That is a matter over which we have nothing to
do. T h a t is a juatter of monetary policy which is regulated by the
Treasury and Board of Governors.
M r . WOLCOTT. Something over 101.
M r . HARL. The Open Market Committee of the Federal Reserve, i n
conjunction with the Treasury, handles that matter.
M r . WOLCOTT. W h y are these bankers advocating pegging of Governments at less than par ?
M r . H A R L . Y O U have among certain bankers, as among other people,
advocates of a free-bond market, the same as you have of a free-gold
market. I happen to come from Colorado. Out there we constantly
hear about a free-gold market. Our people advocate a free-gold
market, not because they figure gold is going down, but because they
figure gold is going up. It is the profit motive.
M r . WOLCOTT. Could we get the figures at which Governments are
pegged ?
S e n a t o r DOUGLAS.

Yes.

M r . HARL. That is controlled by the Open Market Committee and
the Treasury.
Senator DOUGLAS. They reduced it a few months ago.
M r . WOLCOTT. I do not know that M r . H a r l w i l l want to put it i n
the record, but I think we should have also the average interest rate
on Government bonds and the average yield of the banks on Government holdings.
M r . HARL. W e would be very glad to get
M r . WOLCOTT. I wonder i f we could not have that covering the last
3 or 4 3^ears, to show the increases in years and the interest rates.
Senator DOUGLAS. M r . Harl, in view of the fact that runs seem to be
initiated by the large depositors, would not a greater degree of security
be given to the large depositors and hence less danger of bank runs i f
the coverage were increased from $5,000 up either to total coverage or a
larger figure?
M r . HARL. I would say that since the inception of the Federal Deposit Insurance Corporation, either because of the confidence i n the
Corporation's ability to pay or because of psychology, there have been
no runs.
Senator DOUGLAS. M r . Harl, I would like to go back to the parable
in the Bible of the foolish man who built his house upon the sands.
The rains descended and the winds blew and beat upon that house and
it fell and great was the f a l l thereof; but the house that was founded
upon the rock did not fall.
Now, the question I am raising—and my mind is open about it—is
this: I f bank runs are initiated by the withdrawal of large deposits and
i f only the first $5,000 of these deposits are insured, what guaranty is
there, i f the country should get into trouble in the future, that we would
not have the same process repeated and the banks would crash ? Y o u
have had sunshine, but we may be going into a period of storm.
M r . HARL. I would say the old adage, " I n time of peace, prepare
for war"—we have had from the banking standpoint 10 years of remarkable peace and we have built up not only in the F D I C but the
capital structures of the banks have increased from $6,000,000,000 to
better than $10,000,000,000. Therefore, your supporting structure all



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the way along the line has been materially increased to where I am very
confident that the Federal Deposit Insurance Corporation can protect
the bank depositors. AT no time do we ever attempt to speak for the
banks.
Senator D O U G L A S . I do not want to interrupt constantly, but the
bigger the house, the bigger the fall. Samson was i n quite a large
palace, you know, and he is presumed to have brought it down.
M r . H A R L . A S you remember, Samson was a b l i n d man, and I believe the bankers of this country have their eyes wide open to conditions.
Senator DOUGLAS. Let's turn from the O l d Testament to the New
Testament. I use this rock and sand analogy. The point I am trying
to get at is this, and I repeat: I f bank runs are initiated by the withdrawal of large accounts and i f only the first $ 5 , 0 0 0 is insured, what
is to prevent this from happening again ?
M r . HARL. I n the first place, i n the last 15 years the Federal Deposit
Insurance Corporation has eliminated large runs.
Senator DOUGLAS. Because there has been no doubt about the solvency of the system, but suppose you do get a serious depression. Y o u
have been i n the period of inflation, rising prices, f u l l employment—
and we hope, so far as f u l l employment and rising production is concerned, that w i l l continue, although not rising prices—but suppose we
were to get into a period of declining production, declining employment, f a l l i n g prices, shrinkage of assets, fear, and panic. Now, would
your house stand when only the first $ 5 , 0 0 0 is insured?
M r . HARL.

Y e s , sir.

Senator D O U G L A S . I S this an affirmation or a hope ?
M r . HARL. T h i s is based on 14 years of operating procedures.
Senator D O U G L A S . I say, with all deference to you, M r . H a r l , I say
the experience of 14 years of sunny weather is no guaranty that i n a
period of storm you necessarily can stand.
M r . HARL. T h e chart here on this last page—I am trying to illustrate by that, Senator, our exposure is entirely i n the bond accounts
and the discounts. Therefore, i f the Government bond market is
maintained at par, the Federal Deposit Insurance Corporation, i n our
opinion, can meet any strain on the banking structure.
Senator DOUGLAS. Then your hopes are based upon the continuance by the Federal Reserve B o a r d of the present price-support program for Government bonds ?
M r . HARL. M y statement is predicated on what the bankers of this
country were led to believe by those i n high authority at the time they
made these tremendous investments i n Government securities.
Senator DOUGLAS. Suppose the Federal Reserve B o a r d were to take
the position that these assurances d i d not bind them i n perpetuity and
that while they had followed this policy for a period of years, now it
was time to allow "natural forces" to determine the price of bonds.
The price of Government bonds, let us say would fall, we do not
know how much they would fall. Y o u would not be so certain that
the banks could stand up then, would you?
M r . H A R L . I f you had $ 5 0 , 0 0 0 , 0 0 0 invested i n Government securities and you were informed or you picked up a rumor that that market
might be 90 cents next week, as based on the dollar today, you would
immediately start selling.
Senator DOUGLAS. Naturally.



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M r . H A R L . SO the old case of the law of supply and demand goes
into gear. Now, whether it is Government bonds or the free gold market, i f you have more gold offered than you have purchasers, you naturally are going to have a sliding market. Theref ore, I think it is most
essential that those who are handling our monetary policies and credit
policies of this country maintain Government bonds not only from a
banker's standpoint but for those individuals who took their savings
and put them into Government bonds, and I think they are entitled,
just as much as the $5,000 depositor is guaranteed, to have their bonds
guaranteed at par.
Senator DOUGLAS. A l l I am trying to find out is this: Is not your assumption that your present guaranty w i l l maintain the system based
upon a further assumption that the Federal Reserve Board w i l l maintain the support on Government bonds ?
M r . HARL. That assumption is correct. I n insurance you always
have something that might happen.
Senator DOUGLAS. Suppose, however, your assumption concerning
the Federal Reserve Board is wrong and that for reasons, whether
good or bad, the Federal Reserve Board decides to remove the peg
either completely or partially. W o u l d you have as much confidence i n
the insurance system taken by itself to maintain the solvency of the
banks as you otherwise would ?
M r . HARL. I n that case you would have to have dollar for dollar for
everything you guaranteed, because i f Government bonds are not
worth par you would then have to have—if you guarantee anything,
you would have to have almost the equivalent in cash.
B y that same token, i f you look at our financial statement, you w i l l
note on this assumption that you mentioned there, you w i l l also see
what would happen to the Federal Deposit Insurance Corporation,
which has roughly $1,000,000,000 invested i n Governments, and I
will say the Congress, when they enacted this law, definitely stated
we had to invest our money i n Governments.
Therefore, it would seem that the Congress at that time felt as i f
the most gilt-edged and safest investments i n the country were Government securities. B y the same token, i f you w i l l pull the ping, so
to speak, on Governments, you would not only hurt every man and
woman who invested in Governments but you would likewise do a
great injustice, whoever pulls that plug, to this Corporation, because
i f you look at the statement you w i l l see the investments of the Corporation are primarily, and statutorily so, i n Government securities.
So, getting back to that assumption, i f this market slides off, it
would not only hurt the banks per se but the insurance corporation
and every man, woman, and child i n this country, including some
large trust funds.
Senator DOUGLAS. Here is the point I am trying to get at, and I
am afraid I have not done any too well i n the form of the questions I
have asked.
Y o u have no power over the Federal Reserve Board to determine
their policy, but you do have power to make recommendations concerning F D I C policy. Now, since you cannot control Federal Reserve
policy, should you not take into account the possibility that the Federal
Reserve System may remove the price support or reduce the price
support on Government bonds? I n which event, you would be i n
trouble. Therefore, to guard against that trouble, might it not be ad


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disable to increase the coverage of insurance as a hedge against such
a possibility occurring ?
M r . HARL. Sir, i f we increase the coverage—and we are not opposed
to it, as yet we have not taken a position opposed to increased coverage—but i n the event we increase coverage to $10,000 and the Federal
Reserve or the other authorities involved should remove the support
of the bond market, the very foundations of what this Corporation is
predicated on, entire resources of a billion dollars, would be affected
by any such policy.
I f we had them insured—if we had the banks insured i n f u l l and
the reserve which we are utilizing to pay those was depreciated by
some action, manifestly that would curtail our ability to pay because
we manifestly would not be i n a position—of course, it would not be
policy to carry a billion dollars i n cash; so Congress decreed wisely
that we invest i n Governments, which we have done.
Now, i f they remove the support, suppose you left the coverage to
$10,000 on the one side and remove the support on bonds on the other,
you w i l l find this Corporation has a greater liability with less ability
to pay.
M r . BUCHANAN. W o u l d there be inflationary tendencies i f Congress
were to increase the coverage to $10,000. T e l l us what it would do to
country banks to increase bank deposits there and the potential availability of bank credit.
M r . HARL. Congressman, I do not think that increasing the insurance coverage to $10,000 would be inflationary at all. I think it might
cause a shifting of deposits. It would have the effect
M r . B U C H A N A N . N O W , a siphoning off of funds, and i f funds remained with country banks, it would be an increase i n remaining bank
deposits.
M r . HARL. I t w^ould not be an increase in deposits in total, but there
would be a shifting of deposits.
Mr. BUCHANAN. Which would cause an increase i n bank credit.
M r . HARL. The deposit level would be the same. I f you have
$142,000,000,000 i n deposits and the corporation or the operator has
$5,000 in 50 banks over the country and the rest of it i n a metropolitan
institution, the chances are that if you raise the coverage to $10,000,
he would not consolidate his overage in a metropolitan bank.
M r . BUCHANAN. It would cause a shift?
M r . HARL. That is our answer. Y o u would have a shifting of deposits. Y o u raised a question a minute ago, Senator Douglas, about
the larger corporation. The larger corporation draws its money off
in many cases to the metropolitan bank, because they are insured up to
$5,000, but as you well know, coming from Chicago, the directors and
the boards of directors of these larger metropolitan banks are made up
of those corporation officials from the corporations in the city; so they
are on the inside of their own bank.
Senator DOUGLAS. What conclusion do you draw from that ?
M r . HARL. The conclusion is that you can watch much more closely
the money i n your pocket than you can the money in Congressman
Wolcott's pocket.
Senator DOUGLAS. Does that facilitate withdrawals or impede withdrawals ?
M r . HARL. It would depend entirely on how Congressman Wolcott
wants to invest your money.



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Senator DOUGLAS. Does that impede withdrawals or facilitate
withdrawals ?
M r . HARL. That is a policy Congress would have to determine.
M r . B U C H A N A N . N O W , as to the premium rate, what is your position
on the reduction of the premium rate?
M r . HARL. W e are endeavoring to analyze one thing, the premium,,
as to whether or not the premium should remain as it is if your coverage
goes up. Manifestly, i f you increase coverage from $5,000 to $10,000, it
would seem by all rules of exposure, that your premium should either
stay in status quo or be increased.
Therefore, we believe the premium or the so-called assessment is
tied very closely to the increase in coverage.
A s Dr. Cramer stated a few minutes ago, we have a questionnaire out
to all banks asking for the amount of deposits in total and the number
of depositors. Likewise, the number of depositors, $5,000 or less,
$10,000 or less, and so forth.
It would seem from the 1945 questionnaire that i f you go to the
$10,000 bracket, you w i l l then insure in f u l l 98 plus percentage of accounts.
Senator DOUGLAS. But the question is, W h a t percentage of deposits
w i l l you insure % The present insurance, which covered 96 percent of
the accounts, only insured 46 percent of the deposits.
M r . HARL. That w i l l also be determined by the questionnaire.
Senator DOUGLAS. M r . Harl, I was interested i n your statement that
the Corporation took no stand on increase in coverage, which you have
made verbally, and then I turned back to page 209, i n which you made
a statement on this, in which you said, and I quote:
Therefore, we are of the view that the Corporation, under the present insurance coverage, is making a maximum contribution to f u r t h e r i n g the purposes of
the Employment A c t and i n this respect there w o u l d be no benefit to be gained
i n changing the coverage of deposit insurance.

Now, these two statements of yours seem to be i n conflict. I am not
interested in indicating conflict or putting you on the spot, but I am i n
some doubt as to which represents your point of view.
M r . H A R L . A S I said before, the matter is being predicated on the
results of this last questionnaire. The answers here were predicated
on the questionnaire that was gotten out i n 1945.
Senator DOUGLAS. Then do I understand that the Corporation is
open-minded ?
M r . H A R L . I t is.

Senator DOUGLAS. O n this question of whether we should raise the
coverage of the $5,000 limit ?
M r . H A R L . Y e s , sir.
Senator D O U G L A S . Y O U are not opposed to it ?
M r . H A R L . N O , sir. W e are open-minded all

the way through.
W e are working with this questionnaire. The savings banks of this
country as well as commercial banks have an F D I C committee, and
they are working with us, and anything that we come to you gentlemen with or anything that you gentlemen come to us with after this
questionnaire comes in, we can discuss more intelligently than we can
today, because our answers here are predicated on the last study
we made.




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M r . WOLCOTT. I wonder i f your 1945 study shows what percentage
of the deposits would be insured had you insured the first $10,000
intoto?
M r . CRAMER. F i f t y percent approximately.
M r . WOLCOTT. About 4 percent more than shows under the $5,000
insurance ?
M r . CRAMER. I was speaking of the commercial banks only.
Senator DOUGLAS. Then, i n other words, the deposits over $10,000,
which form most of the residue of deposits over $ 5 , 0 0 0 — —
M r . WOLCOTT. Over $10,000. H e said i f $10,000 were covered.
Senator DOUGLAS. Fifty-four percent are over $5,000 and 50 percent over $10,000; so that the overwhelming proportion is in the group
above $10,000.
M r . HARL. W e have some cities out West where you have some small
country banks. They in turn deposit, we w i l l say, i n Grand Junction,
Colo.; Grand Junction deposits i n Denver; Denver deposits i n Chicago ; Chicago deposits i n New York.
Senator DOUGLAS. I f you eliminate the interbank deposits and dealt
only with the deposits of individuals and corporations
M r . HARL. That is what we are going to do. W e w i l l take entire
bank deposits, and after you do that, it boils down to: What are the
real honest-to-goodness deposits in this country ?
Senator DOUGLAS. D i d these 1945 figures include interbank deposits
or were they deposits of individuals and corporations ?
Mr. HARL. W e used the entire amount of deposits at that time. W e
are going to eliminate -that and get right down to what are deposits
without interbank deposits.
Senator DOUGLAS. That would show, of course, a much higher percentage in the $5,000 to $10,000 limit of total primary deposits.
M r . HARL. That is right. I t w i l l show that 98 percent of your
depositors on the basis of $10,000, that 98 percent of your depositors
are insured i n full, and those 2 percent which are not fully insured
come in this category of interbank deposits as well as corporate
deposits.
Senator DOUGLAS. A r e you open-minded on the question of increasing the coverage for the savings and loan associations as well as the
commercial banks ?
M r . HARL. We have not made a study of it, but the savings and loan
associations do not come under our supervision.
Senator DOUGLAS. But the Administrator of the Housing and Home
Finance Agency, as I understand it, has recommended an increase
of coverage to $10,000 i n that type of institution, and I wonder i f you
have given any thought to that.
M r . H A R L . A S you know, the mutual savings banks have a ceiling on
the amount of deposits they w i l l accept. I n New Y o r k their ceiling
is $7,500. Therefore, we are interested i n going along with what the
mutual savings banks recommend.
Senator DOUGLAS. What do you mean by "ceiling" ?
M r . HARL. They do not take accounts larger than that on which
they pay interest and the mutual savings banks are very much interested in $7,500 accounts, because as you know, we have some tremendously large mutual savings banks. They feel there should be a ceiling
of $7,500 on the coverage. That gives them 100-percent protection.




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M r . BUCHANAN. Suppose the $10,000 figure were suggested for savings and loan, what would be your position? W o u l d you approve
or take the position against it ?
M r . HARL. W e would not w^ant the savings and loan associations
to have any greater advantage than the savings banks, because, as you
know, when you put your money in the savings and loan association,
you get a share or ownership interest. When you put your money i n
a bank, you have a debtor-creditor relationship. There is quite a
difference there.
Senator DOUGLAS. M r . H a r l , i n your written statement, on pages
212 and 213, you opposed the Hoover Commission proposal that F D I C
be placed under the supervision of the Treasury Department on the
ground that it was a mutual insurance fund and that it should be
independent of the Treasury or any other agency or department.
Now, as you know, the Comptroller of the Currency is also under
the Treasury, but the deputy comptroller testified yesterday that the
Treasury had never attempted to control its policies or to go into the
matter as to whether or not a given bank was solvent.
I think it is on record that the examiners for the Comptroller of
the Currency are about as incorruptible as any set of men i n the
country.
Now, are you afraid that the integrity of your examinations would be
impaired i f you also went into the Treasury, maintaining the same
degree of independence in the examinations that the comptroller's
staff maintains ?
M r . H A R L . T O begin with, we choose to stand on our replies here
on the pages you mentioned. No. 2, we have never impugned the integrity of any examiner, be he comptroller, Federal Reserve, and/or
State supervisor.
Senator DOUGLAS. Well, you are much more charitable than I am
on that point, because I have had enough experience with State banks
to know that supervision in the case of State banks is not always of
an extremely high level; not always.
M r . H A R L . A S a matter of judgment, we think, and not integrity.
Senator DOUGLAS. Well, the national bank examiners certainly have
a very high reputation for integrity and competence. W e may disagree with them as to whether a sound banking system is made up solely
of sound individual banks or whether sound individual banks are not
also affected by the system as a whole. W e may disagree with them on
that point of policy, but no one, I think, can question their technical
competence or integrity, and I wondered i n view of that fact, just
why you did not want to be put in a status comparable to them under
the Treasury?
M r . HARL. The comptroller charters national banks, as you well
know.
S e n a t o r DOUGLAS.

Yes.

M r . HARL. Then you open up the whole matter of States' rights, because you would have the control of Federal chartering policies vested
i n the same group that does insuring. A s you know, we approach each
and every insurance situation on its own merits. The commissioner of
New Y o r k charters a bank, and then i f the bank desires and wants insurance, it is entirely voluntary. The bank can apply for insurance
and we make the examination, and i f we find a bank meets our standards, it is insured.



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I would like to say i n that respect that of the 12 largest banks i n
New Y o r k City, and they are large, nine of them are State-chartered
banks.
Senator DOUGLAS. Does your reply boil down to this: That you think
i f F D I C went into the Treasury, that the independence of the State
banking systems might be endangered ?
M r . HARL. I think you w i l l find the 48 State banking commissioners
likewise share that view.
Senator DOUGLAS. Then it is your view ?
M r . HARL. I t is my view that the Federal chartering authority and
the insuring authority should not vest i n the same group.
Senator DOUGLAS. What I am trying to get at is this: D o you think
i f F D I C went into the Treasury that that might be the camel's nose
under the tent, i f I may use weighted language, the camel's nose under
the tent to extend added Federal control over the State banks ?
M r . HARL. I would think that would be a pencil i n the dike.
Senator DOUGLAS. I f we may get away from these figures of speech,
I take it that is what you do think, that it would be a possible prelude
to added Federal control over State banks.
M r . H A R L . I do, sir.

Senator DOUGLAS. We finally get that point established. W h y do
you feel that?
M r . H A R L . A S I said before, our answers' are given here on this questionnaire. That is No. 1. No. 2
Senator DOUGLAS. Well, I read your reply last night and I may have
been somewhat tired. I gathered that you were opposed to it, but I
did not quite gather why you were opposed to it, and I am a little bit
fresher this morning and probably could understand these reasons
better if you were to repeat them.
M r . HARL. I can say it in a very few words. W e do not believe that
the Federal chartering authority should vest with the insuring group
or vice versa, We do not believe the insuring group should have the
power to charter. We believe the two should be separate and apart.
Senator D O U G L A S . I do not think the Hoover Commission proposed
that you be given the power to charter State banks. A r e you afraid
that you would have the State system wiped out i f F D I C came i n the
Treasury and that you would become the chartering agency or Comptroller of the Currency ?
M r . HARL. We feel if the Federal chartering authority were the insuring authority, that it would be a step toward eliminating the dual
system of banking.
Senator DOUGLAS. I do not see that the chartering authority would
be involved at all.
M r . HARL. It is very much involved, sir.
Senator D O U G L A S . I do not see how it would be involved at all in
your transfer to the Treasury. Chartering authority would still, i n
the absence of other legislation, remain in the hands of the States.
M r . HARL. The chartering authority for a State bank would still
remain in the hands of the State, but the chartering authority for the
national banks
Senator DOUGLAS. That is already there.
^ M r . HARL. It is, but the F D I C is not there. Suppose you place the
Federal Deposit Insurance Corporation under the same authority and




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the same policy operating group that does the chartering of national
banks you would find that you would have a conflict immediately.
Senator D O U G L A S . N O W , you are speaking not of State banks, but of
national banks.
M r . HARL. That is right.
Senator DOUGLAS. A n d you want to have one agency to charter and
another agency to insure?
M r . HARL. That is right.
Senator DOUGLAS. W h y do you want that, aside from the well-known
American desire for checks and balances and distributing authority
all o\er the lot, so that A watches B and then i f anything goes wrong
can say that it is B's fault?
M r . H A R L . Y O U have in this system
Senator D O U G L A S . Y O U see, we in Congress would like to get away
from this "Button, button, who's got the button" game and be able to
find who is responsible, because whenever we want to put someone
on the mat—that is a polite term—and find out who is responsible,
the responsibility is always shifted to someone else.
So that frequently Congressmen feel that they are being exposed
to an administrative shell game in which the pea is always underneath
another shell, and the civil servants face one with a frozen face saying
it is someone else's responsibility; and, as a result, we feel frustrated
and that at times may account for the impolite behavior of Senators
and Congressmen toward administrative officials.
M r . WOLCOTT. A n d also toward each other.
Senator DOUGLAS. Sometimes the frustration laps over.
M r . HARL. Neither the Comptroller of the Currency, the Governors of the Federal Reserve Board, or the "directors of the Federal
Deposit Insurance Corporation are under civil service and, therefore,
they are subject to removal.
Senator D O U G L A S . I am sorry, who is under civil service ?
M r . HARL. None of the bank supervisory authorities.
Senator DOUGLAS. That is, none of the officials of the Comptroller
of the Currency?
M r . HARL. The Comptroller of the Currency is not, the Board of
Governors of the Federal Reserve System are not, and the directors
of the Federal Deposit Insurance Corporation are not.
Senator DOUGLAS. A r e your employees under civil service ?
M r . HARL. W e are by Executive order.
Senator DOUGLAS. W e l l ?
M r . HARL. But the policy end of it, the staff naturally follow policy
as laid down by the Comptroller or by the Board of Governors of the
Federal Reserve or by the F D I C directors, and they are all
Senator DOUGLAS. A r e you saying that the purity of your employees would be contaminated by their being brought into the Treasury because the bank examiners are not under civil service ?
M r . H A R L . I am not implying any such thing, but you made the
statement, i f the record is correct, that the Congress is sometimes
frustrated by the acts of civil servants and also by acts of the bank
supervisory authorities.
Senator DOUGLAS. Not bank supervisory authorities—civil-service
employees i n general. It is a matter of genus rather than species.




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M r . H A R L . I would like to get down to the three or four bank supervisory agencies, and we did not know that we had ever frustrated the
acts of Congress.
Senator D O U G L A S . I did not say you had frustrated the acts of Congress. I say civil servants frustrate Congressmen. I sometimes think
the first is true also.
M r . W O L C O T T . M a y I suggest, Senator, that after you have been
here 10 or 12 years you do not get frustrated about anything. Y o u get
the rough edges worn off, and you take a good many things for
granted.
Senator D O U G L A S . That may be the trouble.
M r . W O L C O T T . Y O U build up an immunity to frustration.
Senator D O U G L A S . That may be the trouble. I think a healthy frustration is very good, but the objects of frustration should be removed.
New ones w i l l develop. Go ahead.
M r . H A R L . Sitting on your left and sitting on your right are two
Members of the Congress, and I believe they w i l l testify that so far as
the Federal Deposit Insurance Corporation is concerned, we have endeavored at all times to work just as closely as possible with the Congress and with their respective committees. Is that not true ?
M r . B U C H A N A N . It is true, M r . H a r l .
M r . W O L C O T T . I concur.
Senator D O U G L A S . I am sorry, M r . Harl, my attention was diverted.
M r . H A R L . I just asked the two members of the committee i f we have
not at all times as members of the Corporation and as individuals endeavored to work closely with them on matters of policy as well as
procedure.
M r . B U C H A N A N . M y affirmative "yes" was emphatic. I do not know
whether M r . Wolcott's was as emphatic as mine.
M r . W O L C O T T . I confirmed it without going into conference about it.
Senator D O U G L A S . Y o u r virtue has been affirmed by my two colleagues, W e are not trying to put anyone on the spot, but we are
trying to work our way through a maze of Government departments
and policies, and so forth, and try to integrate them, which is presumably the function of the legislative body.
I take it from your replies that you do not want to go into the
Treasury, but as I say, I also take it that your reason for it is very
similar to the little poem by Henry Wadsworth Longfellow, which he
wrote as a young man:
I do
The
But
I do

not l i k e you, D r . F e l l
reason w h y I cannot t e l l
this I k n o w a n d k n o w f u l l w e l l
not l i k e you, D r . F e l l .

I n other words, you do not want to go into the Treasury.
M r . H A R L . M a y I ask you: Have you asked the Treasury whether
they would like to have us or not ?
Senator D O U G L A S . N O ; they are going to come later, but we are exploring the possibilities of marriage between you two gentlemen.
M r . H A R L . I believe marriage is a contract which requires the assent
of both contracting parties.
Senator D O U G L A S . Not necessarily, not in this case, because it so
happens that the legislature is still supreme in theory in this country,
and we can compel, i f we should choose to do so, the combination,
even though the two parties did not choose.



126

MONETARY,

CREDIT, AND FISCAL

POLICIES

M r . HARL. A shotgun wedding?
Senator DOUGLAS. W e sometimes perform shotgun weddings.
Now, I take it that you are a very strong believer i n the dual banking system. That is, the system of State banks i n addition to the
system of national banks.
M r . H A R L . I am a strong believer and a supporter of the dual system of banking.
Senator DOUGLAS. T h a t is really 49 systems of banking, is that not
right, because you have 48 States and the Federal Government, and
rules among the States are not uniform.
M r . HARL. W e might expand it and call it 51, then.
Senator DOUGLAS. Yes. W h y do you believe i n that ?
M r . H A R L . T would say that as compared w i t h other countries, it
has been successful; I think the greater number of banking systems
that you have i n the country, the greater protection you have from
nationalization or centralization of banking and credit and, after all,
that credit is the lifeblood of this country.
Senator D O U G L A S . I would as a follower of Andrew Jackson—I
would agree it would be very dangerous to have the lending facilities
of the country concentrated, but you could still have the lending
facilities diffused but all the banks members of one system.
L e t me ask you a question about the percentage of failures under the
State banking systems and the percentage of failures of national banks.
Have you ever collected figures on that point ?
M r . HARL. W e have, but I think it would be more important not to
deal i n percentages. I think it would be more important to deal i n
dollar volume.
Senator D O U G L A S . N O ; because the State banks are the small banks,
so that i f you dealt i n dollar volume, you would not have a picture of
the comparative risk of failure of the two systems.
Now, has anyone ever collected figures on the relative percentage of
failures among State banks as compared with National banks ?
M r . HARL. W e would be very glad to get them, but I still go back
to say
Senator DOUGLAS. Say the last 20 years. Go back to 1929 i n order
to include the stormy years as well. M y own impression, subject to
check and correction, is that the percentage of failures of the State
banks is very appreciably in excess of the percentage of failures among
national banks and that the percentage of deposits i n State banks
which are lost through failure is much greater than the percentage i n
nationals. That is a simple fact, and I presume it is available.
M r . HARL, I t is available.

M r . WOLCOTT. M a y I make an observation, what I consider an interesting observation along that line: T h a t i n Michigan at the time of
the bank closings, there were twenty-some-odd private banks being
liquidated as the owners of them died and were being dissolved otherwise.
The private banks are under no supervision at all. They are strictly
on a local basis, dependent entirely upon the integrity of the manager
of the bank and his judgment. A very strange thing happened i n
Michigan.
W h e n all the other banks throughout the United States closed, these
private banks were the only ones who remained open, and I think the




127 M O N E T A R Y ,

CREDIT, AND FISCAL

POLICIES

record w i l l show that there has not been a dollar lost i n any of these
little private banks for over 20, 25, or perhaps 30 years.
Senator D O U G L A S . I was not speaking of the private banks, which
are not subject even to State inspection and examination, but I was
speaking of the State banks which are subject to State rules, not national rules, and those State rules are generally much less, or, rather,
the rules for State banks not members of the Federal Reserve System
are much less stringent.
M r WOLCOTT. T h e point I wanted to make was that the solvency
or liquidity or soundness of the bank does not always depend upon
the quality of the examination. I t depends largely upon the efficiency
and integrity of the management.
Senator DOUGLAS. W e l l , I would agree that it does not always depend upon that, but I would say that the rules concerning assets are
certainly one factor i n determining the solvency of banks.
Here is a statistical fact that can be settled one way or the other.
I would like to have M r . Chandler, who is adviser t© our subcommittee, prepare material on this point and have it checked by the Comptroller of the Currency and by your office.
M r . WOLCOTT. W o u l d you want to bunch all nonmember banks into
one package, or would you want to break it down by States, because
State laws vary tremendously ?
Senator DOUGLAS. W e could have subdivisions to indicate the States
which have been lax, but I think it would be very interesting to get
figures on national banks, on State banks which are members of the
Federal Reserve System, and on State banks which are not members
of the Federal Reserve System.
D o you have those, D r . Cramer ?
M r . CRAMER. I thought you might be interested i n these figures.
W e have through December 31, 1948, 15 years' experience. W e have
aided 407 banks, a total of 407 banks.
Senator DOUGLAS. F a i l e d ?
M r . CRAMER. W e can very easily supply you w i t h those, showing
how many of those were national banks and how many
Senator DOUGLAS. A n d the deposits ?
M r . CRAMER. A n d b y years.

Senator DOUGLAS. A n d the percentage of those deposits of the
total deposits of the category of banks i n question.
I n addition to that experience, I would also like to get the experience of 1929 to 1933, which is the real period of storm and stress.
(The information referred to above, furnished by the F D I C , is as
follows:)
I n the f o l l o w i n g table the data since the beginning of deposit insurance are
shown not oaly for the entire 16 years but also for the first and second 8-year
periods. D u r i n g the first of these periods, the suspended insured banks were
largely banks w h i c h were reopened after the banking holiday i n the expectation
that they w o u l d recover successfully, but proved unable to do so. I t should
be noted that during the past 8 years there has not been, as was the case formerly,
a significant difference between the failure rates of the various classes of banks.
W e believe this is attributable to the great improvement w h i c h has been brought
about i n the examination and supervision of State banks. Since M a y 1944 no
insured bank has been placed i n receivership; a l l insured banks i n such financial
difficulty that closing was necessary have been merged w i t h the assistance of the
Federal Deposit Insurance Corporation.




128
Number

MONETARY,
and

deposits

CREDIT,

AND

FISCAL

of suspended
commercial
since 1865

POLICIES

banks

Commercial banks

for

selected

periods

Insured commercial banks i

1865-1920
(56 years)
Number of suspended banks:
Total
National banks
Other members Federal Reserve System
Not members Federal Reserve System.
Deposits of suspended banks (millions of
dollars):
Total
National banks
Other members Federal Reserve System.-.
_
Not members Federal Reserve System.
Average annual number of suspensions per
100 operating banks:
Total
National banks
Other members Federal Reserve System
Not members Federal Reserve SystemAverage annual deposits of suspended
banks per $100 of deposits in operating
banks:
Total
National banks
__
Other members Federal Reserve System. . Not members Federal Reserve System.

1921-33
(13 years)

1934-49
(16 years)

3,767
733
2

14,807
2,713

410
70

369
51

41
19

592
11, 502

22
318

18
300

4
18

8,453
2,798

527
105

464
70

63
36

1,464
4,192

188
234

176
218

11
16

4.37
2.74

0.19
.08

0. 33
.12

0.04
.05

3. 49
5.16

.09
.29

.20
.51

.03
.03

$1. 52
1.10

$0.04
.01

$0.12
.03

.05
.14

.14
.45

()

3,034

1,180
324
2

()

865

(3)

0.32

(3)
$0.25
.14
.35

.95
2.86

1934-41
(8 years)

1942-49
(8 years)

$0.01
.01
.004
.01

1 To Nov. 15,1949. Includes banks merged with thefinancialassistance of the Federal Deposit Insurance
Corporation.
2 For 1914-20 included with banks not members Federal Reserve System.
3 Not available. Deposit data for operating State and private banks during a substantial part of the
period, 1865-1920, were derived from tax records. Comparable information on the number of those banks
is not available.

Senator D O U G L A S . N O W , i f it were to be shown
M r . W O L C O T T . Be careful about that, because I am not so sure but
what during that period there were many more Federal banks went
under than State banks.
Senator D O U G L A S . I do not have an idee fixe on this. I f it should
develop there were more Federal failures than State failures during
that period, I want to find it out. I am not starting out with the
assumption
M r . W O L C O T T . I assumed you wanted a little more concentration of
power on the part of the Federal Government over banking.
Senator D O U G L A S . I am an inquirer after truth rather than one who
seeks to impose a policy. I am sure you w i l l give me credit for that.
M r . W O L C O T T . I have up to the present time. Y o u have not done anything yet to cause me to change my mind in that respect.
Senator D O U G L A S . I am delighted that thus far I h&ve not lost
prestige with you. I should feel badly i f that were to occur.
M r . B U C H A N A N . O n the question of bank reserves, M r . McCabe i n
his statement from the Federal Reserve Board proposed legal reserves—proposed on page 61 here in his statement that the legal-reserve
requirements of commercial banks should rot depend on whether or
not the banks were members or nonmembers of the Federal Reserve.
I n short, the Federal Government should prescribe reserve requirements for all banks.
Now, since you are an advocate of the dual system of banking, how
do you feel about raising the reserve requirements of State banks ?



129 M O N E T A R Y ,

CREDIT,

AND

FISCAL

POLICIES

M r . HARL. W e are very much i n favor of raising the reserves of State
banks, but I think you w i l l find, i f you take all the deposits and add
them up, you w i l l find that better than 75 percent of the State bank
supervisors have reserve requirements equal to or better than the Federal Reserve requirements. F o r example, i n the State of Colorado any
bank which is a depository bank has to carry at all times and has had
to carry since 1927 at least 25 percent reserves.
I n other words, to rephrase this answer, Congressman, I would say
that the State laws and/or the regulations promulgated by the State
bank commissioners in those States having at least 75 percent of the
total bank deposits, their reserve requirements are equal to or greater
than those presently required by the Federal Reserve System.
M r . BUCHANAN. I was under the impression that Federal Reserve
requirements ran on the rough of about 15 to 22 percent; whereas the
average of the State bank reserves was around 10 to 12 percent.
M r . HARL. I f you go back into the situation in the States of New
York, New Jersey, Connecticut, and a great many other States, the
bank commissioner by promulgation has always insisted that the reserves of his banks run coincident with or coincide with the requirements of the Federal Reserve, and in other States it is fixed by statute.
M r . BUCHANAN. I n how many cases ?
M r . H A R L . I would not know the number of cases.
M r . BUCHANAN. I was thinking in terms of State statutes rather
than administrative regulation of the State banking commissioner.
M r . H A R L . I think we can get the answer to your question in probably
1 hour.
M r . B U C H A N A N . I would like to see it in the record.
M r . HARL. W e w i l l get the answer and have it i n for the record.
M r . B U C H A N A N . I wish you would.
(The information referred to above is as follows:)
Reserve

requirements
of State commercial
banks and trust companies,
deposits
(demand and time), Dec.
31,19481

by kind

of

[Percent of deposits specified]
Uniform
reserve
requirements on all
deposits 2

State

Alabama
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
_
__ _
District of Columbia
Florida _ _
Georgia
Idaho
Illinois 4
Indiana
Iowa
Kansas,.
Kentucky
Louisiana
Maine.
Maryland
Massachusetts
Michigan
Minnesota

See footnotes at end of table, p. 130.




12, 15, 18---.

15, 25

20
15

.
___

12

Demand
deposits 2
15
15, 20

- 15, 20, 50

.

Different reserve
requirements on—

_

Time
deposits 2
4.
10.3
5.3

1
6
1
6
22

0.3
m.
7H.

1
5

5.

1 34
2,
7, 1
0
121$, 20,25—
7, 1
0
20
1
4
16
15,20 ..

3.
3.
5, 10.
3.
0.
6.
6.
0.3

12, 15

5.

130

MONETARY,

CREDIT, A N D F I S C A L

POLICIES

Reserve requirements of State commercial banks and trust companies, by kinds of
deposits (demand and time), Dec. SI, 19481—Continued
Uniform
reserve
requirements on all
deposits 2

State

Mississippi
Missouri
___
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York _ .
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas _ __ - _
Utah
Vermont5
Virginia
Washington
West Virginia
Wisconsin
Wyoming

10, 15

__

15, 25
_
.
_

__

12

__
___

__
_

17H

...
__ ___
__

_
15

_

12, 20

Different reserve
requirements on—
Demand
deposits 2
15, 25
15, 18

. .

Time
deposits 2
7, 10.
3.

15,20

5.3

15 .
15

5.
3.

14, 20, 26-.-- 7H.
15
5.
10
5, 10.
15
10.
15, 18
5.
15
5, 10.
14
6.
15
0.3
7
3.
10 _
15, 20
15, 20
20
10

3.
5.
5.3
6.
3.

10

5.

20

10.3

1 In most cases these are the rates prescribed in the State law itself. Where the law empowers banking
authorities to change reserve requirements, the rates actually in effect on Dec. 31,1948, were ascertained by
correspondence or otherwise.
2 Where two or three percentages are shown, the second and third apply to banks designated or approved
as reserve depositaries, or to banks in central reserve or in reserve cities, specified cities, cities with specified
population, etc., as follows:
Arizona: The 20 percent requirement applies to banks in places with population of 50,000 or more.
Arkansas: The 20 percent requirement applies to banks designated as reserve agents; 50 percent to banks
in places with less than 1,500 population with capital of $10,000 or more but less than $25,000.
California: The 18 percent requirement applies to banks in places with population of 100,000 or more; 15
percent to banks in places with population of 50,000 to 100,000.
Colorado: The 25-percent requirement applies to banks designated as Reserve banks.
Iowa: The higher requirement applies to banks in Reserve cities (designated as such under the Federal
Reserve Act).
Kansas: The 20-percent requirement applies to demand deposits due to banks in State banks. For all
trust companies, the reserve requirements are 25 percent of demand and 10 percent of time deposits, but
there are only 4 trust companies (with little or no deposits) in the State.
Kentucky: 1 percent of demand deposits for central Reserve city banks, but there never has been a central
3
Reserve city in the State.
Massachusetts: The 20-percent requirement applies only to trust companies acting as Reserve agents.
Minnesota: The higher requirement applies to banks in Reserve cities (designated as such under the
Federal Reserve Act).
Mississippi: The 25-percent requirements against demand deposits and 10 percent against time deposits
apply to banks in places with population over 50,000.
Missouri: The 18-percent requirement applies to banks in places with population of 200,000 or more.
Nebraska: The 20-percent requirement applies to banks in places with population of 25,000 or more.
Nevada: An additional reserve of 10 percent is required against reserve deposits due to other banks, but
no State bank reported any such deposits on Dec. 31, 1948.
New York: The 26-percent requirement applied on Dec. 31,1948, to banks in the Borough of Manhattan:
20-percent requirement applied to banks in the Boroughs of Brooklyn and Bronx, in New York City, and
Buffalo.
North Dakota: The 10-percent requirements in the time deposits column applies to secured savings
deposits.
Oklahoma: The 18-percent requirement applies to approved depositaries.
Oregon: The 10-percent requirement applies to time deposits in noninsured banks, but thre was only
one such bank in December 1948 and it had no deposits.
Texas: The 20-percent requirement applies to banks with capital stock less than $25,000.
Utah: The 20-percent requirement applies to banks in places with population of 50,000 or more.
Wisconsin: The 20-percent requirement applies to banks designated as reserve banks.
3 The reserve requirements shown in the time deposits column for Arizona, California, Connecticut,
Massachusetts, Nebraska, Rhode Island, Utah, and Wyoming apply only to deposits in the asvings departments of commercial banks and trust companies. Other time deposits are subject to higher requirements,
but inspection of State banking department annual reports discloses that such deposits in California, Connecticut, Massachusetts, and Rhode Island are relatively small in comparison with deposits in savings
departments; the same thing probably is true in the other States, to the extent they have separately operated
savings departments in commercial banks.
4 No statutory reserve requirements.
5 The 20-percent requirement against demand and 6 percent against time deposits became effective Feb.
15,1949.




131 M O N E T A R Y ,

CREDIT,

AND FISCAL

POLICIES

M r . BUCHANAN. B y statute, by banking commissioner regulations,
administrative regulations, as compared to here where we have the
Federal Reserve figures.
Senator DOUGLAS. M r . H a r l , I was called to the telephone for a
minute, and I did not gather whether you favored M r . McCabe's proposal of minimum reserve requirements for all banks, including those
not members of the Reserve System.
M r . HARL. W e are very strong for reserves. A s I told Congressman
Buchanan, I think a survey w i l l show that requirements, either administrative or statutory, of all States, at least covering 75 percent or
more of the deposits, that they are equal to or greater than the present
requirements of the Federal Reserve.
Senator DOUGLAS. The reserve requirements under the Federal Reserve city banks are now 18 percent; is that correct?
M r . BUCHANAN. It runs from 24
Senator DOUGLAS. Reserve city banks ?
M r . BUCHANAN. Twenty, and country banks 14.
Senator DOUGLAS. Well, in connection with another matter, I have
had the reserve requirements in a number of States studied; and, with
the exception of Louisiana, District of Columbia, Vermont, and
Wyoming, I found no State which had reserve requirements in excess
of 15 percent.
M r . BUCHANAN.

B y statute ?

Senator DOUGLAS. B y statute, which would be 1 percent higher, it
is true, than country banks, but 5 percent lower than Reserve city
banks, and Reserve city banks cover quite a wide range. I n a number
of cases the reserve requirements were below this. I n Iowa, 7 percent;
Kentucky, 7 percent; Montana, 10 percent; California, 12 percent;
North Dakota, 10 percent; New Mexico, 12 percent; South Carolina,
7 percent, Tennessee, 10 percent; Virginia, 10 percent; West Virginia,
10 percent; Wisconsin, 12 percent; and, further, that this composition
of the reserve under the State laws for the major part could not only
be cash but balances with depository banks.
So there seems to be quite an area, at least, i n which the reserve
requirements of State banks not members of the System are very appreciably below the requirements of banks which are members of the
System.
Now, that gives to the nonmember banks greater earning power for
any given amount of reserves; they can extend more credit upon
a given amount of reserves; and their multiplier is greater, and one
can understand why bankers would favor that; but there is always
the question (a) as to whether it is adequate for safety and (5) whether
it does not exercise an inhibitory influence upon attempts to check
inflation through alteration of the reserve requirements.
Those are the problems of public policy which we have. I wonder
i f you would be w i l l i n g to comment on that.
M r . H A R L . I believe the Senator earlier i n the conference made
the statement that 84, between 84
Senator DOUGLAS. Eighty-five percent.
M r . HARL. Eighty-five percent were Federal Reserve members.
Senator DOUGLAS. Eighty-five percent of the deposits were i n banks
which were Federal Reserve members,
M r . HARL. That means 85 percent of deposits are affected by those
reserve requirements, does it not ?



132

MONETARY,

S e n a t o r DOUGLAS.

CREDIT, AND FISCAL

POLICIES

Yes.

M r . HARL. T h e n we are talking about 15 percent of the aggregate.
Senator DOUGLAS. Yes; but it is also true that since the State banks,
2,000 of which are members of the Federal Reserve System, and
which have roughly 35 percent, roughly 35 percent of the deposits,
have the right of withdrawal from the Federal Reserve System at
any time, and the B o a r d is always faced w i t h the possibility that i f
they raise the reserve requirements and thus reduce the earning
capacity of the banks, that the State banks w i l l exercise their option
and w i l l get out of the System
M r . HARL. H a s that ever happened ?
Senator D O U G L A S . I S that proof that it does not operate upon the
minds of the members of the Board ?
M r . H A R L . I naturally do not know what is i n the back of their
minds, because that Board changes, you know, quite rapidly. There
have been three or four people appointed there since I have been
here in a very brief time, and therefore the policy would change as
they go along; but I think we have to operate on the basis of antecedent practices and what has happened i n the past.
A s you know, the reserves of the banks i n the Federal Reserve
System have varied over the years, and I think that you w i l l find
there is a constant upstreaming, I think you w i l l find banks containi n g a greater amount of deposits now i n the Reserve System than
before. A s you said correctly a few minutes ago, 85 percent of the
deposits were i n the Federal Reserve System. Based on $147,000,000,000 i n assets, you would see that that leaves about $20,000,000,000
not i n the Federal Reserve System.
However, you w i l l find i n those States that it is safe to say that
better than 90 percent of the deposits of this country are i n banks
which require reserves equal to or better than the Federal Reserve
System.
I n my State of Colorado a State bank has to maintain a 15-percent
reserve and has had to maintain that reserve since 1927, and the bank
which accepts bank deposits i n Colorado has to maintain a reserve of
25 percent, whether it is i n the Reserve city or not.
Senator DOUGLAS. Denver banks under the Reserve System would
have to maintain 20 percent ?
M r . HARL. Under the Federal Reserve System but under the State
system they have to maintain 25 percent i f they take bank deposits.
Senator DOUGLAS. W e l l , let me come b a c k - —
M r . HARL. I n other words, a Reserve bank i n Colorado at the present
time has to maintain 25 percent greater reserves than that presently
prescribed by the Federal Reserve.
Senator DOUGLAS. T h a t is rather a unique case.
M r . H A R L . I do not know. W e would be very glad to present a
study for you.
Senator DOUGLAS. The list I read—I think i t is correct—indicates
a considerable number of States where the reserve requirements are
below the Federal Reserve requirements, not only for the Reserve city
banks but for the so-called country banks.
M r . HARL. W e would be glad to make that study, but I took a small
Western State to bring across that point.




133 M O N E T A R Y ,

CREDIT,

AND FISCAL

POLICIES

Senator D O U G L A S . I was not clear whether you favored M r . McCabe's proposal of minimum reserve requirements across the board
or not. I wondered if you w^ould state whether you favor it or not ?
M r . HARL. That members have a 20 percent, 18 percent, or
Senator D O U G L A S . N O . I do not know that it is tied to definite figures, but that it would be uniform at any one time, so that you could
still have State chartering and State banks, but uniform reserve requirements.
M r . H A R L . I w i l l go further and say this board has never opposed
any bank joining the Federal Reserve System.
Senator DOUGLAS. This is not a proposal of M r . McCabe that they
join the System, but i f they stay outside the System, that they should
observe the reserve requirements which are imposed on the banks which
are i n the System.
M r . HARL. I think that is a matter for the States to decide.
Senator DOUGLAS. Not for the Federal Government?
M r . H A R L . Y e s , sir.

Senator DOUGLAS. Not a matter for Congress to legislate?
M r . HARL. I do n o t t h i n k so.

Senator DOUGLAS. W h y not? Y o u mean it is not constitutional for
Congress to pass on it ?
M r . H A R L . I do not know anything about the constitutionality of
it at all. I think, since you quoted Andrew Jackson a few minutes
ago, I believe that the theory is to keep as much as you possibly can
at the State level. But I w i l l go further and say I think an analysis
w i l l disclose that reserve requirements for better than 90 percent of
the deposits of the country, either by State or Federal Reserve requirements, are as high as the Federal Reserve requirements are at the
present time.
Senator DOUGLAS. Therefore, that there is no need for such a proposal ?
M r . HARL. That is my theory. I want to amplify that further.
The Federal Deposit Insurance Corporation is very much i n favor of
all banks maintaining substantial reserves i n cash and/or Governments at all times, but I think there is a difference in the sterilization
of reserves and the nonsterilization of reserves.
Senator DOUGLAS. O f course, M r . McCabe had a second feature to
his proposal, which was that the nonmember banks should have the
same access to reserve loans as member banks. That would give a
privilege which might make this more attractive to the State banks,
since they would be getting something in return for the higher reserve
ratios which might be imposed; and, i n the case of banks which already
had reserve ratios equal to those in the System, it would give them a
privilege without any loss of earning power.
M r . HARL. O n that basis, every bank i n Colorado today would have
the right to borrow from the Federal Reserve, because i n Colorado,
as I said before, you have to maintain a 15-percent reserve i n the country banks, and the banks which take deposits of other banks have to
maintain 25, and the Federal requirement is 20; therefore, Colorado
banks which take deposits of banks have to carry the difference between
15 or 20 and 25, or 25 percent greater reserves than required by the
" F e d " at the present time. That has been on the statute books 22
years.




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Senator DOUGLAS. There is involved not only the amount of the
reserves but also the form of the reserves; i n an analysis which we
made of the various States, i n virtually all the States the vast proportion, and i n some cases the exclusive amount, of the reserves could
be i n the form, not of cash but of deposits i n other banks, which is
a very different thing from a reserve with the Federal Reserve System.
M r . H A R L . Y O U mentioned 85 percent are controlled. Do you think
that 15 percent which is not under their supervision has any detrimental influence on our economy ? W e do not.
Senator DOUGLAS. I am an inquirer, not an arguer.
M r . WOLCOTT. H e answered the question.
Senator D O U G L A S . I beg your pardon ?
M r . H A R L . I asked the question and then answered it. I said we do
not.
Senator D O U G L A S . I beg your pardon.
M r . HARL. W e testified, I believe, before the Banking and Currency
Committee to that effect.
Senator DOUGLAS. W h a t would you say to the national banking system lowering the minimum capital requirements from $ 5 0 , 0 0 0 to
$ 2 5 , 0 0 0 on banks which have already been organized under the State
banking laws, under the Federal Reserve ?
M r . HARL. F o r some reason which we do not know, the Congress,
probably with the advice and counsel of the authorities, enacted the
present capital requirements at a time when you had smaller deposits
and greater capital ratios than you have at the present time.
I believe the capital ratios i n this country were better or about 25
to 1, or $1 of capital to $4 of deposits, when these laws were written.
A s of December 31, 1948, the capital ratio was 6.7, or $16 roughly, i n
depositors' funds to $1 bank capital. Therefore, i f they saw fit to
raise these standards at that time, when the capital ratios were greater,
we cannot understand why they seek to reduce those standards when
the capital ratios are much less.
Senator D O U G L A S . Here is my question: I f $ 2 5 , 0 0 0 is enough to
qualify a bank safely under a State banking system, why is it not sufficient to admit them into the Federal Reserve System ?
M r . H A R L . I t m a y be.

Senator D O U G L A S . D O you want to express an opinion ?
M r . HARL. W e do not think so because we stand for greater capitalization, and the record of the Federal Deposit Insurance Corporation has been at all times for heavier capitalization.
Senator D O U G L A S . B u t you insure the $ 2 5 , 0 0 0 bank.
M r . HARL. W e do not insure every bank that applies for insurance.
Senator D O U G L A S . Y O U w i l l insure a $ 2 5 , 0 0 0 bank, w i l l you not?
M r . H A R L . W e do at times.

Senator D O U G L A S . D O you discriminate against the bank because it
has only $ 2 5 , 0 0 0 ?
M r . HARL. W e make a survey of the community.
Senator DOUGLAS. There are only 700 State banks which are outside
yotir insurance, and i f a $ 2 5 , 0 0 0 bank is good enough for the States
and good enough for you, why shouldn't it be good enough to be admitted to the Federal Reserve System ?
M r . H A R L . I think you w i l l find i n the last 3 or 4 years we have
insured very few banks that have had only $ 2 5 , 0 0 0 capital. They have
had more capital than that i n practically every case.



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Senator D O U G L A S . D O you have a statement of the division of State
banks which are insured by you according to capital ? M r . McCabe's
proposal is not to lower the requirements on newly formed banks,
but to permit State banks already formed with the capital of $25,000
to come i n i f in other respects they are satisfactory.
M r . H A R L . I w i l l say to your committee, Senator, we would gladly
subscribe to the matter of capital structure. I f the law were so
enacted, we would be very glad to go along with the law if, i n order
to obtain insurance, the capital requirements were raised.
Senator D O U G L A S . Y O U do not want them lowered, but you would
like them raised?
M r . HARL. W e would like them raised; yes, sir.
Senator DOUGLAS. And, therefore, you do not agree with M r . McCabe in his proposal?
M r . HARL. W e can see no reason for it. A t the present time 85
Senator D O U G L A S . This is what puzzles me. I f a $ 2 5 , 0 0 0 bank is
good enough under the State laws—and you think the State laws on
the whole are correct—and i f this $ 2 5 , 0 0 0 bank already formed is
good enough to be insured by you, then why is it not good enough
to be admitted to the Federal Reserve System ?
M r . HARL. W e have never said it was not good enough for the
Federal Reserve System.
Senator DOUGLAS. That is what I am trying to find out.
M r . HARL. W e want to be shown the advantage of that because it
has been developed here this morning that banks containing better
than 85 percent of the deposits are members of the Federal Reserve
System. W e have no quarrel with the Federal Reserve System whatsoever.
Senator DOUGLAS. Then you would not oppose this proposal to lower
the entrance requirement into the Reserve System?
M r . H A R L . I w i l l go further. T o my knowledge this Corporation
has never opposed any bank at any time joining the Federal Reserve
System.
Senator DOUGLAS. A n d you would not oppose lowering the requirement on State banks already organized by nonmembers of the System
to $ 2 5 , 0 0 0 so that they could come i n ?
M r . H A R L . I would not make the statement until I could discuss
the matter with my Board of Directors, because, as you know, one
member of this Board happens to be the Comptroller of the Currency,
and his requirements
Senator DOUGLAS. A r e for national banks but not for State banks ?
M r . HARL. That is very true; and, as you know, any bank he charters, they have not only Federal Reserve membership but likewise
F D I C membership at the same time; and I would rather reserve that
question until I talk to my colleagues.
Senator DOUGLAS. I n other words, you want to have deferred judgment on that?
M r . HARL. That is right.
Senator DOUGLAS. B u t what would you say as a person withoujt
committing your organization to this query of mine that, i f a $25,000
bank already in existence is good enough for the States and good
enough for F D I C , why should it not also be eligible for membership
i n the Federal Reserve System?




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M r . H A R L . I think my judgment i n that case would be absolutely
predicated on discussion with the other two members of our Board,
bearing i n mind that one member is the Comptroller of the Currency
and the other member is past president of the National Bank Division
A B A and has always operated i n a national bank.
Senator DOUGLAS. There is one final question I should like to ask
you, and I want to state it as precisely as I can.
A s I go over the Federal laws and regulations which are applicable
to banks which are members of the Federal Reserve System, I find
that many of these laws and regulations do not relate directly to monetary and credit control, but to a series of technical requirements such
as the adequacy of bank capital, soundness of bank lending and investi n g operations, and the maintenance of competition i n banking.
I can see why these Federal laws and regulations were attached to
membership i n the Federal Reserve System when that was the only
Federal agency attempting to increase the uniformity of standards
applying to State chartered banks.
B u t now we have your organization, the Federal Deposit Insurance
Corporation, whose primary purpose it is to insure the safety of
deposits and to try to raise banking standards so as to avoid losses on
deposits.
I n view of that fact, would it not be appropriate to cease attaching
these laws and regulations to membership in the Federal Reserve
System and transfer them instead to the privilege of deposit insurance ? Thus taking in some 13 percent of the deposits which are i n
your system but not in the Federal system.
M r . H A R L . Y O U understand when a bank fails, whether it is a State
bank, a National bank, or a member bank, we have to pay the bill.
Senator DOUGLAS. Should you not, therefore, be given the safeguards ? A t present you have the liability i n these cases.
M r . HARL. Yes, sir; we would leave the monetary and the credit
policies to Federal Reserve, but we think we should have the right to
examine those 1,900 banks.
Senator DOUGLAS. It is not merely a question of examination, but it
is a question of the adequacy of bank capital, soundness of bank lending
and investing operations, and maintenance of competition i n banking
as laid down by Federal laws and regulations.
Should not those rules be attached to your organization, which is primarily concerned with safety of deposits rather than to the Federal
Reserve System covering a smaller area, whose primary function is
monetary and credit control?
M r . H A R L . A S you know, the Federal Reserve System leaves examination of the national banks to the Comptroller of the Currency.
Senator DOUGLAS. That is right.
M r . HARL. The Comptroller of the Currency is a member of our
Board, which is the policy-making end of the Federal Deposit Insurance Corporation. Therefore, it can be said that we do exercise
considerable influence over every bank i n the United States except
1,960 banks to which you referred.
Senator DOUGLAS. That is the point.
M r . HARL. W e feel we can do the same examining job for the Federal Reserve as is now done by the Comptroller of the Currency.
Senator D O U G L A S . I am a very literal man, I am afraid. W o u l d you
say that these laws and regulations concerning soundness of bank



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lending and investing operations and maintenace of competition i n
banking, which are now attached to the Federal Reserve System,
should be transferred to F D I C , and, therefore, cover this wider area
of state banks not members of the Reserve System but members of
the insurance system ?
M r . HARL. Well, i f I knew what those laws and regulations were,
we would be very glad to undertake to enforce those laws and regulations as laid down by the Congress.
Senator DOUGLAS. Well, we have made a listing of provisions which
apply to National banks and to State banks which are members of
the Federal Reserve System, but which do not apply to State banks
not members of the System, but members of the F D I C .
Y o u say that i f you knew what they were—well, I have a list of
30 which I should like to read. [Reading:]
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.

Limitations on total loans to one borrower.
Regulations governing purchase of investment securities.
P r o h i b i t i o n against purchasing stocks.
P r o h i b i t i o n against engaging i n u n d e r w r i t i n g of investment securities a n d
stocks.
Restrictions on loans to executive officers.
Restrictions on dealings w i t h directors.
Restrictions on interlocking directorates or other interlocking relations w i t h
other banks and w i t h securities companies.
P r o h i b i t i o n against bank having less than 5 or more t h a n 25 directors.
Provision authorizing supervisory authority to remove officers and directors
f o r continued violations of l a w or continued unsafe or unsound practices.
P r o h i b i t i o n against affiliation w i t h securities company.
Restriction on holding companies affiliates.
Restrictions on bank stock representing stock of other corporations.
L i m i t a t i o n s on loans to affiliates.
Requirements of reports of affiliates and publication thereof.
Requirements f o r examination of affiliates.
L i m i t a t i o n s on investment i n bank premises.
M i n i m u m capital requirements.
M i n i m u m capital requirements for branches.
Prohibitions against loaning on or purchasing on stock.
Restrictions on w i t h d r a w a l of capital and payment of unearned dividends.
Requirement that reserves specified i n the F e d e r a l Reserve A c t be maintained.
P r o h i b i t i o n against making loans or paying dividends w h i l e reserves are
deficient.
Requirement f o r specific number of condition reports annually and for
publication thereof.
Requirements i n connection w i t h the par clearance collection system.
P r o h i b i t i o n against false certification of checks.
Limitations on acceptance powers.
P r o h i b i t i o n against acting as agent f o r nonbanking institutions i n making
loans to brokers and dealers i n securities.
L i m i t a t i o n s on loans to one borrower on stocks or bonds.
L i m i t a t i o n s on aggregate loans to a l l borrowers on stocks or bonds.
L i m i t a t i o n s on deposits w i t h nonmember banks.

Now, it may be that some of these restrictions are unduly severe, but
I would think probably the vast majority of them were designed to
get greater security and safety. Now, i f these are good for the banks
within the System, why should they not be also good for the residue
of banks which are not i n the System but are in the Federal Deposit
Insurance Corporation?
M r . HARL. Senator, I think you w i l l find by your statement a few
minutes ago that 90 percent or more of these very regulations are written into the State statutes.



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Senator DOUGLAS. Then you think the State laws are sufficient on
this point?
M r . H A R L . I think we can take what you read item by item and you
w i l l find that 90 percent of those provisions are statutory in respective
States at the present time.
Senator DOUGLAS. W o u l d you have these repealed, therefore, at the
Federal level for the State banks which are members of the Federal
Reserve System?
M r . HARL. Not necessarily, but I think you w i l l find a great many of
those
Senator DOUGLAS. I f the State laws are adequate, then why should
you require them for State banks which are members of the System,
since they would be covered by these State laws ?
M r . H A R L . I did not require them. That is the Federal Reserve
requiring them.
Senator DOUGLAS. W h y should they be required ?
M r . HARL. That is a question I think that the Board of Governors
of the Federal Reserve should answer.
Senator DOUGLAS. Fundamentally, it is Congress which makes the
laws on these points, and we are seeking guidance, and i n a problem
i f we depend solely on the judgment of the agency concerned we get a
partial view. So we are trying to get the opinions of others.
M r . HARL. W e have no complaint with those regulations.
Senator DOUGLAS. W h y not extend them ? I f you have no complaint
with the regulations, why not extend them to the State banks wl^ich
are members of the insurance system but not members of the Reserve
System ?
M r . H A R L . A S I said before, 90 percent of those very same edicts or
regulations or statutes are on the State books at the present time.
Senator DOUGLAS. I t would be interesting to get a comparative
analysis on that point, but what about the rules which are not on the
State statute books, rules which are desirable but which are not on the
State statute books ?
M r . HARL. I think any rule which is desirable should be on the State
statutes, and I w i l l say this: When you come to a law which is beneficial to banks, we have found the State banking commissioners sincerely interested in having those statutes passed i n their local States.
I do not believe the Federal Reserve or the F D I C
Senator DOUGLAS. O r the Congress?
M r . HARL. O r the Congress has ever had any opposition from the
State banking advisers to passing any legislation which was constructive at the State level, and i n your own State you have a thing which
has really upset things very much.
Senator DOUGLAS. Please do not think for one minute that I am
making any apology for the State banking laws of my State, which
are i n many ways, I want to say, about as bad as you could get i n any
section of the country.
M r . H A R L . A S you know, for many years a stockholder i n a bank
was always faced with a liability, an assessment liability. The Congress, after the passage of the Federal Deposit Insurance Corporation
Act, dissolved that liability for national banks. I n many States they
had assessments up to 200 percent by statute for which bank stockholders were liable.




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Unfortunately, in the State of Illinois, that was written into the
constitution, as the Senator, I believe, is familiar with, with the result
that nobody out there wants to organize a State bank.
It has not been too long ago that certain officials of the Illinois
Bankers Association came down here and wanted to know why the
Comptroller was chartering so many national banks i n his State as
compared with State banks. The Comptroller and members of our
Board sat in that conference, and we told them because there is discrimination i n Illinois against the State banker.
Senator DOUGLAS. I may say that the Governor of Illinois and other
members of my party have been doing the best they could to get the
Constitution of Illinois altered and a new constitutional convention
called, but we are having some difficulties i n that respect.
I am very glad you have furnished this further evidence as to the
need for constitutional revision i n the State of Illinois.
M r . HARL, I do not believe, Senator, that bankers as a rule are
affiliated with the same or belong to the same party that you and
I happen to belong to, but I think you w i l l find that both parties subscribe thoroughly to what you said a few minutes ago. I think it
transcends party philosophy in the State of Illinois.
Senator D O U G L A S . Y O U mean the desire for constitutional reform?
M r . H A R L . I am talking about the banks. I do not know about the
rest of it.
Senator DOUGLAS. I wish the desire for constitutional reform did
transcend the party lines in the State of Illinois, but that is neither
here nor there.
M r . W O L C O T T . I think the Republicans—and I cannot speak for
them—and, of course, I am sorry politics have been brought into these
hearings—would be perfectly i n favor of the amendment of the constitution in that respect.
I think that is i n keeping with our philosophy of government.
M r . HARL. Congressman, I w i l l say everybody is working wholeheartedly out there and has for many years to get that constitutional
prohibition out of there, because it discriminates against the dual
system of banking.
M r . WOLCOTT. I n that connection, of course, it aids this movement
toward centralization of power in the Federal Government.
M r . HARL.

Yes.

M r . WOLCOTT. Which, of course, every Republican would be violently opposed to.
Senator D O U G L A S . A S followers of Alexander Hamilton, I am surprised that you favor decentralization.
M r . W O L C O T T . Y O U referred to Andrew Jackson. I finished reading the biography of Andrew Jackson by Marquis James, and I think
my father and my grandfather would have considered it sacrilegious
i f they knew I read it, but I was amazed to find out what close affiliation there was between his advocacies and the Republican P a r t y policies at the present time. I do not think you Democrats have any more
right now, after that book has been written and the facts have been
brought out, to claim him as your patron saint. W e are going to
adopt him.
Senator DOUGLAS. Probably departing from the principles of Alexander Hamilton.
M r . WOLCOTT. Union now and forever.



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Senator DOUGLAS. One and inseparable.
M r . BUCHANAN. O n the question of concentration of all Federal
bank examinations in one agency, you are opposed, of course, to that
concentration; are you not ?
M r . HARL. W e

are.

M r . BUCHANAN. A n d for what reasons? W o u l d you care to give
them?
M r . HARL. Again you transcend and cross the Andrew Jackson
philosophy of State rights. The Comptroller, of course, should have
a right to examine banks he charters.
Senator D O U G L A S . I have always believed that Andrew Jackson was
a great man in his day, even willing to concede reluctantly that Alexander Hamilton may have been a great man in his day, but we are now
living i n 1949 and not in 1799 or 1834.
M r . B U C H A N A N . A hundred years to convert some Republicans.
Senator DOUGLAS. I n view of the present situation, this is what we
have. Y o u are supposed to insure the soundness of these banks and
yet we find a rim of banks which have about 13 percent of the deposits
which are State banks but not members of the Federal Reserve System,
that do not have imposed on them the requirements for soundness—
and I am not speaking of monetary and credit control, I am speaking
simply of soundness—which are imposed on banks which voluntarily
come into the Federal Reserve System.
M y query is whether you are not being held financially liable for
possible failures of these banks while you are being denied the safeguards which the majority of the other deposits have, and in view of
the fact that this deposit insurance is not a perfect protection, and is
only a partial protection, I am wondering i f you would be opposed to
having such regulations as are reasonable—I do not say every one of
these 30 restrictions is perfect—such regulations as are reasonable,
designed to get the security of deposits extended to the some 4,500
banks and to the $20,000,000,000 of deposits which are i n your system
but not i n the Reserve System ?
M r . HARL. Senator, I believe it is fundamental that the insurer has
the right to look at his risk.
Senator D O U G L A S . S O that you can decline to accept these risks ?
M r . HARL. Once they are insured, we have the right to continue to
appraise and otherwise look at our risk. W e look at those risks i n
all but 1,900 members through our examiners or those of a member of
our Board of Directors. Therefore, we believe that you are correct
that we should not be denied the right to look at our risk in those other
1,900 banks.
Furthermore, we again believe that you are correct i n that we are for
every one of those regulations which are reasonable and we also believe,
as we said a few minutes ago, that you w i l l find 90 percent of those
regulations which you read and put i n the record are now i n the
statutes of the various 48 States.
Senator D O U G L A S . S O would you be willing to prepare a memorandum on this point, covering what regulations you believe are reasonable and which are not now adequately provided for under State
laws?
M r . HARL. W e would be very glad to.
Senator DOUGLAS. Thank you very much.




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(The following memorandum to Senator Douglas was later supplied
for the record. The September 1948 tentative draft of the model State
banking code with notes, statutory references and index are i n the files
of the Joint Committee on the Economic Report:)
F E D E R A L D E P O S I T I N S U R A N C E CORPORATION,

Washington,

Hon. PAUL H.

December 6, 19Jf9.

DOUGLAS,

Chairman, Subcommittee on Monetary, Credit, and Fiscal
Joint Committee on the Economic Report,
United States Senate, Washington, D. C.

DEAR

SENATOR DOUGLAS : D u r i n g

my

testimony

before

your

Policies,

subcommittee

on

November 15, 1949, you mentioned certain Federal statutory provisions some
of which were applicable only to national banks and some of which were applicable
to national banks and to State banks which are members of the Federal Reserve
System. Y o u inquired whether I would favor the extension of these provisions
to the insured State banks which are not members of the Federal Reserve System.
A t the hearing I stated in effect that I believed that most of these provisions were
covered by the laws and regulations of most States.
The most recent general research on this whole question of State banking laws
was made in connection with the drafting of a model State banking code by a
special committee of the American Bankers Association. There is enclosed, for
your committee's use, a copy of the September 1948, tentative draft of that model
State banking code w i t h notes, statutory reference, and index. W e have been advised by the American Bankers Association committee on this code that the draft
is i n tentative form and is now being put i n final shape w i t h hopes of completion
i n 1950. T h e notes accompanying the enclosed tentative draft of the model
State banking code set forth the various State banking statutory requirements
and the States in which certain requirements are made.
In the varied requirements of the banking laws of the 48 States naturally
some of the provisions are less restrictive than the present requirements for
national banks and State banks which are members of the Federal Reserve
System. However, in some respects the State banking requirements are more
restrictive. State bank supervisory authorities and State banking associations
have been very cooperative in making necessary improvements i n State banking
laws. Because of this and because of the effective powers which Congress has
given this Corporation we have not felt the necessity of requesting Congress to
extend to State-insured banks which are not members of the Federal Reserve
System the particular Federal banking statutes mentioned by you.
A f t e r our operations from 1933 to 1935, this Corporation recommended and
Congress enacted an entire revision of our law to make our deposit insurance
more effective. Congress authorized this Corporation to consider the following
factors in admitting a bank to insurance and i n approving the establishment
of branches:
"The financial history and condition of the bank, the adequacy of its capital
structure, its future earnings prospects, the general character of its management,
the convenience and needs of the community to be served by the bank, and
whether or not its corporate powers are consistent w i t h the purposes of this
section."
W i t h our authority to consider the adequacy of the capital structure we are
not limited to the minimum State capital requirements but may require capital
which we consider adequate i n relation to the expected deposits of a new bank.
T h i s makes possible a somewhat uniform capital requirement for a l l Stateinsured banks which are not members of the Federal Reserve System i n spite of
the existing differences i n State requirements.
I n considering whether a bank's corporate powers are consistent w i t h the purposes of our l a w we consider its powers and the applicable State banking laws.
Where the bank's corporate powers are inconsistent or where the State banking
laws are inadequate i n any matters this Corporation requires the bank to agree
not to engage i n certain powers or to restrict its activities i n certain respects.
(See 12 C F R , pts. 332 and 333.)
T h i s Corporation is authorized to terminate the insured status of any insured
bank found to be continuing unsafe or unsound practices i n conducting the business of the bank or to knowingly or negligently permit any of its officers or agents
to violate any law or regulation to which the insured bank is subject I n this
connection provision is made for a period i n which the bank may make correction
and for a hearing prior to any order terminating insured status.
99076—50

10




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Statutory requirements and restrictions are but minimum aids i n maintaini n g a sound banking system. Successful banking operations and bank supervision are grounded on the good judgment of bankers and examiners. It is to them
that we attribute the present excellent condition of banks and the success of
deposit insurance.
W i t h the existing State banking laws, the cooperation of the State banking
authorities, the statutory powers of this Corporation and the effectiveness of
our examiners i n dealing w i t h the individual banks, this Corporation sees no
necessity, at this time, for the general extension to insured State nonmember
banks of Federal banking laws now applicable to national banks and State banks
w h i c h are members of the Federal Reserve System. A s matters may arise needing
correction we would prefer to seek needed changes i n the State banking l a w s or
request Congress to enact appropriate legislation applicable to a l l insured banks.
W e are reconsidering the Federal statutory requirements mentioned by you
w h i c h are applicable to national banks and State banks w h i c h are members of
the F e d e r a l Reserve System for the purpose of recommending to Congress the
extension to insured nonmember banks of any particular provision w h i c h may be
desirable and w h i c h w o u l d improve the soundness of the Federal deposit insurance system.
W i t h kindest regards, I am,
Sincerely yours,
MAPLE T . HARL,

Chairman.

Senator DOUGLAS. M r . Wolcott ?
M r . WOLCOTT. I assume that Senator Douglas has been referring to
i n respect to the lack of regulation he implies is a lack of regulation
on the part of the Federal Government. Y o u r contention is that the
nonmember banks are regulated at least 90 percent as much under State
laws as member banks are; is that correct?
M r . H A R L . Y e s , sir.
M r . W O L C O T T . SO the

issue seems to boil down as to whether the
Federal Government shall promulgate the regulations, either statutory
or otherwise, or whether the State governments shall do the same job.
I think perhaps the record is f u l l of it, but may I ask you, M r . H a r l ,
i f you can tell us offhand what the losses have been i n F D I C .
I know there are not many losses, have not been many—you know
what I mean by losses—the losses you have had to suffer. Y o u do not
show any loss on your statement, of course, because of your reserve and
capital, but what losses have there been to the Corporation ?
M r . HARL. Around 8 percent.
M r . WOLCOTT. Eight percent of what?
M r . HARL. O f the total deposits i n the closed banks. I n other
words, we have liquidated up to 92 percent.
M r . WOLCOTT. Those are the banks which have been closed ?
M r . HARL. Yes, but I w i l l say furthermore that i n the last 6 years
we have had very fair weather because of economic conditions and i n
many cases we are taking banks now which pay out 100 percent.
M r . WOLCOTT. I n terms of dollars about how much would that be ?
M r . HARL. It is going to boil down, we think, when we get through
this liquidation, to where we are going to lose between 26 and 30 million
dollars.
M r . W O L C O T T . Y O U have ample reserves ?
M r . HARL. Those reserves have been set up for that now, and are
included i n this statement, and this statement is net.
M r . W O L C O T T . Y O U think your somewhat-over-a-billion dollars of
reserves is sufficient for all ordinary purposes ?
M r . H A R L . N O , sir; we do not. W e came to the Congress as you
remember, Congressman, 2 years ago and asked for the right to obtain
from the Treasury up to $3,000,000,000 by the debenture route, i n the



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event that money was needed, and that was predicated on the following
formula.
A s a result of the 1 9 2 9 - 3 3 depression it took over $ 4 , 0 0 0 , 0 0 0 , 0 0 0 to
put a floor back under the banks. Now, with our billion dollars i n
reserves, plus the $3,000,000,000 that we can get from the Treasury
through debentures, we feel that that $4,000,000,000 makes the corporation invulnerable to these depressions.
T h a t was the reason for our statement a few minutes ago that we
felt we were invulnerable.
M r . WOLCOTT. W a s that three times the reserves ?
M r . HARL. I t is spelled out, $3,000,000,000.
M r . WOLCOTT. I n figures, not three times your reserves ?
M r . H A R L . N O , sir; so that we have absolutely at the present time
i n reserves or contingent reserves $4,000,000,000.
Now, as we accrue more money i n our f u n d we would have to borrow
less money from the Treasury. Predicated on what happened—and
you can only judge the future by the past—with our present insurance
coverage and assessment rate our actual reserves or contingent reserves are probably ample to take care of and protect us against any
storm we have i n the future, provided that storm is not greater than
1933. W e do not believe it w i l l be greater than 1933 because we think
there are better practices i n the banks.
M r . WOLCOTT. Under the l a w — I should know, but I do not—what
is the obligation of the Federal Government over and above your reserve i n respect to your losses ?
M r . HARL. T h e only obligation we have w i t h the Federal Government at the present time is that the Treasury is mandated to purchase
from the Federal Deposit Insurance Corporation, when, as, and i f
offered, up to $3,000,000,000 i n our evidences of indebtedness.
M r . WOLCOTT. A n y loss to depositors over that, there is no obligation
upon the Federal Government to pay them ?
M r . HARL. There is no obligation on the Federal Government at the
present time to pay any loss. T h e whole obligation vests i n the Corporation's guaranty.
M r . WOLCOTT. Where do you get your capital ?
M r . HARL. Our capital has come from the banks. They pay, as you
know, one-twelfth of 1 percent of deposits per year, and our capital
comes from the amount of the assessment paid i n annually, plus income from our investments, which are Government securities.
M r . WOLCOTT. Where d i d you originally get your capital?
M r . HARL, Originally i n 1933, when the act was initiated, we sold
$ 1 5 0 , 0 0 0 , 0 0 0 common stock to the Treasury and $ 1 3 9 , 0 0 0 , 0 0 0 common
stock to the Federal Reserve System, or $ 2 8 9 , 0 0 0 , 0 0 0 from the Treasury and the Federal Reserve System.
M r . WOLCOTT. Has that all been retired ?
M r . HARL. Yes, sir. The act was introduced i n the House by, I
think, you and Congressman Spence, repaying the Treasury and repaying the Federal Reserve System, and that has all been consummated.
Senator DOUGLAS. W h a t about the earnings on this capital ? Have
those been repaid ?
M r . HARL. T h e earnings have accrued to our reserves.
Senator D O U G L A S . S O that while the loans of the Treasury and Federal Reserve to the Corporation have been repaid, you retain among



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your assets the earnings which accrued 0 1 these assets prior to retire1
ment ?
M r . HARL. That is correct.
M r . W O L C O T T . I recall very indefinitely that this $ 1 3 9 , 0 0 0 , 0 0 0 ,
which the Federal Reserve put up, was the so-called profit of the Federal Reserve System.
M r . HARL. I t was half of their surplus at that time from their
earnings.
M r . WOLCOTT. The law provides that shall be paid into the Treasury, as I recall it, but it does not say when; and the Federal Reserve
Board interprets that to mean they pay i n any profit they have upon
liquidation.
M r . H A R L . This $ 1 3 9 , 0 0 0 , 0 0 0 went direct to the Treasury. The act
provided that would go to the Treasury.
M r . W O L C O T T . Y O U paid it to the Treasury and not to the Federal
Reserve ?
M r . H A R L . W e paid $ 2 8 9 , 0 0 0 , 0 0 0 to the Treasury.
M r . WOLCOTT. The Congress i n that manner settled the question as
to whether the profit of the Federal Reserve should be paid to the
Treasury now or upon liquidation.
M r . H A R L . That $289,000,000, of which $ 1 3 9 , 0 0 0 , 0 0 0 came from the
Federal Reserve, by that act you decreed we pay the entire amount
to the Treasury, which we did.
M r . WOLCOTT. O f course, we have no way of knowing whether even
this $4,000,000,000—is that it, your billion reserve and $3,000,000,000
you can get on debentures from the Treasury—we have no way of
knowing whether that would be adequate. That would depend somewhat upon how deep the depression was and how much of the reserves of the banks had been used or otherwise dissipated previous to
the crash. W e w i l l call it a crash, because it would have to be a crash
to absorb that much, probably.
H o w far would you go i n times of stress i n supporting the bond
market? H o w far would you recommend that we go i n supporting
the bond market i f and when the conditions of the banks were such
that for their normal purposes they had to unload an unusually large
amount of Governments?
M r . H A R L . I think the bond market should be supported always at
par.
M r . WOLCOTT. Regardless of the amount of sales by the banks of
Governments?
M r . HARL. That is right.
M r . WOLCOTT. I guess that is all.
M r . BUCHANAN. I f there are no further questions, the committee
w i l l adjourn until 2 o'clock this afternoon.
(Whereupon, at 12:45 p. m., a recess was taken until 2 p. m., of
the same day.)
A F T E R N O O N SESSION

Senator DOUGLAS. W e welcome this afternoon representatives of the
Reconstruction Finance Corporation, M r . Gunderson, one of the
directors; M r . Dougherty, General Counsel; and M r . Considine,
Comptroller. I would appreciate it i f you gentlemen would take seats
here.



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W e originally invited M r . Harley Hise, the Chairman of the Board
of Directors of the Reconstruction Finance Corporation. H e said
that he would be prevented from coming and asked i f these representatives might come i n his stead. W e replied that we would be
very glad to see them personally and would be glad to welcome them
officially, provided it was understood that they spoke as representatives
of the Reconstruction Finance Corporation and not merely as individuals. W e have since received a letter from M r . Hise saying that
these three gentlemen have the right to speak for the Reconstruction
Finance Corporation, and that M r . Gunderson w i l l be spokesman.

STATEMENT OF HARVEY J. GUNDERSON, DIRECTOR, RECONSTRUCTION FINANCE CORPORATION, ACCOMPANIED BY JAMES I.
DOUGHERTY, GENERAL COUNSEL, AND JAMES W. CONSIDINE,
COMPTROLLER
Senator D O U G L A S . D O you want to add anything, M r . Gunderson. to
the statement that M r . Hise made in reply to our questionnaire ?
(Mr. Hise's statement is found on p. 218 of the committee print on
Monetary, Credit, and Fiscal Policies.)
M r . G U N D E R S O N . N O , sir. W e think M r . Hise's statement covers
the questions that you propounded to us, perhaps not as fully as you
might wish, but we think that it covers the points, at least briefly, and
we are here to answer additional questions the committee might wish
to ask.
Senator DOUGLAS. M r . Gunderson, the Reconstruction Finance Corporation was originally set up, I believe, in the summer of 1931, as
a means of helping to meet the business depression or cataclysm which
was breaking upon the country and to make available to private business funds which would enable them to continue and which were not
available through security issues or from bank loans. A t that time
the security market was flat and the banks were contracting rather
than expanding. Undoubtedly the Reconstruction Finance Corporation saved many businesses and contributed a great deal to the stability
of the business structure.
I think the question which is i n the mind of a great many people,
and which I should like to probe, is this: The depression has been
over for at least 10 years now; the Reconstruction Finance Corporation is still in business, it is still making loans. I wondered what the
reasons in your mind are for the continuation of direct lending by
the Government. Before you go into that, I would like to say that
I assume you have the same presumption that I have; namely, that
the retailing of credit should i n the main be i n private hands rather
than i n public hands, because any public agency which retails credit is
necessarily i n a difficult position to determine who gets credit and who
doesn't get credit, and is liable to be damned i f it does and damned
i f it doesn't. So that I wondered if you would make a statement as
to why you regard direct Government lending as a continuing function of the Government, i n good times as well as i n bad times.
M r . GUNDERSON. Senator Douglas, commencing with the statement
that you made, when the Reconstruction Finance Corporation was
originally set up it did not make any loans to business.
Senator DOUGLAS. I t insured loans?



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M r . G U N D E R S O N . I t d i d not insure. I t d i d no operation except i n
financing banks, savings banks, insurance companies, and railroads.
T h e first authority to assist industrial businesses was put i n the act
by Congress i n 1934. One of the provisions was that R F C could not
make any loan i f private sources of financing were available. T h a t
provision continues i n the act today and is a condition precedent to
any financing of business by the Reconstruction Finance Corporation.
I n the original act it was required that adequate security be obtained for the making of any loan, and at a later date—I believe i t
was 1936 or 1937—Congress eliminated the requirement of f u l l and
adequate security and inserted into the act the provision that any
loan to a business enterprise should be so secured as to reasonably
assure repayment; and although the act has been changed and amended
and rewritten and readapted by the Congress, i n 1947, those provisions, as they affect loans to business, have remained substantially the
same, for about the last 12 years.
T h i s leads up to the question as to why the Reconstruction Finance
Corporation would continue to make loans. I t is a question that I am
not sure I can answer satisfactorily but it is a fact that d u r i n g the
years of our lending to industrial enterprises there seems to have been
a fluctuating availability of money to business. I n the authority of
the Reconstruction Finance Corporation to lend money, the two requirements that Congress has imposed—the first one being that we have
to be sure that business has exhausted the private sources, and the
second, that it has to be secured so that we are assured that it w i l l be
repaid—have really restricted the lending operation to a very narrow
field, namely, those cases where the borrower, who is unable to secure
his needs privately, still has sufficient collateral so that we feel the loan
could be made, even i n the event the business fails and we have to
realize on the assets.
Senator D O U G L A S . W h a t is the total amount of your outstanding
loans at the present time ?
M r . G U N D E R S O N . $ 4 3 3 , 0 0 0 , 0 0 0 i n business loans at September 3 0 ,
1949.

Senator D O U G L A S . W h a t is the total of the losses suffered by the
Reconstruction Finance Corporation since its beginning ?
M r . G U N D E R S O N . Maybe M r . Considine can give you the dollar figure.
Percentagewise I believe i t is less than three-quarters of 1 percent.
Senator D O U G L A S . Three-quarters of 1 percent of the loans ?
M r . G U N D E R S O N . Three-quarters of 1 percent of our loans.
Senator D O U G L A S . T h e n the interest upon the loans p a i d more than
offsets the losses ?
M r . G U N D E R S O N . S O f a r our profit on lending operations is about
$560,000,000.

Senator D O U G L A S . S O that the Government to date has not had any
losses and the profits are i n excess of the total volume of present outstanding loans?
M r . GUNDERSON. Y e s , sir.

Senator

DOUGLAS.

M r . GUNDERSON.

Senator
have.

DOUGLAS.




By

$100,000,000 ?

Yes.

Well,

I

think these are very valuable figures to

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I wasn't quite able to gather i n what way you thought the private
banking system failed to furnish adequate or selected credit so that
you regarded direct Government lending as a continuing necessity.
M r . GUNDERSON. M r . Chairman, I think it is necessary to qualify the
type of lending you are talking about. F o r example, the bulk of lending, i n banks, is i n the form of commercial loans, open lines of credit
to borrowers, loans on receivables and warehouse certificates, and most
well-run banks confine themselves to short-term credits of a year or
less, and i f they do enter the field of making loans for more than a year,
or for a term of years, they usually confine the dollar amount to a percentage of their capital, their capital structure, so that they w i l l
always be i n a position to meet their depositors5 needs for funds.
The Reconstruction Finance Corporation almost never makes a loan
of this type. I f you were describing a typical business loan made by
the Reconstruction Finance Corporation it would be a loan for between
twenty-five and fifty thousand dollars, because 87 percent of our loans
are under $100,000, and about 52 percent are under $20,000. So the
typical loan is one of $20,000 to $50,000, then it is usually to a business
to allow it to expand its facilities or put in more machinery, or do
something that is strictly a term debt and requires, on the average,
from 3 to 5 years to repay out of earning.
Senator DOUGLAS. What you are saying is that the commercial banking system does not have a type of commercial paper sufficiently long
to permit such loans to be made ?
M r . GUNDERSON. That is my belief.
Senator DOUGLAS. What about the ability of these concerns to
finance themselves through stock or bond issues, which would be the
normal recourse for longer term capital ?
M r . GUNDERSON. O f course, Senator, I think our type of lending
more closely approximates some of the investments i n business loans
by insurance companies. A n d the insurance companies, as a matter of
expense of operation, prefer loans, it has been our experience, if they
are of $1,000,000 or larger. They can handle just as many of the
larger loans as the smaller ones, on a cost basis. I think some of us
feel that our loans of $25,000 to $50,000 cost us money to put on the
books. That was gone into before the Ranking and Currency Committee at some length during the past few years and was one of the
reasons that Congress left our capital and surplus where it is, to take
care of that part of the work.
Coming down to the question of the equity market, it is our opinion,
based on information we have received from our borrowers, and some
knowledge that I think is generally prevalent, that the equity market
is almost nonexistent, regardless of the soundness of the enterprise,
particularly with regard to small businesses. Since the beginning of
the war, under our present system of income taxation, it is not attractive for a person with money to invest in small business, because it
is unremunerative to him in proportion to the risk.
Senator DOUGLAS. Then what you would say is that small business
has such difficulty in borrowing for capital improvements, from the
banks, getting money from insurance companies, or floating security
issues, that there is a gap left, and that the Reconstruction Finance
Corporation performs very useful functions in enabling this type of
business to get capital, which otherwise would not be the case?
M r . GUNDERSON. Y e s , sir.




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Senator DOUGLAS. I personally tend to agree with you on that but
I am in more doubt about your loans to larger businesses. Y o u mentioned the fact that 5 2 percent of your loans are for less than $ 2 5 , 0 0 0
and 87 percent
M r . GUNDERSON. Less than $100,000.
Senator D O U G L A S . Less than $ 1 0 0 , 0 0 0 . What percentage of the
loans, however, are for these small businesses and what percentage of
the loans are i n large magnitudes ?
M r . G U N D E R S O N . I would say that we are making an increasing number of loans of larger amounts. I f the situation of the first part of this
year had continued—what I would call the frightened condition of
people who have money, their belief that economic conditions were
going to demand that they preserve and keep their cash—we would
have had a considerably increased number of much larger loans,
because we would be the only place left that could make them.
Senator DOUGLAS. Then the argument now turns away from small
business to the drying up of the banking system for big business.
M r . GUNDERSON. I n our act, Senator, any business concern, where
we think it w i l l continue employment and increase the economic stability of the United States, can get a loan from us, i f it can't get it
privately. That is the way the act reads.
Senator DOUGLAS. Let me ask you this: What proportion of your
loans are made to firms to whom you have loaned a million dollars or
more?
M r . GUNDERSON. I n the last quarter we made 1,273 loans and 28
were for over a million dollars.
Senator D O U G L A S . H O W much of the total was loaned to those 28 ?
M r . G U N D E R S O N . The gross amount was $ 2 0 5 , 0 0 0 , 0 0 0 .
Senator DOUGLAS. H o w many ?
M r . G U N D E R S O N . Twenty-eight received $ 1 2 2 , 0 0 0 , 0 0 0 .
Senator DOUGLAS. I n other words, 60 percent.
M r . GUNDERSON. O f the dollar amount.
Senator DOUGLAS. O f the dollar amount went to firms which borrowed more than a million.
M r . GUNDERSON.

Yes.

Senator DOUGLAS. A n d of the total of approximately 450 millions
of outstanding business loans, what proportion of those are i n concerns which had borrowed more than a million dollars ?
M r . G U N D E R S O N . I would have to get that information for you,
Senator, but I would venture a guess that it is that much or more.
Senator DOUGLAS. Sixty percent?
M r . GUNDERSON.

Y e s , sir.

Senator D O U G L A S . I S it not true that one of your loans, the KaiserFrazer loan, amounts to almost one-third of the total amount which
you have loaned ?
M r . GUNDERSON. That is not correct.
Senator DOUGLAS. The Kaiser-Frazer loan
M r . GUNDERSON. About 10 percent.
Senator DOUGLAS. The Kaiser-Frazer loan
M r . G U N D E R S O N . I think you are thinking of the steel loan, the loan
to the steel division of the Kaiser Co., and which I believe was a war
loan. I don't believe we carry that as a business loan; it is a national
defense loan; it was made during the war. That loan, though, is approximately $ 9 6 , 0 0 0 , 0 0 0 , against which the corporation holds approxi


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mately $8,000,000 of unapplied funds, pending completion of certain
construction.
Senator DOUGLAS. W h o collects the interest on it ?
M r . GUNDERSON. P a r d o n me ?

Senator DOUGLAS. W h o collects the interest on it ?
M r . GUNDERSON. W e collect it. W e carry it
Senator D O U G L A S . Y O U did not authorize the loan originally but interest payments are made to you; and to whom w i l l the principal
payments be made?
M r . G U N D E R S O N . I don't want any misrepresentation. W e made
the loan but it was made under our wartime authority that Congress passed in June of 1940 and rescinded, I mean, revoked in 1947.
Under that we could make 100-percent loans, build plants, buy materials ; we could do anything needed for the war effort.
Senator D O U G L A S . I S that 96 million included i n the figure of 450
million which you gave me ?
M r . GUNDERSON. Y e s ; i t is included.

Senator D O U G L A S . S O that i f you take the 4 5 0 million what is the
total now loaned to Kaiser-Frazer, or to Kaiser, i n their various enterprises—aluminum, steel, and automobile?
M r . GUNDERSON. About 140 million.
Senator D O U G L A S . 1 4 0 million ?
M r . GUNDERSON.

Yes.

Senator DOUGLAS. Does that include the new loans just authorized ?
M r . GUNDERSON.- Yes, sir. The loans the Reconstruction Finance
Corporation has to any Kaiser enterprise is the loan made as a national
defense loan to the steel corporation of 96 million and the recent loans
to the Kaiser-Frazer Co. for 44,000,000.
Senator DOUGLAS. That is 96 plus 44; 140 million dollars. Then
any other loans that the Kaiser-Frazer group may have owing to the
Government have been borrowed from other governmental agencies?
M r . GUNDERSON. I am not aware that they owe the Government
anything else other than perhaps part of the purchase price of the
plant that they have purchased from W a r Assets Corporation.
Senator DOUGLAS. D i d you give to Kaiser-Frazer an initial loan
to get them started i n business ?
M r . G U N D E R S O N . N O , sir. The first loan to Kaiser-Frazer was made
this fall, within the last 2 or 3 months.
Senator D O U G L A S . A loan to help them i n business rather than a loan
to start them i n business ?
M r . GUNDERSON. There was this distinction, Senator, i n the case of
the steel company: That is a wholly owned part of Kaiser. I n the
case of Kaiser-Frazer, the Kaiser interest is less than 10 percent;
the balance is owned by the public.
Senator DOUGLAS. I understand. B u t i f you have $140,000,000
loaned to the Kaiser steel interest, plus the Kaiser-Frazer automobile
interest, that means that 30 percent of your loans are, approximately,
given to one set of interests.
M r . GUNDERSON. Well, i f you assume that they are one set of interests, I think the interests i n the car are a lot different than in the
other.
Senator DOUGLAS. They are certainly under central management
control.
M r . GUNDERSON. That is correct.



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Senator DOUGLAS. Have you ever had any qualms as to whether you
were not putting too large a proportion of your eggs i n one basket?
M r . GUNDERSON. I think such qualms as we have had, Senator, have
been our desire to see that each loan we make comes under the act and
is properly collateralized, and we are confident that they are.
Senator D O U G L A S . Let me ask you, what is the total of loans to
Lustron as of this date ?
M r . G U N D E R S O N . Approximately $ 3 7 , 0 0 0 , 0 0 0 .
Senator D O U G L A S . S O that we have a further 8 percent loan to
another
M r . GUNDERSON. Senator, I would like to point out, i n the Lustron
case, that the initial loan to Lustron was not made under the Reconstruction Finance Corporation lending authority; it was made under
the war powers pursuant to the Veterans Emergency Housing Act,
and that the recent loans have been made pursuant to the congressional enactment of section 102 of the National Housing A c t of 1948,
which gave us $50,000,000 without any collateral requirements to help
the prefabricated-housing program.
Senator DOUGLAS. A r e there any other large individual loans which
the Reconstruction Finance Corporation has made ?
M r . GUNDERSON. I would like to go back for a minute, Senator.
W e have 127,000 loans outstanding, which include mortgages
M r . B U C H A N A N . 127,000?
M r . GUNDERSON.

Y e s , sir.

M r . CONSIDINE. That includes F H A and V A mortgages.
M r . GUNDERSON. O f which 246 are for a half million or more, and
the 1 2 7 , 0 0 0 are for loans representing a total of $ 1 , 6 8 2 , 0 0 0 loaned.
The 2 4 6 for a half million or more, represent $ 7 5 0 , 0 0 0 , 0 0 0 .
Senator DOUGLAS. Y e s .

M r . GUNDERSON. Approximately. I t is a little less than half. B u t
included i n here are a lot of mortgages loaned through the " F a n n y
M a y . " I f you took it out of the business loans it would be 60 percent
or better.
Senator D O U G L A S . I S it a matter of secrecy, or a matter of public
record, as to some of the other large loans which you have made to
individual companies ?
M r . G U N D E R S O N . N O ; W e report the loans of over $ 1 0 0 , 0 0 0 to
^
Congress.
Senator D O U G L A S . W o u l d you read some of the loans over
$5,000,000?
M r . G U N D E R S O N . Over $ 5 , 0 0 0 , 0 0 0 ?
Senator DOUGLAS. Yes. W e w i l l start on that end and then get
down to over a million.
M r . G U N D E R S O N . M r . Considine, w i l l you read those ?
M r . C O N S I D I N E . Y O U wish the amounts authorized over $ 5 , 0 0 0 , 0 0 0
or the amount outstanding over $ 5 , 0 0 0 , 0 0 0 ?
M r . GUNDERSON. I think the amount outstanding.
M r . CONSIDINE. The first I come to is the Lustron Corp.
Senator DOUGLAS. $38,000,000?
M r . C O N S I D I N E . $ 3 7 , 4 8 6 , 0 0 0 . That involves the complete loan, both
under section 102 of the Housing A c t and under the prior act.
Senator DOUGLAS. Y e s .

M r . CONSIDINE. The M c L o u t h Steel Corp.




151 M O N E T A R Y ,

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DOUGLAS. H O W

M r . CONSIDINE.

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much to them?

$11,723,000.

Petrol Refineries, Inc., $5,240,000.
Carthage Hydocol, Inc., $11,100,000.
Glen L . M a r t i n Co., $11,177,000.
Reynolds Metals Co., $30,700,000.
These balances are as of September 30.
Kaiser Co., Inc., $95,865,000.
Senator D O U G L A S . The loan of $ 4 4 , 0 0 0 , 0 0 0 recently authorized to
them would bring that total to approximately $ 1 4 0 , 0 0 0 , 0 0 0 .
M r . CONSIDINE. Not to them. This is to the Kaiser Co., Inc. The
other loan was to Kaiser-Frazer, of which the Kaiser interests are only
10 percent.
Senator DOUGLAS. Well, to the group of companies i n which M r .
Kaiser is one of the dominant figures, let's put it that way.
M r . CONSIDINE. That was an October loan. These are September 30
loans.
Senator D O U G L A S . SO, we would add to the Kaiser-Frazer Co., $44,400,000?

M r . CONSIDINE. That is right.
Senator DOUGLAS. M a k i n g a total to the two groups of companies,
however we manage this semantically, of $140,000,000.
M r . C O N S I D I N E . Northwest Airlines, Inc., $9,143,000.
This amount that I am reading to you is R F C ' s share i n those cases
i n which a private bank or banks participated. F o r instance, i n the
Northwest Airlines the total amount of the loan was $21,000,000.
R F C ' s share outstanding at September 30 was $9,143,000.
M r . B U C H A N A N . Is that on a 7 5 - 2 5 basis ? Was it originally ?
M r . G U N D E R S O N . N O . W e have four-sevenths. Banks took $9,000,000; we took $12,000,000.
Senator DOUGLAS. What about the Waltham Watch Co. loan ?
M r . G U N D E R S O N . Probably isn't up to $ 5 , 0 0 0 , 0 0 0 yet. I t is about
$3,000,000.

M r . CONSIDINE. Waltham Watch, the amount outstanding is
$2,916,000.
Senator D O U G L A S . I don't know how well I can add, but I bring these
totals of outstanding loans of over $5,000,000 to the nine companies
that you read, to $256,000,000.
M r . GUNDERSON. That is right.
Senator DOUGLAS. These were not cases. M i n d you, I am not necessarily condemning the policy of the Reconstruction Finance Corporation, but these are not loans to small business'. Here you have over half
of the outstanding loans of Reconstruction Finance Corporation made
to nine companies, aggregating $256,000,000, of some $450,000,000 outstanding ; so this is obviously not aid to small business.
M r . GUNDERSON. There is nothing i n our act which restricts our
operation to aid the small business. O f the total of $256,000,000, only
$203,000,000 is included in the $433,000,000 outstanding on September
30.
Senator DOUGLAS. Pardon me ?
M r . GUNDERSON. There is nothing in our act
Senator D O U G L A S . I understand, but the argument you started out
with, as a justification for direct loans, was that small business did not




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have access to short-term loans from banks, and now big business is
getting in that position.
Mr. GUNDERSON. Since the last year, sir. I f the present trend continues, and nothing is done to free equity-investor capital, talking
about double taxation of corporate dividends for one thing, it w i l l
continue this way.
I am not arguing that Kaiser-Frazer is a small business, but it is
a small business in the automotive field.
Senator DOUGLAS. Well, I seem to remember advertisements by
Kaiser-Frazer saying that they were the fourth-largest automobile
concern.
M r . GUNDERSON. But the larger ones have sold a lot more. KaiserFrazer has about 400,000 automobiles on the road. The first three sell
in the millions a year. They do over 95 percent of the business.
Kaiser-Frazer does' about 2 percent of the total automotive business.
Senator DOUGLAS. Taking the Kaiser-Frazer concern, is it your
theory that this was a desirable loan i n order to preserve a greater
degree of competition in the automotive business ?
M r . G U N D E R S O N . N O , sir. I t does that, but that is not the reason
for the loan. The reason is, after it was determined that the money
was not available privately, the fact that between 10 and 11 thousand
people are employed at W i l l o w Run, and the people employed by the
dealers and suppliers, there are the jobs of 4 8 , 0 0 0 people at stake in
the continued operation of that business.
Senator DOUGLAS. Therefore, to keep those jobs going you felt this
further loan should be made?
M r . GUNDERSON. A n d they subcontract to about a thousand small
businesses.
Senator D O U G L A S . The . initial portion of this $ 4 4 , 0 0 0 , 0 0 0 KaiserFrazer loan was $ 1 9 , 0 0 0 , 0 0 0 ; is that true?
M r . G U N D E R S O N . N O . The initial part, the first disbursement, was
about that amount.
Senator D O U G L A S . D O you know how Kaiser-Frazer spent this
$19,000,000?
M r . GUNDERSON. I don't know what you mean by that $19,000,000.
Senator D O U G L A S . Isn't it true that you gave them $ 1 9 , 0 0 0 , 0 0 0 —
made available $ 1 9 , 0 0 0 , 0 0 0 ?
M r . GUNDERSON. That was the first disbursement.
Senator DOUGLAS. That is right. DO you have any information as
to the purpose which Kaiser-Fraser put this $19,000,000 to ?
M r . GUNDERSON. I think most of it was used as working capital
and a part was used to retire an existing bank loan.
Senator DOUGLAS. W h a t was that bank loan ?
M r . GUNDERSON. I t was a loan from the Bank of America and the
Mellon National Bank for working capital during the past year.
Senator DOUGLAS. A n d that loan has been repaid?
M r . GUNDERSON. I am not informed that it has been repaid.
Senator D O U G L A S . Is it true that this loan amounted to $ 1 6 , 0 0 0 , 0 0 0 ?
M r . G U N D E R S O N . N O ; the loan amounted to $20,000,000, of which
the highest outstanding money taken under it was $16,000,000.
Senator DOUGLAS. W h i c h was it, the Bank of America or the Mellon
Bank, which got the $16,000,000, that had the $16,000,000?




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M r . GUNDERSON. The credit was by them jointly. I don't know
which got which. I t didn't make any difference because each had
a half interest.
Senator DOUGLAS. Each had $10,000,000 of $20,000,000?
M r . GUNDERSON. That is correct.
Senator D O U G L A S . I S it true this $ 1 9 , 0 0 0 , 0 0 0 disbursed to Kaiser Fraser has been devoted almost exclusively to reducing or eliminating
that loan ?
M r . G U N D E R S O N . I don't believe that is a true statement. I think
at the time the loan
Senator DOUGLAS. When you made the loan didn't you know the
purpose for which the $ 1 9 , 0 0 0 , 0 0 0 was to be used?
M r . GUNDERSON.

Yes; but

Senator DOUGLAS. What did they state was the purpose ?
M r . GUNDERSON. I don't want to run around, Senator, but at the
time we made the loan they had $ 3 5 , 0 0 0 , 0 0 0 i n working capital, and
I am sure they didn't use over $8,000,000 of the loan to apply on any
back debt.
Senator DOUGLAS. They must have stated to you why they wanted
the $ 1 9 , 0 0 0 , 0 0 0 cash.
M r . GUNDERSON. They stated to us why they wanted it.
Senator D O U G L A S . Y O U don't know how they spent the $ 1 9 , 0 0 0 , 0 0 0 ?
M r . GUNDERSON. I a m sure we do.

Senator DOUGLAS. Could you tell us ?
M r . G U N D E R S O N . I would prefer to get that from our loaning agency
and provide you with an accurate statement.
Senator DOUGLAS. But this is a transaction of such magnitude that
it seems strange that it is not known to the men at the top and that it is
only known to people in the lower level.
M r . GUNDERSON.

NO

Senator D O U G L A S . $ 1 9 , 0 0 0 , 0 0 0 seems like a large sum of money.
M r . G U N D E R S O N . I don't think there is anything strange about it.
The loan was approved on the basis that so much of it—and I can give
you the exact figures—would be used for working capital and so much
for retooling.
Senator D O U G L A S . T O the best of your knowledge and belief, was or
was not the major portion of the $ 1 9 , 0 0 0 , 0 0 0 which you gave to KaiserFrazer used to retire this outstanding bank loan ?
M r . GUNDERSON. Less than 50 percent. I can get the exact figures.
Senator D O U G L A S . Y O U think around $ 1 0 , 0 0 0 , 0 0 0 ?
M r . G U N D E R S O N . I t was less than $ 8 , 0 0 0 , 0 0 0 .
Senator DOUGLAS. I f they had working capital, why did they need
to borrow to retire the loan?
M r . GUNDERSON. W e w i l l be glad to tell you the reasons they gave
us, and the reasons we gave them the loan. One was that when KaiserFrazer began making this automobile—they sold the same automobile
for 3 years—they were coming into a more competitive period in the
sale of cars. They had attempted to put an automatic transmission
on the car last year. Due to certain circumstances, they did not get it.
They were faced with sales that were not increasing. They became
convinced that it would be necessary to bring the car out on a new
basis with some of the competitive characteristics of the other cars,
and they had prepared as a part of their operation a car that they




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believed would do this job. Also, up to the present time, they have
only made one automobile, a four-door sedan, wThich restricts them to*
50 percent of the market, because only about 50 percent of the automobiles sold i n this country are four-door sedans. So, they are not
competitive across the field.
The two banks that agreed to finance them on working-capital requirements would not finance them for tooling, which was necessary
i n order to bring out the new car. It was on that basis that they came
in and applied to us, believing that, i f they retooled to bring out their
new cars, they would be i n a competitive position and would work
themselves out of this situation.
Senator DOUGLAS. W h a t was the attitude of the Mellon Bank and
the Bank of America on continuing to loan Kaiser-Frazer these sums ?
Were they calling loans on Kaiser-Frazer ?
M r . GUNDERSON. The Kaiser-Frazer people informed me that the
banks were entirely willing to continue with those funds, but the
$20,000,000 credit was secured by a guarant}7 of two of the Kaiser companies and an agreement that they wouldn't pledge any of the assets,
and i n order to give the Reconstruction Finance Corporation a mortgage of the assets as required it was necessary to reduce that loan,
which was partially reduced with cash they had on hand and part of
the loan proceeds. The bank line was an open account.
Senator D O U G L A S . I don't want to use any invidious terms, but
isn't the net effect—a large part of the net effect thus far—that you
bailed the banks out on this initial disbursement ?
M r . GUNDERSON. W e use the term, Senator "bail out," to mean "remove them from a loss." Used in that sense, I do not think we "bailed
them out." They were paid off.
Senator DOUGLAS. They were paid off out of the proceeds of the
loan that you advanced to Kaiser-Frazer ?
M r . GUNDERSON. Partially out of the proceeds.
Senator DOUGLAS. Well, from where else were they paid ?
M r . G U N D E R S O N . The company had $ 3 5 , 0 0 0 , 0 0 0 of working capital.
Senator DOUGLAS. I t is just a bookkeeping feat. Y o u say that they
had $35,000,000. Y o u gave them $19,000,000 more, making $54,000,000. They paid, let us say $8,000,000 to $10,000,000 out of the $19,000,000 you gave them and paid the rest due out of the $35,000,000.
I n practice, you put $19,000,000 in and then they took $16,000,000 out.
I would say, on the theory of indistinguishable funds, that you bailed
the bank out.
M r . BUCHANAN. Were the terms of the loan any better than they
were with the bank?
M r . GUNDERSON. I think they are more severe. The bank line was
unsecured except for a guaranty. W e had a pledge of some $56,000,000
i n machinery and equipment of the company.
M r . BUCHANAN. What about interest rate to the company ?
M r . GUNDERSON. I don't know what the banks' interest was. I t was
probably lower than ours.
Senator DOUGLAS. What is the interest rate that you have ?
M r . GUNDERSON. Four percent.
Senator DOUGLAS. F o r how long a period of time ?
M r . G U N D E R S O N . Well, there are two loans. The $ 1 0 , 0 0 0 , 0 0 0 credit
is 18 months, and the $ 3 4 , 0 0 0 , 0 0 0 credit, I think, is 3 years.
Senator DOUGLAS. What security do you take ?



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M r . GUNDERSON. The company itself, at the time the loan was approved, had $56,000,000 in machinery, equipment, tools, automotive
equipment, cash, accounts receivable, and cars. W e have taken a first
lien on all that. W e also required a first lien on the plant.
There should be no misunderstanding on that plant. The plant was
sold by W a r Assets to them for $1,000,000 down payment and a total
of $15,000,000. I t had a cost of $42,000,000. A reproduction cost of
$47,000,000. The appraiser gave the plant a net value of $58,000,000.
W e have a first lien on the plant, on the equipment, and we have a
$15,000,000 guaranty by Henry J . Kaiser Co. and Kaiser Engineers,
secured by $10,000,000 in marketable value of securities.
Senator DOUGLAS. Let me double back for a minute. Is it your
understanding that Kaiser-Frazer is now out of debt to Mellon
National Bank and Bank of America ?
M r . GUNDERSON. That is my understanding.
Senator DOUGLAS. A n d that the $20,000,000 loan outstanding has
been retired ?
M r . GUNDERSON. Y e s , sir.

Senator DOUGLAS. A n d your contention is that $8,000,000 of that
came from your $19,000,000 ?
M r . GUNDERSON. That is the way I would attempt to explain it. I
would say, i f we were satisfied we had the collateral, that it was necessary to make this loan in order to keep the business running, we would
pay the banks off. W e don't like to pay the banks off, and we do our
best to avoid paying banks off; but, when they flatly refuse to go ahead
and do what is necessary to help a business, we pay banks off. That
is not new.
Senator DOUGLAS. I n practice, isn't that what happened? Prior to
your loan, the Kaiser-Frazer Co. had $35,000,000 in cash but it owed
$20,000,000 in loans to these two banks.
M r . GUNDERSON. Never got over $16,000,000.
Senator D O U G L A S . $16,000,000, then, in loans to these two banks.
Y o u put in $19,000,000. They had a net asset of $19,000,000, let us sav.
Y o u put in $19,000,000, building them up to $54,000,000. They retired
$16,000,000 worth of indebtedness. So that their net assets were now
$38,000,000. So, their net assets were increased by the amount of the
loan, $19,000,000, and the banks were really paid off out of the proceeds
of your loan. So that, in effect, you did bail out the Mellon National
Bank and the Bank of America.
M r . GUNDERSON. Senator, paying off is not a bailing out. That is
the only point I have made.
Senator DOUGLAS. I don't want to use invidious terms, such as "bail
out."
M r . GUNDERSON. I think that has a definite meaning that does not
exist i n this picture.
Senator DOUGLAS. Then, let us say that the Mellon National Bank
and the Bank of America were paid off out of the proceeds of your
loan.
M r . GUNDERSON. They were partially paid off.
M r . WOLCOTT. Wasn't the indebtedness to the Bank of America
endorsed by Kaiser as an individual ?
M r . GUNDERSON. Not as an individual. Most of the Kaiser assets
are in two companies: Henry J . Kaiser Co. and the Kaiser Engineers.
Those two companies had endorsed that line of credit.



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M r . W O L C O T T . S O the assets of all of those companies were behind
the $10,000,000 which was involved?
M r . G U N D E R S O N . The line of credit that was arranged was for a
maximum of $20,000,000, of which they only used $16,000,000. That
was an open line of credit unsecured except for this guaranty.
M r . W O L C O T T . T W O loans?
M r . G U N D E R S O N . N O ; one loan by the banks jointly. E a c h bank had
a half of it. I mean, the banks joined in making that credit available.
M r . W O L C O T T . $ 1 0 , 0 0 0 , 0 0 0 ; a line of credit of $ 2 0 , 0 0 0 , 0 0 0 , and the
2 banks split it?
M r . G U N D E R S O N . That is right.
Senator D O U G L A S . W h y couldn't Kaiser-Frazer Co. have obtained
the capital which they needed for retooling, and so forth, by a securities issue?
M r . G U N D E R S O N . Their investment brokers, I think it was the F i r s t
Boston Corp., advised us that it would not be possible for them to sell
their securities. W e went into it very carefully to be sure that the
banks—the insurance companies and the investment bankers—could
not raise this money for them. That came up when they first came
in to discuss this with us last spring. W e were satisfied that they
had exhausted the possibilities of either getting the banks to stay i n
and participate with us or getting insurance company loans, or of
selling their securities.
Senator D O U G L A S . D O you see any dangers, i f this Kaiser-Frazer
example is blown up into a general practice?
M r . G U N D E R S O N . Yes, sir; speaking personally. I don't think the
R F C is i n a position to answer that question, but I wouldn't hesitate
to say, personally, that you are i n a very dangerous position i f you
do not have an adequate supply of equity money for business. There
definitely is not an adequate supply of equity capital funds for business today available.
Senator D O U G L A S . A n d i n the absence of that equity capital you
feel that it is an obligation on the part of R F C to make individual
loans ?
M r . G U N D E R S O N . I think that Congress, i n writing our act, has written it so that when a borrower has adequate collateral, and is unable
to get his money elsewhere, plus the other requirements, we have to do
what we can to help them; I think that is the job you have given us to
do.
Senator D O U G L A S . Y O U didn't take equity i n these companies?
M r . G U N D E R S O N . These are capital, working-capital loans; they are
capital loans, really. They are well secured, in my opinion; they w i l l
be paid off, regardless of what happens to the borrower.
Senator D O U G L A S . What you are saying is that the inability of
Kaiser-Frazer to get equity capital forced them to turn for intermediate capital to you ?
M r . G U N D E R S O N . That is correct. Some of our people, very frankly,
have doubts about the future of Kaiser-Frazer Co. and its automobiles.
However, i f I did not believe that they had a very good chance of being successful, I wouldn't have, personally, worked so hard to try and
help them. I think perhaps, i f the private money market turns around
a little bit, they can refinance this whole thing privately in another
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Senator D O U G L A S . D O you have the same confidence about Lustron
Corp. ?
M r . G U N D E R S O N . N O , sir. I have never expressed a similar confidence about Lustron.
Senator DOUGLAS. D i d you recently make a loan of about $8,000,000
to Lustron ?
M r . G U N D E R S O N . N O , sir. They applied for a loan of about $ 1 4 , 000,000 on the first of September; and, as we advised the Banking and
Currency Committee, we have been working very hard to try and get
the final answer as to whether that business can be made successful,
and we have kept them merely on a very small operating basis until
we reach that decision.
Senator D O U G L A S . H O W much have you advanced in recent months ?
M r . G U N D E R S O N . I am sure it wouldn't be over a couple of million
dollars. I think we have made three $1,000,000 loans since about
August.
Senator DOUGLAS. A n d you are keeping them on a month-to-month
basis ?
M r . GUNDERSON. Yes, sir; until we can reach a decision. We have
had an engineering firm, an outside engineering firm, as we told you
before, on the original loan. O n two of the second advances, we had
Stone & Webster in there. W e employed the firm of Boos, A l l e n &
Hamilton, and they are about ready to complete their report on the
possibilities of that business and its future. When we get that— and
there has been some work we have been doing ourselves—why, we
should be i n a position to reach a decision.
Senator DOUGLAS. Have you ever wished that you were out of the
business of making large loans to companies ?
M r . GUNDERSON. Well, I have never wished to be out of the business
of trying to be helpful to people who couldn't be helped elsewhere.
Senator D O U G L A S . I S there not a danger, when you make loans, that
you may not be able to get the funds, when the Government makes
large loans, you may not be able to get the funds into the best hands ?
M r . GUNDERSON. I don't believe so, Senator. I n the history of the
Reconstruction Finance Corporation we have always made, dollarwise,
a lot more big loans than we have made small loans. When it was first
set up, we used to make hundred-million-dollar loans, as, for instance, to the Central Illinois Bank, to keep it going. I think we are
doing the same kind of business today in a different field. I think
until something can be done, and I am not saying this in the sense
that we feel we know the answers, but I believe that the problem is to
ease up investment money sufficiently so that it w i l l go into businesses,
and when that is done the R F C w i l l be only making a few business
loans. It w i l l be back so that it won't be as large a factor as it is today.
O n the other hand, i f investment funds are going to be discouraged
from going into business, I think something w i l l have to be done to
help business stay open, when they have the collateral and the possibility of paying off a loan.
Senator DOUGLAS. I n the field of agriculture, the problem of providi n g credit is largely met, but not wholly, of course, by the creation of
intermediate credit banks and by the creation of cooperative banks.
I n Germany, beginning about a century ago, they created the so-called
Schultze Delitsch banks, which were cooperative banks, to make available credit for small business.
99076—50

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Now, what would you say to the creation of new credit agencies to
provide for small business, to meet these needs?
M r . GUNDERSON. I don't believe that is the answer, Senator. I think
you have got to free equity capital to go into business. Y o u have got
to eliminate some of the double taxation on corporate earnings and
make it attractive for people who have money to buy something more
than municipal tax-free bonds and put it into businesses. A n d when
that is done the Reconstruction Finance Corporation business of this
nature w i l l sink to a very low volume. I am sure of that, because that
was our experience.
Senator DOUGLAS. Then, you would say the remedy lies in the abolition of tax on corporate profits and taxing individual income when
received ?
M r . GUNDERSON. I think some change should be made. I wouldn't
say it should be abolished. I think it should be modified so that investing in a corporation is at least as attractive as some other means of
investing, because that is the reason for the dearth of capital i n business, and particularly in small business. It is no longer attractive
for people to have investments of that character.
Senator DOUGLAS. What about noncorporate small business ?
M r . GUNDERSON. They should probably have some assistance. I
would like to say this, Senator, that during the years I have been with
the R F C we are making today a much better type of loan, in my opinion, than we made from 1934 to 1940. The loans we are making now
are good loans. Y o u remember our discussions this spring i n the
Ranking and Currency Committee about the Northwest Airlines ? I
have never understood why we had to make that air-line loan, because
that is a fine loan. I t was a good loan at the time the banks made the
original commitment. A n d there was no reason at all why it shouldn't
have been financed privately. But it was not financed privately. I
have every confidence that this loan w i l l be fully repaid on or before its
maturity date. O n the basis of operating results for the first 10
months of 1949, the cash available from earnings and depreciation
should exceed $6,000,000 for the f u l l year. Over the next 5 years the
depreciation account alone w i l l average approximately $6,000,000 per
year. I f operations in these years are only at a break-even level, the
cash available from depreciation w i l l be more than sufficient to meet
the required repayments on the loans.
Senator DOUGLAS. D O you see any need for a new type of lending
agency to meet the needs of small business ?
M r . GUNDERSON. I don't believe so, sir. I think that we may not do
as thorough a job as we would like to do, but I think as far as lending
money goes, we are supplying the needs of small business for a loan.
I don't think an additional source would facilitate it.
Senator DOUGLAS. What would you say to giving to the Federal
Reserve banks limited power to make direct loans ?
M r . GUNDERSON. Well, the Federal Reserve banks have that authority, to make direct loans, have had it for about 11 or 12 years, and they
have not done very much business under it.
Senator DOUGLAS. H O W limited are their powers ?
M r . GUNDERSON. I do not have a record of the loans they have made
during the time they have had this authority. I don't know that I
can quote the power. It is the authority to make direct industrial




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Is the limitation

M r . DOUGHERTY. Y e s ; both.

M r . BUCHANAN. F o r working capital purposes only.
M r . GUNDERSON. Something like that. There are limitations both
as to type and amount of money.
Senator DOUGLAS. Would you favor reducing those limitations?
M r . GUNDERSON. I don't have any feeling about it. Senator.
Senator DOUGLAS. M y general feeling is that it is a very distinct
function of the Federal Government to regulate total supply of credit
i n order to stabilize business and to maintain an expanding production
as well as a stable price level, but that the Government should be very
cautious about getting into direct lending activities and insofar as
possible it should have these functions performed by middlemen.
M r . GUNDERSON. I think that is a sound approach.
Senator DOUGLAS. Well, now, following that out, might it not be
well to create intermediate institutions which are not governmental
agencies, as the R F C necessarily is, to help make loans to small
business?
M r . (TUNDERSON. I don't see any advantage in it, Senator.
I don't think, because something has worked satisfactorily for 17
years, it is a reason for trying to change it. I don't think that as long
as you are making loans any agency you could set up would do the
job much better than we have tried to do it.
Senator D O U G L A S . I am sure you have tried to do well.
What we are all holding our breath for, I suppose, is because there
is a general fear that the Lustron loan w i l l blow up; and while we
wish M r . Kaiser well, we are not at all certain that that is going to
come through. I f those two loans should go sour a very heavy blow
would be struck at the Reconstruction Finance Corporation.
M r . GUNDERSON. I can't agree; i f we were to have a 100 percent loss
on Lustron, I don't think it would be any blow to the Reconstruction
Finance Corporation. That was done under the Veterans Emergency
Housing Act with as near a directive of Congress, short of them appropriating the money, as anything I have ever seen, and i f there is any
blow at anybody, it certainly wouldn't be us, because we have done
nothing but carry out the assignment the best we could under all of
the conditions. I n the case of M r . Kaiser, I am confident that loan
w i l l be repaid.
Senator DOUGLAS. W E certainly all hope so.
M r . GUNDERSON. I feel far more strongly than a hope. I don't
think there is any doubt about it.
Senator DOUGLAS. M r . Dougherty, did you want to ask something?
M r . D O U G H E R T Y . N O ; thank you.
Senator DOUGLAS. M r . McCabe, Chairman of the Federal Reserve
Board, states, on page 77 of the committee print on monetary, credit,
and fiscal policies [reading] :
It is my view that both the F e d e r a l Reserve banks and the Reconstruction
Finance Corporation may, without inconsistency, operate together to provide
financial assistance for business enterprises, provided, however, that there is
written into the l a w a provision w h i c h would require the Reconstruction Finance
Corporation, before i t extends financial assistance to a business enterprise, to consider whether such assistance is available, not only f r o m commercial banks, but
through the Reserve banks. T h i s would be i n the nature of a clarification of the
present statutory requirement that the Corporation shall render financial assistance only if it is "not otherwise available on reasonable terms."




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I wonder i f you have any comment concerning that.
M r . GUNDERSON. W e have taken the position, as expressed at some
length to the Banking and Currency Committee a year or two ago, and
which I might summarize briefly, that i f you want a central bank,
perhaps you should give the powers to the Federal Reserve to lend
money, but there are two things about the Federal Reserve that lead
some people to believe they should not be in the direct lending business
or even i n the indirect lending business. That is their banking discounts. I f they were to commit their funds on loans then in times of
stress they wouldn't have anything left.
Senator DOUGLAS. The discount function of the Federal Reserve
bank has virtually disappeared through attrition. The amount of
commercial paper which is presented to the Federal Reserve banks for
rediscount forms only about 2 percent of the total volume of business.
M r . GUNDERSON. I n economic emergency it might be a great deal
larger.
But the other thing is that they are a supervisory agency of banks,
and it is questionable whether they ought to be supervising their own
operations.
Senator D O U G L A S . I think the second consideration is of much more
weight than the first.
M r . GUNDERSON. Personally, I don't have any feeling at all as to
whether the Federal Reserve should or should not be given authority
to make loans. I do not think that people trying to get loans should
be put through any more of a devious process than they are now. B y
putting in the Federal Reserve, it is just one more place they must go
to before they come to us for help.
Senator DOUGLAS. What would you say to the creation of banks
similar to the agriculture cooperative banks and intermediate credit
banks for agriculture, which are fairly well decentralized from
government ?
M r . GUNDERSON. Well, of course, you know we are fairly well decentralized. Each of our loan agencies has authority to make loans up
to $100,000, and handle all that business without recourse to Washington.
Senator DOUGLAS. The governing boards of these agencies, as I understand it, are not appointed by the Government but chosen by the
groups which are served by the loan. So the shifting is from primarily
governmental agencies to primarily voluntary agencies.
M r . GUNDERSON. I don't believe that you would get the results with
voluntary agencies. It is difficult to get it with an agenc}^ charged with
the job of doing it sometimes. I presume you would capitalize such
entities, i f you are going to be successful with Government funds. A
private pool of bank credit has never been successful in meeting this
situation. So I think it is largely a question as to what kind of a job
Congress wants done. I f Congress wants a certain job done, as they
have i n the last 17 years with R F C , I think R F C is as good an entity
to get that result as any. I f it is more desirable to eliminate this function or change it, I don't have any feeling about doing something different, but on the job we are doing I think we can do it as well as
anybody else and maybe better.
Senator DOUGLAS. M r . Gunderson, would you describe briefly the
purposes and functions of the Federal National Mortgage Association,
familiarly known as Fanny May.



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M r . GUNDERSON. I n some housing act a long time ago. Congress provided for the creation of a national mortgage association. Pursuant
to that, February 10,1938, the Federal National Mortgage Association
was set up, I believe, with the primary purpose of creating a secondary
market for F H A mortgages.
Senator D O U G L A S . Y O U mean it was to be in the real-estate mortgage
field what the Federal Reserve was to be in the commercial banking
field?
M r . GUNDERSON. That is correct. A n d as such its entire function
has been in the past and is today purchasing or agreeing to purchase
mortgages insured by the Federal Housing Administration, and today
that is enlarged because it also purchases loans that are insured by
the Veterans' Administration.
Back in 1938, at the time when there was a credit stringency, the
Federal National Mortgage Association bought a considerable volume
of mortgages, which were subsequently sold at premiums, and for a
number of years, including the war years, it did very little i f any
business. A f t e r the war there was a lot of conjecture that private
people who bought mortgages didn't wish to hold them, but I believe
probably the best reason is the fact that they believed the interest rate
might go up, and there seemed to be a considerable need for an agency
to provide a secondary market for F H A and Veterans' Administration
insured mortgages, and as a result the Federal National Mortgage
Association started in to buy mortgages again. A t the time that Congress indicated to us, by eliminating the R F C Mortgage Company and
the other real-estate operations, that they didn't desire to have us
make real-estate loans as such
Senator DOUGLAS. M a y I interject? A m I correct i n my understanding that the "Fanny M a y " is run by the directors of R F C ?
M r . GUNDERSON. Y e s , sir.
Senator D O U G L A S . SO that

M r . GUNDERSON. I t is for all intents and purposes the same thing.
Senator DOUGLAS. I t is the left hand of R F C ?
M r . GUNDERSON. I t is just a different account.
Senator DOUGLAS. Yes. W h a t is the value of the real estate mortgages which you now hold in your portfolio ?
M r . G U N D E R S O N . $637,400,000.
Senator D O U G L A S . D O you hold

these or do you try to resell them ?
M r . GUNDERSON. W e have launched a program, beginning about
August, of setting prices on these things. W e are not particularly
anxious to make a profit, but we believe there should be some penalty
to the people who sell to us; we shouldn't just buy and sell at par. W e
have aggressively undertaken the sales, and I would say I think we
are progressing satisfactorily. A t the time we started systematically
to go about selling them, we believed it would take 6 or 8 months to
build these sales up in any great volume. I f my memory is correct
we sold about half a million dollars' worth i n August and about a
million and a half* in September and about a million and a half in October, and we have tentative commitments for the sale of about $21,000,000. W e have other individual sales of $10,000,000 each under
consideration that are not included in the figures I am talking about.
I would say that by spring we should be moving at a more rapid and
increased rate and i n substantial amounts.




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Senator D O U G L A S . Well, now, on the mortgages which you hold,
w^hat charge do you make for rediscount ?
M r . GUNDERSON. Under the F H A and V A acts there are several
different kinds of mortgages. I think the highest premium we ask,
that is, on old 4%'s, is about 2 points, but we have a schedule of
premiums for each type of loan, and I would say that on the bulk
of the loans the premium is about a half of 1 percent.
Senator D O U G L A S . What do you pay out?
M r . GUNDERSON. M r . Dougherty is president of the company. H e
might discuss that.
M r . DOUGHERTY. F o r those that we buy over the counter we pay
par and accrued interest. We pay par and accrued interest for those
mortgages we buy over the counter.
Senator DOUGLAS. Where do you make your profit then ?
M r . DOUGHERTY. Well, we w i l l sell them at a premium after a while.
Senator D O U G L A S . Y O U mean the mortgages w i l l sell at a premium ?
M r . DOUGHERTY.

Yes.

Senator DOUGLAS. Isn't that hope rather than realization ?
M r . D O U G H E R T Y . Senator, prior to the war we bought $ 2 7 1 , 0 0 0 , 0 0 0
of those mortgages and sold them at premiums of between 5 and 6
million dollars.
Senator DOUGLAS. That was prior to the war.
M r . D O U G H E R T Y . Yes. Presently
Senator D O U G L A S . Y O U bought in a period of low construction cost
and sold in a period of high costs, but now you have been buying i n
a period of high costs and certainly you cannot sell in a period of still
higher costs.
M r . D O U G H E R T Y . I hadn't finished the answer, Senator.
Senator D O U G L A S . I am sorry.
M r . DOUGHERTY. F o r those we buy over the counter we pay par and
accrued interest. F o r those for which we issue a commitment to purchase, and those are in the majority, we pay 99%. I f we issue a commitment to purchase a mortgage and it is not sold to us, we charge a
quarter of a percent for having issued the commitment, and return
the commitment fee except one-quarter of 1 percent. A t the time we
issue the commitment, the seller asking us to purchase the mortgage
and seeking the commitment pays us 1 percent cash fee, of which we
w i l l return him one-half i f he sells the mortgage to us and one-quarter
i f he doesn't sell it to us.
Senator DOUGLAS. But in practice, don't you make a profit, not from
a resale at a higher figure but from the fact that you borrow from the
Treasury at a rate of interest which, I assume, is around 2 percent ?
M r . D O U G H E R T Y . S O far as income is concerned, that is correct; so far
as sale is concerned
Senator DOUGLAS. Speaking of income; on income, you borrow from
the Treasury at what rate—2 percent?
M r . DOUGHERTY. About that, 1% percent is the correct rate.
Senator DOUGLAS. Then you collect how much, 4 percent ?
M r . DOUGHERTY. Four percent less a half that we pay for servicing the mortgage to the mortgagor.
Senator D O U G L A S . Y O U have a iy2 percent credit
M r . D O U G H E R T Y . That is right, approximately.
Senator D O U G L A S . Out of which you meet your operating costs ?
M r . DOUGHERTY.




Yes.

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Senator DOUGLAS. Then, in addition, to make any profit on a higher
resale figure ?
M r . D O U G H E R T Y . I might say that one of the sales to which M r .
Gunderson has referred was made at: $500,000 at 1% premium, and
for about $7,000,000 of it, 101% is the sale price.
Senator DOUGLAS. I f we would have a decline in building costs and
in the general price level, you would not have the same confidence,
would you, that you would be able to sell at a premium ?
M r . DOUGHERTY. Well, they are all the same; regardless of what the
cost level may be, your mortgage is insured 100 percent by the Government of the United States and the F H A , and up to 50 percent
Senator D O U G L A S . Y O U pass the losses on to someone else ?
M r . D O U G H E R T Y . NO.
The Government guaranty doesn't change
because building costs go up or down. I t remains the same.
M r . W O L C O T T . Y O U sell them in bulk also?
M r . DOUGHERTY.

Yes.

Senator DOUGLAS. W h y do the building and loan associations, and
so forth, want a rediscount market if they have a hundred-percent
guaranty ?
M r . DOUGHERTY. That is a mystery we w i l l never be able to solve.
We do not know why they do not keep them as investments and why
Congress has been obligated to increase the amount of money we spend
for them and place limitations upon the kind of mortgages we can buy.
Senator DOUGLAS. That is a mystery that is running up into hundreds of millions of dollars,
M r . GUNDERSON. I t can be broken down. I believe one of the principal reasons during the past year was the belief by people that the
interest rate might be increased of the insured mortgages, which would
mean a half percent or more yield. Say F H A would be 4 ^ .
Senator DOUGLAS. They want cash to go into new mortgages ?
M r . GUNDERSON. Yes. I think when the feeling becomes prevalent
that the market is stabilized at 4 percent, they w i l l move back out
la rgely where they were. That may not be the only reason, but I think
it is one of the important reasons.
Senator DOUGLAS. That is all the questions I have.
M r . B U C H A N A N . H O W are the lending activities of R F C coordinated
with the Federal Reserve in general credit processes?
M r . GUNDERSON. Rather loosely. They are coordinated. I n order
to explain the position, the type of loan that we make is confined to
a rather narrow group of loans when you consider the over-all credit,
the types of credit available in the country. F o r example, probably
the largest bulk of credit available is consumer credit. Time credit
of appliances and purchases at retail stores and that type of credit
run into billions of dollars. One of the others, also, which you could
probably include in consumer credit, is the short-term bank loans of
one type or another, both to individuals and to stores, with which to
purchase, carry, and sell merchandise.
That field of short-term consumer credit is a very, very vast field.
I have seen figures on it which run up into the billions of dollars.
Our field, on the other hand, is restricted to a very narrow field
where the borrower must have enough collateral. W e cannot lend a
fellow, no matter how good he is, if he has marketable securities or
Government bonds or money i n the bank; our field of lending is




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usually on fixed assets. So the typical loan we make is one on a plant
or a store, and it is usually for the purpose of either replenishing loss
incurred in operating the business or to build an addition to the store,
and so forth.
Now, the only case that has come up recently was the administration's and Congress' wish to restrain inflation a number of years ago.
A t that time the President, i n his message, indicated that the Federal
Reserve would take certain steps, and one of the steps the Federal Reserve took was to restrict and curtail in very large measure certain
aspects of consumer credit such as monthly payments on automobiles
and that kind of thing.
Now, at that time we advised all our people to avoid making any
loans that were inflationary. A t the same time, the President indicated he wanted every possible aid given to production, with the idea
that i f you increase production sufficiently, you w i l l overcome scarcity
and decrease inflationary tendencies. Except for the fact that we
made a few loans i n the past, maybe to theaters or bowling alleys or
something like that, almost every loan the R F C makes is one i n production and distribution. So wTe told our officers' and our people that
we did not want to make any loans that were inflationary. A s near
as we can define an inflationary loan it was some loan for what I would
say would be a nonessential purpose that used up scarce building materials—that type of thing. I t is a very loose thing, but we conscientiously tried to conform to what the Federal Reserve is doing, and in
the very small and narrow sphere in which we lend, I think it is
adequate.
M r . BUCHANAN. What percentage break-down do your loans take
i n the form of production and distribution and the other fields ?
M r . GUNDERSON. Can you give that, M r . Considine ?
M r . CONSIDINE. F o r the quarter ended September 30 of the loans
we made, the R F C ' s share of the loans we made, which was $177,600,000, 31.7 percent represented loans for construction purposes, 30.3 percent represented loans for working capital purposes, 27.8 percent for
debt payment, and 9.6 percent for machinery and equipment, 0.6 percent for purchase of real estate to be used i n the business, which
accounts for the whole 100 percent.
M r . B U C H A N A N . H O W much on accounts receivable i n consumer
goods ?
M r . CONSIDINE. That would be 30.3 percent; inventory loans, accounts receivable.
M r . BUCHANAN. Is there a break-down i n that figure ?
M r . GUNDERSON. I do not think we can give a break-down on accounts receivable, but I can tell you that our loans on accounts receivable are minute. They are very small.
M r . BUCHANAN. W o u l d they be about 15 percent of that figure?
M r . GUNDERSON. M y guess is it might even be less than five, might
be down around one, because we never make an accounts receivable
loan by itself, and usually the only time we take them is' when it is
absolutely essential to the business to have a little more money than
he can get on his building, equipment, etc., and he has to have it i n
order to make a go of it.
I f the only source of collateral remaining is a few accounts receivable, we try to do it, but i n almost any business, except up i n




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Boston last spring when the banks quit loaning on accounts receivable,
they can borrow on accounts receivable.
Our lending is largely restricted to term loans on plants and
equipment.
M r . BUCHANAN. I was thinking of the problem of small business
i n regard to contraction by banks on that type of loan and their availability of funds and the only assets left are accounts receivable that
they are able to pledge. It is a growing problem with those lines of
activities such as furniture and household appliances.
M r . GUNDERSON. Unless we have a local bank participating—we have
had loans, for example, to dry-cleaning and pressing establishments,
which may have thousands of accounts that w i l l run from 75 cents
to 3 or 4 dollars. W i t h our set-up, although we can go to any extent
to be helpful, i f we do not have a participating bank in that town
which can function with the substitution and release of those accounts
receivable monthly, you get unwieldy. W e would rather lean over
backward and leave them freer on that because, while we do everything we can to help small business, we are not in a position to service
things like a vast amount of small accounts receivable loan. I t is
difficult for the borrower as well as for us.
Mr. BUCHANAN. Even things of a semidurable nature such as household furniture and refrigerators?
M r . GUNDERSON. W e have never done much of it. W e did it i n the
Kaiser-Frazer loan, that $10,000,000 loan.
M r . BUCHANAN. That is where the business units have outgrown
the banking facilities ?
M r . GUNDERSON. That is where C I T , for instance, does not wish
to operate. The bulk of dealers w i l l be financed on the floor plan by
credit agencies, and none of that money is available until the regular
credit agencies turn one of them down.
We have run into more applications in the last 6 or 8 months asking
for us to lend them money to assist them in financing certain types
of their business, which is accounts receivable, than we have had i n a
long time.
M r . BUCHANAN. The present moratorium in the strike areas of the
steel and coal sections—is that going to lead to a demand for that type
of loan ? I have had inquiries.
M r . GUNDERSON. W e can certainly help them i f they cannot handle
it privately.
M r . WOLCOTT. W h a t profits do you show on your loan operations?
M r . GUNDERSON. Gross to date about $560,000,000, M r . Wolcott.
Have you got it for this year, M r . Considine ?
That is after setting up reserve for losses of over a hundred million.
So far it has totaled $568,000,000.
Senator DOUGLAS. Does that include interest on Government advances to R F C ? Have you deducted interest paid to the Government ?
M r . GUNDERSON. Yes; that is correct bookkeeping; net.
Senator DOUGLAS. That is profit over and above cost of capital furnished to you by the Government ?
M r . GUNDERSON. Y e s , sir.

M r . WOLCOTT. Y o u r net would be minus your reserves, so you have
made something over $500,000,000 ?
M r . GUNDERSON.




Yes.

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M r . C O N S I D I N E . I might add, $ 3 0 7 , 0 0 0 , 0 0 0 of that was paid as a
dividend to the Treasury last December, subject to the requirements
of a recent act.
M r . W O L C O T T . D O you think, M r . Gunderson, i n the operation of
R F C i n making investment capital available to small industry, that
you perhaps have prevented concentration or helped to prevent concentrations of industrial and commercial power ?
M r . G U N D E R S O N . Definitely, M r . Wolcott. W e have certainly done
that, and we have done one other thing that is a little difficult to explain, but it interests me.
I had a record kept in one of our loan agencies for about 18 months,
from J u l y 1946 to about March 1948. I had them keep an individual
detailed record of each application from a borrower, the type of business he was in, the amount of money he asked for, and the amount
of the loan that the R F C approved.
Then we did one other thing: W e broke that list down into the
loans that we actually paid out the money on; and the loans thereafter, after we had done all the work, banks and insurance companies
took over the commitment and paid it out on our terms. The amount
of loans made in which we did all the work and disbursed no money
was $ 1 3 , 4 0 0 , 0 0 0 , and during the same period we made and disbursed
loans to the amount of $ 3 , 5 0 0 , 0 0 0 . That was just one of our loan
agencies.
So we have done and continued to do an excellent job i n putting
together a situation in businesses that are in difficulty, whereby private sources that were not available to them before we went to work
on it come to their assistance after we have put the picture together.
M r . W O L C O T T . A f t e r you have made a survey, a study, and a commitment, then a bank takes over the loan, and there is no way of reimbursing you for the service you have performed ?
M r . G U N D E R S O N . N O , sir. That is a gratuitous service on our part.
M r . W O L C O T T . W h a t is your total borrowing power now?
M r . G U N D E R S O N . Three billion five.
M r . W O L C O T T . What part of that has been theoretically set aside
for capital for "Fanny M a y " [ F N M A ] ?
M r . G U N D E R S O N . T W O and one-half billion.
M r . W O L C O T T . S O there is a very definite limitation upon your
operations ?
M r . GUNDERSON.

Y e s , sir.

M r . W O L C O T T . Y O U have in the neighborhood of a billion and a half
of borrowing power with which to compete with our entire economy,
and the Congress can or cannot, just as it pleases, expand your authority in that respect as it did during the war; is that right ?
M r . G U N D E R S O N . M r . Wolcott, in addition to the monetary limitations, the much more real limitation is the wording of the act and the
requirement that credit cannot be privately available and that a loan
has to be so secured as to assure repayment. I n my opinion, enforcement of those two conditions is such that it is almost a physical impossibility, no matter what the situation, to find enough loans to use
up the money over a very long period of time.
M r . W O L C O T T . That language surely prevents you from getting into
open competition with private lending institutions.




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M r . GUNDERSON. It means that we have to exhaust every possibility
of having a thing financed privately; and we have been, I think, very
successful. I know of a case where the fourth largest biscuit-manufacturing company in the country came in to get a loan from us about a
year ago, and it already had a loan from one of the insurance companies, and it had embarked upon a program of modernization following the war in which they put i n automatic bake ovens.
They had spent about $2,000,000 more than they had expected.
They came down because they had exhausted all possibilities of getting
credit privately, and I suggested that they go back to the insurance
company and offer the insurance company the same rate of interest we
would require and the same term of years.
After about 6 weeks' negotiating they got the insurance company
first to agree to take half of the loan we might make to help them, and
finally the company took it all.
Those types of our assistance are in carrying out the direction to be
sure private capital is not available; and it results in, I would say, on an
a verage, two or three loans being made privately that have been turned
down by private sources after they have come to us throughout the
country.
That is why I say that business of exhausting them is a
restriction on the amount of work you do. Also, the limitation that it
must be so secured as to reasonably secure repayment ties it down to
where they must have physical assets, and it eliminates the consideration of all the types of loans that constitute the largest bulk of credit
in this country, like a note at the bank for a line of credit. W e cannot
do any business like that. Somebody has to have a building or
machinery with a market value to it before we can do anything for
them, and it is a very real limitation and one that restricts the rate
at which we can lend and the number of loan applications, short of
some major economic catastrophe.
M r . W O L C O T T . W E built you up during the war so that in the spring
of 1947 you had a potential borrowing authority of—we never could
determine just what it was, but it was between 14 and 18 billion,
was it not ?
M r . GUNDERSON. That is correct.
M r . WOLCOTT. I t is not your impression that we changed the
identity of the Corporation in respect to loans to business and banks
when we cut you back 2 years ago to the $2,000,000,000 and you became
a sort of stand-by organization to meet any emergencies that might
arise in the future—it isn't your impression that it was the intent of
Congress to give you any more or less power to compete with private
enterprise than you had before that ?
M r . G U N D E R S O N . N O , sir. The two actual changes in the act, the
elimination of loans on purchase of preferred stock, the only change
i n this business-loan section
M r . WOLCOTT. Preferred stock in banks ?
M r . GUNDERSON. Yes. The only change in the wording of the
section of the R F C A c t which covers loans to business was the addition
of three words: "encourage small business."
Mr, W O L C O T T . N O W , I just want to make this statement for what
it might be worth. Back in 1940 when we gave you these very broad
powers, especially under 5 (d), and then later on increased your
borrowing authority to upward of $14,000,000,000, it was very appar-




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ent that the R F C had the authority, the power, i f it had missed it, to
socialize our banking structure and to control the flow of credit to agriculture and business and industry.
I think it is to the great credit of the Board of the R F C that that
power was never abused in that respect. The Congress has always
been very cautious not to continue those powers beyond the time
when it was found necessary for war purposes, so that any Board
in the future that might think otherwise would not have the power
to socialize our banking and credit or industry generally.
I have always thought that the R F C did a very splendid job during
the war in financing our war effort, and especially that it did not at
any time misuse its powers to the prejudice of the American system
of government. The fundamental and basic issue before the country
today appears to be whether we are going to perpetuate the American
way of life.
Government was set up to encourage and regulate business but not
to control it to the point where there would be through Government
control or otherwise a too high concentration of financial and industrial power. I think that the R F C has done a very splendid job in
contributing to that ambition, which we all should have that America
continue strong.
I think I should correct a thought I had and I might have expressed
to loans made by the Federal Reserve. M r . Buchanan called my
attention to that paragraph on page 76 of the preliminary hearings
which states that the restrictions on those loans which it says under
present law they—that is, the Federal Reserve banks—may make commitments on loans only for working capital purposes, only to "established" business, and only with maturities not exceeding 5 years.
These are severe limitations upon the ability of the Reserve banks to
render effective assistance in meeting the requirements of smaller
businesses.
O f course, that does not remove in any manner the basic objection
to Federal Reserve banks making direct loans. W e have always successfully fought attempts which have been made to make the Federal
Reserve banks banks of deposit and to authorize the Federal Reserve
banks to make loans, whether to small business or to big business or
anyone, which would put them in direct competition with the members
over which they have control. I t is directly contrary to the theory
behind the establishment of the Federal Reserve System i n 1913 and
the amendments which we have adopted to it.
I can readily understand why the Federal Reserve System might
think that the only way they can control the volume and velocity of
credit is to get control over the issuance of credit ; but, of course,
that is to me a rather superficial reason because, of course, i f the
Federal Reserve Board is going to do an effective job i n that field,
which the Congress itself delegated to it, then the Federal Reserve
System would have to be given control over all expenditures in respect
to our foreign affairs and E C A and every other expense which the
Government has which involves the raising of money. The only other
way you could concentrate control of credit would be to transfer the
R F C , the Federal home loan banks, the Federal Reserve banks into the
Treasury and put them all under the single head; and I do not think
anybody is advocating that.




169 M O N E T A R Y ,

CREDIT,

AND

FISCAL

POLICIES

So I think we should proceed rather cautiously in any recommendation we make that the Federal Reserve Board change its identity
from that of its present set-up to one in which they are doing a general banking business. We d i d give them the authority at one time,
the Federal Reserve Bank of New York, as I recall it, to accept some
deposits to the account of foreign countries temporarily. That is the
nearest we have come to giving Federal Reserve banks authority to
accept deposits.
I guess that is about all.
Senator DOUGLAS. One final question, M r . Gunderson, which I would
like to ask you. W h o owns the profits of the R F C ? The same question has from time to time arisen in connection with the Federal
Reserve banks and System, and the Federal Reserve System brought
some gifts up to the altar and presented them to the Treasury i n
possible anticipation of congressional legislation and possibly with a
desire to forestall congressional legislation. Now, i n the case of the
R F C , who owns these five-hundred and sixty-odd million dollars ?
M r . GUNDERSON. The United States.
Senator DOUGLAS. N o t the R F C ?

M r . GUNDERSON. Under our act Congress has permitted us to retain
$100,000,000 worth of capital and $250,000,000 in surplus, together w i t h
the adequate reserves; anything we make over and above that it has to
be paid into the Treasury at the end of each year.
Senator D O U G L A S . H O W much have you paid into the Treasury ?
M r . GUNDERSON. W e have paid $307,000,000.
Senator DOUGLAS. Over a period of time ?
M r . GUNDERSON. I n the last couple of years, because that provision
was just put i n our act about 2 years ago.
Senator DOUGLAS. I n addition to that, you have accumulated your
capital and surplus ?
M r . GUNDERSON.

Y e s , sir.

Senator DOUGLAS. Y o u have retired the advances ?
M r . G U N D E R S O N . A l l but $ 1 0 0 , 0 0 0 , 0 0 0 i n capital stock, but we have
surplus and reserves. The best picture on it is that our gross earnings
to date are $ 5 6 8 , 0 0 0 , 0 0 0 , of which $ 3 0 7 , 0 0 0 , 0 0 0 have been paid into
the Treasury.
M r . BUCHANAN. Since the inception of the R F C i n 1932 ?
M r . GUNDERSON. That is correct.
M r . W O L C O T T . We did write off in legislation about $ 2 , 0 0 0 , 0 0 0 , 0 0 0 of
losses in the R F C as a result of extracurricular activities during the
war.
M r . GUNDERSON. Nine billion.
M r . W O L C O T T . Y O U had been mandated to raise money for activities
upon which you could get no return.
M r . GUNDERSON. That was written off, and on the liquidation of
that Ave still, as a liquidation of the war activities, run by direction of
Congress the synthetic-rubber program, the tin smelter at Texas City,
certain abaca properties i n Central America, and a handful of leases
on plants in the process of liquidation; but all proceeds from all that
activity goes to the miscellaneous proceeds of the Treasury.
Senator D O U G L A S . A S I remember, financial statements on those
activities showed a profit, too; is that right ?




170

MONETARY,

CREDIT, A N D F I S C A L

POLICIES

M r . G U N D E R S O N . N O , sir. They did not show a profit, for the reason
that much of the money w e spent during the war was i n the payment
^
of subsidies.
Senator DOUGLAS. The operations i n the last fiscal year, I mean.
M r . GUNDERSON. Oh, yes. There is profit on most of these operations,
M r . WOLCOTT. Y o u paid butter and other food subsidies.
M r . GUNDERSON. A l l metal and food subsidies were paid out of
those funds during the war.
Senator DOUGLAS. W i l l you furnish statistics on various points
which we have brought out; that is, the loans outstanding, classified
by size, the earnings of the Corporation above costs, and so on ?
M r . GUNDERSON. Yes; that w i l l be done.
(The following tables were later submitted for the record:)
Business

loans

outstanding,

by size, as at Sept.

30,1949

D I R E C T LOANS
Number
Less than $500,000-$500,000 to $1,000,000
$1,000,000 to $5,000,000
$5,000,000 and over.
Total

Amount

5,477
41
33
11

..

__

$148, 297, 000
26,338, 000
69,320, 000
189,640,000

5,562

...

433, 595,000

D E F E R R E D PARTICIPATIONS IN B A N K LOANS
Number

Business

-

-_

-

- _ . --

.

loan

authorizations,

by size,

July

1, 1948, through
Number
798
591
1,084

$5,000 and under
$5,001 to $10,000
$10,001 to $25,000

Sept.

Gross amount
$2,392, 203
4, 616, 783
19, 508, 780

30, 19^9
R F C amount
$2,313,894
4,188,419
16, 962, 959

26, 517, 766

23,465, 272

935
759

36, 521,041
60, 306, 969

31, 236, 608
51, 957, 735

-

109, 352, 727

96,484,967

52, 474, 892
308, 461,361

46, 810, 295
276, 568, 313

148

Total $500,001 or more

32, 883, 772
63, 601,195

71
77

$500,001 to $1,000,000
Over $1,000,000

83,194, 343

37, 423,372
71, 929, 355

467

Total $100,001 to $500,000

96, 828,010

243
224

Total $25,001 to $100,000




148, 679,000

1, 694

-

$100,001 to $200,000
$200,001 to $500,000

Total

$127,048, 000
5, 247,000
7, 241,000
9,143,000

2, 473

Total $25,000 and under
$25,001 to $50,000
$50,001 to $100,000

6,453
8
3
1
6,465

Less than $500,000
$500 000 to $1,000,000
_
_
$1 000 000 to $5,000,000 _
$5 000 000 and over
Total

R F C share

360, 936, 253

323, 378,608

4, 782

593, 634, 756

526, 523,190

171 M O N E T A R Y ,
Reconstruction
lending

Finance
activities

Corporation—Consolidated
cumulative from inception

T o t a l income
Less:
A d m i n i s t r a t i v e expense
Interest expense
A l l other expenses
Income before provision for losses
P r o v i s i o n for losses
Total

CREDIT, AND FISCAL

POLICIES

statement of income from
through June 30, 19^9
$1,328,117,141
$193, 767, 680
369, 453, 214
11,780,287

575, 001,181
753,115, 960
188, 039, 575
565, 076, 385

Senator DOUGLAS. IS there anything further, M r . Buchanan ?
M r . BUCHANAN. Nothing further.
Senator DOUGLAS. M r . Wolcott ?
M r . W O L C O T T . N O questions.
Senator DOUGLAS. Thank you very much. The committee w i l l
stand adjourned.
(Whereupon, at 4:10 p. m., a recess was taken until 10 a. m., Friday,
November 18, 1949.)







MONETAEY, CEEDIT, AND FISCAL POLICIES
FRIDAY,

NOVEMBER

18,

CONGRESS o r T H E U N I T E D

1949
STATES,

S U B C O M M I T T E E ON M O N E T A R Y , CREDIT, AND FISCAL

POLICIES,

J O I N T C O M M I T T E E ON T H E ECONOMIC

REPORT,

Washington, D. C.
The subcommittee met, pursuant to adjournment, at 10:20 a. m.,
i n the caucus room, Senate Office Building, Senator P a u l H . Douglas
(chairman of the subcommittee) presiding.
Present: Senator Douglas, Representatives Buchanan and Wolcott.
Also present: Dr. Grover W . Ensley, acting staff director, and Dr.
Lester V . Chandler, economist to the subcommittee.
Senator D O U G L A S . M r . Burgess, we are glad to welcome you this
morning. I understand that you are chairman of the executive committee of the National City Bank of New York, member of the Federal Advisory Council from the New Y o r k Federal Reserve district,
and, I believe, formerly vice president of the New Y o r k Federal Reserve Bank; so you are able to review this situation both from your
present position as a private banker and your former position as a
public banker or quasi public banker.
I understand you have a statement which you have prepared. I w i l l
be very glad to have you read it.
STATEMENT
EXECUTIVE

OF

W.

RANDOLPH

COMMITTEE,

BURGESS,

NATIONAL

CITY

C H A I R M A N
B A N K

OF

OF N E W

T H E

YORK

M r . B U R G E S S . Senator, I might add that I have been on three sides
of this triangle. I have also done some tours of duty with the Treasury from time to time, but I am speaking wholly for myself i n appeari n g before you today.
I would like to present a very brief statement as perhaps a quick
way of giving you my general philosophy about the place of the Federal
Reserve System i n the economy.
I n today's search for economic stability we ought to reassess the
position and operations of the Federal Reserve System, for I believe
it can be the most powerful instrument the Government possesses for
avoiding booms and busts. Properly used, it can be more effective
than fiscal policy or any of the newer gadgets which have been highly
advertised, but have never proved themselves.
This and other countries have today committed themselves to the
principle that the Government must intervene i n economic life, not
only to see that the game is played according to rules that are fair for
all, but also to seek to avoid sweeping instabilities which bring with
them the excesses of speculation on the one hand, and the distress
99076—50

12




173

174

MONETARY,

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POLICIES

of unemployment on the other. B y education and the accumulation
of experience and wisdom the business and agricultural communities
ought by themselves to reduce some of the causes of instability; since
the war they have demonstrated their ability to do so. I am not sure
it is clear what I mean by that, but it seems to me i n the period since
the war that business and agriculture have exercised a great deal of
restraint. I n the inflationary period they did not go off the deep end.
The farmer paid off his debts instead of acquiring more as he did
after W o r l d W a r I. The businessman, when prices went down i n
1948 and 1949, found himself with inventories, which he liquidated,
but it did not disclose serious weaknesses, which is an evidence to my
mind that the business community has been learning something.
Nevertheless, Government has a duty to exert a positive influence
for greater economic stability. Too often, alas, Government has been
the chief offender i n creating instability.
Senator DOUGLAS. Then I take it you do not object to the general
thesis that the Government should exercise powers to help create stability, that your objection is to what you believe an improper use of
these powers ?
M r . BURGESS. Yes; as to the use of the powers we have experimented with—we have not got the final answer yet, but we are committed definitely to the Government's intervention.
Senator D O U G L A S . Y O U would not alter that?
M r . B U R G E S S . N O ; I would not alter that.
Our own and other governments have tried i n recent years three
different methods for checking booms and depressions. One of these
is establishing direct control—somebody at headquarters makes a
plan of fixing prices and wages and rationing goods, general exchange
controls, and what not, and compels the people to follow it.
Except in a completely totalitarian country like Russia or i n wartime these methods do not work well.
Senator D O U G L A S . Y O U would make an exception i n wartime for
democratic countries ?
M r . BURGESS. That is right, you have to do it i n time of war.
Senator DOUGLAS. W h a t about the period immediately following
the war ?
M r . B U R G E S S . Y O U have to work out of it gradually. Obviously,
you cannot simply drop them immediately. O f course, anybody who
goes to Europe is impressed with the fact that these controls lose their
effectiveness as they go on and people find they way around them and
they do not do the job.
They grow more and more difficult to enforce, and they gradually
choke off the free flow of initiative and enterprise which are the lifeblood of our economic system. They are abhorrent to our democratic
notions of the freedom of the individual.
The most fashionable recent idea in this country for combating economic instability is the "compensatory spending" theory. A whole
metaphysics has been developed on precisely how to manage fiscal
policy in a way that w i l l stabilize the economy.
The Federal budget is of course an important economic influence, but
not always a salutary one. Experience of recent years is discouraging
to the belief that the budget can be so subjected to economic control
that its fluctuations w i l l become a stabilizing influence i n the business




175 M O N E T A R Y ,

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POLICIES

cycle. According to the theory, spending should be reduced when the
economic goose hangs high, and increased in depressions.
So far, about all we have succeeded in doing since this theory gained
official sanction has been to increase the budget i n both booms and
depressions, with the notable exception, of course, of the fiscal year
1948, when we really did have a surplus.
Budgets are instruments of politics, and to make them also economic
tools is asking much of human nature.
That is simply saying in other words what you yourself, M r . Chairman, have said in these hearings: that so many people participate in
these decisions that to get the thing agreed on and going one way is
very hard to do.
The best practice w i l l be to fortify insistently the old tradition that
budgets are to be balanced. Circumstances themselves w i l l unbalance
them often enough despite all that can be done.
Senator DOUGLAS. Would you say budgets should be balanced in a
depression period?
M r . B U R G E S S . N O ; I think the principle is that you want your budget
balanced. Y o u recognize you cannot always do it. Y o u plan out a
balance, and your income drops away, and you find yourself with an
unbalanced budget.
Senator D O U G L A S . Y O U say you should not increase Government
expenditures during a depression, and any unbalance would come
from shrinkage i n revenues ?
M r . B U R G E S S . I would not go that far. There may be occasions
wThen you find it necessary to increase expenditures in a depression.
Senator D O U G L A S . I think the presumption would be i n favor of
increasing expenditures i n a depression to offset the decline of private
business.
M r . BURGESS. Well, that is one of those difficult questions where
we would probably mean the same thing. The thing that, of course,
impresses one at this time is the extreme difficulty in getting a democracy to balance the budget, to overbalance it at the right time
Senator D O U G L A S . Y O U mean it is difficult to get a government to
balance a budget i n a period of prosperity ?
M r . BURGESS. Yes; it is difficult at any time.
Senator D O U G L A S . N O W , I go with you on the principle that in prosperity the budget should be balanced, and you should have a surplus
to retire a portion of the public debt; but I think that there is danger
that the advocates of balancing a budget i n a period of prosperity may
go too far and say that you should not expand expenditures i n a
period of depression.
M r . B U R G E S S . I think there is a danger. I do not think I differ
fundamentally from you.
Senator DOUGLAS. What you are afraid of is that it w i l l get Congressmen and economists i n bad habits i f they embrace the principle
of unbalancing budgets i n periods of depression?
M r . BURGESS. That is right.
Senator DOUGLAS. A n d you are afraid of a relative system of economic ethics lest it destroy the desirability of balancing budgets in
periods of prosperity ?
M r . B U R G E S S . S O many of us do not determine our immediate actions
by long-term objectives, but by rules and by what you call ethics, the
ethics of a thing, and the ethics are highly in favor of a budget balance.



176

MONETARY,

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AND FISCAL

POLICIES

I f we say that does not mean anything, push that old rule to one
side, the danger is we go along year after year with an unbalance.
I n the very laudible effort to seek to control our expenditures with an
eye on the economic climate, we must not give people the impression
that we are just putting aside that old ethic. That is all I am arguing.
The third of the traditional methods of affecting business fluctuations is the regulation of money through changes in the supply and
cost of money. History records many instances of the successful use
of this instrument. F o r years, the Bank of England, by changes in
its discount rate, or by its purchase or sale of bank acceptances or
Treasury obligations, influenced the flow of funds in and out o f
the London market. More important still, it influenced the activity
of the investment market. The Federal Reserve System now has a
long history of attempts at credit control—some more, some less successful.
There are great advantages in trying to influence economic fluctuations through the money supply. I n the first place, it can be done.
The central banking system has the power to change the price of
money and to influence the volume of money.
It can act with the decisions of a relatively small group of men. I t
does not have to have the number of people in agreement that you do
when you deal with the budget.
The second advantage o l using monetary action as a method of
influencing business is that this method is consistent with democracy.
Y o u don't have to tell the individual borrower or lender what to do,
but you create the conditions under which he makes his own decision.
I f we must have some form of Government control, the best form in
all our experience is control through money, because that involves the
least interference with the freedom of the individual to make his own
choices in his economic life.
A n y skeptic as to the power of money in any economy does well to
examine the dramatic illustrations of the results of recent basic changes
in money values and credit policies in Belgium, Germany, and Italy.
These were extreme cases, but they revealed vividly the improvement
that can follow large doses of good old-fashioned monetary medicine.
M r . W O L C O T T . I think perhaps, when M r . Burgess uses the term
"money" here, we understand that he does not narrow it to hard
money; that the term also embraces credit.
M r . BURGESS. That is right, bank deposits, and the credit currency
we all use.
M r . W O L C O T T . I suggest that be in the record. Somebody reading
the record might think he is referring to Federal Reserve notes, tens,
twenties, and so on—hard money.
M r . BURGESS. The Federal Reserve System is our mechanism i n the
United States for money management, and I suggest that today it
offers a better hope for successful Government influence toward business stability than any of the newer products of the economic
laboratories.
But, i f the Federal Reserve System is to realize the high purpose
for which it was created, it w i l l require from the American people,
and more directly from the Congress and from the other arms of
Government, better support and cooperation in three special directions.




177 M O N E T A R Y ,

CREDIT,

AND

FISCAL

POLICIES

1. T H E PRESTIGE TO A T T R A C T A B L E M E N

The symbol of the standing of the System is the salaries which are
paid the Federal Reserve Board. The salaries recently approved by
the Congress would condemn the System to a position as simply one
of many Government regulatory agencies. They should be higher.
Senator D O U G L A S . M r . Burgess, as I remember it, in the recent topbracket salary bill which Congress passed, we raised the salaries of
members of the Board to $16,000.
M r . B U R G E S S . That is right, from $ 1 5 , 0 0 0 to $ 1 6 , 0 0 0 .
Senator D O U G L A S . N O W , I personally wanted to raise them more
than that, but the difficulty that we ran into was that there was quite
a demand that the salaries of the members of the Federal Deposit
Insurance Corporation should be on a parity with the Federal Reserve
Board, and there was a reluctance to raise the salaries of the members
of the Federal Deposit Insurance Corporation Board to $22,000; and,
therefore, holding the salaries of the Federal Deposit Insurance Corporation Board to $16,000, on the principle of equality, meant keeping
the Federal Reserve Board down to $16,000.
I wondered i f you would comment on that.
M r . B U R G E S S . I think they are all underpaid for the work that they
do.
Senator D O U G L A S . W o u l d you recommend raising the Federal Deposit Insurance Corporation Board to $22,000?
M r . B U R G E S S . I would be inclined to suggest $ 2 0 , 0 0 0 for both the
Board of Governors and, let us say, the Comptroller of the Currency
and the head of the F D I C .
Senator D O U G L A S . I am not a suspicious man, but we received lots
of telegrams from banking groups insisting on the F D I C being kept
on an equality with the Federal Reserve.
I t crossed my mind that that might be a move to keep down the
salaries of the Federal Reserve. I wondered i f you were at variance—
whether my suspicions were entirely unjust or whether you were at
variance with a large proportion of the banking fraternity on this
issue.
M r . B U R G E S S . I would not be able to read their minds, M r . Senator.
Senator D O U G L A S . A t any event, irrespective of what is done in the
case of the Federal Deposit Insurance Corporation, you would be in
favor of increasing the salaries of the members of the Federal Reserve
Board ?
M r . B U R G E S S . I would. I think what they do is of enormous importance for the economy of this country.
Senator D O U G L A S . I notice you use the term "symbol" rather than
"payment." Y o u think that it is not so much the increase in salary but
the fact that the gentlemen would have more chips and would, therefore, be indicated to be good poker players in the game of life; is that
right ?
M r . B U R G E S S . That is a pretty good way to express it. There is a
lot of protocol in Washington as well as everywhere else, and what you
get is a symbol of your rating. There are some members of the Board
to whom the salary does not mean anything of importance.
The other point, of course, is that it has been difficult to get members
of the Board. I know of a good many cases where people declined
membership on the Board, people of the sort you would like to have



178

MONETARY,

CREDIT,

AND

FISCAL

POLICIES

there. Younger men with other opportunities and a family to educate
find it very difficult with those salaries.
M r . B U C H A N A N . Y O U do feel, M r . Burgess, that the members of
the Federal Reserve Board should be compensated on a higher level
than other comparable agencies, such as, for example, the F D I C ?
M r . B U R G E S S . I think the work of the F D I C is enormously important and might be critical i n a time of emergency. B u t the work of
the Reserve Board in terms of the broad movement of the economy is
just out of the class of Government regulatory agencies which deal
with special sectors of the economy. They have got the f u l l thing to
deal with, and it takes men with breadth of understanding and experience. That is my long way of saying "Yes," M r . Congressman.
2. I N D E P E N D E N C E OF A C T I O N

D u r i n g the war the System necessarily became an instrument for
enabling the Government to finance the war swiftly, surely, and economically. That role has been continued too long into peacetime. I f
the Reserve System is to act vigorously and effectively to check inflation or deflation, it must be free to take action i n controlling credit
volume, which w i l l inevitably raise or lower interest rates, and hence
the prices of Government securities. There can be no tightening or
loosening of credit without affecting interest rates. They are the
thermometer of credit.
I am one of those people who think there should be flexibility in
rates and prices.
Senator D O U G L A S . I want to have you finish the next paragraph, and
then I w i l l ask some questions.
M r . B U R G E S S . Neither can the Federal Reserve System be treated as
just one of the political instruments of the administration. The wise
Executive w i l l yield to the Reserve System a substantial measure of
independence of action so that its judgments can be objective and free
from political bias. Only so can it do promptly some of the hard
things that have to be done—and politically unpopular things—if
inflationary tendencies are to be checked before they blossom into the
booms that so often induce depressions.
Senator D O U G L A S . M a y I ask you some questions on those two paragraphs, because they hint at a lot of issues.
M r . B U R G E S S . I come back to some of that later.
Senator D O U G L A S . W o u l d you prefer to finish your statement ?
M r . B U R G E S S . Perhaps so, because I think we are wading into some
very deep water.
The Federal Reserve System needs a certain measure of cooperation from other Government agencies. I n the recent inflation, for
example, the Reserve System and the commercial banks were conducting a vigorous campaign to resist inflationary extension of credits.
A t the same time other Government lending agencies were pumping
out credit vigorously and freely.
The activities of these other agencies partly offset restraining action
taken by the Reserve System. Some plan of coordination of the
activities of lending agencies along the line of the proposed credit
council, which Chairman McCabe referred to i n his testimony, warrants thorough examination.




179 M O N E T A R Y ,

CREDIT,

AND

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POLICIES

I f we w i l l act to restore the prestige of the Federal Reserve System,
to give it greater independence and better cooperation from other
Government agencies, I believe it does not need any new powers. It
has at its command i n open-market operations and the discount rate
instruments of tested worth which have been used i n country after
country with success.
Senator D O U G L A S . M r . Burgess, isn't the discount rate virtually
obsolete as a method of control now due to the fact that the volume of
paper presented for rediscount is infinitesimal ?
We had testimony on the first day of our hearings that the amount
of commercial paper which is rediscounted by the Federal Reserve
banks is less than 2 percent of the total transactions at the banks, and
I wondered i f this is not just a carry-over from the original purpose
of the Federal Reserve System, but which has become obsolete with
the passage of time.
M r . B U R G E S S . N O , sir. I disagree with that point of view completely
and emphatically. That point of view would imply that the importance of the discount rate was that a member bank had to pay a little
more when it borrows from the Federal Reserve System. That has
very little to do with the use of the discount rate.
The discount rate is an indication of what a very responsible group
of people in a controlling position think about money; and, when the
discount rate changes, all money rates change, not just the rates of
that limited amount of paper that they deal with.
F o r example, the discount rate was used very effectively by the
Reserve System during the past few years. They had a preferential
rate of a half of 1 percent in 1945 to encourage the banks to do their
job in war and postwar lending. They moved that up until you
got a rate of Vy2 percent.
Senator D O U G L A S . But, M r . Burgess, the total amount of paper, as
I remember it, which has been rediscounted by the Federal Reserve
System, now in its vaults, amounts to $ 3 0 0 , 0 0 0 , 0 0 0 .
M r . BURGESS.

Yes.

Senator D O U G L A S . A S compared to $ 1 7 , 0 0 0 , 0 0 0 , 0 0 0 i n Government
securities and—well, what is the total volume of commercial loans
outstanding by the banks ? That is well over $ 2 0 , 0 0 0 , 0 0 0 , 0 0 0 . So how
would $ 3 0 0 , 0 0 0 , 0 0 0 affect $ 2 0 , 0 0 0 , 0 0 0 , 0 0 0 of commercial loans? That
is 1 y 2 percent of the commercial loans possessed by the banks not
rediscounted.
M r . B U R G E S S . Well, it is the marginal difference, it is the marginal
straw that makes the difference in the whole thing. A change in the
discount rate has frequently, i f not usually, changed the rate that
several million borrowers pay at their banks. The rate on some loans
is tied to the discount rate, and the rate on all loans is influenced
indirectly. A discount-rate change has often changed the rate which
the Standard O i l Co. of New Jersey, for example, has to pay when
it goes to the market and sells debentures.
M y old chief, Ben Strong, used to say that the country's credit pool
is one pool. You, drop a rock i n at one point and the ripple runs
throughout the pool.
Senator D O U G L A S . I f the banks are out of debt to the System, how
does this rediscount rate affect the rates they charge ?




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M r . BURGESS. The main avenue of contact now between the banks
and the Federal Reserve is not the discount window but the Government-security window.
Senator DOUGLAS. That is the point.
M r . BURGESS. A n d through that window they control the whole
money market, both in terms of buying and selling; and the rate at
which they buy and sell and the rate of buying and selling moves with
the discount rate.
Senator DOUGLAS. That seems to me to be the center of attention,
the open-market operations.
M r . BURGESS. They go together. The open-market operations and
rediscount rate are twin instruments used together.
Senator D O U G L A S . I would say one twin is of the size of P r i m o
Camera and the other twin is like one of Sanger's Midgets.
M r . BURGESS. H e has been wounded, but I think you w i l l find he
gives a pretty good account of himself over a period.
Senator DOUGLAS. What about changes i n reserve requirements ?
M r . BURGESS. I refer to that later.
Senator DOUGLAS. Excuse me. It is always the tendency of a crossexaminer to anticipate points a witness w i l l later develop.
M r . BURGESS. There must be freedom and courage to use them. I
am here expressing agreement with the .statement by A l l a n Sproul,
on page 156 of the committee print, and I quote just a few sentences,
although the whole passage is worth reviewing:
* * * for the type of inflationary situation through w h i c h we have just
passed, I should think our present powers are adequate, provided they are used to
the necessary extent.

W i t h respect to the requests which were made for more powers over
reserve requirements, M r . Sproul said:
A request for more powers was sidestepping the real issue, an issue w h i c h
would have remained and reemerged once any new powers have been granted
and put i n operation.

M r . Sproul further says:
So long as the System cannot allow moderate changes i n rates to o c c u r —

he means interest rates—
as a result of its decisions to ease or tighten credits, then i t cannot i n fact
accomplish an easing or tightening of c r e d i t —

omitting a few sentences—
A resort to special powers to increase reserve requirements would, i n my opinion,
only conceal or delay recognition of this central fact.

Senator DOUGLAS. Does that complete your statement ?
M r . BURGESS. That completes my statement.
Senator DOUGLAS. M a y I ask you to turn back to page 3, the bottom
paragraph. Y o u speak of the fact that the System during the war
helped the Government to finance the operations swiftly, surely, and
economically. Would you describe briefly how this was done?
M r . BURGESS. Well, the Treasury and the Federal Reserve System,
with the concurrence of the banking community—some of us were
members of groups that were called in by the Treasury and the System—agreed on a general scale of rates at which the war could be
financed, running from three-eights on Treasury bills up through to
2y 2 on bonds.



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Then the Federal Reserve by its purchases in the open market stood
back of those rates so that, whenever bonds were offered in the market
below the prices that these rates indicated, they would buy them i n
amounts necessary to maintain it,
Senator DOUGLAS. Maintain the price ?
M r . BURGESS. Maintain the rates and prices.
Senator DOUGLAS. A n d give to the sellers credits on the books of
the Federal Reserve banks which would serve as reserves ?
M r . BURGESS. They would get a Federal Reserve check which would
be deposited in a bank, and that bank presents it to the Federal Reserve,
and that creates credit, of course. I t formed the basis for credit
expansion which, of course, in some measure you had to have.
Senator DOUGLAS. W o u l d it have been possible for the banks to have
created some $70,000,000,000 of credit with which they took title to
Government bonds without the cooperation of the Federal Reserve
System ?
M r . BURGESS.

NO.

Senator D O U G L A S . S O that you think this function was necessary for
the prosecution of the war ?
M r . BURGESS. I agree. A s a matter of fact, I was chairman of the
economic policy commission of the American Bankers Association at
that time. W e wrote a pamphlet, which we sent to all banks, explaini n g just exactly the process that was called for and supporting it to
the fullest extent of our ability.
Senator D O U G L A S . N O W , you say that role has been continued too
long into peacetime.
M r . BURGESS. Y e s , s i r .

Senator D O U G L A S . I wonder i f you would state why you believe that
to be true.
M r . BURGESS. W e sold savings bonds to the people. Since the war
the buying power of those bonds has been reduced very substantially
because commodity prices have risen. It is my feeling that a somewhat more vigorous campaign of checking credit expansion could have
held back that price increase in some measure.
Senator DOUGLAS. We have had the increase i n prices, have we not,
because during the war we had this expansion of credit with which to
purchase the Government bonds, and while that increase was held back
by specific controls during the wartime, when the dam finally burst
you had such a quantity of bank credits available that finally it caused
prices to rise.
M r . BURGESS. I do not think anything could have been done that
would have wholly avoided a price increase. There was a shortage of
goods and there was a large supply of money. I t is a question of
degree.
The Federal Reserve System went at the problem; they appreciated
what it was; they did raise their discount rate as I have said; and,
working with the Treasury, the yields on short-term securities were
increased.
That led to some further absorptions of these securities by corporations and others. I t was my feeling, however, that more of the debt
would be in the hands of others than banks if rates had been raised
more rapidly. I think in this I am simply echoing what I gather to be
the feeling of many people in the Reserve System.




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Senator D O U G L A S . I have a chart here which shows that the yields
began to rise about the middle of 1947. That is page 30 of this chart
book of the Federal Reserve System, October 1949.
M r . BURGESS. That is what I have i n mind. They made an adjustment toward the end of 1947. It is known i n the market as the Christmas present by the Federal Reserve System to the banks, when they
dropped the support level on Government bonds by one or two points,
which I think was very wise. It slowed up the process of new financing, made people who were planning investment programs—I mean
business people who were going ahead with accumulating inventory
or building new plants or buying machinery—go a little slower.
This was an illustration, to my mind, of what can be done, even with
only moderate action.
Looking at it from the point of view of hindsight, it is my view that
they could have acted a little sooner and a little more vigorously.
M r . W O L C O T T . D O you not think that perhaps support of the bond
market is a very material influence and should be included with the
manipulation of the rediscount rate and operation of the Open Market
Committee i n respect to economic stabilization ?
M r . BURGESS. That is a big question, and, of course, it is the question, because the minute you try to put the heat on credit expansion
you inevitably depress the Government market.
I have read some of M r . Harl's testimony here yesterday. I n the
first place, I want to say that I think the Treasury has no obligation
to hold the prices of Government bonds at par. I was the chief salesman for the Treasury i n the third and fourth war loans i n the New
Y o r k area, where we sold as many bonds as anybody, and I can assure
you that as a salesman for the Treasury we made no such commitment.
I can assure you that the banks that I know do not regard themselves as having had a commitment; when you buy a bond you take the
risk of decline.
I think the facts are evident that the banks do not think they
have a firm commitment. I f they felt they had a firm commitment,
there is no reason i n the world why they should not buy all longterm bonds and get the benefit of the high yield, but they do not.
Their average maturity is down around 3 years. I have the figures
here i n a chart from the Federal Reserve chart book. I t shows the
figures for a group of banks that report to the Treasury regularly.
O f a total of $58,000,000,000 of Government securities held by these
banks as of the end of July, $47,000,000,000 are under 5 years' maturity, and only $11,000,000,000 are over 5 years' maturity. The banks
are keeping pretty close to the shore, because they know there is always a risk of changes i n prices of bonds.
The other conclusion that would be drawn from these figures is,
as far as a bank is concerned, a moderate decline i n bond prices is
nothing very serious. I f our holdings are reasonably short, we are
prepared to have fluctuations i n the market. W e think these are
the best securities i n the world.
Senator DOUGLAS. W h a t about the general investing public? These
bonds are widely distributed. I suppose they are more widely distributed than the bond issues of any previous war. Y o u have virtually
everyone in the United States holding Government bonds.
M r . BURGESS.

Yes.




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Senator DOUGLAS. N O W , i f you raise the interest rate, you indirectly lower the price; or, i f you lower the price, you raise the interest
rate.
So your proposal i n effect might well mean an appreciable decline i n the price of Government bonds and, therefore, a capital loss
(a) to individuals and (6) to banks.
M r . BURGESS. Well, let's look at that one. T h a t raises the real
issue, as you suggest.
M r . WOLCOTT. M a y I interrupt a moment ? W h e n you use the term
"interest rate," does that embrace the yield? The interest rate does
not change, does it ? Y i e l d changes.
Senator DOUGLAS. I mean, of course, the yield.




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M r . BURGESS. That was part of the plan that was worked out at
the very beginning of the war. The Secretary of the Treasury at that
time was keenly conscious of what happened after W o r l d W a r I when a
great many small people bought Liberty bonds and some sold them as
low as 82 or 83. H e was resolved that that should not happen again.
I think he was right, and there was devised this plan for the sale of
savings bonds, which are redeemable by the Treasury at any time at
a price above what the man paid for them. I f you hold them a
short time, you get less; i f you hold them a long time, you get more
interest.
So that our great pressure on all these drives which I participated
in, was to get people to buy these bonds that were guaranteed by
the Government against depression. The small man was sold those
bonds. The other bonds, the market issues, were not issued i n denominations of less than $500, it was very carefully planned so there
should be two types of bonds sold: One, the bond for the man who is
not used to investing, does not want to take a risk; the other, the
market type of bonds which are bought by people who could afford
to take the risk. The people who bought these market-type bonds
were insurance companies, wealthier individuals, who take the risk.
Senator DOUGLAS. The price on one goes down, and the price on the
other goes down.
M r . BURGESS. The price on savings bonds cannot go down, because
that is fixed by the Treasury. They are redeemable at any time at
fixed prices.
Senator DOUGLAS. What about the insurance companies?
M r . BURGESS. Well, that is a good point. I n your statement you
suggested the possibility of loss. I n the first place, these are the best
securities i n the world. I think we w i l l all agree on that. There is
nothing better than the bonds of the United States Government.
While they may fluctuate i n value, they w i l l be paid off at maturity
i n dollars at the face amount. There is no loss i f you hold them.
A s far as the banks are concerned, I pointed out their holdings are
mainly short. Their holdings of long-term bonds are so modest that
they are well within the amount that they can hold to maturity.
So, the banks can weather a very considerable change in those
bonds, if necessary. So far as insurance companies go, they are holding those bonds against long-term contracts, which mature over a
]ong period of years. They probably w i l l never sell any substantial
part of them unless they do it ,as a matter of policy because they can
get a higher yield somewhere else.
I am on the finance committee of a large insurance company, and
we are perfectly comfortable with our Government bonds, even if they
fluctuate a little. The individuals who bought the bonds are perfectly
able to take some fluctuations. Let's not get our attention focused
solely on the dollar price of things. Let's think i n terms of the
buying power
Now, I say that the responsibility of the United States Government
for the buying power of the savings bonds that it sold under high
pressure—and I helped to do it—to the people of this country is fully
as important as the cash redemption of these bonds at the price you
sell them. I do not know any way of controlling credit expansion
without really putting on the brakes, and really putting on the brakes
means that you are going to get high money rates and feel it i n bond



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prices, but that is part of the responsibility for keeping the purchasing power of these bonds that we have sold.
Senator D O U G L A S . H O W would you have the Federal Reserve System raise interest rates? I take it what you are saying is interest
rates should be raised i f we move into an inflationary period.
M r . BURGESS. There is not much point i n it now. Looking back to
the period when prices were going up, I am suggesting that they would
not have gone up so far and so fast i f we had not somewhat made a
fetish of this matter of maintaining Government bonds at a fixed
price. It held back the Federal Reserve System from using the
instruments, not just the discount rate, but open-market operations.
They could not reduce their holdings. I t made completely ineffective
these changes i n reserve requirements.
Take the case of a specific bank. When they raise the reserve requirements 2 points, it means the National City Bank has to turn
$65 million of its Government securities into cash. So we go out in
the market and sell them. W h o buys them? The Federal Reserve
System buys them and puts exactly that amount of money back in
the banks. So there is no decrease in the amount of money i n the
market at all. I t is just an exchange of ownership of those bonds,
that is all.
So changes i n reserve requirements are ineffective so long as the
Federal Reserve System is standing there with a basket to catch
all Government bonds that are dropped i n at a given price.
M r . WOLCOTT. M a y I follow up i n that respect what I intended to
earlier ?
M r . H a r l yesterday expressed the opinion that he thought it advisable as a stablizing influence for the Federal Reserve to support
the price of Government bonds, notwithstanding the demands upon
the Federal Reserve to purchase them from the banks, the point
being that in times of depression where there was a need on the part
of the banks to get an unusually large amount of cash, which would
otherwise affect very materially the price of bonds, notwithstanding the depths to which the bonds might otherwise go, the Federal
Reserve should support them—he did not say at par—but substantially. W o u l d you comment on that ?
M r . BURGESS. I am glad you asked that. That enables me to clarify
it a little more. Here I may say M r . Sproul's statement clarifies this
whole thing very much along the lines I am saying. I t happens that
lie and I had at different times the responsibility of administering this
matter of supporting the market. I had it for some 8 years in the
Federal Reserve Bank i n New York, and now it is i n his lap. So, we
are giving you the results of our experience in dealing with the market.
Now coming to the point that Congressman Wolcott makes, with a
debt of $254,000,000,000, or it may have gone beyond that figure since
I looked at it, you cannot ignore that as a factor in the economic situation. The Federal Reserve System has got to take account of it.
I think it would be foolish to suggest, as the papers reported some
of the statements here, that the Federal Reserve should withdraw from
the market, withdraw its support. I am not suggesting that. Since
Government bonds are such a tremendous factor in the whole monetary
economy, there must be responsibility somewhere for their market. I n
the Reserve System we developed phrases that are used in distinguishing between "pegging markets" and "maintaining orderly markets."



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We use those two phrases. One thing is to peg at an absolute fixed
price, the other is to make sure there is always somebody there to buy
at a price. I n the price economy, there needs to be a buyer at a price.
The Federal Reserve System used to try in the old days, when the
debt was smaller, to maintain an orderly market, and did exactly that
for a good many years; they tried to see that there was a buyer at
a suitable price. That way you cushion any serious decline and make
sure that you cut off distress selling. I n that way you keep the price
declines from getting out of hand.
That, of course, ought to be done. But that is very different from
standing there and taking everything anybody wants to offer you,
whether he is a speculator or dealer or whoever he is, at a fixed price.
M u c h of the buying of the Federal Reserve has, in fact, been done way
above par to maintain a pattern of rates.
M r . WOLCOTT. W o u l d you consider it advisable for the Congress to
enact the standards or the limitations upon which the Open Market
Committee would be bound in the stabilization of the bond market.
M r . BURGESS. N O , sir. I think it would be impossible to phrase any
limitation of that sort in such a way that you could work it out. I t is a
problem to be worked out within the Federal Reserve System, with the
Treasury. There has been very close understanding between the Reserve System and the Treasury in recent years.
I think it is a problem of working it out, and nobody can lay down
a formula which would govern it, a legal formula.
M r . WOLCOTT. I f we were to enact legislation, M r . Chairman, that
would provide that the Open Market Committee should never support
the Government bond market at less than, say, 95—as an arbitrary
figure—there probably would be some danger i n respect to that; would
there not? That might become the ceiling or the ceiling the people
might expect to be put on the bonds ?
M r . BURGESS. It would either be worthless or dangerous, one or the
other, because you could not anticipate the events that might occur.
Senator D O U G L A S . I S the immediate problem inflation ?
M r . BURGESS. Well, I do not know. I notice the President said yesterday that he felt the danger of recession had rather passed. I agree
with him. I think that the inventory adjustments that we have been
through have passed over; and, very happily, we have done it without
any serious difficulty. Where we go from here, of course, nobody ever
knows ahead of time.
There are both depressing and inflationary elements. I do not think
the adjustment is fully completed in the capital-goods area. F a r m
income is likely to be a little lower, looking ahead.
O n the other hand, there are definite inflationary elements i n the
situation, foremost among which is the unbalanced Federal budget,
the plan of distributing more than 2y2 billion dollars to the veterans as
dividends on their insurance, spending by municipalities and States.
I am inclined to think that the inflationary possibilities are now a
little stronger than the deflationary.
Senator DOUGLAS. Suppose you were a member of the Federal Reserve Board. W o u l d you believe that the support price should be
lowered at the moment ?
M r . BURGESS. The support price—there isn't any support price at
the moment. They have not bought at support price for some time,
and I interpret their statement of June 30 as a kind of declaration of



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independence, a move in exactly the direction I have been talking
about.
Senator DOUGLAS. Y o u r proposal to increase interest rates to check
bank expansion of credit and, hence, increase i n prices would operate
through a lowering of the price at which Government bonds were purchased and, hence, an increase upon their yields; isn't that true ?
M r . BURGESS. Yes. Or they would push out some bonds. F o r
example, the particular situation i n the market today that is interesting is that the long Government bonds have been rising a bit i n price,
and the Federal Reserve has a huge holding of these bonds and is not
selling any of them. The statement shows week after week no change.
Now, they scooped in all these bonds, and they are holding on to
them. I f I were a member of the Federal Reserve today, I would vote
to let some of those bonds go as there was demand for them, so that
the longer-term rate of interest was a little higher.
Now, those bonds are way above par. This does not involve the
question of par, but the yield rate now on longer-term Government
bonds is so low and the prices are so high that the market is restricted.
The market is very restricted.
Senator DOUGLAS. Let me see if I follow your train of thought. Y o u
would say that the Reserve should sell long-term Government securities
in the open market ?
M r . BURGESS. That is right.
Senator DOUGLAS. A n d that this would diminish, directly and indirectly, the reserves which member banks would have i n the System,
and hence reduce their lending capacity; is that true ?
M r . Burgess, That is the logic of it, but it isn't exactly what would
happen, M r . Senator.
Senator DOUGLAS. I was going to ask the further question: W o u l d it
not then be possible for banks to present these bonds back again to the
Reserve System; and, if the Reserve System had the policy of buying,
it would put back in the right-hand pocket deposits for the bank which
it had taken away from the left-hand pocket ?
M r . BURGESS. They don't have to buy them back.
Senator D O U G L A S . N O . They don't have to; but, suppose they didn't,
what would happen ?
M r . BURGESS. Prices would go down a little. That is what would
h appen. A n d the whole investment market
Senator DOUGLAS. Yields would go up; interest rates would rise?
M r . BURGESS. Yes; interest rates would rise.
Senator D O U G L A S . H O W far do you think the prices of bonds would
f a l l if the Reserve System stopped buying ?
M r . BURGESS. They can decide that almost completely. They can
put those bonds down 2 points or down one point. They have almost
complete control over that market.
Senator D O U G L A S . D O you feel that this is the time for putting such
policy into effect ?
M r . BURGESS. Well, I don't think the situation is clear enough to
pursue the policy vigorously.
Senator DOUGLAS. A n d you say "watchful waiting for the moment" ?
M r . BURGESS. A n d a little feeling out of the market.
Senator DOUGLAS. A n d i f prices should rise by, say, 5 percent
M r . B U R G E S S . I would move sooner than that. I think they can tell
sooner than that.



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Senator D O U G L A S . Y O U would say that with any appreciable increase of prices, defining "appreciable" as less than 5 percent, that
the Federal Reserve System should temporarily cease buying bonds,
until they depreciated i n price sufficiently to raise the interest rate
by X amount ?
M r . BURGESS. Well, I would have to go back over all those steps and
rephrase it, but the effect is the same. I don't think that you can judge
the situation completely by the price level. I think they can catch it
sooner than that. I f they see the volume of credit rising, due to
deficit financing, and see some speculative tendencies, they may move
sooner than the wholesale price or retail price reflects that change.
But, i n general, I think they ought to start moving a little i n the
direction of firmer money and restraint.
Senator DOUGLAS. What weight would you give to the presence of
unemployment as an index ?
M r . B U R G E S S . Well, I think it has very important weight.
Senator D O U G L A S . Y O U might have wholesale prices rise slightly,
but unemployment i n excess of 5 percent.
M r . B U R G E S S . Y O U could and you would have to decide where
median judgment lay as to whether the economy was moving too fast
or not fast enough.
Senator D O U G L A S . D O you have any bench marks i n your own mind ?
M r . BURGESS. Yes. Employment is one of them; the movement of
wholesale prices is another bench mark; production index; movement
of security prices, stocks and bonds; stocks is an indication of the
atmosphere, whether speculative or not; the movement of loans of
the banks, bank loans, whether they are going up or down.
Senator DOUGLAS. When all of the indexes point i n one direction,
the decision is fairly clear; but when you get
M r . BURGESS. That is a cinch.
Senator D O U G L A S (continuing). But when you get contradictions
of indexes, that is the difficult problem. I f we found, for example,
that unemployment had been reduced to, say, 2 or 3 percent, and production had ceased to increase, and that prices were rising, then I
think it would be pretty clear that we were in inflation, and that we
should check any further increase in price.
M r . BURGESS. That is right.
Senator DOUGLAS. Suppose production is rising, prices are rising,
and unemployment falling, it is still, let us say, above 3 percent or
5 percent; that is where the difficulty is.
M r . BURGESS. That is right.
Senator D O U G L A S . Yes.
M r . B U R G E S S . That is why you need such competent people i n the
Federal Reserve System.
Senator D O U G L A S . W e are trying to get A little light on that subject,
because the Federal Reserve System, after all, although it dwells i n a
handsome building (we hope not in an ivory tower) finds that its
decisions are, in part, conditioned by public opinion.
M r . B U R G E S S . That is right.
Senator D O U G L A S . These hearings perhaps, to some degree, help to
build a more informed public opinion. So, we would appreciate very
much your judgment on it.




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Suppose production were to go up, unemployment were to fall, but
would still be above, let us say, 2,000,000, and prices would be rising
slightly.
M r . BURGESS.

Yes.

Senator D O U G L A S . N O W
M r . BURGESS. A n d the money supply rising. I f the money supply
were rising, I would think that was a time
Senator DOUGLAS. Because it would be rising faster than
production ?
M r . BURGESS. Yes. That is the time, I think, to begin to firm things
up a little.
Senator DOUGLAS. Even though it meant a decrease i n the rate of
absorbing the unemployment and the slackening i n production ?
M r . BURGESS. Well, I doubt i f it would mean that. I should say, i f
your unemployment condition were as at present, the indication would
still be for "firming" because you have had a period of high employment and still have.
Senator DOUGLAS. H i g h employment, but, i f you can believe the unemployment figures, probably 3,400,000 unemployed, which is about
7 percent of the nonagricultural labor force.
M r . BURGESS. B u t still below normal—isn't it ?—for unemployment.
Senator DOUGLAS. I t all depends on what you mean by "normal."
M r . BURGESS. I w i l l leave that to you; you are the expert i n that
field.
Senator D O U G L A S . D O you mean average, or what exists at the peak ?
M r . BURGESS.

Yes.

Senator DOUGLAS. I t is certainly less than f u l l employment; let's
put it that way. I t is certainly less than f u l l employment.
M r . BURGESS. Yes. O f course, there is a tremendous lag i n employment figures. They represent the result of business plans made a
long time ahead. So, it isn't a very good immediate index.
Senator D O U G L A S . Y O U see, what we would like to do is to get some
of these mysterious decisions which the Federal Reserve Board makes
i n quiet out in the open, so that they can be appraised.
M r . BURGESS. Yes. Well, I think they have a remarkably able research service that turns up the various factors i n the business front.
Senator D O U G L A S . I have always believed that the Egyptian priests
were extremely able too, but they tried to conceal all their information
from the Egyptian public and make it an esoteric secret; and, therefore, I would like to have some of the elements of these decisions made
public.
M r . BURGESS. Yes. Well, I think that perhaps this chart book by
the Federal Reserve Governors shows what they are thinking about.
I t is a beautiful job of presenting data.
Senator D O U G L A S . D O you have any judgment i n your own mind as
to how low the Federal Reserve Board should allow Government bonds
to fall?
M r . BURGESS. Well, there again, that is dependent on so many factors i n the situation. I have felt that we have been i n a period where
very modest changes i n credit policy have substantial effect. Periods
are very different that way. There was a period during the middle
1920's when the economic situation was extraordinarily sensitive, when
a change of one-half of 1 percent i n the discount rate of the Federal
Reserve Bank seemed to make a difference whether speculation or
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prices or production moved forward or backward. That is, the economy was very responsive. Y o u take other times, like 1928 and 1929,
when you put your foot hard on the brake, nothing happened.
M r . W O L C O T T . H O W high was the rediscount rate finally %
M r . BURGESS. I t w^ent to 6 percent, I think.
M r . WOLCOTT. A b o u t 7 ?

M r . BURGESS. I t went to 7 percent i n 1920. M y impression is that
6 is as high as it got in 1929.
M r . W O L C O T T . I S there any statutory limitation upon the amount
by which they could increase the discount rate ?
M r . BURGESS.

None.

M a y I just finish this thought: I n 1928 and 1929 the situation was
very insensitive to Federal Reserve policy. The same was true when
you were i n the midst of the depression i n 1932 and 1933. The System
bought a billion dollars' worth of Government securities i n the spring
of 1932, and it had some effect, but the effect was very slow. L o w
money rates had very little effect i n stimulating things i n the early
thirties.
M y impression is that the present time is one where small changes
make quite a difference. The market is watching the Federal Reserve
very closely. A t the present time I don't think you have to take any
action which would result in putting Government bonds below par i n
order to get the effects you want. W e don't have to think i n terms of
95 or 99, or what have you. The situation is very sensitive. B u t I
can see other situations where, if you got a very active inflation going,
commodity prices were leaping upward, you might really want to put
on the brakes.
But that is just part of the problem. T h e question is the objective.
Is your object to stabilize money rates or is your objective to stabilize
the United States economy so that you have i n the long run a period
of stability and good employment and sound economic activity, not
sowing the seed for difficulty i n the future ? The latter is the objective
for the Reserve System.
Senator DOUGLAS. I think there is one point that has to be faced:
namely, any such move would be criticized as a means of having the
effect of increasing the earnings of the banks by giving them higher
interest rates.
M r . BURGESS. I am prepared to defend that. I think that the banks
are earning too little at the moment. They are earning about 7 percent on their capital fund. We are told by the Reserve System and
by the Comptroller, and others, that our capital is too small. The
only way we can get more capital is by earning it. Bank stocks are
now selling at a discount from their book value of 20 to 25 percent, i n
many cases more. There are only a few banks i n the country whose
stocks sell at their break-up values. I n other words, at the moment
the market says we are worth more dead than on the hoof.
Senator DOUGLAS. Isn't it also true that the average rate of bank
earnings are appreciably higher than virtually every other line of
business ?
M r . BURGESS. O n the contrary, it is lower than almost any other line
of business. I t is 7 percent on its capital.
Senator DOUGLAS. Seven percent has always seemed to me to be
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M r . BURGESS. The bank stockholder gets a return of 3% or 4 percent
on his money. I f he buys industrial stocks, he gets 7 or 8 or 9 percent.
Senator DOUGLAS. But you get also an accumulation of surplus.
M r . BURGESS. W e are putting about half away into our surplus, as
other businesses are, too.
Senator DOUGLAS. Is it not true that over a period of time—I don't
knowT how you could make allowances for the losses during the depression, but over a period of time is it not true that bank earnings
upon capital have been higher than in most other lines?
M r . BURGESS. I think exactly the opposite is true, M r . Senator. The
stock market shows it. I would like to show you a chart which shows
what has happened to the bank shares in the market as compared with
the shares of other companies. Bank shares have gone down steadily
in relation to the rest of the market.
The test of it is that banks can't sell stock in the market. The buyers
don't want them because they have such a low yield. The reasons for
that are the very low interest rates and the fact that a large part of
our funds are immobilized i n cash because of high reserve requirements.
Senator DOUGLAS. That is a very interesting observation. I had not
thought that the productivity of capital in other areas was as high as
7 percent; and I have believed that your earnings had averaged well
over 10 percent.
Mr. BURGESS. The banks of the country are earning 7 percent.
Senator D O U G L A S . N O W . But have they not many times gone over
10 percent? I think it is sometimes hard to translate the Federal
Reserve figures on earnings on assets into earnings on capital, but I
made some computations which indicated that in a number of years
it was over 10 percent.
M r . BURGESS. Net profits of the member banks i n the year 1 9 4 7 - 4 8
were 7.2 percent; they were 10.9 percent in only one year, 1945, when
bond profits were large. F o r the past 10 years bank earnings have
averaged 7.9 percent, as compared with over 100 percent for leading
business corporations. We are told we ought to have more capital,
but the market doesn't want to provide the capital, and we have to
earn it. So, we pay smaller dividends. Maybe we should pay larger
and push the stock up higher. But the accumulation of capital seems
very important. Banks are like other business. I f you are to have
a sound banking system that can stand the strains and stresses, they
have to earn money and have to put aside reserves and increase their
capital.
Senator DOUGLAS. I was impressed by the fact that you have not
discussed the question of reserve requirements of the Federal Reserve
System. I wonder if you would comment upon that.
M r . BURGESS. I w i l l be very happy to.
Senator DOUGLAS. F o r commercial banks.
M r . BURGESS. Yes. The reserve requirements.
Senator DOUGLAS. Y e s .

M r . BURGESS. M y feeling is that reserve requirements should be
changed only when there is a basic change i n the monetary situation.
Senator DOUGLAS. I n a period of inflation. Isn't this a direct
method of control by increasing reserve requirements. Y o u diminish
the amount which banks can lend rather than merely enabling them to
get a higher interest rate.



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M r . BURGESS. I have already indicated that I think, as long as your
Federal Reserve stands ready to buy Government securities at a price
which brings increases i n bank reserves, they are completely ineffective
because, as you increase the reserve requirements, the bank simply
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the cash to meet them; so, it doesn't make any change i n the lending
policy. A l l it does is to decrease the earnings of the member banks
and increase the earnings of the Reserve bank.
Senator DOUGLAS. Doesn't that tighten the amount of credit which
they can extend for other purposes to private lenders ?
M r . BURGESS. N O , sir, because they can always get the credit they
need from the Federal Reserve bank. They always would prefer to
lend to commercial borrowers than to hold Government securities.
T h a t is our permanent business. W e want to do business for our
customers.
So, I would say that the changes in reserve requirements that have
been made over the past few years have been almost completely ineffective; made ineffective by the policies with respect to Government
securities.
Senator DOUGLAS. But is it a question of alternative policies; can
you not do both of these at the same time ?
M r . BURGESS. Y O U could, of course, and my belief is that the changes
i n reserve requirements should be used only rarely and for fundamental
changes.
One of those took place in 1940,1 think it was. W e had tremendous
gold imports over a long period. The excess reserves of the banks
were over $6,000,000,000. The Reserve Board, Reserve banks, and
the Federal Advisory Council all recommended giving the Federal
Open Market Committee power to double the legal reserve requirements. I advocated it myself. That was an appropriate time. B u t
as a method of current credit control these changes i n reserve requirements are pretty painful. I f you are trying to operate a bank, you
need to know from month to month what money you are going to have
to use. These changes i n reserve requirements make it difficult to
plan.
I f they accomplish the purpose, of course, credit policy has to come
ahead of the convenience of the banker. But, since they didn't accomplish the purpose, my belief is that the proper instruments to use were
the open market and discount rate, at that time. The Reserve System
now has a portfolio of $20,000,000,000 of Government securities to feed
the market through open-market operations. Under those circumstances, I see no occasion for any further increase i n their power to
change reserve requirements.
M r . W O L C O T T . A S an example of that, what happened when the
Board did increase their reserve requirements?
M r . BURGESS. It simply resulted i n a transfer of Government securities from the commercial banks to the Federal Reserve Bank in the
exact amount of the change in reserve requirements. I t didn't change
our attitude toward our commercial borrower. W e were already engaged in a very thoroughgoing and careful campaign of scrutinizing
our loans and trying to resist the forces of inflation.
M r . WOLCOTT. They asked for an increase of 10 points. W e gave
an increase of 4 points. W o u l d it have made any difference had the
Congress given the increase of 10 points? They didn't use their authority up to 4 points. But would it have had any psychological effect
i f we had given them 10 points instead of 4 ?
M r . BURGESS. It would have had the psychological effect of creating
fear of how these vast powers would be used. I t is my view that any




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change was entirely unnecessary at that time. A s long as the policy
of pegging the prices of governments was maintained, they were completely ineffective on credit and unnecessary. They simply kept things
stirred up.
M r . BUCHANAN. This was December 1947 or 1948 ?
M r . B U R G E S S . N O ; this was last summer. I mean, a year ago.
M r . BUCHANAN.

1948 ?

M r . B U R G E S S . T h e s u m m e r o f 1948.

M r . WOLCOTT. What new legislation might be necessary, in your
opinion, or is any new legislation necessary, to give the Federal Reserve adequate controls over the volume and velocity of credit as it
affects our economy ?
M r . B U R G E S S . I think they have the necessary powers already, if they
feel free to use them.
M r . W O L C O T T . I S there any statutory restriction on the use of it ?
M r . B U R G E S S . N O ; I don't think that is necessary or desirable.
M r . WOLCOTT. Y o u r answer indicates that they might not be free
to use the powers in some particulars. W h y aren't they ?
M r . BURGESS. That is largely a question of their relationship to the
Treasury market. I think they have already been facing that, have
taken steps to indicate they feel they have more freedom now. H o w
far that w i l l actually be the case when the test comes we don't know,
but it is a matter of which they are thoroughly aware, where I think
they have taken very wise steps.
M r . W O L C O T T . I S it reasonable to assume from your statement that
you are somewhat i n favor of a higher concentration of credit control
i n the Federal Reserve than we have in the Government at the present
time ?
I perhaps should explain that a little bit and give you a little of the
background for iny question.
I n the Legislative Reorganization A c t of 1946, although the Banking and Currency Committees of the House and Senate are given the
duty and obligation of exercising jurisdiction over credit policies, we
find that as a consequence of the Legislative Reorganization A c t the
credit policies are distributed over perhaps a half a dozen other legislative committees.
Now, I was wondering i f perhaps that didn't prevail in the executive
establishment and among the independent agencies to a point where,
i f the Federal Reserve is given the obligation to stabilize our economy,
perhaps we shouldn't do something to more highly concentrate the
control over the issuance of Government credit as it affects our economy
i n the Federal Reserve ?
M r . BURGESS. Yes. Well, I think I see what you mean. That perhaps is related
M r . WOLCOTT. I mean this: W e have the R F C , the F a r m Credit
Administration, the Export-Import Bank; there is a coordinating influence, of course, through the National Advisory Council, but that is
purely advisory; they have no administrative function
M r . BURGESS. Purely with respect to their foreign operations.
M r . WOLCOTT. Yes. Y o u might find a situation where, when the
Federal Reserve is increasing discount rates or pegging the Government bond market to prevent inflationary tendencies, other agencies
of the Government might be expanding their activities and completely
offsetting it.



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M r . BURGESS. Yes. I think that there is a need for coordination of
some sort at that point. Y o u have the R F C , the Federal Housing A d ministration—it has some new name now
M r . WOLCOTT. Housing and Home Finance Agency.
M r . BURGESS. A n d the F a r m Credit Administration, all of whom
are dispensers of credit. There is no Cabinet officer, I believe, who controls all of those. They are operated with appropriations from Congress directly. What they do greatly influences what the Federal Reserve is trying to do. I think there ought to be some way of pulling
that policy together. I think the suggestion for a credit council in the
Treasury has a lot to commend it. I think there should be some place
of meeting with the Secretary of the Treasury as the appropriate
chairman where these various credit-granting agencies review their
problems together in the national interest, with the chairman of the
Federal Reserve Board there to indicate what the Board's policy is, so
that you won't have one group of agencies running off in one direction
and the Federal Reserve off in another.
Now, how much power such a council should have I am not prepared
to say. I think there should be some power so that programs could be
slowed down, programs of R F C lending or housing guaranteeing or
what have you, could be slowed down in a period where the Federal
Reserve was trying to check inflation, and speed it up in a period when
you want money put out more freely.
M r . BUCHANAN. Wouldn't the recent inflation, the situation relative to easier finance terms for housing, and the housing picture in
1948 and 1949, as the result of these easier terms, have tended to offset
the deeper drop i n the curve i f we had followed the recommendations
of the Reserve System in the Banking and Currency Committees of
both sides and refused to liberalize terms in the face of a concrete
shortage in the housing field ?
M r . BURGESS. I am not perfectly sure that I understand you, M r .
Congressman.
M r . BUCHANAN. I n your statement, you refer to the recent inflation.
M r . BURGESS.

Yes.

M r . BUCHANAN. While the Reserve System was conducting a vigorous campaign to resist inflationary extension of credits.
M r . BURGESS.

Yes.

M r . BUCHANAN. A n d one of the resistant proposals w^as, of course,
to tighten up on housing financing terms.
M r . BURGESS.

Yes.

M r . B U C H A N A N . A S we look back over the current recession of the
past 12 months, it was the housing situation that tended to hold up
above all others.
M r . BURGESS. That carried through. O f course, you have a difficult
problem of timing. I n 1946, 1947, and early 1948, let us say, things
were moving too fast. Y o u wanted to hold back a little. There is
no question in my mind that the cost of housing was increased for
the veteran by reason of the enormous amount of money that was
trying to crowd into the housing field in those years. I think the
price of housing for the veteran is higher today because of the amount
of money that was poured in, partly through Government channels.
Senator DOUGLAS. But the veterans are getting more houses than
they otherwise would have obtained. I think that is the Congressman's point.



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M r . BURGESS. That is always the problem, to try to assess the weight
both ways. That is all the more reason why there should be current
consultations on this matter. Y o u have to change policy with some
rapidity from time to time. That is hard to do i n a housing campaign, I realize.
M r . WOLCOTT. M r . Chairman, I wish that some witness—and perhaps M r . Burgess could do it—for the record could discuss the influence of deficit financing on the value of our currency, on inflation,
depression, and so forth.
Senator D O U G L A S . I think that is a very good question. I hope
that M r . Burgess i n making his reply w i l l distinguish between a period
of depression in which you have idle capital and idle labor, and a
period of prosperity in which capital and labor are relatively fully
employed, because I think it makes a great deal of difference which
period one is talking about.
M r . W O L C O T T . I think that is true. But I don't think he should
be restricted.
Senator D O U G L A S . N O .
M r . BURGESS. M r . Chairman, I was a member of the Committee on
Public Debt Policy, which spent the better part of 3 years studying
that question. W e have written a booklet on the subject which is
now published and, I think, i n your hands.
O f course, deficit financing long continued is inflationary. A s it
goes to the point where you lose complete confidence, then it becomes
deflationary, perhaps.
O f course, we recognize the effect of deficit financing in every country that the E C A is working with. Our representatives i n E n g l a n d
and i n France and i n Italy have applied the greatest pressure on all
those countries to bring their budgets into balance.
Senator DOUGLAS. That is because they have f u l l employment, isn't
it?
M r . BURGESS. It is because they are creating money faster than they
are creating goods.
Senator DOUGLAS. The British are not operating on deficit financing.
M r . BURGESS. The British budget is, apparently, balanced.
Senator DOUGLAS. That is right.
M r . BURGESS. They are going to have difficulty the coming year.
They are cutting their expenses somewhat, Some of the other budgets
are balanced for current operations but in deficit for special operations.
Those countries illustrate very clearly the principle that deficit
financing is one of the fastest and most vigorous ways to inflate your
economy and to destroy economic soundness and the prosperity of
the workingman.
Our problem is that we are so rich and prosperous and productive
that we can violate some of these rules for a time and get away with it.
But i n the long run the economic laws usually work out. So that i n
the long run, i f we continue deficit financing over a period, I think
we will pay the penalty.
Senator DOUGLAS. I f we continue it i n periods of prosperity as well
as i n periods of depression.
M r . BURGESS. That is right.
M r . WOLCOTT. W e have been told that inflation is sometimes 90
percent psychological. I f we indulge i n deficit financing, there is a




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psychological reaction on the value of our currency before the time
when it actually affects it.
M r . BURGESS. I t is very hard to untangle those two things. There
are always plenty of people who are trying to anticipate what is going
to happen next and move ahead.
M r . W O L C O T T . I S it reasonable to assume that it follows as an actual
consequence of deficit financing that prices and values go up and the
value of the dollar goes down; in anticipation of that people start
converting their savings into goods, and they create a demand which,
i f it becomes unusually large in proportion to the supply of goods,
causes the prices to go up or the value of the dollar to go down before
the deficit financing would itself cause it?
M r . BURGESS. That, of course, is the logic of it. That is what happens. Y o u could run into cases of people who say, "Well, the money
isn't worth anything; let's spend it; let's build that house we were
talking about," and so forth; but I think the figures show that for
the American people as a whole they haven't taken that step; they still
have sufficient faith in the dollar so they are saving a great deal
of dollars; our savings accounts are going up i n the banks; the people
are putting money into savings bonds, building and loan associations,
insurance policies, and so on; they are still saving.
M r . WOLCOTT. When it was announced some time ago that the
anticipated deficit for fiscal year 1951 might be something over
5 billion, and especially since that has been confirmed by the President's statement the other day, that we might expect a deficit of
51/2 billion—which some of us believe is conservative, that it might
go up to 7 billion—since that time, I think, all of the Members of
Congress, although I only speak for myself, have experienced an
increase in mail on that issue daily; and I think i n the last week I have
been asked the question at least a dozen times by people as to whether
we are going to have inflation; and, i f so, they are going to use some
of their savings.
I have a newly rich friend who has a home that I think perhaps he
paid five or six thousand dollars for, and he wants to know whether
he should build a house which is going to cost him about $32,000. I
explained that he was newly rich. H e thinks that we are going to
have inflation and that he can afford now to buy the $32,000 house
with a reasonable assurance that when he gets ready to turn it over
in the market he can get at least $32,000 out of it.
So there is undoubtedly some influence being brought to bear; people
generally are affiliating deficit financing with inflation, although we
haven't commenced to see it in volume yet; but I think perhaps after
60 days we might see much more of it and much more demand for
goods.
Is that a reasonable assumption ?
M r . BURGESS. That is really what I had i n mind, M r . Congressman,
i n suggesting that I thought in the current situation the inflationary
forces looked a little stronger than the deflationary ones.
Senator DOUGLAS. Then do I understand that you say for the fiscal
year 1951, assuming that we do not move into a depression, and assuming that we get reasonably f u l l employment, that we should strive to
reduce the deficit, and, i f it is possible, to balance the budget ?
M r . BURGESS. Exactly. I am sure that is right.
Senator DOUGLAS. That happens to be my own view too.



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Yes.

Senator DOUGLAS. M r . Burgess, you were reported i n the press the
other day as advocating the adoption of what was termed the goldcoin standard for this country, by which I suppose was meant that
the Federal Reserve notes should be made convertible into gold,
redeemable in gold ?
M r . BURGESS. M r . Senator, I didn't say gold-coin standard. I said
that as an objective of monetary policy I think we should work toward
convertibility into gold.
S e n a t o r DOUGLAS.

Yes.

M r . BURGESS. I didn't say whether I felt that should be gold bullion
or gold coin. I also said emphatically that I saw no occasion to change
the price of gold and that it was foolish to even think about it. The
dollar is the anchor of world commerce and should be held at a fixed
price.
Senator DOUGLAS. The President and the Secretary of the Treasury
made the same statement.
M r . BURGESS. Yes, sir. I agree with that. I also said that it was
premature to talk about domestic convertibility, that with so many
of the countries of the world still i n economic uncertainty, and with
our own picture not fully settled down after the w a r ? this is not the
time to restore convertibility. I did say that as a long term objective
I thought we should work toward it; I thought there w^ere some things
that might well be done toward that end, particularly reconsideration of the Gold Reserve A c t of 1934, which appears to some people,
at least, to be a little ambiguous as to the Treasury's authority with
respect to the buying or selling of gold.
Senator DOUGLAS. W o u l d you expand on that point ?
M r . BURGESS. Yes. A section of that act appears to give the Secretary of the Treasury power to buy or sell gold at any price. That has
been interpreted by some people to mean that the Secretary simply by
his purchases or sales of gold could change the gold content of the
dollar. There is legal opinion that the Bretton Woods A c t supersedes that, when it provided that nobody can change the gold content
of the dollar without act of Congress. I f there is an ambiguity there,
after carefully examining it, it ought to be cleared up, because that
is one of the surest of these insidious rumors about changing the price
of gold.
M r . WOLCOTT. I f I may interject, for what it may be wTorth: That
provision of the Bretton Woods Enabling A c t was put i n there definitely and with deliberation i n an attempt on the part of the Congress
to prevent any further increase or change i n the dollar value of gold
without congressional assent.
I think, and I am sure I am not speaking only for myself, that i f it
wasn't clearly stated i n the committee report, it was intended by the
members of the House Banking and Currency Committee, and I believe
I can speak for them as a whole, that we could not otherwise have
stability i n world currencies. A s M r . Burgess has said they were
anchored to the dollar, with the danger of fluctuations i n the dollar
value of gold. F o r that reason it was clearly our intent when we wrote
that provision that there should not be any changes i n the dollar value
of gold unless the Congress approved it.
Senator DOUGLAS. M r . Burgess was raising the question as to
whether the original act did not give the power.



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M r . WOLCOTT. No. The trouble comes from the ambiguity i n the
Gold Act, which I think is corrected, or explained, i n the Bretton
Woods Agreement Act. I think it is section 3 of the Gold Act, isn't it ?
M r . BURGESS. Sections 8 and 9 of the Gold Reserve A c t of 1934.
M r . WOLCOTT. Yes; whatever it is. But the Bretton Woods A c t
explains and is, perhaps, i n clarification of the ambiguity which appeared in the Gold Act.
Senator D O U G L A S . Y O U think the Bretton Woods A c t w i l l make it
impossible to alter the price of gold without consent of Congress %
M r . WOLCOTT. That was clearly our intent in writing that law.
Now, how the lawyers would interpret it, I don't know, but i f
they interpret it as I know was the intent of Congress, whether it
is expressed in such language that they would get the same interpretation or not, I don't know, but I do know that w^as our intent, and,
from my indirect contact with the Treasury, I think the General
Counsel of the Treasury has taken that attitude recently, and I think
the President has made the same statement.
I don't know as he
made the statement, but I think the General Counsel of the Treasury
has given an opinion, formal or not I don't know, that the dollar
value of gold could not be changed without the consent of Congress.
So it is very apparent Jthat they are not going to change it, notwithstanding the ambiguity and the possibility of authority.
Senator DOUGLAS. One final question which I should like to ask:
F r o m time to time the responsible officials of the Federal Reserve
System imply or state that their power to control credit is restricted
by the some 50 percent of the banks which are outside the Federal
Reserve System and which create about 15 percent of the total volume
of outstanding commercial credit, and that as long as you have
this residual, with the power of State banks to secede at any time,
that the Federal Reserve Board goes into the battle of stabilization
with one hand tied behind its back. What do you think of that
contention ?
M r . BURGESS. I don't agree with it.
I think they are overemphasizing that difficulty. When I used to be with the Reserve System
and made speeches about it I used to say there were i n the System
a third of the banks with two-thirds of the banking resources. The
proportion of resources in the System has steadily increased. There
hasn't at any time been any substantial defection from the System,
in spite of the very large rise of reserve requirements that took
place.
There again we come back to the question that you and I discussed
a little, about how the policies of the Federal Reserve become effective, do they become effective because this particular member bank
has to borrow at the Reserve System and finds the rate of interest a
little higher, or because the Reserve System tells it to do something ?
M y whole belief, based on my experience, is that that isn't the way
credit controls work. I quoted Ben Strong in saying that the country's pool of credit is one pool, and if you just stick your toe in at
one side and start the ripples going they go right across. A credit
policy is effective primarily, not so much on the loans that banks
make, but in the investment markets, where people get capital, and
where they make their decisions as to whether to do something a
year from now or 2 years from now i n the way of building a new plant
and employing people.



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It is the climate that you create i n your money markets and your
investment markets that has much more to do with changing the
swings of business than your relationship with any single member
bank.
Senator D O U G L A S . I think it is logical that you take this position,
because you seem to minimize the effect of alterations i n reserve requirements.
M r . BURGESS.

Yes.

Senator DOUGLAS. B u t i f reserve requirements were to be an appreciable factor i n controlling the supply of credit, then the fact that State
banks can secede at any time and go under State laws, with perhaps
less stringent reserve requirements, and therefore give them greater
earning power upon a given set of assets, that might exercise a restraining influence upon the Board to use this instrument which they
have i n their possession, and which, i f escape by member banks were
impossible, they could and would use.
M r . BURGESS. Well, of course, you can't just say there is nothing at
all i n that argument. I don't think there is very much. I think a
little restraint on the Board i n using those powers might have some
merit. I don't think very much of changes i n reserve requirements
as a means of handling current credit problems. They are rather for
meeting substantial alterations i n the gold supply or similar basic
changes. W e advocated a change in requirement, and a very substantial one i n 1940; so our record is reasonably good on that.
Senator DOUGLAS. A t that time did you recommend that they be
made applicable to nonmember as well as members ?
M r . BURGESS. A S a matter of fact we did.
Senator DOUGLAS. W h y are you opposed to it now ?
M r . BURGESS. Because of the fear of encroachments of centralized
Government power. There also is a change in the situation which is
that i n the States the nonmember banks have been decreasing, relatively, i n their assets, the members have gradually been coming into
the System, and the State banking laws are becoming more adequate.
I think this committee has not had called to its attention the efforts
of the American Bankers Association i n this respect. W e have had
for a good many years a group of people, a committee, and some staff
members, who have been examining the provisions of the State bank
legislation and the instruments that the States have for controlling
the banks that are under their supervision. W e have suggested to
the States a model banking code that has been adopted i n many States
and that provides that a State banking board, or the supervisor of
banks, would have the power to apply to the State banks the same
requirements, or substantially the same requirements, i n terms of
percentages, that the Reserve System can impose on the member banks.
I n my own State, in New Y o r k State, when the Reserve System acts
the State banking board gets together and they have, without exception adopted a similar change in reserve requirements for their State
banks.
I would like to place i n the record a resolution adopted by unanimous consent of the administrative committee of American Bankers
Association on September 28, 1942, proposed by the committee on
State legislation, which makes this recommendation to the States. I
don't need to read it. I w i l l put it in the record.




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(The resolution referred to is as follows:)
RESOLUTION
PROPOSED B Y

TIIE COMMITTEE

ON STATE

LEGISLATION

Whereas i n the determination of the adequacy, the control and the composition
of nonmember bank reserves, it is considered preferable that the power of such
determination be vested w i t h the proper State supervisory authority; and
Whereas it is deemed further advisable that the m i n i m u m and maximum
reserve requirement of nonmember banks be clearly defined by statute, and made,
insofar as may be consistent, to conform w i t h regulations of the F e d e r a l Reserve
System, and that such reserves be limited to cash on hand or on deposit w i t h
reserve depositaries approved by the supervisory authority, w h i c h depositaries
may include, i n addition to other nonmember banks subjected to additional
reserve requirements, F e d e r a l Reserve Banks or member banks of the Federal
Reserve System : Therefore be i t
Resolved, T h a t the administrative committee approve i n substance the report
and recommendations of the committee on State legislation, and authorize the
d r a f t i n g of appropriate legislation to accomplish the purposes therein expressed,
w h i c h legislation when approved by the legal department, shall become a part
of the A B A program of approved State legislation.
Adopted by unanimous vote.
ADMINISTRATIVE
WALDORF-ASTORIA,

NEW

COMMITTEE

YORK

OF A M E R I C A N

C I T Y , September

28,

BANKERS

ASSOCIATION.

1942.

Senator D O U G L A S . Y O U say a number of the States have adopted
this?
M r . BURGESS. There are 21 States.
Senator DOUGLAS. That have adopted this standard ?
M r . BURGESS. Yes, or substantially that, which grants discretion
respecting reserves to their State banking authorities, so that they can
follow the Federal Reserve System. When you take account of this
action it narrows down this nonmember problem to very small
proportions.
Senator DOUGLAS. A r e these States with large numbers of private
bankers ?
M r . BURGESS. Arkansas, Connecticut, Delaware, Illinois, Kentucky,
Maine, Maryland, Massachusetts, Michigan, New Hampshire, New
York, Ohio, Pennsylvania. That is the list.
Senator D O U G L A S . N O minimum or maximum requirement, it is
purely optional upon the State board as to whether or not it is followed?
M r . BURGESS. Optional on the State board. They have minimum
requirements. They can be raised optionally by the banking authorities, I understand.
So that this type of cooperation I think is growing. I think this is a
method that can appropriately be used and carried further so that
this whole question of nonmember banks boils down to one of very
small proportions.
M r . BUCHANAN. California or Texas are not i n the list ?
M r . BURGESS. I think not.
Senator DOUGLAS. Thank you very much, M r . Burgess.
(Whereupon, at 12:15 p. m., a recess was taken until 2 p. m., of
the same day.)
A F T E R N O O N SESSION

Senator DOUGLAS. M r . Foley, w i l l you come forward and bring with
you anyone you wish to have with you ?



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M r . FOLEY. I w i l l have the Deputy Administrator, M r . Fitzpatrick,
at the table with me, and others from the agency w i l l be available.
Senator DOUGLAS. M r . Fitzpatrick is an old friend.
M r . FOLEY. I have also Dr. Husband from the Federal Savings
and L o a n Insurance Corporation, Commissioner Richards of the Federal Housing Administration, and M r . Hardy, Assistant Administrator of the Housing and Home Finance Agency, and others here
whom you may want to call upon for details.

STATEMENT OF RAYMOND M. FOLEY, ADMINISTRATOR; ACCOMPANIED BY B. T. FITZPATRICK, DEPUTY ADMINISTRATOR AND
GENERAL COUNSEL, HOUSING AND HOME FINANCE AGENCY;
FRANKLIN D. RICHARDS, COMMISSIONER, FEDERAL HOUSING
ADMINISTRATION; DR. WILLIAM H. HUSBAND, GENERAL MANAGER, FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION ;
AND NEAL J. HARDY, ASSISTANT ADMINISTRATOR, HOUSING
AND HOME FINANCE AGENCY
Senator D O U G L A S . Y O U have already submitted a statement for this
committee, and unless you have additions which you would like to
make, there are a few questions I should like to ask. I do not think
it need take us too long.
M r . FOLEY. W e submitted answers at some length to the questions
that had been sent to us, and I do not feel I have anything to add. I
would be glad to try to answer any further questions.
Senator DOUGLAS. This is the question I would like to start off with.
I personally believe that one of the fine features i n the Public Housing A c t was the provision that the number of housing units started
would vary i n a countercyclical manner with the business depression;
that while the average was, I believe, 162,000 a y e a r ? it could f a l l as
low as 50,000 starts i n a year of acute prosperity and rise to 200,000
in a year of acute depression.
I may say that i n the b i l l as originally introduced, we provided a
variation between 50,000 and 250,000, and it was on the motion of
Senator T a f t that we reduced the peak from 250,000 to 200,000.
T h i s makes it possible, i f the act is so administered, to build approximately the same number of houses over a 5-year period, which would
otherwise be done, but to vary the rate of building between years so
that i n years of prosperity there would not be as much inflationary
pressure upon the economy as a whole as there otherwise would be
and that, on the other hand, during a period of depression you would
have a larger volume of construction to throw into the breach, and
to that degree, therefore, you would be able to check the cumulative
forces of depression.
I personally believe that is a very wise provision. The question I
should now like to ask is whether some similar provision should not
be introduced into the F H A insurance field. A t present F H A insurance is written i n boom times as well as i n depression times. There
are those who have contended—I personally do not take too great
stock i n it—that the high volume of residential construction i n 1948
may have contributed to the booms of that year and similarly i n 1947.




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I f we adopt as a policy that F H A should be geared to help produce
stability as well as be an end i n itself, could we not approach this i n
two ways: First, by having F H A write insurance only i n periods of
depression and then to suspend its taking on new business during prosperous periods or, second, to have F H A insurance mortgages continuously but to liberalize its terms when housing activity needs to be
encouraged and to tighten its terms when an inflationary boom develops or threatens.
Among the terms which could be thus varied would be: (a) the
amount of down payment required; (b) the length of the period of
repayment; (c) the amount of the insurance charge; (d) the basis
for appraisal; and, possibly (e) the height of permitted interest rates.
I n other words, so manipulate these terms as to encourage F H A
insurance and, hence, construction i n periods of depression and
dampen it down somewhat in periods of prosperity and inflation.
I wonder i f you would be willing to comment on that or i f you
want to ask any members of your staff to comment on it, we would be
grateful for that, too.
M r . FOLEY. I would like to comment on it, but I think my remarks
would havei to be general, without considerable study of the implications of both those suggestions. A s between the two, I think the
second suggestion would be the more practicable, i f either were to be
adopted.
A s a matter of fact, much of the effect that your question contemplates has already been inherent in the System as applied, both in the
terms of legislation as passed by Congress and in the activities of the
agency in the past. I think you would have first to look at the situation we are trying to meet at a given time.
Since the war—and it has been since the war and particularly in
the last 2 or maybe 3 years—discussions of this kind have arisen and
we have been contending with the basic and urgent necessity for producing a very large supply of housing, as against a variety of difficulties and changing conditions. The original difficulties after the war
were chiefly material and labor shortages.
That necessity has not yet passed. One, at least, of the chief causes
for inflation in the price of housing after the war was the drastic
shortage of housing and the tremendous and suddenly effective demand for it. So that the task we had to do was not only to build as
many units as possible, but to build them insofar as possible in certain price ranges for sale and^for rent, and underlying all of that to
build an industry organization sufficient to carry that kind of volume
through a long period of time without the various strains of competition that add to inflation.
Now, i f the contemplation i n either of these proposals were as
against the condition of the kind that we met immediately after the
war, I think you would have to give an entirely different consideration to it than you would i f you were contemplating when we get into
a fairly stabilized situation as a safeguard against the future.
Senator DOUGLAS. This is an important qualification. I n the year
1948 we built something over 900,000 housing units, and I am informed the record this year looks as though we are going to have
approximately that number. Suppose that over a period of the next
2 or 3 years we build 900,000 units, and while I know new families




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are forming at a rapid rate, we get this housing development, the
housing shortage may ease; is that not true ?
M r . F O L E Y . T h e acute edge of need from the standpoint of supplying an absolute lack of shelter, yes. I think the studies made by the
committees of Congress i n the past several years, Senator, have been
pretty thorough and have pretty well demonstrated that we need from
a million to a million and a half added units per year for perhaps 10
years. Assuming no other situations that would cause inflation, I am
of the opinion that production of a million and gradually i n excess of
a million houses a year, i f they are properly distributed into types
and price brackets and as to geographical locations, would not necessarily be an inflationary factor.
I n other words, I think we have developed the capacity to produce
materials and have developed and are developing the techniques, and
the skills so that kind of production need not put a strain on the
supply of either materials or men to the point that would cause
inflation.
Senator D O U G L A S . A leading public figure made a speech a day or
two ago setting the goal as between a million and a half and tw^o
million dwelling units a year for 10 years.
M r . F O L E Y . I would not attempt to make an exact statement any
more than I think the committees of Congress in their studies would.
I t depends on what you are approaching as a goal i n the way of total
betterment or improvement i n the housing situation.
Senator D O U G L A S . I n other words, what you are saying is that as
long as housing construction does not exceed a million units a year,
you do not believe that should be dampened off even i n periods of
prosperity ?
M r . F O L E Y . A S against the further assumption I made of no other
factors creating an inflationary boom, which would cause inflation
i n housing other than for reasons of that production.
Senator D O U G L A S . I f you got to a million and a half units a year,
do you think that might possibly be dampened down i n periods of
prosperity and accelerated in periods of depression ?
M r . F O L E Y . Taking the million and a half as a figure that could be
assumed to make the degree of speed i n improvement of the over-all
housing situation that, for instance, was contemplated i n the reports
of Congress, I think I might say yes.
I was going on to add that actually the operation of the insured
mortgage system at present has anti-inflationary effects.
Senator D O U G L A S . I would be very glad to have you develop that.
M r . F O L E Y . That, as we pointed out at some length i n our answer to
your question, has been applied chiefly through the valuation and appraisal system. I do not believe it is necessary to repeat the detail we
had there as to how that actually operates. I w i l l not recite the successive stages of application, imperfect I grant you, but pointing to the
possibilities and the trends of thought i n application of the insuredmortgage system.
The fundamental philosophy i n the whole insured-mortgage system,
except the emergency types of title V I , has been i n itself an effort to
apply the financing aids involved i n insured mortgages in an antiinflationary way in a sense that the more liberal types of insurance
have been made available i n the lower price fields, so that the incentive




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furnished through the financing aids to the industry has been downward, away from an inflationary increase in prices.
Again, of course, it has not worked perfectly, but that has been the
philosophy under which it was set in title I I and section 203 and originally i n section 207 in the rental field, although not nearly so closely
applied there.
The emergency type of financing, beginning in the defense period,
carried on through the war, lapsed and then renewed for the veterans'
program after the war, got away from the valuation theory to the current cost, first a reasonable current cost and then a necessary current
cost; so that that philosophy was only imperfectly applied.
I think the general effect of the basic philosophy of the permanent
phases of the mortgage-insurance system is in the direction of an antiinflationary influence upon the market.
Senator D O U G L A S . Y O U mean because the appraisals are based not
on present cost but upon what the expected normal sales value w i l l be ?
M r . FOLEY. Yes; and in normal times the amount of mortgage funds
available in a large-volume market is an important factor in determini n g sales price and controlling sales price.
Senator D O U G L A S . H O W much under cost have you been insuring
houses?
M r . FOLEY. I am not sure I understand your question, Senator.
Senator D O U G L A S . Y O U say you have been making your appraisals
on the basis of expected normal sales value, which is lower than current costs in a period of inflation.
What I was trying to find out is how much under has it been on the
average.
M r . FOLEY. That would depend on the scale. F o r instance, i f the
insurance is under title II, the possible maximum mortgage would
range from 95 percent of appraised value down to a maximum of 80
i n certain types.
Senator DOUGLAS. But what is the relationship of appraised value
to cost ?
M r . FOLEY. That is what I was coming to. The distinction between
title I I and title V I , in which necessary current cost was recognized
on the for-sale side until, I think, 2 years ago and on the for-rent side
until now, with certain qualifications, is that you did not have an
appraisal of value but rather a determination of necessary current
cost.
Now, the sale price of housing on which insured mortgages are
placed is not fixed by the Government. I t is fixed by the seller.
I n times of a strong seller's market, there may be a wide variance, a
very large down-payment required. I n times of what becomes more
a buyer's market, your sales price is more likely to approximate the
appraisal fixed by the F H A .
A s of now, I am not sure I could give you any close idea. Perhaps
M r . Richards could tell you what the current experience on sales prices
against our valuation is. Do you have any such information, M r .
Richards ?
M r . RICHARDS. D u r i n g the period that was referred to the variations would range, I would say, from 5 to possibly 30 percent or more,
according to the area. D u r i n g the last year, of course, the line or
difference between current cost and appraised value has been coming
closer and closer together, due to these many factors; and I would say
99076—50
14



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in the majority of instances today, all other things being equal, such
as your not trying to build a larger house in an area than the area w i l l
absorb, and that sort of thing, that the difference between long-term
value and reproduction cost is very little or approximately the same i n
a great number of areas throughout the country.
M r . FOLEY. But the Senator, I think, wants to know if you can give
some estimate of what it is currently.
M r . RICHARDS. That is what I say.
Senator DOUGLAS. Y O U think the two are identical ?
M r . RICHARDS. Virtually so, all other factors being equal insofar as
the house being a suitable house for the area, and so forth.
Senator DOUGLAS. Y O U expect present costs to reflect almost precisely future values ?
M r . RICHARDS. Virtually so. There is very little difference between
what we construe now to be current costs and long-term mortgage
value.
M r . FOLEY. That is assuming you would allow estimated replacement costs.
M r . RICHARDS.

Yes.

M r . FOLEY. Costs vary with different buildings on the same house.
The cost estimation has to be made typical.
Senator DOUGLAS. I n other words, do I take it that you think this
suggestion should not be seriously considered until we get a much
larger volume of building than we now have ?
M r . FOLEY. I think the suggestion is well worthy of study. I do
not think it is susceptible of a simple answer of " Y e s " or " N o " at this
time. I think we can and do apply the F H A - i n s u r e d mortgage system generally i n the direction of trying to hold down an undue inflation of prices, but there are so many factors i n the consideration such,
for instance, as the suggestion for varying the amortization terms.
That becomes a very complicated question, and I do not think a
yes-or-no answer on the question of whether it should be varied for
anti-inflationary purposes—in fact, shortening it might have the effect,
perhaps would have the effect, of reducing the amount of construction.
It might, however, have the effect of reducing the amount of construction i n the very fields where you want to focus your limited
amount of construction at that period; so it is a complicated question,
I think an important question and a significant one, but I think it
would require much more study than would be possible to answer " Y e s "
or " N o " now.
Senator DOUGLAS. I n our questionnaire, which you were kind enough
to reply to, we asked as one of the queries: What legislation would you
recommend for the purpose of increasing F H A ' s contribution to general economic stability?
Y o u responded, as I remember it, with two recommendations. The
first recommendation was to place on a permanent basis the program
for home improvement. The second of your recommendations I shall
read in f u l l :
T o provide the President w i t h authority to terminate or reinstate emergency
insurance program on an economically sound basis, depending on the economic
conditions prevailing i n the Nation. Such authority w o u l d provide a degree of
flexibility i n the administration of the insurance programs w h i c h w o u l d increase
the F H A ' s contribution to general economic stability. T h e success of the emergency insurance program during the defense period, war, a n d postwar periods




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testifies to their effectiveness i n meeting the housing needs of the Nation.
By
meeting the housing needs of the N a t i o n a significant contribution can be made
to general economic stability.

I found that interesting but somewhat general, and I wondered i f
you could describe more fully the kind of authority you believe should
be given to the President.
M r . FOLEY. The suggestion was made as against the background of
title V I , which we mentioned there as having served a very useful
purpose i n defense, wartime, and postwar. The history is very interesting in that the number of times that it had to come before Congress
for renewal, consideration, amendment, change to meet changing conditions. current conditions; for instance, it had expired and then
was renewed or reestablished to take care of the veterans' emergency
housing program after the war.
During the past year, I forget how many extensions there have been,
but it has been a stop-and-go proposition all the time. It had to be
brought up and considered by Congress as to whether it should go on,
and Congress has determined each time that this was a need and
that it should go on. Then it would be extended perhaps for a few
months, 6 months, or 1 month, depending again on the Congress.
That has made an extremely difficult situation, not only for the administrative agency but for the building industry as to making plans
for even a single building season.
What was contemplated in that suggestion and limited rather to
that one consideration, since that is the only emergency program that
we have had to deal with, was that such an authority, i f it were coupled
with an authority for the President to say it shall go on or it shall stop
or it shall stop and be revived within an over-all period that Congress
had originally determined
Senator DOUGLAS. I n other words, Congress would authorize for a
longer period of time, with the President given discretionary powers
to start or terminate within that period.
M r . FOLEY. Perhaps within other maxima and minima broadly set
forth, so that it could be applied flexibly by the President.
Senator DOUGLAS. Could your suggestion not be combined with the
suggestion I have just previously made, that administrative officials
be given power to vary the terms according to the state of business
conditions ? Could not the two suggestions be combined ?
M r . FOLEY. I f the first suggestion were to be adopted, I think the
variants of it suggested here would be desirable.
Senator DOUGLAS. President Truman recently stated that the Federal National Mortgage Association has been accumulating insured
mortgages at a rapid rate, I think around a hundred million dollars
a month. I wonder i f you would explain the purposes of F N M A , the
reason why its mortgage purchases are so large at the present time and
the types of mortgages which have been acquired.
M r . FOLEY. The Federal National Mortgage Association was originally established i n pursuit of the program for a national mortgage
association set-up in title I I I of the National Housing A c t originally
back in 1934,1 think, the original contemplation being they would be
financed privately to deal i n insured mortgages, particularly as a secondary market to furnish an avenue of liquidity when needed by the
initiators thereof.




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Senator DOUGLAS. I n other words, it was designed to play the same
part for building and loan associations which the Federal Reserve
banks had been designed to play for the commercial banks ?
M r . F O L E Y . N O ; I think that is hardly the parallel, since it was designed to serve all approved mortgages of the system, which might be
building and loan associations, banks, mortgage companies, insurance
companies, etc.
Senator D O U G L A S . T O do for real-estate financing what the Federal
Reserve banks were supposed to do for commercial banking ?
M r . FOLEY. It was part of the declared plan or purpose in the act for
the establishment of a national home mortgage market, seeking to
make that security, a mortgage on a loan, a standard security, the
insurance being one of the factors in making it that.
I t was furnished that avenue of liquidity for lenders that needed
it from time to time as perhaps their portfolio filled up and they had
demands for home loans and no funds; so they could dispose of the
mortgages they had made, i f insured.
I t also was designed to be and did operate successfully as a sort of
way-station for the gathering, packaging, and disposing of mortgages
to private investors in the secondary mortgage field. It worked very
successfully on that basis all through the thirties and during the war
and early postwar period. I t works very successfully on that basis
now.
I should add that subsequently this market was broadened to include
the guaranteed mortgages of the Veterans' Administration as well as
the insured mortgage of the F H A . There is, of course, a definite difference and distinction between insured mortgages of the F H A and the
common tyr>e of Y A guaranteed mortgage, which is under section 501.
Senator D O U G L A S . H O W do you account for the recent transfer of so
many mortgages from the building and loan associations to the "Fanny
May'' [ F N M A ] ?
M r . F O L E Y . T O start with, Senator, at the time that I am talking
about, when the Federal National Mortgage Association market was
used more sparingly than it is now, it was never on a perfectly level
basis, it changed in its volume as conditions changed, the availability
of funds, and so on, but at that period and during the war period the
demand for mortgage funds was much less. W e had a total production far below what we now have, perhaps as low as a quarter during
the war of what we now have. So that the opportunities for investment of mortgage funds were much more limited, and there was
stronger competition for getting them and premiums actually were
paid for them, even by the originating mortgagee as well as the secondary mortgagee.
Now, you have a volume calling for readily available, current, rapid
flow of mortgage funds to sustain upward of a million-house production. Y o u consequently have local situations frequently i n which a
portfolio of a bank or a savings and loan company gets too f u l l 0$
mortgages, cannot continue to meet the need locally; so they have the
necessity to dispose of some. The private secondary market does not
absorb them sufficiently rapidly, and so they go to the Federal National
Mortgage Association.
Y o u have also in that picture a greater activity on the part of a nonportfolio type of mortgagee than you used to have. That is the mort-




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gage company as distinguished from the bank or savings and loan
association.
They have served a very useful purpose, but they must have a rapid
turn-over of their portfolio i f they are going to continue to loan; so
they seek more frequently the Federal National Mortgage Association
as a quick and assured outlet. There are other factors of the relative
desirability of mortgages.
Senator DOUGLAS. O n page 222 of the committee print, M r . Hise
stated that as of the present, "Fanny M a y " held 55,000 F H A insured mortgages totaling approximately $390,000,000; 41,500—and
I am giving this to the nearest rough figure—VA guaranteed mortgages, total amount of $247,000,000; and i n addition had outstanding
contracts to acquire additional mortgages—namely, a little over 18,000
F H A mortgages, amounting to $346,000,000; 52,000 of V A mortgages,
amounting to $376,000,000.
So, if vou add those totals together, you get approximately $735,000,000 of F H A mortgages and about $650,000,000 of V A mortgages,
or a total of $1,400,000,000.
Now, apparently that has been growing Very rapidly.
M r . FOLEY. That is right.
Senator DOUGLAS. Have you ever awakened i n the middle of the
night and wondered whether possibly sour mortgages were being unloaded upon you ?
M r . FOLEY. I think one would never be in the situation of the Federal
National Mortgage Association or any other purchaser of mortgages
without being aware of the necessity of wondering whether you are
going to have mortgages go down.
Senator DOUGLAS. Perhaps I used the wrong pronoun, because of
course "Fanny M a y " is not under your direction.
M r . FOLEY. That is right. I knew you meant in the broad sense,
but I do not think it is to be deduced from the fact that this volume
of mortgages is being offered that it i n any way implies that the
mortgages might be called sour in the sense that they would be unsafe
and go bad more than others.
There are other factors. Interest rates are one, the matter of the
application of standards in the construction of the houses is another,
as to why at one or another time a given type of mortgage may not
be attractive to private lenders in the secondary market i n the volume
necessary to sustain this over-all production.
Senator D O U G L A S . I am told that I am very indiscreet i n the way I
ask questions. I hope you w i l l forgive me.
I asked M r . Gunderson, who represents the R F C yesterday i f he
could explain why such large quantities were being sold to "Fanny
M a y " [ F N M A ] or R F C .
A t first he said he could give no explanation, and then he thought
that possibly the real estate lending agencies thought the interest rate
was going to rise and that they wanted to divest themselves of this
type of security i n order to have liquid funds to invest at a higher
rate of interest. That seemed acceptable to me at the time, and then
during the night I got to thinking it over, and I wondered i f possibly
they were not sorting out their mortgages and taking those mortgages
which they thought were perhaps a bit overinsured and turning them
over to "Fanny May."




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M r . FOLEY. O f course, I am not familiar with all details of the portfolio nor the current handling or offerings made to the Federal National Mortgage Association. I t would be interesting to examine a list
of the exact offerings for a current period.
I think you would find, Senator, that they are not being presented
that way. I think you would find, for instance, that from certain
types of institutions a very considerable percentage of their current
loans are offered not on a selective basis but as made and without the
idea of selecting this one as better than that one or that one being a
little worse than the others.
I think that has been the experience during the past 2 years, and
I think you w i l l find it so now.
The increase of offerings very lately is probably due i n considerable
part to the expansion of the mortgage authority of "Fanny M a y "
[ F N M A ] to 100 percent as against the 50 percent limitation that
existed before. I would not believe from any information that we
have that it is a selective offering of what they consider poorer mortgages from the standpoint of risk. They may be poorer mortgages
from the standpoint of
Senator DOUGLAS. They are insured by F H A and, therefore, the
holder would have no chance of losing.
M r . FOLEY. I think a little more exactly than that. F r o m the standpoint of the risk of there being a foreclosure likely to take place,
they may be less desirable from the standpoint of yield or some
other reason to the particular institution involved. I think it is a
little bit early to draw conclusions as to what the present flow of
mortgages into the "Fanny M a y " may really mean. I t may well be
that their sales plan or effort to dispose, which is now under way and
beginning to acquire some momentum, I understand
Senator DOUGLAS. Not too much momentum.
M r . FOLEY. Not at present, but it may well be that within six months
the situation in the investment market w i l l be such that sales w i l l
develop rapidly. I think it is too soon to come to a final conclusion
as to the meaning. The question of yield is involved.
Senator DOUGLAS. Suppose they were to turn out sour. Then
"Fanny May," one Government agency, would have claims against
the F H A , another Government agency.
M r . FOLEY. A n d against V A . I t would make no difference as f a r
as the claim is concerned, however, since i f they had not been sold
to the Federal National Mortgage Association and resulted i n a
foreclosure, the claim would come from a private holder rather than
f rom the Federal National Mortgage Association.
M r . WOLCOTT. M a y I ask a question ?
S e n a t o r DOUGLAS. Y e s , sir.

M r . WOLCOTT. The bank or savings and loan association or mortgage
association wilich sells the mortgage to "Fanny May"—what do they
get as a service charge ? Is it 1 percent ?
M r . FOLEY. The original mortgagee who keeps it and services it, I
think their present rate is a half percent allowance.
M r . WOLCOTT. Then let's work this out i n a case. I gave a bank a
mortgage on my house, which is F H A , which I agreed to amortize
over a period of time. That bank sells the mortgage to "Fanny M a y " ;
I continue making my payments to the bank; the bank reimburses




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POLICIES

"Fanny M a y " ; there is a servicing charge there that they make, isn't
there, representing "Fanny May? Is that the one-half of 1 percent?
M r . F O L E Y . "Fanny M a y " pays them a service charge. Y o u do not
pay that.
M r . W O L C O T T . That is right. They get one-half of 1 percent service
charge.
M r . FOLEY.

Yes.

M r . W O L C O T T . N O W , the reason why there was an adjustment i n
"Fanny M a y " operations was perhaps not primarily due to but was
influenced by the fact that there were a few—and I know of a very
few—mortgage-investment concerns which sprang up and organized
on a shoestring and were selling their mortgages without recourse to
"Fanny May," and in that way there was direct financing by the Federal Government of a good many builders, some of them had perhaps
controlling shares in these mortgage associations.
Now, I am making this as a statement, but I hope it w i l l be interpreted as a question, because I am seeking information.
Perhaps there is another or a third reason why there has been this
increase in sales of mortgages to "Fanny May." That is, that when
the mortgagee sells a great enough volume of mortgages to "Fanny
May," which he services and is getting one-half of 1 percent on, it
becomes quite a profitable business to him. That is my question i n
the form of a statement.
M r . F O L E Y . The question, as I get it, is whether or not he is making
the mortgages with a view simply to establishing a servicing business
which w i l l be profitable in itself and using the existence of the publicly financed secondary market as an easy avenue to do that. I
doubt that many mortgage institutions have engaged in the mortgage
business with sales to the Federal National Mortgage Association
primarily to establish a servicing account, although the servicing ascount, i f it gets large enough, can be a profitable business.
Unless they continue in operation, it w i l l gradually decline. I think
it has probably been an incidental cause in an unknown number of
cases, that type of lending institution.
Senator D O U G L A S . The Hoover Commission recommended that
"Fanny M a y " be transferred from the R F C to your agency. Is it an
unnecessary question to ask you if you favor that ?
M r . F O L E Y . I n the sense that i f it were unnecessary I would have
said "Yes," or that you would assume I would say "Yes" ? A s a matter
of fact, the matter has been discussed many times i n the course of
various recommendations for reorganization; and actually i n some
legislative proposals of 2 years ago—S. 866, I believe—it was proposed; and we testified in favor of the establishment of the Federal
National Mortgage Association i n the housing agency. I am familiar
with the answer of the R F C to that question.
Senator D O U G L A S . W h i c h was "No."
M r . F O L E Y . A n d from the standpoint of the reasons they advanced,
i f those were the only factors under consideration, I would probably
agree with them. A s a matter of fact, I do not think it is possible
to separate the operation so entirely from the character of an agency
concerned with housing as to describe it solely as a financing and
investing firm.




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So that, i n the face of the type of conditions we confront and may
continue to confront, while I am not at this time recommending a
transfer, I would not give an unqualified " N o " to it, such as has been
given.
Senator D O U G L A S . D O you remember Dickens' novel, David Copperfield?
M r . FOLEY. Barkis is willing ?
Senator D O U G L A S . D O you have any such implications ?
M r . FOLEY. I would not say " Y e s " to all the implications. H i s explanation of it, as I recall it, was that when he said that he was really
very anxious.
Senator DOUGLAS. I t amounted to a marriage proposal.
I was not quite certain what this diplomatic reply of yours boiled
down to.
M r . FOLEY. A t this point what I am saying is that I would not go
along with the answer of the R F C to the extent of saying " N o ; it
should not be considered," because at this point I think the operation
is one that cannot be considered strictly and solely as a financial operation.
Senator D O U G L A S . Y O U do not say "No,'' but do you say " Y e s " ?
M r . F O L E Y . I say that, i f present conditions continue and we have to
continue to rely as heavily upon a secondary mortgage market as we
apparently now do, I think we should give serious consideration to
incorporating it i n the agency.
Senator DOUGLAS. Those are all the questions that I had.
M r . Wolcott?
M r . W O L C O T T . I do not think I have any.
M r . F O L E Y . I have tried to be as responsive as I could. I hope it has
been helpful.
Senator DOUGLAS. Thank you very much.
Gentlemen, I should announce for the benefit of the press that we
open our hearings again on Tuesday, and i n the morning at 10 o'clock
M r . Marriner Eccles, now member and former Chairman of the Board
of Governors of the Federal Reserve System, w i l l testify; at 2 o'clock
in the afternoon M r . E . E . Brown, chairman of the board of the F i r s t
National Bank of Chicago, w i l l testify.
(Whereupon, the committee adjourned at 3 p. m., to reconvene at
10 a. m., Tuesday, November 22,1949.)




MONETARY, CREDIT, AND FISCAL POLICIES
TUESDAY,

NOVEMBER

2 2 , 1949

CONGRESS OF T H E U N I T E D S T A T E S ,
S U B C O M M I T T E E OF M O N E T A R Y ,

CREDIT,

AND FISCAL

POLICIES,

J O I N T C O M M I T T E E ON T H E ECONOMIC REPORT,

Washington,, I). C.
The subcommittee met, pursuant to adjournment, at 10: 00 a. m. i n
the caucus room, Senate Office Building, Senator P a u l H . Douglas
(chairman of the subcommittee) presiding.
Present: Senator Douglas (chairman of the subcommittee) and
Representative Wolcott.
Also present: Dr. Grover W . Ensley, acting staff director, and Dr.
Lester V . Chandler, economist to the subcommittee.
Senator DOUGLAS. M r . Eccles, we are very happy indeed to have
you with us this morning. W e were glad to get the expanded statement of Chairman McCabe, which I suppose represented official Federal Reserve policy on the matters which we raised i n our questionnaire, and I assume that may have been one of reasons why you as
an individual did not submit a reply to our questionnaire. B u t we are
happy to welcome you here this morning, and I understand that you
have a statement which you would like to give first. I think perhaps
I should say for the record that you are here on our invitation and not
on your solicitation.

STATEMENT OF MARRINER S. ECCLES, BOARD OF
GOVERNORS, FEDERAL RESERVE SYSTEM
M r . ECCLES. I would like to comment on your observation. The
reason I did not reply to the questionnaire is that I understood, as did
the rest of the Board members, that it w^as submitted to Chairman
McCabe as a personal matter, and I did not see the questionnaire, nor
have I seen the replies. The replies to the questionnaire, as Chairman
McCabe indicated, were his views and not necessarily those of the
Board. I would not say, however, that there may not be a lot of
agreement on the Chairman's replies, but at the same time there may be
some different points of view and some disagreement. I appreciate
this opportunity, Chairman Douglas, to appear before your committee.
M r . Chairman, I am here, as you know, i n response to the invitation
i n your letter of October 31, 1949, to discuss issues that have been
raised during the study initiated by your subcommittee i n the field
of monetary, credit, and fiscal policies.
I shall be glad to try to
answer such questions as may be uppermost i n your mind, but I
should like first to present for your consideration a short statement




213

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which I hope may anticipate and answer some of your questions. M y
views are the cumulative results of 15 years of participation i n developing and carrying out policies of the Federal Reserve System, preceded by long experience in private banking under State as well as
National authority and membership i n the Federal Reserve System.
I therefore could not f a i l to be aware of the vigorous opposition that
has so often been voiced against new proposals with respect to Federal
authority over banking. I n recent years it has seemed that nearly
every recommendation emanating from the Federal Reserve Board
has been assailed as a threat to destroy the dual banking system. A s
one who has spent his business life in that system, I have been unable
to see the justification for such agitation.
Our commercial banking system is composed of banks that receive
deposits subject to withdrawal upon demand, make loans, and perform
other services. About half of the total dollar amount of bank deposits
are insured up to $ 5 , 0 0 0 for each depositor by a Federal agency, the
Federal Deposit Insurance Corporation. Banks holding 85 percent
of the resources of the banking system are i n the Federal Reserve System, another Federal agency. Approximately 5 , 0 0 0 of these banks
operate under Federal charters, issued by the Comptroller of the Currency, and about 9,100 operate under charters from the 48 States. T h i s
is the dual-banking system.
Senator D O U G L A S . M a y I interrupt a minute? And, of the 9 , 1 0 0
State banks, about 2,000 are i n the Federal Reserve System ?
M r . E C C L E S . That is correct.
Senator D O U G L A S . About 7 , 1 0 0 outside ?
M r . E C C L E S . I do not know the exact figure, but I think it is less than
7 , 0 0 0 that are outside, between 6 , 0 0 0 and 7 , 0 0 0 .
While I am sure that those who are its most vociferous supporters
would not seriously contend for the abolition of the Federal Reserve
System, with the consequent restoration of the intolerable conditions
that prevailed before its establishment, they nevertheless constantly
oppose measures that would enable the Reserve System to be far more
effective i n carrying out its intended functions—functions that help
to protect not only all banking but the entire economy.
T w o proposals, more than any others, stir up this agitation. One is
the proposal for the equal application of a fair and adequate system
of reserve requirements to all insured commercial banks. T h e other
proposal is that the Federal Government apply the principles and objectives of the Hoover Commission to the Federal agencies concern©^,
with banking, monetary, and credit policy. Bankers believe i n the
objectives of the Hoover Commission, at least as applied to all other
activities of the Government—why not the banking activities ?
The red herring of the dual banking system is always brought up
to obscure the real merits of the fundamental questions involved i n
the proper administration of fiscal monetary, and credit policy, which
concerns commerce, agriculture, industry, and the public as a whole;
it is by no means the sole concern of bankers.
The major responsibility of the Federal Reserve System is that of
formulating and administering national monetary policy. I t does
this chiefly through the exercise of such influence as it may bring to
bear upon the volume, availability, and cost of commercial bank reserves. I t must operate through the commercial banks of the country,




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because they, together with the Federal Reserve banks, are the institutions through which the money supply is increased or decreased. I t
is of paramount importance to the entire country that someone have
the means as well as the ability to discharge this responsibility. I t
cannot be left to the voluntary choice of some 14,000 individual and
competing banking institutions. I t cannot be split up among the
various agencies of the Federal and State Governments. The framers
of the Federal Reserve A c t undoubtedly intended that it should be i n
the Federal Reserve Board under the direct control of Congress.
Others have pointed out that existing bank reserve requirements
are inequitable, unfair, and ineffective at the very time when they
are most urgently needed to restrain excessive expansion of bank
credit. They should not depend as they do now on whether a bank
is located in a central Reserve city or in a Reserve city or whether it
is outside of one of these cities or away from its downtown area, nor
should they depend on whether a bank is a member or a nonmember.
There is no good reason for such distinctions from the standpoint of
effectuating monetary policy.
Senator DOUGLAS. May I interrupt a minute? A r e you suggesting,
therefore, that you should have one set of reserve requirements and
abolish the present distinction between central Reserve cities and
country banks ?
M r . ECCLES. That is right.
Senator DOUGLAS. That is one set across the board ?
M r . ECCLES. That is right.
Senator DOUGLAS. F o r banks wherever located ?
M r . ECCLES. The next paragraph w i l l cover that, I think.
I n addition to other handicaps of membership, members of the Federal Reserve System are subject to much more onerous reserve requirements than nonmember banks. Member banks are required to carry
certain percentages of their demand and time deposits i n non-interestbearing cash balances with the Federal Reserve banks. A p a r t from
these required reserve balances, member banks necessarily carry some
vault cash to meet deposit withdrawals, and in addition they carry
balances with correspondent banks, none of which can be counted
toward statutory reserve requirements. O n the other hand, nonmember bank reserve requirements not only are generally lower in amount
but may also consist entirely of vault cash and balances carried with
city correspondents. I n some instances reserves of nonmember banks
may be invested in United States Government and other specified securities. Thus to a considerable extent nonmember banks may receive
direct or indirect compensation for a substantial part of their reserves.
These discrepancies are most obvious and difficult to explain when two
banks, one a member and the other not, are doing the same kind of
business as competitors on opposite corners of the same town. Member banks therefore bear an undue and unfair share of the responsibility for the execution of national credit policy.
There should be a plan under which the responsibility for holding
reserves to promote monetary and general economic stability would
be as fairly distributed as possible. This would require a fundamental
revision of the existing basis for bank reserve requirements. They
should be based on the nature of depoits rather than mere location;
they should be somewhat higher upon interbank deposits than upon




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other demand deposits. Vault cash should be given consideration
because it has much the same effect as deposits at reserve banks.
I n any such revision of reserve requirements, it is of primary
importance to take into account the fact that they are a means of
contracting or expanding the liquidity position of the banking system
and of making other credit instruments more effective. Reserve funds
of banks may expand through large gold inflows or silver purchases,
or return of currency from circulation, or borrowing from Reserve
banks, or Federal Reserve purchases of Government securities through
necessary open-market operations. There should be sufficient authority over reserve requirements to permit taking such developments into
consideration when necessary.
There is widespread misunderstanding even among bankers of the
function of reserve requirements as a means of expanding or contracting the supply of bank credit. I n sharp contrast with State
reserve requirements, those applied to member banks under the Federal Reserve A c t are primarily designed to affect the availability of
credit; that is to say, the money supply. The Federal requirements
are not primarily applied for the purpose of providing a cushion to
protect the individual bank. They are not basically reserves i n that
sense at all, and incidentally the Reserve banks do not and cannot
use them to buy Government securities, as most of the bankers seem
to think.
The Federal Reserve System is a creature of the Congress. Y o u
can make it weak or you can make it strong. W e have recited to the
Congress over and over again the dilemma that we face. It is perfectly simple. So long as the Reserve System is expected to support
the Government bond market and to the extent that such support
requires the System to purchase marketable issues, whether sold by
banks or others, this means that the System is deprived of its only
really effective instrument for curbing overexpansion of credit. I t
means that the initiative in the creation of reserves which form a basis
on which credit can be pyramided rests with banks or others and not
with those responsible for carrying out national monetary policy.
T o the extent that banks or others can at w i l l obtain reserves, they are
thus able to monetize the public debt. I n view of this situation, i f the
Congress intends to have the Reserve System perform its functions,
then you should by all means arm it with alternative means of applying restraints. The only effective way to do that is through revision
and modernization of the mechanism of reserve requirements. The
Congress w i l l not have done the job at all i f it fails to include all
insured banks. Reserve requirements that are limited only to member
banks of the Federal Reserve System impose upon them a wholly
unfair and inequitable burden which becomes the more intolerable
as the need arises to increase reserve requirements as a means of curbing overexpansion of bank credit. O f course, organized banking and
its spokesmen, chiefly large city banks, do not want any change. They
never do.
Throughout the long history of banking reform i n this country—
and it is still very far from complete—the same bankers or their prototypes have been for the status quo. Beginning with the National
Banking Act, they have fought every progressive step, including the
Federal Reserve A c t and creation of the Federal Deposit Insurance
Corporation. I f you abide by their counsels or wait for their leader


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ship, you w i l l never do anything i n time to safeguard and protect private banking and meet the changing needs of the economy i n such a
way as to avoid still further intrusion of the Government into the field
of private credit, to which I am really very much opposed—an intrusion which the public has demanded i n the past because private banki n g leadership failed.
I may add that whenever Congress sees fit to enact into legislation
the principle of equitable reserve requirements applied uniformly
without regard to membership i n the Federal Reserve System, there
might well be changes in other relations of the Federal Reserve System which would be of benefit to all commercial banking, as, for
example, to offer the credit facilities of the Reserve banks on equal
terms to all banks which maintain their reserves with the Reserve
banks, together with further improvements i n the check-collection
system. These and other beneficial changes could well be brought
about with great advantage to banks and to the public i n general.
The role of the Reserve System i n relation to Government lending
to business also should be clarified. This is particularly important to
the functions exercised in that field by the Reconstruction Finance
Corporation and with respect to the authority of the Reserve banks to
extend credit to industrial enterprises under section 13b of the Federal Reserve Act. The latter should be modified as proposed in S. 408,
the bill favorably reported by the Senate Banking and Currency Committee in 1947, and the enactment of which was again recommended
by the Board i n 1948.
There is unquestionably a need for such an agency as the Reconstruction Finance Corporation i n emergency periods for direct Government lending for projects outside the fieid of private credit, but I
have always taken the position that the Government should not compete with or invade the domain of private banking and credit institutions. When aid is necessary to facilitate the functioning of private
credit, then such aid should take the form of guaranteeing i n part the
loans made by private institutions, just as was done i n the V-loan
program of the Federal Reserve for financing war production. That
is what S. 408 proposes. The profound difference i n the principle at
stake here ought to be obvious.
I n relation to the second question, that of organization, which I
mentioned at the outset, I feel that students of government, and particularly those who endorsed the objectives of the Hoover Commission, ought to be more interested than they appear to have been in
the problems of organization of the agencies of Federal Government
concerned with bank supervision. Some, however, may have been
misled into thinking that there is no problem i n this field because
the expenses of these agencies are not paid from governmental
appropriations.
The establishment of a system of insurance of deposits by the Federal Government was one of the great accomplishments of the Congress in the direction of fostering public confidence in the banking
system. I favored Federal deposit-insurance legislation at a time
when most of my fellow bankers were denouncing it. But I never
expected, and I am certain Congress never intended, that this protection for depositors would be used either to hamper effective national monetary policy or to give any class of banks special advantages
over others. I regret to say that the Federal Deposit Insurance Cor


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poration has been used to discourage membership in the Federal Reserve System and to weaken effective monetary policy.
There is no logic whatever in the present provisions of law, which
say, in effect, to a bank, " Y o u can't joint the Federal Reserve System
unless you also join the Federal Deposit Insurance Corporation, but
you can join the Federal Deposit Insurance Corporation without joining the Federal Reserve System." The law compels a national bank
to join both, but a State bank has the option of joining one or the
other or neither. I should like most earnestly to urge upon you the
importance of making this a two-way street by providing that a bank
can be a member of the Federal Reserve System without joining
the Federal Deposit Insurance Corporation, in the same way that a
State bank is now privileged to be a member of the Federal Deposit
Insurance Corporation without being obliged to join the Federal
Reserve System.
Senator DOUGLAS. M r . Eccles, may I ask a question there ? Is this
a counterattack which you are proposing that the Federal Reserve
System make
M r . ECCLES. It is a logical answer to some of the comments.
Senator DOUGLAS. Are you serious about this ?
M r . E C C L E S . I have proposed a uniform system of reserves. Certainly, i f there is not to be a uniform system of reserves, the Federal
Reserve System is weakened, and its position can only be maintained
by having a two-way street as proposed. I n other words, it seems to
me that, unless you have uniform reserve requirements, then certainly this proposal here is an alternative that should be taken into
account, not as a counterattack for the purpose of any destructive
effects, but merely, as it seems to me, a necessary piece of legislation
so that the Federal Reserve is in a position at least to protect itself
or to defend itself.
Senator DOUGLAS. This might be a very effective means of bringing
the Federal Deposit Insurance Corporation and some of its supporters
into line with your proposal for uniform reserve requirements.
M r . ECCLES. I would hope that would be the result.
Senator DOUGLAS. But i f it were not the case, do you think this proposal of yours would strengthen the banking system as a whole ?
M r . ECCLES. I do not think it would hurt it.
M r . WOLCOTT. W o u l d it strengthen it ?
M r . ECCLES. No; I do not know that it would strengthen it. I think
there may be some member banks that would decide they would not
need Federal deposit insurance just as there are many State banks
now that have decided they do not need the Federal Reserve as long as
they have Federal deposit insurance.
I think some of the bigger banks may well say that as members of
the Federal Reserve they do not need F D I C .
Senator DOUGLAS. D O you think that Federal deposit insurance has
lowered the value of a bank belonging to the Federal Reserve System ?
M r . E C C L E S . N O ; I do not think so. I favored F D I C . Neither do
I think that membership in the Federal Reserve System would lower
the standards of a bank which is a member of the F D I C .
The Federal Deposit Insurance Corporation was designed i n the
public interest, and it should be maintained for that purpose; but
this is not to say that the continued existence of three Federal agencies
performing similar or allied functions i n the field of bank supervision,



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regulation, statistical, and other services is justifiable. There is unnecessary duplication and triplication of offices, personnel, effort, time,
and expense. While the maintenance of separate and often conflicting
viewpoints may serve selfish interests, on the old principle of "divide
and conquer," it seems to me that this should not prevent improvements wherever possible in the organization of a Government already
overburdened with complexity and bureaucracy.
I n this connection various suggestions as to where responsibility
should be lodged for the examination of banks subject to Federal
supervision have been offered, ranging from the setting up of a new
agency with no other responsibility to maintaining the status quo.
The Reserve System must have currently accurate information, procured through examination, bank condition reports, special investigations, constant correspondence, and contacts with the banks. The
System must have examiners and other personnel responsible to it,
specially trained and directed for the purpose of procuring such
information. The Reserve System is in position to determine policies
to be pursued by examiners, to coordinate them with credit policies,
and at the same time decentralizes the actual administration by utilizing the facilities of the 12 Reserve Banks and their 24 branches. They
examine all State member banks, receive copies of examination of all
national banks, are in close touch in this and i n other ways with all
member banks, as well as the State and National supervisory
authorities.
Through their daily activities of furnishing currency, collecting
checks, seeing that member banks maintain their reserves, and extending credit to them, the Reserve banks obtain current information
about banks which is invaluable for purposes of bank supervision.
The Federal Reserve is and must be at least as vitally concerned with
the soundness of the individual bank as anyone i n the organization
of the Comptroller or the Federal Deposit Insurance Corporation.
The Federal Reserve Act places i n the Federal Reserve a specific responsibility for effective supervision over banking in the United States.
Soundness of the individual bank and soundness of the economy must
go hand in hand. Therefore, Federal Reserve concern with the maintenance of stable economic conditions should be and is i n the interest
of sound banking as well as the public welfare. I t has not destroyed
the effectiveness of Federal Reserve supervision over State member
banks, and it is absurd to think, as I understand has been suggested to
you, that it would destroy the effectiveness of supervision or examination of other banks. Moreover, is it reasonable to believe that the
intelligence of the officials of the Federal Reserve banks, combined
with the judgment of a seven-man board appointed by the President,
confirmed by the Senate, responsible to the Congress, should be regarded as less independent than a bureau i n the Treasury under one
official whose deputies are appointed by the Secretary of the Treasury ? No single individual in the Federal Reserve System determines
its policies.
Since examination supplies information essential to the right conduct of the business of the Reserve System and since the Reserve
authorities must review reports of examination of all member banks,
it is illogical to argue that they should be deprived of all examination authority. Examination procedure is a tool of bank supervision
and regulation which should be integrated with and responsive to



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monetary and credit policy. I f directed as though it were not concerned with such policy it could nullify what otherwise could be effective monetary and credit policy. I n fact, too often i n the past, bank
examination policy became tighter when conditions grew worse, thus
intensifying deflation, and conversely examination policy has gone
along with inflationary forces when caution was needed.
Only one of the three Federal supervisory agencies, the Federal
Eeserve System, is charged by Congress with responsibility over the
supply and cost of credit, which is directly affected by reserve requirements, discount policy, and open-market operations. The Eeserve System views the economic scene principally from the standpoint of national credit conditions as effected by monetary, fiscal, and
related governmental policy. Other agencies do not have these responsibilities. Their differences of interest often lead to prolonged
discussions which delay or prevent agreements.
Let me turn now to the question of the composition and responsibilities of the Board of Governors and the Open Market Committee, which
committee is composed of the seven members of the Board plus five
Reserve bank presidents. The New Y o r k bank has one of those five,
and the position is continuous. The other banks rotate i n their membership on the committee.
I do not suggest that the present system has not worked. I t was a
compromise and your committee is interested, and properly so, in the
question whether the present structure could be improved. I feel that
I should point out its defects and how they could be remedied.
W h i l e the Board of Governors has final responsibility and authority
for determining, within statutory limitations, the amount of reserves
that shall be carried by member banks at the Federal Reserve banks,
for discount rates charged by the Federal Reserve bank for advances
to member banks, and for general regulation and supervision of the
lending operations of the Reserve banks, the responsibility and
authority under existing law for policy with respect to the Government security market, known as open-market operations, is vested
in the Open Market Committee. These operations have become an
increasingly vital part of Federal Reserve policy. I n practice they
are the principal means through which debt-management policies of
the Government are effectuated. They are the means by which an
orderly market for Government securities is maintained. W i t h the
rapid growth of the public debt, chiefly as a result of wartime financing, with the continuance of a budget of extraordinary size, with
major refunding operations in view and the prospect of deficit financing, there can be no doubt of the responsibility that w i l l continue to
rest with the Federal Reserve System for open-market policy .
Suggestions have been made and I believe w i l l appear in answers
to your questionnaire, with a certain degree of logic in their support,
that the interrelations between the considerations of policy governing
open-market operations and those governing reserve requirements,
discount rates, and perhaps other functions, are such as to justify
transferring these major instruments of policy to the Federal Open
Market Committee, leaving to the Federal Reserve Board as such only
matters of secondary importance. T h i s would not justify the continued existence of a seven-man Board of Governors. T o the extent,
however, that such suggestions recognize the principle that responsibility for over-all credit and monetary policy should be fixed i n one



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place, I would agree. O n the other hand, they accentuate the major
inconsistency in the present set-up.
I t should be noted i n this connection that the president of a Federal
Reserve bank is not a director of that bank but is its chief executive
officer. H e is elected for a 5-year term by a local board of nine directors, three of whom are appointed by the Board of Governors and
the other six by the member banks of the district. I n addition to
making the appointment, the directors fix his salary. Both of these
decisions are subject to approval by the Board of Governors. Neither
he nor the directors of the bank have any direct responsibility to the
Congress, or the administration, for that matter.
When a Reserve bank president sits as a member of the Federal
Open Market Committee, however, he participates i n vital policy decisions with full-time members of the Board of Governors, who are
appointed by the President of the United States and confirmed by
the Senate and whose salaries are fixed by Congress. Those decisions,
which must be obeyed by his bank as well as by the other Federal
Reserve banks, affect all banking. So far as I know, there is no other
major governmental power entrusted to a Federal agency composed
i n part of representatives of the organizations which are the subject
of regulation by that agency. President Woodrow Wilson expressed
himself very vigorously on this subject when the original Federal
Reserve Act was under consideration. I f this principle is not to be
discarded, it follows that further inroads should not be made into the
functions of the Federal Reserve Board and on the other hand that
responsibility for open-market policy should be concentrated i n the
Board. I am convinced i n this connection that there is no need for
more than five members, instead of seven as at present, and that the
Congress should recognize by more appropriate salaries the great
importance of the public responsibilities entrusted to the Federal
Reserve System, of which the Federal Reserve Board is the governing
body. Such recognition would be more likely to attract to the membership of the Board men fully qualified for the position.
I f , however, it is believed preferable for national credit and monetary policy to be determined in part by some of the presidents of the
Reserve banks, then the presidents of all 12 Reserve banks should
be constituted the monetary and credit authority, and they should
take over the functions of the Board of Governors, which body should
be abolished. The governmental responsibility of such a body should
be recognized by requiring their appointment by the President of the
United States and their confirmation by the Senate; their salaries
should be fixed by Congress, to whom they should report. M a y I point
out that i f the presidents of the Reserve banks can, in addition to performing their manifold duties as chief executive officers of these very
important institutions, take on i n addition the principal functions
of the Federal Reserve Board, it must be that these functions do not
justify a full-time seven-man Board, and this would be another reason
for abolishing it, and substituting a part-time Board composed of the
12 presidents.
Y o u would have to add, of course, an administrator and a proper
staff i n Washington, and you would possibly have to add committees
made up from the 12.
99076—50

15




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I am offering this seriously. This is not a counter-proposal. T h i s
is a serious proposal based upon the experience that I have had in
Washington over a long period of time.
Senator D O U G L A S . I S this your first choice or is your first choice
the abolition of the Open Market Committee and the lodging of
powers of the Open Market Committee in the Federal Reserve Board ?
M r . ECCLES. Well, I would be pretty neutral on that. I think either
would work. I think it is largely a question of placing responsibility
i n a governmental body, whether it be the President's or whether it
be another board. I think either would work. I would be neutral.
Senator DOUGLAS. But you would prefer either to the present
set-up ?
M r . E C C L E S . I would.
The views I have expressed have developed out of a long experience
i n and out of Government and they have not been altered by the fact
that I have ceased to be Chairman of the Board after serving i n that
capacity for more than 12 years or by the fact that I expect sometime
to return to the field of private banking.
I n the foregoing I have not attempted to include some other important matters which may be of interest to the committee i n its
deliberations and might well be considered by a national monetary
commission, such as that proposed in S. 1559 which I strongly support.
Accordingly, I would appreciate it i f you would permit me to file a
supplemental memorandum for the record in the even that it appears
to be desirable to do so in order to complete my statement.
Senator DOUGLAS. Thank you very much, M r . Eccles. O f course
we w i l l be glad to have you file a supplementary statement. I want
to thank you for your very interesting testimony.
(The following supplementary statement was later furnished by
M r . Eccles:)
BOARD

OF G O V E R N O R S OF T H E F E D E R A L

RESERVE

SYSTEM,

December
Hon. PAUL H.

1, 19^9.

DOUGLAS,

United States Senate, Washington, D. G.
DEAR SENATOR DOUGLAS : I n connection w i t h my testimony presented on November 22 before your committee, I indicated that I had not attempted to include i n
my statement some important matters w h i c h may be helpful to the committee.
Y o u granted me the privilege of filing a supplementary statement should that
appear desirable.
I n the course of my testimony you asked i f it w o u l d serve a useful purpose i f
Congress were to instruct the Treasury further as to the policies to be f o l l o w e d
i n debt management where they are dependent upon the monetary policies of the
F e d e r a l Reserve System. Y o u also stated that you w o u l d appreciate it i f y o u
could get some suggested standards of an instruction that might be given to the
Treasury by Congress w i t h reference to Treasury relations w i t h the F e d e r a l
Reserve.
Since presenting my testimony I have given a great deal of thought to t h i s
subject. I n reading over the record of my remarks, it was apparent to me that
I had not responded as f u l l y as I could have to some of your questions. Therefore, I should like to take advantage of the privilege of making a supplementary
statement.
A very fundamental dilemma confronts the F e d e r a l Reserve System i n the
discharge of the responsibilities placed on it by Congress. T h e System has by
statute the task of influencing the supply, availability, and cost of money and
credit. I n peacetime, the objective is to do this i n such a w a y that monetary
and credit policy w i l l make the maximum possible contribution to sustained progress t o w a r d goals of high employment and rising standards of living.
Federal
Reserve System powers for c a r r y i n g out this responsibility are at present basically




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adequate. B u t the System has not, i n fact, been free to use its powers under
circumstances when a restrictive monetary policy was highly essential i n the
public interest. It has been precluded from doing so in the earlier postwar period
in part because of the large volume of Government securities held by banks,
insurance companies, and others who did not view them as permanent investments. Reasons for supporting the market under these conditions I have already
presented before your committee.
T h i s policy of rigid support of Government securities should not be continued
indefinitely. T h e circumstances that made it necessary are no longer compelling.
B u t the Federal Reserve would not be able to change these policies as long as i t
felt bound to support debt-management decisions made by the Treasury, unless
these were i n conformity with the same objectives that guide the Federal Reserve. The Treasury, however, is not responsible to Congress for monetary and
credit policy and has had for a long time general easy-money bias under almost
any and a l l circumstances. A s long as the Federal Reserve policy must be based
upon this criterion, it could not pursue a restrictive money policy to combat
inflationary pressures.
Decisions regarding management of the public debt set the framework w i t h i n
which monetary and credit action can be taken. A s the size of the debt grew
through the period of deficit finance i n the thirties and particularly over the w a r
period, Treasury needs came to overshadow and finally to dominate completely
Federal Reserve monetary and credit policy. When the Treasury announces the
issue of securities at a very low rate pattern during a period of credit expansion,
as it did last Wednesday, the Federal Reserve is forced to defend these terms
unless the System is prepared to let the financing fail, which it could not very
well do. T o maintain a very low rate pattern when there is a strong demand
for credit, the System cannot avoid supplying Federal Reserve credit at the w i l l
of the market.
Under these conditions it can hardly be said that the Federal Reserve System
retains any effective influence in its own right over the supply of money i n the
country or over the availability and cost of credit, although these are the major
duties for which the System has statutory responsibility. Nor can i t be said
that the discount rate and open-market operations of the System are determined by Federal Reserve authorities, except in form. They are predetermined
by debt-management decisions made,by the Treasury. T h i s w i l l be true as long
as the System is not i n a position to pursue an independent policy but must support i n the market any program of financing adopted by the Treasury even though
the program may be inconsistent with the monetary and credit policies the System
considers appropriate i n the public interest.
The Federal Reserve System was established by Congress primarily for the
purpose of determining and carrying out credit and monetary policy in the interest of economic stability and is responsible to Congress for that task. There is
a seven-man Board of Governors, appointed for 14-year terms w i t h approval of
the Senate. The B o a r d is assisted by an experienced and highly qualified staff of
experts. There are 12 presidents of the Federal Reserve banks, each w i t h a
staff of specialists, and each Federal Reserve bank has a board of directors composed of leading citizens in its district drawn from professional, business, farming,
banking, and other activities. There is also the Federal Advisory Council, composed of a leading banker from each of the 12 districts, established by Congress
to advise the Board. A l l of these supply information and advice and many participate i n formulation of monetary policies appropriate to the needs of the
economy.
Under present circumstances the talents and efforts of these men are largely
wasted. Views of the Federal Reserve B o a r d and Open Market Committee regarding debt-management polices are seldom sought by the Treasury before
decisions are reached. T h e System, however, has made suggestions on its own
initiative to the Treasury i n connection w i t h each financing, but very often these
have not been accepted. Decisions are apparently made by the Treasury largely
on the basis of its general desire to get money as cheaply as possible.
In a war period or a depression, there is reason for financing a deficit through
commercial bank credit—that is, by creating new money. The Federal Reserve
System has supported such financing at very low rates by purchasing Government
securities i n the market at such rates, thus pumping the needed reserves into
the banking system. I n the early postwar period some support was desirable,
especially for the 2%-percent long-term bonds, but it should not have been as
inflexible as it was for short-term rates.




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T h e outlook at the present time i s for a n expanding economic activity w i t h
high employment. W e also n o w anticipate a Government cash deficit of over
$6,000,000,000 i n the calendar year 1950. It w o u l d be inexcusable to finance this
deficit at very l o w rates of interest by creating new money should inflationary
pressures resurge. B u t i f the Treasury, under these conditions, insists on cont i n u a t i o n of the present very l o w rates, the F e d e r a l Reserve w i l l have to pump
new money out into the economy even though i t may be i n the interest of economic
stability to take the opposite action. I n m a k i n g a cheap money market f o r the
T r e a s u r y , w e cannot avoid m a k i n g i t f o r everybody. A l l monetary a n d credit
restraints are gone under such conditions; the F e d e r a l Reserve becomes simply
a n engine of inflation.
W i t h respect to the problem of h o w future monetary and credit policies are
to be established, i t seems to me Congress must choose f r o m the f o l l o w i n g three
general alternatives i f the present dilemma confronting the F e d e r a l Reserve
System is to be resolved:
(1) Congress can permit the present arrangement to continue. T h e T r e a s u r y
w o u l d control i n effect the open market and other credit policy as i t does n o w
by establishing such rates a n d terms on its securities as i t pleases, w i t h the reQuirement that the F e d e r a l Reserve support them. I t should be recognized t h a t
under this course, limitations over the volume of bank credit available both to
p r i v a t e and public borrowers, a n d accordingly l i m i t a t i o n over the t o t a l volume
of money i n the country, w o u l d be largely given up. Such credit a n d monetary
restraint as might be required f r o m time to time to promote economic
stability w o u l d be entirely dependent upon the willingness of the T r e a s u r y to
finance at higher interest rates, and i n the past the T r e a s u r y has been resistant to
doing this. I f this alternative is followed, w h i c h is the present arangement, Congress should recognize that the responsibilities for monetary and credit policies
are w i t h the T r e a s u r y and not w i t h the F e d e r a l Reserve System a n d that the
p r i n c i p a l purpose of the F e d e r a l Reserve System is then to supply a d d i t i o n a l
bank reserves on the demand of any holder of Government securities at rates
of interest i n effect established by the Treasury.
(2) T h e Congress could provide the F e d e r a l Reserve System w i t h a p a r t i a l
substitute f o r the open market and discount powers w h i c h debt-management
decisions of the T r e a s u r y have rendered and can continue to render largely useless f o r purposes of credit restraint. Soin§ measure of control over the availa b i l i t y of credit under inflationary circumstances could be regained i f the System
were given substantial a d d i t i o n a l authority over basic reserve requirements of
the entire commercial b a n k i n g system. W i t h such authority, the System could,
i f necessary, immobilize new bank reserves a r i s i n g f r o m a return of currency
f r o m circulation, gold inflows, and System purchases of securities f r o m nonbank
investors and thereby prevent the multiple expansion of the money supply.
In
addition, the System w o u l d need authority to require banks to h o l d a special
reserve i n Government bills and certificates. T h i s w o u l d be necessary i n case
banks entered upon an inflationary credit expansion through the sale of Government securities to the F e d e r a l Reserve or i n the event i t was necessary to assist
the Government to finance large deficits w i t h o u t creating a d d i t i o n a l bank reserves
w h i c h serve as a basis for multiple credit expansion.
(3) Congress, i f i t wishes credit a n d monetary policy to be made by the Fede r a l Reserve System i n accordance w i t h the objectives of the F e d e r a l Reserve
A c t a n d the Employment A c t of 1946, could direct the T r e a s u r y to consult w i t h
the System i n the f o r m u l a t i o n of its debt-management decisions i n order t h a t
these decisions may be compatible w i t h the general f r a m e w o r k of credit and monetary policy being followed by the System i n the interest of general economic
stability. I t is obvious, of course, that Government financing needs must be
met a n d the responsibility of the F e d e r a l Reserve to insure successful T r e a s u r y
financing must continue to be f u l l y recognized. B u t T r e a s u r y financing can be
c a r r i e d out successfully w i t h i n the framework of a restrictive credit policy, provided the terms of the securities offered are i n accordance w i t h t h a t policy.
T o sum up briefly my views, I believe that Congress should fix clearly the
responsibility for n a t i o n a l monetary and credit policy. A l t h o u g h the F e d e r a l
Reserve System w a s established as a n agency of Congress for determination of
monetary a n d credit policy, as it must function now i t is responsible both to
Congress and to the T r e a s u r y f o r that policy. These two responsibilities are
often conflcting, and both cannot be satisfactorily discharged. T h e responsibilities a n d authority of the System need clarification and for that purpose one of
three alternative actions might be taken by Congress:




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(1) Recognize i n the statute that responsibility f o r monetary and credit policy
is w i t h the T r e a s u r y and recognize the F e d e r a l Reserve for w h a t i t is t o d a y —
a n agent f o r advising the Treasury and c a r r y i n g out monetary and credit policy
determined by the Treasury.
(2) Give the F e d e r a l Reserve System such additional authority over bank
reserve requirements as would adequately serve as a p a r t i a l substitute for discount and open-market powers.
(3) Give the System a mandate to determine monetary and credit policies
on the basis of guide posts stated i n terms of the language of the F u l l Employment
A c t of 1946, w i t h the Treasury required to advise and consult w i t h the F e d e r a l
Reserve and take into account the mandate of Congress i n connection w i t h its
debt-management decisions.
I recognize that monetary or credit policy by itself cannot assure economic
stability. I t should be accompanied by a fiscal policy, as w e l l as a bank supervisory policy, i n harmony w i t h it.
I appreciate very much having the opportunity to express my views on this
matter.
Sincerely yours,
M.

S.

ECCLES

Senator D O U G L A S . N O W , M r . Eccles, I take it that the three main
methods by which the Federal Reserve System attempts to control
the general supply of money and credit are first, rediscount; second,
open-market operations; and third, the reserve requirements which
the Board can impose on member banks; and I would like to ask you
whether you think the rediscount powers under the present conditions
of banking furnish any appreciable strength to the Reserve System.
M r . ECCLES. B y themselves, practically none.
Senator DOUGLAS. W e had testimony last week which indicated that
the total amount of commercial paper rediscounted by the System
and held by the Federal Reserve banks amounted to less than 2 percent of the assets of the System.
M r . E C C L E S . S O long as the banking system owns such a large
amount of Government securities, and there is an immediate market
for those securities, banks have little or no use for the rediscount
facilities, and therefore the discount rate by itself is not effective.
The discount rate may have some psychological effect, but it must
closely adhere to the Open Market Committee s buying rate on shortterm Government securities. Otherwise, it would be considered a
penalty rate, and would not be used at all to the extent that the buying
rate on short-term securities is very close to or below the discount rate.
The banks, i n order to meet their, reserve requirements, which in the
Reserve city and central Reserve city banks are figured on a weekly
basis, w i l l sometimes borrow over-night funds, perhaps for 2 or 3 days,
rather than go through the market. The sale and the repurchase of
securities contains an element of cost in the commissions that they have
to pay i n the buying and the selling.
If, however, the discount rate is substantially higher than the buying
rate, of course, banks w i l l buy and sell bills and certificates to adjust
with their reserve position.
Senator D O U G L A S . N O W may I ask some questions about the openmarket operations which imply not merely the purchase of Government securities by the System, i n order to build up the reserves and
therefore to expand credit, but I take it also it was at least originally
intended to imply the sale of Government securities in order to reduce
the member bank reserves and therefore curtail expansion. That is
true, is it not?
That is a preliminary question. Then I was going to follow that
up. Is that statement correct?



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M r . E C C L E S . I f the banks have excess reserves, and the System does
not sell its Government securities, that is, the Open Market Committee
does not sell out of its portfolio of Government securities, then the
banks would bid up the prices of Government securities; interest rates
drop, and an exceedingly easy-money situation develops.
A n example of that occurred when the emergency authority of the
Board to increase reserve requirements was permitted to lapse on the
1st of July. The banking system immediately received very substantial excess reserves. The Open Market Committee did not sell securities in the market, and as banks endeavored to invest their funds the
b i l l rate, which was approximately one and an eighth, went down to
three-quarters within a week's time or less. Certificate rates dropped
accordingly and bond prices went up. I n order to keep the short-term
rate from practically going to the vanishing point, the System then
permitted the sale of sufficient securities to absorb the excess reserves.
Let me put it this way: The money market banks as well as most
of the Reserve city banks generally maintain practically 110 excess
reserves with the Reserve System. They immediately invest any excess reserves that they have in short-term Government paper, almost
irrespective of the rate. I t has been definitely demonstrated that it
is impossible to maintain more than about three-quarers of a billion
of excess reserves, which are maintained largely by what are known
as the country banks—smaller banks throughout the country.
Reserves are supplied through gold imports, the return of currency
and Treasury operations which put funds into the market. The Treasury may also take funds out of the market, as would an increase i n
currency or a loss of gold. N Variations i n reserves through all of these
immediately affect the short-term rate.
Senator D O U G L A S . Well, I take it that you believe that during the
period of expanding prices, and a period i n which there is a tendency
toward inflation, one way of checking this would be, i f it could be
made effective, for the System to sell Governments in the open market
and thus draw down the
M r . E C C L E S . I t cannot be made effective.
Senator D O U G L A S . That is the next point I was coming to. B u t i f
it could be made effective, that is what you would like to have done ?
M r . E C C L E S . Oh, yes; i f the banks or the public would buy securities
out of the portfolio of the System, that would be fine.
Senator D O U G L A S . That would draw down the reserves and therefore diminish the lending power ?
M r . E C C L E S . Yes; but there are not any reserves during those periods.
W h a t really happens is that not only the banking system but nonbank
holders, such as insurance companies and investors, generally may
sell Government securities. The only market for the securities during
those periods is the Federal Reserve, and System purchases, of course,
monetize the public debt. Every dollar's worth of securities that the
Federal Reserve buys, whether from banks or otherwise, adds to the
total deposits of the banking system and the reserves of the banking
system upon which a multiple expansion of credit can be created.
W h a t would be required under the conditions which you have indicated
would be not that the Federal Reserve, the Open Market Committee,
sell securities in the market, but that it withdraw from the market
and refuse to buy.




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Senator DOUGLAS. Well, now, that was the next point. A r e you saying that the weapon of the open-market operations has been virtually
made inoperative to check inflation because of the readiness of the
System to buy unlimited quantities of Governments at relatively
pegged prices ?
M r . ECCLES. That is correct.
Senator DOUGLAS. A n d that as long as the banks can take bonds, go
to the Federal Reserve System, sell them and get reserves, that the
process of selling to them is taking money out of one pocket, which
they promptly proceed to put in the other ?
M r . ECCLES. W h e n the System buys securities it creates new reserves upon which the banking system can loan six times that amount
of money on the basis of the present reserve requirements.
Senator DOUGLAS. Now who decides whether or not the Federal
Reserve System shall buy Governments ?
M r . ECCLES. T h a t is a decision that is made by the Open Market
Committee in conjunction with the Treasury.
Senator DOUGLAS. Well, do they determine the amount or do they
determine the rate ?
M r . ECCLES. Well, they do not determine the amount. Y o u cannot
determine the amount not knowing what the supply of securities is
going to be.
The support price is really what is determined, and i f you have
a support price, then whatever amount is offered is what we take.
The best example of that was last year when there was very heavy
selling of the long-term
-percent Treasury bonds. They were
mostly the 2y2 marketable bonds not eligible for purchase by banks.
The insurance companies particularly were very, very heavy sellers,
and the System over a period of a few months purchased over $3,000,000,000 of these securites i n the market and within a year such
purchases were nearly $7,000,000,000. I n the same period over 2y2
billion of bonds—eligible bonds—were purchased by the System.
Senator DOUGLAS. M r . Eccles, I have never believed that congressional hearings were designed to exploit administrative differences, but you have been a member of this Open Market Committee,
a very influential member, and yet now you are saying that this policy
that the commitee has followed is i n your judgment incorrect ?
M r . ECCLES. I did not say it was* incorrect. I merely outlined the
effect of it. When I appeared before this committee November 25,
1947, this same committe of which Senator T a f t was then chairman
and again before this committee on A p r i l 13, 1948, I discussed very
fully this whole question of monetary policy. Y o u may recall that
there were some very important inflationary pressures i n existence
i n the f a l l of 1947 and i n the spring of 1948. O n those occasions I
requested for the Board certain powers.
I made this statement i n A p r i l of last year. I t is very short:
So f a r as the monetary and credit yield is concerned, we have t r i e d to make
clear the action on these fronts alone cannot guarantee stability. Nevertheless
we believe that the Reserve System should be armed w i t h requisite powers, first
to increase basic reserve requirements of a l l commercial banks, and, later on,
i f the situation requires it, to provide that a l l such banks hold a n a d d i t i o n a l
special reserve.

That was i n the form of short-term Governments.




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B o t h of these w o u l d be protective measures. T h e first could be used to offset
gold acquisitions and purchases of Government securities by the F e d e r a l
Reserve—

That is, from insurance companies and others.
lock up the effect of such an operation—

I t would neutralize,

and thereby restrict continued expansion and the already excessive money supply.
T h e second w o u l d be essential i n case banks embark upon an inflationary credit
expansion through the sale of Government securities to the F e d e r a l Reserve, or
to assist the Government i n case of large-scale deficit financing.

Now that was the gist of what was recommended at that time.
I supported a policy of maintaining a 2% percent rate for the
longest term Government securities at the time when that policy was
being pursued.
That policy likewise had the support of the Reserve bank presidents
including M r . Sproul, who was vice chairman of the Open Market
Committee, and also of M r . Brown, who was the chairman of the
Federal Advisory Council of the Board, and of the great majority of
the bankers of the country.
Last October, before the Iowa bankers, i n answer to M r . Parkinson,
the insurance company executive who criticized that policy, M r . L e f fingwell of J . P . Morgan & Co., and M r . Burgess of the National
City Bank—the three leaders opposed to the support policy—I presented a statement i n justification of the support of the long-term
2y 2 percent rate, at that time, and gave the reasons for it. I w i l l
read this later.
Senator DOUGLAS. Then you wanted the short-time interest rate on
Government notes, certificates, and so forth, to go up and not the longtime rate ?
M r . ECCLES. Over the last several years the Open Market Committee was, I believe, i n almost unanimous agreement on the question
of raising the short-term rate. W e advocated a much freer shortterm rate than was in effect. W e ran into resistance always with the
Treasury. D u r i n g the war period we had a pattern of rates for
the purpose of carrying out the war financing which seemed very
necessary and desirable. W e assured the Treasury that we would see
to it that whatever deficit financing was required would be carried
out at a fixed pattern of rates. W e did that because it seemed to us,
with the very large amount of deficit, financing that the war required,
and not knowing, of course, just how large it would be or when it
would end, that we could not have a speculative Government bond
market. I don't mean to say there wasn't considerable speculation
on the "up side." There was too much speculative bidding up of
prices which was not our fault—but we realized that it would be exceedingly difficult to finance the Government with increasing interest
rates, which would mean declining prices for securities after issuance.
W h e n the war ended we tried to get out of what we called a straitjacket by raising the short-term rates. W e had difficulty with the
Treasury, commencing with Secretary Vinson—Secretary Morganthau, of course, left the Treasury prior to the end of the war. W e
continued to have difficulty with the Treasury i n getting them to
agree to freeing the short-term rate. That couid have been a flexible
rate, i f it could have been permitted to go wherever it would go, i n
relation to the %y2 percent long-term rate. I t may well have gone
as high as the long-term rate—short-term rates i n the past have gone



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as high or even higher than long-term rates—and we would have
then followed up that change i n the short-term rate with an increase
i n the discount rate.
Senator DOUGLAS. M a y I ask: When did the Federal Reserve first
suggest raising the short-term rate Treasury bills ?
M r . E C C L E S . I n 1946.

Senator DOUGLAS. B u t it was not carried into effect until the
middle of 1947?
M r . ECCLES. Yes. I think that is true. W e had a buying rate of
bills of three-eighths.
Senator DOUGLAS. Was there a disagreement i n Government circles ?
M r . ECCLES. T h e r e was.
Senator D O U G L A S . Y O U felt

the short-time rate should go up ?
M r . ECCLES. The Open Market Committee felt it should go up.
Senator DOUGLAS. The Treasury did not think it should go up ?
M r . ECCLES. That is correct.
Senator DOUGLAS. W h y did you think it should go up ?
M r . ECCLES. Well, I felt that you had no flexibility i n the market at
all. Y o u could, as many of the banks were doing, sell the shorter
securities to us and buy the longer-term securities. This practice,
which wTe call playing the pattern of rates, tends to force the longterm rate down as long as short-term rates are not permitted to rise.
I n other words, we had a spread between short-term rates and longterm rates that didn't make sense, i n view of the support policy. W h y
should anyone want to handle any short-term securities at seveneighths i f you could get 2y2 percent for a demand liability i n long-term
securities ?
Senator D O U G L A S . Y O U were in favor of the pegging of the longterm rate?
M r . ECCLES. I couldn't figure out any alternative. I didn't like it
but it seemed to me that we were confronted with a dilemma, that the
size of the public debt was so great, the amounts of E . F . < G. bonds
&
outstanding, which were demand liabilities, were likewise very great
and—I am going to read this from the Iowa statement, to which I previously referred, because really it is the heart of the problem, and I
might just as well cover this point here. [Reading:]
Now, just what does this type of program actually contemplate ?

That is pegging.
It seems to involve a continued willingness on the part of the F e d e r a l Reserve
System to take Government bonds and to supply Reserve bank credit, but at
yields higher than 2% percent.

That is the policy that some were talking about.
Apparently, however, the System should f o l l o w a policy of gradually easing
bond prices down and yields up, but buying aggressively, i f necessary, to maintain
orderliness i n the market.
W h a t would be the position of a Government bond owner or a potential
bond buyer under such circumstances? W o u l d they have any confidence i n the
market? Holders w o u l d tend to sell and potential buyers to hold back, creating
increasing d o w n w a r d pressure on bond prices, u n t i l substantially lower prices
were reached. I f yields should rise only % percent on the longest 2% percent
bonds, their price w o u l d f a l l to less than 93. B u t i n a f a l l i n g bond market, w i t h
general credit demand strong, rates on other securities and loans w o u l d tend
to rise at least proportionately as much.
Under these conditions, can i t be
expected that insurance companies or savings and loan associations or other
institutional investors would act materially differently w i t h the yield on Governments at 3 percent than they do now at 2% percent?




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W e have had tax-free Governments, entirely tax free, selling at
almost 6 percent i n the past with a small public debt.
L o a n s or investment, other than Government securities, w o u l d have as much, i f
not more, relative attractivenes to lenders and investors. Few, if any, borrowers w o u l d be priced out of the market for funds by rate increases of the size
contemplated by advocates of this "flexibility" policy.

The long-term rate.
A n y moderate rise i n long-term interest rates w o u l d not, i n itself, reduce
significantly the demand for money.
Investing institutions, w h i c h are now
switching f r o m long-term Government bonds to private credit forms, w o u l d
s t i l l be motivated to do so by a continuing margin of return between the two
kinds of investment.
Thus, under the "flexible" policy, the F e d e r a l Reserve System w o u l d s t i l l be
called upon to support the bond market and w o u l d thereby continue to create
bank reserves. It is possible that the amount of support required under these
conditions would be much greater than is now the case. Investors generally
w o u l d lose confidence i n the market and w o u l d rush to sell their securities before
prices declined further.
Money and reserves created by F e d e r a l Reserve purchases below present
support prices w o u l d be just as high-powered as those created by support at
existing prices, and the reserves thus made available could support nearly six
times as much i n bank loans.

Senator DOUGLAS. M r . Eccles, may I interrupt for a minute. Y o u r
program was not, therefore, to raise the yield on long-time securities ?
M r . ECCLES. That is right.
Senator DOUGLAS. But to raise the yield on short-time securities
nearer to the 2y2 percent on long-time ?
M r . ECCLES. That is right; that is correct.
Senator DOUGLAS. A n d this was opposed by the Treasury ?
M r . ECCLES. Well, the Open Market Committee and executive committee of the Open Market Committee meet regularly and discuss the
question of the open-market operations i n relation to the constant and
current problem of debt management. A s you know, with the billion
dollars of bills falling due every week, and with the 25 billion of certificates, something of that sort, outstanding, falling due, with several
billions of bonds falling due periodically, debt management is a current and constant problem. I t is important that the Federal Reserve
policy be coordinated with the refunding operations, or the "rolling
off" operations of the Treasury with reference to short-term debt.
I n other w^ords, we couldn't let the short-term rates go completely
free. W e never proposed that it go free. But what we d i d propose
is that the b i l l rates and the certificate rates be permitted to go up.
T h e Treasury was unwilling to permit our buing rate to go up as far
as we recommended it, and thus permit the rates on short-term Government securities to rise.
Senator DOUGLAS. They didn't want the short-term rate to go up
because it meant a greater interest charge on the short-term debt; is
that right?
M r . ECCLES. That was one of the reasons, I suppose.
Senator DOUGLAS. A n d they, also, did not want fluctuating prices?
M r . ECCLES. D u r i n g this period of time, over a period of 2 or 3
years, the rate did go up on the certificates from % to 114. There
were three raises of an eighth i n a period of a little over a year.
Senator DOUGLAS. Well, this is something that puzzles me a bit:
A s I remember it, the Federal Reserve System was supposed to be an
independent agency; the Treasury, another independent agency. Yet,



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it is inevitable that the views of one be taken into consideration by the
other, and highly desirable. W h a t is the machinery for coordinating
the policies of the Eeserve System with the policies of the Treasury ?
Here was a case i n which the Federal Reserve Board, or rather the
Open Market Committee, wanted a higher rate on short-time Government securities; the Treasury did not. Now, what is the process of
osmosis by which the views of one becomes communicated to the other ?
M r . ECCLES. Well, our staff of people are constantly i n contact w i t h
the Treasury staff people, giving them the point of view of the Federal
Eeserve; and the Chairman of the Board was in close touch with the
Treasury. M r . Sproul and I met with the Secretary of the Treasury
periodically to discuss with him the recommendations of the Open
Market Committee with reference to this question. W e were successf u l in persuading the Treasury to permit some modest changes. That
is how we got the changes that we did, but we were never able to get
the short-term rate as free as we desired to get it, and there has
been
Senator DOUGLAS. Suppose you had gone ahead and raised the
short-term rate; what would have happened ?
M r . ECCLES. Well, I suppose that the System could have done that,
in defiance of the wishes of the Treasury. M y views of the independence of a central bank are these: That the Congress appropriate the
money; they levy the taxes; they determine whether or not there shall
be deficit financing. The Treasury then is charged with the responsibility of raising whatever funds the Government needs to meet its
requirements. They have the responsibility not only for raising new
funds and determining the types of issues and the rates that should
be paid, but they also have the responsibility for the refunding of
the debt.
The mechanism, however, for establishing money-market rates is
in the hands of the Open Market Committee.
I do not believe it is consistent to have an agent so independent
that it can undertake, i f it chooses, to defeat the financing of a large
deficit, which is a policy of the Congress.
I n other words, it seems to me that it is up to the Federal Eeserve,
the Open Market Committee, to advise, to recommend, to the Treasury and to the Congress. But it is not the position, I believe, of the
Federal Eeserve Board, or the Open Market Committee, to enforce
its will. I t has its day i n court. I t has its opportunity to make its
views known. It has an opportunity to persuade and to influence,
to whatever extent it can. I feel, however, that the final responsibility
for making the decisions with reference to public financing is up to
the Congress and the Treasury.
A n y open-market committee, or any central banking system, that
for any length of time did not go along with that conception would
not survive.
Now, I do think, when the policies pursued by the Government are
sufficiently displeasing to the central banking authorities, their redress
is to resign, but not to undertake to enforce their will.
Senator DOUGLAS. M r . Eccles, I can quite understand that during
the period of the war, when the amounts collected i n taxes and subscribed for bond purchase out of current income were not sufficient to
meet the total cost of the war, we had to create credit by banks. B u t
i n the period of 1946 and the first part of 1947, of which you speak,



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the Government d i d not have a deficit; it had a surplus, so that the
policy of low rates on short-time securities was not necessary f o r
current financing. Y o u can say that it was desirable for refunding,
but not for current financing.
M r . ECCLES. There was no current financing. I t was a l l a problem
o f refunding.
Senator DOUGLAS. T h e n the question comes, F o r how long w i l l the
refunding needs of the Treasury dictate reserve policy ? Is this going
to continue forever?
M r . ECCLES. I think so. I f Congress would, as a result of hearings
of this sort, make it apparent that this support policy on the part of
the Open Market Committee was not desirable, I think you w o u l d find,
maybe, a greater independence on the part of the Open Market Committee. B u t i n the hearings that have been held up here d u r i n g the
past 2 or 3 years we were unable, though the agent of Congress, to get
any indication f r o m any of the committees of Congress as to whether
or not this support program should be discontinued. I don't think the
System expected to get an opinion, but it only indicated that they had
to do the best they could under the circumstances that existed.
Senator DOUGLAS. A n d i n default of such a mandate you felt that,
while you should advise and conciliate and attempt to persuade the
Treasury, you should not act i n opposition to its wishes?
M r . ECCLES. T h a t is correct. W e felt that increasing the short-term
rates or permitting a long-term rate to go up would not necessarily
stop an inflationary development unless we went so f a r as to withdraw
f r o m the market. T o buy Government's, whether you buy Government's i n the market at par or at 75 cents on the dollar, you still create
reserves. T o stop the growth of bank credit, it would have been necessary to deny banks Federal funds, either through rediscounting or
through the support of the Government bond market. That, of course,
would have stopped the growth of bank credit and the supply of money.
A n increase i n rates of 1 percent or 2 percent, or even more, is not
going to stop, i n a period of inflationary development, the borrower
f r o m desiring to borrow i f he needs that credit i n order to do what he
considers necessary to do business. T h e psychological effect on borrowers and lenders of such rate increases is, of course, h a r d to judge.
I t would depend upon the degree of inflation, and the amount of confidence or lack of confidence i n the Government security market.
Senator DOUGLAS. I n order to get an appreciable increase i n yields
and i n interest rates, you would have to let the price of Government
bonds depreciate markedly ?
M r . ECCLES. A half of 1 percent i n interest rate would put the longterm Government bonds to 93. Now, you must consider what w o u l d
then happen to the fifty-some-odd b i l l i o n of E , F , and G savings bonds
that are outstanding.
Senator D O U G L A S . I understand those are to be redeemed at par.
M r . ECCLES. No, but they could be redeemed for cash. Those bonds,
first, are demand liabilities on the Treasury, and i f
Senator DOUGLAS. T h e Treasury w i l l redeem at par ?
M r . ECCLES. I t w i l l redeem them for cash at stated prices. B u t , i f
the Treasury has to redeem those bonds, then the Treasury has got
to raise money i n the market, i n order to pay them off, and the Federal
Reserve would have to see to it that the Treasury could raise the money.
Therefore, you have a process of monetization there.



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Senator DOUGLAS. I n other words, what you are saying is that, for
the stability of the banking system, perhaps the stability of the
finances of the country, you can only permit minor changes i n the
price of government; and, therefore, i n yields—very minor changes?
M r . E C C L E S . I think so.
Senator DOUGLAS. A n d that these minor changes w i l l not have very
much effect i n damping down inflation ?
M r . ECCLES. Well, if the demand for credit is great, or if the lack
of confidence i n the long-term rates is greatly weakened, i f confidence
i n the purchasing power of the dollar, which usually takes place i n a
rapid and continuing inflationary condition, developed, then certainly
merely a change of a few points i n the interest rate is not going to
stop your inflationary development.
A s was pointed out, there are two ways that inflation must be
stopped. One is through fiscal policy, budgetary surpluses. But
budgetary surpluses, i n and of themselves, w i l l not stop inflationary
development, i f the effect of budgetary surplus, which is anti-inflationary, is neutralized or nullified by the banking system expanding
credit of an amount equal to the budgetary surplus. That is what
took place i n 1946 and 1947.
Senator DOUGLAS. B u t couldn't the budgetary surplus be used to
purchase a portion of the bank-held public debt ?
M r . ECCLES. I t was used entirely for that purpose.
Senator DOUGLAS. That should have diminished the reserves.
M r . ECCLES. I t diminished the amount of deposits and reserves, but
the banking system expanded bank credit, for housing particularly
under a Government-sponsored program, for consumer credit through
commercial loans, and various types of credit, which were encouraged.
The banking system expanded credit and created money by an amount
i n excess of the budgetary surplus which the Government created
through a sound fiscal policy.
Senator DOUGLAS. B u t they expanded by less than would have been
the case had there not been a budgetary surplus.
M r . ECCLES. One largely neutralized the other, or you would have
had a much more serious inflationary development.
Now, the principal reason why the Board proposed what was known
as the special reserve was i n recognition of what I am saying. I t was
desirable to put the banks under pressure not to loan, not to expand
credit. Merely changing the interest rate further encouraged the
banks to want to loan. T o increase the rates wouldn't discourage bank
lending. The small increase in the rates would not discourage borrowers from borrowing. So, what seemed to us to be required was to
put pressure on the banks by requiring that a substantial part of their
deposits be locked up against the short-term Government securities
which i n their purchase created the deposits.
A n d I would like to read, in that connection, what I said on November 25,1947, to the Joint Committee on the Economic Report, i n hearings that were held for the purpose of considering inflationary problems, just a paragraph on this very point. [Reading:]
It is unfortunate, I think, that banking leaders oppose protective measures
against inflationary forces arising i n the credit field. T h e y seem to forget that,
i n order to assist i n w a r financing, the Government provided the banking system
w i t h additional reserves w h i c h enabled the banks to buy Government securities;
that this created new deposits i n the banks; and that banks have also had the
benefit of interest received on the Government securities they have held and w i l l




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continue to hold for an indefinite period. They object even to a temporary limitation on the further use of these funds as a basis for loans to private borrowers,
w h i c h w o u l d i n t u r n create more and more deposits. T h e Government has an
obligation and a duty to step i n at this time of national danger to say to! the
banks, " W e are not proposing to deprive you of benefits you have already derived
and w i l l continue to derive from the vast increase i n bank deposits resulting f r o m
your purchases of Government securities, but we do say that you should be
w i l l i n g to accept a reasonable limitation on using a war-created situation to multiply private loans i n peacetime when they serve to intensify inflationary pressures."

Senator DOUGLAS. That was to be a limitation on the purchase of
short-time securities ?
M r . ECCLES. That was to require a reserve to be held i n short-term
securities.
M r . WOLCOTT. M a y we identify what he is reading from, M r .
Chairman ?
M r . ECCLES. Hearings before the Joint Committee on the Economic
Report entitled "Anti-Inflation Program as Recommended i n the
President's Message of November 17,1947," page 145.
M r . WOLCOTT. Testimony which you gave before this committee or
the House Banking and Currency Committee ?
M r . ECCLES. Before this committee.
M r . WOLCOTT. What was the other one you read from; was that
testimony before this committee?
M r . ECCLES, They were both before this committee.
M r . WOLCOTT. O n what dates?
M r . ECCLES. November 25, 1947, the one that I have just read; and
the other was A p r i l 13,1948.
Extensive hearings were held before your committee, M r . Wolcott,
i n the House at that time. I appeared for two f u l l days before your
committee in connection with this entire subject.
M r . W O L C O T T . I remember you did. I thought there was something
nostalgic about what you were reading.
M r . ECCLES. That is right. There w i l l always be, of course, nostalgia, I think, about this subject of inflation and monetary and credit
control. There is nothing new about it, and there is not likely to be
over the ages.
Senator DOUGLAS. M r . Eccles, when M r . Burgess testified last week,
he contended that an increase i n the member-bank reserves ordered
by the System could not restrict the growth of credit extended by the
banks so long as the Federal Reserve follows the policy of pegging
the prices of governments and is therefore committed to purchasing
all securities offered to it. D o you agree with that ?
M r . E C C L E S . I agree w i t h it.
Senator D O U G L A S . S O that, i n effect, you are saying that the openmarket operations of the Reserve System and the reserve requirements
of the System are relatively inoperative as a means of checking inflation because of the debt-management policy ?
M r . ECCLES. Well, I think the debt-management policy is, of course,
the most important factor i n this whole situation. W h a t M r . Burgess said, of course, is, like a great many statements, true as far as it
goes; but more could be said upon the subject of how to exercise more
effective credit controls through increasing reserve requirements to
offset the effect i n reserves of Federal Reserve purchases of securities
sold by nonbank investors. When insurance companies or other longterm investors decide to sell, so long as the Federal Reserve is support-




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ing the long-term 2%-percent rate, reserves are created in the banking system. The banks themselves don't create those reserves. They
get reserves and are under pressure then to use the money. Gold imports or silver purchases, or a reduction of currency i n circulation, all
of those factors add to the excess reserves of the banking system; and
the banks themselves, either individually or collectively, have nothing
to do with the creating of those reserves. Y e t when reserves are available, the banks are under pressure to expend credit, to use those funds
to drive interest rates down and to drive prices of securities up.
Now, an increase in reserve requirements sterilizes the effect of
reserves going into the banking system from these sources. But to
increase reserve requirements very materially and not include nonmember banks would drive member banks out of the System. The
Reserve banks would be, in effect, holding an umbrella over the banking system as a whole, and that is why we argue strongly that reserve
requirements should be applied to all banks, so as to help the System
get new members and to help the System hold the members we have.
Now, there is one other point on that that I want to make. The
banker v/ho chooses to sell securities doesn't see how or why he is
necessarily creating more money. H e only sees that he has a good
customer who gets the credit. Even though that customer gets the
credit and uses it to compete for goods in short supply, the individual
bank doesn't see that you must stop the growth of bank loans and
investment i n order to stop the growth of bank credit. The special
reserve requirement that would require the banks to hold a substantial
part of their demand deposits in short-term Governments would put
the banks under pressure to restrict loan expansion, because they
wouldn't be able to sell their short-term securities. They would have
much more hesitancy to sell the longer-term securities which give a
higher yield, and they would want to maintain such liquidity as was
left to them i f a reserve of short-term securities was applied.
Now, I merely mention that as reviewing the proposal made, because
we saw this situation fully at the time. W e saw the dilemma, and we
tried to point out to the committees what we could do as an alternative
to withdrawing support from the Government security market, which
may have been necessary to prevent monetization of the public debt.
W e hesitated to withdraw support for the reasons which I have indicated to you: Because of the effect upon the entire problem of management of the public debt, the problem of refunding, and particularly
the effect that might be had upon the demand liability i n the form of
E , F , and G bonds.
Senator DOUGLAS. M r . Eccles, earlier you said that i n default of a
congressional mandate you felt that you should not disregard the considered judgment of the Treasury on the question of yield of Government securities.
M r . ECCLES. T h a t is correct.
Senator D O U G L A S . I would like to ask: W o u l d it serve a useful purpose i f Congress were to instruct the Treasury further as to the policies
to be followed in debt management and the procedures of cooperating
with the Federal Reserve System ?
M r . E C C L E S . I think it would be of great assistance.
Senator D O U G L A S . D O you have any suggestions as to the policies
which Congress might instruct the Treasury to follow ?




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M r . ECCLES. Well, I hadn't thought of the subject, but I w i l l be glad
to do so. I can't think of the practical language of a resolution or b i l l
that would be required. I t would require action on the part of Congress. I t would certainly be debated plenty within the Congress.
Senator DOUGLAS. B u t you are saying, i f properly constructed, it
would be helpful. I take that i f such an instruction were unwise it
could cause great damage. Therefore, we would appreciate it very
much i f wTe might get some suggested standards, standards of instruction.
M r . ECCLES. O f course, the Federal Eeserve System—that is, the
Board in particular, more than the Open Market Committee—is i n a
particularly difficult situation. The Members of the Congress and the
public blame the Federal Eeserve for not restricting credit expansion
and not preventing inflationary developments on the one hand, while on
the other hand the Board would, of course, be condemned by many
who would be opposed to such action. Certainly the Eeserve Board is
no place for a person who does not have the courage to take unpopular
action.
I t would be of great assistance, of course, to the Board i f that were
made perfectly clear, that this responsibility for credit and monetary
control is theirs and not the Treasury's.
I don't know that it would be practical to work out an arrangement,
for the reasons I stated a while ago, to create an independent Eeserve
Board, independent to the extent that it was expected to enforce its
will. I t is now independent and should continue to be independent to
the extent that it has an opportunity to recommend and to advise.
That is, of course, desirable, and is a better situation than would be
the case i f the Federal Eeserve authority and power were vested in
the Treasury itself.
Senator DOUGLAS. Well, would you favor a national monetary counc i l composed of the chief officers of the Gocernment who deal with
fiscal and credit policies, so that there might be a formal opportunity for them to meet and try to arrive at common decisions rather
than have these matters discussed at informal conferences on a staff
level?
M r . ECCLES. I don't think that would improve the situation. I t may
be desirable to have an interdepartmental statutory council, such as
the N A C i n the foreign field, for the purpose of coordination of certain
credit activities. Y o u have the F a r m Credit Administration, and you
have the Housing Administration, you have the E F C , and you do
have a great many Government agencies whose activities affect the
field of money and credit. I t might be desirable to have such an interdepartmental committee; but it would seem to me that, whatever the
policy of the administration was at the time, it would prevail i n such
a council; and it would, i f anything, reduce the independence of the
Board and not increase it.
Senator DOUGLAS. W e asked Secretary Snyder a question as to how
we could get better coordination of fiscal policies; also, among other
questions we asked him, whether he believed that the Secretary of the
Treasury should be made a member of the Board of Governors of
the Federal Eeserve System; and he replied [reading] :
T h e Secretary of the Treasury is the
seems to me that any proposal to make
of the F e d e r a l Reserve System for the
coordination of F e d e r a l Reserve and




chief fiscal officer of the Government. I t
h i m a member of the B o a r d of Governors
express purpose of bringing about better
Treasury policies w o u l d appear to sub-

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ordinate the responsibility of the Treasury
ters. I n the final analysis, the p r i n c i p a l
area must rest w i t h the President and his
the electorate f o r their actions (p. 11 of the
and F i s c a l Policies).

POLICIES

Department i n fiscal-monetary matresponsibility i n the
fiscal-monetary
fiscal officers who are accountable to
committee print on Monetary, Credit,

Now, i f what you have been saying amounts to this, that on these
vital matters the Federal Reserve Board defers in its credit policies
ultimately to the Secretary of the Treasury, that means that the
Secretary of the Treasury ultimately has responsibility both for the
fiscal and for credit policies ?
M r . ECCLES. Well, there is no difference between money and credit.
They are one and the same thing. W e say "money and credit," but
credit is merely the basis for creating money.
Senator DOUGLAS. Debt management, perhaps.
M r . ECCLES. That is right. There is a distinction, of course, between what we call fiscal policy and monetary and credit policy.
Now, I have advocated that the Federal Reserve Board or some
organization should have the sole responsibility i n the field of monetary and credit policy; and, as I have indicated here, examinations
are closely related to that question of monetary and credit policy.
Senator DOUGLAS. Including the management of the public debt?
M r . E C C L E S . N O ; when it comes to the question of management of
the public debt, the Treasury is the huge borrower; and I don't know
wThether you can, as a practical matter, improve a situation that merely
gives to an independent Federal Reserve agency the opportunity to
advise—the opportunity to recommend. I t is difficult for me to see
how you can go further than that. When the administration in power
at any given time is put there by the electorate and is responsible to
the electorate, to have an independent agency deprive them of the most
important tool i n the economic kit doesn't seem to me to be very
practical.
I t has never operated that way i n any other country. I n Canada, i n
England, France, and every other country i n the world, so far as I
know, the central bank has never successfully used its authority to
enforce its w i l l over any administration i n power.
Senator DOUGLAS. M r . Eccles, i n connection with the responsibilities of the Treasury for debt management, which you now say you do
not propose to change, does not that necessarily carry w i t h it, i n the
final analysis, control over credit policy and therefore over money
policy?
M r . ECCLES. Well, you could make A good argument for that.
Senator DOUGLAS. Isn't that just a statement of fact under the
present situation ?
M r . E C C L E S . I would question that. Certainly the desirability of it.
Senator D O U G L A S . I am not speaking about the desirability of it.
I am just saying, isn't that a statement of the situation?
M r . ECCLES. Well, I must admit that that is where the logic of the
situation leads you; I must admit that. A n d yet we all know, I think,
as a practical matter, that to increase the direct authority of the
Treasury over the whole field of money and credit—in other words,
set up within the Treasury itself a division or a department of monetary and credit control—may well lead, i n time, to a socialization of
the credit structure, w^hich, I think, would be very undesirable and
very dangerous.
99076- -50

16




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Senator DOUGLAS. I want to make it clear that I am not advocating
that. ^ I am merely raising the question as to whether, in the present
situation, the power of the Treasury to manage the debt, which you do
not question, does not, as a matter of fact, also carry with it the virtual
control over credit and monetary policy. That is all. I am not saying
this should be permanent.
M r . ECCLES. I wouldn't say that it carried the complete control.
Senator D O U G L A S . N O ; predominant control.
M r . ECCLES. I would say that it exercised a tremendous influence.
I would say that it possibly carries a much greater control than is
generally recognized and understood. That control, of course, can
be extremely dangerous if the Treasury would be, for political reasons,
enforcing a monetary and credit policy i n connection with its debtmanagement responsibility that was contrary to the best interests of the
country at a given time. They could do that and it could be dangerous.
Senator DOUGLAS. M r . Eccles, I am aware of the fact that I have
probably asked more questions than I should, i n justice to my colleague, Congressman Wolcott, but I do have one or two more questions,
and then I w i l l defer to him.
I n hearings last week I asked a number of witnesses whether the
Federal Reserve Board, in their judgment, should not be given powers
to impose uniform reserve requirements on all banks, whether members or nonmembers, and their reply was almost uniformly "No." The
chief argument which they brought forward was that already 85
percent of the deposits of the country are i n the Federal Reserve
banks, and that the dog in the System was a big dog, and that the
tail outside of the System was a relatively small tail, and that in practice the Federal Reserve Board did not need this control on reserve
requirements to control the total amount of credit.
Now, I replied to this argument of theirs by saying "Yes," but i f
the Reserve Board raises requirements to check inflation there is
always the danger that State banks w i l l resign from the System.
They replied, "Have any ever done so," and their implication was,
in practice, that the advantages of being in the System are such that
even i f reserve requirements are raised that State banks, members of
the System, holding 35 percent of the total deposits, w i l l not get out.
What is your judgment on that?
M r . ECCLES. I don't agree with that at all. I think i f reserve
requirements were substantially increased that you would not only
find a substantial number of State banks getting out, but you would
find national banks converting to State banks. Y o u would weaken
the entire structure of Federal control over the banking system.
Not only would that happen but the State banks which are now out
of the System would certainly not come into the System.
Senator DOUGLAS, They only have 15 percent of the deposits.
M r . ECCLES. That is right; but that is a pretty good size hole i n
the dike. There is always a terrific opposition to an increase i n
reserve requirements by member banks and national banks because
of the discrimination. That is one of the great arguments against
further increasing reserve requirements.
Now, as a banker with a good many years of practical experience
I can say that I cannot see any good reason why a bank would remain
i n the Reserve System under conditions of an expanding increase i n
reserve requirements. The advantages of the System are very minor
aside from the use of its credit facilities.



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Senator DOUGLAS. What about the clearance of checks ?
M r . ECCLES. Well, you can clear checks through the banks which
are members. That is no problem. They are delighted to have your
balances.
I n other words, most nonmember banks might get by on 15 percent
of their demand deposits held as reserves—in cash and correspondent
balances; whereas a member bank today cannot get by on less than
25 or 30 percent. Now, that is already a great penalty.
Senator DOUGLAS. That includes vault cash ?
M r . ECCLES. That is vault cash and correspondent bank balances
that member banks must carry, i n addition to required balances with
the Federal Reserve, in order to get the services that the Reserve
System is unable to give them. Nonmember banks can count their vault
cash and balances with correspondents to meet any reserve requirements
the}7 are subject to. There would be no good reason why banks should
stay in the Federal Reserve System so long as they have a large portfolio of Government securities which they are able to sell in order to get
funds to meet their situation.
Senator DOUGLAS. M a y I ask this, Has the fear that the raising of
reserve requirements might cause State banks to get out of the Federal
Reserve System ever operated to make the Federal Reserve Board
abstain from putting into effect an increase i n reserve requirements
which otherwise it would have thought desirable ?
M r . ECCLES. W e didn't have authority to increase reserve requirements any further than we did.
Senator DOUGLAS. Then has this fear operated to restrain you in
the past ?
M r . ECCLES. The fear hasn't operated to restrain the Reserve Board,
no; but had we gotten the authority that was requested it may well
have. I appeared before the committee and said that, unless authority
to increase reserve requirements applied to nonmember banks, the
Board did not want that authority, because they would be under pressure not to use it, because of the discrimination.
Senator D O U G L A S . H O W much more did you want to raise it ?
M r . ECCLES. W e asked for authority, as I recall, of 10 percent. I
think that was i n A p r i l 1948. I n December of 1947 we had suggested
authority to impose a special reserve requirement of up to 25 percent
of demand deposits i n short-term Governments, which would have
permitted the banks, of course, to hold their reserves i n the form of
Governments, which are earning assets.
What I have said here this morning, of course, with reference to this
subject, had application in an inflationary situation that existed i n
1947 and 1948, and does not have the same application today.
This is now an academic discussion, which does not necessarily have
application to the present economic situation.
I see no urgency at the present time for increased authority. I f the
System had increased authority I can't see any use that they would
have for it at the present time. That does not mean, however, looking
to the future, that whatever authority may be necessary to deal with
inflationary situations, should not be available.
Senator DOUGLAS. I think those are all of the questions I have. Congressman Wolcott.
M r . WOLCOTT. M r . Eccles, I don't know as you intended, and I
surely am not going to interpret your remarks as critical of the con


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POLICIES

gressional action, but, of course, you have known for some time of the
difficulty which Congress has had in trying to reconcile the policy as it
was announced by the Treasury and the Federal Reserve Board—and
sometimes, as I recall it, you haven't been in hearty agreement with
other members of the Board in respect to these problems
M r . ECCLES. I do not think that statement is correct.
M r . WOLCOTT. Perhaps not on these problems, but on others.
M r . ECCLES. I think that the statements I have presented are the
statements of the Board.
M r . WOLCOTT. A t that time ?
M r . ECCLES. A t this time.
M r . WOLCOTT. What I was leading up to is the statements you are
making today and the suggestions and recommendations which you
have made—are they your own, or are they the Board's ?
M r . ECCLES. They are my statements. I am not Chairman of the
Board, and I was asked to come up here and express my own views.
M r . WOLCOTT. Do you believe that they substantially conform to the
thinking of the other members of the Board ?
M r . ECCLES. Well, it would be my judgment that they do conform y
i n general, with certainly the majority of the Board. That is my
judgment. I may be wrong.
M r . W O L C O T T . Y O U have been dealing principally here in the past
tense as to what our attitude should have been in previous inflations.
Do you believe that the Government should, either through the Federal
Reserve or the Treasury, continue to support the Government bond
market?
M r . ECCLES. Well, the Open Market Committee is not supporting
the Government bond market at this time.
M r . WOLCOTT. I f there should be a case where the Government bond
market has to be supported, do you believe they should? They are
surely influencing it to a point where it is supported i n some measure
today.
M r . ECCLES. Yes; as a matter of fact the Federal Reserve has reduced its holdings of Government securities during this year; it has
sold into the market something over $4,000,000,000 of securities; including $3,000,000,000 of bonds.
M r . WOLCOTT. W h y have they sold them?
M r . ECCLES. Well, they have sold them to meet the demand. W e
have let the market have securities; otherwise prices would have gone
sky high, interest rates would have gone exceedingly low.
M r . WOLCOTT. A l l of the operations of the Open Market Committee are predicated upon the desirability of maintaining a stable market, are they not; that is, since 1935, when you were given this authority, these mandatory powers? Before that the Open Market Committee was purely advisory.
M r . E C C L E S . Y O U mean the Board was advisory. The Open Market Committee was composed of the governors of the 12 banks.
M r . WOLCOTT.

Yes.

M r . ECCLES. The Board was advisory.
power.
M r . WOLCOTT.

The Board had the veto

Yes.

M r . ECCLES. B u t they had no initiative; the initiative was i n the
hands of the governors of the 12 banks.




241 M O N E T A R Y ,

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M r . WOLCOTT. The Open Market Committee had no initiatory powers previous to 1935 ?
M r . ECCLES. The Open Market Committee had initiative before
1935.. The Open Market Committee was set up i n 1933. P r i o r to
that they acted informally. F r o m about 1922 they acted informally,
largely under the leadership of New York. B u t it wasn't until
the Banking A c t of 1935 that there was an Open Market Committee
that had the authority to force the Reserve banks to buy and sell.
P r i o r to that time all the Open Market Committee could do was
to adopt a policy over which the Board had a veto power. But whatever policy they adopted, any Reserve bank could refuse to participate. It was, of course, a very impractical and unsuccessful
operation. That is why the Banking A c t of 1935 changed that entire
open-market structure. A t the time of the Banking A c t of 1935, and
I sponsored that legislation and carried it through Congress, it was
recommended that the authority of the Open Market Committee be
put in the Board, and the b i l l passed the House i n that form. It was
the Senate that set up the present form, and that compromise was
accepted in the conference committee.
M r . WOLCOTT. M r . Eccles, can you give us some idea as to where
you think the bond market should be pegged, w^here the Government
bonds should be pegged ?
M r . ECCLES. I t seems to me
asked me the question, D i d I feel
the Government bond market should be supported ?
M r . WOLCOTT.

Yes.

M r . E C C L E S . A n d I answered by saying that the Government bond
market w^as not requiring support, but the System was selling securities in the market,
M r . WOLCOTT. Let me put it this way: W h a t we are trying to get
at is whether the Congress should enact legislation to help i n the
stabilization effort. I gather from what you have said that you
believe the authority to peg the Government bond market should be
continued ?
M r . E C C L E S . Well, there is no direct requirement that the Government bond market be pegged. I am not saying, looking to the
future that the 2!/2 rate should be maintained.
I t seems to me that nothing could be worse than that the Reserve
system be given a mandate, or that it be indicated, either by the Congress or by the Open Market Committee, that it should peg the Government bond market at a 2%-percent rate indefinitely, as M r . H a r l
suggested the other day. Nothing could be worse.
I t would be perfectly stupid then to have more than one rate.
W h y on earth, i f the Open Market Committee, or the Congress, were
to publicly announce that from here on out the long-term rate of 2%
percent on Government securities was going to be maintained on
market securities would anyone want a b i l l or a certificate that
yields 1% or 1% ? A l l the Government would need to have is just one
security, which would be a demand liability of 2y 2 percent.
W h y have obligations maturing in 20 years ?
M r . W O L C O T T . That brings up the question of the standards under
which you should be given the authority. M y point is, Should the
Congress just say that either the Treasury or the Federal Reserve,
through the Open Market Committee, shall have the authority to
support the Government-bond market, and stop there? W h a t more
authority would that get you over what you have at the present time ?



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M r . ECCLES. I t wouldn't give us any. W e have got that authority
now.
M r . WOLCOTT. Then it becomes a question of standards. W h a t
standards, as Senator Douglas has suggested, could the Congress
enact into law that would clarify your position i n respect to supporting the Government-bond market any more than has been done by
giving the Open Market Committee initiatory powers under the Banki n g A c t of 1935 ?
M r . ECCLES. I don't know.
M r . WOLCOTT. W e don't know. That is what we have been t r y i n g
to find out here ever since 1935. Surely we should make it flexible
enough so that you wouldn't create a situation where you would
destroy your market for the short-term stuff.
M r . ECCLES. What the Board suggested was that the authority
that the Open Market Committee has was not i n itself sufficient and
that further powers were needed; namely, the authority to increase
reserve requirements or to apply special reserve requirements, as
supplemental to the other authority.
M r . WOLCOTT. A l l r i g h t .

M r . ECCLES. The authority of the Open Market Committee was
adequate only to the extent that you denied the market Federal
Reserve funds by withdrawing.
M r . WOLCOTT. W e did give you authority i n respect to reserve requirements, and you say they weren't operative and you couldn't
effect your purpose because we did not give you authority over reserves of nonmember banks ?
M r . E C C L E S . N O ; we got authority about a year ago to increase requirements by 4 percent, but it was temporary and lapsed last June.
M r . WOLCOTT.

Yes.

M r . ECCLES. I t applied to member banks only. I f you recall, that
authority was not given until a year after it was asked, and then we
were heading into a recession.
M r . WOLCOTT. Y o u asked for a 10 percent authority ?
M r . ECCLES.

Yes.

M r . WOLCOTT. The reason that the Congress did not give you the 10
percent was because it was self-evident, it was thought, that i f you
exerted that authority up to the limit you could have put almost
every bank i n the United States out of business; we thought it was
too broad an authority. W e eventually compromised on your 4 percent, and you did not use all of that, did you ?
M r . ECCLES. W e pointed out that the 10 percent at the time would
still leave the banking system with enough Governments. They had
about 50 percent of their deposits i n Governments; and a 10 percent
increase, we pointed out, would leave them with nearly 50 percent of
their deposits i n Government securities, and therefore it was not as
drastic as you have indicated.
M r . WOLCOTT. Well, we were told, as I recall, that you would never
use that much authority.
M r . ECCLES. Well, the very fact that we had the authority to use
M r . WOLCOTT. Because there was no other alternative given to the
Congress, we had to use our own good judgment as to what we considered equitable and what we considered sufficient authority to do
the job at the time, so we compromised on 4 percent.
M r . ECCLES. W e got no authority at that time.



243 M O N E T A R Y ,

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AND

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POLICIES

M r . W O L C O T T . Y O U didn't get the authority, M r . Eccles, because you
asked for this unwarranted amount, in the opinion of the majority of
the Congress.
Mr. E C C L E S . N O ; they didn't even give us 4 percent; they gave us
nothing at the time.
M r . WOLCOTT. Because there was no alternative. The Congress
had to create an alternative, as between 10 percent and 4 percent; and
they did; and you did not use it. That is purely academic, of course.
M r . ECCLES. B u t that is just part of the truth of the whole.
M r . WOLCOTT. This is what I am trying to find out. W h a t do you
recommend as a figure that the Congress should enact i n respect to
the reserve requirements over and above what they are at the present
time?
M r . ECCLES. I am not making any recommendations with reference
to what Congress should enact with reference to either reserve requirements or special reserves. I am merely pointing out here what the
problem has been and
M r . WOLCOTT. Has the Board taken any action as to' the amount of
authority which it needs in that direction; has the Board agreed upon
any figure ?
M r . E C C L E S . N O ; the matter has not been discussed, because at the
present time, I think, it is academic. W e have been reducing reserve
requirements during the past year. Eeserve requirements have been
reduced below the statutory limit by 2 percent. The Board would
have authority, of course, to increase reserve requirements by that
amount in the future. There is certainly no immediate problem today
with reference to undue bank-credit expansion. Outstanding bank
loans today are less than they were at the beginning of the year.
So there is no urgency at the present time. I have suggested i n my
statement that I think the passing of a resolution—that was Senate
b i l l 1559, which called for the creation of a National Monetary Commission—is very important. I have said that such a Commission
should be set up and an extensive study made before any of these
questions are determined. I have tried to point out here only a few
of the high lights.
M r . WOLCOTT. Should we give this Monetary Commission the
authority to dictate to the Federal Eeserve, the Open Market Committee, the point at which Governments should be supported ?
M r . ECCLES. The Monetary Commission was to be set up for the
purpose of making a study, and would not, as I understand it, be given
any authority.
M r . WOLCOTT. I am not getting very far. I have been trying to
centralize this authority somewhere—perhaps that is the wrong
term—but I think we see here a need for coordinating these efforts;
and whatever is set up, whether it is a monetary authority or a commission or whether it is a credit council, do you think that any such
coordinating body should be given the authority to dictate to the
Federal Eeserve the point at which the Governments should be
pegged ?
M r . E C C L E S . N O ; I don't.
M r . WOLCOTT. W h o should have the authority?
M r . ECCLES. I think the Federal Eeserve should have it.
M r . W O L C O T T . Y O U are not in favor of transferring that authority
to the Treasury ?



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M r . E C C L E S . N O ; I am not. A s I have indicated, I think that the
Federal Reserve itself needs some reorganization, and I do think
that there should be a consolidation of the Federal supervisory agents.
Senator D O U G L A S . I can hardly keep still, because you are saying
that the Federal Reserve Board should have the power to determine
the price at which Federal securities are purchased, but previously
you have said that the Treasury should be given the power over debt
management.
M r . ECCLES. W h a t I meant to say, Senator, is that, whether it be
the Board as now constituted or whether it be any other credit, monetary or credit organization, they should have the authority rather
than there being a direct authority of the Treasury. They should
have the authority to manage the open-market operations, in line with
a policy that would have to be agreed upon with the Treasury.
Now they would be independent to the extent that they are able
to advise the Treasury, to recommend to the Treasury, and hence,
I think, have considerable influence upon the Treasury. I think that
that much independence must and should be maintained; w^hereas
i f you put it in the Treasury directly, eliminating the Federal Reserve
Board, you would not have any agency with any independence of
expression on the subject.
Senator DOUGLAS. O n the principle that a subordinate can hardly
give independent advice to a superior who wants to be advised i n a
different direction ?
M r . ECCLES. Well, i n a degree I think that is correct. A n d I don't
know how you are going to get away from that. I think that the
history of central banking throughout the world would indicate tHat
they must be subordinate to treasuries, and particularly is that true,
now that the public debt is 60 percent of the entire debt.
Now, it was one thing prior to the First W o r l d War, and even
during the Twenties, and even prior to the Second W o r l d W a r . But,
with a public debt the size that the public debt now is and with the
prospect of running into another deficit, it seems to me pretty impractical to say that there should be a body with sufficient independence
that it can defeat the purposes of an administration that chooses
to create public deficits.
M r . WOLCOTT. M r . Eccles, do you think the trend, the immediate
trend, is toward further inflation, or reflation, or deflation, or are we
on a level that w i l l remain more or less static for some time ?
M r . ECCLES. Well, the statistics at the present time point to, I would
say, some inflationary developments, and I say that for these reasons:
Bank credit is beginning to expand a little. There is an excessively
rapid growth i n consumer credit on more and more favorable terms.
There is a great growth i n housing credit on very small down payments. There is a very rapid growth i n State and municipal debt.
There is a very substantial public deficit, of about $5,000,000,000 i n
this fiscal year. I n addition, there is the payment to the veterans
of close to $2,800,000,000 that w i l l be disbursed the first 6 months of
next year. There is the agricultural support policy of the Government, which, of course, tends to sustain the inflationary level i n the
field of agriculture. There is the present labor wage policy that is
indicating a further increase i n wages that must reflect itself, i n many
instances, i n prices. There are the private corporate pension programs,




245 MONETARY, CREDIT, AND FISCAL POLICIES
which, I think, are a big mistake, that are equivalent to wage increases
and that likewise tend to support or hold up prices.
That is just part of the picture. O n the other hand I recognize
the increased productivity of our machine, and I think that any
inflationary development, unless it is followed up by larger budgets,
Federal budgets, which I hope w i l l not be the case, and larger Federal
deficits, w i l l be greatly moderated by the fact that supply may well
overtake the demand all along the line. I t has done so now i n many
fields, and prices are only being held up by Government action.
I think that our longer-range problem is not one of inflation. I t is
one of deflationary pressures. I t is one not of inadequate production,
not of capital for investment—of which I think there is plenty—but
it is one of consumption—being able to buy what our machine can produce. That doesn't mean ability to buy through a continued expansion of consumer credit. I think we are going to be confronted with
that problem before very long.
M r . WOLCOTT. W h a t do you think should be done i n respect to supporting the Government-bond market i n the face of this inflationary
threat; what do you suggest should be done by way of letting the
Government-bond market find its own level or pegging it at a higher
or lower figure than they are selling for on the market at the present
time ?
M r . ECCLES. I do not think that support of the Government-bond
market w i l l be required for some time to come. The long-term Governments are selling at very high premiums; and I, for one, would like
to see those premiums reduced. The long-term rate, i n my opinion^
is too low and not too high. The rate on the long-term securities on
the basis of which they are selling today is about 21/4. So there is
quite a way to go before the decision w i l l have to be made as to whether
or not it is advisable, under the circumstances that exist, to hold the
long-term Governments at 2y 2 .
M r . WOLCOTT. W o u l d you recommend that the rediscount rate be
changed at this time ?
M r . ECCLES. N O ; I d o not.

M r . W O L C O T T . D O you think the amount of reserve requirements
should be increased, provided you have the authority to do it?
M r . ECCLES. I d o not.

M r . WOLCOTT. W h a t can Congress do to help stop inflation except
balance the budget and cut Government expense ?
M r . ECCLES. I thought I made the point that I understood this was
a discussion to determine what might be done to deal with a long-range
program.
M r . WOLCOTT. A n y t h i n g that would deal with a long-range program would, of course, have an immediate psychological effect. The
fact that Congress was considering limitations and standards, and so
forth, which might result in stabilizing our economy on a long-range
basis might have a psychological effect to prevent immediate inflation.
That is what I am thinking of in asking that question.
M r . ECCLES. Well, I am not too much concerned about the psychological effect. I think that is very temporary. I think it is the basic
economic factors that are finally the determining factors.
M r . WOLCOTT. L e t me ask you, Do you think that sterilizing any
part of the Government debt which is held by the banks, so that no




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more than a certain amount would be monetized, would be of any
help ?
M r . ECCLES. I do. That was what we suggested i n our special reserve program. That was exactly what it was. I think that would be
very helpful i f you should begin to get an inflationary development
through bank credit expansion. Y o u have to consider your fiscal situation in connection with this. I f you are going to operate i n a period
of great business activity financed in part by Federal deficits. T h a t
creates an entirely different problem. I t is pretty difficult to adopt a
restrictive monetary policy i n the banking system under conditions of
a peacetime economy i f the Federal Government is going to operate
heavy Federal deficits.
M r . W O L C O T T . Because of the importance of the holdings by insurance companies of Government debt, i n the stabilizing effort would
you recommend that the Federal Government be given more control
over insurance reserves ?
M r . ECCLES. I don't think so. I think that you could sterilize pretty
largely the effect of the sale of securities held by insurance companies
by increasing bank reserves.
I do think howver, the study should take into account the operation
of these huge insurance companies. They are very important factors
i n this whole field of money and credit. I t may well be that certain
Federal laws, certain controls, would be necessary. I am not prepared
at this time to say. B u t I do think that you cannot ignore the effects
of any such large pools of investment money i n private hands.
Senator DOUGLAS. M a y I say that the Investment Subcommittee of
our general committee is going into the question of the role of insurance companies and has scheduled about 3 days of hearings when these
monetary, credit, and fiscal policy hearings are closed.
M r . ECCLES. Yes, I just don't want to be put into the position of
suggesting anything with reference to that because
M r . WOLCOTT. W e are dealing with fiscal matters here. I t is the
influence of insurance holdings, or I can shorten it up by saying, on the
value of the American dollar, that is what I was asking about, and
whether there was any control you thought necessary over those holdings, which might embrace other large holders of Governments, i n
addition to insurance companies.
M r . E C C L E S . A heavy sale of Government securities added to the
inflationary pressures last year.
M r . W O L C O T T . Y O U mentioned silver, you slid over it pretty fast,
and for which I am thankful, but I wondered if you were i n position
now to perhaps recommend changes in the Silver Purchase Act.
M r . E C C L E S . Being from, I think, the No. 1 silver State i n the
Union, maybe I better pass that up.
M r . W O L C O T T . Well, i n the
M r . ECCLES. I would like to say, however, that I am just jesting,
because I haven't passed it up, and my position on silver is well
known. I recognize the program for what it is, a subsidy, but I see
no reason why there may not be a silver subsidy as well as many
other subsidies. When we take up the question of what to do w i t h
the farm and other subsidies, I think it might be well to take up the
question of the silver subsidy.
Senator D O U G L A S . A n d you wouldn't give up the silver subsidy until
every other subsidy is given up ?



247MONETARY,CREDIT, AND FISCAL POLICIES
M r . E C C L E S . I wouldn't say that. I think there are a lot of subsidies that have more merit than the silver subsidy.
M r . WOLCOTT. I n the Banking A c t of 1935 we legislated to force
all banks to come into the Federal Reserve System in order to participate i n the Federal Deposit Insurance Corporation. W e let that
authority lapse finally. W o u l d you be i n favor of restoring that
requirement ?
M r . ECCLES. I f the recommendations that I have suggested here be
adopted it would not be necessary to require that all State banks be
members, or all insured banks be members, of the Federal Eeserve
System. The important thing is that they maintain the same reserves
that the member banks of the Eeserve System do. Whether they are
members or not, and have to buy stock, and have to comply with the
other requirements, is not too important, and I would certainly be
w i l l i n g to waive that.
M r . W O L C O T T . One other question. This $5,000,000,000 overdraft
authority of the Treasury, I don't know whether you want to get
into that or not, but that expires this next year. I think you sponsored
that, didn't you ?
M r . E C C L E S . That is right.
M r . W O L C O T T . D O }^OU think it should be continued ?
M r . ECCLES. I think it is desirable to continue it. I think it is a
proper instrument, I think it is a useful instrument, i n the case of debt
management. I t is often desirable to give the Treasury a substantial
overdraft in order to avoid undue money market strains during tax
payment periods. That authority has been helpful, and over the years
that it has existed i n the Eeserve System I am sure that it has never
been abused.
M r . W O L C O T T . Thank you very much.
Senator D O U G L A S . Thank you very much, M r . Eccles.
(Whereupon, the committee adjourned until 2: 30 p. m.)
A F T E R N O O N SESSION

Senator DOUGLAS. M r . Brown, we are very glad indeed to have you
here. W e appreciate your public spirit i n coming from Chicago to
testify on this subject.
STATEMENT OF E. E. BROWN, C H A I R M A N OF T H E BOARD, FIRST
NATIONAL B A N K OF CHICAGO
Senator DOUGLAS. M r . Brown, did you have a prepared statement
which you would like to read ?
M r . B R O W N . N O , Senator; I have no prepared statement. The
questionnaire of your committee offered such a wide variety of subjects
that it seemed to me difficult to give a prepared statement which would
cover the many points i n it. I would like to express my views briefly
on three points.
Senator D O U G L A S . We w i l l be very glad to have you.
M r . BROWN. A f t e r that I w i l l be very glad to answer any questions
which you or the other members of the committee may desire to submit.
These three points are :
(1) The relationship of the Federal Eeserve Board to the Treasury
and the national administration;



248

MONETARY, CREDIT, AND FISCAL POLICIES

(2) The power that the Federal Reserve should have to fix the reserves of banks;
(3) The question as to what agency or agencies should examine and
supervise banks.
A s to the first, the relation of the Federal Reserve Board to the
Treasury and the national administration: Originally the Federal
Reserve Board was conceived as an independent body. W o r l d W a r I
broke out before the system was really functioning. Under the necessity of financing the war the policies of the Board had to be subordinated to those of the administration and the Treasury i n practice.
A f t e r the war came the depression of 1921 and the Board policies continued i n practice to be those of the administration during the period
up to 1933. When the Banking A c t of 1935 was adopted, which gave
the Board additional powers, it was still the view of Congress that the
Board should be independent.
There were many statements to the effect that the depression
wouldn't have occurred i f the Board had been an independent organization i n the Hoover and Coolidge and H a r d i n g administrations,
and that the depression was partly caused by the fact that it had been
subservient to the administration. T o make the Board more independent the Secretary of the Treasury and the Comptroller were removed as ex officio members. The Board, according to the debates i n
Congress, was to be a supreme court of finance; statements were made
that it should be as free as the Supreme Court of political pressures;
the members were to have long terms, staggered, and to receive salaries
equal to those of Cabinet officers.
Then came deficit financing and W o r l d W a r I I with its legacy of a
tremendous Federal debt and the problems of its management.
The Federal Reserve Board could not, under such circumstances,
have been politically independent at any stage of its history. I do
not believe that at any time i n the foreseeable future it or any central
bank can really be independent of the administration i n power. T h e
Board, i n the final analysis, must adapt its monetary policies to the
policies of the administration, no matter how it may feel about their
wisdom. It must bow to the judgment of the Secretary of the Treasury i n matters affecting the handling of the public debt and the interest
rates thereon.
Granted that the Federal Reserve Board must conform its policies
to those of the administration and the Treasury, it does not mean that
it should become a subordinate bureau of the Treasury, or some other
branch of the administration, or that its members should hold office
only at the pleasure of the President or be appointed for short terms,
or that their judgment and ability are relatively unimportant.
Decisions and actions i n the field of monetary policy affect the whole
economy. I t takes a high degree of ability, technical experience, and
judgment to make them wisely and to appraise their effects i n advance.
The giving of sound advice on monetary matters to an administration or to its Secretary of the Treasury that must make the ultimate
decision, and skillful carrying out of the monetary policies designed
to implement an over-all general policy, are much more probable oy a
continuing board, made up of men of stature and of long tenure i n
office, than by any subordinate bureau.
T o make it possible to get men of proper caliber and public stature
to serve on the Federal Reserve Board, terms should be long and the



249 MONETARY, CREDIT, AND FISCAL POLICIES
salaries of Board members high enough both to indicate the importance of the position and not to penalize qualified men without private
means. The present salaries of the Board members do neither.
Senator DOUGLAS. Even with the increase of a thousand dollars ?
M r . BROWN. Even with the increase of a thousand dollars.
Senator DOUGLAS. O f course, I was i n favor of raising the salaries
of the Federal Reserve Board members to $22,500, but wTe had a great
deal of opposition from the friends of the Federal Deposit Insurance
Corporation, who said that i f you raised the Federal Reserve Board
members to $22,500 the F D I C salaries should go up, too, and that
seemed to be out of keeping with the rather limited responsibility
which that group has. Sometimes, M r . Brown, I suspected that there
were certain banks i n the country which were using the principle of
equality of salaries between the Federal Reserve and F D I C to keep
down the salaries of Federal Reserve Board members. I am much
reassured by this testimony of yours. B u t I had thought that some of
your colleagues wanted to keep the salaries of the Federal Reserve
Board down. That may have been an unjust suspicion on my part.
M r . BROWN. I think there is probably some justification i n it.
Senator DOUGLAS. I n any event without going into the question of
what others think, so far as you are concerned you would be for
an appreciable further increase i n the salaries of the Federal Reserve
Board members ?
M r . BROWN. I would. Given a competent Federal Reserve Board,
the administration and the Secretary of the Treasury, I think, could
be counted on to pay attention to its advice i n matters affecting the
monetary field, though reserving to themselves the final decision.
The Board should be allowed large freedom i n monetary methods
to implement and carry out the administration's or Secretary's policy.
Conversely the Federal Board should, even i f its views were not
followed, carry out and administer or direct policy finally adapted
as such to the best of its ability.
Members of the Board differing with the policy could and should
resign, i f they regarded it of sufficient importance, and fundamentally
wrong.
That is another reason for getting strong men on the Board. I f
we get men of stature, of proper caliber, they w i l l resign i f their
views are not followed on a fundamental matter. I t acts as a great
check on Treasury or administration action.
It seems to me so self-evident, under present conditions, and
conditions that w i l l exist as long as we live, that the Board, i n the
last analysis, has to follow the policy of the administration i n power,
not only as regards management of the public debt, but facilitating
the export of capital to Europe and the rest of the world, or what
w^ill you, or making possible easy credit for agriculture, housing, even
i f they disbelieve i n it. This to me is almost axiomatic, and I think
a whale of a lot of the time of Congress is lost and the public is
confused by talking of the Federal Reserve Board as a really independent judicial body which is immune from political pressure, or
should be immune from political pressure.
The second question is, what powers the Federal Reserve should
have over the reserves of banks. I n the first place, I am opposed to
giving the Federal Reserve any power over the reserves of nonmember
banks. W i t h 85 percent or so of the deposits of the country i n member



250

MONETARY, CREDIT, AND FISCAL POLICIES

banks, it does not need control of reserves against the other 15 percent
to effectively control the volume of credit.
I might say i n passing that the reserve requirements of a large
percentage of the remaining 15 percent are set by State boards which
tend to follow the reserve policy of the Federal Reserve Board. The
advantage of access to credit from the Federal Reserve Bank is important, so important that no really large bank can afford not to be
a member bank, and most medium-sized banks, and many small ones,
are members.
Too high reserve requirements make it impossible for a b&nk to
make money.
The fact that a small- or medium-sized bank can give up its membership i n the System if, i n its opinion, excessive reserve requirements
offset the advantages of the System membership is a healthy restraini n g influence on the Federal Reserve Board i n setting requirements
for its member banks.
I do not want to argue here the dual banking system. I believe i n
it chiefly because it affords a check against arbitrary and unreasonable action or legislation by either a State or the Federal Government.
A bank can shift from a State charter to a national, and a national
bank can shift to a State charter.
T o give the Federal Reserve Board authority over State nonmember banks would be a first step toward the breaking down of the dual
system.
I can't forget that in times past we have had highly capricious and
arbitrary comptrollers. More recently, many States have had to deal
with capricious and unreasonable State banking authorities.
The greatest check on arbitrary actions by a State or national supervisory authority is the ability, when conditions become too bad, to
shift from a State into the national system, or from the national into
the State.
Senator DOUGLAS. O f course, they were Comptrollers of the Currency, not Reserve Board members as much, as I remember.
M r . BROWN. They were Comptrollers of the Currency, yes. They
were not Federal Reserve Board members.
A s to the reserve requirements of member banks, I believe that the
Federal Reserve Board should have power to vary them within a
limit, but with a maximum limit fixed by law at a figure which w i l l
enable banks to make sufficient profit so that they can absorb losses,
maintain and build up their capital structures, and pay reasonable
dividends.
I f this is not done, I doubt i f our present system of privately owned
chartered banks can survive.
I believe present maximum limits to be about as high as they are
tolerable.
The market value of bank stock today is almost universally less
than the liquidating value of banks, due, I believe, to a fear that
future legislators and governmental policies w i l l cut bank earnings.
Changes in bank reserves should only be made rarely and when
general basic conditions have changed.
Credit control should ordinarily be exercised by open-market
operations and changes in the rediscount rate.




251 MONETARY, CREDIT, AND FISCAL POLICIES
W i t h these instruments of credit control, the maximum reserve requirements which the law now authorizes, we give the board adequate
powers to control credit.
The present fixing of reserves, by central Reserve, Reserve, city,
and country bank classifications lack logic, but the banking system,
over many years, has adjusted itself to the arrangement. Some other
method might be more logical and work as well or better, but a change
should not be made without a detailed study of its effects on various
classes of banks and banks in different localities. X o change should
be made which would increase the over-all percentage of the maximum reserve to total deposits that would be required from member
banks as a whole above the present over-all percentage.
I t seems to me clear that vault cash should be counted as reserve.
The question as to what agency or agencies should examine and
supervise banks is the third matter which I would like to comment on.
The guiding principle in bank examinations and supervision should
be objective, for the purpose of protecting the banks' depositors and
seeing that the bank examined or supervised is obeying the law.
Bank examinations and supervision should not be used as instruments to carry out a monetary policy, contracting or expanding credit,
or of directing credit in specific directions.
If supervision and examination are exercised for the purpose of
carrying out monetary policy, the examinations w i l l not be as efficient
i n determining the safety and soundness of the bank as i f the examinations were purely objective and made for that purpose.
I t has been argued by members of the Federal Reserve Board, and
it was argued by M r . Eccles this morning, that examinations and
supervision should be used as instruments of general over-all credit
control and direction. I think that is a highly dangerous doctrine.
No body of men, even the Federal Reserve Board, is able, with sufficient
certainty, to predict the course of the economy, and put pressure on
banks by examination or supervision as to when to loan, when to
refrain from loaning, when not to make certain classes of loans.
I know, in the case of my own bank i n the depression, that ninetenths of our losses came from loans made after the begining of 1930,
i n an effort to, as we thought, help turn the tide, keep the depression
from going deeper. Our losses weren't on loans made at the height
of the boom. W e lost enough money as it was, but I tremble to think
what we would have lost i f we had had pressure from M r . Hoover's
Comptroller or bank examiners and we had been under pressure to
go out and loan even more liberally in order to keep the economy of
the country from going down.
Granting my argument that bank examinations should be objective,
not made for the purpose of carrying out monetary policy, the primary examinations of banks should not be made by the Federal Reserve System; they should be made by the Comptroller in the case of
national banks, by the State authority in the case of State banks.
Since the F D I C and the Federal Reserve Board are both Federal
agencies, and they are not satisfied with taking the reports of the
State banking departments, they should have the right, which they
now exercise, of joining in the examinations of State banks. The
Federal Reserve Board, I suppose, theoretically, should have the right
to join i n the examination of national banks, i f it wanted to, although




252

MONETARY, CREDIT, AND FISCAL POLICIES

it is difficult to consider one Federal agency not taking the report of
the other. I don't believe any economy would be effected by combining
the Comptroller, F D I C , and the Federal Reserve examinations.
I t takes about so many examiners to examine so many banks, and I
think the present system works well enough.
I f it should be decided to consolidate examinations, I think the
logical thing would be to put all the examinations under the Comptroller of the Currency, as being the supervising authority with the
longest record in examining and supervising banks. The Comptroller's
office has been at it now for a long time.
Senator DOUGLAS. W o u l d you have him examine the State banks
which are members of the Federal Reserve and F D I C respectively ?
M r . B R O W N . I think it would do no harm. I think the present
system works well enough and should be left alone; but, i f there is a
consolidation of bank examinations, my first preference would be to
have the Comptroller conduct the examining functions for both State
member and F D I C State nonmember banks.
I think the present system works relatively well, and I do not think
there is any considerable overlapping, and I think examination policies
are sufficiently coordinated to work out well.
Senator D O U G L A S . I take it that the two reasons why you believe
i f consolidation were to be carried into effect it should be under the
Comptroller of the Currency, are: (a) That the group of nationalbank examiners have a longer record and you regard them on the
whole as more experienced and competent than the examiners
attached
M r . BROWN. They have a longer tradition of freedom from political
influence and political pressure.
Senator DOUGLAS. They are i n a department headed by a political
appointee.
M r . BROWN. I t may be, but the Comptroller's office has been brought
up under an enviable record of freedom from political and personal
pressure. A t times it has shown signs of deterioration, but it has
always come back.
Senator DOUGLAS. A n d also you believe that bank examination
should not be connected with credit policy.
M r . B R O W N . I am very strongly of that opinion.
Senator DOUGLAS. And, therefore, you want to have it divorced
from an agency which is also concerned with credit policy?
M r . BROWN. Yes; I think it is sound to do so. I would be glad to
answer any questions on any other points of the questionnaire that I
may be able to.
Senator DOUGLAS. Before I turn to the first part of your testimony,
could you comment upon the proposal to have the F D I C put i n the
Treasury ?
M r . BROWN. I do not see any advantage to be gained by it. I do
not know that it would do any harm. The F D I C — t h e greatest number of its members are State banks, and I think that the State banks
would prefer an independent Federal agency rather than a Treasury
agency, and I think that the F D I C would probably function better
independently than as a Treasury bureau.
Senator DOUGLAS. M r . Brown, I was struck with many parts of
your testimony, but I was struck by the statement that you thought it
was desirable that State banks, members of the Reserve System, should



253 MONETARY, CREDIT, AND FISCAL POLICIES
be able to get out of the Reserve System i f the reserve and other requirements imposed by the Board became arbitrary and not i n the
general interest, so they could have an avenue of escape, and that this
would operate as a restraining influence upon the Board itself.
Now, what puzzles me is who is to tell what is arbitrary and what is
i n the public interest ? There is a natural desire, which should not be
condemned, on the part of the banks to not have any more of their
assets tied up i n reserves than is absolutely necessary, and an increase
i n reserve requirements diminishes the potential loaning power of
banks.
B u t suppose you are i n a period of inflation, and it may be i n the
public interest to check the loaning power of banks and not let them
go to the maximum. The Reserve Board raises the reserve requirements; but the member banks, which are State banks, those State
banks which are members, perhaps I should say, feel that the provisions are arbitrary and get out of the System i n order to have a higher
earning power.
Now, that is protection for the individual bank, but is it a protection
for either (a) the economy as a whole or (b) the banking system as a
whole?
. M r . BROWN. I think it is, because, i n the first place, giving up membership in the Federal Reserve System means giving up very valuable
privileges of access to the credit facilities of the Federal Reserve. A
bank is not going to give up such privileges lightly unless it thinks
it is heavily penalized.
I n the second place, i f the statutory maximums are not too high,
the banks w i l l expect to see those statutory maximums exercised i n a
period of inflation and w i l l stay i n the System. I think the proof of
the pudding is i n the eating. W e had very few banks go out of the
System with the present maximum during the inflationary period of
the war and the immediate period following the war.
Senator DOUGLAS. B u t the amount of Government securities held
by the banks is so large that, i f they turn those i n and get reserves i n
the Federal Reserve System for them, it gives them a tremendous
potential lending power, which would not be checked by maintenance
of present reserve requirements.
M r , BROWN. That is another question than that of the banks getting
out of the System. I think you have got to realize that the present
policy of the Open Market Committee and the Treasury, i f you want
to put it that way—or as I think it is fundamentally and i n the last
analysis a Treasury policy—of buying all Government bonds that are
tendered, and in the past supporting all Government issues at par or
above, has undoubtedly weakened the credit controls of the Federal
Reserve System.
That applies to national banks, which cannot get out of the System
without giving up their national charter and all member banks. O n
the other hand, i f you raise reserve requirements sufficiently high, as
I tried to point out i n my statement, you make it impossible for the
private banking system to survive by cutting down on its earnings.
I think it is better to take the chance of too much bank credit than to
get r i d of the privately owned chartered banks and substitute a collection of Government loaning agencies i n their place.
A great many economists and bankers think that reserve requirements should be fixed by law and that the Federal Reserve Board
99076—50

17




254

MONETARY, CREDIT, AND FISCAL POLICIES

should have no power whatsoever to vary them. I personally think
the Board should have the power to vary them—but I think the maximum limits at all times must be placed at a level which w i l l enable the
private banking system to survive. I think i n a discussion of reserve
requirements. Not enough attention has been paid to the necessity of
enabling banks to make reasonable earnings which w i l l maintain and
gradually build up their capital accounts and enable them to pay
sufficient dividends.
A s I said before, 99 banks out of a 100 i n this country could be
liquidated and pay anywhere from 25 to 50 percent more than the present market value of their stock. That is a highly unhealthy condition.
Senator DOUGLAS. I have some difficulty remembering always what
the present size limits are, but as I understand it, the maximum limit
for the central Eeserve cities on demand deposits is 26 percent, for
Eeserve cities 20 percent, and for the country banks 14 percent.
M r . BROWN.

Yes.

Senator DOUGLAS. A n d that this in practice results in an average
maximum reserve ratio of approximately 20 percent. That is, that the
deposits i n the country banks, as I remember it, are approximately
equal to the deposits i n the central Eeserve city banks.
M r . B R O W N . Y O U are speaking of
Senator DOUGLAS. Demand deposits.
M r . BROWN. Time deposits?
Senator DOUGLAS. Demand deposits only.
M r . BROWN. I thought the over-all percentage was slightly less,
something like 18y2 or 19 percent.
Senator DOUGLAS. I t is a weighted average.
M r . BROWN. The weighted average somewhat less.
Senator DOUGLAS. Not far from the 20 percent.
M r . BROWN. I know in the original Federal Eeserve A c t as it stood
up to 1935 it contained maximums of 13, 10, and 7; and the Federal
Eeserve Board had no power to vary Eeserve requirements.
I n the discussions of the Banking A c t of 1935 there was a great
deal of discussion as to what the maximum should be. Before the
Federal Eeserve System, central Eeserve city banks had operated with
reserve requirements of 25 percent, which had to be kept i n cash. I t
was felt that they had demonstrated they could live with a reserve
of 25 percent i n that it was a figure on which they could live; 26 percent was fixed as a compromise that was not very far from the 25;
and they just doubled the reserve requirements, that is, from 13 to 26
and from 10 to 20 and from 7 to 14.
Senator DOUGLAS. I think I heard you say that you favored a uniform reserve requirement based on the type of deposit rather than
according to the size of the city.
M r . BROWN. I am quite sure I did not say that. I said that the
present system was illogical and that another system might work
as well or better, but that the banks of the country operated on this
Eeserve city, and central Eeserve city and country classifications since
the passage of the Federal Eeserve Act, and a change should not be
made without a careful study of its effect on different classes of banks
and banks in different parts of the country, and that i f a change was
made to some other system, such as the so-called Bopp plan, the total
over-all maximum reserves which could be required by the System




255 MONETARY, CREDIT, AND FISCAL POLICIES
should not be higher percentagewise than the present reserve requirements.
Senator DOUGLAS. I f the weighted average is 18y2 or 19 percent,
would a uniform requirement on ordinary demand deposits, say, of
18% but allowing vault cash to count as part of the reserve—would
that be onerous upon the banks ?
M r . B R O W N . N O ; I do not think so and it probably would not make
as great difference between banks in different classes of cities as you
suggest. A l l these plans contemplate a higher rate on interbank deposits. They are largely centered i n New Y o r k and Chicago. Demand
deposits would carry a higher rate than time deposits, and banks of
central Reserve and Reserve cities generally have a higher percentage
of demand deposits compared to total deposits, including time, than
country banks do, but no study has ever yet been made—or, at least,
I have not seen it—as to how it would hit the country bank.
I t might upset whole regions or various classes of banks, and such
a change should not be made until a careful study has been made of
its effect.
Senator D O U G L A S . Have you any rough estimate as to what percentage of demand deposits should be kept i n vault cash, as good
banking practice ? Have you a rough guess ?
M r . BROWN. There is no such thing as any standard practice. A
large bank can keep a much smaller percentage i n vault cash than a
small bank can. A bank i n Chicago, which can get currency from the
Federal Reserve Bank i n 15 minutes, needs much less cash, vault jcash,
than a bank i n some country town, that has not even got a railroad
i n it, i n Wisconsin.
Senator DOUGLAS. Suppose you had a uniform requirement of 18 or
19 percent. That would only be 5 percent above the present requirement on demand deposits for the country banks, and i f you allowed
vault cash, the difference might either be negligible or nonexistent.
M r . B R O W N . I do not know that there would be any particular objection by adding i n all present vault cash held with the present
required reserves and counting that. The theory of counting vaulting
cash a part of your reserves is that vault cash today is i n practice
Federal Reserve notes, and of Federal Reserve control over reserves i n
Federal Reserve notes held by banks is just as effective an over-all
credit control as control over balances carried at the Federal Reserve
banks.
Senator DOUGLAS. I f you were to have a uniform rate of 18y2 or 19
percent,, accepting your figures as a weighted average, that would
increase the earning power of banks i n the central Reserve cities by
lowering their reserves and would increase slightly the earning power
of banks i n Reserve cities.
M r . B R O W N . I am not so sure, because I have not seen the tabulations, that i f reserve requirements on interbank deposits were to be
very large and i f the deposits i n the two central Reserve cities had a
disproportionate amount of interbank deposits, their total reserve requirements might work out about where they are now.
Senator DOUGLAS. These differential rates of reserves, I assume, grew
up in the days when the call money market was so important i n New
Y o r k primarily ?
M r . B R O W N / N O . I think that they date back to the formation of
the national banking system i n 1863. There was not any call money



256

MONETARY, CREDIT, AND FISCAL POLICIES

market. Banks had to carry certain reserves. Country banks could
carry part of their reserves i n deposits with banks i n Reserve cities,
which were supposed to be money centers. Banks i n the Reserve cities
could carry part of their deposits i n central Reserve cities, of which
there were originally three—New York, Chicago, and St. Louis.
Because of this pyramiding of bank reserves the cities which held
deposits of other banks were subject to more sudden withdrawals of
their cash and, consequently, they were required to keep larger reserves.
Senator DOUGLAS. M a y I go back to what you have discussed i n
the first part of your testimony—namely, the question of pegging
prices and yields on governmental obligations with Federal Reserve
action.
Now, M r . Burgess said he thought that the Federal Reserve System
should not do this. W h a t would be your position? I think you
have indicated it.
M r . B R O W N . I indicated first that I think i n the last analysis the
Federal Reserve Board has to follow the policy laid down by the
Secretary of the Treasury and the administration, so that the decision is i n the final analysis the decision of the Secretary of the Treasury
rather than the decision of the Federal Reserve Board.
A s M r . Eccles stated this morning, up to 1948 I was one of those
who believed that the long-term 2^'s should be supported at par. I
urged that both as a banker—as a member of a committee which M r .
Morganthau had during the war advising the Treasury regarding war
financing, also as a member of the Federal Advisory Council.
A
good many statements were made by the Treasury that they intended
to support the price of Government bonds at par i n the foreseeable
future. N o promise was ever made to the banking system that they
would always be supported.
Senator DOUGLAS. M r . H a r l testified last week that i n his judgment
a promise had been made.
M r . BROWN. I am quite sure it was not. T h e language of the Secretary of the Treasury was generally pretty carefully chosen. The
words used were generally " i n the foreseeable future."
Since the middle or latter part of 1948 the price of the long-term
2 y 2 s has advanced very considerably above par. The bank eligible
2y2's of the longest issue are today selling at 106 or 107. T h e ineligible
long-term 2%'s are selling around 104. That is about 2*4 percent yield
basis.
I think the Treasury could now announce that they intended at all
times to support an orderly market, but that the "foreseeable future"
h a d passed, i f you want to put it that way, that under present conditions they did not feel they had obligations to support Government
bonds at par at all times, that i n the future they might very well do
so but they were not obligated to do so. I do not think there is the
slightest possibility i f such an announcement were made today, that
Government bonds of any issue would break below par.
Then I would have the Treasury or Federal Reserve Board or
Open Market Committee, acting under the domination of the Treasury, maintain orderly markets. I would leave it to the future to
determine that when the price got down to par or close to par on
the long-term issues, whether they should not in effect step i n and




257 MONETARY, CREDIT, AND FISCAL POLICIES
support the bonds at par without making any public statements
that they would do so. I do not think there would be any lack of confidence. I think it would restore a great deal of flexibility to the
Federal Reserve System and that in the long run it would help the
Treasury i n its problem of debt financing.
I want to state that I differed from a great many bankers on conditions as they existed up until about the middle of 1948. I looked at
an announced policy of supporting the long-term 2%'s at par as necessary and desirable.
Senator D O U G L A S . N O support is needed now, is there?
M r . B R O W N . N O support is needed now with the premiums. I know,
i n spite of M r . Harl's statement, of no promises by the Government
that they were always going to support long-term Government bonds
at par. I think M r . Eccles this morning indicated that he knew of no
such promises. M r . Burgess certainly stated in his testimony, as reported in the papers, and i n his published statement, that he knew
of no such promises by the Government. A good many people think
they w i l l be supported, yes, but I think now is the time for the Treasury
to clarify it.
They did issue a sphinx-like statement between the Treasury and the
Federal Reserve Board, which nobody could understand—and I think
it was purposely drawn so that nobody could understand it—that they
had changed their Government-support policy, and left everybody
wondering whether they were promising to support bonds at par or
whether it was an indication that they were edging away from the
practice of doing it.
Senator D O U G L A S . D i d I understand correctly that you thought the
bonds should not be permitted to f a l l appreciably below par ?
M r . BROWN. I did not believe they should be allowed—I did not
think they should be allowed to f a l l anywhere below par up to the
summer of 1948.
Senator D O U G L A S . H O W about now ?
M r . BROWN. I f I were running the Treasury or the Federal Reserve
System as of now, I would announce I felt no obligations, and if the
bonds should by any chance break to par, I would in practice support
them at par, but I would not make any promise to do it. Perhaps it
is fortunate for me as well as the country that I am not running the
Treasury.
Senator D O U G L A S . D O you think that a slight increase i n yields
caused by a f a l l of 4 or 5 points i n the price of Governments would have
any real deterrent effect upon the amount of private credit loaned by
banks ? That would be a change of less than one-quarter of 1 percent
i n yield.
M r . BROWN. I do' not know so much about the credit extended by
banks. I think it would have a great over-all effect on the long-term
market. I think the municipalities and large corporations borrowing
long-term money would be greatly influenced by a change of as much
as a quarter of 1 percent in the interest rate.
Senator DOUGLAS. They would not borrow as much ?
M r . BROWN. They would not make improvements and capital expenditures or pay bonuses or what not i f they had to pay a higher rate
of interest and, therefore, a change in the interest rate would have a
deflationary effect, i f you want to call it such, on the total over-all
expansion of credit.



258

MONETARY, CREDIT, AND FISCAL POLICIES

Senator D O U G L A S . S O you think that i f we were to go into inflation,
and i f the Government bonds would still then sell above par, you think
it might be a good means of checking inflation to allow the price of
Governments
M r . B R O W N . T O drop to par on the long ones, and it would not
worry me i f some of the intermediates ones got to 99 or some such
price in the process.
Senator D O U G L A S . Y O U would not permit a run-away market with
the price of Government bonds breaking to much lower limits ?
M r . B R O W N . N O ; I think the Government has to maintain an orderly
market in its bonds at all times. It cannot allow panicky conditions
to get under way.
Senator DOUGLAS. O f course, there are some who say don't have the
Government support the price at all; let the Reserve System get out
and then let the price of bonds be determined by "market forces."
M r . BROWN. Well, that cannot be worked that way. The Federal
Reserve System holds so many Government bonds that it can determine the yield on them by the price it pays for them, the price it sells
them. I t can determine short-term rates, and short-term rates i f they
rise w i l l have a somewhat depressing effect on long-term yields.
Senator DOUGLAS. I n other words, the Federal Reserve System is
part of the market, and if you take it out you w i l l alter the market.
M r . BROWN. Yes; and the Federal Reserve System or some of the
spokesmen—I think M r . Eccles said this morning we are out of the
market on the long-term bonds. They cornered all the floating supply
of long-term bonds, and now they w i l l not sell them when the price
is up.
I f that happened on the Board of Trade i n Chicago, that would be
called cornering wheat or lard or something, but i f it is done by the
Federal Reserve Board or the Treasury it is a somewhat different
thing.
I f they wanted to sell some of their large holdings of ineligible
long-term bonds, they could cause the price to go down a point or two,
to my mind, to the benefit of the whole economy.
Senator DOUGLAS. W e had a study made, M r . Brown, on the requirements relating to the safety and soundness of banks, which requirements were imposed by the Federal Reserve System as a condition
of membership of State banks in the Federal Reserve System. W e
got some 30 requirements, which I read to M r . H a r l last week, which
are not required by F D I C itself.
W o u l d there be any value of attaching these requirements dealing
with safety and soundness to membership in the F D I C system rather
than to membership in the Federal Reserve System and thus reaching
a broader band of deposits in banks ?
M r . B R O W N . I do not know what the requirements are, Senator. I
probably should know.
Senator DOUGLAS. They are as follows:
1. Limitations on total loans to one borrower.
2. Regulations governing purchase of investment securities.
3. Prohibition against purchasing stocks.
4. Prohibition against engaging i n underwriting of investment securities and stocks.
5. Restrictions on loans to executive officers.
6. Restrictions on dealings with directors.



259 MONETARY, CREDIT, AND FISCAL POLICIES
7. Restrictions on interlocking directorates or other interlocking
relations with other banks and with securities companies.
8. Prohibition against bank having less than 5 or more than 25
directors.
9. Provision authorizing supervisory authority to remove officers
and directors for continued violations of law or continued unsafe or
unsound practices.
10. Prohibition against affiliation with securities company.
11. Restriction on holding companies affiliates.
12. Restrictions on bank stock representing stock of other corporations.
13. Limitations on loans to affiliates.
14. Requirements of reports of affiliates and publication thereof.
15. Requirements for examination of affiliates.
16. Limitations on investment in bank premises.
17. Minimum capital requirements.
18. Minimum capital requirements for branches.
19. Prohibitions against loaning on or purchasing on stock.
20. Restrictions on withdrawal of capital and payment of unearned
dividends.
21. Requirement that reserves specified i n the Federal Reserve A c t
be maintained.
That is a debatable one.
22. Prohibition against making loans or paying dividends while
reserves are deficient.
23. Requirement for specific number of condition reports annually
and for publication thereof.
24. Requirements in connection with the par clearance collection
system.
25. Prohibition against false certification of checks.
26. Limitations on acceptance powers.
27. Prohibition against acting as agent for nonbanking institutions
i n making loans to brokers and dealers in securities.
28. Limitations on loans to one borrower on stocks or bonds.
29. Limitations on aggregate loans to all borrowers on stocks or
bonds.
30. Limitations on deposits with nonmember banks.
As I understand it, these are provisions relating to the soundness of
the individual bank which are imposed on members of the Reserve
System which are State banks.
M r . B R O W N . I would not say many of them had much to do with
soundness. They might have something to do with over-all governmental policy.
I think, i f you tried to make all those conditions a condition for membership in the F D I C , a lot of banks would decide to get along without
the F D I C membership, the small banks i n particular.
Senator D O U G L A S . O n the other hand, under F D I C you assume a
liability that the bank may fail, and that normally should carry with
it some powers to protect you against the excessive danger that the
liability may occur.
M r . BROWN. Yes; but I think most of those regulations that you
read only incidentally deal with the soundness of a bank.




260

MONETARY, CREDIT, AND FISCAL POLICIES

Senator DOUGLAS. Well, I should think a good many of them
dealt——
M r . BROWN. A good many do, but others deal with other matters of
Federal policy.
Senator DOUGLAS. Eestricting the power of the insiders to use the
banks privately.
M r . BROWN. A good many of them are i n the nature of restrictions
which are now imposed on national banks.
Senator DOUGLAS. Yes; I think they are, but not on State banks.
M r . BROWN. State nonmember banks.
Senator DOUGLAS. Except insofar as the States specifically provide
for them.
M a y I ask you a question or two on the gold and silver policy?
M r . BROWN.

Yes.

Senator DOUGLAS. There has been some talk of advocating the restoration of the unlimited convertibility of money or Federal Reserve
notes into gold coin or gold bullion. Has the Federal Advisory Council taken any position on that subject?
M r . BROWN. They have. A l l 12 members as recently as last week
stated their belief that at this time convertibility of the currency to
gold coin was neither feasible nor desirable. W e felt that as an ultimate objective of monetary policy it was desirable and that studies
should be made as to how it might be ultimately brought about.
W e felt at the present time the unsettled condition of the world, the
desire to hoard money, both at home and abroad, w^ould make it highly
undesirable to adopt such a policy at the present time.
W e did recommend, or did feel—I w i l l not say recommend—that
Congrss should repeal the act of 1934, which gives the Secretary of
the Treasury the power to buy or sell gold at home or abroad i n any
amount at any price he may see fit.
Senator DOUGLAS. It is a favorite subject of Congressman Wolcott.
M r . WOLCOTT. There has been some doubt raised as to whether the
Treasury has the authority to change the rate. I t all stems back to
what M r . Brown referred to, the fact that they may do it, perhaps those
provisions which are not completely offset by the provisions in the
Bretton Woods Agreement to the contrary. The question seems to be
as to whether the authority i n the Gold A c t to buy and sell supersedes
or has been repealed by the Bretton Woods Act.
I f there is a dispute there, it should be corrected.
M r . BROWN. There seems to be some doubt about it. I think the
opinion of most lawyers is that since the act adopting the Bretton
Woods agreements contains the provision that the President or any
person acting on behalf of the United States should not propose or
consent to any change i n the gold value of the dollar the Treasury has
lost its authority.
M r . WOLCOTT. I think perhaps M r . B r o w n would agree with me that
it was our intent to prohibit it, but whether we did or not seems to
be i n dispute.
M r . BROWN. I think it was a clear intent to prohibit it, and I think
it has probably been done, but there seems to be enough doubt about
it to make it desirable to clean up the doubt. I believe M r . Snyder
i n a press release stated that the price for purchases and sales of gold
could not be varied without the consent of Congress, but even that
statement of his is not final. The attitude of the Council—and it is



261 MONETARY, CREDIT, AND FISCAL POLICIES
my own attitude, incidentally—is that convertibility is not feasible nor
desirable at the present time, but as an ultimate objective of monetary
policy it is, and that the gold value of the dollar should not be changed,
and it would be desirable, since uncertainty does exist because of this
act of 1934 being still in force and effect, to repeal it or amend it so
as to make it clear that the gold value of the dollar cannot be changed
without the consent of Congress.
Senator DOUGLAS. What are the advantages, as you see them, i n
ultimate convertibility ?
M r . BROWN. I think the value of ultimate convertibility is that it
tends to check the creeping decline i n the purchasing power of the
dollar. Nations devalue; they never increase the value of their currency, practically speaking.
Senator DOUGLAS. England did in 1924.
M r . BROWN. England did temporarily, with unfortunate results.
I t went back to the gold standard; we went back to the gold standard
after C i v i l W a r days; but i f currency was convertible into gold, since
gold has a commodity value, i f you want to call it such, it would make
it less likely that the dollar w i l l keep on decreasing in purchasing
power indefinitely.
I think also,' granted somewhat normal circumstances, the feeling
that a lot of people may want to get gold might have some effect on
Congress i n matters of deficit financing and expenditures. Y o u are
familiar with the arguments against it of M r . Sproul and others, but
I still believe on the whole that, granted a stable world, free of the fear
of war, ultimate gold convertibility is desirable.
Senator DOUGLA'S. That is on the ground that there are more r i g i d
limits to the supply of gold than to the potentiality of man's
foolishness ?
M r . BROWN. Exactly, and also the belief that the value of gold is
determined by the cost of the marginal production, and i f currency is
convertible into gold the dollar as a measure of value would have more
stability over a period of years than it otherwise would without convertibility.
Senator DOUGLAS. O f course, we had a very sharp rise i n prices from
1896 to 1914 under the gold standard.
M r . BROWN. That was due to the fact that South A f r i c a n production
came i n at that time. Probably the ability of the United States to go
back to the gold standard after the C i v i l W a r was largely influenced
by the gold production of the V i r g i n i a lode in Nevada at that time.
I do not think the gold standard is by any manner of means an infallible standard. I f you could work out Professor Fisher's stable dollar
in a practical way, I think I would favor it. I do not see that it caji
very well be worked out, but I am very certain that the value of gold
bullion or gold coin, which is the same thing, is more likely to be stable
over a period of years than an arbitrary value set by political bodies or
governments on their monetary standards.
M r . WOLCOTT. M r . Brown, i f the United States and the other former*
gold countries went back on a gold convertible basis, what would you
anticipate would happen to the international fund ?
M r . BROWN. I do not know that I quite got your question.
M r . WOLCOTT. I f we went back on the gold standard
M r . B R O W N . Y O U mean gold convertibility standard?




262

MONETARY, CREDIT, AND FISCAL POLICIES

M r . WOLCOTT. Yes; and all the other former gold convertible conntries did likewise
M r . B R O W N . A t the present time ?
M r . W O L C O T T . N O ; finally when this can be brought about—what
would be the future of the international fund ?
M r . BROWN. Oh, I think it would lapse into innocuous desuetude
that probably would not be harmful.
M r . WOLCOTT. What did you call it ?
M r . BROWN. Innocuous desuetude.
Senator DOUGLAS. That was launched into political language, I believe, by Grover Cleveland, so it has a very respectable lineage.
M r . WOLCOTT. I think I know what it means now, with the context.
M r . BROWN. Pardon me for not making myself clear.
M r . WOLCOTT. It is excusable under the circumstances.
Senator DOUGLAS. M r . Brown, what specific recommendations, i f
any, would you make to increase the effectiveness and independence
of the Federal Reserve System?
Y o u propose to increase their
salaries ?
M r . BROWN. I have already said I proposed an increase in salaries
to attract men of greater stature. I do not know but that the Board
could function as well or better with five members as against seven.
T o be one of a group of five is probably somewhat more attractive
than to be one of a group of seven. I do not believe that membership
of the Board should be more than seven. I think the present size
of the Board and the terms of its members are effective. I do not
think any change in the number or tenure of the Board would be of
sufficient importance to make it desirable to make the change.
Senator DOUGLAS. D o you want to increase the statutory powers
of the Board?
M r . BROWN.

NO.

Senator D O U G L A S . D O you want to decrease the statutory powers of
the Board?
M r . B R O W N . N O . Believing as I do that i n the last analysis the
Board has to go along with the administration, I think its statutory
powers are less important than the character of the Board and its
members.
Senator DOUGLAS. W h a t are the weaknesses of the Board or of the
System, rather, as you see it ?
M r . BROWN. That is a hard question to answer. I would say the
greatest weakness in the past has been that at all times it has not
had men of proper stature on it. Please do not ask me to specify
what times and what men.
I think I have know^n every member of the Board since it
was formed i n 1913, but I really think that i n the long analysis of
the Board, its greatest fault has been that either proper men have
not been appointed to it or that men whom it was desired to appoint
would not take the appointment.
Senator D O U G L A S . D O you see any advantage i n Congress giving
to the Treasury and to the Federal Reserve System more definite
instructions concerning the operations of the Open Market Committee ?
M r . B R O W N . N O ; I think that would be highly detrimental to the
working of the System.
Senator DOUGLAS. A n d no instructions to the Secretary of the
Treasury ?



263 MONETARY, CREDIT, AND FISCAL POLICIES
M r . B R O W N . N O . The administration of government has to be
worked out between men just as the organization of any large business has to be. Instructions and charts do not count as much as good
w i l l and intelligent cooperation.
M r . WOLCOTT. M a y I ask a question i n there ?
Senator DOUGLAS. Y e s .

M r . WOLCOTT. Would you recommend that the make-up of the Open
Market Committee be changed i n any way ?
M r . B R O W N . N O ; I think the present compromise is a good compromise.
Senator DOUGLAS. Well, you say that the Eeserve Board must i n
the nature of the case be more or less subordinate to the Secretary
of the Treasury as regards open-market operations, but does not the
Secretary of the Treasury almost inevitably tend to have a prejudice
i n favor of low interest rates because that means a smaller burden of
carrying the debt and makes the refunding problems less than otherwise would be the case ?
M r . BROWN. I do not think that is actually the case. The Secretary of the Treasury has to consider the burden of the interest charge
i n connection wTith the total budget, but I think he realizes that a
proper rate structure w i l l by promoting general prosperity of the
country probably increase tax receipts more than the interest charge
would be increased; and i n my discussions with various Secretaries
of the Treasury I have never seen any indication of such a consistent
and hard-boiled attitude i n favor of very low rates on their part.
Senator D O U G L A S . D O you want to comment upon the silver-purchase policy of the Government ?
M r . BROWN. I cannot make any better comment than the one L o r d
Keynes made at the time of Bretton Woods, and there was talk of
using silver as a monetary base, the Government buying it. H e said,
u
W h y not buy Irish potatoes?" We are buying Irish potatoes and
buying silver, and buying Irish potatoes is about the same degree
of foolishness.
Senator DOUGLAS. Silver is not as perishable.
M r . BROWN. I f you want to subsidize both of them, all right. I f
you want to subsidize the potato producer i n New Jersey or in Maine,
or subsidize the silver producer, let them do it, but it should not be
called monetary policy.
Senator D O U G L A S . I take it, then, that you are not enthusiastically
i n favor of the silver-purchase policy.
M r . B R O W N . I think it is just a subsidy and I think it is an entirely
unjustified subsidy, even less justified than the subsidy to the potato
growers.
Senator D O U G L A S . I have no more questions.
M r . WOLCOTT. I do not know that I have, except the comment that
1 think we disposed of the silver question at Bretton Woods by a
resolution that they study the problem.
I do not know whether M r . Brown wants to do it—perhaps it
has gone i n the record—but should we not have i n the record the
advantages to banks of going i n and staying in the Federal Reserve
System that are not enjoyed generally by nonmember banks? I do
not know i f M r . Brown wants to take the time to do that.




264

MONETARY, CREDIT, AND FISCAL POLICIES

M r . BROWN. Haven't some of the Federal Reserve banks published
books on that? I am pretty busy and I do not have a staff of
economists at my disposal.
M r . WOLCOTT. That is why I put the question as I did. Y o u probably would not want to give an offhand opinion without study. W e
can get it.
Senator DOUGLAS. I f there is nothing further, thank you very
much, sir.
(Whereupon, the committee adjourned at 4 p. m., to reconvene at
10 a. m., Wednesday, November 23, 1949.)




MONETARY; CREDIT, AND FISCAL POLICIEb
WEDNESDAY, NOVEMBER 23, 1949
C O N G R E S S OF T H E U N I T E D S T A T E S ,
S U B C O M M I T T E E O N M O N E T A R Y , CREDIT, AND F I S C A L POLICIES,
J O I N T C O M M I T T E E OF T H E E C O N O M I C R E P O R T ,

Washington, D. C.
T h e subcommittee met, pursuant to adjournment, at 10 a. m., i n
the caucus room, Senate Office Building, Senator P a u l H . Douglas
(chairman of the subcommittee) presiding.
Present: Senator Douglas (chairman of the subcommittee) ; Senator
Flanders and Representative Wolcott.
A l s o present: D r . Grover W . Ensley, acting staff director; and D r .
Lester V . Chandler, economist to the subcommittee.
Senator D O U G L A S . Ladies and gentlemen, I think perhaps it w o u l d
be well i f we opened the proceedings.
I n general, we have tried, by submitting questionnaires to people
i n advance, to which they made detailed replies, to obviate the necessity
for reading a prepared statement, and to enable us to plunge immediately into a discussion of the issues involved, but the Committee f o r
Economic Development has been probing some of these issues for some
years, and, since our questionnaire was addressed to individuals and
d i d not cover organizations, we have asked M r . J . Cameron Thomson
and M r . Beardsley Ruml, representing the Committee f o r Economic
Development, to appear. W e are going to waive our usual procedure and suggest that they read the statement which they have
prepared; and, after that, we w i l l move i n to questions.
M r . Thomson.
S T A T E M E N T OP J. CAMERON THOMSON, PRESIDENT, NORTHWEST
BANC0RP0RATI0N, MINNEAPOLIS, MINN., ACCOMPANIED B Y
B E A R D S L E Y RUML, V I C E C H A I R M A N OP T H E R E S E A R C H A N D
POLICY COMMITTEE, COMMITTEE FOR ECONOMIC D E V E L O P M E N T ,
N E W YORK CITY
M r . T H O M S O N . T h i s is a prepared statement. I believe that everybody has a copy. W i t h one exception, I w i l l confine my statement to
this prepared statement.
I am J . Cameron Thomson, president of the Northwest Bancorporation, Minneapolis. I n response to your invitation, I appear here a&
chairman of the monetary and fiscal policy subcommittee of the re~




25
6

266

MONETARY, CREDIT, AND FISCAL POLICIES

search and policy committee of the Committee for Economic
Development.1
I shall present a statement describing the views of our research and
policy committee on the questions before your subcommittee. M r .
Beardsley Ruml, of New Y o r k City, vice chairman of the research
and policy committee, is here with me; and we shall both be available
for questioning.
The Joint Committee oh the Economic Report has before it one of
the three or four great problems of our time—how to maintain high
employment i n a free dynamic society without serious inflation. A
repetition of anything like the experience of the thirties would be more
than an immediate economic catastrophe to the American people. I t
would set off a chain of disastrous consequences i n political and social
organization, domestically and internationally.
The idea that great economic instability is inevitable in a free society
is one of the most dangerous ideas at large i n the world today. The
Committee for Economic Development was established i n the belief
that this idea is not only dangerous but false. The Employment A c t
of 1946, which is the charter of your committee, expresses the national
belief that economic stability can be maintained by democratic
methods i n a free competitive economy. H a v i n g expressed this belief,
it is now up to all of us to prove its truth. This requires, first of all,
that we should actually avoid serious depression and great inflation.
B u t this alone would not be enough. W e should not be satisfied just
to go on from day to day avoiding depression and inflation. W e need
institutions and policies that deservedly create confidence that our
economy w i l l continue to be stable.
W e need a positive program for greater economic stability. Such a
program cannot be simply drawn up by economists and enacted by
1
The Committee for Economic Development is an organization of businessmen formed
to study a n d report on the problems of achieving and maintaining a high level of employment and production w i t h i n a free economy. Its research and policy committee issues
from time to time statements of national policy containing recommendations for action
which, i n the committee's judgment, w i l l contribute to maintaining productive employment
and a rising standard of living. F o l l o w i n g is a list of the members of the Committee for
Economic Development research and policy committee :

C O M M I T T E E FOR E C O N O M I C D E V E L O P M E N T R E S E A R C H A N D P O L I C Y

COMMITTEE

M a r i o n B . Folson, chairman, treasurer, East- J a y C. Hormel, chairman of the board, Geo.
man K o d a k Co., Rochester, N. Y .
A. H o r m e l & Co., Austin, M i n n .
Beardsley Ruml, vice chairman, New York, Amory Houghton, chairman of the board,
N Y.
Corning Glass Works, Corning, N. Y .
W i l l i a m Benton, chairman of the board, E r i c Johnston, president, M o t i o n P i c t u r e
Encyclopaedia Britannica, Inc., and Muzak
Association of America, Inc., Washington,
Corp., New York, N . Y .
D. C.
J o h n D Biggers, president, Libbey-Owens- Ernest Kanzler, chairman of the board, IJniF o r d Glass Co., Toledo, Ohio
versal C. I. T . Credit Corp., Detroit, Mich.
J a m e s F Brownlee, L o n g Meadow Road, F a i r - Meyer Kestnbaum, president, H a r t , Schaffner
field Conn
& Marx, Chicago, 111.
W
L ' Clayton, chairman of the board, F r e d Lazarus, Jr., president, Federated DeAnderson, Clayton & Co., Houston, Tex.
partment Stores, Inc., Cincinnati, Ohio.
S. Sloan Colt, president, Bankers T r u s t Co., Robert A. Lovett, partner
B r o w n Bros.,
New Y o r k N Y
H a r r i m a n & Co., New York, N. Y .
'Gardner Cowles, president and publisher, Des F o w l e r McCormick, chairman of the board
^ ^ n e s Register and Tribune, Des Moines,
^ n i t e ^ i n ^ ;
lOWcl
Chioasri Til
Chester C ^avis president Federal Reserve ^
£ \
j c h a i r m a n o f t h e b o a r d Gen_
B a n k of St. L o u i s St. Louis, M o
eral Electric C o
N e w Y o r k
N
Y
Clarence F r a n c i s chairman of the board, H a
Scherman, president,
Book-of-theGeneral Foods Corp., New York, N Y .
'Y
M o n t h Club> N e w York> N
P h i l i p L . Graham, president and publisher, H
c h r i s t i a n Sonne, president, Amiinck,
the Washington Post, Washington 4, D. C.
Sonne & Co., New York, N. Y .
J o h n M . Hancock, partner, Lehman Bros., j . Cameron Thomson, president, Northwest
New York, N. Y .
Bancorporation, Minneapolis, M i n n .
George L . Harrison, chairman of the board, W . Walter Williams, president, Continental,
New Y o r k L i f e Insurance Co., N e w York,
Inc., Seattle, Wash.
N. Y .
Theodore O. Yntema, vice president i n
Robert Heller, president, Robert Heller a n d
charge of finance, F o r d M o t o r Co., DearAssociates, Inc., Cleveland, Ohio.
born. Mich.




267 MONETARY, CREDIT, AND FISCAL POLICIES
legislators. I f the program is to be effective, it w i l l have to grow out
of a responsible discussion in which all viewpoints are represented.
It w i l l have to be understood and accepted by the American people.
I n the process of discussion, we shall have to avoid accepting ideas as
true just because they are old or, equally dangerous, just because they
are new. Moreover, we should recognize that reaching wise decisions
can only be impeded by attempts to make it appear that the goal of
economic stability is the private property of any group or party. W e
all share this objective in common. W e have all made mistakes; we
have all learned something; and we all have much to learn.
I know that the committee invited me down here to express the views
of the C E D on certain specific questions, and I hope that the remarks
I have just made w i l l not seem too far afield. But I am sure this subcommittee knows that it w i l l not reach final answers to all the questions before it in the limited time it has available. Even if time were
unlimited, there would always be new questions emerging as old ones
were settled. The job upon which you and the Nation are engaged—
the pursuit of greater stability—will be a continuing job. H o w well we
do it w i l l depend upon the effectiveness of the process by which we
seek decisions. I hope that i n your report to your colleagues and to
the American people you w i l l urge upon them the need for continuing,
responsible participation in the development of policy.
T H E I M P O R T A N C E OF M O N E T A R Y , F I S C A L , A N D DEBT P O L I C Y

I should like to turn now to the area with which your subcommittee
is chiefly concerned. I believe that the greatest opportunities in the
Federal Government for contributing to economic stability lie i n this
area; namely, fiscal, monetary, and debt-management policy. Obviously, the Federal Government must have a policy, or at least must
act, with respect to its budget, its debt, and the money supply. I t is
equally obvious that this action is going to affect the stability of the
economy. And, when we face a $40,000,000,000 budget and $250,000,000,000 Federal debt, the effects of Federal action upon economic stability become of paramount importance.
Senator DOUGLAS. That is now a $44,000,000,000 figure ?
M r . THOMSON. That is right.
I n emphasizing the importance of fiscal, monetary, and debt-management policy, I do not want to give the impression that nothing else
needs to be done. O n the contrary, public and private policy with
respect to international economic affairs, prices and wages, agriculture, and many other matters have much to contribute i n a rounded
stabilization program. But it seems to me very unlikely that these
other policies can make an effective contribution i f fiscal, monetary,
and debt policies are erratic or perverse from the standpoint of
stability.
I want to draw a sharp distinction between fiscal, monetary, and
debt-management policies on the one hand and direct controls on the
other hand. B y direct controls I mean such measures as Government
price controls, wage controls, rationing, allocations, and controls over
the direction of investment. Failure to distinguish between these
two kinds of measures is responsible for much confusion i n public discussion and could lead to serious error in public policy. T w o kinds
of confusion are common. One is to reject the attempt to achieve
greater stability by fiscal, monetary, and debt-management policies by



268

MONETARY, CREDIT, AND FISCAL POLICIES

putting these policies i n the same class with direct controls over the
details of private economic activity. The other is to accept and justify
all manner of direct controls by putting them i n the same class with
indirect financial measures for stability.
Senator D O U G L A S . I don't want to interrupt continually, but I have
felt that the banking fraternity did not always understand the difference between these two types of controls and that they argue against
the control of credit as though it were an infringement solely and
exclusively upon private business.
M r . THOMSON. I don't think that applied to the banking fraternity
solely, but I admit it does apply to us sometimes.
Fiscal, monetary and debt policies are appropriate means for attacki n g the problem of instability i n a free society. T h e problem of
instability is essentially a problem of broad forces affecting the overall magnitudes of the economy. The problem arises when millions
of workers are simultaneously unemployed or when there is a general,
although probably uneven, rise of most prices. The advantage of
fiscal, monetary, and debt policies is that they allow the Government
to influence the over-all forces, especially the level of aggregate
demand, that determine the stability of the economy without necessarily involving the Government i n detail control of the particulars
of the economy. These over-all measures will, of course, affect different individuals and businesses differently. B u t the differences are
determined by the market process, not by Government decisions. The
Government does not have to make decisions that are w^ith rare
exceptions better left to the market—the price of shoes relative to the
price of automobiles, whether the A B C company or the X Y Z company
should prosper, what kind of a job J o h n Jones or Robert Smith should
have.
Direct controls do involve Government decision about the particular interrelationships of the parts of the economy. One virtue
claimed for them by their advocates is that they are selective. B u t
adding together a very large number of selective controls is surely
a clumsy, expensive, inefficient, and politically dangerous way to get
the over-all effect needed to deal with the stability problem. W h i l e
the market process is not perfect, any general substitution of Government decisions for it would result i n serious loss of efficiency, progress,
and stability.
But more than efficiency, progress and stability are at stake. Freedom is also at stake. A n y widespread system of direct controls would
necessarily involve widespread power of government to affect the economic fortunes of particular individuals, businesses, industries, and regions selectively; that is, discriminatingly. T h i s power would have to
be exercised by the Executive subject to only the most general statutory
limitations. I t would be the power to reward or punish, to coerce,
!by administrative action. T h e existence of such a power would
ominously threaten the survival of our free society for so long as
the free society might endure.
W e hear the concepts of "freedom" and "statism" used so much
and so loosely that we become callous and impatient with them. B u t
on the specific problem of this subcommittee I am convinced that the
importance of fiscal, monetary, and debt policy w i l l not be sufficiently
appreciated until we learn to make the distinction between power
to coerce individuals and power to affect the general behavior of the



269 MONETARY, CREDIT, AND FISCAL POLICIES
economy. A precise line cannot be drawn between appropriate and
inappropriate powers, yet we must recognize that there is a direction i n which we should not move except i n cases of clearest necessity
and even then only with utmost caution.
Senator DOUGLAS. M a y I say that this is almost precisely the distinction which M r . Williams, president of the Federal Reserve Bank
of Philadelphia, drew between general controls exercised through
the supply of money and credit affected by debt management on the
one hand and direct controls exercised by the Government on the
other.
T H E U N I T Y OF F I S C A L , M O N E T A R Y , A N D D E B T - M A N A G E M E N T

POLICIES

One of the things we have learned most definitely from C E D ' s
studies in the fiscal-money-debt field is that the three instruments are
inseparable.
I might say that is one of the things we have learned. The first
statement that C E D made was on taxes. Then we made one on taxes
and the budget and then one on fiscal, monetary, and debt-management policies. We are going to deal with tax policy i n our statement
i n January; but the long-range statement w i l l be on fiscal, monetary,
and debt management as well. So we have been learning.
It w i l l not be possible to work out a satisfactory policy that uses
one of the three instruments alone. I f you try to develop a stabilization program relying solely on fiscal policy, you w i l l find that, while
fiscal policy is very powerful, it is not sufficiently flexible to be effective
alone in some circumstances and in other circumstances can be effective alone only at the sacrifice of other important objectives. I f you
try to develop a stabilization program relying solely on money and debt
policy, you w i l l find that, while the instrument is very flexible, it may
not be sufficiently powerful for your purposes in some circumstances.
This means more than that the instruments must be used consistently. I t means that the instruments should be combined i n a program
that achieves the desired net effect most efficiently by using the special
capacities of each instrument. A t some times this may involve having
budget policy running counter to monetary-debt policy. F o r example,
suppose that i n some period not calling for inflationary action we are
faced by a sudden, large, and temporary increase i n Federal expenditures. T o keep the budget from having an inflationary effect, it might
be necessary to raise tax rates temporarily by a large amount. However, it would ordinarily be better not to raise tax rates in this iyay.
Rather, we should follow more restrictive monetary and debt policies
to offset the temporarily inflationary effects of the budget. This would
not be inconsistent policy so long as the combined program avoids
inflation and each part of the program does what it is best suited to do.
T H E STABILIZING BUDGET P O L I C Y

C E D recognizes that it does not have the final answers to all the
problems of an integrated money-budget-debt policy for economic
stability. W e think we have learned some important things. Also, we
are encouraged by the fact that a consensus seems to be emerging among
students of this subject and that the C E D recommendations lie within
the range of this consensus. However, we are aware of a number of
unsettled problems and are planning to continue our work i n this field.
99076—50

18




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MONETARY, CREDIT, AND FISCAL POLICIES

What I have to say this morning is i n the nature of a progress report
rather than a final report.
Senator DOUGLAS. The modesty with which you advance this program is very disarming, I may say.
M r . T H O M S O N . I am very, very humble when I sit here representing
C E D on this very important subject.
I would like to read from our 1947 statement, Taxes and the Budget,
page 20, a description of the three alternatives on budget policy.
[Reading:]
T h e r e are three distinct alternatives in budgetary p o l i c y :
1. The annually
balanced
budget policy.—This
p o l i c y a t t e m p t s to k e e p G o v e r n m e n t revenues c o n t i n u o u s l y e q u a l to or i n excess of G o v e r n m e n t e x p e n d i t u r e s ,
regardless of economic conditions.
2. The managed
compensatory
budget
policy.—Under
this policy, attempts
w o u l d be m a d e to a d j u s t t a x r a t e s a n d e x p e n d i t u r e p r o g r a m s as o f t e n as necess a r y a n d to t h e e x t e n t n e c e s s a r y to k e e p e m p l o y m e n t o r the n a t i o n a l i n c o m e
s t e a d y a t a h i g h level.
3. The stabilizing
budget policy.—This
policy is described herein, a n d advoc a t e d as t h e m o s t p r a c t i c a l m e t h o d of a c h i e v i n g a l l t h e o b j e c t i v e s o f b u d g e t a r y
policy.
I t s b a s i c p r i n c i p l e i s to set t a x r a t e s to b a l a n c e t h e budget a n d p r o v i d e
a s u r p l u s a t a g r e e d h i g h l e v e l s o f e m p l o y m e n t a n d n a t i o n a l i n c o m e a n d therea f t e r to l e a v e t h e m a l o n e u n l e s s t h e r e i s some m a j o r c h a n g e i n n a t i o n a l p o l i c y
or c o n d i t i o n o f n a t i o n a l l i f e .
A N N U A L BUDGET B A L A N C I N G

T h e a n n u a l - b a l a n c e p o l i c y c a n n o t be m a d e to w o r k , a n d t h e e f f o r t to m a k e i t
w o r k a c c e n t u a t e s i n f l a t i o n s a n d depressions.
W i t h its inevitable break-down
fiscal p o l i c y becomes a m e r e day-to-day expedient.
T h i s p r o g r a m r e q u i r e s that, w h e n e v e r a decrease i n the n a t i o n a l i n c o m e is
f o r e c a s t , t a x r a t e s m u s t be r a i s e d or e x p e n d i t u r e s cut, or both, to p r e v e n t a
b u d g e t deficit. W h e n e v e r t h e f o r e c a s t of h i g h e r n a t i o n a l i n c o m e p r o m i s e s l a r g e r
surpluses, it not only permits but invites a cut i n t a x rates a n d a rise i n expenditure programs.
O n t h e record, t h e p r o g r a m m e a n t t a x c u t s i n t h e p r o s p e r o u s
twenties, a n d tax increases i n the depressed thirties.
T h e i m p l i c a t i o n s of such a p r o g r a m are c l e a r :
(a) T a x r a t e s a n d e x p e n d i t u r e p r o g r a m s w i l l be c h a n g e d a t t i m e s a n d i n direct i o n s m o s t h a r m f u l to h i g h e m p l o y m e n t a n d s t a b l e p r i c e s .
W h e n incomes are
l o w a n d u n e m p l o y m e n t i s w i d e s p r e a d , t a x r a t e s m u s t be r a i s e d a n d G o v e r n m e n t
e x p e n d i t u r e s cut. I n b o o m t i m e s t h e p r o g r a m w e l c o m e s t a x r e d u c t i o n s a n d n e w
expenditures.
(b) A n n u a l b u d g e t - b a l a n c i n g p o l i c y does n o t i n t h e l o n g r u n p r o m o t e G o v e r n ment economy.
T h e program allows a g r o w t h of public expenditures i n boom
times, w i t h o u t a n y i n c r e a s e o f t a x rates, even w i t h a d e c r e a s e i n t a x r a t e s .
The
p o l i c y does n o t f u r n i s h s t e a d y p r e s s u r e a g a i n s t t h e i n i t i a t i o n of u n n e c e s s a r y
e x p e n d i t u r e s ; t h e p r e s s u r e i t does p r o v i d e , to e n d e n t r e n c h e d e x p e n d i t u r e prog r a m s i n depressions, i s c e r t a i n to b e i n e f f e c t i v e .
( c ) T h e s y s t e m d i s s i p a t e s t h e p o t e n t i a l l y l a r g e s u r p l u s e s of g o o d t i m e s a n d
s t r i v e s v a i n l y f o r b a l a n c e i n b a d times.
I n a fluctuating e c o n o m y t h i s p r o g r a m
w i l l n o t r e s u l t i n debt r e d u c t i o n .
( d ) T o c a r r y o u t t h e p r o g r a m r e q u i r e s a degree o f a c c u r a c y i n f o r e c a s t i n g
fluctuations
i n b u s i n e s s a c t i v i t y t h a t h a s n o t been a c h i e v e d i n t h e p a s t a n d t h a t
is n o t p o s s i b l e n o w .
(c) T h e p r o g r a m i n v o l v e s i r r e g u l a r a n d u n p r e d i c t a b l e v a r i a t i o n s o f t a x rates,
w i t h u n s e t t l i n g effects u p o n b u s i n e s s a n d p e r s o n a l planning.
T H E M A N A G E D C O M P E N S A T O R Y BUDGET

POLICY

T h e t h e o r y o f the m a n a g e d c o m p e n s a t o r y b u d g e t i s s i m p l e . W h e n e v e r e m p l o y m e n t i s j u d g e d " a b o u t to b e " b e l o w a h i g h level, t a x e s s h o u l d be c u t a n d e x p e n d i t u r e s i n c r e a s e d b y t h e a m o u n t n e c e s s a r y to p r e v e n t t h e f o r e c a s t f r o m c o m i n g
t r u e . W h e n e v e r p r i c e s seem " a b o u t to b e " a b o v e t h e p r o p e r level, t a x r a t e s m u s t
be r a i s e d a n d e x p e n d i t u r e s cut.
D e p e n d e n c e u p o n a c c u r a t e f o r e c a s t i n g o f b u s i n e s s fluctuations i s e v e n g r e a t e r
f o r the compensatory budget t h a n for the a n n u a l l y balanced budget.
I f forec a s t i n g is inaccurate, the compensatory budget c o u l d easily increase
fluctuations
r a t h e r t h a n m o d e r a t e them.




271 MONETARY, CREDIT, AND FISCAL POLICIES
Senator D O U G L A S . I suppose you could point in that connection to the
failure of most of the forecasts i n the f a l l of 1945, when the vast
preponderance of forecasters estimated that there would be 8 to 10
to 12 million unemployed by the spring of 1946, and i f we had followed
that policy we would then have expended expenditures and reduced
taxes and therefore have added enormously to the inflation which
actually occurred ?
M r . THOMSON. That is a very definite example in recent times, Senator, yes. [Reading.]
L i k e the a n n u a l l y balanced budget system, the compensatory p r o g r a m encourages increased expenditure programs w i t h o u t higher t a x rates at some stage of
the business cycle. H o w e v e r , w T hereas the a n n u a l l y balanced budget p l a n opens
the door to n e w spending i n boom times, the compensatory p l a n opens the door
i n d e p r e s s i o n — a c t u a l or forecast. I n either case the effect u p o n Government
economy i s l i k e l y to be the same—periods of r a p i d increases i n spending, f o l l o w e d
by f u t i l e efforts at retrenchment a n d a generally excessive u p w a r d d r i f t of
expenditures.
I f the managed compensatory system is to make any progress t o w a r d r e d u c i n g
the debt, i t must count upon c r e a t i n g large surpluses i n prosperous periods by
r a i s i n g taxes a n d c u t t i n g expenditures.
B u t expenditures resist d o w n w a r d
change a n d taxes resist u p w a r d change. I n the present state of economic forecasting, i t w i l l a l w a y s be possible to make out a p l a u s i b l e case t h a t depression
is a r o u n d the corner. Such a p r e d i c t i o n w i l l p e r m i t both unpleasant alternatives
to be avoided, since under the managed compensatory theory the forecast of
depression requires l o w e r t a x rates a n d higher expenditures. T h i s system offers
no r e a l i s t i c hope of debt reduction.
U n d e r t h i s plan, as under the annual-balance plan, t a x rates are subject to
frequent a n d u n s e t t l i n g changes.

Senator DOUGLAS. M a y I interrupt for a minute ?
Mr.

THOMSON.

Yes.

Senator D O U G L A S . I don't want to introduce an excessively personal
note, but when some of us felt that the budget for 1949-50 should be
reduced, this argument was immediately advanced, that we were going
to have a period of depression, and that therefore we should avoid
reductions i n expenditures. So here is another illustration of what
you say.
M r . T H O M S O N . I am glad to have your comments.
A s I have said, budget, money and debt policy should be considered
as a unitary program. However, for purposes of exposition I shall
describe the elements of the program separately before telling how we
think of these elements as fitting together. I shall start with budget
policy.
The key to C E D ' s budget policy, which we call the stabilizing budget
policy, is i n these two sentences:
Set t a x rates to balance the budget a n d provide a s u r p l u s f o r debt retirement
a t a n agreed h i g h level of employment a n d n a t i o n a l income. H a v i n g set these
rates, leave them alone unless there is some m a j o r change i n n a t i o n a l policy
or c o n d i t i o n of n a t i o n a l life.

I should point out at once that the budget we are talking about
is the cash consolidated budget and the surplus is a surplus in that
budget. I shall come back to this later.
C E D suggested that tax rates should be set to yield a $3,000,000,000
cash surplus at high employment. However, i n our thinking, this
particular figure is less important than that there should be agreement upon a moderate surplus to be achieved at high employment.
This basic proposition has a number of far-reaching implications.




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MONETARY, CREDIT, AND FISCAL POLICIES

First, the size of the surplus would remain constant so long as
the level of employment and national income remains constant. I f
we remain at high employment the surplus would remain at the agreed
level.
Senator DOUGLAS. May I interrupt ?.
M r . THOMSON.

Yes.

Senator DOUGLAS. When you speak about the cash consolidated
budget, you refer to total receipts and total expenditures by the Federal Government, including social-security receipts ?
M r . THOMSON. That is correct, Senator, and the social security and
the trust funds are the main element that is not i n the administrative
budget.
Senator DOUGLAS. I t is possible that this type of budget w i l l not
be as much out of balance for 1949-50 as the operating budget because
I think there w i l l be an excess of contributions for the old-age-annuity
account of probably close to $2,000,000,000 with the increased rates
which are going into effect, and while the unemployment-insurance
account has been drawn down in the last 8 months if unemployment
falls off we may have a cumulative surplus. It is probable that the
budget wouldn't be quite in balance but there would be an excess of
collections over disbursements in the social-security account, so that
the deficit for 1949-50 for those items would not be probably more than
$2,000,000,000.
Senator FLANDERS. Senator, won't you have to take into account
the additional purchases of mortgages by "Fanny M a y " ( F N M A )
which go into the cash budget ? They go into the regular budget, but
we are talking about the cash budget.
Senator DOUGLAS. Would you include veterans' insurance disbursements ?
M r . THOMSON.

Yes.

Senator DOUGLAS. I f you make an allowance for that it would probably put the cash consolidated budget at about the same deficit as
the operating budget.
M r . THOMSON. That is right.
M r . RUML. I think, M r . Chairman, since the point has come up now
with respect to these two budgets, I might say this: I think it is of the
greatest importance, when we talk about inflation and deflation, that
we talk about the impact of Federal Government by way of cash expenditures and receipts, rather than the other budget, which is perfectly valid for administrative control, but which really has nothing
to do with inflation and deflation.
Let me give a somewhat dramatic case on the other side, namely,
that the increase in the redemption value of series E bonds from year
to year is counted as an expenditure in the administrative budget
although no cash is distributed.
It is for that reason that i n discussing fiscal policy we felt these
issues of policy should be determined by the cash consolidated budget.
M r , THOMSON. That is right. May I continue ?
Second, the size of the surplus or deficit would vary with the national income. I f the national income declines the tax base w i l l decline and the yield of a stable set of tax rates w i l l decline. This w i l l
cause a decline of the surplus or below some point an increase of the
deficit. Also variation of the national income w i l l cause some change




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MONETARY,

CREDIT, AND

FISCAL POLICIES

i n expenditures under stable expenditure programs. F o r example,
unemployment compensation payments w i l l automatically increase
i f unemployment rises. The amount of variation i n the surplus or
deficit with any given variation in national income w i l l be determined by the variation of tax yields and expenditures under stable
tax rates and expenditure programs.
Third, i n order to carry out this policy once it is embarked upon,
an increase of expenditure programs calls for a matching increase of
tax rates, and a decrease of expenditure programs calls for a cut of
tax rates. The distinction between actual expenditures and expenditure programs may need explanation. F o r example, the unemployment compensation system sets up an expenditure program providing that certain amounts of money shall be paid to certain classes of
persons i f they are unemployed for certain periods of time. Under
that program actual expenditures w i l l depend upon the actual amount
and distribution of unemployment. Similarly, actual expenditures
w i l l vary even i f programs are held stable in the case of farm price
supports, veterans' readjustment benefits, and some other programs.
A change in the program calls for a change in tax rates, but a change
i n expenditures i f the program is unchanged does not call for a
change in tax rates.
T w o exceptions to the general basic proposition are so important
that they must be considered integral parts of the policy. However,
I shall come to them and reserve discussion of them after I have explained the advantages that we would expect to be realized from the
policy i n its general outlines.
1. The policy would contribute to the stability of the economy. I t
would cushion the cumulative process by which economic fluctuations
build up into great depressions or inflations. When total expenditures for goods and services decline, total incomes earned i n production of goods and services also decline, which causes a further decline
of expenditures and so a further decline of incomes, and so on. A
similar process works on the inflationary side. The stabilizing budget
policy would insert a shock absorber i n this cumulative process,.
When expenditures decline, part of the resulting decline of incomes
w i l l be absorbed by the Government budget. T a x yields w i l l f a l l and
as a consequence private incomes after tax w i l l not f a l l so much. A t
the same time Government expenditures for unemployment compensation w i l l rise and offset part of the decline i n private incomes. The
result is to reduce the decline i n private incomes available for expenditure and so to dampen the cumulative process, making fluctuations smaller than they would otherwise be.
Senator DOUGLAS. I notice that this is very carefully worded, and
that all you claim for that process is that it would provide a shock
absorber, that it would contribute to the stability and that it would
cushion the cumulative process. I n other words, the fluctuations
would occur, but their magnitude would be diminished.
M r . THOMSON. That is right, Senator.
M r . WOLCOTT. M r . C h a i r m a n
S e n a t o r DOUGLAS. Y e s , M r . W o l c o t t .

M r . WOLCOTT. I n connection with stabilizing budget policy and compensatory budget policy, do you want to discuss what effect the result
of this drive by retailers for a reduction i n excise taxes might have on
either one or both of those ?



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MONETARY, CREDIT, AND FISCAL POLICIES

M r . THOMSON. W o u l d you like to have it discussed now or when we
get through? I think M r . R u m l is thoroughly familiar with it.
M r . WOLCOTT. Perhaps we can put it on the shelf until you finish
your statement.
M r . R U M L . I shall be very glad to discuss it at the proper time.
T h a t is not C E D policy.
M r . THOMSON. 2. The policy would contribute to economy i n Government. No budget policy by itself can assure economy i n Government. So far as our policy goes, it would permit an increase of Government expenditure programs whenever the Congress and the public
are w i l l i n g to raise tax rates to pay for them. R u t the fact that, i f
the recommended policy were followed, an increase of expenditure programs would call for higher tax rates would lead to more careful counting of the costs of higher expenditures.
Senator DOUGLAS. Perhaps I am anticipating a subject which is
discussed later i n your statement, but i f you were i n an especially
severe depression wouldn't you approve of a stepping-up of expenditures ?
M r . THOMSON. That is covered a little later, and would be taken into
account, Senator.
3. T h e policy would contribute to reduction of the debt out of Government surpluses over the long period, although not necessarily in
every year. The policy would assure cumulative reduction of the
debt i f high employment is i n fact maintained on the average. I t
seems to me very unlikely that any policy could i n fact succeed i n
reducing the debt i f our average level of activity is much below high
employment, and I think that the attempt to reduce the debt under
such conditions would be dangerous. B u t this is not to say what is
sometimes said, that the future course of the national debt w i l l be
determined by events. Whether or not we succeed i n reducing the debt
w i l l depend upon:
(ai) Whether all public policies, plus private policies, plus events
combined are such as to maintain at least reasonably high employment
on the average, and
(b) Whether budget policy is such as to provide for debt reduction
under conditions of reasonably high employment.
I w i l l now come to the two important exceptions to our basic budgetary principle which I referred to earlier.
The first relates to the handling of extraordinarily large Government expenditures that are known to be temporary. I t seems to us
undesirable to raise tax rates sharply i n order to finance such expenditures currently and then cut tax rates when the expenditure ceases.
Therefore we suggested that it would be better not to match the
temporary expenditure increase by a temporary tax increase and
that any inflationary consequence of the expenditure should be offset
by anti-inflationary debt and monetary policy. One of the questions
that our committee wishes to examine further is the proper scope of
this exception.
Senator D O U G L A S . D O you have any illustration of what might be an
extraordinarily large governmental expenditure that is known to be
temporary ?
M r . THOMPSON. W e think this whole question of what are nonrecurring expenditures should be explored, and we intend to explore




275 MONETARY, CREDIT, AND FISCAL POLICIES
it i n connection with the statement we w i l l issue next year. The thing
that bothers us at this time is that there seems to be so many regular
nonrecurring expenditures.
Somewhere along the line we hope to deal with that subject more
effectively than we have been able to so far.
The second important exception to our general principle relates
to action to be taken in the event of an extreme depression or inflation.
Under our general principle we would not cut tax rates i n depression
or raise tax rates in inflation i n order to stabilize the economy. Instead, we would rely, so far as the budget alone is concerned, upon the
stabilizing effect of automatic variations i n revenue and expenditures
from stable tax rates and expenditure programs. W e believe that
this stabilizing influence, i f combined with appropriate measures i n
other fields—and I emphasize that—will certainly moderate fluctuations. W e hope they w i l l be sufficient to avoid more than moderate
departures from high employment. But, of course, no one can guarantee that. We have to think about what we would do if, i n the
absence of appropriate policies, or in spite of them, we find ourselves
i n a severe depression or major inflation. I n such conditions, extraordinary action should and w i l l be taken. I n our opinion an emergency congressional reduction or increase of tax rates would be one
of the most effective and least dangerous courses.
Senator DOUGLAS. M r . Thompson, may I interject there? What
you are proposing, I take it, is to make the stabilized budget policy
the standard, and to apply a portion of the managed compensatory
budget for severe fluctuations insofar as that refers to taxes. I t is a
partial marriage of point 2 with point 3.
M r . THOMSON. I don't think we would want to agree that we are
adopting any part of that compensatory philosophy.
Senator DOUGLAS. What I mean is this, you say i n a severe emergency that you would alter tax rates, presumably decreasing them i n
a period of depression, and increasing them i n a period of severe inflation ; so there is at least one element of the compensatory principle
which you graft on to your stabilized budget.
Senator FLANDERS. Perhaps there is a secret liaison instead of a
marriage.
Senator DOUGLAS. That could be as effective, but i f it is put into
effect it would be legitimatized; we want no illicit relationships.
M r . RUML. I think there are two important distinctions. One is
a real one; the other semantic. The "compensatory" term has a bad
odor. Therefore we want to make a very large distinction between
this policy and the compensatory. The chief distinction, M r . Chairman, is on this point, that these actions on either the tax reduction or
the expenditure side would take place after the fact, rather than in
anticipation of the fact.
Senator DOUGLAS. A f t e r the depression has occurred ?
M r . RUML. That is right. Therefore, the element of forecasting is
eliminated.
I f you take the situation that existed i n 1949,1 think probably most
people would have looked for more trouble by September than actually
occurred, and would have taken actions i n J u l y that would have been
very untimely i n October.




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MONETARY, CREDIT, AND FISCAL POLICIES

Senator DOUGLAS. W o u l d you apply the same modification i n the
field of expenditures, that after an appreciable depression has occurred
you should expand expenditures ?
M r . THOMSON. W e do suggest that, i n the public works program
later on.
Senator DOUGLAS. A n d reduce expenditures i n a period of severe
inflation after the inflation had occurred ?
M r . THOMSON. That is correct.
Senator D O U G L A S . I would say that you have affected a partial marriage between theory 2 and theory 3.
Senator F L A N D E R S . A trial marriage.
M r . THOMSON. Since the question has come up recently I want to
say a word about "automatic guides to policy." Neither the guides nor
the policy recommended by C E D is automatic. A s we said 2 years ago
i n first presenting the stabilizing budget policy:
T h e p o l i c y recommended here cannot be " a d o p t e d " a n d l e f t to r u n w i t h o u t
c o m m o n sense a n d vigilance. B a s i c a l l y , w e a r e p r e s e n t i n g the p r i n c i p l e s t h a t
a r e i m p o r t a n t i n m a k i n g the decisions t h a t must be made. T h e p o l i c y w i l l n o t
y i e l d the results of w h i c h i t i s capable unless the p r i n c i p l e s a r e c o n s i s t e n t l y foll o w e d a n d reasonably interpreted.

W e have tried to describe our principles as specifically as possible,
and to provide within the policy itself for the most important exceptions to the general principles. W e do not think it an adequate policy
to say that sound judgment must be used about the relevant facts, without saying what the relevant facts are and how they are to be taken
account of. A n y policy that is followed w i l l have certain consequences, which may be called automatic. W e choose our particular
policy not because its consequences are automatic but because we believe
its consequences are good.
MONEY-DEBT POLICY

I should like now to describe briefly the money-debt elements of the
program and then turn to an appraisal of the whole program as a unit.
I think it may be useful to distinguish between two aspects of
money-debt policy:
1. The contribution to stability that a sound financial structure can
make by not itself initiating or aggravating fluctuations. T h i s means
that random changes i n monetary reserves—say as a result of gold
flows—should not initiate undesired expansion or contraction of the
money supply. I t means that fear about the soundness of financial
institutions should not cause intense pressure for contraction. Business recession should not make the banking system so illiquid that the
flow of credit is frozen and the money supply shrinks. T h e economy
should not bear an excessive burden of private debt, especially shortterm debt.
I think we tend to underestimate the importance of these factors,
possibly because they are not dramatic. F o r instance, we tend to forget the simple fact that between 1929 and 1933 our money and banki n g systems were allowed to collapse. T h a t collapse added materially
to the severity of the depression. There is nothing more essential
to avoiding another great depression than avoiding another financial
collapse; and we have done something about this, as I shall point out i n
a moment.



277 MONETARY, CREDIT, AND FISCAL POLICIES
2. I n addition to this more or less neutral function there is a positive function of monetary-debt policy for stability. This means i n
times of recession, deliberate action by the monetary and debt authorities to increase the reserves of the banking system and the money
holdings of the public, to increase the availability of credit and, i n
general, to make holding liquid assets less attractive and to make investment and consumption more attractive. W i t h appropriate reversal of direction the same policy holds good for inflation.
W e think of this positive stabilizing policy as coming into operation quickly i n response to relatively moderate departures i n either
direction from high employment and price stability. I t is one of the
great virtues of monetary-debt policy, as compared w i t h deliberate
fiscal policy, that it can come into operation quickly. Monetary-debt
policy does not involve cumbersome legislative or administrative procedures. Moreover, it can take some risks of being wrong because it
can reverse itself quickly.
Our financial institutions are now much stronger than they were,
say, 20 years ago. T h i s is partly the result of legal changes in the
Federal Eeserve System and the establishment of deposit insurance.
I n part, our financial structure is more stable because of the change
i n the composition of bank assets from predominantly private loans
to predominantly Government securities. Our private financial structure has been strengthened by the use of the amortized mortgage for
home and farm financing and the growth of the term loan for business, Moreover, the total burden of private debt on the economy has
been much reduced i n relation to total incomes and total asset values.
W e should remember that this relatively favorable private debt
position is largely the product of the war and the accompanying inflation. I t w i l l not be maintained unless more favorable conditions
for equity financing are created. The present tax structure and the
fact that a large proportion of our current savings flow through financial institutions both restrain equity financing. T h i s w i l l not only
make our economy more vulnerable to depression, it w i l l make our
economy less able to meet urgent needs for productive investment at
home and abroad.
T h e tools and techniques for a positive, stabilizing monetary policy
are well known and available. They inclucje open-market operations,
changes of reserve requirements, and changes of rediscount rates. The
main requisite in this area is recognition that economic stability is the
primary objective of monetary policy in association with fiscal and
debt policy. I believe this proposition is recognized by the Federal
Eeserve. It and its implications need to be more fully understood by
the public generally. One implication of the proposition is that monetary policy must concern itself first with the over-all state of the
economy and should not allow responsibilities with respect to particular markets and particular prices to interfere with its over-all
responsibility. Another implication is that monetary policy w i l l
involve risks, particularly the risk that action to restrain inflation
may be followed by recession. This risk may be reduced by prompt
and flexible action, but cannot be entirely eliminated. Failure of the
public to understand this may tend to make the monetary authority
unduly cautious.
More problems arise in connection with the debt aspect of the moneydebt combination. Certain general features of a debt management



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MONETARY, CREDIT, AND FISCAL POLICIES

policy for stability may be described. I n times of inflation the Government should retire debt held by the banks, using for this purpose
the budget surplus and the proceeds of borrowing from the public,
I n times of recession the Government should borrow from the banks
to finance its budget deficit and to retire debt held by the public. But
there are problems beyond this. One is how to devise the terms and
selling methods of a Government bond that would more effectively
attract savings when needed. The issue and redemption of such security would be a valuable additional stabilization instrument. Another
problem, which w i l l become acute i n a year or two, is how to handle
the refinancing of savings bonds as large amounts mature.
O f course, the best-known problem i n this area is that a vigorously
anti-inflationary monetary policy might lead to a major drop i n the
market prices of Government bonds, with possibly serious adverse consequences. I believe that this problem is likely to be less acute i n the
future than it was in 1947 and 1948. F o r one thing, recent events have
reminded us that the Government bond market is not a one-way street.
I t can go up as well as down. Moreover, as time passes since the warbond drives, holders of Government securities probably come to regard
them more as permanent investments and become less concerned about
market prices.
Senator D O U G L A S . I suppose you are referring to the fact that i n
recent months the price of Government bonds has risen, and I believe
they are now selling at a premium of around 4 points above par ?
M r . THOMSON. That is right, Senator; yes.
These remarks are not intended to dispose of the problem, which
may still remain or may recur, even i f possibly i n less acute form.
Our committee has taken the position that the Federal Reserve, while
it has a continuing responsibility for maintenance of an orderly bond
market, should make its decision i n terms of the effects of its action
upon the whole economy. More specifically, "the Federal Reserve
should feel free to reduce the support level unless it finds a superior
alternative way of bringing about a monetary restriction i f and when
that is required by the objective of economic stability." General stability is the primary objective, and the objective of stability i n
the bond market should be reconciled to that, rather than the other
way around.
Probably the most immediate question about this situation is whether
it requires or justifies an increase of the powers of the Federal Reserve.
A r e there powers not now possessed by the Federal Reserve that would
significantly add to its ability to reconcile the objectives of general
stability and bond-market stability ? W o u l d the existence or exercise
of these powers have other effects that would make them on balance
undesirable ? Chairman McCabe has presented to this subcommittee
a clear and thoughtful statement of the case for additional powers. I
think these questions require more consideration, and I would not be
prepared to answer them definitely now. They would be appropriate
questions for the National Commission to which I shall refer later.
T H E COMBINED PROGRAM

W h a t we are seeking i n the whole program I have outlined is this:
A combination of neutralizing, cushioning, and compensating influences achieved by a suitable division of responsibility among budget,
money, and debt policies.



279 MONETARY, CREDIT, AND FISCAL POLICIES
First, as a minimum and all the time we want the financial system
to be at least neutral. That is, the financial system should not itself
originate or intensify unstabilizing disturbances. W e would get this
effect with respect to the budget, under our policy, by the provision
that the surplus should remain constant i f the national income remains
constant. W e would also get this effect by maintaining, what we
already essentially have, sound financial institutions that do not give
rise to perverse movements of money and credit, that are not subject
to panic and collapse, and that avoid an excessive burden of private
debt.
So long as we have high employment and price stability, all we
expect from our policy is neutrality.
Senator DOUGLAS. I notice that you use as your norm high employment. Now, when the stabilization b i l l was first introduced, the objective was stated as f u l l employment. I n the act as finally passed, the
objective was to be maximum employment, production, and purchasing
power.
M r . THOMSON.

Yes.

Senator DOUGLAS. I have a dictionary, but, as I remember those
comparative terms, you have great, greater, greatest. I assume that
maximum is "greatest," i f I remember my Latin.
Now, your standard is, apparently, somewhat lower than maximum,
somewhat lower than greatest, and I wonder what definite meaning
you attach to the word "great."
Now, the advocates of f u l l employment, as you remember, were willing to concede that i n this country you could have, say, 3 to 4 percent
unemployment caused by seasonal and transitional factors; somewhat
higher i n this country than i n England, because of the greater fluctuations of the weather and more rapidly a fluctuating tempo; and it
was said that, when unemployment is greater than 3 or 4 percent, then
these compensatory or stabilizing devices should be called into play.
Now, apparently you do not contemplate as r i g i d a standard as 3
percent.
M r . T H O M S O N . I think we started with the idea, Senator, that there
would be seasonal and transitional unemployment, as classified, and
that high employment would include employment of everyone i n the
labor force outside of those unemployed for seasonal or transitional
reasons.
Senator DOUGLAS. I think the advocates of f u l l employment would
concede that. A s I remember M r . Beveridge's book, he said that we
should not expect to eliminate seasonal and transitional unemployment. Let us say that the figure is somewhat higher for the United
States than for Great Britain. Say it is 4 percent. Would you say
that we should keep unemployment down to 4 percent, or would you
allow a further figure above that ?
M r . THOMSON. Our estimates were based on 4-percent unemployment representing high employment.
Senator DOUGLAS. And, when unemployment exceeded 4 percent,
then you thought there was a departure from the norm which we would
try to maintain ?
M r . THOMSON. Yes. M a y I just read a paragraph here?
Senator DOUGLAS. Y e s .

M r . THOMSON. W e did cover this.
T h e s e precise

figures—




[Reading:]

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MONETARY, CREDIT, AND FISCAL POLICIES

that is the 4 percent—
cannot be rigorously defended against other figures i n the same neighborhood, and
some adjustments may be indicated after the system has been i n operation. H o w ever, the appropriate figures cannot be f a r away i n either direction. A c t u a l
unemployment may, f r o m time to time, lie below 4 percent, as it does n o w —

this was written i n 1947—
it probably cannot be much below this figure without serious inflationary pressure. W i t h 4-percent unemployment, most involuntary idleness is of the betweenjobs variety.

That was our thinking at that time.
Senator DOUGLAS. When you say 4 percent, do you mean 4 percent
of the total labor force or 4 percent of the nonagricultural working
force ?
M r . THOMSON. F o u r percent of the total labor force.
Senator DOUGLAS. W h i c h would be around 2.4 million ?
M r . THOMSON. That is correct.
Senator FLANDERS. F o r the record, I suggest that you tell us what „
the document is that you just read from.
M r . THOMSON. That is from our 1947 statement called Taxes and
the Budget, page 32.
Senator DOUGLAS. When with the present labor force unemployment
rose above 2y 2 million, then you would want to have some of these
stabilizing influences go into effect?
M r . THOMSON. Yes. A s a matter of fact, some are i n effect now.
Senator DOUGLAS. Let me raise another query: H o w severe would
unemployment have to be before you think your added compensatory
feature should go into effect?
M r . T H O M S O N . I don't believe that we have arrived at an answer to
that. I don't think that it is anywhere near the present situation.
W e haven't arrived at a definite answer.
Senator DOUGLAS. The Congress has to do so, however.
M r . THOMSON. That is right.
Senator DOUGLAS. W o u l d you say 10 percent ?
M r . T H O M S O N . I think, Senator, that I would have to let the statement stand, that we never have taken a position. W e w i l l consider that
further i n connection with the statement next year.
Senator DOUGLAS. I t would be very helpful, because frequently the
Members of Congress feel that they are given an adjective but not
given the definition of the adjective, and it is always a question as to
whether the actual facts justify one policy or another.
M r . THOMSON. That is right.
Senator FLANDERS. M a y I introduce here a statement of the Princeton conference which was held on September 16 and 18. Their recommendation was [reading] :
Congress should act i n case of a decline i n activity involving a genuine increase
i n unemployment of more t h a n i y 2 m i l l i o n persons above present levels.
This
w o u l d mean total unemployment of about 5,000,000 according to present methods
of computation.

Senator DOUGLAS. E i g h t and one-third percent ?
Senator FLANDERS. Yes; 8y3 percent.
M r . RUML. M r . Chairman, it might be worth pointing out that, i n
case we gradually moved into a high level of unemployment such as
you talk about, the measures i n this program become extremely power-




281 MONETARY, CREDIT, AND FISCAL POLICIES
f u l all by themselves. W h a t we do not know yet is how powerful they
really are, and for that reason we don't know when the crisis action
should be taken; but notice that unemployment insurance begins to pay
out, tax receipts from withholding stop being paid, other things begin
to happen, that accelerate as the amount of unemployment increases.
F o r that reason, without more experience than we have had today,
it would be a little dangerous to say much more than that at some
point you would take crisis action; when you would have to do that,
we do not know.
M r . T H O M S O N . A S I understand it, these communities that are supposed to be i n distress are supposed to have 12-percent unemployment.
They are using 12 percent as a yardstick now |pr trying to put Government orders into effect there. I suppose there must be a history
or an experience back of that.
B u t in the event of departure i n either direction from this target
position we want more than neutrality. W e want a strong cushioning influence to come into play to restrain the deflationary or inflationary movement. We would get this cushioning influence mainly
from the variations i n tax yields and i n some expenditures under
stable tax rates and expenditure programs. I have already described this factor, which the economists call built-in flexibility. W e
expect it to be a very powerful force, much more powerful than it
could have been before the war, simply because of bigger budgets,
greater use of income taxes, including the pay-as-you-go feature, and
the unemployment-compensation system.
The purpose of the cushioning factor is not merely to moderate
fluctuations, to make little depressions out of big ones, although that
i n itself is highly important. W e expect the cushioning force to help
retain the conditions under which such natural forces for stability as
do exist can operate. That is, we want to prevent the natural forces
that make for stability from being swamped by the cumulative process
of instability.
So long as departure from high employment and price stability are
small, our policy calls for no more than neutralizing plus cushioning
measures. B u t i f the departures are larger we want to do more. W e
want positive compensating action to get us back to the position of
high employment and price stability. Under our policy this compensating action would be of two kinds and would come into play at
two different levels. First, i n case of moderate, even rather small,
recessions or inflations, deliberate monetary and debt policy would
be called for. The precise timing and amounts of action would be a
question for the judgment of the monetary and debt authorities. W e
can only say i n advance that it should be prompt and large.
There is, I know, considerable skepticism about the effectiveness
of monetary policy, especially against depression. This feeling is
partly derived from consideration of conditions i n which a severe
collapse has so impaired the outlook for future sales, incomes, and
profits that no flooding of the economy with money and credit can
stimulate investment and consumption. But it is the purpose of our
whole program to prevent such conditions from developing. That
is, we look to the other parts of the program to prevent conditions from
getting so bad that monetary policy cannot work, and we look to monetary policy to make conditions better.




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MONETARY, CREDIT, AND FISCAL POLICIES

Finally, i f the combination of neutralizing measures, cushioning
measures, and compensating money-debt measures is not sufficient, if
we run into an extreme depression or inflation, we would want to do
more. W e would call for positive compensating action i n the budget
to give a strong impetus back to high employment at stable prices.
W e would mainly rely on cutting tax rates i n severe depression, because it is practical to do much more in a short time i n this way rather
than by increasing expenditures. However, we would not rule out
such deliberate changes of public works or other expenditures as
might be feasible.
That is a more definite answer to the question you put a while ago.
Senator D O U G L A S . Y O U don't rule it out, but you don't say "No' f
and apparently you don't say "Yes."
M r . T H O M S O N . I wouldn't think that. I would think that what
we are saying is that it is a matter of information and of judgment
as to when you do these things, with the emphasis on being able to
do a better job, using present techniques, better understood, and with
a policy.
Senator DOUGLAS. The argument i n favor of increasing expenditures, you see, rather than reducing taxes i n periods of depression is
the contention that, i f you reduce taxes, that w i l l not result i n a corresponding increase in private expenditures, due to hoarding, whereas
the direct expenditure by the Government w i l l translate itself into
such an initial outlay.
M r . T H O M S O N . Y O U can get the effect by tax reduction and make it
more effective quicker than you can by a public-works program.
Senator DOUGLAS. But the argument is that it w i l l not translate
itself into corresponding increases i n either investment or i n expenditure.
Senator FLANDERS. M a y I make an observation, Senator?
Senator DOUGLAS. Surely, Senator Flanders.
Senator FLANDERS. W e had from the early 1930's through the
thirties, what was, for the period, a very high compensatory spending
by the Government, with no satisfactory result i n increasing employment. A s I remember, under that period, we increased our national
debt about $15,000,000,000, which then looked very large indeed. A t
the same time, i n making those expenditures, we went into war preparations with somewhere around 10,000,000 people unemployed.
It seems to me that there is another factor that was missing during
that period, and that was a sympathetic state of mind on the part of
the administration toward private business, toward private enterprise,
toward profits, toward the whole structure of our enterprise system.
That not only can but did negate these expenditures to a very large
measure, and it seems to me that that factor must be kept i n mind by
governmental forces i f the increases i n expenditures are to become
effective. Otherwise, the funds go right into unused liquid capital
and remain stagnant and ineffective i n their results.
M r . RUML. M r . Chairman, I think, to complete the record, that
period was also characterized not only by increases i n expenditures but
also by increases in tax rates, which is, of course, just contrary to the
type of program we are suggesting.
Senator DOUGLAS. That was only in the first 2 years, as I remember,
1933 and 1934, wasn't it?




283 MONETARY, CREDIT, AND FISCAL POLICIES
Senator FLANDERS. The undistributed profits tax came i n at that
time.
M r . RUML. I n 1936 and 1939 there was an upward change i n the
corporate rate, I believe. I think there were more than two changes,
M r . Chairman.
Senator FLANDERS. The undistributed profits tax was one of those
measures which, to my recollection, negated the other results, in that
it put a penalty on a new investment and the plowing back of such
profits as there were into business expansion and revival. So that
while we had that one measure of increased taxation, it was increased
taxation that worked unfavorably and, furthermore, i n putting a
damper on business enterprise, it was one of those features which
tended to reduce the effect of increased governmental expenditures.
Senator D O U G L A S . I am sure that it is not our purpose to relight the
battles of the New Deal, but I would say i n reply to my very esteemed
colleague that i f the tax policy followed by the Roosevelt administration during this period was not precisely perfect, that does not prove
that the expenditure policy was wrong.
Senator FLANDERS. I n looking back to that period, what we are
looking for is to gain from it some experience as to making increased
governmental expenditures during a depression period.
Senator DOUGLAS. That is right. What I am saying is that it is
possible that the tax policy may have dampened down the beneficial
effect of an expenditure policy, and that i f that is true you should lay
the blame at the door of the tax policy rather than at the door of
public works, P W A , and so forth.
Senator F L A N D E R S . I haven't argued against that.
Senator D O U G L A S . I understand. B u t you are a very subtle man.
The implications were there, and I wanted to prevent the stream of
opinion from moving in a direction contrary to what I, at least, believe
to be thev truth.
M r . WOLCOTT. M r . Chairman, perhaps this is as good a place as any
to bring this up. A s to compensatory actions on the part of the Federal Government to take up the slack, and so forth, I think we are all
agreed that they are desirable. I wonder i f M r . Thomson or M r . Ruml
could clear up a point which has been bothering a great many people:
The relative importance of public works as compared to private activities. Somewhere, at some time or other, I read or heard that a Government-created dollar of credit turns over i n velocity with a ratio
of about 2, or 2y2, to 1, and that normally a privately created dollar
of credit turns over at a ratio of about 10 to 1.
M r . RUML. I think your judgment on that would be affected by one
paramount fact, that is, the scale of income of the recipient of the
dollar. Obviously, i f a governmental dollar goes to the poor it w i l l
be spent rapidly by the recipient; if it goes to people who are better
off, some part of it might be saved. I f it goes to a corporation, some
part might go into depreciation; some into withheld profits. I think
you can't draw any general rule except perhaps to say this: That when
there is a lack of confidence in governmental spending it tends to create an attitude of unrest and a feeling of lack of confidence.
I think that some of that has happened in the past because of the
unconventional character of some of the things done.
Senator DOUGLAS. M a y I interject? I would say that lack of confidence in business conditions may impede private expenditure or



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MONETARY, CREDIT, AND FISCAL POLICIES

investment. I t was that lack of confidence i n business conditions
during the middle thirties which the Government strove to offset by an
increase in public expenditures, which would not necessarily be forthcoming from funds i n the possession of private business.
Senator FLANDERS. I could follow with my point of view on this,
but I think it is understood, so it doesn't have to be reiterated.
Senator DOUGLAS. That is right. Then, I understand, the flag of
truce has been put up on both sides.
M r . RUML. M r . Chairman, could I just p i n a bright ribbon on the
flag of truce ?
I n studying the public-works situation specifically, it has seemed
to me—and this is a personal view which the C E D has not adopted—
that the objective i n the public-works program can hardly be more
than to stabilize the over-all construction picture; that i f the publicworks program tried to stabilize the whole economy the consequences
would be to give a terrifically unstable character to that particular
industry, creating public demand for labor and materials that would
preclude private activity.
So that there is a limitation of that character on the usefulness of
public works as such.
M r . WOLCOTT. I n that connection there is a formula, which we have
heard about, that heavy-goods-industries expenditures and construction-industry expenditures are usually about 16 percent of the income
i n all the effort. Could the Government determine—that is, broadly—
what the national income could be by providing always that this base
be maintained ?
Perhaps I am not on the right premise i n taking at face value that
16 percent is the base, but, whatever it is, could the Government,
through Government spending or reductions, and so forth, determine,
within certain reasonable bounds, what our income would be, i f the
Government provided that base, i f private industry was not providi n g it?
M r . R U M L . I think i n aiming at it we would come closer to it than
in the past. The record of 1931-32 is that when private building went
off so also did State and municipal building. They all went off at the
same time due to the general attitude with respect to building.
Senator DOUGLAS. A great change occurred i n 1933, 1934, and 1935.
M r . RUML. W e made an enormous amount of progress, but d i d not
quite hit the State and municipal level.
Senators FLANDERS. M r . Chairman, I wonder i f I might state the
terms of this truce ?
Senator DOUGLAS. Yes, Senator Flanders.
Senator FLANDERS. A r e not we all interested in having the increase
i n Government expenditures i n slow times as effective as possible in
generating a general increase i n business ?
Senator DOUGLAS. Yes; certainly, that is correct.
M r . W O L C O T T . I S there substance to the contention that we can,
through Government expenditures in the heavy goods and construction lines provide, within reasonable bounds, for a level of national
income?
M r . R U M L . I think not. I think it can only be a contributing factor.
Certainly we can keep it from going i n reverse.
M r . WOLCOTT. I t doesn't necessarily follow.




285 MONETARY, CREDIT, AND FISCAL POLICIES
M r . R U M L . I think the amount of preliminary planning, the amount
of work that w i l l have to be ready, and all the rest of it, would involve
such fantastic engineering operations that they might be out of date
when the time came to exercise it; but a great deal more can be done
than ever has been done, I think, along those lines.
Senator DOUGLAS. Then your preference for using a reduction i n
taxes at the time of a severe depression rather than an increase i n
expenditures is primarily based on the fact that you think public
works would be slow to start; whereas the effect of a reduction i n taxes
would be immediate ?
M r . RUML. Primarily that. There is one collateral thought, however, that i f the amount that would have to be spread is very large
indeed, it probably is more consistent with our way of life to let individual consumers decide what they want rather than to have a central
•agency decide.
Senator D O U G L A S . S O far as the first objection is concerned, i f engineering plans are drawn i n detail i n advance, would that not reduce
the time required ?
M r . RUML. Yes; it would very much. B u t you would have to be
very careful to make sure i f the plans were drawn 4 years ago that they
are still up to date and there have been no technological changes.
Senator DOUGLAS. Congress just appropriated $100,000,000 for the
detailed planning of a large series of works.
M r . THOMSON. I f I may make a couple of observations: (1) The
C E D has been in favor of the kind of advanced planning you speak of;
(2) I do not know, M r . Wolcott, the exact measure of the impact, but I
do recall some studies along this line. I f you conceive of public
works being augmented, you have to deal with some 250,000 governmental units, and it has seemed to me that the effect on all these
governmental units is going to be influenced by the level of business
thinking, and it is not as easy as you might think to get either business
or Government or smaller governmental units to go ahead and say that
this is a time of low prices, this is the time we need employment, and
we are going ahead.
There is one more point to be made here. I was trying to find the
exact statement used i n the 1946 Employment Act, but as I recall it, it
says we are trying to promote economic stability within a framework
of a free enterprise economy.
I t seems to me the act says that i f you have a choice between Government expenditure and incentives to make the free enterprise economy
operate, that you give the preference to things that w i l l create incentive. I f there are no other questions I w i l l continue my statement.
A P P R A I S A L OF T H E C O M B I N E D P R O G R A M

The program I have outlined does not guarantee perfect stability.
W e do not think perfect stability can be guaranteed. A n d the small
ups and downs, i f kept small, serve a useful purpose. The number
one economic problem of the United States is great fluctuations, not
small fluctuations. W e believe that this program, i f accompanied by
reasonable policy i n other fields, would prevent great fluctuations.
Perhaps it is more relevant to say that we have worked hard, and I
believe objectively, on this problem and that this is the best we know
99076—50

19




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MONETARY, CREDIT, AND FISCAL POLICIES

at present. W i t h more study and experience we, or the Nation, w i l l
certainly learn more.
One question that is sometimes asked about our policy is why we
propose to wait until extreme conditions arrive before we take
affirmative compensatory fiscal action. I hope I have made it perfectly clear that our policy proposes strong action to avoid, moderate,
and combat depressions or inflations before they reach extreme dimensions. It is the purpose of the program to prevent severe depression
or inflation. The provision for extraordinary budget action i n extreme
conditions is not the heart of our program. It is an exception, and
if the rest of the program operates as we think it can, the exception
would be rarely invoked. W e provided the exception, not because we
thought the rest of the program would fail, but because we could not
guarantee that it would succeed.
Nevertheless, it is pertinent to ask whether what we call extraordinary budget measures should not be made the ordinary procedure.
F o r example, instead of waiting for severe depression before cutting
tax rates, shouldn't we cut tax rates when depression is forecast or at
least in the case of an actual moderate recession? This is a question
essentially involving judgments about two factors:
(a) The possibility of forecasting economic fluctuations reliably,
and
( i ) The possibility of quick action to change tax rates (or expenditure programs).
I don't think it is necessary to say more about forecasting than that
we share what is now almost the universal opinion that forecasts of
economic fluctuations are not sufficiently reliable to serve as a basis for
public policy.
Senator FLANDERS. M a y I at this point again read a paragraph
from the report of that group of economists which met at Princeton? I t indicates a little difference i n optimism as to the effect of
the automatic flexibility, although you are not confining yourself
to automatic flexibility at all. So perhaps this paragraph should be
read i n view of the fact that you are not relying completely on automatic flexibility. This paragraph reads :
A u t o m a t i c flexibility can slow d o w n a n d perhaps h a l t a decline of a c t i v i t y or
a rise of prices. I t can give time for restorative forces to come into play, but i t
w i l l not by itself p u l l activity back to a f u l l employment level or restore prices
to a p r e i n f l a t i o n level.

A s I followed your testimony, it would seem as though you were
not too far off from that, although you do, after all, limit the possibilities of the automatic flexibility and call for definite action particularly in the monetary and credit and debt control fields.
M r . THOMSON. That is correct, Senator.
The more reasonable proposition is that we should take fiscal steps,,
say cut tax rates, in response to actual but moderate recession. T h i s
does not escape the forecasting problem unless the response takes effect
much more quickly than the economic situation is likely to reverse itself for other reasons.
I f we call for a cut of tax rates in a moderate recession and the
economy is on its way to inflation by the time the tax cut takes effect,
the result of the fiscal action is unstabilizing rather than stabilizing.
The smaller the fluctuations are to which stabilization policy is to
respond, the quicker-acting must be the response i f it is to do any good.



287 MONETARY, CREDIT, AND FISCAL POLICIES
Built-in flexibility can respond to very small fluctuation because its
response is instantaneous. Monetary and debt policy can respond to
moderate fluctuations because it can respond quite quickly, although
not instantaneously.
B u t so far as we can see, the deliberate response of fiscal policy via
changing tax rates or expenditure programs w i l l be rather slow and
should be confined to major fluctuations. However, it may not be impossible to devise ways to speed up the process of making fiscal decisions and putting them into effect; in that case it might be desirable to
reconsider this conclusion.
I t is possible that in the future the problem of maintaining high
employment without inflation i n a free economy may arise i n a form
rather different than the form it has taken i n the past. I n the past
the main problem has been great instability i n the total demand for
output. It w i l l certainly be essential to avoid such instability i n the
future. B u t it is conceivable that this, while it would have been sufficient i n the past, w i l l not be sufficient i n the future.
Suppose that prices and wage rates are, or come to be, predominantly
determined not by the market process but by the administrative decisions of business organizations, trade-unions, and government. A n d
suppose that these decisions are made i n a way that lead to continuous
increase of prices and to increase of wage rates more rapidly than
productivity rises.
It would then not be possible to maintain high employment without
inflation, as it is uncertain whether high employment could be maintained even with inflation. W e do not know whether this kind of
problem exists now, or whether it w i l l exist in the future. However,
the possibility does suggest a reservation to the claims that should be
made for any program of fiscal, monetary and debt policy.
T H E CASH-CONSOLIDATED

BUDGET

A s I pointed out earlier, C E D recommends that over-all budget
policy should be decided i n terms of the cash-consolidated budget.
This committee is already familiar with the significance of the cashconsolidated budget. The President has regularly included in his
annual economic reports, which this committee studies, a statement
of Federal cash receipts from and payments to the public.
This statement is what we call the cash-consolidated budget. The
Economic Report uses this budget, rather than the ordinary budget,
because the cash-consolidated budget presents a better picture of the
over-all effects of Federal finance upon the economy. I t is therefore
more useful in developing over-all economic policy.
B u t of course it is not solely the President and the Joint Committee
on the Economic Report who are concerned with over-all economic
policy. T h e President in his budget message, and your colleagues i n
the revenue and appropriation committees, are making over-all economic policy, as well as making policy about a lot of particular programs.
I t is our suggestion that when total budget policy is considered—
questions such as whether or not the budget is balanced, how big the
surplus should be, what should be done to achieve the desired surplus—
we should look at the cash-consolidated budget.




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MONETARY, CREDIT, AND FISCAL POLICIES

W e are not suggesting that the present administrative budget should
be abolished. W e think that most of the business of the Government
would continue to be done i n terms of an administrative budget. B u t
for certain important decisions the cash-consolidated budget would
be used.
There is nothing wrong with having two budgets. W h a t is wrong
is not to have all the relevant information for making policy about
a $40,000,000,000 budget—$44,000,000,000 now—even i f that involves
two budgets. The difference between the two budgets is not minor or
technical. I n fiscal 1949 there was a surplus of $1,000,000,000 i n the
cash-consolidated budget and a deficit of $1,800,000,000 in the administrative budget.
I n our opinion one of the simplest and most useful things this subcommittee can do is to explain the facts of the cash-consolidated budget
to its colleagues i n the Congress.
SOME U N S E T T L E D

QUESTIONS

I would leave an inadequate impression of the state of our current thinking i f I did not refer to one of the problems that now
troubles us and that we plan to consider during the next year. T h i s
problem arises from the fact that the present tax system i n the United
States is extremely heavy as well as badly constructed.
Continuation of the existing tax system would be a serious menace
to the strength of the American economy and to the welfare of a l l
the American people. I shall not elaborate upon this fact, which we
have discussed i n several policy statements, but merely raise some
questions about its implications for fiscal policy.
W h i l e the ideas of proper fiscal policy now held i n the United States
differ i n many respects, most of them, including ours, would agree
that any substantial increase i n Federal expenditures would call for
higher taxes and that substantially lower taxes would have to wait for
reduction of expenditures.
T h i s leaves one route to tax reduction, namely, expenditure reduction. W e believe that some steps along this road can be taken now.
B u t we must recognize that substantial progress along this road, i f
achieved at all, may take a long time.
There are possibilities of reducing the adverse effects of the present
tax system without reducing total revenues; these possibilities should
be fully exploited. But there are obvious limitations, economic and
political, to these possibilities that would not apply i f revenue reduction could be permitted.
T h i s raises the question whether we can devise a fiscal policy that
w i l l permit more rapid total tax reduction. A r e we relying too heavily upon taxation in our present economic policies? Can we discover
ways other than taxation to perform some part of the functions we now
count upon high taxes to perform ?
One important aspect of these questions is how far we may consider our present level of Federal expenditures as an abnormal and
temporary reflection of the transition from war to peace, possibly justif y i n g some temporary departure from normal fiscal policy.
W e do not know the answers to these questions, and I hope I have
succeeded i n raising them in a way that does not imply an answer.
Senator F L A N D E R S . I think you have.



289 MONETARY, CREDIT, AND FISCAL POLICIES
M r . WOLCOTT. M r . Chairman, may I clear this up ?
A s I understand from your statement, you are advocating that we
put less stress upon our tax structure as a stabilizing influence, that
taxes should be raised for purposes of carrying on the functions, extraordinary as well as ordinary, of the Federal Government, but
should not be used purely for the sake of siphoning off purchasing
power, et cetera, as we have so frequently done, excepting where that
might be necessary, of course, to build up reserves against lower tax
income in periods of depression.
M r . THOMSON. W e suggest that question as one that very properly
has to be considered, and it is a very proper question for the Monetary
Commission, and we say we are going to study it next year. I t is a
very proper question.
Senator DOUGLAS. I am a little puzzled by the meaning of the two
following sentences i n your statement :
A r e we relying too heavily upon taxation i n our present economic policies?
C a n we discover ways other than taxation to perform some part of the functions we nowT count upon high taxes to perform ?

I confess that leaves me completely mystified.
M r . THOMSON. I think I w i l l ask M r . R u m l to comment on this.
M r . RUML. D u r i n g the war we knew that the sale of savings bonds
to the public was an anti-inflationary measure, and as soon as the
war ended we suddenly seemed to forget that the sale of savings bonds
to the public is an alternative to taxation insofar as the immediate
consequences of inflation are concerned.
W e knew that some day the savings bonds would have to be paid
out of taxation, but it would be over a period of time. Therefore,
we operated our war program and financed it partly by taxes, partly
by deflationary financing, and partly by inflationary financing.
Senator D O U G L A S . I n the form of bank-created deposits, which were
used to take title to Government bonds ? Is not that the inflationary
type?
M r . RUML. That is right. Now, then—and here I want to make
it perfectly clear that I am speaking only for myself and not for
the Committee on Economic Development, and I w i l l be quite concrete with the risk that concreteness brings—in my opinion it is worth
thinking about these refunds to the veterans of life-insurance premiums as a nonrecurring expense and as part of the consequences of
the war. I t would seem to me that the inflationary consequences of
that disbursement, which they certainly are, might be properly offset
by similar net sales of savings bonds to the public rather than to
cover them by taxation. That would be not a departure from our
policy, but would be consistent with the second exception, namely,
that our tax structure should not be distorted by what are obviously
transitional and nonrecurring expenditures; and even though these
are inflationary, there are other ways of countering them than by
taxation.
Senator D O U G L A S . Y O U are not proposing that you use these bonds
to have a permanent increase i n the public debt, are you ?
M r . RUML. The bonds, when they mature, w i l l either be refunded
or paid off. The point is that the people living and breathing i n 194950 w i l l not by themselves take up this expenditure. I t w i l l be like
other war expenditures, spread over the period of the life of the bonds,




290

MONETARY, CREDIT, AND FISCAL POLICIES

or their refunding. I t is, i n other words, a national emergency not
yet liquidated and not an ordinary expense of the National
Government.
Senator F L A N D E R S . T O put that concretely—you spoke of being concrete—does that justify that part of the deficit for the coming year?
M r . EUML. M y personal answer is that it does i f it is financed by
the sale of savings bonds to the public net, because that would be
deflationary debt management and would have the equivalent effect of
taxation, except for one important exception—namely, that the payment would be over the period of the life of the bonds and their refunding rather than out of the current year's income.
Senator DOUGLAS. I suppose there is one exception you would want
to make to that—although perhaps you would not. The amount
devoted to the purchase of these E bonds, the net addition to the total
amount of savings, would this not be a diversion of at least a portion
of savings that would otherwise be made for private purposes and
placed i n the bonds ?
M r . EUML. I t almost certainly would be a diversion in part. I n
other words, you would have to allow some elbow room in the picture
to get your complete effect. But, on the other hand, so also w i l l there
be some savings made out of these life insurance premiums, so that
it is not all net expenditure either. A l l you can do is come to some
practical judgment as to the consequence.
M a y I mention one other concrete example that occurs to me where
this alternative principle might be used? That is in the question of
the expenditures for Fanny M a y ( F N M A ) of taking over mortgages
that presumably w i l l be paid off someday. I t seems to me quite discussable as to whether those should not be refunded by deflationary
debt operations rather than be covered out of this year's taxes. Those
are the types of considerations that give us a great deal of pause,
which really make us have this humility that is referred to, because
the consequences of these policy decisions are so vast i n terms of what
might happen to the tax structure.
M r . WOLCOTT. W o u l d you suggest, M r . Euml, that the insurance
premiums be refunded i n the form of interest-bearing nonnegotiable
certificates, perhaps ?
M r . EUML. Yes.

M r . WOLCOTT. O n the chance that most of them would have been
kept as savings and not immediately liquidated ?
M r . EUML. O n the basis of our past experience, yes.
M r . WOLCOTT. Such as the veterans' bonus certificates, I believe.
M r . EUML. But I want to say again that these are strictly personal
views, and I am very grateful to M r . Thomson for having permitted
me to make that statement, because I feel much happier about getting
my views on the record.
M r . THOMSON. I want to emphasize what M r . E u m l said, and that
is that the illustration of the way of handling it does represent one of
the points of view that is discussed and is a proper subject for the
Monetary Commission. M y only personal views are that, one, we have
not studied the question; two, we are concerned about the present situation of deficit financing at a time of high level employment; and,
three, I would like to explore more carefully with more information
than I have now as to the volume of these so-called nonrecurring ex-




291 MONETARY, CREDIT, AND FISCAL POLICIES
penditures that seem to be more or less current, before I make a decision ; but it is one of the points that is raised and is a proper subject,
in our opinion, for consideration by the Commission.
Senator F L A N D E R S . I would like to raise a question or two about
F a n n y M a y ( F N M A ) . Now, the expenditures for purchasing these
mortgages by the R F C would appear, would they not, in the cash
budget ?
Mr. RUML.

Yes.

Senator F L A N D E R S . S O that, appearing in that cash budget, they have
the economic effects which you assign to the situation so far as the
cash budget is concerned.
There is another type of double budget which is under consideration. This may perhaps lead to a triple budget. T h a t is the investment budget. I t seems to me that, i f there is any case i n which the
investment budget is justified, "Fanny M a y " would be the case,
because the investment is one which w i l l result in the profit to
the Government; the investment is justified from a strictly business
basis. The degree of risk i n it is small on the basis of past experience
or any future expected experience.
So that, i f we begin to talk about an investment budget, that is one
of the items which I think, on a strictly business basis, might well
appear i n it. I do not want to raise the question of the investment
budget and the expenditure budget at this time, but I do feel that it is
perhaps the best case you can add to this as an example of a valid
governmental investment, but it does have the economic effects that
you attribute to the cash budget.
NATIONAL

COMMISSION

M r . T H O M S O N . There are, of course, a great many other questions
that should be raised. I have, for example, not talked at. all about
organizational matters, such as the possibility of f ormalizing the cooperation between the Federal Reserve and the Treasury. I have not
raised any of the questions that arise from the fact that the United
States is part of a world economy and not a closed economy. We are
talking about an area in which the questions still outnumber the
answers.
This brings me to the recommendation on which I shall close. Last
year our committee recommended the establishment of a temporary
commission on national monetary and financial policy to make a comprehensive study of the possibilities of improving the structure and
policies of monetary, budgetary, and related institutions.
Similar
suggestions were made by other groups.
W e were very much encouraged by the establishment of this subcommittee, by the quality of its membership, and by the workmanlike
way in which it has approached its task. W e think the materials
assembled by this subcommittee w i l l be invaluable i n pointing out
the main questions and laying the basis for the comprehensive study
we recommended.
Now that such a good start has been made, it would be folly not
to follow it up. H o w long a thorough study would take, I don't
know. Probably 2 or 3 years would not be an overestimate. I n any
case, as much time as is necessary should be allowed. W e think the
membership of the commission should extend outside of Congress.



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MONETARY, CREDIT, AND FISCAL POLICIES

These are people i n the administration who have much to contribute,
not as witnesses merely but as active collaborators. Also, outside the
Government there are people whose wisdom and experience should be
brought directly to bear on these problems. A f t e r all, my good friend
R a l p h Flanders could have made a major contribution to this study
3 years ago, when he was not yet a Senator. I might say, i f you
let R a l p h retire, we w i l l put him back on the committee. I don't think
we can find another R a l p h Flanders. But there may be three or four
private citizens who together make nearly his equivalent. F r o m a
broader commission I think you would get not only somewhat better
answers but also more attention paid to the answers, which is very
important.
I think you for your courtesy i n hearing me at such length on
this difficult subject.
Senator FLANDERS. M r . Chairman, may I rise to a point of personal
privilege? I may say that I have looked upon my connection with
the C E D as a very valuable course of adult education, and I think
that is about all that I can claim for it, and I do not think I am
educated yet completely.
This process that the C E D goes through is rather complicated and
time consuming, and is, I think, the greatest project i n adult education among both businessmen and economists that has been undertaken. A l l the credit I want to claim is that of having pursued that
process of adult education assiduously over a period of years, but
I do not think a diploma is yet ready for anybody.
M r . T H O M S O N . I would like, i f it is satisfactory, to give M r . R u m l
a chance to make any comments. H e has been listening and may have
comments.
M r . RUML. I am afraid I have spoken a good deal. I would like
to just briefly touch some of the high points i n the report you have
already read.
I would like to emphasize the fact that we distinguished between
three different budget policies and accepted one and rejected the
others.
Senator DOUGLAS. The others?
Mr. RUML.

Yes.

Senator D O U G L A S . I think you took number three, but you also took
a portion of number two.
M r . RUML. I would not be so stubborn as to deny that i n periods
of depression the stabilized budget policy which we advocate has
i n it strong compensatory mechanisms, but there is a necessity for a
distinction because the extreme position that was taken i n the thirties
as to the possibility of using Federal expenditures and perhaps taxes
to even out the economy is quite a different measure from introducing
built-in stabilizing influences that do not require either legislative or
administrative discretion.
Particularly we reject the policy that requires an annual balancing
of the budget, because we know that, i f business falls off, the only
way to balance the budget is to raise taxes, and the only thing you are
going to do then is make it f a l l off more, and then you w i l l have to
raise taxes some more, and then in the end you w i l l have to abandon
the policy, and you might as well abandon it i n the first place. I t
w i l l save time and headaches.




293 MONETARY, CREDIT, AND FISCAL POLICIES
I call attention to the exceptions again of the stabilizing budget
policy. They are not exceptions; they are parts of the policy, actions
for exceptional circumstances.
Senator DOUGLAS. Compensatory modifications of the policy.
M r . RUML. One is and one is not. Yes; the first exception is how
to behave under conditions of extreme deflation or inflation. T h e
other is how to handle the extremely difficult problem of nonrecurring
expenditures and also how to handle this new question that is now becoming so important, the question of investments that have an inflationary consequence. These things must be part of any over-all
program. Let me leave that for a minute and refer to the administrative measures that are necessary to make any policy work,
whatever policy you adopt.
First, on the side of the executive branch, my good friend Tom
McCabe, in testifying before this committee, said that good friends
would always be able to work together, and I am sure that is true.
O n the other hand, I think it is a good thing for them to have minutes
of their meetings so that their successors can find what the causes for
their actions were.
I therefore believe that some modification with recognition of contemporary events should be made of the short-lived Fiscal and Monetary Advisory Board that was created in 1938 and lasted, I think, for
4 weeks into 1939. The record of that Board is quite extraordinary i n
showing both the difficulties of getting cooperation among independent
agencies and also the extraordinary power they have when they
cooperate.
I believe it would be worth while to note that, and I spoke to T o m
McCabe about it, and he said, " B y all means take exception to my
friendship plan, i f you please," and so I do. I think something
more formal than that is necessary i n the executive branch.
I n 1938 we brought together—I say "we" because I was working
with M r . Delano at that time i n the National Resources Planning
Board—the Secretary of the Treasury, the Director of the Budget,
the Chairman of the Federal Reserve Board, and the Chairman of
the National Resources Planning Board. The Resources Planning
Board is now extinct; there are new agencies that have been set up.
W e note the actions of the National Advisory Committee and find it
to be an extroardinary example of interagency cooperation.
Senator D O U G L A S . D O you favor the Hoover proposal for a National
Commission on Monetary Policy composed of the chief officers of the
Government to deal with such matters ?
M r . R U M L . I think it would have to be broader than that, M r . Chairman. I certainly would refer questions of debt management i n principle and also questions of taxes i n principle for recommendation.
Senator D O U G L A S . T O the Council as a whole and not to the Secretary of the Treasury ?
M r . RUML. T h a t would be the conception, not that they would have
power of decision, but they would have power of discussion and coordination and reference to the President i n case of a serious dispute.
I do not know what should be recommended on that. That probably
would be another study.
The other administrative measure would be that something needs
to be done on the legislative side to see that there is brought together




294

MONETARY, CREDIT, AND FISCAL POLICIES

the over-all problem of expenditure and taxation and the consequences
of actions in either area. The Congress has had before it recommendations along those lines.
I have nothing to add. I do not even know that I can do more than
simply say that, in moving into a world where you have this vast debt
and vast expenditure and vast taxation, with the consequences of policy
i n taxation on the lives of people, I really think that something more
is needed to tie the activities of the legislative branch more i n harmonj
each with the other, the executive branch more i n harmony, and the
channel of communication between the two.
I think that is all I have to say, M r . Chairman.
Senator FLANDERS. M r . Chairman, I had passed over my shoulder
by some person unknown to me this little note, which I would like
to read. I think it is in the interest of peace and harmony.
Is it correct to say that, i f you remove action on the basis of forecasts from a compensatory budget policy and act only after an economic trend becomes clear, as recommended by the 15 university
economists at Princeton, you approach the C E D ' s proposal of a
stabilized budget policy ?
M r . EUML. Yes; with one addition, which I am sure the author
would have put in i f he had recalled it, and that is that the program
within the area of small fluctuations should have as an essential part
some built-in flexibility. T h a t would have to be part. T h a t would be
the essence. There must be some flexibility in the program that does
not require administrative or legislative action.
M r . T H O M S O N . I would like to indicate that what M r . E u m l said
about better procedure on the part of Congress is covered in our statement, T a x and Expenditure Policy for 1949, on page IB. T h a t w i l l
give you a reference to it.
Senator FLANDERS. There was one point raised by the Princeton
people, and that was the possibility of formula
flexibility.
That
apparently has not been i n the recommendations of the C E D .
M r . T H O M S O N . I think, Senator, that would be covered in our general
statement that you cannot consider this as an automatic device, that it
is something which has to be used with judgment and with all the facts
before you. I take it that would provide for the flexibility they had i n
mind.
M r . EUML. I t is a little more serious than that, and we shall undoubtedly have to consider it, but for myself I have always felt it
rather impractical that Congress or the Executive would delegate to
some operating board or committee the type of powers that would be
necessary for built-in flexibility, because, as this report indicates, these
powers involve changing the withholding rate on the income tax.
I t seems to me that hardly any formula could be set up that would
cause you to refer that to an executive agency or even a board like the
Federal Eeserve Board. I t w i l l have to be studied. T o say it is politically impractical really is no answer.
M r . W O L C O T T . Y O U have not forgotten my question on excise taxes,
have you ?
M r . EUML. Again, I am not speaking for the C E D . I am speaking
for myself only.
I think that, to discuss excise taxes, it is absolutely necessary to
define what we are talking about, because there are three areas of




295 MONETARY, CREDIT, AND FISCAL POLICIES
excise taxes that must be distinguished: No. 1 is the excise taxes as a
whole, including gasoline, alcohol, and tobacco. I think that the
situation from a public-revenue point of view on gasoline, tobacco, and
alcohol is sufficiently distinct so that those taxes can be removed from
consideration from the rest.
Senator DOUGLAS. W o u l d you remove the taxes or merely separate
them ?
M r . RUML. They should be considered separately. I f you take all
the rest, there is another distinction, and that is the excises we have
used traditionally prior to the war as a means of getting revenue, and
the excises and rates that were put on i n 1941 and 1943.
Now, what I want to do next is to remove from consideration
everything except the excises that were put on i n 1941 and 1943 for
wartime purposes, excluding gasoline, alcohol, and tobacco.
Senator FLANDERS. Did. you give us an example of the second group
you wish to exclude ?
M r . RUML. The second group that I wish to exclude—there was an
excise tax, I believe, on automobiles prior to 1941. There was a tax
on oleomargarine prior to 1941.
Senator F L A N D E R S . W i l l you please avoid discussing that?
M r . RUML. That is why I hesitated.
Senator F L A N D E R S . G O directly to your third group now.
M r . RUML. These taxes I am talking about have one thing i n common. They were put on during the war for punitive purposes against
certain particular types of consumption and types of production.
They were put on there to save materials, to save labor, or because it
was presumed that a good moral influence on the war would be had,
such as the tax on admissions to cabarets, et cetera.
Now, then, it seems to me that this bundle of taxes should be repealed as being contrary to a nondiscriminatory tax position for
peacetime.
It also seems to me that, after they are repealed, the revenue consequences of the repeal should be studied to see i f anything needs to
be done, because I have a feeling, having observed what has happened
to the fur industry i n New Y o r k and the jewelry industry i n New
England and the leather goods industry, et cetera, that the net loss of
revenue will be much less than what would appear to be the gross loss.
I n other words, there w i l l be taxes on manufacturers' profits, taxes
on retail profits, taxes on withholding taxes, on employees' income, a
lessening on out-payments on unemployment insurance.
I f I may go back, I think by taking these punitive taxes as a group
they should be repealed as being contrary to a peacetime policy of
taxation, and that after that is done the revenue effects should be appraised to see what, i f anything, needs to be done to make up for loss
of net revenue.
M r . W O L C O T T . H O W would you fit that into our discussions with respect to a compensatory budget policy or stabilizing budget policy?
W o u l d you give consideration i n these budgets to the renewal of them
under certain circumstances?
M r . R U M L . I would consider this, sir, just as the community-property reform was considered. That is, the correction of an inequity
which has prior consideration to revenue consideration. This thing
should be done, because the employees of these industries and their




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MONETARY, CREDIT, AND FISCAL POLICIES

families have done nothing wrong to justify the punitive action taken
against them.
H a v i n g done that and having come to a figure that represents the
net loss, I would then say: "Is this so large that we cannot absorb it?
Must we find revenue from some other source ? W h a t should we then
do about i t ? "
M r . W O L C O T T . A S I understand it, i n respect to a consideration of
a budget, whether under the compensatory system or stabilizing
system, you eliminate these punitive taxes altogether?
M r . RUML. Or even under the annual balanced budget. I think
under any policy they have no place in a peacetime scheme of taxation.
M r . WOLCOTT. T h a n k you.

M r . THOMSON. I might add I w^as glad to have M r . R u m l make
that comment, because he has studied the subject so definitely, and
he is expressing his viewpoint.
A s chairman of the committee, the committee has i n mind that they
are going to bring out a tax-policy statement i n January, and that
one of the subjects we w i l l deal with is this matter of excise-tax
removal i n part or in total, and we have said so far that our tax-policy
statement for January w i l l be considered i n terms of the C E D ' s
previous policy statements.
So I am not saying at this time whether the committee w i l l agree
with M r . R u m l or not, but we are working on it and we w i l l have a
statement i n January that w i l l deal with that subject.
M r . WOLCOTT. I am glad to have these statements, and I w i l l have
to explain that they are somewhat personal and perhaps a little selfish
on my part. However, I do not think my mail on the subject is any
different from that which other Members of the Congress are receiving. I think perhaps I have more information now upon which to
base an answer to the complaints against the baby-oil tax and the
cosmetics tax, which come v/ithin that category.
M r . R U M L . I did make it clear that I was giving my personal
views, did I not?
M r . THOMSON.

Yes; you did.

Senator DOUGLAS. I f I may question you about your personal views
for a minute, suppose it were to be found that by the reduction of these
excise taxes you caused a very severe reduction i n revenues and contributed to the governmental deficit in a period of high employment,
and therefore added to inflationary pressures. Wouldn't you regret,
as a citizen of the country, that you had offered this advice to the
Congress and led them down a path which later turned out to have
bad results?
Mr. RUML.

NO.

Senator DOUGLAS. A n d wouldn't we regret having been led down
that path ? I would.
Senator FLANDERS. I would not. I would rather get the taxes some
other way than that way.
M r . RUML. M r . Chairman, I think that is the whole point of this
business. I f you have an unjust and inequitable tax, the thing to do
is get r i d of the tax and then decide what you are going to do to have
an equitable system of revenue rather than perpetuate the wartime
legacy that is unjust to towns, communities, and families, and has
nothing to do with the current needs.




297 MONETARY, CREDIT, AND FISCAL POLICIES
Today most of our unemployment, or a great part of it, is in these
affected industries—it was last summer. There are no public works
I know of that can give employment to fur workers and jewelry
workers and leather workers and cosmeticians.
Senator FLANDERS. They would not make good cement mixers.
Senator DOUGLAS. M a y I raise a question? Y o u mentioned the
liquor industry. Y o u say you would not favor reducing the taxes
on liquor; but, as I remember it, the taxes on liquor were increased
during the war. I was not here, but I believe they were trebled. A n d
i f you say that the imposition of these fresh taxes on the items that
you mentioned w^as a war measure, which should be discontinued
as soon as possible, would not the same line of reasoning lead you to a
reduction i n the very high liquor taxes ? A n d it may be argued that
distillery workers do not adapt themselves very readily to other
occupations.
Senator FLANDERS. A r e they not as well employed as they were
before the war ?
Senator D O U G L A S . I am asking M r . R u m l whether he is going
to remove the wartime increases on liquor as well as the fresher portion of the imposition of war taxes on leather goods, jewelry, and
furs.
M r . RUML. M r . Chairman, I think I was quite precise i n my original statement, not that I would not reduce the taxes; I would not
consider them in this package, because of the
Senator DOUGLAS. They are to have secondary treatment ?
M r . RUML. That is right, because of many secondary considerations of a moral, ethical, and perverse character.
Senator D O U G L A S . I think you have lingering traces of prohibition
inside your moral consciousness.
M r . WOLCOTT. I f M r . R u m l has the figures, it might be helpful for
the record i f we could have the amount of revenue which is being
received from those three different categories.
M r . R U M L . I have three estimates which differ so widely that I
trust none of'them; and, i f I might be excused, I can give you their
orders of magnitude. I t is some place between a gross of about
$1,700,000,000 and $2,500,000,000. W h a t is included, what is excluded,
what estimates are made on the volume to occur i n 1950, are all bases for
variation, and all I can say is it is within that gross. What the net
is, I do not really feel that I ought to even try to make an estimate.
W e are going to try—not the C E D , but another group—to make
a study to see i f we can present to the Congress i n January or February an honest estimate on this extraordinarily difficult question as to
what the net loss might be.
M r . WOLCOTT. Can we assume the major part of that revenue comes
from the first group of liquor, tobacco, and gasoline?
M r . RUML. Excluding that altogether. This is only the package
of the wartime rates and taxes excluding tobacco, gasoline, and liquor.
M r . W O L C O T T . They vary between $1,700,000,000 and $ 2 , 5 0 0 , 0 0 0 , 0 0 0 ?
M r . RUML. That is gross. W h a t the net is, I do not know, but less
than that.
Senator D O U G L A S . Y O U may be able to throw away $ 1 , 7 5 0 , 0 0 0 , 0 0 0
or $ 2 , 5 0 0 , 0 0 0 , 0 0 0 i n this free-hearted gesture; but, much as I would
like to be a public benefactor to these industries, I find a certain reluc-




298

MONETARY,

CREDIT,

AND

FISCAL

POLICIES

tance i n abandoning these sources of revenue until we know what
other sources of revenue we could get.
I f our aim is a balanced budget—and some of us are trying as best
we can to get it balanced—to throw it out of kilter by a reduction of
$1,700,000,000 or $2,500,000,000
M r . WOLCOTT. I t would be offset somewhat by an increase in employment i n those fields and an increase i n production.
M r . RUML. I f I may say so, M r . Chairman, I hope you w i l l not decide
an issue until after the estimates are in hand, and then you can seQ
whether the estimates are good and what alternatives there are.
There is an inequity here hanging over from wartime, which ought
to be gotten r i d of i f we possibly can.
Senator D O U G L A S . I would agree, but I think we ought to count the
cost before we take final action.
M r . RUML. That is right.
M r . THOMSON. I said the C E D Committee is studying the question, and our idea is to make recommendations on that and other questions i n line with our budgetary policies.
Senator D O U G L A S . W e want to thank you for this very valuable
presentation, which I think we have all enjoyed.
W e w i l l shortly be working on the budget for fiscal 1951. W h a t
concrete adjustments would you recommend i n the light of this general
policy which you have outlined ?
M r . THOMSON. That again I would have to defer and tell you we
are working harder than we have usually worked to get a statement out
i n January dealing specifically with the 1950 situation, but we are
not prepared to make our statement now.
Senator DOUGLAS. W o u l d you like to make a personal statement ?
M r . T H O M S O N . I think not. I have a strong feeling that the chairman of the committee should not anticipate what a very good and
capable committee is going to decide.
Senator DOUGLAS. W h a t about the vice chairman?
M r . RUML. I n spite of the fact that I have been free i n expressing
my opinion on general matters, when it comes to something specific
about budgets for fiscal 1951, and now it is almost the 1st of December and we w i l l have that recommendation the first part of January, I think I am bound by courtesy to the committee to reserve what
I have to say until the committee reports.
Senator D O U G L A S . W e thank you very much for your appearance
before the subcommittee and for your interesting contribution.
M r . T H O M S O N . W e thank you very much and hope we made some
contribution.
(Whereupon a recess was had at 12:10 p. m., to reconvene at 2 p. m.)
A F T E R N O O N SESSION

Senator DOUGLAS. Ladies and gentlemen, I wonder i f it would not
be better i f we came to order.
W e had invited M r . E m i l Rieve, who is president of the Textile
Workers U n i o n of America, and vice president of the C I O , and administrative chairman of the C I O f u l l employment committee, to testify
this afternoon.
M r . Rieve is unable to be present, but he has sent a statement which
w i l l be read by two of his representatives, M r . Stanley H . Ruttenberg



299 M O N E T A R Y ,

CREDIT, A N D FISCAL

POLICIES

and M r . Everett M . Kassalow, and we would like to have the statement
read. I assume that you w i l l be ready to entertain questions at appropriate points during the reading of the memorandum.
M r . Kassalow, w i l l you read the statement %
STATEMENTS OF E V E R E T T M. KASSALOW, EXECUTIVE SECRETARY,
CIO F U L L EMPLOYMENT COMMITTEE, CIO; AND STANLEY H.
RUTTENBERGr, DIRECTOR OF EDUCATION AND RESEARCH, CIO
M r . K A S S A L O W . I should like to say that M r . Rieve was sorry he could
not be here today. H e has followed very closely the workings of the
Employment A c t and the activities of the joint committee, but he was
detained in New Y o r k this afternoon. [Reading:]
I do not appear before this subcommittee in the role of a fiscal or monetary
expert. Y o u r subcommittee already has received statements, written and oral,
f r o m many Government officials who are certainly f a r more learned i n the techn i c a l aspects of this subject than I or the C I O f u l l employment committee of
w h i c h I am a member.
L e t me add, however, that this particular C I O committee was formed immediately after passage of the Employment A c t of 1948 for the specific purpose of
enabling C I O to develop policy and shape support to carry out the broad mandate
established by this act. W e are, therefore, extremely interested i n the activities of the Joint Committee on the Economic Report, which, like our committee,
is a k i n d of child of the Employment Act. Consequently, we welcome this opportunity to testify, if even only to present general views on fiscal and monetary
policy.
Our own consideration of th£ Employment Act and the policies w h i c h can bring
about its successful operation have convinced us that there is no more important
single area for bold Government action than i n the fields of credit, fiscal, and
monetary policy.
A s a nation we have come a long distance from the 1930's when a national
debt of $25,000,000,000 or $80,000,000,000 and an annual deficit of $3,000,000,000 or
$4,000,000,000 looked like a catastrophe. Economically speaking, we are living
i n a new climate. I n the space of less than 12 years our national debt has grown
7 or 8 times over. Yet, i n spite of a debt of $250,000,000,000, I don't believe there
is much disagreement w i t h the fact that as a nation we are stronger economically
today than ever before.
A s a nation we have learned that fiscal problems such as the size of the debt,
taxes, and F e d e r a l budget surpluses or deficits cannot be considered as entities
unto themselves. They can only be regarded intelligently i n relationship to the
Nation's total income i n a given period as w e l l as its prospects for economic
growth and development.
I say that as a nation we have learned this, and let me add that we i n the
labor movement are frank to admit that much of the fiscal experience of the
past decade has been eye opening and highly educational for us. W e like to
believe other groups have undergone similar education, and we hope the joint
committee can do something about extending a broader understanding of Federal
debt problems.
Consider, for example, that our national debt today of 250 b i l l i o n dollars has
an annual interest-carrying charge of 5% billions. T h i s interest charge is more
than five times the 1939 level, but it shapes up against a current national income
of 230 billion dollars compared to national income i n 1939, to choose a so-called
normal prewar peacetime year, of 72 billion dollars.
T h e level of current interest payments on the debt is referred to here because
we think i t is a matter too easily overlooked. I n at least a limited sense, the
real burden of the debt is the annual c a r r y i n g charge.
L e t me remark, aside, that we recognize that the size of the debt itself as w e l l
as the kinds of annual deficits it has involved creates other problems and is not
an unmixed blessing, but we shall discuss budget balancing and related questions later i n this testimony.
Getting back to the c a r r y i n g charges, we cannot help but be struck by the
fact that a more than fivefold increase i n annual Federal interest payments
doesn't seem too serious a load i n the light of the 180-billion-dollar increase i n
national income over the same period. E v e n i n real terms, national income is




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MONETARY,

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POLICIES

up over 100 percent. Obviously this great rise i n income has raised the tax-bearing capacity of the N a t i o n and thereby makes the c a r r y i n g charge of 5% b i l l i o n
dollars i n interest much less of a burden t h a n even the 1-billion-dollar charge
was i n the late thirties.

Senator DOUGLAS. M a y I interrupt ? F i v e and a half billion is approximately 2y3 percent of $230,000,000,000 of national income, A
$1,000,000,000 interest charge upon a national income of $72,000,000,000 would be 1.4 percent. So I think you do well to point out that the
increase i n the carrying charge, as a percentage of the national income,
has not increased as much as the gross amount of the debt would
indicate; still it does seem to be an increase from 1.4 percent of the
national income to around 21/3 percent, which is an increase.
M r . K A S S A L O W . I would agree that on a strict proportionality basis
it was an increase, but we mentioned the fact that Ave think it must
be seen i n contact of prospects for growth.
S e n a t o r DOUGLAS. Y e s .
K A S S A L O W . I wouldn't

Mr.
ing:]

disagree with you on that point.

[Read-

A s to just where F e d e r a l fiscal policies fit into this great growth i n income,
w h i l e there were undoubtedly many economic influences at work, our own analysis convinces us that the wartime F e d e r a l spending was the i n i t i a t i n g force that
j a r r e d the economy back into f u l l operation and enabled the country to put its
idle manpower and resources to work. T h e result was a record flow of both w a r
a n d nonwar goods.
Moreover, the lasting favorable effects of these huge F e d e r a l expenditures
have undoubtedly contributed to the high levels of postwar economic activity.
H u g e wartime-created accumulations of cash i n the hands of both consumers a n d
business provided an unprecedented peacetime demand for the products of f a r m
and factory i n 1946, 1947, 1948, a n d even i n 1949.
I t may w e l l be that, when historians come to assess the role of Federal spending i n the past decade, they w i l l conclude that, w i t h a l l its shortcomings and
dangers, its major significance l a y i n the fact that i t furnished the leverage
w h i c h moved the economy off the dead center i t h a d hit i n the stagnant thirties.
Once under way, the basic strength w h i c h was inherent i n the system but h a d
remained dormant f o r over a decade came into play.
L o o k i n g back, it seems p a r t i c u l a r l y unfortunate that this spending, so f a r as
many of the goods produced were concerned, had to be of so largely a wasteful,
w a r l i k e character. Can anyone here conceive w h a t our instruments of health,
welfare, and education, to choose but three, might be today i f the two-hundredodd-billion-dollar debt had been poured into more useful channels ?
L e t me make one final comment on the positive side of this debt question. I
don't pretend quite to understand a l l the mysteries of the F e d e r a l debt and
budget deficits; perhaps, therefore, some member of this subcommittee can tell
me w h y is it that when a private utility company floats a bond issue and uses
the funds thus obtained to b u i l d a new power plant or a series of transmission
lines, i t is entered on the books as an asset; yet, when a Government agency, a
T V A or the like, borrows money and does the same thing, i t becomes an all-terrible
public debt, w i t h nothing good to be said for it.

Senator DOUGLAS. I n other words, you would suggest having an
operating budget and an investment budget to differentiate the
amounts which are spent for current purposes from, those which are
used to build up capital investment ?
M r . K A S S A L O W . I believe that i n an earlier period we made such a
recommendation, but it strikes me that this is more than simply a technical problem or one of semantics; it is a matter of concept. I t is
unfortunate that the notion of varying types of Federal expenditures
is not sufficiently differentiated i n many people's minds.
Senator DOUGLAS. W h a t you are saying is that some Federal expenditures are highly productive, even though they involve the operation of a deficit?



301 M O N E T A R Y ,

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POLICIES

M r . KASSALOW. Yes. I agree that the division of the budget into the
two categories you suggested might serve a very educational purpose.
[Reading:]
W h i l e I have here emphasized w h a t might be called the positive aspects of
F e d e r a l monetary, fiscal, and credit policy, types of spending that under certain^
conditions may help raise levels of national income and output, I hasten to add
that we i n C I O believe that the application, i n reverse, of s i m i l a r fiscal tools can
also help check inflation and prevent w i l d booms. W e believe, f o r example, that
the F e d e r a l surpluses piled up i n the years of 1947 and 1948 certainly reduced
the force of inflation and lent additional stability to the economy.
T h e S E C Act, to cite another phase of F e d e r a l fiscal policy, has also been a
healthy, restraining influence d u r i n g the past 3 years.
Another c r i t i c a l phase of F e d e r a l fiscal policy is the t a x field.

I might add, we didn't go into taxes very substantially because we
didn't want to add to the length of the statement, but we would be glad
to answer questions on that. That is a related fiscal policy. M r . Ruttenberg is the secretary of the CIO's tax committee. [Reading:]
Indeed, i n our judgment, one reason w h y F e d e r a l deflationary policies were
not entirely successful i n the immediate postwar years was because of some bad
tax legislation that was passed. These bad tax c h a n g e s — w h i c h we opposed,,
incidentally—helped b r i n g on serious inflation and ultimately greased the skids
for the current recession. If, for example, the excess-profits t a x h a d been r e t a i n e d
on the statute books, there is good reason to believe inflation w o u l d have been
lessened. B y the same token, the ill-timed, ill-staged income-tax b i l l of 1948
undoubtedly f e d the fires of demand at the worst time.
But, i f anything, these past mistakes only point up the general conclusion
that proper F e d e r a l fiscal monetary a n d credit policies can help to stabilize the
economy.
These types of F e d e r a l activity, incidentally, have special added attractions^
F o r example, they f a l l clearly into the realm of accepted Government responsibility. Not even i n this day and age of the attack on the w e l f a r e state w o u l d
many question the F e d e r a l Government's right to use these policies, i n keeping
w i t h its powers of regulating the value of money and credit under the Constitution.
Another compelling reason that leads us to put so much reliance on these
policies is that they are exercised on a very broad general plane. They can help
guide the general movement of the economy, but they do not, by and large, extend
to i n d i v i d u a l industries and workers.
Thus, they fit into the accepted A m e r i c a n t r a d i t i o n of leaving fundamental
areas free for action by i n d i v i d u a l companies, unions, and consumers. M u c h of
what is unique and dynamic i n the A m e r i c a n economy can continue to function
and grow i n the face of well-executed F e d e r a l fiscal and monetary action.

Senator DOUGLAS. M a y I interrupt? W h a t you are saying now is
substantially what the Committee for Economic Development said this
morning and what the president of the Philadelphia Federal Reserve
Bank, M r . Williams, said last week—that the Federal Government
should use, primarily, indirect controls to regulate the total quantity
of money, credit, the general price level, and so forth, but that the
matter of individual adjustment be left to competition and to the
market rather than the exercise directly by the Government ?
M r . KASSALOW. Well, we w i l l agree generally with that provision.
A s we indicate later on, we don't believe that fiscal policies are by any
means sufficient. [Reading:]
F o r these reasons, we believe that this subcommittee w o u l d be w e l l advised
to give sympathetic consideration to proposals to strengthen these policies and
the agencies exercising them.
F o r example, we are not prepared to say ourselves precisely what should be
done about bringing the seven-thousand-odd commercial banks w h i c h are not
members of the F e d e r a l Reserve System under the general jurisdiction of t h e
central banking system. Whether membership i n the System should be com99076—50
20




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pulsory or whether the mere requirement that a l l banks must observe the reserve
ratios established by the F e d e r a l Reserve System w o u l d be sufficient, we don't
pretend to know. W e sincerely hope, however, that this subcommittee w i l l see
fit to recommend either of these lines of action, whichever it judges best, to make
our banking structure more rational.

Senator DOUGLAS. But you think that one or two others should be
adopted, that others shouldn't be left as they are now ?
M r . KASSALOWt. That is right. Those, as we understand it, have
been the major proposals to accomplish that general end. [Reading:]
W e think Congress' f a i l u r e to renew the F e d e r a l Reserve Board's
consumer credit was an appalling mistake. Clearly this was a F R B
h a d justified its existence. Of course, there w i l l be periods when it
necessary to exercise it, but this is one of those flexible fiscal powers
be available for use when necessary.

power over
power that
may not be
that should

Senator DOUGLAS. M a y I interrupt there? The continuance of
regulations on consumer credit was attacked by some on the ground
that it would be unfair to unduly restrict the ability of low-income
groups to command durable consumer goods, who were able to borrow
on mutually acceptable terms from the consumer-goods financing institutions. I gatner that you do not agree with that criticism, and I
think it would be informative for the sake of the record i f you would
state why you do not.
M r . RUTTENBERG. M i g h t I comment on that ?
It is generally the people who have i n the past shown no regard for
the welfare of the low-income individuals who make the argument
which you quote; it comes from people who oppose the extension of
Regulation W . I n other words, they show their tremendous interest
in the welfare of the low-income people by saying we ought to permit them to become so indebted that they can't get out of it, and they
might even lose the products they buy because they have gone into
the consumer credit market to buy them.
W e take the position, and the very strong position in which wTe have
supported Regulation W from the beginning that it is a power and
authority which ought to exist to be used i n times of inflation to curtail
expenditures of durable and hard goods production.
Senator DOUGLAS. Have you given any thought to the desirability
of requiring concerns which sell on the installment plan to state what
the interest rate is which they are charging on unpaid balances ? There
is a concealed rate, of course, i n all installment purchasing, and frequently that concealed interest rate, I found i n the past when I looked
into the matter, was very high. W o u l d you favor requiring, as one
of the conditions of installment sale, a statement—not necessarily a
regulation, but a statement—as to what the interest rate actually is
which the person buying on the installment plan pays ? A n d furthermore, to have that interest rate computed on the unpaid balance, which
is what the purchaser owes ?
M r . R U T T E N B E R G . I think that is an excellent suggestion, and your
committee, I think, could do considerable good service i f during the
course of your report you point out and analyze just this question of
interest rates on consumer buying. O f course, it relates to the whole
field of the Small Loans Act.
S e n a t o r DOUGLAS.

Yes.

M r . RUTTENBERG. Actually efforts have been made in past years to
get the Congress to take some action i n the field of small loans, and,.




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of course, they haven't. B u t regulation over that whole field, or at
least pointing up the problem in an educational way, w i l l go farther
toward accomplishing something useful than any other measure i n
this field of consumer loans.
The general charge is made that workers buy regardless of the situation. That is generally true. Sometimes it might be well to help
them understand the problem they are getting into in terms of high
interest rates they pay and i n terms of what w i l l happen to the products
they buy i f they default on payments.
Senator DOUGLAS. I know some years ago I looked into this matter
and found in a great many cases of installment selling that the interest rate was never mentioned, and when the interest rate was mentioned it was commonly stated as a percentage of the original figure
whereas it should have been at least twice the rate of interest on the
unpaid balance.
M r . RUTTENBERG. O f course, the interest rate is always figured on
the original balance, not the unpaid balance.
Senator DOUGLAS. The proper analysis is on the unpaid balance,
which is that which the purchaser owes the seller or the borrower owes
the lender.
M r . KASSALOW. Or, I suppose, the rate at which the lender refinances it.
M r . R U T T E N B E R G . I think it might be well to suggest that another
worthy service which your committee could perform would be an
analysis of the existing Small Loans A c t as it applies to this whole
field of consumer lending.
Senator DOUGLAS. Thank you very much.
M r . K A S S A L O W (reading) :
These are details, however, and we prefer to rest this testimony on the broad
needs for adequate Federal fiscal, monetary, and credit policy and actions.
N o statement on fiscal and related policies can avoid the question of budget
deficits and budget balancing, particularly at the present time, when the current
budget deficit has been a subject of such great controversy.
I have earlier referred to the fact that we by no means see large deficits or
a growing F e d e r a l debt as an unmixed blessing. Indeed, w h i l e we pointed out
how Federal spending helped move the economy off dead center, we appreciate
the fact that this k i n d of stimulation provided by liberal F e d e r a l fiscal, monetary,
and credit policy can only be effective i f it isn't a steady k i n d of dosage. No one
would recommend the huge F e d e r a l spending of the forties as a steady diet.
Moreover, the growing burden of interest charges does raise some serious questions as to income redistribution. A n internally held F e d e r a l debt—that is,
one owned p r i m a r i l y (as is the status of our current national debt) by the people
of this country—is not like an ordinary private debt. B r o a d l y speaking, i t is
something we owe to ourselves and the interest payments on it don't constitute
a real d r a i n i n g off of wealth f r o m the Nation.
T o the extent, however, that the debt is held by any particular economic group,
it makes for an unfavorable flow of income to that part of the economy. Progressive taxation may mitigate this unfavorable flow of interest payments and
income distribution, but the problem of trying to hold down the size of the debt
in order to keep the level of interest payments as low as possible remains.
Then, too, we have always taken the position that waste i n Government can
no more be condoned than waste i n private industry—and we realize there is
plenty of it i n both.
T h e principle of striving, as far as possible, for a balanced budget and a budget
surplus, then, appeals to us as a sound economic canon.

Senator DOUGLAS. M a y I interrupt at that point ? I am very glad,
indeed, to have you make the statement—I think it is very important—
namely, that you believe waste i n Government should be reduced, and




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that the presumption in normal times is probably i n favor of a balanced budget, with whatever meaning you attach to "normal."
I f , for instance, it were developed that there were an excessive
number of Federal employees, you would not regard it as an antilabor
policy i f their number were reduced ?
M r . KASSALOW. I think we could agree with that. I f it were a
demonstrable form of waste, no one could really defend it.
Senator DOUGLAS. I f there were more people i n Federal service
than needed to perform the functions of the Federal service.
M r . KASSALOW. Frankly, we would be doubtful that you could pose
it on such a grandiose scale and decide that there were more people i n
the Federal service broadly than needed. I suppose that you could
well attack it on the basis of this or that department, or this or that
function.
Senator DOUGLAS. But, you see, Congress gets lost when they have
to search out each individual unit, because of the hundreds and almost
thousands of individual units. The question is, Isn't there a general
presumption that there probably is an excessive number of persons
i n Government employ ?
M r . KASSALOW. I f you w i l l forgive a bit of levity, we are opposed
to "5 percenters" or "10 percenters," on any kind of operation, but let
me explain. I think that kind of broad cut which might be envisaged
under a broad attack on this question of waste, i f there is waste, is a
regressive kind of action. I daresay that there are some departments
where there is waste. W h i l e I don't know all of the details of Secretary Johnson's handling of the armed services, it would seem he found
waste.
Senator DOUGLAS. H e was trying to save $2,000,000,000 out of a
$15,000,000,000 budget.
Is it your belief that there are no reductions which could be made
i n the civilian budget?
M r . K A S S A L O W . I would say that when you get down to the situation where you are trying to impose a 5 or 10 percent cut on a budget
say as small as the Labor Department, it is about as regressive as a
2-percent sales tax for the low-income person.
Senator D O U G L A S . I S it your assumption that there is no waste i n
the Labor Department?
M r . RUTTENBERG. I think what M r . Kassalow is saying is that he is
using the Labor Department as an example.
Senator DOUGLAS. That is right.
M r . RUTTENBERG. I f you take the Federal Trade Commission, or
the Department of Justice, the Antitrust Division, and try to cut
5 percent out of those Departments, which are now completely inadequately staffed to do a job, they w i l l not be able to carry out their
functions.
Senator DOUGLAS. Let the record show that I went on the floor of
the Senate and advocated an increase in the appropriations for the
Federal Trade Commission because I believed that they needed more
people to perform their functions, and that I was in favor of an
increase i n the number of internal revenue tax agents to diminish evasions under the income-tax law.
Isn't there a presumption, however, that most governmental departments are somewhat overstaffed, some more than others—not every
department, but nearly every department ?



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M r . KASSALOW. There seems to be too many dangers i n that broad
approach.
Senator DOUGLAS. Have you ever worked for a Government department?
M r . KASSALOW.

Yes.

Senator DOUGLAS. Wasn't it your general judgment that there was
excessive personnel?
M r . K A S S A L O W . I worked for several Government departments.
Senator DOUGLAS. Then you have had quite a wide range of experience.
M r . K A S S A L O W . I would say I really couldn't generalize on that
point.
Senator D O U G L A S . Y O U mean you can't tell on the whole ?
M r . K A S S A L O W . N O , sir; because not i n the case of each of the divisions that I worked for would I make the same judgment.
Senator DOUGLAS. But i n totality, i f you add them all up, D o you
feel that there is ?
M r . K A S S A L O W . D O we think that there is a possibility of trimming
some of the budget and eliminating some of the waste ?
Senator DOUGLAS. Y e s .

M r . K A S S A L O W . I think we would agree with that.
Senator DOUGLAS. Reducing the number of personnel ?
M r . KASSALOW. Yes. The only fear we have is i n a too broad
attempt to get at that question.
Senator D O U G L A S . N O one proposed, so far as I know, that a 5 percent cut be imposed on every unit, division, section, bureau, or even
department. W h a t we did propose was that within a given department a percentage figure cut be imposed and that either the members
of the Appropriations Committee or the department itself apportion
those cuts. B u t what we aimed at, at least what I aimed at, was a
general reduction of some 6 percent i n the number of governmental
employees, an average over-all reduction, but distributed differently
from department to department, and from unit to unit.
I had hoped from the statement that I was going to get reinforcement from you and now I feel my hopes are beginning to be a little bit
dashed.
M r . KASSALOW. I daresay the only hope we could give you is that
we are i n general sympathy with your position, and when specific
appropriations are under question we would have our specific positions
on them.
Senator DOUGLAS. W h e n you start on specific appropriations you
always hit somebody's pet bureau or department, and it is always
said that that is not the place to make cuts, or the manner i n which
you are proposing it is not the proper manner, or that now is not the
proper time.
So that it is like sin, everybody is against it, as a
general principle, but a great many seem to dally on the primrose path.
M r . RUTTENBERG. Isn't it the duty of the Appropriations Committees, its subcommittees, to review the budgets of the various departments?
Senator DOUGLAS. Yes; but it is not completely staffed, and besides
an appropriations committee needs the support of public opinion.
M r . RUTTENBERG. B u t this proposal, as it looked to us when it was
made during the past session of Congress, was that Congress was
attempting to pass the buck to the Executive.



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Senator DOUGLAS. I think you are confusing the last move that was
made, after everything else had failed, with the previous attempts.
The previous attempts had been to reduce specific appropriation bills.
The last and final attempt was, having failed i n all these efforts, we
asked the Executive to do it.
I n any event, I take it that the C I O is opposed to waste ?
M r . KASSALOW. They are against sin, too.
Senator DOUGLAS. W e hope that we w i l l get sympathetic and strong
support when the specific proposals to reduce waste are brought forward. Have you thought of any possible ways of reducing waste ?
M r . KASSALOW. W h a t about these pork-barrel projects which I think
you made a speech about once ?
Senator DOUGLAS. I feel very keenly about those. I would like to
see them reduced by $300,000,000.
M r . KASSALOW. A n d

Senator DOUGLAS. A reduction in rivers and harbors.
M r . KASSALOW. A n d the substitution therefore of a good conservation program ?
Senator DOUGLAS. I would not say you should substitute another,
an equivalent $300,000,000 for it. I think we need to reduce the total
budget.
M r . KASSALOW. One difficulty we have i n focusing on this question
is that the appropriations have been quite inadequate over the years.
Such as those M r . Ruttenberg mentioned, for the Federal Trade Commission, the Department of Labor, and to some extent Federal
Security.
Senator DOUGLAS. I think the regulatory agencies, i f they are rigorous, tend to be starved by Congress. I f they are tame they probably
can get all the money they legitimately want. B u t I wondered i f you
felt that the Labor Department and the Social Security Division have
reached a 100 percent efficiency, so that you can effect no reduction i n
their personnel.
M r . R U T T E N B E R G . Y O U can always improve efficiency, i n the Government, i n an industrial plant, or wherever you go.
Senator D O U G L A S . Y O U can get the same amount of work done with
fewer people.
M r . KASSALOW. W e think fundamentally the things the Labor Department should be doing and is not doing, and the things the Federal
Trade Commission should be doing and is not doing, could not be done
merely by an increase i n efficiency, whether it was 6 percent or 10
percent. That is not answering you directly but maybe gives some
idea of the problem as we see it.
Senator DOUGLAS. W e are getting into colloquy, but I have never
seen how the protection of underpaid men, women, and children i n
factories depended upon the maintenance of an excessive number of
highly marcelled stenographers in the Department of Labor.
M r . RUTTENBERG. Take a look at the wage and hour enforcement
branch. Take a look at that problem. They need far more people i n
that department as inspectors i n the field to investigate violations of
wages and hours, and unless they get more people the 75-cent minimum
which the Congress passed w i l l become totally ineffective.
M r . K A S S A L O W . I think the estimate now is that a check is possible
i n about every 10 years i n the ordinary establishment.




307 MONETARY, CREDIT, AND FISCAL POLICIES
M r . R U T T E N B E R G . They can make only 3 5 , 0 0 0 inspections every year
with their present budget. Y o u can't enforce wages and hours with
that kind of personnel. Y o u have got to increase it.
So that, obviously, where you take it away in certain areas, i n other
areas equally important personnel ought to be added.
Senator D O U G L A S . I take it the net result is that you do not believe
the appropriations for the Department of Labor or the Social Security
Administration should be cut, and economies should be made elsewhere ?
M r . R U T T E N B E R G . I f we can be shown that economies can be made
in the administration of the Federal Security Agency and the Department of Labor, the Antitrust Division, and others, we would be glad
to accept them.
Senator D O U G L A S . A S to the Antitrust Division and the Federal
Trade Commission, I think those in the past have been understaffed.
What is your feeling on the Post Office? Should the Post Office
approximately pay its way?
M r . R U T T E N B E R G . I think the current deficit is approximately
$500,000,000

Senator D O U G L A S . Approximately $ 5 5 0 , 0 0 0 , 0 0 0 .
M r . R U T T E N B E R G . The Congress doesn't seem to be willing to act
on the rates which people must pay.
Senator D O U G L A S . I am trying to get your opinion on that. The
Postmaster General estimates that the value of unpaid services performed by the Post Office Department to other governmental agencies
is about $ 1 5 0 , 0 0 0 , 0 0 0 and he does not propose that those costs should
be assumed by the private users of the system, but does propose that
the other $ 4 0 0 , 0 0 0 , 0 0 0 be assumed. H e estimates that it costs $ 2 4 7 , 000,000 to take second-class matter, newspapers, and magazines
through the mail, for which the Federal Government only gets $40,000,000.
There is, therefore, a subsidy of some $ 2 0 0 , 0 0 0 , 0 0 0 on second-class matter; it is $120,000,000 on third-class matter, unsealed
advertising matter, i n the main.
Do you think those rates should be increased ?
M r . R U T T E N B E R G . What is the franking privilege cost?
Senator D O U G L A S . F o r Members of Congress ? That is included in
the $ 1 5 0 , 0 0 0 , 0 0 0 of unpaid services to other Government departments,
for which the Post Office Department grants that the private users
should not pay.
B u t $ 1 5 0 , 0 0 0 , 0 0 0 from $ 5 5 0 , 0 0 0 , 0 0 0 leaves $ 4 0 0 , 0 0 0 , 0 0 0 as a subsidy
of second-, third-, or fourth-class matter.
Have you given that subject any thought?
M r . R U T T E N B E R G . W e would have to say that we have really not
given the subject a careful enough consideration to give any general
opinion on it.
Senator D O U G L A S . I f that deficit could be reduced, obviously the
Government would be put in a sounder fiscal position.
M r . R U T T E N B E R G . A n d probably that deficit could be used to develop
a real sound welfare program which the Government ought to become
engaged in doing.
Senator D O U G L A S . A t least to reduce the deficit.
Do you think it would be a good contribution to sound budgeting
i f the newspapers and magazines of the country would voluntarily
come forward with a request that the subsidies be discontinued and



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that their rates be increased to the point where they would pay for
the cost of services rendered ?
M r . RUTTENBERG. Shall we answer that i n the presence of all these
newspapermen ?
Senator D O U G L A S . Yes.
M r . KASSALOW. I f they voluntarily did it
Senator DOUGLAS. I f they did not voluntarily do it, then what would
your answer be ?
M r . RUTTENBERG. W e haven't given careful enough consideration to
it. Thus far, the C I O has restricted its public utterances on this
question merely to expressing opposition to proposals to eliminate the
special mailing rates allowed for nonprofit publications. Such elimination, we have pointed out, would create special hardships, for example, for the labor press.
Senator D O U G L A S . W o u l d you go ahead ?
M r . K A S S A L O W (reading) :
W e do not believe, however, that this canon or principle can be applied to
very r i g i d periods of time. N o one seriously proposed that w e try to balance the
budget d u r i n g the war, nor, looking back, w o u l d anyone say we were w r o n g
i n spending beyond the limits of a balanced budget to care for the hungry and
homeless millions of Americans during the depression of the thirties.
W e were quite impressed w i t h Budget Director F r a n k Pace's formulation of
t h i s problem i n his recent statement to the committee when he noted that "budget
surpluses cannot ordinarily be achieved i n a declining national economy. Rather,
the way to achieve such surpluses is to preserve the types of budgetary and other
policies w h i c h w i l l increase national income and taxpaying capacity * * *
the fundamental fiscal consideration should be the long-run outlook for expenditures, receipts, and public debt. T h e policies contemplated i n the budget of any
given year, therefore, should be judged p r i m a r i l y i n terms of their impact on
the budget and the public debt over a period of years rather than i n terms of
their interior effects."
B a l a n c i n g the budget, then, as we see it, gets to be a k i n d of offshoot of the
business cycle. W h e n times are good and f u l l employment and high levels of
national income prevail, every effort should be made to pile up F e d e r a l surpluses
a n d pay off part of the debt. W h e n unemployment rises, however, a n d national
income drops, the F e d e r a l Government must use its fiscal powers to help stabilize
the economy, including, i f necessary, spending f o r programs w h i c h may result
i n budget deficits for ajwhile.

Senator DOUGLAS. M a y I ask a question: H o w much must unemployment rise before the Government should, i n your judgement, use
such a policy?
M r . KASSALOW. This question was recently put to M r . Rieve, and I
think you might be interested i n his answer, because, after all, his
judgment is more of a critical importance, and I think it reflects C I O
leadership. H e said his feeling was that to him it was just about
untenable to talk about normal hard-core unemployment; as far as he
was concerned, unemployment at a level of 1 percent of the labor force
might not appear to be a very serious problem, but he w^ould not want
to be i n that 1 percent category; that he was interested i n a policy
which continually strove for employment, suitable employment for all
those able, willing, and seeking work, as stipulated i n the Employment A c t of 1946.
I f you want to get our current judgment, we certainly don't believe
that 4- or 5-percent unemployment is a frictional figure, or an irreducible minimum of unemployment.
Senator DOUGLAS. Let's see. O f course, there is some unemployment
created by seasonal fluctuations which exist even at the top of a




309 MONETARY, CREDIT, AND FISCAL POLICIES
business boom, and there is other unemployment caused by the waning
of some industries and localities. So that even at the peak you have,
I suppose, 3- or 4-percent unemployment. W o u l d you use Government deficits to try to put that 3 to 4 percent back to work ?
M r . K A S S A L O W . I can answer you indirectly. W e would never be
satisfied with unemployment at 3 or 4 percent, but we did not advocate
deficit spending i n 1947 and 1948, for example, when unemployment
was running about 3 percent of the labor force.
Senator DOUGLAS. That is, you would try to reduce it i n other ways,
by better employment services, and so forth ?
M r . KASSALOW.

Yes.

Senator DOUGLASS. But i f unemployment rose above 3 or 4 percent?
M r . KASSALOW. It isn't strictly a matter of Federal spending, because I don't think Federal fiscal action reduces itself to that, or our
program, or the things we believe are necessary for f u l l employment,
don't get down to just Federal spending, either. But let me read on.
W e w i l l discuss the current budget, and maybe that anticipates your
question.
Senator DOUGLAS. Well, I would like to go back, i f I may, to your
statement. Personally, I think you are quite correct in saying that
we couldn't probably have balanced the budget during the war, and
that we shouldn't have balanced the budget during the thirties.
I agree with you.
Have you, however, heard of Dr. Pavlov's discovery of the conditioned reflex ?
That may seem to be a tangential question which has no bearing, but
I think it does.
Y o u may remember Dr. Pavlov took his dogs and oifered them
steaks and rang a bell at the same time. The dogs would see the steaks
and hear the bell and their saliva would flow at a very lively rate.
Then after a while Dr. Pavlov took the steaks away and rang the bell
and the saliva continued to flow for a time, but the dogs then became
confused and finally were sent to the equivalent of an animal psychiatrist. I wonder i f this same moral couldn't be drawn in this particular
instance. Is it not possible to f a l l into a frame of mind which welcomed deficits i n order to avert the misery of the depression and to help
us get out of a depression, and which accepted deficits and high spendi n g as a necessary consequence of the war; and that, when the depression is removed and the war is nonexistent, for the emotional and
intellectual saliva of men to continue to flow i n the presence of deficits,
irrespective of the purpose for which they are incurred ?
Y o u w i l l forgive me for this fanciful story; but, since this is supposed to be, i n part, a physiological matter, i wondered i f you would
make any comment upon it?
M r . K A S S A L O W . I think part of the answer to your question lies i n
one's notion of what a recession or depression is. I think we probably
both would agree, for example, that at a level of 7 or 8 million unemployment was something which warranted serious Federal action,
whether fiscal or otherwise. W e believe that at a level of 3y 2 or 4
million it is also a rather serious economic problem.
Senator DOUGLAS. A t a level of one and a half or two ?
M r . KASSALOWt. W e might not recommend the same things at the
level of 1 y 2 to 2 that we would recommend should be done at a level of




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MONETARY, CREDIT, AND FISCAL POLICIES

Sy2 to 4. I don't believe that it is strictly a matter of deficits or surpluses. There are certain programs which we believe should not be
sacrificecl at any stage of the cycle, and i f it happens that those programs w i l l entail deficits we go ahead with them, because we think that
i n the long run they might add to the productive strength of the country, and it so happens we think that the current budget discussion entails those kinds of considerations.
I would agree that there is the danger of getting into that rut. W e
would hope, however, that we have a kind of good watchdog on the H i l ]
i n the form of the Appropriations Committee, and I know it usually
gives us a good deal of trouble on our programs. I hope they are not
responding to any bells. I don't think they have been up to now.
Senator DOUGLAS. Assuming that you regard certain expenditures
as necessary, couldn't those be met i n normal times by taxes, so thai
you don't have a deficit, i n normal times—whatever the definition of
"normal" may be ?
M r . RUTTENBERG. W e think so. That is why during all of the
Eightieth Congress, and in that attempt of Congressman Knutson
of Minnesota to impose his tax cut, we opposed it, and we supported
the President when he vetoed the measure, and supported the Congress when they upheld the veto; and finally, when they did override
his veto and put into effect in 1948 a tax-reduction bill, we criticized
it wholeheartedly, because, we said, i n times of high national income
it was no time at all to begin cutting taxes. W e also had the same
thing to say i n 1946 when the Congress was considering the elimination of the excess-profits tax as well as the reduction in certain individual-income taxes by about 5 percent.
So that we feel very strongly on that question.
M r . KASSALOW. W e go on i n the. statement to indicate that we
don't think that all sources of revenue have been tapped even at this
point of a recession.
Senator DOUGLAS. W i l l you proceed?
M r . RUTTENBERG. W e also make a strong point i n that i f we could
really develop the full-employment economy with an ever-increasing
national income our tax structure could remain stable and still produce
much higher levels.
Senator DOUGLAS. Because of an increase i n income?
M r . RUTTENBERG. Yes. I f the Government followed the proper
policies to establish a full-employment economy.
Senator DOUGLAS. W i l l you go ahead ?
M r . K A S S A L O W (reading) :
A p p l y i n g this standard, we feel the President i n his midyear report was on
sound grounds i n resisting cuts i n essential F e d e r a l programs. F o r so long as
the private economy is f a i l i n g to provide useful employment for a l l those able,
willing, and seeking work, budget cutting doesn't make sense, socially or economically. P a r t i c u l a r l y is this true when cuts are aimed at programs w h i c h
i n the long r u n w i l l add to our productive power.
Again, let me emphasize that i n taking this position we are not suggesting a
discontinuation of sincere efforts to eliminate actual waste; but this is a different
proposition f r o m merely striving to balance the budget at any cost.
It is w e l l to remember the one thing no country can afford is wasted manpower and idle resources. Those, too, are real deficit threats to national
economic development.
So f a r as the current situation is concerned, however, we are not prepared
to say that nothing can be done about increasing F e d e r a l revenue and scaling
d o w n the prospective deficit. W e pleaded i n 1945 against the premature l i f t i n g




311 MONETARY, CREDIT, AND FISCAL POLICIES
of the corporate excess-profits tax. T h e staggering profits of the giant-size corporations i n each of the past 4 years has convinced us we were correct. W e
s t i l l believe the enactment of an excess-profits tax, especially i n a f o r m w h i c h
"would exempt the smaller-size company, is desirable, and w o u l d help take up the
slack i n revenue?
A s an organization, we strongly disapprove the iniquitous income-tax l a w of
1948. W e s t i l l feel it was a mistake. W h i l e it may be difficult to reverse a l l
o f this ill-advised action, at the very least we feel such features of the l a w as
the provision for split returns should be revised to enable the Government to
recapture some of the lost revenue.
But, again, these are detailed considerations; and, as we understand it, this
committee is p r i m a r i l y interested i n the broad aspects of fiscal, monetary, and
credit policy.
Before I conclude, let me set the record clear. A s I have indicated, we place
considerable hope i n fiscal and related aspects of Government economic policy.
P a r t of this hope stems from the f a c t that as a N a t i o n over the past 16 years
we have adopted other policy measures w h i c h lend great basic support to the
Nation's economy.
T h e social-security system, the minimum wage, the farm-support program, the
securities and bank-deposit legislation, the public-housing law, these and other
phases of national economic policy help create an environment i n w h i c h the
tasks of fiscal policy are reduced. A s a consequence, the prospects for successf u l fiscal-policy operations are enhanced.
B u t the lesson shouldn't be lost. F i s c a l policy can be a major tool for f u l l
employment, economic growth, and stability. B y no means, however, is it sufficient i n itself. A d d i t i o n a l measures are needed, such as broadening and improving of social security, additional housing legislation, resource and publicw o r k s development, and Federal a i d to education, to name but a few. Necessary
adjustments i n wage, price, profit relationships, looking toward a f a i r e r distribution of income, also should not be minimized.
There are, of course, no conflicts between these policies and a vigorous F e d e r a l
fiscal program designed to help stabilize the economy. Indeed, sound fiscal
policy complements the other measures I have briefly mentioned here.
L e t me thank you again for this opportunity of appearing. T h e C I O strongly
supports the work currently being done by the J o i n t Committee on the Economic
•Report. Hearings and studies such as these have a real function i n the effective
execution of the Employment A c t of 1946.

Senator D O U G L A S . M r . Wolcott ?
M r . W O L C O T T . N O questions.
Senator D O U G L A S . I have no more questions. Thank you very much.
M r . Ruttenberg, did you want to submit a supplementary statement ?
M r . RUTTENBERG. NO.
Senator D O U G L A S . Thank

you very much.
Is M r . Warren here? I t was understood that M r . Warren, of
Moorestown, N. J., was to testify.
W e w i l l recess for 10 minutes to find out M r . Warren's whereabouts
and convene again at 3:10.
(Short recess taken.)
Senator D O U G L A S . M r . Warren, we appreciate very much your readiness to come down and testify before our committee, and we are very
glad, indeed, to have you. W o u l d you care to make a general statement, and then perhaps there might be a few questions that I would
like to ask you on the basis of your statement.

STATEMENT OF ULYSSES GRANT WARREN, A. S. RIECKE & CO.,
INVESTMENTS, PHILADELPHIA, PA.
M r . W A R R E N . M r . Chairman, I am very glad I did finally get here.
I am sorry that my train was late because I should have gotten here
much earlier.




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The only general statement that I would have at the present time,
in addition to what I have here i n the memorandum, is the fact that
while I have been i n the investment-banking business all my business
life, since 1931, I do not consider myself a high-powered economist,
but I think I would qualify as an expert i n the investment-securities
field.
Senator D O U G L A S . W e are very glad to welcome you, indeed. W o u l d
you go ahead.
M r . WARREN. Yes, sir. A s I see it, gentlemen, over the recent years
the impact of the monetary and fiscal policies of the Federal Government upon the private-investment problem has been manifold i n its
aspects. When I refer to the monetary and fiscal policies of the Federal Government, I mean its easy-money policy and its deficit financing. A n d when I refer to the private-investment problem I mean the
investment-securities markets.
I believe the low interest rates occasioned by this easy-money policy
have enabled many corporations—utilities, rails, and industrials—
successfully to refund many hundreds of millions of high coupon bonds
with long-term low-interest bonds. This cheap borrowed money helps
these corporations to render their services or manufacture their products at a lower cost. This also applies to the Federal, State, county,
and municipal governmental agency services. T h i s refunding market
thus created proved to be a stimulant to the underwriting phase of the
investment-securities business.
Also, this change i n interest rates has driven a lot of money out of
the high-grade market into the semi-investment and speculative markets, from high-grade bonds, preferreds, and commons into lowergrade bonds, preferreds, and commons. Unfortunately, this has hurt
a lot of people, some elderly and retired, who bought high-grade securities with good dollars. They now find that they have had these
securities taken away from them by call and replaced with securities
of comparable quality but yielding fewer dollars which i n turn are
not worth as much as they were when they invested them originally.
I n other words, their income consists of fewer and smaller dollars.
Their standard of living i n some cases has been reduced, and they are
w orried and mad.
Senator D O U G L A S . Y O U mean angry ?
M r . W A R R E N . Yes, sir; angry; that is right.
T h i s would appear to be an unfortunate corollary to what some
people term a redistribution of wealth.
Also, the higher taxes attending the afore-mentioned fiscal policies
combined with the capital-gains aspects of the present tax laws has
tended to increase the speculative activity of those persons i n high*
tax brackets because of the premium placed on long-term capital gains
as compared with income. T h i s speculative capital is not of necessity
venture capital.
Speaking of venture capital, I don't believe that the monetary and
fiscal policies of the Government have had any slowing effect as yet
on new money coming into the market. That kind of money is primarily interested i n capital gains rather than income. I believe that
the slowing effects of current corporate taxes are more than offset by
the stimulating effect of the increased activity i n our economic life.
Finally, i f we are after a continually expanding economy, with all
its implications of a higher standard of living for more people, in


313 MONETARY, CREDIT, AND FISCAL POLICIES
creased personal and corporate incomes, increased tax revenues, et
cetera, that is fine so long as our economy continues to expand i n proper relation to our debt; but, when the economy starts to contract or
deflate, then where are we with a Federal debt the size of ours that
continues to grow ? I am not an alarmist, but I am curious—just what
w i l l we do i f a first-class depression hits us ?
T h a t may not be very much, but it about covers the field i n which I
would be qualified to talk, gentlemen; and perhaps I overran that field
a little bit.
Senator DOUGLAS. What distinction would you draw between speculative capital and venture capital, which you refer to i n your memorandum ?
M r . WARREN. I would draw this distinction: Venture capital is of
necessity speculative capital, but all speculative capital is not necessarily venture capital.
F o r instance, there are a great many speculative securities i n the
market today, all outstanding. A person can speculate i n securities
of that sort with speculative capital, but it has not added any money
to the venture-capital field, to the venture-capital market.
Senator D O U G L A S . Y O U refer to venture capital as new capital poured
into enterprises ?
M r . WARREN. That is right.
Senator DOUGLAS. A n d either into new enterprises or to expand old
enterprises and invested i n the form of common stock rather than i n
the form of bonds ?
M r . WARREN. Not necessarily. There are a great many speculative
bonds as well as common stocks. The distinction I would make is this:
Y o u take a man who is i n a high tax bracket. H e may speculate
i n common stocks because of the long-term capital gains. H e might
not want to go into any new ventures at all. H e might be riding
the market rather than be interested i n any particular field of
operation.
Senator DOUGLAS. I am interested i n your statement that you do not
think venture capital has been slowed up by monetary and fiscal policies of the Government.
M r . WARREN. That is right.
Senator DOUGLAS. W e keep hearing complaints that venture capital is being dried up because of the amount of new stock issues or,
rather, the amount of capital obtained by new security issues is very
low.
A s I remember the figures, the S E C approved something less than
a billion dollars' worth of new capital last year.
M r . WARREN. I t c o u l d be.

Senator DOUGLAS. A n d that the major portion of expansion is being
financed overwhelmingly out of corporate profits. I believe about
half of corporate profits, as I remember it, were reinvested, and that
is furnishing the major proportion of capital expansion.
M r . WARREN. That is still venture capital, only it is coming out of
the corporations directly rather than being paid out i n the form of
dividends and coming back into the market.
Senator DOUGLAS. So you do not think it serious that new stock and
bond issues are at a low point ?
M r . WARREN. No; I do not think that that was exactly the point
that I had i n mind. W h a t I mean to say is this, Senator: Y o u hear



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a lot of complaint about the fiscal policy of the Federal Government
slowing down venture capital. That is a popular complaint, particularly i f you are not running the thing. I do believe, myself, that
the fiscal policy of the Federal Government has slowed down venture
capital, new money.
Senator D O U G L A S . Y O U point to reinvestment of corporate profits
inside the concern before distribution.
M r . WARREN. That is right, and I do not see exactly how any change
i n the fiscal policy of the Federal Government would stimulate more
venture capital. Temporarily there might be brought out some more
new issues with a lot of newspaper publicity about we are going to
have less taxes, et cetera, but the over-all effect over a period of 5
years, I do not think would be changed a bit now. I do not think it
would.
Senator D O U G L A S . D O you have any recommendations to make 011
fiscal policy of the Government?
M r . WARREN. NO, sir; I do not, except to say that the people who
have determined or do determine the fiscal policy of the Government
are bound to be criticized, but I think the folks, generally speaking,
the grass-roots folks, are betting on the fellows who are carrying the
ball. There may be criticism, and