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Sec. 5 (a) of Public Law 304
(79th Congress)

DECEMBER 10 A N D 11, 1956

Printed for the use of the Joint Economic Committee



For sale by the Superintendent of Documents, U. S. Government Printing Office
Washington 25, D. O. - Price 45 cents




(Created pursuant to sec. 5 (a) of Public Law 304, 79th Cong.)
PAUL H. DOUGLAS, Senator from Illinois, Chairman
WRIGHT PATMAN, Representative from Texas, Vice Chairman




GROVER W . ENSLEY, Executive


WRIGHT PATMAN, Texas, Chairman
AU3USTINE B. KELLEY, Pennsylvania



Statements in order of appearance:
Bell, Elliott V., editor and publisher, Business Week magazine, New
Levitt, Arthur, State comptroller, State of New York, Albany
Young, Robert R., chairman of the board, New York Central system,
New York
Martin, William McC., Jr., Chairman, Board of Governors of the
Federal Reserve System (accompanied by members of the Federal
Open Market Committee)
71, 115
Haves, Alfred, president, Federal Reserve Bank of New York; Vice
Chairman, Federal Open Market Committee (accompanied by
members of the Federal Open Market Committee and Robert G.
Rouse, manager of System Open Market Account)
71, 115
Statements and exhibits:
Bell, Elliott V., editor and publisher of Business Week
Exhibit: Supplemental questions and answers
Hayes, Alfred, president, Federal Reserve Bank of New York
71, 115
Holdings of United States Government certificates and
notes by weekly reporting banks and average yield on
computed Government obligations, 1952-56
Treasury bill holdings of weekly reporting banks and
average yields on Treasury bills, 1952-56
United States Government bond holdings of weekly reporting banks and average yields on long-term Governments, 1952-56
Member bank earnings and expenses in selected years
Ratio of net profits to total capital, member banks and
leading corporations, 1946 to 1955
Levitt, Arthur, comptroller of the State of New York
Exhibit: State aid for school buildings, total paid in New York
State for school years 1926-27 through 1955-56
Martin, William McChesney, Jr., Chairman, Board of Governors of
the Federal Reserve System
Answers to Chairman Patman's supplemental questions
Biographical sketches of members of Federal Open Market
Committee as of December 11, 1956
Boeckh indexes of construction costs for (1) resources, and
(2) apartments, hotels, and office buildings, 1947-49
equals 100
Imports and reserves of foreign countries
Letter to Hon. Joseph C. O'Mahoney, and enclosures
Federal income taxation of commercial banks
United States gold stock and foreign dollar holdings
Rouse, Robert G., manager, Federal Reserve System's Open Market
71, 115,150
Young, Robert R., chairman of the board, New York Central Railroad
Additional information:
Average prices paid by farmers at independent stores September 15,
1956, compared to September 15, 1947
Average prices received by farmers for farm products in United States,
November 15, 1956, compared to November 15, 1947
Bond yields and money-market rates, 1947, and week ending December 1, 1956.




Additional information—Continued
Chairman Pat man's concluding summary statement
Corporate bonds advance while Treasury's drop, article in the New
York Times, December 9, 1956, submitted by Hon. Joseph C.
Farm wage rates, railroad freight rate index, and total transportation
bill for farm products, 1947, 1955, 1956
Ike Disclaims Any Role in FRB Credit Moves, article in Washington
Post and Times Herald, November 6, 1956
Michigan Fails To Get Any Bids for $52 Million Highway Bond
Offering, article in the Wall Street Journal, December 5, 1956, submitted by Hon. Joseph C. O'Mahoney
Supplemental question on Federal income taxation of commercial banks—





M O N D A Y , D E C E M B E B 10,





The subcommittee met, pursuant to call, at 10 a. m., in the Old Supreme Court Chamber, United States Capitol Building, Washington,
JD. C., Hon. Wright Patman (chairman) presiding.
Present: Representative Wright Patman (chairman), and Senator
Also present: Grover Ensley, executive director; William H. Moore,
staff economist; and Reed L. Frischknecht, legislative assistant to
Senator Watkins.
Chairman P A T M A N . The subcommittee will please come to order.
Senator O'Mahoney will be here, I am sure, and while we are waiting for him I will read the statement that has been prepared; and, Mr.
Bell, will you take a place here, please.
M r . BELL.

Y e s , sir.

Chairman P A T M A N . Mr. Bell is ourfirstwitness this morning.
It is very nice having you come down here to make it possible to give
us the benefit of your views.
Senator Watkins' administrative assistant is here to cooperate with
us, and we are glad to have him.
There would certainly be very few persons today who would disagree with the proposition that it is good sense, good business, and
good government to strive in every reasonable way, within the framework of free enterprise system, to promote stability and high-level
employment in our economy. The intention of the Federal Government to do its part toward those ends are stated in the policy declaration of the Employment Act of 1946.
While there are doubtless many ways in which government plans,
functions, and policy affect the operation of the economy, it is generally
agreed that monetary, credit, and fiscal policies are the principal
means of directly promoting stability, high-level employment, and
Having made such an undertaking, prudence dictates that Congress
and the executive agencies of Government, with the help of experts
in the field, give constant attention to the adequacy and the continual
modernization of the stabilization tools.
Later this week, this subcommittee is going to hold hearings on the
subject of automation and technological progress in industry. In that
field we know that engineers, scientists, and technicians are giving
constant attention and thought to the improvement and working of



MONETARY POLICY I 1 9 5 5 - 5 6 2

various machines and processes. The same kind of checking and precautions are just as appropriate and called for in government and
economics. We, too, must be continually sure that our instruments
are regularly examined for rust and not allowed to be overtaken by
That is precisely the purpose of these current hearings—putting an
important stabilization device under examination to see how it is
working and if its working can be improved upon. Other subcommittees of the joint committee give similar study to other major policies affecting stabilization and growth, especially fiscal policy.
The Joint Economic Committee, charged as it is with the duty of
making continuing studies of matters relating to the working of the
economy, has, over the years, conducted a series of such hearings and
examinations of progress and knowledge in the field of monetary and
credit controls.
One great accomplishment under the authority of the Employment
Act has been the extent to which general understanding and knowledge of monetary affairs by Members of Congress, the public, the
press, and even experts themselves, have been materially aided by this
series of periodic reviews. This hearing will undertake to bring the
record on monetary policy up to date.
This hearing is only another in this series of regular studies which
the Joint Economic Committee makes. It is important that that fact
be stressed in view of the rumors we have recently been hearing from
various sources that the independence of the Federal Reserve System as
presently constituted is being currently threatened.
Whether there is any truth or not in sueh rumors, this hearing, at
least, is not being held with any such notions in mind. It represents
a good-faith search for information as to recent and current policy
and its overall effects.
While it is obviously impossible to anticipate what the evidence
presented at these hearings may show, no report or immediate recommendation are likely or expected. The record will, of course, be
thoroughly considered in connection with the joint committee's annual
report due March 1.
Hearings at this time are warranted by the need for public enlightenment and the danger that the tight money policy may wreck the
As to the control and the kind of independence enjoyed by the
Eeserve System, it is well to keep in mind that the Constitution is
quite specific in assigning to the Congress the control over money and
the value thereof. In the modern world the money supply, of course,
takes the form in large part of credit and credit instruments.
The Congress, as a matter of expediency, has delegated the administration of this power over the supply of money to the Board of Governors and the Federal Open Market Committee. The relationship is
such that criticism of today's tight money policy should be directed
at Congress as well as at its agent—the Federal Reserve System.
The determination of monetary policy is thus an important public
function to be exercised in the public interest by public-minded servants. The United States is, I believe, the only country in which the
central bank is not owned outright or controlled directiy by the political government. We preserve thefictionthat the central bank is a private concern by allowing commercial banks to make a sort of deposit

MONETARY POLICY I 1 9 5 5 - 5 6


erroneously referred to as capital stock, which prompts the private
banks to falsely claim that the central bank should be independent of
Our plan of organization has worked tolerably well, however, because we have checks and balances inherent in the structure of the
System as provided by law, and we can always change the law.
^ We must always be alert, however, to the danger that considerations
dictated by private interests may come to influence the decisions of
the Reserve authorities. If, for example, the influence or the profitmaking objectives of private banking were to crowd out the public
interest in management of the System, we would perhaps have then
to prefer some measure of political control as the only course guaranteeing the paramount public interest in the management of the
Nation's monetary affairs!
The first question which the Federal Reserve authorities, the Congress, and the critics of recent System action must answer at a time
like this is whether inflationary forces are currently strong and predominant in our economy.
If we conclude that inflationary forces are substantial enough to
need restraint, we must then decide what can be done about them.
What alternatives do we have?
(1) We can place reliance on fiscal policy, which would possibly
mean increasing taxes; (2) we can rely more or less, as we have been,
upon general credit controls with their admitted shortcomings; or (3)
ii we feel that general credit controls are unsatisfactory and fall unequally upon various parts of the credit structure, they can be supplemented by selective credit controls or other means of control. For
example, should we directly control plant and equipment investments
through some sort of capital rationing device ?
The purpose of these hearings is to explore these questions, including the merits of possible alternatives to high interest and general
credit restraints. In any case, we need to study the impact of these
various alternatives upon large and small business and upon parts of
the credit structure such as home mortgage financing, school construction, and consumer installment buying.
To the extent that we decide to rely upon general monetary control,
we need to consider the various instruments used in making it effective.
What control devices are there other than ever higher and higher interest rates? Are these rising interest rates effective in controlling
inflation, or do they possibly contribute to it?
The important thing of which we must make sure is that such credit
resources as are available are flowing to the right spots and that efforts, however justifiable, in the restraint of threatened inflation, do
not lead over the hump into a period of deflation, which may be even
more difficult to deal with.
Our methods of dealing with deflation once it gets started are much
less adequate and certain than are our brakes upon inflation.
We must guard against the danger of making high interest rates and
tight credit a permanent habit in the United States. We must recognize that monetary controls are essentially short-run tools and there
are other and better long-run stabilization techniques.
Finally, I think the time is here when we must begin seriously to
make a policy choice. And I would like to state that although I believe
our productivity can in the long run give us both stable prices and full


MONETARY POLICY I 1 9 5 5 - 5 6 4

employment, if I had to choose between a policy that might be mildly
inflationary in the short run as against one that would plunge us into
recession, unemployment, bankruptcies, and farm foreclosures, my
choice would be unhesitatingly for the former.
I cannot understand how anybody could possibly support the alternative of recession. But there are men in high places who conscientiously think recession is the lesser of two evils.
I hope that we can bring this basic argument before the public
gaze in the course of these hearings and this basic question of public
policy can be resolved in the national interest.
To sum up? I fervently believe that the time is past due for a thorough reexemmation of our country's monetary and credit policy. I
hope that these 2 days of hearings by our subcommittee will be a helpful curtain raiser for that reexamination.
I know that efforts in that direction will be continued in the next
session by the full committee.
Our schedule of hearings at this particular time will include on
December 10 at 10 a. m. Elliott V. Bell, editor and publisher, Business
Week magazine, New York, N. Y., and Arthur Levitt, State comptroller, State of New York, Albany, N. Y. At 2 p. m. Robert R.
Young, chairman of the board, New York Central System, New York,
N. Y. On December 11 at 10 a. m. William McC. Martin, Jr., Chairman, Board of Governors of the Federal Reserve System, accompanied
by members of the Federal Open Market Committee; and at 2 p. m.
Alfred Hayes? president of the Federal Reserve Bank of New York
and Vice Chairman of the Federal Open Market Committee, accompanied by members of the Federal Open Market Committee, and
Robert G. Rouse, manager of system open market account.
This morning we have as our witness, who accepted the invitation
of the committee to be here, Mr. Elliott V. Bell, editor and publisher
of Business Week magazine.
Mr. Bell, it was certainly nice of you to accept our invitation, and
we are looking forward to your testimony, which we know will be
constructive and helpful.
You may proceed in your own way, sir.

Mr. BELL. Thank you, Mr. Chairman.
I have prepared a statement, not very long, which I would like to
read, if I may.
There exists today more widespread concern and questioning about
the working of our money system than at any time since the banking
crisis of 1933. There is need for a basic reexamination of our entire
monetary and financial networks to determine whether the present
institutions are adequate for present needs and whether the functioning of our money system could be improved.
Such an inquiry need not imply an indictment of our existing system, but it would almost certainly disclose defects that need legislative correction.
In the past, reform and improvement of our money system has
generally been delayed until forced by critical events. Thus, the National Bank Act of 1863 followed the panic of 1857, which has been

MONETARY POLICY I 1 9 5 5 - 5 6


brought on by a chaotic money system that allowed every kind of
wildcat bank to issue paper money.
The Federal Reserve Act of 1913 was an aftermath of the panic of
1907, and the banking reforms of the early 1930's, including the establishment of the Federal Deposit Insurance Corporation, followed the
banking holiday of 1933.
It is normal for conservative economists and financiers to oppose
change; but if we run away from or try to shut our eyes to current
problems, the chances are that those problems will some day be dealt
with by more extreme people and in more radical terms.
I have in mind the sort of broad inquiry that has been suggested
by Allan Sproul and others, conducted by a Presidential commission
composed of outstanding citizens.
It is now more than 40 years since the last National Monetary
Commission—the Aldrich Commission—made its report in 1912. In
the interval, and especially in the past twenty-odd years, there have
occurred revolutionary changes in the structure of our monetary system, and equally revolutionary changes in our economic objectives.
I would like to summarize those changes.
I. The past 20 years have brought the development of federally
chartered savings and loan associations which today constitute a third
banking system, having their own central banks—the Federal homeloan banks.
It has brought the rise and growing importance of State-chartered
savings and loan associations; the entry of life insurance companies
into large-scale lending, paralleling and competing with the commercial banks; the growth of large finance companies providing consumer
credit, and of pension funds—a comparatively new type of financial
institution, enjoying tax exemption and free from any regulation,
either Federal or State. These pension funds now engage in major
financial operations and promise to become one of the most important
sources of lendable funds in the future.
In addition, there has been an enormous growth of Federal instrumentalities such as the Federal Housing Administration, the Small
Business Administration and the Veterans' Administration, which
are engaged in lending or in guaranteeing or insuring loans. A report
of the Hoover Commission lists 104 such instrumentalities, created
between 1913 and 1955, and I understand about a score of them is
actively engaged in lending or insuring loans in a way calculated to
affect credit conditions and possibly to involve an intrusion upon the
course of monetary policy.
Some of these Government credit intermediaries were established
by Congress to carry out a social purpose—such as rural electrification—others are more akin to private financial institutions.
And so, the question arises whether there is need for all these agencies and whether their individual operations are always in harmony
with broad national policies.
II. The period since the banking crisis of the 1930's has brought
the development of an increased number of regulatory agencies. These
now include: the Comptroller of the Currency, the 48 State bank
supervisors, the Federal Reserve System, the Federal Deposit Insurance Corporation, the Home Loan Bank Board, and others. Their
jurisdictions overlap and the coordination of policies followed is de-


MONETARY POLICY I 1 9 5 5 - 5 6 6

pendent almost entirely upon the personalities of the individuals in
charge at any one period of time.
It was said that the banking troubles of the 1930's were due partly
to a "competition in laxity" among the various supervisory authorities
in the booming twenties. There is nothing to prevent a recurrence of
such competition in the present boom.
This multiplicity of regulatory and chartering authorities raises
the question of the need for more uniform standards and requirements to govern the establishment of new financial institutions, including branches of existing institutions.
Every commercial bank in the country is a part of our monetary
system, and its lending and investing activities affect the supply of
money. Yet, the standards of competence, character, and public necessity governing the chartering and branching of such institutions vary
Lately a new complication has been introduced by the bank holding
company legislation enacted this year, which would, according to
Governor Harriman of New York and the banking superintendent of
that State, George Mooney, provide a means of bypassing the State
authority with respect to branch banking and the concentration of
banking power.
III. There is need to reexamine the task now expected of monetary
and fiscal policy in this country. When the Federal Reserve was
established, its primary purpose was to provide an elastic currency
geared to commercial paper. Today, we are committed to a national
program which calls for Government action to promote high-level
employment and to maintain economic stability.
In carrying out these objectives, monetary policy has a large role
to play. Is the Federal Reserve System adequate to play its part;
have its responsibilities in this connection ever been clearly defined
so that either the members of the Federal Reserve Board or anyone
else can know what its obligations actually are ?
What should be the relation between the Federal Reserve and the
various other governmental agencies which extend or guarantee credit
or regulate financial institutions, and with the Treasury ?
Is there need for new arrangements to provide for consultation and
collaboration among these various agencies ?
Mr. Chairman, I ventured recently to suggest the desirability of
a National Economic Council which would function in respect to economic policies somewhat as the National Security Council functions
with respect to defense policies.
In some quarters this suggestion has been misinterpreted as an
assault upon the independence of the Federal Reserve System. I cannot see it that way. The suggested Council could be established by
congressional action, as was the National Security Council, or it
could be created by the simple act of the President in inviting the
appropriate individuals to participate.
In either case, I cannot see why the essential independence of the
Federal Reserve System should be endangered. That independence,
as I see it, simply means that the Federal Reserve must not be compelled in peacetime to use its credit-making powers to facilitate the
Treasury's financing needs as was done in two World Wars.
But apart from Treasury-Federal Reserve relationships, it would,
it seems to me, be a matter of common sense to bring the Federal

MONETARY POLICY I 1 9 5 5 - 5 6


Reserve more directly into the councils guiding the administration in
its economic policies.
I do not have so low an opinion either of Governor Martin or of
President Eisenhower as to think it would be impossible for the former
to counsel with the latter without losing his independence.
If, however, it is felt that the Federal Reserve Board is so sensitive
that contact with the President would corrupt it, then I suggest there
might usefully be formed a National Economic Council without
regular representation by the Federal Reserve Board. In this event,
the Fed might be invited to send an observer with the express understanding that he could sit near an open door ready to fly to the sanctuary of Constitution Avenue if he felt the danger at any point of
political contamination.
IV. For some years, there has been controversy concerning the
relations between the Federal Reserve Board and the Federal Reserve
banks. There have been differences of viewpoint as to the composition
of the Federal Reserve Board, the term of office of Board members
and the rate of compensation received by them.
During the first 20 years of the existence of the Federal Reserve
System, the Board in Washington was relatively unimportant and
relatively impotent. The Federal Reserve banks, especially the
Federal Reserve Bank of New York, were dominant.
In the reforms following the banking holiday of 1933, this situation
was abruptly reversed. Power was shifted to the Board in Washington and taken away from the regional banks. And yet the President
of the Federal Reserve Bank of New York is paid about three times
as much as the Chairman of the Board of Governors of the Federal
Reserve System.
This is an anomalous situation. If the Board is to be dominant,
the question is relevant whether the compensation paid to members
of the Board should not be at least sufficient to make it possible to
persuade a man who has distinguished himself as president of a
regional bank to go on to Washington as a member of the Board. At
present I understand this is practically impossible.
Study should also be given to the question of whether it is desirable
to continue a 14-year term for members of the Board of Governors;
whether the Chairman of the Board should serve at the pleasure of
the President who appoints him; whether his term should be coterminous with that of the President; whether he should have more
authority over other members of the Board than he now has; whether
the entire Board setup should be altered and replaced by something
more akin to European central bank organizations in which the system is headed by a governor or chairman assisted by various deputies.
I do not advocate any of these. I think they are questions that
should be explored.
Now, there have been differences of opinion between the System
and its member banks about the level of reserve requirements. There
has been serious disagreement within the System over open market
operations. There is confusion and inconsistency with respect to
the System's responsibilities toward the Government securities
market. All these questions and controversies need to be examined.
V. There is need to explore the role of selective credit controls as
an instrument of national monetary policy. No one likes selective
controls. Yet, they can be made to work.


MONETARY POLICY I 1 9 5 5 - 5 6 8

An outstanding example of this is the selective control of security
credit through margin requirements. There are times when selective
controls might prove to be a lesser evil than overall quantitative credit
For example, when installment credit seems to be expanding too
fast, it might be better to have a regulation tightening up the terms
of installment credit rather than putting a stranglehold on the entire
economy through an overall tight money policy.
I appreciate that there are dangers of bureaucratic interference
with free enterprise in the use of selective controls, but I believe
there will ultimately prove also to be great dangers in the attempt
to stabilize our economy through the violent alternations of dear money
and cheap money we have seen in recent years.
VI. There is need also to explore the possibility of compensatory
fiscal policies, such for example as variable depreciation, as instruments
contributing to economic stability. This might conceivably be a means
of spreading out a capital expansion boom like the present, which
it seems to me tight money thus far does not seem to have affected.
I understand this device is employed in the Netherlands, so there
is means of learning how useful it has been in actual practice.
VII. Other questions that need study include the effects upon
quantitative credit control of high taxes and of a large outstanding
Government debt.
It has become apparent in recent months that rising interest rates
present no serious obstacle to large and profitable corporations. Since
interest paid is a tax-deductible expense, a prime rate of 4 percent
costs the corporate borrower less than 2 percent. Even a rate of 8
or 9 percent would cost the large corporation, after taxes, less than
municipalities are now paying for money to build schools.
On the other hand, the corporation that is in trouble, operating in
the red, is directly penalized.
It has also been noted in the past year that the existence of a large
Government debt, constituting a major part of the assets of the
country's financial institutions, results in a pronounced lag in the
effectiveness of a tight money policy.
Although the Federal Reserve has been following a stringent credit
policy for well over a year, and has prevented virtually any expansion
of the money supply, bank loans have expanded to record levels.
An explanation of this appears in the condition statement of weekly
reporting member banks. In the 12 months ended last November 21,
these banks showed an increase in their commercial and industrial
loans of $4,600 million, while their holdings of Government securities
went down $3,700 million and investments in other securities fell
$709 million.
In short, the banks simply shifted their assets from Government
and other securities to loans. Meanwhile, deposits declined nearly
half a billion dollars in the year.
I am told that in the first half of this year corporate business
obtained over three and a half times as much in bank loans as was
obtained in thefirsthalf of 1955.
And I know in the 18 months ended last June 30, bank loans rose
$17 billion—which was the largest 18-month increase on record.
And so it seems to me the tight money policy thus far has hurt
home builders, small business, and municipalities that need to build

MONETARY POLICY I 1 9 5 5 - 5 6


schools and other improvements. It has not, as far as I can see,
touched the capital goods boom. It may actually have stimulated,
rather than curbed, business borrowing because the prudent corporation executive, reading and hearing about tight money policies, has in
many cases borrowed money he did not yet need—just to be on the
safe side.
This, of course, is not to say that tight money will not be effective.
It may grab hold very soon now because financial institutions have
come about to the end of the road when it comes to selling "governments," especially at current prices and in present thin markets.
Moreover, many banks are "loaned up" to the limit of what they consider prudent.
In concluding, Mr. Chairman, may I say a personal word. I am not
posing here as an expert. I do not pretend to know the answers to
these difficult questions. I think it would require at least 2 years'
study by a monetary commission, aided by afirst-ratestaff, to begin
to arrive at the answers. I do claim to be a qualified observer of the
financial scene.
My record over nearly 30 years should prove, I think, that I am no
enemy of the Federal Reserve Board or of any public officials who try
honestly and according to their best judgment to serve us all.
So far from being opposed to monetary management, including the
quantitative control of credit, I have, I think, a clear record of having
encouraged the broader understanding of these matters.
As for the independence of the Fed—as far back as 1950 I pointed
out that the Fed was under no compulsion, legal or otherwise, to peg
Government bonds. I showed that in any contest between the Federal Reserve and the Treasury, the Treasury could not hope to win.
I urged the Federal Reserve to take its courage in its hands and act
The Board of Governors had a speech I made at that time reprinted
and sent all over the country, and the following year they did assert
their independence.
And so, in raising now some troublesome questions, I am not seeking
to injure the Federal Reserve System. On the contrary, I believe
that if we cannot soon persuade moderate men to face up to these questions, we will be too late and will find ourselves confronted with immoderate solutions.
Thank you, Mr. Chairman.
Chairman P A T M A N . Thank you, Mr. Bell. You have certainly
raised some good questions. Your statement is very fine.
I wonder, Senator O'Mahoney, would you like to ask Mr. Bell some
questions now, or would you prefer that I interrogate him first?
Senator O ' M A H O N E Y . It is quite immaterial to me.
Chairman PATMAN. I mean, I do not know what your schedule is.
I know you are very busy.
Senator O ' M A H O N E Y . I am here for the duration of the morning
session, at any rate.
Chairman PATMAN. Thank you, sir.
Senator O ' M A H O N E Y . Mr. Bell, I would like to start with calling
attention to yourself as a witness and as a man of great experience in
the field offinance—eventhough you do not call yourself an expert—
I think you are overmodest in that. I read with interest Business

MONETARY POLICY I 1 9 5 5 - 5 6 14

Week, which you edit. I read it almost every week except in political
campaigns. [Laughter.]
The President of the United States is reported by the press to be
advocating or preparing to advocate in his state of the Union message
an expansion of the Marshall plan or, shall I say, a renewal of the
Marshall plan on a great scale whereby the Congress will be asked
to approve large loans to foreign countries, principally, of course, the
Western bloc of free nations.
We already know, and this I approve completely, that he has recommended that the British request for remission of the interest due upon
the British debt shall be forgiven.
That latter recommendation of the Government forgiving entirely
the interest upon the debt is altogether contrary to the policy of the
Secretary of the Treasury in boosting the debt—the interest upon the
debt of private citizens, private corporations, and of the Government
Do you find in these facts which I have just related, any basis for
further comment ?
Mr. BELL. Senator, the chairman referred, in his very excellent, if
he will permit me to say so, opening statement, to the inherent checks
and balances that we have in our system, not merely by reason of the
institutions that we have, but by reason of the divergence of viewpoints
of men. And I suppose that it is a sound thing in an administration
not to have people who all think exactly alike, but to have people who
have at least some variance of views and of the values they place upon
I would certainly not want to pass any judgement upon the validity
of the point of view of anybody in the administration. My own feeling, Senator, is that it
Senator O ' M A H O N E Y . I am not asking you to pass any judgement.
M r . BELL. N o .
Senator O ' M A H O N E Y . I

am just asking you to give your own opinions with respect to a central fact in this whole problem of interest
upon debt. Can we logically follow a policy of no interest upon the
debt owed the United States Government, while levying a constantly
increasing interest upon the debt of the people of the United States
through the policy of the Government?
The only purpose of our sitting here is to decide what is best for the
policy of the United States. We have to be prepared in our reports
to Congress, just as the Executive has to be, for the opening of the
new session of Congress, and I would welcome your comment upon
this apparent conflict of policy.
Mr. BELL. Well, sir, I do not quite see the conflict as sharply as you
apparently see it. It seems to me clearly that we are faced with a
very emergent situation in Europe. The Suez crisis, without entering
into the question of the rights and wrongs of it, has created a serious
economic crisis in Europe, and I think, sir, that we must be prepared
for emergency measures such as this remission of this one installment
of debt. Otherwise, I think the consequences might be serious, not
merely for our allies but for ourselves.
Senator O ' M A H O N E Y . NOW let me ask you to turn to page 9 of your
statement this morning. I began to read it only toward the conclusion of your statement.
M r . BELL. Y e s , s i r .

MONETARY POLICY I 1 9 5 5 - 5 6


Senator O ' M A H O N E Y . Toward the end of the paragraph beginning,
"My record over nearly 30 years"
Senator O ' M A H O N E Y (continuing). You say:
As for the independence of the Fed—as far back as 1950 I pointed out that
the Fed was under no compulsion, legal or otherwise, to peg Government bonds.

In order to carry out the foreign fiscal policy as part of the foreign
policy of the United States which the President has prescribed, it
will be necessary for the Treasury to borrow money.
M r . BELL. Y e s , s i r .
Senator O ' M A H O N E Y .

And it was so stated. The Treasury is wondering this morning what rate of interest it must be prepared to pay
to the big banks in New York on the money that will be required because of the forgiveness of the interest on the British debt.
M r . BELL. Y e s , s i r .
Senator O ' M A H O N E Y .

And because of the program which the administration apparently is about to follow, of expanding its policy
of economic loans.
M r . BELL. Y e s .
Senator O ' M A H O N E X .

In order that you may be under no misapprehension as to my own views about this, I advocated and supported
the Marshall plan from the very beginning, and I see no objection
to the continuation of the Marshall plan, even though some may prefer now to call it the Eisenhower plan or the Dulles plan, or some
other plan.
It was a good plan, and it has done wonders for Western Europe.
There is only one point on which I reserve judgment, and that is the
policy which Secretary Dulles followed during the last administration, of refusing to allow his subordinates, or to testify himself, before the authorized committees of Congress with respect to how the
money we loan was being spent abroad, and by whom.
I know very well, and I think everybody who has watched the development of the fiscal matters knows, that when the Government
holds out the molasses pot and takes the cover off, the flies begin to
So when the Secretary, Secretary Dulles, deliberately refused to
allow witnesses to answer questions—questions by Congress, let me
say—with respect to the manner of expenditure, I felt that was
wrong. Congress ought to know about it.
But, with that reservation, I see no objection whatsoever to fighting
communism by economic aids rather than by war, and I deeply believe that we are engaged in a cold war which, if we continue to follow the policy of the last 4 years, we may lose to Communist Russia.
And one of the indications betore us now of the danger in which
we are is the point of view which you have just expressed in your
paper with respect to high interest rates.
I am sorry to have taken so much time in explaining my own point
of view, but I did that merely to disabuse you of any fear that I was
talking from partisan motives rather than from great concern for
the monetary policy of the United States.
Mr. BELL. Yes, Senator.
Senator O ' M A H O N E Y . NOW, would you care to answer, to make any
comment upon this apparent conflict?
Mr. BELL. The only comment I think that I could appropriately
make, sir, is that this is another complication, a very serious one, which


MONETARY POLICY I 1 9 5 5 - 5 6 12

makes it even more urgent. It seems to me that we should reexamine
these policies and counsel together on them.
Senator O ' M A H O N E Y . I apologize to you, Mr. Bell. I talked so
long that you lost the question.
Mr. BELL. Perhaps I did.
Senator O ' M A H O N E Y . The question was keyed to your statement
on page 9.
Mr. BELL. On pegging Government bonds?
Senator O ' M A H O N E Y . On pegging Government bonds.
M r . BELL. Y e s , s i r .
Senator O ' M A H O N E Y . D O

you not think it would be a very sound
policy for the Federal Reserve Board to come to the aid of the Government in selling these bonds which the Treasury Department will have
to sell to carry out the program that President Eisenhower is now
Mr. BELL. Well, Senator, if you will permit me to put it in my own
words, which may not be quite as concise as yours, I have always felt
that the Federal Reserve and the Treasury were married, that they
have to get along together and they have to help each other
Senator O ' M A H O N E Y . I agree with that.
Mr. BELL (continuing). That it is silly to think that one can go
rampaging off entirely on its own. They cannot do that.
Now, that is not to say that the Fed must peg Government bonds
or that it must be a handmaiden to the Treasury to cater to whatever
desires or whims the Treasury may have. But it must, of course, share
responsibility for the stability of the Government security market.
(Senator O ' M A H O N E Y . I knew you took that point of view because
of your speech before the American Bankers' Association. I think
you said that the Federal Reserve should not say to the Government,
"Go fly your own kite." Those were your words, were they not ?
Mr. BELL. That is correct.
Senator O ' M A H O N E Y . And I think it is most important to take advantage of your appearance before this committee here to emphasize
that point of view, with which I completely agree.
I judge, then, that I am justified in saying that in response to my
questions now, you have reasserted your oft-repeated principle that
the Federal Reserve Board owes an obligation to work as a partner
with the Treasury Department to see that the Government bond
market is not
Mr. BELT,. Sir, an equal partner in which neither side dominates
or orders the other around; in which they work together.
Senator O ' M A H O N E Y . I think I might be invading the chairman's
field in this question.
When you say "an equal partner," do you believe that the Federal
Reserve Board is superior to Congress ?
M r . BELL. O h , n o , s i r .
Senator O ' M A H O N E Y .

It is not superior to the Treasury, but how
about Congress ?
Mr. BELL. I certainly do not; by no means.
Senator O ' M A H O N E Y . Thank you very much, Mr. Chairman.
Chairman P A T M A N . On that point, Mr. Martin at one time stated
that he considered the Federal Reserve Board a servant or agent of
Congress. Necessarily that is true, because the Constitution is very
plain that the powers that they now assume are powers that Congress

MONETARY POLICY I 1 9 5 5 - 5 6


should perform and duties that Congress should perform, but Congress
has delegated the powers to the Federal Reserve System.
On this study, Mr. Bell, that you have mentioned, I agree with you
that a thorough study should be made, but I hope that you do not insist
upon a Presidential Commission to make the study, for these reasons:
No. 1, it is a legislative matter, not an executive matter.
No. 2, people who are elected and have something to lose should
be charged with the responsibility, rather than someone who is in
no way connected with an obligation to directly or indirectly keep in
mind the public interest.
It occurs to me that that makes a big difference, Mr. Bell.
Mr. BELL. Mr. Chairman, I would like to respond to that. I have
worked, as I think you know, in very close cooperation with the
Legislature of the State of New York.
Chairman P A T M A N . Yes, sir.
Mr. BELL. I was for 7 years an official of the State, and I think
that I have a very proper respect for the legislative branch, and I
think I have some understanding of the problems that they deal with.
Now, the reason I suggested that this should be a commission which
would not include members either of the legislature or of the administration, is that it seemed to me that it would be valuable at this time
to get what, as far as it is humanly possible, would be an outside or
detached viewpoint.
My point is that the Members of the Senate and the Congress will, of
course, be studying these problems, as you are doing right now; but it
is they who will ultimately have to pass upon the recommendations
of this Commission^ because the Commission will be meaningless except
as its recommendations exentuate in constructive legislation.
It just seemed to me that it would be better if you could have this
group that would study, not in terms of any legislative deadlines, not
thinking of whether we have to get our recommendations in for this
session or for that session, but who would work on this problem until
they are satisfied that they have come as close to the answers as is
humanly possible, and maybe there are no answers to some of those
And they would then put forth their report and findings to be
debated, and we would presumably have differences of opinion on the
matter; and then ultimately these recommendations would, of course,
come to the consideration of the committees like yours, sir, and if they
had merit they would ultimately result in legislation.
But it seems to me that it would leave the leaders of Congress and
the Senate freer to exercise their clear and unbiased judgment if
they were not themselves participants in this study. That is my
whole point.
Chairman P A T M A N . I think they would feel very free, anyway;
they usually do, Mr. Bell.
Here is the viewpoint I have on that: If you have an outside
commission, you certainly delay action; because after that commission gets through, it must present its findings, and the reasons for
the findings, to the proper legislative committees, House and Senate.
It is going by a roundabout way, when the House and Senate, either
by joint hearing or by the respective committees of the two bodies,
could have the hearings and call before them the people that you



POLICY I 1 9 5 5 - 5 6 14

would normally select to serve on a commission. In that way you
would get all viewpoints.
The Members of Congress have a responsibility to the people.
They have something to lose, their own seats are involved if they
make a mistake, why, it is too bad for them. On the other hand
a commission appointed by the President, I am assuming that
they will be public-minded people and that they would not have some
ax to grind, at the same time do not have the responsibility that a
Member of Congress has. They have not been elected to office.
They are not under obligations to constituents. They have nothing
to lose in the advocacy of what they present, like a Member of
Congress, I believe that it would be better to have congressional
committees, either joint or preferably each body conducting its
own investigation, and calling all these people before them and getting
all viewpoints.
That is just my opinion. You have yours.
M r . BELL.


Chairman P A T M A N . Which I respect, of course.
Mr. B E L L . Well, I am quite sure that there is great force in what
?rou said. It iust seems to me that it would actually leave the legisative bodies freer to pass judgment upon these recommendations.
Chairman P A T M A N . I understand your viewpoint. And furthermore, you know that they would be bankers, because they are the
ones who would know about it.
Mr. B E L L . They would have to be.
Chairman P A T M A N . Well, bankers have a self-interest in this thing,
and I think that is one of the bad features of the Federal Reserve
System now, that the bankers have too much control, and I do not
think we should necessarily consult the bankers about it.
We can hear them all right, and hear their testimony and listen to
them, give consideration to their views, but I do not think they should
be leading the parade, because they are too much interested.
Mr. Bell, you mentioned the inability of the central bank to control economic conditions through monetary changes because of the
competitive situation with respect to those commercial banks over
which they have no control.
I assume State banks would come first, and I agree with you that
we should give serious consideration to that.
Mr. B E L L . I merely mentioned that consideration should be given
to the overall monetary system when so much of your commercial bank
structure is outside of the banking system.
Chairman P A T M A N . That is right. You take, for instance, the other
day the interest rate was raised on time deposits.
M r . BELL. Y e s , sir.

Chairman P A T M A N . In the 1 9 3 5 act, you will recall, it is unlawful to
pay interest on demand deposits, and it is also unlawful to pay an interest rate in excess of the amount that is fixed by the Federal Reserve
Board. Heretofore that has been 2y2 percent, and the other day they
raised it to 3 percent.
Senator O ' M A H O N E Y . Mr. Chairman, may I interrupt, merely to
remark that some of the banks are not taking advantage of the permission of the Board to raise the interest rate on certificates of deposit?
I have seen some certificates of deposit recently reissued which stiff
carry only 2 percent.




Chairman P A T M A N . Well, there is a little catch to that three, you
know. That does not apply until about 6 months, does it, Mr. Bell?
Mr. B E L L . It is effective January 1.
Chairman P A T M A N . I mean only to deposits that are over 6 months
M r . BELL. O h , y e s .
Chairman P A T M A N . I think there is a little fine print on
Mr. B E L L . May I make a comment on that. As an old

Senator, I think that authorities who have to place these ceilings would
prefer, if they could, not to be in the position of actually fixing the
rates, but rather, if possible, to fix a ceiling within which there would
be variations. So that I would not think that it would be desirable
that everybody should immediately go to the limit of the ceiling, because then what you would have, in effect, is the Federal Reserve
Board not fixing ceilings but fixing rates.
Senator O ' M A H O N E Y . I quite agree with you, and I did not want to
interrupt the chain of questions that the chairman is following, but
I make this further comment to call attention to the fact that the
banks increased the rate of interest which the Government must pay,
but they are not ready to increase the rate of interest which the small
savers can receive.
They want their money cheap when they get it from the little people,
and they want to get a very high interest rate return when the Government wants it from them. And I think the time has come for the
banks, as well as the Federal Reserve Board, to cooperate with the
Government in meeting the terrificfinancialproblem that is now ours.
Mr. B E L L . Well, sir, I do not know whether this statement will find
any sympathy with you, but it is my opinion, truly, that the majority
of the larger banks, at any rate, have been very reluctant to increase
their loan rates, and have really gone along with reluctant feet.
Certainly as far as the last increase in the prime rate was concerned,
the New York banks wouldn't do it long after they were really being
pushed. It was left for a Boston bank to do it, and the thing was
set up so that the Fed appeared to be following the market, but it was
really the other way around.
Senator O ' M A H O N E Y . Mr. Chairman, would you permit me to tell
my story
Chairman P A T M A N . Certainly.
Senator O ' M A H O N E Y (continuing). About Gene McCarthy, the
sheepgrower in Wyoming?
Chairman P A T M A N . G O ahead, Senator.
Senator O ' M A H O N E Y . I think it is appropriate at this moment.
Gene McCarthy was a very wealthy grower and very successful
woolgrower in the State of Wyoming. He was a member of the
Wyoming Woolgrowers Association.
The members of this organization, like those who are engaged in
the sheep industry throughout the public land States, raised their
sheep upon the public domain, and they were always very much
afraid of the havoc wrought among their flocks by the coyotes. So
always their representatives in Congress were requested to secure appropriations for the Department of Agriculture to make war on
predatory animals.
The woolgrowers association was holding a meeting, and the president thought it would be a good idea to call on Gene McCarthy to


MONETARY POLICY I 1 9 5 5 - 5 6 16

make a speech on predatory animals. He accepted. It was a brief
speech. He said, and he had a very nice, sweet, Irish brogue:
Mr. President, you have heard a lot of technical talk this morning about predatory animals. All I want to say to you is this: If you can keep the banks out of
your flocks, you don't need to worry about the coyotes.

Mr. BELL. Well, Senator, some of my best friends are bankers.
Chairman PATMAN. Yes. We are not against the bankers because
they are bankers. I know Senator O'Mahoney feels the same way I
feel about it. In fact, we cannot get along without the commercial
banking system. We think it is the finest and best system on earth,
at least I do, and I think they render great service to our Nation in
time of peace as well as in time of war, and I do not want to change
the commercial banking system.
I do not want to change the Federal Eeserve System, except get
it back to its original intentions, and leave it to public members to
control. That is the only thing I want to change.
Now, on the increase in the time deposit interest rate to 3 percent,
do you not think that is inflationary, for this reason: The object
clearly is to induce depositors to bring their money from the Federal
savings and loans or similar institutions, over to the commercial banks.
Obviously that is the object.
Let us suppose that a customer does that. Is that deflationary or
inflationary. It is inflationary, because the savings and loan can only
make a loan of just this particular money, and it is unable to expand
on it; whereas if the money is brought over to a commercial bank,
I think the required reserve is only 5 percent now, is it now ?
M r . BELL. Y e s , s i r .
Chairman P A T M A N .

Then the commercial banks can expand 20-to-l.
So do you not think if the policy is effective, that it will actually
be inflationary rather than deflationary, Mr. Bell ?
Mr. BELL. Well, I don't think so, Mr. Chairman.
First of all, I would like to make sure that there is no implication
here that I am criticizing the action of the Federal Reserve in changing regulation Q. I think that their ceilings had become obsolete,
and if I had any criticism it was that they didn't act sooner.
Chairman P A T M A N . I am not criticizing just on that.
M r . BELL. NO.
Chairman P A T M A N . I
M r . BELL. Y e s .

am just bringing it out.

Now, my point of view on this matter of these interest rjates is
perhaps a minority viewpoint, but again it goes back to my experience as a bank supervisor.
I remember, sir, that in the 1920's, our banking system did engage
in a very destructive competition to see who could pull deposits away
from the other fellow by paying the highest rate of interest.
Chairman P A T M A N . Higher rate of interest, yes, sir.
Mr. BELL. And the result of that, sir, was that Congress, as you
have pointed out, ended it by forbidding the payment of any interest
rates on demand deposits at all.
Now, I think there is a danger—I won't say it is actually here—
but I would say there is a danger of getting excessive competition for
these time and thrift deposits by the payment of high interest rates
which strain the capacity of the banks to earn and justify them; and


POLICY I 1 9 5 5 - 5 6


I am of the opinion, sir, that so long as we have an overall monetary
policy which freezes the volume of money in the country, that you
are not going to increase the volume of deposits by paying higher
rates of interest.
I think you are merely, as you suggest, going to yank them from
one institution to another, or convert a certain amount of demand
deposits into time deposits in response to these higher interest rates.
So I am concerned about them on that score, sir, but I don't think
they can be described properly as inflationary. That does not seem
to me to be
Chairman P A T M A N . All right. Let me ask you this question, Mr.
We will take a thousand dollars in a Federal savings and loan, and
that thousand dollars moves over to the commercial bank because the
customer would just rather do business with the commercial bank;
the commercial bank can offer so many more services than a savings
and loan.
But is not the potential there, the inflation potential, we will call
it, more than at the Federal savings and loan, for the reason that they
can only lend it one time, and the commercial banking system can
lend it 20 times?
How can you say it is not calculated to be more inflationary under
those conditions, Mr. Bell?
Mr. B E L L . Well, sir, this is rather a complicated question, and I
tread very lightly here, but I do not believe, Mr. Chairman, that a
transfer of a savings and loan share over to a time deposit in a commercial bank would give the commercial bank any additional reserves,
and it would have to get additional reserves, would it not, in order for
the system to multiply deposits?
Chairman P A T M A N . That is true, it would have to do that. But
they are capable of doing it because they have the means of doing it.
Now, I am talking about a commercial bank which has a savings
department. I am not talking about one
Mr. B E L L . Yes, sir, I realize that.
Chairman P A T M A N . I am not talking about one which does not
have a savings department.
M r . BELL.


Chairman P A T M A N . In some States it is possible that they cannot
do that. But generally, they can do that.
Mr. B E L L . Well, I believe, sir, that one would have to follow this
transaction through rather carefully, and I think we must assume
that the savings and loan had that money invested, and that when
somebody came in and took that money out, that the savings and loan
probably had to decrease its investments in order to supply the money;
somebody else had to take that up, and I do not think there is any
increase in money involved.
Chairman P A T M A N . Not just that particular money, but 20 times
that much. You see, that becomes a base, if properly used, to expand
20 times, just like in a commercial bank now it is possible to expand
6 times.
Mr. B E L L . On the basis of new reserves, I must say I prefer
Chairman P A T M A N . That is right; that is all I am talking about.
Mr. B E L L (continuing). I must say I would rather have some
licensed practitioner, like Mr. Ensley, answer that.


MONETARY POLICY I 1 9 5 5 - 5 6 18

Chairman P A T M A N . YOU made a very interesting comment concerning the holding company bill.
M r . BELL. Y e s , s i r .
Chairman P A T M A N . I

am on the Banking and Currency Committee
of the House, and we watched that bill closely, and I think the bill
as it passed tne House was all right. I did not keep up with it in the
Senate, but I understand it was in the Senate that the amendment
was made that permitted the acquisition of new banks by holding
companies within the States without prior approval of the appropriate State banking authority; am I correct m that, Mr. Bell ?
Mr. BELL. I am sorry, I am not sufficiently close to the course of
Chairman P A T M A N . A S a Member of Congress, and certainly as a
member of the Banking and Currency Committee, I am disappointed.
I think if this public Taw goes as far as the Federal Reserve Board
seems to indicate, and as the banks seem to think, something should
be done immediately to repeal that part of the law.
We were not trying to expand holding companies. We were trying
to restrict them. That was your understanding; was it not ?
M r . BELL. Y e s , s i r ; i t w a s .
Chairman P A T M A N . It is rather

unusual that we would end up
doing exactly what we said we were trying to stop.
Mr. BELL. Well, I think, sir, that as far as we in the State of New
York are concerned, we do not fully understand what the implications
of this bill may turn out to be, but we do have a particular situation
before us at the present time.
When I say "we," I am still a member of the Banking Board of the
State of New York, so I share some part of the superintendent's concern, and it gives us a great deal of concern. There is, as you know,
in our State a joint legislative committee studying our banking law.
I am on an advisory committee to that, and the members of the legislature in New York are very much concerned about this problem.
We do not know the answer. We don't even know for sure that we
know the right questions yet.
Chairman PATMAN. Well, I am very much concerned, and I know
other members are. This bill did not turn out as it was intended.
I am not trying to place responsibility and I am not criticizing or
censuring any particular person or either body of Congress about it,
but I do know that the object of that bill was to restrict and limit
holding companies and retard their progress. Certainly there was
no thought that a law should be passed which would permit the exmnsion of holding companies within a State and contrary to State
I think that would be terrible, and I think you would find a lot of
sentiment to change it quickly.
Mr. BELL. If I may make this suggestion, sir, I think that much
help could be done if there were a general revision of all of our banking
laws, to make sure that the Federal chartering and supervisory
authorities did abide by the State laws with respect to branches.
Chairman P A T M A N . I thoroughly agree with you.
Mr. BELL. That was done with respect to the national banks, but it
was left very vague in other areas, and this causes a good deal of
friction and unhappiness in the workings of our dual system,


MONETARY POLICY I 1 9 5 5 - 5 6


Chairman P A T M A N . It is depressing to me, particularly in view of
the fact that in our State constitution—and we ar£ very proud of this
provision—it is impossible for a bank to be a chain bank or have more
than one office. We have an independent banking system in our State,
and they can only have one office.
M r . BELL. Y e s , s i r .
Chairman P A T M A N .

Yet, if this law which recently was enacted by
Congress is interpreted as many people seem to think it should be,
that would even destroy our State constitutional provision, would it
not, Mr. Bell?
Mr. BELL. If that is correct, sir.
Chairman P A T M A N . In other words, it could be evaded through the
holding company process, if that interpretation were correct which I
do not concur in.
Mr. BELL. Well, I am not sufficiently sure as to the full implications
of this bill, but I know that in the case of New York, the matter that
arose there was such that the New York authorities are considered
to have nothing to say about it at all, and the Federal Reserve advised
them of the facts as a matter of courtesy only.
Chairman P A T M A N . A S a matter of courtesy only.
Mr. BELL. That is right.
Chairman P A T M A N . Well now, that is pretty rough; that is pretty
rough. If it goes that far, I am sure there will be plenty of sentiment
in Congress
Mr. BELL. The institutions involved, although two of them were
State-chartered institutions, did not advise the banking department
at all.
Chairman P A T M A N . YOU mentioned the Federal Reserve System
changes in 1935. I believe it is material to suggest at this point that
you recognize, I know, in view of the fact that you have kept up with
the banking laws, that we did not have a central bank until 1935.
Mr. BELL. That is correct, sir.
Chairman P A T M A N . And in 1935, we completely changed the Federal Reserve System.
Mr. BELL. That is correct.
Chairman P A T M A N . Y O U agree to that, do you not ?
M r . BELL. Y e s ; I d o .
Chairman P A T M A N . YOU

see, before that we had 12 regions, and
we had 9 directors of each bank, and 6 of those, of course, were selected
by the banking interests, 3 of them were appointed by the Board of
Governors, class C directors. They were pretty big people, you know,
then. The chairman of the board was the biggest man in that bank,
was he not? He was the one who had to reach back in the safe and
get the Federal Reserve notes to deliver. He was the only one who
Mr. BELL. Wasn't he the Federal Reserve agent ?
Chairman P A T M A N . That is correct. The chairman of the board
was the Federal Reserve agent.
M r . BELL.


Chairman P A T M A N . And he was the only one who could handle
the Government's money.
Well, in 1935 the law was changed so that these six bank directors
could elect their president, who would become the big man in that
bank, could they not?


MONETARY POLICY I 1 9 5 5 - 5 6 20

Mr. BELL. That is correct. Under the 1935 law the president became the head of the bank.
Chairman P A T M A N . S O it was completely changed there. And then
the regional banks used to have lots of other authority in the open market operations which were important. Under the 1935 act, they were,
for all practical purposes, put in 1 pool, and 1 person controlled it,
and now when there is an open market purchase—of a Government
bond or anything else—this 1 person, who is a manager of the account
in the New York Federal Reserve Bank, divides it through some system or formula that they have devised, among all the 12 banks; is that
not correct?
Mr. BELL. Sir, I think you know more about this than I do.
Chairman P A T M A N . And furthermore, the banks had something to
do with the rediscount rate before 1935, and now it is only the Board
here which has anything to do with the rediscount rate.
Mr. BELL. I believe the board still had a veto power in those early
days, because as I recall, the Federal Reserve bank in New York tried
several times to raise the rate in the summer of 1929.
Chairman P A T M A N . They did not have what you might call the
Russian type veto.
Mr. BELL. They did not stimulate spontaneous action on the part of
regional banks.
Chairman P A T M A N . That is right. They could discuss it.
But now, since 1935, the Federal Reserve Board absolutely controls
it, and this business of saying 108 directors of the 12 banks and their
branches initiated it and caused it, why, that is all hokum. They can
do it, all right. But the Federal Reserve Board has the power to
approve or disapprove. If they want the interest rate at 2y2 percent,
they can keep it there, just like Mr. Eccles testified.
They have the power to do it. If they want to let it increase, they
can do that, too.
The 1935 act completely changed the System. I will not go into it
thoroughly, but you do agree with me that up until that time it was
not a real central bank, but since it has become a central bank ?
Mr. BELL. Well, I certainly agree that prior to that time that the
power lay primarily in the regional banks, especially the Federal
Reserve Bank of New York, and then it was shifted to Washington.
It still seems to me it is not quite accurate to call it a central bank
because you have the regional setup, and so on, and there
Chairman P A T M A N . I would not want to embarrass these people in
the regional system by asking what powers they have. It would be
a source of great embarrassment.
Mr. BELL. Well, I think there have been
Chairman PATMAN. N O W , on this tight money, high interest policy,
you are having a lot of trouble now getting money for your schools in
New York. Mr. Levitt is to be here this morning.
Mr. BELL. He is right here.
M r . LEVITT. Y e s .
Chairman PATMAN.

Glad to have you, sir. I know about your p r o gram and your schedule. You advised me when you were invited to
M r . LEVITT. Y e s , s i r .
Chairman P A T M A N . With

Mr. Bell's permission, we will permit Mr.
Levitt to testify now, and then we will resume questioning you after
he gets through, as well as Mr. Levitt, because he has a deadline to meet.




Mr. LEVITT. Thank you.
Chairman PATMAN. We promised to accommodate ourselves to his
Senator O ' M A H O N E Y . Before the transfer is made, will you permit
me to ask another question of Mr. Bell ?
Chairman P A T M A N . Yes, sir.
Senator O ' M A H O N E Y . This question is prompted by a desire to make
absolutely clear your views as to whether or not tight money, otherwise
known as the rising interest rate throughout the American economy,
is or is not inflation.
I assume from what you say on page 8, and what you have said
throughout the morning, that you do believe that the high interest
rate is inflation.
You say at the beginning of the last paragraph on page 8 as follows:
The tight money policy thus far has hurt home builders, small business and
municipalities that need to build schools and other improvements. It has not,
as far as I can see, touched the capital goods boom.
It may actually have stimulated, rather than curbed, business borrowing because the prudent corporation executive, reading and hearing about tight money
policies, has in many cases borrowed money he did not yet need just to be on
the safe side.

Are we to interpret as an expression of your belief, that the increase
in rate of interest throughout our economy is inflation?
Mr. BELL. Well, not without some modification, Senator.
I am of the opinion that the policy if persisted in will prove to be
very deflationary, and if carried on far enough and long enough, I
think it can halt any boom and bring you into a real depression.
I am sure there is no intention on the part of the Federal Reserve
authorities to go that far.
What has happened in the present situation, it seems to me, is that
an overall tight money policy has not operated very effectively or very
smoothly to do what is claimed for it; namely to moderate this boom
and to curb the excesses, because, as I say, it does not seem to me that
it has as yet had any material effect upon the heart and driving force
of the boom, which is the capital expansion program of corporations.
It has hit the fringes such as the home builder and the municipalities
that Comptroller Levitt is going to talk about. I cannot answer your
question "Yes" or "No," except the best thing I can say is that it
does not seem to me up until this point that the overwhelming reliance
upon quantitative credit control alone has proved to be a very successful device, and at the same time I think if we continue to rely
upon that alone and to press it harder and harder we will at some
point come to a point where the brake will grab and we are in trouble.
Senator O ' M A H O N E Y . With that answer I agree. I realize that you
come here with a paper which is largely confined to the discussion of
the Federal Reserve policy, but when I find you pointing out as many
of our correspondents have earlier pointed out, that the tight money
policy has hurt home builders, small business, and municipalities, then
it has been inflationary because it has increased the cost of building
homes, of expanding small business or maintaining small business,
and the efforts of local communities to build schools, thereby increasing the demand for Federal intervention in the school construction
That is all, it seems to me, inflationary. Do I misunderstand you
in that regard ?


MONETARY POLICY I 1 9 5 5 - 5 6 22

Mr. BELL. That is a very ticklish problem because I think once upon
a time when I was a newspaper man I counted up some 40 or 50 definitions of the word "inflation."
To me it means primarily a condition in which the money supply is
expanding and that ultimately results in higher prices.
Chairman P A T M A N . Wouldn't the phrase "undue expansion" be a
good one?
In other words, what some people call inflation, is just necessary
But when you go beyond the necessary expansion, couldn't you call
that inflation ?
Mr. BELL. Well, I want to be very responsive here, Mr. Chairman,
but I do not think I can quite follow your question.
I would like, if I may, to say this: I do not wish at all to give the
impression that I am against efforts to moderate a boom. I do think
this is part of the stabilization process.
Nor am I against quantitative credit control where it is useful and
where it is supplemented by other things.
My difficulty with the present situation is that it does not seem to
me to be working in the way it should work.
Senator O ' M A H O N E Y . Let me interrupt you, because I know Mr.
Levitt is coming; just to boil it down to one question.
M r . BELL. Y e s , s i r .
Senator O ' M A H O N E Y . D O

you not agree that if the price of money
goes up, it is equally inflation of it as when the price of food goes up ?
Mr. BELL. N O , sir. I am afraid I could not agree with that.
Senator O ' M A H O N E Y . And why?
Mr. BELL. Well, because when the price of money goes up it is a
reflection of the fact that the supply of money is smaller or is not
expanding. And the ultimate results of that are bound to be deflationary, because if we are to have an expanding system as we hope
for, we have got to have expansion in our money supply.
There comes a time when if you limit the money supply you won't get
growth any longer. I think that is deflationary. The temporary
effect of these higher interest rates may be, it is true, to add to costs,
the costs of doing business, but the longer run
Senator O ' M A H O N E Y . We are not talking about the long run, but
about the immediate effect. I have no disagreement with the theory
that if this policy of tight money is carried on an ad lib and permanent basis, it would be deflationary. You say that; do you not ?
M r . BELL. Y e s .
Senator O ' M A H O N E Y .

But, certainly, temporarily, it is increasing
the cost of operating for our full economy, as you have so well pointed
out here with respect to home builders, small business, and municipalities.
Mr. BELL. Well, I think that is correct; temporarily it does increase
their costs.
Senator O ' M A H O N E Y . Thank you very much.
Thank you, Mr. Chairman.
Chairman P A T M A N . I had conferred with Mr. Bell before the meeting. He suggested that Mr. Levitt had to get back and he would be
glad to yield. That is why I suggested that a minute ago.
Mr. Arthur Levitt, State comptroller of the State of New York,
Albany, N. Y. We are very delighted to have you here, and we shall
await your testimony, and we know we will profit by what you say.

MONETARY POLICY I 1 9 5 5 - 5 6



Mr. LEVITT. My name is Arthur Levitt. I am the comptroller of
New York State.
As chief fiscal officer of the State, I am responsible for the accounting of the receipts and disbursement of all State moneys, for the issuance of all State obligations, and the investment of all State money
and moneys, such as trust funds, which are under the jurisdiction of
the State.
The constitution and laws of New York State also assign the comptroller a number of duties affecting municipal finance. These duties
include, but are not limited to, the following:
The examination of the fiscal affairs of all municipalities except the
cities of New York, Buffalo, and Rochester, and the counties within
the city of New York; enforcement of constitutional tax limitations;
approval of the exclusion from the constitutional debt limitation of
the bonds issued for certain revenue-producing purposes; and approval, together with that of the board of regents, of certain school
debt in excess of the constitutional limitation.
In order to facilitate the performance of these duties, the law requires municipalities to submit annual financial reports to the comptroller, and to prepare such other reports as may be required.
A great deal of information about local finance and the problems of
municipalities is gathered by the comptroller's office as a result of
these duties. One of the divisions of my office, the division of municipal affairs, in addition to handling the municipal responsibilities of
the comptroller, provides legal consulting services for local officials,
and does research relating to municipal problems.
My duties and the services provided give me, as comptroller, a broad
and thorough knowledge of current municipal financial problems.
My acquaintance with the problems which the present restrictive
credit policy has created for the municipalities and school districts
of New York State is based upon the facts which are continually
being reported to me.
School districts are particularly affected by the Federal Reserve
Board's policy, because school building cannot be postponed until a
more favorable moment for financing arrives.
One indication of the urgency of the school-building problem in
New York State is the anticipated expenditure during the next 2
years of over a half billion dollars in school construction.
School enrollments are expected to increase every year for at
least the next 10 years. In 1952-53, there were 2,096,402 pupils enrolled in New York schools. Preliminary figures of the enrollment
for this past September have just been announced—2,426,387 pupils.
By 1965 the New York State Department of Education estimates
that we will need to provide for 3,184,500 schoolchildren. New
schools must be built to house the anticipated growth.
The cost of borrowing to finance school construction has been rising
alarmingly. In 1951-52, capital outlay for schools was $170,123,548, and the average interest rate on the money borrowed by the
school districts was 2.285 percent.
In June of 1956 the average interest rate on school borrowing was
2.760. Evidence that the tight money policy is placing more and


MONETARY POLICY I 1 9 5 5 - 5 6 24

more pressure upon the money market is found in the interest rate
which prevailed in school borrowings the past month.
In November 1956 the average rate was 4.078. Over the life of the
bond issue it will cost school districts and taxpayers $2,729,842' more
for the $13.8 million borrowed in November than it would have cost
them in June.
During 1957 and 1958 school districts in upstate New York plan
to spend $314 million in school construction. The borrowing to
finance this construction will cost $62,077,800 more at the November
rate than at the June.
The $5.5 million bond issue of Union Free School District No. 5,
in the town of Hempstead, was sold on November 15 at an interest
rate of 4.30 percent.
Four years ago this same district sold its bonds at 2.70 percent.
If the 1952 rate had continued, the difference in interest payments
over the life of the bond issue would be $1,383,767—enough to build
a school for 900 pupils.
On November 28 another district in the town of Hempstead rejected all bids on a bond issue of $2 million because the school
authorities felt that the 4.30 bid was too high.
This is not an isolated instance. It is happening all over the State.
But it is particularly revealing in Hempstead, which is located in
the heart of Nassau County's rapidly growing, urban population and
which possesses extensive tax resources.
Eventually, if the high cost of borrowing continues, I believe that
some of the money which normally would be used to support classroom programs will be diverted for the payment of debt service in
order to ease the tax burden. The quality of education will suffer if
the cost of providing educational facilities rises excessively.
High interest rates do not reflect the soundness of the school bonds.
The municipal securities market does not offer any safer investment
than the bonds of New York State school districts.
Generally, the laws provide that schools always realize their tax
levies because the taxes uncollected at the close of the tax period
are turned over to the proper authorities, either county or town.
These authorities pay the district the full amount of taxes due and
then enforce collection in the regular manner.
School districts, in addition to being assured of receiving the full
amount of taxes needed, receive substantial amounts of State aid.
While I will not describe all the education aids given, I would like
to point out that two are earmarked for debt service: the so-called
building quota and the emergency school building advance.
The building quota provides central school districts with substantial amounts of State aid for the payment of debt service. The
emergency building quota is intended to assist those districts which
have to expand their facilities because of unusually rapid population
During the school year 1955-56, the State paid $8.6 million in
building quota aid to control districts and $2.6 million emergency
building aid. The amount is expected to increase this year as more
districts qualify.
Senator O ' M A H O N E Y . What is the specific authority for that?
Mr. LEVITT. It is under the State education law.


MONETARY POLICY I 1 9 5 5 - 5 6

Senator O ' M A H O N E Y . H O W long has the State of New York been
providing State aid for the building of schools?
Mr. LEVITT. Oh, for many years. Longer than I can remember.
Always has been regarded as a function of the State to provide a
sound system of education for the children of the State, and the
medium through which the State exercises that function is the overall supervision of State aid through its department of education and
the granting offinancialaid to the school districts.
Senator O ' M A H O N E Y . In other words, that has been the policy OF
the State for some time, for many years ?
M r . LEVITT. Y e s , s i r .
Senator O ' M A H O N E Y .

That the school districts are not wealthy
enough to raise the taxes necessary to build the schools that the children ought to have; and, therefore, contributions from the State are
Mr. LEVITT. Yes, sir. It has been the policy of the State that each
child, no matter where he lives, is entitled to an equal opportunity of
education, and in the poorer districts the State makes up the difference.
Senator O ' M A H O N E Y . Could you, at your convenience, after you
have gone back to New York, furnish the committee with a table
showing the amount of State aid for schools contributed by the State
of New York since the program wasfirstinitiated ?
Mr. LEVITT. Yes, sir; I will do that.
Senator O ' M A H O N E Y . Thank you very much.
(The table referred to follows:)
State aid for school buildings—Total paid in New York State for school years
1926-27 through 1955-56

Additional Emergencyaid for
service 1


School fiscal school
1945-461946-471947-481948-491949-501950-511951-521952-531953-541954-55 2
1955-56 2

811, 590

aid for


* Additional aid for debt service on former debt to districts which have become centralized.
2 Preliminary figures.

Mr. LEVITT. The State is attempting to do all that it can to help to
bring the costs of school borrowing to reasonable levels. My office is
preparing a brochure explaining the merits of investment in New York
State school bonds. I expect to distribute this brochure to banks and
investment houses for the information of their clients.
The Governor has appointed a committee, of which I am chairman—
of which Mr. Bell is a member—to study ways to cut the interest cost
of school bonds. This committee will explore alternative ways of
financing school construction.


MONETARY POLICY I 1 9 5 5 - 5 6 26

While the State government will do everything possible, some remedies are beyond our power. Federal action can enhance the municipal
bond market and encourage the flow of funds, thus reducing interest
The current demoralization of the tax-exempt bond market has
created a serious problem in local government finance. Special consideration by the Federal Government is fully warranted m order to
alleviate the results of this restrictive credit policy.
Without passing on the merits of that policy, I want to point out that
there is a sharp distinction between public financing and private
financing so far as the burden of increased interest costs is concerned.
Local government borrowing must bear the full brunt of the steady
increase m interest rates which we have all witnessed in the course of
this year. On the other hand, when private industry borrows, the
burden of the higher interest rates is less than half of that which is
borne by local government units.
This is so because the Federal corporate income tax rate of 52 percent means in effect that the Federal Government is sharing to that
extent the increased interest costs of private business which are deductible from taxable income.
For example, when Hempstead School District No. 5 has to pay $2
million more interest it means that the taxpayers of the school district
must dig out of their pockets $2 million more to pay the cost of the new
school building.
But when a business corporation has to pay $2 million more in interest, the stockholders of the company are out of pocket only $1 million
and the United States Treasury contributes the other million dollars
through a tax deduction.
There is ample justification for considering the problem of local
government financing separately from the overall problem of the consequences of the present monetary policy upon borrowing in general,
business loans in particular.
Public finance is a special and separate subject, not only because of
the cushioning effect of the Federal income tax law on private borrowings, but also because of the urgent social necessity of proceeding with
the prompt construction of schools, hospitals, highways, water and
sewerage systems, and other public works as a matter of high priority.
For one thing the Federal Reserve might require member banks to
hold a certain reserve in municipal obligations. At present, in New
York State the municipal holdings of State chartered banks range
from one-tenth of 1 percent to 20 percent of the bank assets.
The average held by the State oanks is 5 percent. I presume that
there is a similar range in the municipal holdings of nationally chartered commercial banks and savings banks.
I recognize that individual banks have individual situations to meet,
but consideration might be given to a modest requirement of investments in municipal bonds which would not significantly curtail their
other loan activities while being of substantial benefit to the municipal
bond market.
At the present time savings and loan associations under Federal
charter lack the power to purchase municipal obligations. This
should be remedied.
One of the proposals before Senator Robertson's banking subcommittee, now working to revise the Federal banking laws, would permit

MONETARY POLICY I 1 9 5 5 - 5 6


Federal savings and loan associations to invest in municipals, subject
to the rules of the Home Loan Bank Board.
This recommendation seems well taken and I respectfully urge your
approval when a bill embodying such investment powers comes before
Another proposal which I believe demands serious attention is that
of amending the Internal Revenue Code to permit share owners of
investment companies which invest in tax-exempt bonds to receive
tax free the interest earned on such bonds.
This is in line with the recommendation of the President in his
1955 Economic Report. Passage of such legislation, which is merely
an extension of the conduit theory of taxation that now applies,
would open an entirely new buyer's market for municipal bonds, one
of major importance.
I will have more to say on this very important measure when changes
in the Internal Revenue Code are considered by the House Ways and
Means Committee.
Senator O ' M A H O N E Y . In order that your testimony may be clear
to those who read it, would you define the conduit theory ? You have
used that phrase.
Mr. LEVITT. The conduit theory, as I understand it
Senator O ' M A H O N E Y . For those engaged infinance,etc.
Mr. LEVITT. It is that which attaches to the particular security when
it comes into the hands of the investment company, and follows it so
that the benefit redounds to the advantage of the shareholder in the
investment company.
That is to say, that when the investment company purchases a taxfree security, the income from that security, is tax free, to the investment company, and the tax-free quality follows it into the hands of the
participant in the fund. And to the extent that the fund holds taxfree obligations, the participant in the fund benefits pro rata.
Senator O ' M A H O N E Y . Thank you, sir.
Mr. LEVITT. There is one more suggestion that I feel must be made.
If the tight money market continues for some months, and most of
the people whom I have consulted agree that it will, conditions in the
municipal bond market may be expected to worsen.
There is a great backlog of municipal bond issues which have been
postponed. Circumstances may force these issues on the market.
Then interest rates on municipal issues may be expected to continue to
rise at the accelerated pace we have witnessed during the last 6 months.
Under these circumstances, I believe that the possibility of giving
the Federal Reserve power to exercise selective credit controls, should
be carefully studied. Selective credit controls, if feasible, would allow
us to satisfy our needs for hospitals, mental institutions, highways,
and schools without inflicting an unwarranted burden upon the
I appreciate this opportunity to discuss the problems which New
York State school districts are encountering in marketing their bonds.
I hope that this committee will find the time to give consideration to
some of the remedies which I have suggested.
Senator O ' M A H O N E Y . What do you mean by "selective Federal
Mr. LEVITT. I mean the selective controls as distinguished from
the quantitative controls that Mr. Bell spoke of. Selective controls



POLICY I 1 9 5 5 - 5 6 28

such as the power to control consumer credit, power to control investment buying, the power to control mortgage credit and the like, as
distinguished from the broadside all-inclusive form of control that is
in operation today. Quantitative, all embracing control.
Senator O ' M A H O N E Y . Thank you.
Mr. LEVITT. Thank you, gentlemen.
Chairman P A T M A N . Thank you very much, Mr. Levitt.
Now, since Mr. Bell is a member of the committee selected by Governor Harriman to study this question, I wonder if Mr. Bell would
like to supplement the statement that has been made by Mr. Levitt.
Mr. B E L L . NO, Mr. Chairman. I think that Mr. Levitt has stated
the case very well indeed.
I would like to say this, that the plight in which municipalities find
themselves, particularly with respect to the financing of schools at a
time when we all recognize the urgent necessity for more schools is to
my way of thinking merely another illustration of the perplexities
which surround our present condition, and another proof of the fact
that we need to reexamine it and to give it a lot more thought.
Chairman P A T M A N . Concerning the tax-exempt bonds, Mr. Levitt,
I have always been opposed to removing the tax exemption but over
the years I have had studies made and I find that the people in the
school districts and States, counties and cities and political subdivisions, who have been beneficiaries of the tax-free income from those
bonds get very, very little out of it. Have you come to any conclusion
on that ?
And possibly not enough to justify it being such a fine storm cellar
for extreme wealth.
Mr. LEVITT. I would be very much interested in looking at those
statistics. It has been my observation, though, that the tax-exemption
feature does confer upon these securities an advantage in marketability
which is appreciable.
My experience in the field does not extend beyond the 2 years that I
have been in office, but I have noted a considerable margin of difference between the tax exempt and the nontax exempt, which it seemed
to me redounded to the advantage of the issuing agency.
I confess that the advantage is not as great as it ought to be and I
sometimes wonder why the market for these obligations is not as broad
as it should be.
Chairman P A T M A N . Y O U mentioned savings and loans purchasing
these obligations. Any organization that is built upon the cooperative
principle, naturally, would not have the inducement to buy these
tax-exempt bonds


Chairman P A T M A N . That a commercial bank would have.
The commercial banks now hold about $14 billion worth of taxexempt bonds. Do you know that? I mean of local State school districts, cities, and political subdivisions.
Mr. LEVITT. I understand that.
Chairman P A T M A N . Isn't it $ 1 4 billion? It is right around $ 1 4
Mr. LEVITT. I understand that the amount is large.
Chairman P A T M A N . Furthermore, they hold about $ 7 billion in
addition to that, $6 or $7 billion, of Federal securities that are tax
exempt, or partially tax exempt.

MONETARY POLICY I 1 9 5 5 - 5 6


So the commercial banking system now holds approximately $20
billion of tax-exempt or partly tax-exempt bonds. So they are not
behind on the program, Mr. Levitt.
Mr. LEVITT. They are interested primarily in the early maturities.
The amazing thing to me is that when school district bonds of the
quality I am speaking of are offered on the market at a rate of better
than 4 percent that unless I support the market by buying them for
the funds of which I am trustee, they have a hard time getting a bid
from the bankers.
There are not enough takers for this fine security even at the
prevailing rate.
Chairman P A T M A N . Don't you think, Mr. Levitt, that the Reconstruction Finance Corporation performed a great public service when
that organization purchased these bonds from all over the Nation
and kept them and "cured" them for the market and then fed them
out to the market, without anybody losing any money or taking any
discount ?
Don't you think that was a great service ?
Mr. LEVITT. I think that is a tremendous service and that is the
principle that the committee that Mr. Bell and I are on, is going to
consider very carefully in connection with the plan we hope to devise
for New York State.
Chairman P A T M A N . I read very carefully what you have said about
this and was impressed with it except I think you should broaden it
out, since education is the whole Nation, it involves the whole Nation,
including our military powers.
You know so many young men are excluded from military service
because of the lack of ability to even read or write. And so education
is a national issue, at least to that extent.
And I am hopeful that you will embrace in your recommendations,
if you can confine it to the State of New York, what the Federal
Government should possibly consider doing in that direction, to help
the entire Nation including the State of New York.
Mr. LEVITT. We will be very glad to do that.
Senator O ' M A H O N E Y . Mr. Chairman, may I ask Mr. Levitt if he will
amplify the statement which he made on page 4 in the second from the
last paragraph of that page that "there is a great backlog of municipal
bond issues which have been postponed."
Were you speaking of New York alone or other States?
Mr. LEVITT. Yes, sir. There are school issues from districts which
are fearful to come to the market with their bonds. And that fear I
might add, is amply justified.
Senator O ' M A H O N E Y . H O W many schools do you suppose are
included ?
Mr. LEVITT. In that category, sir ?
Senator O ' M A H O N E Y . Yes; in New York State.
Mr. LEVITT. It is difficult to estimate the number of school districts
which postponed the building of schools because of the bond-market
situation. We know several instances where boards of education rejected all bids on proposed bonds because of the high interest rate,
but we also know that there were numerous districts which decided to
delay the borrowing for school-building purposes. Because no formal
announcement of intended bond issues was made by these latter districts, it is not possible to tell the number of school districts affected.


MONETARY POLICY I 1 9 5 5 - 5 6 30

Senator O ' M A H O N E Y . Because of the difficulty with marketing the
Mr. LEVITT. In my own position as State comptroller, I have State
obligations which I hope to market but I have kept out of the market
because of these conditions.
I have been obliged in July, to call off an offering of bonds for the
thruway, because of adverse marketing conditions, in the hope that
I would be able to market those bonds at a later date. But that time
has not yet come.
So I am somewhat in the same position as the school districts, awaiting a better market.
Senator O ' M A H O N E Y . My attention is called by Mr. Moore, to a story
in the Wall Street Journal of Wednesday, December 5, bearing the
headline, "Michigan fails to get any bids for $52 million highway bond
Perhaps it would be well, Mr. Chairman, to have that story made
a part of the record.
Chairman P A T M A N . Yes, sir. That will be made a part. They have
a State limitation of 3y2 percent. Even 3% percent is quite high for
tax-exempt securities. That is equal to 4.7 percent.
(The article is as follows:)
[From the Wall Street Journal, December 5, 19561

By a Wall Street Journal staff reporter

percent coupon limit and a required bid of par wert
cited as key reasons for the State of Michigan's failure to receive any bids for its
proposed $52 million highway bond revenue issue yesterday.
Spokesmen for a seven-manager group that had planned to enter a bid for the
bonds said, "Because of the coupon limitation and the bid requirements, we are
unable to underwrite a bid for all or any part of the issue."
The syndicate had an option to purchase the entire $52 million of bonds or any
combination of three issues, one each for $25 million, $17 million and $10 million.
Blyth & Co., Inc.; Smith, Barney & Co.; Lehman Brothers; Halsey, Stuart
& Co., Inc.; Drexel & Co.; Harriman Ripley & Co., Inc., and First of Michigan
Corp., had been scheduled to manage the syndicate.
Charles M. Ziegler, Michigan State Highway Commissioner, said the issue will
be reoffered for sale at the present 3 ^ percent coupon rate if there's a sufficient
improvement in market conditions.
Mr. Ziegler added that if present market conditions continue, steps will be
taken toward making the "necessary adjustment in the maximum interest rate
to permit their sale."
As measured by the Dow-Jones municipal average of 20 representative 20-year
bonds, tax-exempt prices are at 19-year lows. The index, which moves inversely
to prices, stands at 3.29 percent, the highest point since early 1937.
The State last marketed a comparable issue on September 13 when a total of
$25 million bonds were sold at an interest cost of 3.04 percent. The Dow-Jones
average then stood at 2.93 percent.
The bonds offered yesterday were authorized in proceedings that began last
August and September. At that time, Mr. Ziegler said, the maximum rate of
3V2 percent seemed "more than ample."

Senator O ' M A H O N E Y . 1 think that it would be appropriate to insert
in the record at this point, also a clipping from the New York Times,
written for the Associated Press by Warren Bennett, on the continuation of the drop of United States bonds.
Chairman P A T M A N . It may be inserted.
(The article is as follows:)

MONETARY POLICY I 1 9 5 5 - 5 6


[From the New York Times, Sunday, December 9,1956]

(By Warren Bennett, Associated Press Financial Writer)
NEW YORK, December 8.—Corporate bond prices advanced this week for the
first time in 2 months. Government bonds continued to decline.
Corporate bond trading was heavy with volume of $38,100,999 par value on
the bid board, highest weekly total since December 17, 1954. This compared
with $35,020,000 last week and $21,222,400 for the corresponding week in 1955.
Rails, investment quality issues and foreign dollar bonds wound up higher.
Industrials were slightly lower while utilities, despite gains Thursday and Friday,
were sharply lower for the period. Japanese issues climbed major fractions, with
Oriental Development Co. 6s of 1963 posting an advance of 1 % at 9 5 % Friday.
Treasury obligations continued to drift lower on somewhat heavier volume
in the over-the-counter market. Dealers said much of the activity stemmed
from tax-swapping.
For the week the Government 21,£s of 1963 dropped
to a new low of the
year, 93% 2 bid. The Victory 23/i>s of December 1972-87, declined *% 2 to 89 1 % 2 .
The 30-year 3 /4s last %2 at 98%2 while the 40-year 3s were %2 lower at
93% 2 bid.
At these prices the 2V2s of 1963 yield 3.64 percent, the "vies" 3.34, the 3%s
3.35, and the 3s 3.31 percent.

Chairman P A T M A N . May I suggest, Senator O'Mahoney, the bonds
of the British Government—you know about this, Mr. Bell—that
are paying 3*/2 percent, are now selling below 60.
You know our bonds, 2i/£ percent, are selling below 90.
Do you not think that it creates a very unstable and unreliable
situation when people have no way in the world to invest their money
in a security that will always be at par, and to have the benefit of
the knowledge that they can rely upon an interest rate within bounds
of some kind?
How can they prepare and plan and contract for the future ?
Don't you think it is rather a bad situation for us to be in, Mr. Bell?
Mr. BELL. Mr. Chairman, I am afraid I will have to take a little
bit different viewpoint. We do have through our savings bonds, of
course, an instrumentality for small savers, which is always at par,
where they do not have to take any loss.
Chairman P A T M A N . I will take issue with you on that.
Senator O ' M A H O N E Y . The situation is this: A small saver who has
a thousand dollars may buy a long-term bond today which will yield
more than 3 percent.
M r . BELL. Y e s .
Senator O ' M A H O N E Y .

But if he invests in savings bonds, before
he gets 3 percent he must have held them for 10 years.
Mr. BELL. Yes, sir. That is true. There are other avenues of
savings, though,—you have the savings banks, for example, many of
which in my State pay three percent.
I would just like to make it clear, sir, that I do not think as a
practical matter we can or should think in terms of pegging Government bonds at a fixed rate. I really don't think that that is a good
plan. I don't like to see our Government bond market bounce around
the way it has in recent years.
Senator O ' M A H O N E Y . I am not suggesting
Mr. BELL. I am not in favor of pegging it.
Senator O ' M A H O N E Y . I am not suggesting that, Mr. Bell. But I do
call your attention to the fact that at the beginning of this administra-


MONETARY POLICY I 1 9 5 5 - 5 6 32

tion the first act of the Treasury Department was to issue the longterm 30 year bonds at, what was the rate of interest ?
Chairman P A T M A N . Three and a quarter percent.
Mr. BELL. Three and one-quarter.
Senator O ' M A H O N E Y . It sold immediately at a premium, and remained at a premium for some time.
Mr. BELL. Excuse me, didn't it go downfirst? I think it went down.
Senator O ' M A H O N E Y . It might have gone down first. Yes, it did
go down first, then went up to a premium, and now it is selling
below 99.
Chairman P A T M A N . Ninty-eight something.
Senator O ' M A H O N E Y . It may be 9 8 but I know it is below 9 9 .
Chairman P A T M A N . Ninety-eight and twenty thirty-seconds.
Senator O ' M A H O N E Y . That is below 9 9 . This is the situation in
regard to our Government bonds which on television shows, in factory
campaigns for the sale of savings bonds, we are constantly telling the
people are the most certain security that they can get for their savings.
And yet we are following a policy which has resulted in the steady
decrease of the value of those bonds upon the market. Even though
they may be maturing in a few years, they are still below par. That
is a serious condition, is it not, Mr. Bell ?
Mr. BELL. Well, sir, I think it is a serious condition when you have
the degree of instability that you have seen in recent years in the
Government bond market and when you have the thinness of the
market that now exists.
Chairman P A T M A N . And an unregulated market, too. It is
Mr. BELL. I am not against that, sir.
Chairman P A T M A N . The Securities and Exchange regulates the
private securities market pretty well.
Mr. BELL. But I think that this, again I do not like to be monotonous about it, is simply another point that illustrates the weakness
of this tremendous reliance we have had upon one thing, the quantitative credit control.
I think we ought to see if we can't be ingenuous enough to find
another arrow to our quiver than just this one that seems to have
certain boomerang qualities to it.
Senator O ' M A H O N E Y . I am sure that the committee has not reached
any decision, nor has any of its members, as to what should be done.
But the fact remains that your Federal bonds are going down, at the
same time the administration is suggesting new expenditures for economic aid abroad, while following a tight money policy which restrains economic development at home. It is a most serious question.
Mr. BELL. I think you are quite correct there.
Chairman P A T M A N . May I suggest, Mr. Bell, that I have before me
Mr. Lanston's statement about the bonds table based on yield and so
forth. The 3% that Senator O'Mahoney mentioned are just now
barely below 99—9820/32? but that is a yield of 3.34.
And now there are several bonds here in the list of Mr. Lanston's,
where the return will be 3.59, 3.69. How can we with a straight face
go out and try to induce people, small savers, to put their money into
bonds that will only yield them 3 percent after 10 years, when they can
go right in the market right now and buy bonds that will pay them
up to much over 3y2 percent?

MONETARY POLICY I 1 9 5 5 - 5 6


Senator O ' M A H O N E Y . It is worse than that, Mr. Chairman, because
of the huge issue of Government bills and notes which are given out
by the Treasury and which yield more than 3 percent now.
Chairman P A T M A N . Short term.
Senator O ' M A H O N E Y . Ninety day bills are being sold only to a very
limited group, namely, the banks and big corporations. The little
fellow cannot invest in those. They are not available to him.
There is talk now about a new issue of certificates of some kind to be
applicable on taxes which will be due in April. In other words, that
means that the Treasury is proposing to issue certificates to those who
have the idle money to buy them, certificates which may then be used
to pay their taxes when these fall due for the current year. Meanwhile the certificates will draw interest during the period from now
until the taxpayment is made.
Mr. BELL. I think that has been a fairly standard instrument.
Chairman P A T M A N . It has been.
Senator O ' M A H O N E Y . It has been adopted and dropped.
It was largely available only for the big taxpayers. It is difficult
for the little fellow to get that.
You agree, of course, with the policy of the savings bonds which is
its great virtue, that it is not affected by the market, and the holder
of the savings bond may get the full amount that he paid plus a little
interest whenever he wants to.
M r . BELL. Y e s , s i r
Senator O ' M A H O N E Y .

The price of the bond in that respect is not
affected by market fluctuation.
Mr. BELL. I believe that many people who invest in the savings
bonds do so as a regular program, too, by buying a bond a month or
something of that sort. And they are not so concerned with that.
Senator O ' M A H O N E Y . That is true.
Mr. BELL. With the interest rate, I mean.
Senator O ' M A H O N E Y . It is also true—and this I have read from
the charts in Business Week, that the redemptions of those bonds
have been rising at a very sharp rate.
You recall that, do you not ?
Mr. BELL. I believe I do.
Chairman PATMAN. Have youfinished,sir ?
Senator O ' M A H O N E Y . Yes.
Chairman PATMAN. Mr. Levitt, in your group, and Mr. Bell's group,
too, I hope you gentlemen consider these trust funds to be used in investments like school bonds and even housing, guaranteed by the
The social security fund, of course, is more than $40 billion. The
national service life insurance fund is $5% billion.
There is an ironical situation where the veterans who contribute
to that fund, who paid into it, are not able to get home loans at a
reasonable rate of interest at all. Yet their NSLI funds are only drawing 3 percent.
It is one of these pigeonhole devices where the Treasury uses money
and puts its I O U m the lockbox and they only get 3 percent, and if
they were privileged to invest in housing loans guaranteed by the
Government, they can get a minimum of 4y2 percent.
It occurs to me that these trust funds could be used that way.
I hope you keep in mind and consider that in your deliberations.


MONETARY POLICY I 1 9 5 5 - 5 6 34

M r . LEVITT. Y e s , s i r .
Chairman PATMAN. Any more questions of Mr. Levitt.
Senator O ' M A H O N E Y . NO.
Chairman PATMAN. Mr. Frischknecht, would you like to

questions for Senator Watkins?
Chairman P A T M A N . We will

ask some

excuse Mr. Levitt.
I would like to ask Mr. Bell just a few more questions, if you pleas*,.
Do you think, Mr. Bell, that the brakes are working well or do you
think we may be headed through the windshield as you said one time?
Mr. BELL. I am sure I don't know the answer to that question, except that as for the first part of it, I don't think that the brakes are
workihg as well as they should.
The thing that bothers me is that I think we are in danger of building up certain distortions in our economy as a result of this overall
credit restriction policy. As I have pointed out it seems to take hold
rather sharply in some directions, and up to this point it does not
seem to take hold at all in other directions.
I think this is bad for two reasons: First, when you have brakes
that grab unevenly you develop distortions.
And second, you develop a resistance, it seems to me, on the part
of the public to this type of instrumentality that seems to fall so
We know perfectly well that you can't have any policy of restraint
that is going to be painless. Surely, if you are going to try to moderate a boom, it is going to go against the grain with a lot of people.
But it does not seem to me that the present policy has been ideal.
Chairman P A T M A N . Mr. Bell, where is this boom and where is this
inflation ? It certainly is not on the farm or on the ranch. Certainly
not in small business. It is not in the home building. Where is this
inflation that the Federal Reserve is trying to stop ?
Mr. BELL. Well, I think it is really up to them to answer that question, sir, but I do think that we have had a period of long sustained
activity, certainly in the capital goods field.
Chairman P A T M A N . I know but this does not restrain capital goods.
That is where the inequities come in and discrimination is
Mr. BELL. That is right.
Chairman P A T M A N . And injustice is.
You see the capital goods industry, they rely not on bank loans,
except to take some short loans, which denies the little fellow funds,
but two-thirds of their investment capital comes from—two-thirds
from retained earnings and depreciation.
Mr. BELL. That is right.
Chairman P A T M A N . S O they don't have to look to the market. They
don't have to look to anybody.
And then if they need more they can go to the bank. They have
entry there that the other people don't have and they can get what
they want in short term loans which denies the little fellow that
So the capital goods market that you mentioned, the present policy is
not restraining the capital goods market at all. They will go right
ahead expanding. They are not restrained a bit. Don't you agree
with that?

MONETARY POLICY I 1 9 5 5 - 5 6


Mr. BELL. Not at the moment. I think there is very little evidence
there has been any restraint there.
Chairman P A T M A N . It is the little fellow that is hurt, and the big
fellow is not hurt at all.
Mr. BELL. I think that is about right.
Chairman P A T M A N . Yes, sir.
Let me ask you this question: What do you think has contributed
most to the recent rise in prices, capital goods investment, consumer
spending, wage increases in excess of productivity, profit margins, or
high interest rates ?
Mr. BELL. Well, I think that a great many of those factors have contributed. Mr. Chairman, it seems to me that when you have an economy like ours that is going ahead at such an active rate, with full
employment or very high level employment, with an expanding tendency it is hard to imagine that prices will remain completely level.
I would hope that no one would mistake me for a fellow who is
reconciled to or an advocate of perpetual inflation. But I frankly
don't get terribly alarmed at what we have had in the way of price
increases in the past few years.
Chairman PATMAN. Mr. Bell, you may recall that when the campaign was on, to take off all of the controls, the argument was made
that will lower prices; you recall that.
But it did not lower prices. They kept prices up. And whispered around, you would hear this suggestion, that they could not
afford to lower prices because it was possible we would have another
emergency and they might be frozen like they were one time at a low
level. They didn't want to be caught again.
So they kept prices up. Then we were told that if we repealed the
excess profits tax, you recall that, prices would go down.
But prices didn't go down. They stayed up. Because of that the
big fellows got plenty of money through retained earnings, and
depreciation, to carry on any expansion program that they wanted.
But that makes it harder on the others, because of the limited supply
of materials and labor.
Mr. BELL. Mr. Chairman, I would not describe the situation in
quite the terms that you have used. It seems to me actually that we
had a rather remarkable price stability here for a number of years,
and indeed, in the light of the type of economy that we have had, with
the great expansion that has taken place, my own feeling is that it is
quite remarkable that prices haven't gone up more, rather than that
they have gone up somewhat recently.
Chairman PATMAN. After all, there is conscience involved in these
things. I don't see how they could put them up in good conscience.
Mr. BELL. I am sorry. I don't quite get that.
Chairman P A T M A N . I don't see how they could in good conscience
put them up higher than they have, because they have collected from
the consumer enough to pay all of their expenses, and had enough to
pay a good dividend to their stockholders, which they should, and
enough left to put over into retained earnings, which is costless capital to them, a very large amount. I don't see hardly how they could
in good conscience take more.
Mr. BELL. I don't quite visualize the process as you are describing
it, sir. ^
Chairman PATMAN. Mr. Bell, the hour is getting late.


MONETARY POLICY I 1 9 5 5 - 5 6 36

Senator O ' M A H O N E Y . Before you dismiss him, may I call his attention to several matters ?
Chairman P A T M A N . Yes, sir.
Senator O ' M A H O N E Y . I have before me the November issue of the
Economic Indicator. This, as you know, is prepared for the Joint
Economic Committee by the Council of Economic Advisers. Dr.
Burns, until recently, was the Chairman of the Council and had a large
share in the preparation of these statistics.
On page 28, there is a graph and tables on consumer credit. For
the purposes of this question, I will just read the increase in consumer
credit beginning at 1950:
The total consumer credit then outstanding in 1950 was $21,395 million. In
1953, the total outstanding was $31,243 million. In 1955, $38,648 million. The
latest figure for 1956 is for the month of September, $40,074 million.
In other words, since 1950, to September 1956, outstanding consumer credit
had almost doubled.

That means that in many instances purchasers of consumer goods
are obligating themselves for a long time in the future, and may be
obligating themselves for more than the income they can actually
expect for the period of the credit.
That frequently results in the recovery by the seller of the goods
that was sold. That was one of the marks which preceded the depression of 1929, the extension by business beyond the capacity of
the people to whom the credit was made to repay.
In your statement on page 8, discussing the last paragraph, this
question of the tight money policy, you pointed out that so far as
you know, as you have seen, tight money has not affected the proSuction of capital goods.
Your language is this:
It has not, as far as I can see, touched the capital goods boom. It may actually
have stimulated rather than curbed business borrowing, because the prudent
corporation executive reading and hearing about tight money policy has in
many cases borrowed money he did not yet need, just to be on the safe side.

Do you think in the face of this picture of the consumer credit
such an executive who borrows money that he does not need can be
called a prudent corporation executive?
Mr. BELL. Oh, yes, sir, because he knows he is going to need it but
he may not actually need it for another year.
Let us say he is the head of a corporation that is expanding as
most- of our corporations are. He has got a program ahead of him.
He lmows that in 1957 he is going to enlarge his plant, in Dubuque
and in 1956 he thinks he will perhaps put a plant in the Midsouth or
something like that. He knows he will need money.
Senator O ' M A H O N E Y . But, Mr. Bell, if as you say in the sentence
before that, the tight money policy has hurt homeowners, small business, and municipalities, does that not raise the question as to whether
there will be a market for the capital goods which the prudent corporation executive is borrowing money in order to have the plant
to produce?
Mr. BELL. Yes, sir. This is what hangs like the sword of Damocles
over the economy.
Senator O ' M A H O N E Y . Y O U will acknowledge, will you not, there
is a serious danger in it?
Mr. BELL. Yes. I have stressed that, but can I say a word with
respect to these consumer credit figures?

MONETARY POLICY I 1 9 5 5 - 5 6


Senator O ' M A H O N E Y . Yes, I wish you would.
Mr. BELL. I would like to say that I certainly am not wise enough
to know whether $40 billion of consumer credit is too much, whether
this Nation can afford it or not. I don't know that anybody else can.
Senator O ' M A H O N E Y . May I suggest that as the editor of Business
Week, you assign someone from your staff to go into that question
Mr. BELL. Sir, I think this is like the question of what is truth and
what is virtue. It is not susceptible to a positive answer.
But what I think you can say, you can ask yourself whether the
trend seems to be excessively sharp. And I think that on the basis
of the figures you have cited there is room for concern in this thing.
Chairman P A T M A N . There is what?
Mr. BELL. Room for concern. Certainly, there has been a remarkable expansion of consumer credit. I won't say that this creates a
disastrous situation.
But I will say it is something to be concerned about. I say again
Chairman P A T M A N . One premise is wrong.
Mr. BELL. What is that?
Chairman PATMAN. That is, that people have obligated themselves
beyond their ability to pay. That was the premise that Senator
O'Mahoney had. I think that is incorrect, Senator.
I think you will find that people are paying their bills regularly,
that there is no evidence of inability to pay, there is no evidence that
people cannot meet their terms and conditions.
Do you know of any evidence like that ?
Mr. BELL. Not at this point; no, sir.
Chairman PATMAN. A S long as people can carry out their obligations, why should we be alarmed about it ?
Senator O ' M A H O N E Y . Are there not television sets and other commodities of that kind for sale in secondhand stores which have been
taken back from the original purchaser by the seller ?
Chairman PATMAN. Yes. And automobiles. But it is not alarming. What I mean, generally, they are keeping up with their
Senator O ' M A H O N E Y . We are talking about trends here. They
have to surrender the television set or automobile—they are not
Chairman PATMAN. People generally who have installment obligations are meeting them and meeting them satisfactorily.
Senator O ' M A H O N E Y . I think it is important for us to get the facts.
Mr. JBELL. The thing that worries me about it is a tendency on the
part of people who are selling things on credit to extend the terms
further and further as they meet with resistance.
I think if you sell a man a car, on a term of payment, that is going
to outlive the usefulness of the car or going to leave him more money
owing on the car than he can get in trade-in value, it seems to me that
clearly is not to his interest, or anybody else's.
Chairman PATMAN. We don't want to be his guardian.
M r . BELL. NO.
Chairman P A T M A N . N O

reason why we should try to regulate.
That is private enterprise. You see the fellow who buys should have
some say and the fellow who sells should have some say.
M r . BELL. Y e s , s i r .



POLICY I 1 9 5 5 - 5 6 38

Chairman P A T M A N . But when they come together, why should we
Mr. B E L L . I think in the Securities and Exchange Act we do modify
the free market.
Senator O ' M A H O N E Y . I am afraid that the point of my question
has been lost. The question was based upon the fact that the witness
has testified that some prudent corporation executive is borrowing
more money than he needs because he is afraid the interest rate will go
And there is a business boom, according to the witness, on the construction of plants for the production of commodities to be sold.
At the same time we have the definite report that the consumer
credit is steadily increasing. I didn't say it was at the danger point.
But it is a trend, which did precede the collapse of 1929, when people
were encouraged by businessmen to pledge themselves and their incomes and their families' incomes for things for which they could
not pay. Overstraining credit brings about such a situation.
Chairman P A T M A N . I agree, when credit is overstrained. I look
upon consumer credit as the healthiest part of our economy.
The people who sell these television sets and radio sets have to take
some of them back, but they do pretty well in the business. They
get pretty good profits.
Senator O ' M A H O N E Y . Sometimes they have to pay high rates of
Chairman P A T M A N . We like to see people have the benefit of those
comforts of life and those conveniences. I would rather see people
buy what they want and pay cash; that is preferable, of course, and
I am not encouraging people to go into debt.
But the reason I say installment credit is the healthiest part of our
economy is that at one time when we were considering the OP A, in
1941, before Pearl Harbor, we had Leon Henderson on the witness
stand, one of the smartest witnesses I ever heard in my life—lie always had a good answer to every question—and it came up, and it
was appropriate for me to ask him, that in our capitalistic system
that our money is based on debt. If everybody paid their debts we
wouldn't have any money. No debts, no money.
And I asked Leon what he wTould do about that if we paid all of our
debts. He said, "Well, anybody that paid his debts ought to go right
back into debt." In other words, create debts, pay them off.
And that is our economy.
And the reason I think that installment buying is about the healthiest part of it, is because the people actually pay those installments.
And they go into debt. They pay their debts, and they go into debt
again. It is their method of saving, in many instances. And I am
not afraid of it at all. I look with favor on it.
As long as people are substantially meeting their payments, I do
not think we should be disturbed about it. But I am willing to keep
watching it, just like Senator O'Mahoney suggested; we should not
have it get to alarming proportions.
One other question, Mr. Bell.
Senator O ' M A H O N E Y . I thought you turned the questioning over
to me for a minute.
Chairman P A T M A N . D O you want to ask some more ?
Senator O ' M A H O N E Y . We reserve our debate for executive session.

MONETARY POLICY I 1 9 5 5 - 5 6


Chairman P A T M A N . That is right.
Senator O ' M A H O N E Y . Mr. Bell, I wondered what reaction you have
had from that very fine speech you made to the American Bankers'
Association at Los Angeles. What have you heard with regard to
that suggestion for a combination of the Council of Economic Advisers
and the Federal Reserve Board ?
Mr. B E L L . Well, sir, I have had a great many letters from people
who wrote in and said that they had thought well of the speech and
that they thoroughly agreed with me and wished something would be
done about it. I also have been denounced, it seems to me, with a
great deal of heat by some of my good friends among the more
orthodox economists and financial writers.
And I have also had the curious experience of various highly placed
people coming up to me like conspirators and whispering in my ear,
"I am all for you, I think you are exactly right."
Senator O ' M A H O N E Y . "But don't quote me"—was that also a part
of the response ?
Mr. B E L L . Well, it seems to have stirred up quite a lot of conversation.
Senator O ' M A H O N E Y . I S there any official interest in the matter,
may I ask?
Mr. B E L L . Not to the best of my knowledge. There was no official
connection of any sort with the speech, sir. This was simply the case
of a fellow who had an assignment to make a speech, before a bunch of
bankers, and tried to make it interesting.
Senator O ' M A H O N E Y . Y O U certainly did make it interesting. In
fact, the opening of it was very interesting to me, because I was in
charge of the Employment Act when it was passed by the Senate,
in a Democratic Congress, and it was signed by a Democratic
I understand that the slip you made was in saying that it was passed
by a Republican Congress
Mr. B E L L . Yes, sir, I remember that.
Senator O ' M A H O N E Y . Has been corrected by you
M r . BELL. Y e s , s i r .
Senator O ' M A H O N E Y .

In other fields. I thank you for that, but I
felt it ought to be corrected on the record here.
Mr. B E L L . Quite right.
Senator O ' M A H O N E Y . It was a Democratic Congress which passed
Mr. B E L L . I regret that a Republican Congress did not.
Senator O ' M A H O N E Y . That is one thing I can properly state, I
think, with respect to it. I was the first chairman of that committee, and Senator Taft was the second chairman, because the 80th
Congress came into existence immediately after this became an
effective law.
I want to say that, both on the part of Senator Taft and on the
part of myself, and those who have succeeded as chairman of the
committee, there was always an effort to secure a staff which would
be competent, and which would be concerned not with merely partisan
arguments but with the objective study of the economy of the country.
And I am happy to say that that has been the policy throughout the
life of the Joint Committee on the Economic Report,


MONETARY POLICY I 1 9 5 5 - 5 6 40

Members of the staff, which were selected at the beginning, still are
with the committee, no matter what the turn of the wheel of fortune
was at the ballot box.
Mr. BELL. I think that it has been generally recognized.
Chairman PATMAN. Frankness compels me to admit, too, Mr. Bell,
that I was the author of the bill in the House. We had bipartisan
support for the Employment Act.
In fact, I was amazed at the strong support we had from both sides
of the aisle. And I think that is to the credit of both major political
And I think it has worked out quite well. This question that I
wanted to ask you, you discussed a little with Senator O'Mahoney, a
matter of this great importance, and. in view of the fact that there
are differences between the administration people about certain things,
I just had an idea that you discussed this proposal with some of the
administration people before you made it.
For instance, Arthur Burns. I wonder if you did discuss it with
Mr. B E L L . I have known Arthur very intimately since long before
he came down here, and I have discussed a great many things with
him. And the answer to your question, sir, is "Yes," but the speech
was entirely my own—everything in it was my own, my own concept.
You recognized there are a great many ideas there that are not new,
and that have been discussed before, and nobody in the administration
at any point either said, "This isfine,go ahead," or, "Aye, yes, or no."
Chairman PATMAN. Mr. Bell, in rounding out the record or for any
other purpose if we should want to submit to you questions to be
answered before the record closes you would be willing to do that?
M r . BELL. Y e s , sir.

Chairman P A T M A N . D O you know of any other questions?
Senator O'MAHONEY. No.
Chairman PATMAN. Would you like to ask any ?

Chairman PATMAN.

Thank you very kindly. Your testimony has
been very helpful and we appreciate it.
Mr. BELL. May I thank you ? It was a great courtesy.
(Supplementary questions later asked of Mr. Bell and his answers
to them are covered in the following letter from him:)

New York, N. Y., December 18,1956.


House of Representatives,
DEAR MR. PATMAN : The two questions you have asked me are not easy ones
and I am not sure that my answers are very good ones; but they are about the
best I can produce at the present moment without going to inordinate lengths.
Here they are:
Question. First, assuming that, at any particular time, economic forces are
recognized and accepted as predominantly inflationary, warranting thereby
some measures of restraint on the supply of credit, what type of borrowers should
get the available credit and, under our present system, who actually does get
it? In other words, what form of machinery should we look for rationing the
curtailed supply?
Answer. Except in time of war or extreme national emergency, I would not
favor any overall system of rationing credit. My objection to the present tightmoney policy is that it does in effect provide a discriminatory rationing of credit
by making credit difficult to obtain in certain areas such as housing, municipal

MONETARY POLICY I 1 9 5 5 - 5 6


financing, and small business, while it places very little restraint upon large
corporations. Credit restraint, as I see it, is justified merely as a means to an
end. That end is the prevention of a runaway boom in the economy that could
lead to a subsequent collapse. Accordingly, my approach to the problem would
be as follows: First, when there is a predominantly inflationary condition,
overall measures of restraint should be applied but they should include not only
quantitative credit restriction but also appropriate fiscal measures, including
refunding of the debt from short-term to long-term obligations, restraint of
Government expenditures and tax measures. This overall restraint should be
supplemented by selective credit controls directed toward particular areas of
the economy which appear to be advancing at too rapid a pace.
Question: Second, what policies or institutional setups should we have, if any,
to insure that certain social demands for schools, housing, highways, etc., do
not get lost in the scramble for the relatively scarce credit resources?
Answer: This is the type of question that needs to be examined by a national
monetary commission such as I have suggested. It is clear to me that by congressional action in the past we have accepted as national policy the proposition
that certain types of economic activity, such as housing, represent a social good
that entitles them to special consideration not accorded to other types of economic activity. It is a fact, however, that many conservative-minded people do
not recognize that such national policies exist and see no reason why housing,
for example, should get any special consideration in a period of credit stringency.
Such people can see nothing wrong in the fact that a veteran may not at the
present time be able to get a Gl mortgage to finance the purchase of a $12,000
home, while a big corporation has no trouble in borrowing millions of dollars to
set up a new finance company. Before we can have appropriate policies or
national setups to protect these social demands, we need, I think, a clear statement of what our national policies are.
Sincerely yours,

Chairman P A T M A N . The subcommittee will stand in recess until
2 o'clock when Mr. Robert Young will be the witness.
(Whereupon, at 12:30 p. m., the subcommittee stood in recess, to
reconvene at 2 p. m., this day.)

Chairman P A T M A N . The subcommittee will please come to order.
Mr. Robert R. Young accepted the invitation of this committee to
be our witness this afternoon. Mr. Young is chairman of the board
of the New York Central Railroad Co., in addition to which he has
many other interests.
We are mighty glad to have you, Mr. Young, and you may proceed
as you desire.
Mr. YOUNG. Thank you, Mr. Congressman.
Chairman P A T M A N . Y O U may take your seat, if you desire.

Mr. YOUNG. My invitation here today came, as you gentlemen know,
as a result of some remarks I made before the Economic Club in
New York on the night of November 19 when I was requested to
address myself to the problems which business will face during this
coming administration.
While the subject of my talk was "inflation," I had time to deal
only with its three most important causes: Wages, taxes, and the
export of our capital. I did this at some risk of being painted as an
enemy of labor, which I am not; an enemy of the administration.


MONETARY POLICY I 1 9 5 5 - 5 6 42

which I am not; an enemy of Congress, which I am not; and an
enemy of our allies, which I am not.
I was prepared to take this personal risk for the sake of labor, the
administration, Congress, and our allies, and I hope that as I amplify
these remarks today, consideration will be given to the fact that time
limits continue to make it impossible for me to elaborate on all of my
views with which, if I had the time to fully explain them, I believe
every well-meaning American citizen would agree.
I started as a day laborer in the days when a man could rise out
of the railks of labor through his superior productivity without
offending its seniority rules. I have been associated with big business. I have even been in Wall Street. And, while I have never been
in government, I have frequently been before it and understand its
problems and the tremendous handicaps and pressures under which
all of you work.
The problems you face today are so complex and the imponderables
so interminable that it seems presumptuous for me to attempt to diagnose our mounting illness. Some of those who imagine they benefit
from this illness may think I exaggerate its critical nature.
I appear here only because I was urged to. And nearly 2 years
elapsed before I accepted the repeated invitations of the Economic
Club, so sure I was that any honest expression of my views would
only make me new enemies, with which I am already well supplied.
Yet, as controversial and complex as the total situation is, there are
a few basic principles on which maybe even my critics and I can agree.
Our economy in its abundance is the eighth wonder of the world.
Any threat to that abundance is inflationary and retrogressive.
Monopoly in all its forms, because it hamstrings and corrupts enterprise, is the greatest threat to this abundance, whether it be monopoly
of government, agriculture, labor, production, distribution, transportation, communications, or credit.
Judging from the background of your other witnesses here today
and tomorrow, it is this last problem of credit which presently engages you. On this subject: Under a Government-managed plethora
of money, our banks and other lenders suffered many years of famine.
It is hard now to begrudge them a few years of clover. But if, as it
did in 1929, the whole house comes tumbling down about their ears
as a result of a famine or panic of credit, what will the benefit in
earnings have been to the moneylenders if it is ultimately to be measured in terms of dollars that are worthless ?
It is not hard to see why you are concerned with the recent increases
in the cost of credit and the rapid shrinking of its supply. Further
increases in interest rates can make the already enormous carrying
charges on our Government debt more than we can bear, to say nothing
of what might happen to confidence should the bottom drop out of
Government bond quotations.
British Consols, their prime Government security, which once sold
for par, are now selling at 50. Can we be sure of where the kind of
a run such an eventuality could start in our economy will end ?
It is adaptability and versatility which are the peculiar American
genius. They have made our country great, and our highest achievements have had the tiniest beginnings. It is an alarming trend, therefore, when so many^ new developments today seem to favor bigness at
the expense of the little fellow.

MONETARY POLICY I 1 9 5 5 - 5 6


I have been both, and can see the value of both. Only the big
corporations, which already enjoy many competitive advantages over
their smaller rivals and which interlock through their boards of directors with the big sources of credit—banks, insurance companies, investment houses, pension and charitable funds, trust funds, ad infinitum—seem to be able to get credit today.
Yet, our productive resources are more than just this close-knit web
of big business. Some of our finest products and best citizens are
found in the thousands of middle-size and smaller enterprises which
are progressively being squeezed out of the credit they so badly need.
The mortality of such independent enterprises can lead to further inflation and concentration of power in still bigger business.
Just as the inflation of wages, taxes, and the export of capital
threaten to beggar the white-collar classes, agriculture, the pensioners
and the service industries, so is the concentration of big business driving a large segment of our population out of small business and into
the rank and file of big business, subject to all of the rules of the "club,"
and you can define "club" either way.
Therefore, the most important domestic problems facing the new
Congress are the rising interest costs and shortages of credit which
add powerful new inflationary forces to an already hardship situation.
There is not only the direct cost of higher interest, but also the reduced
productivity that must eventually flow from postponed capital
There are other far more inflationary forces, however, which are
ignored by most of our fiscal authorities. Indeed, there seems to be
a calculated effort to suppress the facts about inflation.
Mr. George Humphrey, in a recent speech, boasted of the stability
of the Republican dollar, implying that the rise in the cost of living
under the Democrats was due to, I quote him, "arbitrarily cheap and
plentiful money."
Dissenting from this view as a businessman, and not as a partisan,
my experience is that easy money under the Democrats encouraged increased capacity and automation which made operations less costly,
thus slowing the rise in the cost of living.
If you knock automobile sales down by restricting consumer credit,
all you accomplish is to reduce factory volume which, by increasing
overhead, forces an increase in selling price.
The same inexorable law operates in housing, furnishings, appliances, and elsewhere; for ours is an economy of abundance, not scarcity, in which prices can only be held down in the face of spiraling
wages by increasing both volume and productivity. Only thus can
the huge capital costs of automation be absorbed.
Business today must have volume to meet its overhead just as our
Federal Government, dependent on income taxes, must have a vital
and prosperous economy. It is only through a continuation of recent
growth trends that either business or Government can keep from going broke if we go on inflating wages.
Surprising as it may seem to most businessmen, it looks now as
though our Federal Reserve has brought the mature economy fallacy
of Kernes and Hopkins, long after the Democrats themselves abandoned it ; for in all their mummery about controlling inflation through
the manipulation of the rediscount rate, I have not heard our fiscal


MONETARY POLICY I 1 9 5 5 - 5 6 44

authorities once mention the real inflationary force, the wage spiral,
taxes, and the export of capital, which go on unabated.
Here is a gathering typhoon of inflation beside which the policies
of the Federal Reserve are no more than an electric fan; they cannot
possibly check, but might start the cyclone.
Wage increases have not been a necessary adjustment to inflation,
as they would have us believe, but are its prime cause. Since 1932,
wage rates have risen an enormous 320 percent, while the increase in
consumer prices has been only 100 percent. Thus, it is plain that
wages have led and prices only sluggishly followed.
The only possible way to maintain this favorable relationship if
wages continue to be forced up is to still further increase productivity.
Tight money discourages it.
And as for the export of our savings, which now threatens to check
our domestic expansion on which the defense of the world depends,
Republicans were once so high-principaled, they said, that they opposed Democrats on a few millions of badly needed relief for the
Last summer they bemoaned an appropriation of $4 billion of foreign relief for Heaven-knows-whom because, as they alleged, it was
not enough. Any economist knows why the "handout" overseas, because it does not fill a domestic need, is more inflationary than a
"handout" at home.
For example, I would guess that perhaps 25 or 30 percent of our
steel production has gone overseas since 1940 in one form or another.
The price of structural steel has tripled since 1929. Think how much
lower steel prices, to say nothing of wages, might have been if that
huge volume had been allowed to influence the price the other way
in home markets.
Already Suez has caused our oil producers to talk about jacking
up the price of oil. Only weeks ago they were restricting production to keep the price up.
If the oil the New York Central is about to carry to Boston—to
take care of the foreign policy mistakes of France and Britain—were
allowed to go into our furnaces at home, the cost of living this winter
in Harlem and on Park Avenue would be correspondingly lower than
inevitably it must now be.
Our fiscal authorities have correctly attributed our capital shortage
resulting from these exports of capital to a deficiency in savings, but
they behave like stern fathers pointing to our piggy banks; saying
nothing about the fact that the old-fashioned American savings that
once went into common stocks, bonds, life insurance, and time deposits,
continue to be siphoned off in taxes to find their way eventually
through foreign war lords, bureaucrats, and entrepreneurs into the
Swiss banks and the gambling casinos and wine cellars of the Riviera.
You rememberfchatwry line that came out of 1929, "Where are
the customers' yachts?" Now, on those rare occasions when I can
make the Mediterranean, I wonder "Where are the Americans' yachts ?"
No; business cannot be made the scapegoat for inflation because
of its abuse of credit or its failure to save. It has been as frugal in
its demands on bank capital as it has been efficient in reducing costs;
for we find that oui gross national product since 1929 has risen nearly
four times as fast as bank capital.




It has been mostly out of corporate savings that this vast expansion in production has been financed, while the Government has
plowed under abroad what might have been our individual savings.
Savings, capital, and credit are synonymous. When you export
capital gratis in the form of raw materials, wages, or currency, you
disrupt the normal channels of trade, penalizing some foreigners
while enriching others.
The unfavorable balance of trade which results is reflected in drains
upon our bank balances and gold reserves, thus abnormally depleting
the monetary expressions of savings here at home and depriving the
home economy of exactly those same values in terms of local credit.
It is those shortages reflected in tight credit and higher interest rates
which now block our smaller businesses and many municipalities from
building sadly needed facilties.
Our money managersflatterthemselves when they pretend that they
check today s inflation by the orthodox measures which they should
have used to stop the flow of credit into the stock market in 1929. It
was those 10 percent margins which brought us Keynes and Hopkins;
hence most of today's troubles.
Parenthetically, I would like on another occasion to present to your
committee the reasons why banks and brokers even today should be
prohibited by law from making demand loans on anything so intangible as current market prices, which inevitably must crash with the
first bomb.
If it is sound to make a 30-year loan to the United States Steel Corp.,
why is it not equally sound to make at least a 3-year loan on United
States Steel Corp. stock without the usualfineprint sell-out clause?
Such a law might avert the next depression. If the Federal Reserve
would really check inflation, it would call upon Congress to curb
the excesses of labor and taxes. Only thus can our savings meet the
capital needs of constantly growing demands.
There is no failure to appreciate the dangers of inflation; for, Mr.
Humphrey has described it as—
the cruelest form of theft—a theft with the greatest harm to those least able to
protect themselves.

Yet in a Treasury bond advertisement, built around his personal
signature and photograph, the Secretary characterizes savings bonds
as, "a reservoir of future purchasing power." Perhaps his legal
advisers helped him with that word "reservoir"—a receptacle which
can be drained down to the last drop—for half of the original purchasing power of these savings bonds has already gone down the drain.
Your congressional concept of truth in securities as expressed in the
Securities Act is so sound that I have already urged that it should be
expanded to deal with those in Government as well as those governed.
Certainly Congress is inconsistent when it allows the Treasury Department to make questionable representations in the sale of government
securities which the truth in Securities Act prohibits investment companies from making.
If it is moral for the Government to defraud pensioners to finance
overseas adventures and placate labor, why does the Government find
it any the less moral to allow a private corporation to mulct them ?
To inflate labor at the expense of agriculture, housing, transportation, the service industries, and the white-collar class, all of those



MONETARY POLICY I 1 9 5 5 - 5 6 46

income lags far behind labor's, is also a cruel form of theft; as cruel
as it is to strip those who retire of their hard earned pensions.
It is only by such thefts that Mr. Humphrey's boasted honest Eepublican dollar has been temporarily sustained—to go aglimmering
when these tardy segments catch up, as they must, if their wornout
facilities and denuded purchasing power are to be renewed.
The alleged benefits of this built-in wage inflation in which most
must lose for a few to gain are wholly immoral. And as Mr. Humphrey says, the losers inevitably are those least able to protect themselves.
Already some of our pensioners seek congressional relief and,
frankly, they are entitled to it. It is doubtful if our economy, with
all the genius of business, can remain vital many years longer, even
with further sacrifices by the people, in the face of the imbalances
created by the wage monopoly.
One by one the unprotected areas—housing, transportation, the
white-collar class, and even many of our municipalities—will come to
you for relief; and agriculture, already helped so much, will require
even more of your scarce tax dollars.
Then, the philosophy of Karl Marx, as he predicted, will have won
the crucial last battle through our own folly, and our monuments to
Lincoln, Washington and Jefferson will be overturned.
Those who believe—or pretend to believe—that our present full
economy is based on rising wages, lavish defense and careless foreign
relief, should be reminded that we spent on our defense establishment
in 1929 less than 2 percent of what we spent last year, and foreign
relief was undreamed of.
The prosperous twenties were founded on falling prices and taxes,
paradoxically accompanied by huge reductions in Government debt—
three stimulants time-honored in their integrity, now widely feared
as deflationary.
We might have expected our economic defeatists of the school of the
"mature economy," still plagued by unemployment after 6 years of
the New Deal, to tell us that to avoid a recurrence of 1929 we must
accept wage inflation, wartime taxes and a foreign policy of universal
meddling; but here in 1956 we hardly expected the Federal Eeserve
Board to imply that the dire consequences of these policies can be
cured by a rise in the rediscount rate. Do they think that we are
just country boys at a carnival?
The great depression was not, as many would have us believe, a
normal phase of the old-fashioned economy, because the brief downswings of all but 1 or 2 out of our many economic cycles were more
salutary in their aftermaths than otherwise.
With new legislation prohibiting the call feature of collateral loans
that I urge, it is not a new 1929 crash we have to fear. Kather it is
the creeping stagnation which accompanies wage inflation once it
necessitates new subsidies, higher carrying charges on the Federal
debt and higher taxes.
I am not an alarmist when I warn that it may come to a climax
in price, wage, and credit controls; in loss of confidence in the Government debt; and finally in a flight from the dollar—then the printing
press and a completely managed economy.
Our freedom, our wealth, our pride in achievement and joy of
accomplishment—all will have gone with the wind.

MONETARY POLICY I 1 9 5 5 - 5 6


Lest some of you think that inflation and foreign policy are of no
concern to a railroad man, let me remind you of this: While our politicians in their subsidy and tax discrimination have held first-class
passenger fares since 1929 down to a puny raise of only 18 percent,
they have encouraged rail wages to triple. Coach fares are actually
lower today than they were 27 years ago.
The big steel companies whose biggest easy-going customer is the
United States Government, face no problem in absorbinb these wage
increases. They raise their prices and their profits the very same day
they begin paying the wage increase.
But what about the railroads, on which the steel companies depend?
We must endure the mockery of lengthy and costly hearings before the
ICC months, even years, after our own wage increases have started
running, in order that special and selfish interests who seek to sponge
on the railroads by ICC license may have their wishes heard.
These protests have not the slightest relationship to the public interest, but since they lead clear to the Cabinet and Defense Department,
they are too powerful for the ICC to ignore.
Our railroads no sooner stagger up from one of these perennial wage
increases than they are met by the bludgeon of the next; payoffs to our
congressionally licensed monopolists, a process of exploitation of the
less-favored unctuously called negotiation.
And what could be more inflationary, more degrading, more destructive of the joy of accomplishment, than a work rule which requires
2 men where 1 is needed ? To subvert man's enterprise is to corrupt
his devine gift of aspiration, the quality which elevates him from the
animals. Crush this precious gift entirely and we become no more than
bovine chewers of the cud, easy prey to the voracious and insatiable
State, police or patronizing.
Gentlemen, when Russia has most of the manpower of the world,
this Nation cannot longer afford featherbedding any more than it can
afford, as Congressman Patman has told me, the education of many
more technicians and engineers in Russia than we have in our own
Chairman PATMAN. Mr. Young, may I interrupt you just a moment,
since you mentioned that.
Our committee, I think, was the first congressional committee to go
into the question of automation, in November of last year, and we were
shocked to learn that the Russians are graduating engineers and scientists, about twice as many this year as in the United States, at least that
And the most disturbing and alarming situation was the fact that
they are graduating 32 times as many technicians in Russia this year
as we are graduating, 50,000 here compared to 1,600,000 there.
Mr. YOUNG. Well, I would like to take some of these surplus firemen
in our locomotives and put them over into engineering school where
they could do the country some good.
What is the end result to labor of these policies ? War, galloping
inflation, and eventually forced labor? Who then will be remembered
as the friends of labor—those who furthered these policies, or those
who warned against them?
If anything can be more inflationary than a wage monopoly it is
taxes. Under the Monroe Doctrine our taxes were virtually nothing.
Under present policies they eat up a third of the national income. As


MONETARY POLICY I 1 9 5 5 - 5 6 48

a result, consumer prices are grossly higher than they would otherwise need be.
And those who think taxes, the price we pay for our constant failures
in foreign policy, do not warp ambition and curb enterprise, have
never sought to pry a man out of a good job by a big salary increase.
Nor can I blame a family for not wanting to pick up and move just
to serve as a conduit to the United States Treasury, and thence to some
Greek syndicate.
So little is the material reward left for high attainment, I would
pause before advising a young man to put a productive career very
much ahead of that of a golf pro. Why should the family doctor
respond to calls at all hours from neighbors who practice the organized
slowdown and, c o n s e q u e n t l y , yearn for Mr. Nixon's 4-day week ?
And speaking of the idle rich, the big houses of the lords of England,
who have just missed getting us into the third world war and who are
asking us now to pick up the tab for their latest blunders, can be
converted into museums without any loss to their economy. Yes;
they can go; but we must preserve the material rewards of our pioneers
of business if we are to go on enjoying their miracles. If they must
be leveled down, let's be selfish about it and wait until their death, as
God does.
The last cut of any consequence in the steeply graduated income
tax, the joint return, came away back in 1948. It is one thing to work
overtime in wartime, or from force of habit; but in this new peacetime
culture of universal mediocrity imposed upon us by Mr. Humphrey's
tax guillotine, will coming generations aspire to promotion with its
accelerating responsibilities at decelerating rewards?
Just as the railroad man cannot forget inflation and taxes, how
can you forget your dependence on cheap transportation when its
urgency is registered in all the bloody pages of history ?
Go back far beyond Suez to the legendary days of Troy whose site,
at the entrance to the Dardanelles, dominated the dark waters that
flow down out of Europe and Asia, the world's greatest land mass.
The lading of ships, however, in those days was mostly light merchandise, and it was not until the last half of the past century, when
the rails enabled us to tap our coal, cement, and ore, that heavy industry evolved.
Fortunately, our form of government, so wisely founded, was yet
too young to hamstring business after the foreign fashion. Hence
our native enterprise, stimulated by the prospect of unlimited and
untaxed gain, took advantage of that cheap transportation and our
natural resources to create a standard of living that can only be appreciated by traveling abroad.
We can be grateful that this combination of circumstances took
form about the Great Lakes and not the Black Sea. Our ton-mile
rate by rail is only a fraction of what it is in other countries; explanation in itself of the vast disparities in our standards of living.
Those Americans who loathe capitalism should be confined, say for
10 years, to some of these overgoverned and underrailroaded foreign
countries they prod us into emulating.
Penalize Ford, Du Pont, General Electric, with British or French
socialized rail rates and service, and their wonder products would
wither into a fraction of their present volume, conceding that they
could have been achieved in thefirstplace.

MONETARY POLICY I 1 9 5 5 - 5 6


It would take 450 truckdrivers to move the coal that can be moved
by only 5 men in a 150-car train, and 2 of these 5 are featherbedded.
Neither the truck nor the bus could possibly compete with the rails if
they paid for their own rights-of-way; nor could our subsidized airports have been brought into being if their steel and concrete had not
reached them by rail.
It is only because our harbors and waterways are served by the
railways, built and dredged by the taxpayer and protected by our ratemakers, that even water can survive rail competition. The boat not
only consumes more fuel, but it requires 34 men to move the ore that
15 men move by rail, and the rail moves it faster.
You would think, then, reward being a function of service, the railroads would be rich. Instead, since 1929 their rate of return on investment has averaged only 3.4 percent, and in no peacetime year since
1930 has it exceeded 4.3 percent, a shocking contrast to the 9.7 percent
justifiably enjoyed by all other public utilities.
Because of political pressures from members of the Cabinet and
Congress on the Interstate Commerce Commission, and because of the
resulting timidity of railroadmen, the traffic of this rich country has
not been made to bear its fair share of transportation costs—a sop to
the pressure groups which in the end has meant only higher rates and
poorer service.^
This Republican year, supposedly favorable to business, was ironically not nearly so good for us as our last years under Mr. Truman.
Could there be a greater warning against rapidly encroaching Government than this sorry record of our first big regulated industry ?
More than one-third of the Nation's freight cars and two-thirds of
its passenger cars are over 25 years of age. Many are 35 and 40; and
the rust and rot advance. Superimpose a national emergency, and
where would we be ?
If current rate relief requests are not granted in full, your two
largest railways may be forced to stop buying passenger equipment
for all time. Already millions of passenger train-miles have been
lopped off our mainline schedules.
Yet, in New Jersey and New York we are compelled to run trains
some of which average only 4i£ passengers a day, less than the train
The Nation has just faced a shortage of at least 100,000 freight cars,
$1 billion worth, from which nearly every business suffers. To replace every car over 20 years of age would require $12 billion, and it
would pay for itself out of savings.
Large immediate expenditures in many other areas of railroad
physical plant would be no less self-amortizing; but how can you borrow at 5y2 percent to renew a plant which earns 3 percent?
A 10 percent decline in our carloadings and most of us would be at
the brink of bankruptcy, so small are our reserves and narrow our
margin of profit.
And in the face of all these well-known needs of our railroads, there
are those who advocate defense and relief expenditures just as a means
of keeping our people employed.
Local public servants pressured by selfish and special interests
force us to continue marginal rapid transit services of a trolley car
type which they themselves have long since abandoned. At the same
time, other public servants under similar pressures grant subsidies to


MONETARY POLICY I 1 9 5 5 - 5 6 50

the airways and highways which threaten the continuance of main
line trains.
Our revenues in New York State have dropped 8 percent since the
throughway wasfinisheda few months ago.
Can such discrimination and regulation by any stretch of the
imagination be in the public interest ?
What a mockery these protracted and destructive public rate and
service hearings, which Congress and our States intended to protect
the public, have become in the face of our hazardous financial plight.
Yes, these hearings have been perverted into devices to protect the
special interests at the expense of the public interest, as the record
clearly shows.
So far has the will of Congress been perverted that the ICC publicly announced, with unconscious irony, that the recent hearings in
Kansas City were to be held in order to hear shippers. What on earth
do they expect the kind of shipper to say who puts his heel on our 3
percent rate of return so that he may earn 20 percent?
And at the top level, supposedly, of national enlightenment, Congress recently threw out the excise taxes on admissions to movie
theaters, but continued them on admissions to passenger and freight
trains, the one forced to carry more than 95 percent of our troops and
the other more than 90 percent of our freight in the last war.
Imagine, imposing a special excise tax on our only all-weather
freight and passenger service, essential to troop and civilian movement, which already loses $700 million a year on its passenger trains.
The tax on freight is an added inducement to already rich industries,
like those Mr. Humphrey came from, to go into self-transportation
so that they get richer and the rails poorer. His former companies,
as self-transporters by rail, belt, water, truck, and air, save this tax
and hence enjoy that much oi an advantage over their smaller
I am told that Mr. Humphrey opposes the lifting of this tax, in
surprising contrast to his predecessors, Mr. Snyder and Mr. Morgenthau, who saw that the tax, in peacetime, was not in the public interest.
Cannot those responsible for such follies see that if the most remunerative traffic is skimmed off the rails by the truck and the private
carrier, the traffic which the rails are left to carry must finally come
to bear an intolerable burden ?
This I know: sound railways in America are a hundred times more
important to us than the Suez Canal, as is demonstrated by the fact
that it is our railroads that now are called upon to carry oil to our
ports for delivery to France and England.
Yet, the money to buy equipment is left to the mercy of these mock
hearings. Indeed, Mr. Malenkov is smiling. How can the Department of Defense close its eyes to our Achilles' heel, our railroads?
They know that current rates are not keeping our physical plant alive,
particularly in the passenger field. Yet their own underlings come
m and oppose our passenger fare increases in the face of a wage rate
which has tripled.
^ They act as though the Defense Department had no higher obligation to the public interest than a coal operator, some of whom do not
have enough judgment to see that if they do not pay fair rates the
railroads cannot continue to provide cars with which to ship their coal.
A railroad without cars is as useless as a skyscraper without ele-

MONETARY POLICY I 1 9 5 5 - 5 6


vators. Can it be that the Department of Defense has been taken over
in the way in which the Carnegie Foundation was once taken over?
Yet, this great rail service that does so much for our defense, at no
cost to the taxpayer, has been pauperized and made the butt of politicians, newspapers, taxing authorities, ambulance-chasers, college
professors, and Government agencies for a full generation, while its
rapidly growing competitors are subsidized and tax-exempted—even
rescued by the United States Navy.
The rails being the very core of our capitalistic system, it is not hard
to see why its enemies have made them their first line of attack; but
it is difficult to see why the Defense Department and the Treasury
Department should persecute them. Or do I see ghosts of Harry
Dexter White?
Even if Defense and Treasury fail to see, you gentlemen concerned
with economic stabilization will not fail to see the importance of strong
railroads to the economy and defense of the Nation. If the railroads
go, the rest will not be slow to follow.
Forgive me for using the railroads as my illustration. It is only
because they are so symptomatic and I am most familiar with them.
There are scores of other areas of our economy, such as our schools,
in which the deterioration that results from wage and tax inflation has
gone about as far.
Our inflationary troubles, then, are not of business, for it is the
inflation and abuse of credit by Government, not by business, which
threatens to stall our rising standard of living and to strike at the
heart of private enterprise.
The miracles of transportation and business have so far checked the
degenerative forces of progressively burgeoning Government, but the
beginnings of capital shortage indicate that the string has about run
We can stop inflation, we can reduce taxes, we can stop squandering
abroad our essential resources and the flower of our youth. Indeed,
we can return peace to the world.
But we can do these things only if Congress and business join together and sell economic truth and* a foreign policy of national sanity.
Like charity, the voice of America should begin at home.
For it is as alarming as it is incredible that 61 percent of our highschool seniors, for example, do not believe in the need for profits; 82
percent do not believe we have competition in business. This can
only reflect equally misinformed parents—or, are they precocious
youngsters only anticipating the economy into which they may mature ?
The President of the United States has already urged upon Congress the only constructive transportation legislation ever to originate
in the White House. It remains to be seen if Congress will be as
constructive as the President in trying to restore sanity to our national
transportation system.
Again, forgive me for using our railroads as my illustration.
Chairman PATMAN. That is perfectly all right, Mr. Young, and we
thank you for your very interesting statement.
What are the advantages or disadvantages to the alternative way of
combating inflationary forces, Mr. Young, which are listed in the chairman's opening statement this morning, if you were here? Were you
here this morning when I read it ?
Mr. YOUNG. Unfortunately, I was not here.


MONETARY POLICY I 1 9 5 5 - 5 6 52

Chairman P A T M A N . Anyway, I mentioned increased taxes and general credit control through manipulation of the interest rate, openmarket-policy reserve requirements, and selective credit control applying to specific segments of the credit structure, such as installment
buying, real-estate financing, plant and equipment.
In other words, what are the advantages and disadvantages of those
three in comparison with the present method that is being used by the
Federal Eeserve System?
Mr. YOUNG. Well, I would say that almost anything is better than
our artificially tightening credit.
Chairman P A T M A N . Y O U mentioned a while ago something about
the direct cost. It reminded me that if this is a short-run credit
squeeze of tight money, as Some would like to believe, then it means
that during this short run we have still got to have schools, and we
must vote bonds and sell the bonds in order to build the school buildings, but these bonds run 30 and 40 years, so it looks rather burdensome,
does it not, Mr. Young, to make taxpayers pay higher interest rates
for a 40-year period on account of what many of them claim is just a
short-run credit squeeze.
They have got to do it for 40 years instead of just a short period.
Now, when you, as a big-busmess man—you stated that you were
a big-business man. Of course, we all know that you are, and yoti
were small business, too, and you know something about both—when
you can see in the future that there is going to be a scarcity of credit,
and possibly a higher interest rate, would you, using what you consider good Business judgment, go into the market and borrow funds
in advance of your actual needs, or would you wait and pay the higher
Mr. YOUNG. Well, if I could foresee it surely, I would certainly
go into the market and borrow.
Chairman P A T M A N . And do you not think that that has caused
a tighter money market, the fact that some of the larger concerns,
knowing that interest rates are continuing on the way up, are not
only anticipating it but, knowing it, they are going into the market
and borrowing funds they do not actually need now, but expect to
use a year from now or 2 years from now ?
Mr. YOUNG. There may be some of that. I don't believe there is
too much of it yet, sir.
And on that subject of schools, I would say that the national peril
is going to increase rapidly over the next 10 or 15 years or over the
next generation, certainly, and that certainly the last place we should
economize is in our schools, for the very reason you mentioned,
Chairman P A T M A N . Yes, sir.
Mr. YOUNG. That we need technicians and engineers badly, and
we must have them.
Chairman P A T M A N . And we must encourage our school system.
M r . YOUNG. Y e s , s i r .
Chairman P A T M A N . And we need plenty of buildings.
M r . YOUNG. Y e s , s i r .
Chairman P A T M A N . Lots of school construction.
M r . YOUNG. Y e s , s i r .
Chairman P A T M A N . And on the interest rates in particular,

Young, do you not think there are other ways of restraining an

MONETARY POLICY I 1 9 5 5 - 5 6


inflationary condition, if there is an inflationary condition, rather
than just arbitrarily raising interest rates there across the board?
Mr. YOUNG. Again, I think that is the last thing we should do
Chairman P A T M A N . The last thing we should do.
Mr. YOUNG (continuing). Is to artificially make credit tight in this
Nation, because I am afraid that the policies that have already been
followed and are still being followed are going to make it plenty
tight enough without any artificial tightening.
Chairman P A T M A N . The Federal Eeserve Board—I believe you
have served in the Federal Eeserve bank as a director.
Mr. YOUNG. NO, sir, that requires a banking invitation and I don't
Chairman P A T M A N . I understand. [Laughter.]
Anyway, the Federal Eeserve System—you are acquainted with
that—and you know that, for instance, if they wanted to just make
credit a little tighter to meet an inflationary condition which they
really believed was in existence, they could increase the reserve requirements of banks.
In other words, instead of permitting banks to expand their loans
by really creating or manufacturing money equal to $6 for every $1
in reserve, as they can do now, they could change that, they have the
right to do it under existing law, to where they could only manufacture $5 to $1, or $4 to $1, or $3 to $1.
Mr. YOUNG. Correct; I believe that is true; yes, sir.
Chairman P A T M A N . Would that not be preferable to just automatically increasing interest rates ?
Mr. YOUNG. Well, of the two, I think it would—well, no, I am not
sure that that would be preferable.
Chairman P A T M A N . Anyway, that is one of the tools they could use.
Mr. YOUNG. I would say they are equally, they could equally be damaging^
Chairman P A T M A N . They could be, I know they could be.
Mr. YOUNG. And equally inflationary.
Charman P A T M A N . But through rediscount rate increases the interest rate is raised immediately.
Mr. YOUNG. Certainly we know that is inflationary, because we
know higher interest rates increases the cost of doing business.
Chairman P A T M A N . And it comes immediately.
Mr. YOUNG. Yes, sir; 1 agree with you. I think I would agree with
you; yes, sir.
Chairman P A T M A N . And the other one is at least a lot slower if it
Mr. YOUNG. There the effect would be several years later, not immediately.
Chairman PATMAN. Yes, sir, several years later..
Mr. YOUNG. I agree with you a hundred percent.
Chairman P A T M A N . N O W , another thing they have, another tool, is
the open-market operations. They can buy and sell Government bonds
to make money scarce and dear, or plentiful.
Mr. YOUNG. Yes, sir. I remember very well we embarked on a selling operation in 1953 which knocked Government bonds down to 90.
Chairman PATMAN. That is right.
Mr. YOUNG. Which hurt business.


MONETARY POLICY I 1 9 5 5 - 5 6 54

Chairman P A T M A N . And they can do it either way. They can make
Government bonds worth more or Government bonds worth less.
Mr. YOUNG. Yes, sir, within limits.
Chairman P A T M A N . Mr. Eccles testified—and Mr. Eccles should
know something about the Federal Reserve System. He was Chairman longer than any other 1 person; 12 years.
Mr. YOUNG. I think his views on that have been very sound.
Chairman PATMAN. Yes, sir. And he said that the Federal Reserve
System could keep the interest rate at any level it wanted to, if it wanted
to keep the Government bonds at 2y2 percent, it could do it, or 2 percent, or any other rate, by using the open-market operations.
Mr. YOUNG. That was certainly true during his administration.
Chairman P A T M A N . Yes, sir.
I insist that arbitrarily increasing interest rates is certainly cruel
and brutal in comparison to the use of the weapons they have at hand
and are not using.
You know the danger of raising interest rates, because you mentioned about the school construction and about your own business.
What incentive have you to borrow money at 5y2 percent to earn
4 percent?
Mr. YOUNG. We have reduced our building of boxcars recently just
because of the increased cost of money.
Chairman PATMAN. Y O U have? How much would that run into,
in dollars, Mr. Young ?
Mr. YOUNG. Well, more importantly, it deprives the Nation of boxcars when there is a 100,000-car shortage of boxcars.
Chairman PATMAN. I believe you said $ 1 2 billion would be required
to bring the boxcars up to standard.
M r . YOUNG. Y e s , s i r . Y e s , s i r .
Chairman P A T M A N . Twelve billion dollars.
M r . YOUNG. Y e s , s i r .
Chairman P A T M A N . And you have canceled

orders, or at least you
have not
Mr. YOUNG. We have slowed down the scheduling of our building
of boxcars just because we cannot afford to pay 5y2 percent for money
when the Interstate Commerce Commission gives us a 3-percent return.
It is j ust that simple.
Chairman P A T M A N . Yes, sir.
Mr. YOUNG. If thefigureswere reveresd, we would start building;
if we paid 3 percent for money and we were allowed to earn 5 percent,
we would cure the boxcar shortage overnight.
Chairman P A T M A N . And other utilities, in the position that you
are in, of course, they evidently are doing the same thing.
Mr. YOUNG. Well, since they earn 9 . 7 percent, they will not do it as
quickly or as drastically as we are forced to do it; but I am sure their
minds operate in the same way—as money gets tighter, they do not
make improvements which they would make if money was easier.
Chairman P A T M A N . Yes, sir. But all the railroads are in the same
position that your railroad is in, I am sure.
Mr. YOUNG. The big passenger railroads are all in the same fix that
we are in, and that includes such as the Pennsylvania and New Haven,
most of the railroads in the Northeast, where we carry the heavy burden
of mail, passengers, and freight.

MONETARY POLICY I 1 9 5 5 - 5 6


Chairman PATMAN. As an investor, Mr. Young, with considerable
experience in the money market, do you believe that banks and
security dealers are able to anticipate Federal Reserve actions and
thereby avoid the consequences that the Federal Reserve hopes to
achieve by raising rates and causing bond prices to fall ?
Mr. YOUNG. Well, I would say there are some influential bankers
in New York who might know in advance what the Federal Reserve
policy was going to be.
Chairman PATMAN. Again speaking as an investor, do you think
it is possible for someone with access to restricted information about
the intentions of the Open Market Committee, trading this, to make
a lot of money speculating in the Government securities?
Mr. YOUNG. I would say that it was almost inevitable.
Chairman PATMAN. It is impossible to keep secrets like that.
M r . YOUNG. Y e s , s i r .
Chairman PATMAN. Just like it
M r . YOUNG. Y e s .
Chairman PATMAN. If there are

is here on the Hill.

two people involved, why, it is not
a secret any more.
Mr. YOUNG. Yes, sir; particularly when so many of these Government officials come out of influential New York law firms with many
banking partners and affiliations.
Chairman PATMAN. In connection with that, you see, the person
who actually runs the Federal Reserve open market operation is
selected by the Federal Reserve Bank of New York. He is not selected
by the Federal Reserve Board. He is not selected by the Open Market
Committee. He is selected by a board of directors, six of whom are
selected by the private banks, and he is placed in that position of
running the desk, the open market operation.
Now, that is for the whole Nation. These banks, individual banks,
they have no power over that. They have no control at all. The 1935
act made the system of a central bank; and thev have practically no
power now; and the one person there in New York, selected by the
Federal Reserve Bank in New York, has complete control over running
these operations, running into billions and billions of dollars a day
sometimes, and you do not think that they can keep that information
from leaking very well ?
Mr. YOUNG. I would think it would be very difficult.
Chairman PATMAN. Very difficult.
You take the bond market, Mr. Young, you mentioned a while ago
about 1953, 1954. What can a businessman do to protect himself in a
situation we are faced with now, of such uncertainty? He does not
know how low these bonds will go. They are already below 90.
In England, 3y2 percent bonds are down below 60, and England,
of course, has been following the same kind of hard money policy
that we have been following; in fact, very similar. And this^interest
rate keeps going up and up and up. How can a businessman intelligently plan for the future, faced with a condition like we have right
Mr. YOUNG. It is very difficult. It is certainly a great temptation
to go to Florida.
Chairman PATMAN. There is certainly no way that you can anticipate what is going to be done.

MONETARY POLICY I 1 9 5 5 - 5 6 56

The Federal Eeserve seems to be adamant; they just go ahead and
let the bonds go down, interest rates go up. We do not know how far
it will go. There is no way to tell.
They claim they are independent, of course. Independent from
whom? They claim they are independent from the executive. You
know, they seceded in 1951; but they cannot secede from Congress
because they are the agents of Congress.
And Congress, realizing that the Members of Congress are responsible for their actions, I imagine will take definite action in the
foreseeable future if something is not done to change this trend which
is so devastating to the economy right now.
Mr. YOUNG. I think we will be forced to do something about it, sir.
Chairman P A T M A N . Senator O'Mahoney ?
Senator O ' M A H O N E Y . Thank you, Mr. Chairman.
I am very much interested
Mr. YOUNG. Mr. Seuator, how are you, sir.
Senator O ' M A H O N E Y (continuing). In your paper. I am sorry I
was not here at the beginning, but I have been checking back on it
before proceeding, and I find many stimulating statements in it.
Mr. YOUNG. Thank you, sir.
Senator O ' M A H O N E Y . The problem which confronts us is undoubtedly one of the greatest that this country has ever faced, and not many
people realize it, particularly, I think, in New York.
My questions are intended only to clarify statements which you have
made today and previously, and to develop the facts that as a person
holding the important position that you do, and having the important
experience that you have, can help lay before the Congress and the
On the last page of your statement, page 18, I notice 2 or 3 statements which I would like to ask you to amplify.
Our inflationary troubles—

you s a y then, are not of business, for it is the inflation and abuse of credit by Government, not by business, which threatens to stall our rising standard of living and
to strike at the heart of private enterprise.

Do you mean by this to place all the responsibility for the abuse of
credit, which you find to exist, upon the Government and not on
Mr. YOUNG. Well, I wanted to exclude business in the sense of, let
us say, productive business. I would not exclude certain monopolistic
influences in business, which I regard more as banking influences than
business influences.
Senator O ' M A H O N E Y . I see. Well, then, you feel that the banking
Mr. YOUNG. I think banking influences
Senator O ' M A H O N E Y (continuing). Have contributed a responsibility to this abuse of credit ?
Mr. YOUNG. I do. I think, as a matter of fact, most, many of our
Government policies, that the responsibility is fully shared by these,
let us say, these monopolistic banking interests.
Senator O ' M A H O N E Y . You spoke in your testimony today and
{>revious testimony that you had given Congress, of men—sometimes
awyers, sometimes others—flitting back and forth between the law
firms and the business houses of Wall Street and the Government.


MONETARY POLICY I 1 9 5 5 - 5 6

Mr. YOUNG. Yes, sir. There is a constant path, well worn, between
Washington and New York, between partners of these law firms and
banking houses that made it their business to interlock in some of our
big industrial corporations, all of which I spelled out in my last appearance before Congress, and gave Congress a chart at that time of
how they interlock.
Senator O ' M A H O N E Y . YOU are referring to your testimony at the
hearings before a subcommittee of the Committee on Banking and
Currency of the Senate in the 1st session of the 84th Congress ?
M r . YOUNG. Y e s , s i r .
Senator O ' M A H O N E Y . In June or July ?
M r . YOUNG. Y e s , s i r .
Senator O ' M A H O N E Y . I was aware of the

fact that you were having
a proxy fight at that time to gain control of the New York Central
Railroad, and that you had testified at that hearing that the banks
and investment houses and other railroads had combined against
M r . YOUNG. Y e s , s i r .
Senator O ' M A H O N E Y .

(continuing). In the war to prevent you
from gaining control of the railroad by the votes of the stockholders of
the railroads.
Mr. YOUNG. Yes, sir. They organized against me, and almost unanimously, and that included the big insurance companies, the big banks,
and all the railroads. They operated hand in glove to keep any independent stockholder interest from getting into this railroad field
which they had dominated for two or three generations.
Senator O ' M A H O N E Y . In order to get your language into this record,
since you brought it up, I would like to read one or two extracts from
your testimony. The first one is from page 1459.
M r . YOUNG. Y e s , s i r .
Senator O ' M A H O N E Y .


bidding for bonds. You said:

were speaking here of competitive

The records on competitive bidding, railroad reorganization and the Pullman
case, are as complete as they are revealing of corporate collusion against the
public interest.

You meant that, of course.
Mr. YOUNG. Yes, sir; I meant that sincerely, and
said that under oath.
Senator O ' M A H O N E Y . And you still mean it ?
M r . YOUNG. Y e s , s i r .
Senator O ' M A H O N E Y .





"It is indeed shocking," you went on—

that while no two railroads can get together on such constructive things as
through service at Chicago—

and since I am a citizen of Cheyenne, Wyo., I may say to you that I
would like to have through service from Washington, through
Chicago, to Cheyenne.
Mr. YOUNG. The Nation's security requires it.
Senator O ' M A H O N E Y . What?
Mr. YOUNG. The Nation's security, if not your comfort, requires it,
Senator O ' M A H O N E Y . Well, why don't we get it?
Mr. YOUNG. For the reason I gave you, the reason that you will
soon read.
Senator O ' M A H O N E Y . To resume:


MONETARY POLICY I 1 9 5 5 - 5 6 58

It is indeed shocking that while no two railroads can get together on such
constructive things as through service at Chicago, mechanical refrigeration, or
sealed bidders, 131 of them can be brought into unanimous agreement to serve
the bankers at the expense of their own railroad shareholders.
M r . YOUNG. Y e s , s i r .

Senator O ' M A H O N E Y . Y O U found that to be the case?
Mr. Y O U N G . I found that to be true, and I still believe that to be
Senator O ' M A H O N E Y . Y O U still believe that to be true?
Mr. YOUNG. Yes, sir; almost, I might make it, 129 instead of 131.
Senator O ' M A H O N E Y . Another paragraph:
Here was the New York Central, America's second largest railroad, dominated
by 4 personalities, all bankers, holding among them only 450 shares of Central
stock, less than $2,500 worth apiece, through their subordinates and fellow bank
directors. As you see from this chart over on my left, they interlocked with the
directors of 14 other railroads, including Central's most powerful competitors,
and with 56 other mammoth corporations having assets of more than $107 billion.

Mr. YOUNG. Yes, sir. It was against the law for me to serve on
another railroad, but those bankers can interlock all over the lot with



told this story:

Several great insurance companies—

I am reading from page 1462—
through their financial vice presidents, two of whom also served on the board
of directors of railroads competing with Central, filed petitions alongside the
old Central management in its frantic but unavailing attempt for Interstate
Commerce Commission help against us, all to the accompaniment of wide publicity damaging to our cause.
Let me interpolate there and draw yonr attention to the effrontery of that
action of these two insurance companies who had named boards of directors to
17 railroad reorganizations, and the directors of these companies interlocked
with many railroads and interlocked with these corporations which interlock
with all the railroads, and those gentlemen had the effrontery to come down to
the Commission and demand that we be found in violation of the Clayton Act
because I once knew Mr. Eaton and had once owned some stock in the C. & O.
Imagine the effrontery of them, and compare that with the fact that a Mellon
Bank president sat on the Central board when Mr. Mellon himself sat on the
Pennsylvania board with another president whom he controlled, of the Pittsburgh Plate Glass Co.

You named the insurance companies.
M r . YOUNG. Y e s , s i r .
Senator O ' M A H O N E Y .

A little while later you said they were the
Metropolitan Life and the John Hancock.
And I would like to say this—

you went on—
I would like to say this, that I had the pleasure of dining at the White House
during the proxy fight and President Eisenhower was so determined to maintain
neutrality that he asked Mr. Vanderbilt to dine there first. And I discussed
the New York Central proxy fight with members of the White House staff, and
they said that the strictest orders had come down from Mr. Eisenhower to maintain the strictest neutrality in that proxy fight

Do you attribute your victory to that intervention ?

Mr. YOUNG. Well, I would say this—well,
but I would say that


That was only


couldn't say that, sir,

Mr. YOUNG. That was a little light atmosphere I was trying to
throw in there, sir.

60 MONETARY POLICY I 1 9 5 5 - 5 6


Senator O ' M A H O N E Y . Yes, sir. I so interpreted it. But what I am
driving at is to find out whether you still believe that that condition
Mr. YOUNG. I do, and it exists just as dangerously today. And I
think it is that influence that is behind our tight money credit, at the
moment. I think it is that same group that are behind this policy.
Senator O ' M A H O N E Y . Well, now you see you jump ahead of me.
You have given me the answer to the question I was about to ask. I
was referring to men in Wall Street coming to Washington in Government andflittingback again. And then I was going to ask you whether
you thought that Mr. Humphrey, the Secretary of the Treasury, and
Mr. Randolph Burgess, the Under Secretary of the Treasury, who are
issuing the bonds with the high rate of interest, are to be listed in that
same category of big leaders of business coming to Washington to run
the Government ?
Mr. YOUNG. They are members of the club, sir.
Senator O ' M A H O N E Y . YOU are much better than I am—much more
succinct and much more direct, sir, in characterizing the situation that
confronts us. You are concerned about monopoly.
Mr. YOUNG. Deeply, sir. I think that is the greatest threat we have
to the great genius of American enterprise and we have got to curb it in
all its forms.
Senator O ' M A H O N E Y . And in this testimony which you gave some
years ago—it was not so many—it was 1954 or 1955-2 years ago—
you drew attention to the changing character of some businesses.
Once they were family businesses, and later in the "public domain,"
a phrase which I thought was very apt.
M r . YOUNG. Y e s , s i r .
Senator O ' M A H O N E Y .
M r . YOUNG. Y e s , s i r .
Senator O ' M A H O N E Y .

That is a correct statement of your views.

There are corporations now holding dominant positions in the trade and industry of the United States which
are managed not by their owners or by their stockholders but by the
Mr. YOUNG. There is a group of men up there that make it their
business to get and secure the control of the biggest business in the
country. And they are allowed to interlock freely.
And the real owners, the voice of the owners is kept out. And I
say that that kind of bureaucracy is far more dangerous than the
kind of bureaucracy they like to criticize, because that bureaucracy
does not have to answer to the electorate as the Washington bureaucracy does. At least, we get a chance to change them.
But I don't know of any great corporation in America that ever
had to face the stockholders until it happened in the New York
Central. And then
Senator O ' M A H O N E Y . Isn't it a fact that many of these corporations
now are endeavoring to change the face value of the stock so as to get
it in the hands of small stockholders—they reduce the face value of
the stock?
Mr. ZELL. That may be one of their motives, sir. I know that they
just hate to have a large stockholder. They just hate to have a stockholder walk into their office and ask them any questions.
Senator O ' M A H O N E Y . Isn't that the case with the New York


MONETARY POLICY I 1 9 5 5 - 5 6 60

Mr. YOUNG. N O longer, sir. No, sir. As a matter of fact, the
management of the New York Central has me walking into their
offices every day. And I ask them a lot of questions.
Senator O ' M A H O N E Y . Then you wish this committee to understand, so far as the New York Central is concerned, the latchstring
is always out for the stockholders?
Mr. YOUNG. Yes, sir; it is, indeed.
Senator O ' M A H O N E Y . He is treated as an owner?
M r . YOUNG. Y e s , s i r .
Senator O ' M A H O N E Y .

Where do your stockholder meetings take
Mr. YOUNG. In Albany.
Senator O ' M A H O N E Y . But in the State of New York.
Mr. YOUNG. I want to say there with pride that—this was 2 years
after this heated proxy fight—at the annual meeting there last May,
despite the fact that many of them voted against me and hated me
during the proxy fight, for the first time that I ever knew it to happen, there was not a single dissenting vote in 60,000 shareholders of
the New York Central against a single New York Central director.
Senator O ' M A H O N E Y . Let me read another paragraph from your
testimony of 2 years ago. This is from page 1467:
To repeat, a vice president of 1 of the 4 banks represented on Central's board
who was also chairman of the executive committee of Central's competitor, the
Erie, took a leave of absence from his bank to give the Central full time assistance in its fight to prevent our victory which he publicly declared would be a
national calamity.
The Central has since cut the cost of transportation $70 million in 10 months.

Was that the national calamity he foresaw?
Let me ask you, has there been any other calamity under stockholder-office management?
Mr. YOUNG. The only calamity was, sir, we paid $ 2 . 7 5 in dividends
last year and we continuously have paid a dividend since we took
control. And the Central had not been on a regular dividend basis
under the bankers for 25 years.
We are improving service on the Central. And I want to tell you
some of the things we found in the Central were disgraceful. I want
to give full credit for what is happening up there to A1 Perlman.
Senator O ' M A H O N E Y . Returning to your statement, on page 18 of
your testimony today, would you say that the abuse of credit by the
Government is the responsibility of the Government itself and not of
the business, or by the intervention in directing the Government of
men who have come from this category of interlocking banks and
directors and producers of materials that have fallen under monopolistic controls?
Mr. YOUNG. Well, sir; I think I had better say that that kind of
monkey business I did not include in the productive side of business
which I have reference to there, sir.
Senator O ' M A H O N E Y . Further, down on page 1 8 , you say of the
students of the high schools, high-school seniors :
Eighty-two percent do not believe we have competition in business.

Do you believe we have ?
Mr. YOUNG. I believe that we have in the vast areas of business, sir.
Senator O ' M A H O N E Y . What are the "vast areas of business"?

60 MONETARY POLICY I 1 9 5 5 - 5 6


Mr. YOUNG. Well, I would say that we have it in virtually all small
Senator O ' M A H O N E Y . D O you realize that many people in the category of small business are complaining?
Mr. YOUNG. They are complaining—they are probably complaining about these big businesses. And to the extent that we do not have
competition in these big businesses it is due to this interlocking and
there is a lot of that.
And I think it should be eliminated.
Senator O ' M A H O N E Y . They are complaining about the high cost of
money, too.
Mr. YOUNG. That affects small business as well, sir. And there the
effects of noncompetition in business affect all businesses, small as
well as large.
Senator O ' M A H O N E Y . What would be your suggestion to this committee as to the best way for Congress to act to bring about the stimulation and growth of privately owned, as contrasted with collectively
owned, private enterprise in the United States?
I ask you that question because you made a very pertinent remark
here about the danger that unless these abuses of which you speak
are not eliminated we may lose our system
M r . YOUNG. Y e s , s i r .
Senator O ' M A H O N E Y . T O others other than the Communists.
M r . YOUNG. Y e s .
Senator O ' M A H O N E Y . What did you mean by that?
Mr. YOUNG. I think that first—one of the things that we must

eliminate is this imbalance in our economy created by these perennial
wage increases.
Two, I think that we have got to reduce our taxation from a third of
the national
Senator O ' M A H O N E Y . Which is the worst, the wage increases or the
credit increases—the interest rates that lie at the basis of all tight
money ?
Mr. YOUNG. I would say they are equally bad.
Senator O ' M A H O N E Y . Would you reduce wages?
Mr. YOUNG. NO. NO. On the contrary, now, I do not think you
can do that. I would just stop increasing them until these other
areas catch up.
I believe—believe me, understand I am in favor
Senator O ' M A H O N E Y . Y O U are not making the fight on wages?
Mr. YOUNG. NO, sir. All I am making the fight on is the constant
hiking of wages. In other words, I thoroughly believe with Mr. Ford,
what I would like to see is the other areas catch up with labor.
It is the fact that we have a turtle and rabbit nere. And most of
us are turtles.
Now, I would like to see us all rabbits.
Senator O ' M A H O N E Y . I beg your pardon?
Mr. YOUNG. I would like to see all of us rabbits. When it comes
to this wage inflation I'd like all of us to have more money. But
Senator O ' M A H O N E Y . I suppose that anybody who has anything
for sale, whether it be services, commodities or transportation, wants
to have a purchasing power?
Mr. YOUNG. That is what I mean, sir. I think it is very dangerous
to the economy to throw agriculture out of balance—to throw the



MONETARY POLICY I 1 9 5 5 - 5 6 62

white-collar class out of balance—or to throw our aging out of balance.
I think it is very dangerous to have all of our aged sometime in
the next 10 years suddenly find that the money they had from their
pension and their savings is not going to keep them.
Senator O ' M A H O N E Y . I remember very well when I was a youngster,
in the State of my nativity, Massachusetts, living in a community
where a dollar a day was about the customary pay for a wage worker.
You remember those?
Mr. YOUNG. Yes, sir. I started out at 28% cents an hour.
Senator O ' M A H O N E Y . I started out at about $10 a week.
M r . YOUNG. Y e s , s i r .
Senator O ' M A H O N E Y . That
Mr. YOUNG. But your $10

probably bought as much as my 28%
cents an hour.
Senator O ' M A H O N E Y . Absolutely.
M r . YOUNG. Y e s , s i r .
Senator O ' M A H O N E Y .

The value of money as a purchasing medium
has constantly declined, has it not?
M r . YOUNG. Y e s , s i r .
Senator O ' M A H O N E Y . According to all
Mr. YOUNG. It certainly has.
Senator O ' M A H O N E Y . S O it is probably

of the theories it has.

a question of how we will
manage the money, rather than how much the wages will be or how
much the interest may be.
It is the question of seeing that no one group gets more than its
Mr. YOUNG. There is the point. I would say that if the white-collar
class, agriculture, transportation, service industries, the pensioner had
all gotten 300 percent increase with labor since 1929,1 would be all for
And it would not make the slightest difference to anybody if the
rices were 3 or 2 or 5 times higher than they were, so long as we all
ad the same currency with which to buy it.
It is only when one gets more than another that I think that the
situation becomes dangerous. And that goes for bankers as well as
Senator O ' M A H O N E Y . What is the attitude, according to your experience, of the leaders of business in New York, a central city of
business activities of the United States, with respect to the existence
of monopoly and its bad effects upon our whole economy ?
Mr. YOUNG. I think that the officers of the very institutions which
are part and parcel of this great banking monopoly disapprove of it
and resent it. I know that I found that some of these railroad officers
resented the fact that they had to come down here to Washington when
the bell rang and help the bankers fight competitive biddings
But since, so long as they know that this interlocking control has
the power to hire or fire them or promote them, they are going to let
their true feeling be subordinate to their own personal good.
And I think that you would free, let us say, the General Electric Co.
tomorrow, if you saw that no one served on that board who interlocked
with any Dank or insurance company or any other corporation. And
that all of the directors of that corporation were substantial shareholders.
Senator O ' M A H O N E Y . And you are saying in effect then

60 MONETARY POLICY I 1 9 5 5 - 5 6


Mr. YOUNG. And I think the president of the General Electric Co.
would be the man who would be most highly gratified.
Senator O ' M A H O N E Y . YOU are saying that the board of directors of
the General Electric Co. has interlocking directors among its
Mr. YOUNG. I would rather say that I would rather not use that as
a specific example, but let the chips fall where they may and let us say
the XYZ electric company.
Senator O ' M A H O N E Y . I can understand your unwillingness to
specify one.
Mr. YOUNG. But I would say I would be surprised if the General
Electric did not interlock all over the lot as most big corporations do.
And on my chart I think you will find that General Electric there, but
I would rather call it here today, say, the XYZ company.
Senator O ' M A H O N E Y . In spite of your successful fight to win control of the New York Central from banker control, you still believe
that banker control operates in the country among the big corporations?
Mr. YOUNG. I know it does.
Senator O ' M A H O N E Y . You know it does?
M r . YOUNG. Y e s , s i r .
Senator O ' M A H O N E Y . What are we going
Mr. YOUNG. Well, I think that the way to

to do about it?
cure it is the one I have
suggested, that no one should be allowed to serve on the board of
one of our great American corporations and serve on any other
great corporation board or on any bank, or insurance company board.
It is just that simple.
I think that a man can have only one master, and that he should
not be allowed to serve on several great corporations. Some of these
investment bankers do on the boards of sixty companies.
Senator O ' M A H O N E Y . And you would support legislation which
would prohibit any banker or investment banker to sit upon the board
of directors of any corporation with which his bank did business?
Mr. YOUNG. Well, I would go a little further than that perhaps.
There was once a law passed which prohibited a banker from serving
on an insurance company board.
Well, that was all very simple. The banker went on the General
Electric board and they then put the president of the General Electric
on their insurance-company boards.
It is that kind of thing that you have to stop.
So I would say that you ought to keep bankers, brokers, and insurance-company executives off of any board. I just do not believe
any man is going to get—any corporation is going to get a square
deal from a banker if the banker sits on the board and makes the
deal with himself.
That was the way they tried to operate and did operate until we
broke it up with the competitive bidding.
Senator O ' M A H O N E Y . These are the words in which you made the
suggestion in your previous testimony, and I am reading from page
1472, paragraph 7 of your suggestion at that time:
Prohibit the interlocking of directors and officers of banks, investment bankers,
investment companies, insurance companies, mutual savings banks, pension
funds and endowment funds and foundations with or through other large


MONETARY POLICY I 1 9 5 5 - 5 6 64

M r . YOUNG. Y e s , s i r .
Senator O ' M A H O N E Y .
Mr. YOUNG. I would

That is your recommendation?
amplify that to say that no one should serve
on the General Electric board and on the Du Pont board; and on
the Du Pont board and on the General Motors board.
Senator O ' M A H O N E Y . D O you think
Mr. YOUNG. I would like to strike that last out, sir, because of being
a former Du Pont man. Let us say on the General Motors board and
on the General Electric board.
Senator O ' M A H O N E Y . Thank you very much.
Mr. YOUNG. I correct my statement about Du Pont and General
Motors so long as that 30 percent interest is there. That stockholder
interest, I think, entitles them to interlock.
But where there is no stockholder interest, I do not think one great
corporation should interlock with another, for example.
Senator O ' M A H O N E Y . Am I correct in summarizing your opinion
by saying that in your belief the abolition of monopolistic practices
would be an effective way of stopping the abuse of credit and of stimulating actual free independent enterprise in the United States?
Mr. YOUNG. Yes, sir. And I would go so far as to say it might
straighten out our whole foreign policy. [Laughter.]
Senator O ' M A H O N E Y . Thank you very much.
Chairman P A T M A N . Concerning the foreign policy, Mr. Young, I
notice you said this, and I will just read the two sentences from your
statement on page 5 :
Last summer they bemoaned an appropriation of $4 billion for foreign relief,
for Heavens knows whom, because as they allege, it was not enough.
Any economist knows why the handout overseas, because it does not fill a
domestic need, is more inflationary than a handout at home.

Under present conditions, big concerns in the United States can get
plenty of money for overseas operations. That is correct, isn't it?
I refer to the World Bank, to the Export-Import Bank, its capital
wholly -United States funds, and the new International Finance
Corporation, through those three big organizations, sponsored by the
United States Government, they can get unlimited funds, up to billions
of dollars, right now ?
M r . YOUNG. Y e s , s i r .
Chairman P A T M A N . T O

deal with foreign countries overseas or to
permit foreigners to have the loans?
M r . YOUNG. Y e s , s i r .
Chairman P A T M A N . And

to make loans to big business and little
business in foreign countries?
M r . YOUNG. Y e s .
Chairman P A T M A N .

But that same service is not available to the
people here in the United States.
Mr. YOUNG. The American citizen is getting to be the forgotten
man, sir.
Chairman P A T M A N . For instance, I know a place where they have
a perfect location for a cement mill. They have the natural limestone—they have everything. But you know, the cement people, they
are on these boards of directors, too, of these insurance companies, and
do you think they can get that loan ?
Of course they cannot get that loan. They do not have a chance
of getting that loan.


195 5 - 5 6


Mr. YOUNG. I know how it operates.
Chairman P A T M A N . YOU have been through it.
Mr. YOUNG. It has been used against me, sir.
Chairman P A T M A N . And you mentioned a while ago about the
"Club" and about the members of the "Club" and how they operate
and so forth.
May I remind you that when Mr. Humphrey came in as Secretary
of the Treasury of the United States, he brought with him to run the
monetary policy which meant deflation in 1953, bonds going up in
1954 and a few banks making $260 million by buying low and selling
high—he brought down here 5 of the 9 directors of the 1953 directors
of the Federal Reserve Bank of New York, headed by Mr. Burgess
to be the architects of this monetary policy.
And that is the policy that has made this system so uncertain.
Do not the bankers thrive on uncertainty? Do not they make more
money that way by everybody being doubtful about what is going to
happen and trying to protect themselves? Is it not better for the
bankers and money lenders to have uncertainty than security and
stability ?
Mr. YOUNG. They are certainly the only ones that make money out
of tight credit.
Chairman P A T M A N . And the only ones making money out of this
high interest. And what I can't understand is out of all of the different methods and vehicles and tools that the Federal Reserve System
could have used to fight inflation, if there is actual inflation—I am
not saying there is inflation, I don't think there is—and if there is,
I am willing to do anything because we do want to stop it—but out
of all of the tools that they have, they picked out the only one that
would automatically increase, and arbitrarily increase interest clear
across the board, in every household in America.
It will unbalance every budget in America, the higher interest rate.
Six times they have raised interest rates and six times they must have
considered it. "This is the only way we can do this." And six times
they have agreed on the method that would unbalance the Federal
budget, the State, the county, the city, the political subdivisions, all
corporations, individuals, partnerships, even the household budget.
Whenever you increase interest rates 1 percent the ultimate effect of
that is over $7 billion annually. Divide that by the number of people
we have, over 160 million, and you will find that it costs $40 a year
for every man, woman, and child to have a 1 percent interest rate
Now, that higher interest is paid by them, whether they know it
or not. Talk about hidden taxes—this is the worst sort of a hidden
tax. If they own a home, they have to pay increased taxes to the
city in which they live, because the city is having to pay more interest.
And that is reflected in the tax bill, whatever the person pays.
Every utility serving that city is having to increase its rates, because
of higher interest. It goes all over the Nation in every home.
I cannot conceive of anything that is halfway as detrimental and
destructive to the conomic interests of our country as an arbitrary
interest increase.
Would you like to make any additional statement?
Mr. YOUNG. All I can say is that it has increased the cost of our
running the New York Central Railroad.


MONETARY POLICY I 1 9 5 5 - 5 6 66

Senator O ' M A H O N E Y . May I merely make this comment, Mr.
I think it ought to be in the record at this point.
As I remember the statistics of the interest upon the national debt
and the appropriations of Congress, the estimated interest on the
national debt made by the Bureau of the Budget for thefiscalyear 1957,
which will be the period terminating on the 30th of June next, will be
$7,200 million. %
That estimate was made before the President had recommended the
cancellation of all interest upon the payment on the British debt which
is presently to be made, and before it was released from the White
House that the administration is planning to ask for a substantial
expansion of economic expenditures abroad.
It was made before the request for a new loan which was announced
last Saturday by the Treasury was contemplated.
So that it is quite evident that the interest upon the national debt
of the United States for fiscal 1957 will be much more than $7,200
Before we became involved in World War II, the entire appropriation—this I would say was forfiscalyear 1939—the appropriation for
the entire cost of the Federal Government (the legislative branch, the
executive branch, the judicial branch, all of the boards and commissions, and all of the services, including the Interstate Commerce Commission in which you are so personally interested) amounted to less
than $11 billion.
And now our interest upon the national debt alone is almost threefourths or two-thirds of what the entire cost of Government was only
15 or 16 years ago.
The national debt, it was estimated in the papers yesterday, as the
result of this new proposed issue, would be about $278 billion.
The national debt was limited by Congress, by law, to $275 billion
under the Truman administration. The Congress on several occasions
within the last 2 years has had to pass special legislation in order to
permit the Treasury to go above the debt limit.
The debt of the United States is greater than the national debt of
any country or people in all history.
And it is evident now that nobody can predict what the national debt
will be forfiscalyear 1958. Not only is it planned to make these additional expenditures abroad, but it is also planned to increase the
appropriation for national defense.
Guesses upon that from Secretary Wilson and others in the Pentagon are rather vague as to what the exact amount will be. As a matter
of fact, the President has gone so far as to prohibit any of the people
in the Pentagon from giving out any information with respect to that.
But Congress will receive the information when the budget message
is received. I have no hesitation in saying that it will be much greater
because of this crisis than was dreamed possible when the Budget
Bureau gave out its report just before the election.
But this thing I am quite sure will result from the facts which have
been developing with respect to tight money. Unless we find a way by
which the Federal Eeserve Board will cooperate with the Government in financing the added debt which it seems as though it would
be impossible for us to avoid, the burden upon the people and upon
the economy will be greater by far than what was estimated.


MONETARY POLICY I 1 9 5 5 - 5 6


The effect will be felt by every branch of the economy, from top to
bottom. And the big banks, the big insurance companies, will not
escape the bad effect, if this is permitted to go on.
I have been creditably advised that the Federal Reserve Board has
held 3 or 4 executive hearings with economists—economists from the
universities, economists from one group and from another group.
That is a very good sign. It indicates that the Federal Reserve
Board realizes that the trouble is at hand.
But one thing, certainly, it seems to me to prove, Mr. Chairman,
and that is, that restraint upon monopolistic practices by big business
to gain control over all business of the United States must be found
and imposed.
Chairman P A T M A N . Thank you, sir.
I wonder how many automobile manufactures there were 14 years
ago. I notice they only have 3 or 4 now from the last night's automobile show?
Mr. YOUNG. If you will go back 4 0 years you would find 5 0 or 6 0 .
There has been a constant attrition since then.
So there is almost a straight line.
Senator O ' M A H O N E Y . Some of these automobile manufacturers, Mr.
Chairman, are dependent upon the award of Government contracts to
Mr. YOUNG. Correct. Really—really 2 or possibly 3 are able to
survive in the automobile business so concentrated has that business
Speaking of your point, Senator, this may sound a little fantastic,
but I do not believe we would have gotten into World War II had it
not been for this banking control in New York.
It is that banking control that endorses these international policies
and puts the stamp of approval on them.
And I say that our foreign policy is made more by that international
group up there, than it is here in Washington. And we consistently
blunder m all of our—the whole foreign policy area.
And I put the blame right up there in this interlocking.
Chairman P A T M A N . D O you see any interlocking between the people
you speak about and the dollar-a-year men in Washington?
Mr. YOUNG. They are virtually the same crowd.
Chairman P A T M A N . Virtually the same crowd?
M r . YOUNG. Y e s .
Chairman PATMAN. Senator O'Mahoney
Mr. YOUNG. That went for both administrations.
Chairman P A T M A N . Yes, sir. I understand.

Of course, we had them under the Democrats, the same as under the
Senator O'Mahoney brought up a point I think should be mentioned about the national debt, where it is doubly cruel to increase the
interest on the national debt, it is because the national debt probably
will never be paid.
In our capitalistic system, which is the finest and best system on
earth that we have ever been able to find—and we all agree that it is
the best—we must have debt in order to have money.
And we cannot afford to pay off the national debt. It would just
cancel that much money and cause hard times.


MONETARY POLICY I 1 9 5 5 - 5 6 68

And until the slack can be taken up by other loans, by other debts,
in business or in industry or by the big folks, it would be detrimental
to the country to reduce the national debt.
Therefore, considering the expansion, the next expansion and the
natural expansion we will have, it is very doubtful that we will ever
pay any part of this present national debt.
There is no sincere desire being manifested now to pay it—no effort
made, because everybody knows it would be highly deflationary. That
is the way to answer your inflation problem, if you have one, is to pay
some on the national debt. That will help a lot.
But nobody is suggesting that, because we are keeping this debt in
order to have a sufficient medium of exchange. Plenty of money.
And since this is for the convenience of the people only—and that
it what it is—certainly, the Government should not be required to pay
these excessive rates of interest on it—2% percent is enough, because
it is used for the convenience of the people.
Mr. YOUNG. It is certainly burdensome.
Chairman PATMAN. Yes, sir; it is burdensome. And it is getting
more burdensome. Imagine paying 3% percent and then imagine
going out here and asking these people to continue these savings bond
drives, by getting 3 percent, if they keep their bonds 10 years, when
they can go in the open market today and buy bonds, the bonds which
they will receive 3.69 percent on.
So it is unstabilizing and uncertain and confusing everything.
Mr. Young, we certainly appreciate your testimony and your coming
here. And if after reading your remarks, you desire to make changes
or additions, why you may do so.
So again the committee thanks you very much for your attendance
and testimony that you gave.
Mr. YOUNG. Thank you both.
Chairman PATMAN. The subcommittee will meet tomorrow at 10
o'clock. Mr. Martin will be our first witness and with him there will
be the Open Market Committee.
(Thereupon, at 3:55 p. m., the subcommittee adjourned, to reconvene at 10 a. m., Tuesday, December 11, 1956.)








"Washington,, D. G.
The subcommittee met, pursuant to recess, at 10:10 a. m., in the
Old Supreme Court Chamber, United States Capitol Building, Washington, JD. C., Hon. Wright Patman (chairman) presiding.
Present: Representative Patman (chairman), and Senator
Also present: Grover Ensley, executive director; William H. Moore,
staff economist; and Reed L. Frischknecht, legislative assistant to
Senator Watkins; John W. Lehman, clerk.
Chairman P A T M A N . The subcommittee will please come to order.
At the start of yesterday's hearings I made a statement on the
background and purpose of these hearings, which I shall not repeat
since I understand that you all have had an opportunity to look it over.
I pointed out that this is only one of a series of studies made by the
Joint Economic Committee, and emphasized that the determination of
monetary policy is an important public function to be exercised in the
public interest by public-minded servants.
I pointed out, moreover, that we must guard against the danger of
making high interest rates and tight credit a permanent habit in the
United States.
Now, Mr. Martin is here. We have with us Mr. Martin, Chairman
of the Federal Reserve Board, as our first witness this morning, accompanied by the other members of the Federal Open Market
Without asking you to go into a complete analysis and giving your
reasons, would you say whether you regard the forces in the current
economic situation as predominantly inflationary—I will get back to
that, Mr. Martin, if you please.
As today's hearings begin, I presume it is safe for us to continue on
the assumption that the Open Market Committee and the Reserve
authorities are currently pursuing a policy of monetary restraint in
line with the policies of the past year or 18 months.
Perhaps you have answered these questions in your statement, Mr.
Martin. I have not had the time to examine it. It has just arrived
here. But we want these questions answered before you conclude
your testimony.



MONETARY POLICY I 1 9 5 5 - 5 6 70

You have supplied us with brief biographical sketches of the present
members of the Federal Open Market Committee which I believe
should be included in the record at this point, but I think it would be
desirable for you to introduce for the benefit of those present each
one of the gentlemen accompanying you, Mr. Martin, if you please.
(The material referred to follows:)
DECEMBER 1 1 , 1 9 5 6

WilUam McChesney Martin, Jr., Chairman. Effective date of appointment,
April 2, 1951. Reappointed effective February 1, 1956. Term expires January
31,1970. Formerly president of New York Stock Exchange, chairman and president of Export-Import Bank, and at the time of his appointment was Assistant
Secretary of the Treasury.
0. Canby Balderston. Effective date of appointment, August 12, 1954. Term
expires January 31, 1966. Formerly director and deputy chairman of Federal
Reserve Bank of Philadelphia, and at the time of his appointment was dean,
Wharton School of Finance and Commerce, University of Pennsylvania.
M. S. Szymczak. Effective date of appointment, June 14, 1933. Reappointed
effective February 3, 1936, and February 1, 1948. Term expires January 31,
1962. Formerly professor, College of Commerce, DePaul University, Chicago,
111.; officer and director of bank; and at the time of his appointment was comptroller of the city of Chicago.
James K. Vardaman, Jr. Effective date of appointment April 4, 1946. Term
expires January 31, 1960. Formerly engaged in business and banking in S t
Louis, Mo., and at the time of his appointment was naval aide to the President
of the United States.
Abbot L. Mills, Jr. Effective date of appointment February 18, 1952. Term
expires January 31, 1958. Formerly engaged in banking since 1920, and at the
time of his appointment was first vice president of the United States National
Bank, Portland, Oreg.
James Louis Robertson. Effective date of appointment February 18, 1952.
Term expires January 31, 1964. Formerly special agent of F B I ; counsel to the
Comptroller of the Currency; and at the time of his appointment was First
Deputy Comptroller of the Currency.
Chas. N. Shepardson. Effective date of appointment March 17, 1955. Term
expires January 31, 1968. Formerly director and chairman of Houston branch
of the Federal Reserve Bank of Dallas; and at the time of his appointment was
dean of the School of Agriculture of Texas A. & M. College, College Station, Tex.

Alfred Hayes, Vice Chairman. President, Federal Reserve Bank of New York
since August 1,1956. He was engaged in banking activities since 1933 and since
1949 he served as the vice president in charge of the Foreign Department of the
New York Trust Co.
J. A. Erickson. President, Federal Reserve Bank of Boston since December
15, 1948. At the time of his appointment as president he was executive vice
president of the National Shawmut Bank of Boston, having been associated with
that institution since 1920.
Wilbur D. Fulton. President, Federal Reserve Bank of Cleveland since May
14, 1953. He began his service with the System as an examiner at the Federal
Reserve Bank of Cleveland in 1933, advancing through the positions of chief examiner, vice president in charge of the Cincinnati branch, and first vice president.
Delos C. Jones. President, Federal Reserve Bank of St. Louis since February
1,1951. He was in general law practice in Kansas City until 1945, when he was
appointed general counsel and secretary of the Federal Reserve Bank of Kansas
Oliver S. Powell. President, Federal Bank of Minneapolis since July 1, 1952.
He has been associated with the Federal Reserve Bank of Minneaoplis in various
official capacities since 1920, except for his service as a member of the board of
governors from September 1,1950 to July 1,1952.


POLICY I 1 9 5 5 - 5 6



Mr. M A R T I N . All right, Mr. Patman.
I would like to say that Governor Vardaman, a member of this committee, is unable to be here today.
Chairman P A T M A N . He advised me of his reasons, and I think they
were valid and good ones, and he was excused.
Mr. M A R T I N . Eight.
On my left, I have Alfred Hayes, president of the Federal Eeserve
Bank of New York, and Vice Chairman of the Federal Open Market
Going counterclockwise, to my left is Leif Erickson, president of
the Federal Eeserve Bank of Boston, member of the Federal Open
Market Committee.
D. C. Johns, president of the Federal Eeserve Bank of St. Louis,
member of the Federal Open Market Committee.
Oliver Powell, president of the Federal Eeserve Bank of Minneapolis, member of the Open Market Committee.
Wilbur Fulton, president of the Federal Eeserve Bank of Cleveland.
Coming to the right side and down toward me, Governor Charles
N. Shepardson, of the Federal Eeserve Board.
Governor James Louis Eobertson, of the Federal Eeserve Board.
Governor Abbot L. Mills, of the Federal Eeserve Board.
Governor M. S. Szymczak, of the Federal Eeserve Board.
And Vice Chairman of the Federal Eeserve Board, C. Canby
All of these are members of the Federal Open Market Committee.
Chairman P A T M A N . Y O U do have a prepared statement, Mr. Martin ?
Mr. M A R T I N . I have one.
Chairman P A T M A N . Would you like to present it first?
Mr. M A R T I N . I would like to present it first; and I would also like
to say that it encourages me to have these gentlemen here, because it
demonstrates that this is not a one-man operation.
Chairman P A T M A N . That is right, and you may do it in your own
way. And let me see if we can come to this agreement.
Mr. M A R T I N . Fine.
Chairman P A T M A N . We will have 2 hours this morning, and then
we will recess for 2 hours and then we will come back this afternoon,
after a recess of 2 hours, and continue on until we finish.
I believe that on the agenda we have you for 10 o'clock, and have
Mr. Hayes for 2 o'clock this afternoon, but I think we can very well
just go along, all of it together, and make it a continuous thing. Is
that all right with you ?
Mr. M A R T I N . Perfectly all right, sir.
Senator O ' M A H O N E Y . Mr. Chairman, may I ask a question?
Chairman P A T M A N . If you please.


MONETARY POLICY I 1 9 5 5 - 5 6 72

Senator O ' M A H O N E Y . Does the statement of Mr. Martin that
this is not a one-man operation, mean that the paper you are about to
read, sir, is unanimously supported by all of those who surround you?
Mr. M A R T I N . I can't truthfully say, Senator, that every word of
it has been, but the gist of it is unanimously supported.
Senator O ' M A H O N E Y . There is no important disagreement?
Mr. MARTIN. N O important disagreement of any sort.
Senator O ' M A H O N E Y . Thank you.
Mr. M A R T I N . On behalf of my associates of the Federal Reserve
System I want to express our appreciation for these periodic opportunities to appear before committees of the Congress. The Congress has placed a great responsibility upon the Federal Reserve
System—a trusteeship, as I conceive of it, over money.
The Reserve System has always benefited from thoughtful inquiry.
These hearings are not merely a public forum—and that all to the
good. They provide a means of keeping the monetary machinery of
the country abreast of the times. The Federal Reserve Act provides
that we shall report directly to Congress and thus, through it, to the
The task of the Federal Reserve System, under today's conditions,
is to determine the volume of credit that needs to be made available
in order to keep the economy running in high gear—but without
Too much credit would intensify upward pressures on prices. Too
little could needlessly starve some activities. We have to rely on
human judgments in this determination. There are bound to be
differences in judgment—sincere differences.
We do not undertake—and I do not see how it could be otherwise,
short of some form of dictatorship—to say how a given supply of
credit shall be allocated.
Experience would seem to demonstrate that allocations of credit
determined through the market process are to be preferred to judgments—or guesses—of public authorities, however well-intentioned.
I was tola recently of a tongue-in-cheek sign that hung in a Washington office some years ago. It read: "Our guess is always best."
It may be that collective judgments expressed through the market
rocess are not always best, but that process is consistent with our

Eeritage and our institutions under which direct governmental inter-

vention in economic affairs is confined largely to broad, general
policies necessary to protect and promote the public interest.
At any given time the economy is capable of producing a volume
of goods and services limited by currently available resources, human
and material. The difficulty throughout this year has been the attempt to crowd too much into a given time period—demand, in brief,
has been pressing strongly against the supply of labor and materials.
Creating more money won't produce more things when the economy
is running at peak levels. A choice has to be made—and the public
in the end has to make the choice of whether we shall have more of
this and less of that.
We can have, in a given period, just so many houses, automobiles,
household appliances, schools, manufacturing plants, and a myriad of
other things, including ships, planes, submarines^ and other essentials of defense. Under present conditions, something has to be given
up at least for a time.

60 MONETARY POLICY I 1 9 5 5 - 5 6


Throughout this year the combined demand for funds—for credit—
coming from virtually all sectors of the economy has been at an alltime high. It has outrun the available supply.
Contrary to some impressions, the Eeserve System has not reduced
the money supply; in fact, the money supply has continued to increase
this year though at a lesser rate than in 1955.
Moreover, the turnover—that is, the velocity—of the existing money
supply has greatly increased. Although the so-called tightness of
credit is often attributed to an insufficient supply of money, the fact
is that the tightness results from the volume and intensity of demand.
The great bulk of loanable funds represents savings of the community made available to borrowers directly or through financial
institutions other than commercial banks, such as mutual savings
banks, insurance companies, savings and loan associations, private
and public pension funds, finance companies, corporations, and
It is often forgotten that when the commercial banking system
expands its loans and investments, it generates new money. When,
as has been the case this year, aggregate demands for credit have
exceeded savings, the only way to finance them all would be by an
even greater expansion of bank credit—that is, by generating still
more money.
And, as I have emphasized, creating more money will not create
more goods. It can only intensify demands for the current supply of
labor and materials. That is outright inflation.
The Reserve System—and it is a nationwide system of 12 Federal
Reserve banks with 24 branches having all told some 260 directors
representing varied walks of life—is united in the conviction that
the best course is to do what the System can do, to restrain excesses
arising from monetary causes.
It has been estimated that a rise of only 1 point in the consumer
price index, Bureau of Labor Statistics, would cost the American
public $2y2 billion a year.
The Federal Reserve System has been devoting its efforts, through
varying times and circumstances, to assuring monetary and credit
conditions that would help to foster high levels of business and employment, maintain the stability of the currency, and promote sustainable growth in the economy.
The System has sought to keep constantly alert to changes in economic and financial conditions, and to adapt its operations accordingly—leaning against the breezes of inflation and deflation alike,
as I have put it a number of times.
Thus, when the economy had a downturn in 1953, the Reserve
System acted promptly to stimulate credit expansion to help halt the
decline and foster the recovery that began in 1954 and carried through
into 1955.
As we moved from recovery to boom in 1955 and on through 1956,
and as the economy in general pressed against the limits of immediate
capacity, the System took steps to keep expansion of credit within the
limits of the growth in resources so as to discourage excesses that
would inevitably produce higher prices and severe economic
Focusing more closely on the events of 1956, it was apparent there
were positive inflationary dangers inherent in superimposing a mas-


MONETARY POLICY I 1 9 5 5 - 5 6 74

sive increase in business investment on an economy already featuring
high utilization of resources and upward price pressures.
In this situation, to supply on easy terms all of the credit desired
by prospective investors would have increased inflationary bidding
for available resources, especially in the sectors of capital equipment
and construction. It also would have involved a rise in the volume
of outstanding credit, and in commercial bank credit and demand
deposits in particular, that would compound the threat to economic
stability and sustained growth.
Despite the restraint on credit growth and spending capabilities
imposed by monetary policy, demands in many sectors have risen more
rapidly than was consistent with price stability. The price advances
that began in 1955, after several years of stability, continued during
1956, as output in a number of key areas pressed against the limits of
Price increases have been particularly marked in sectors affected
by investment expenditures, in machinery and construction lines and,
affected in part by them, in metals and metal products.
These are the areas in which the restraint imposed upon current
expenditures by monetary policy was, quite possibly, the heaviest.
It is in these sectors that such additional demand as would have resulted from easier credit would have been concentrated.
Despite the strength of credit demands, growth in total commercial
bank credit was limited to a moderate rate, below the average of the
postwar period.
Thus, the increase in total loans and investments of commercial
banks in the 12 months ending with October was held to 2 percent,
and growth in the privately held money supply—demand deposits
and currency—to about iy 2 percent.
Eestraint on expansion in bank credit and the money supply this
year contrasts with the rapid increase that occurred from mid-1953
through 1954, even though loan demands then were generally less
active. During that period, policy was directed toward assuring
ready availability of credit in the economy generally, and toward
creating liquidity conditions favorable to revival and expansion.
In part, the developments since 1954 should be interpreted as a
transition from a time of ready availability of resources, reduced demands for credit, and a monetary policy of active ease, to a time of
intense utilization of resources, very strong credit demands, and a
monetary policy directed to restraint of inflationary forces.
Just now, the year is coming to a close with demands still outpacing
savings, with personal income at a new high annual rate of over $332
billion in October—$21 billion above the rate a year ago—and international disturbances that could add to further overstraining of our
It is a situation that calls for alertness, as well as prudence and restraint, on the part of Government, business, finance, labor, and
Basically, the problem confronting us now—in contrast to that of
the early 1930's—is not one of creating millions of jobs overnight to
cure mass unemployment, but one of sustaining the millions of jobs
we have today and fostering new job opportunities for an expanding
working force tomorrow.
Meeting that problem requires that the efforts of all of us be directed to preserving the stability of the economy, and the stability



POLICY I 1 9 5 5 - 5 6


of the dollar that underlies it, so that we may move steadily along the
road to a higher standard of living for all of us.
That concludes my prepared statement, Mr. Chairman.
Chairman P A T M A N . Complying with your suggestion that you want
to make sure it is not just a one-man organization, I think it would be
well at this point to suggest if any member of the Federal Open
Market Committee, including members of the Board, have a substantial difference, if they would like to present that, they will be recognized at this time.
If they do not have a substantial difference that they want to bring
up, they can either not say anything about it or wait and prepare something for the record. That will be acceptable.
But if either a member of the Board or of the Open Market Committee wishes to be heard in opposition to anything which has been
said, the Chair would be very glad to entertain anyone who desires to
do so.
I assume it meets with the approval of the Board.
Now, Mr. Martin, I read a statement the other day, I wrote it down,
as coming from the Federal Reserve Board. It said the Board,
through its control over the supply of money available to banks, has
sought to discourage borrowing in an attempt to control inflation.
It feels the labor force already is fully employed, and that further
expansion in business activity would push up prices.
Is that a fair statement of the policy of the Board at this time?
Mr. M A R T I N . I want to say on policy, Mr. Patman, that our policy
is adapted from day to day, and that the policy of the Board at the
moment is alertness to the general situation.
That has been a policy statement which would generally apply to
the period we are coming up to, the year-end money market, and I
donx want to in any way forecast what the policy of the Board may
or may not be with the money market in tne present condition, but
I want to point out
Chairman P A T M A N . I did not ask for the future.
M r . MARTIN. O u r j o b
Chairman P A T M A N . I

am asking for the past, if that has been the
Mr. M A R T I N . That has been the policy in the past.
Chairman P A T M A N . That has been the policy in the past.
Another statement was that the Board felt that if the production
of housing was increased by easier credit or easier terms or by making loans available which are not now available, that it would not cause
an increase in housing because there is only a limited supply of labor
and materials anyway, being fully utilized at this time; is that correct,
or not?
Mr. M A R T I N . Our feeling has been that the price of labor and materials would be—the price element is such that you would not create,
by money, additional housing or any other
Chairman P A T M A N . Y O U would just take it away from other production ?
Mr. M A R T I N . That is right.
Chairman P A T M A N . That has been your feeling in the past?
Mr. M A R T I N . That is right.
Chairman P A T M A N . You state that you are trying to stop inflation,
is that correct, that your activities have been directed in trying to


MONETARY POLICY I 1 9 5 5 - 5 6 76

stabilize the dollar and the economy, and particularly by stopping
Mr. M A R T I N . We have been trying to prevent the gap between savings and investment from being covered by bank credit, and adding
to the money supply in a way that would produce upward pressure
on prices.
Now, inflation comes from demand, not from costs, you see.
Chairman P A T M A N . Yes, sir.
Wait j ust a minute. Say that again, please.
Mr. MARTIN. I said inflation, in its essence, comes from demand
factors, not from cost factors. When the demand exceeds the supply, then
Chairman P A T M A N . When there are too many dollars chasing too
few goods, I believe you said.
Mr. MARTIN. That is right. That is another way of saying that.
Chairman P A T M A N . Well, you have said that.
Mr. MARTIN. Yes; I have said that.
Chairman P A T M A N . Yes, sir.
M r . MARTIN. Y e s , s i r .
Chairman P A T M A N . NOW

then, if you have been fighting inflation,
just name where the inflation, indicate to us where the inflation,
has been. Naturally, we know it is not in the small business, it is
not in agriculture, it is not in home building. Where is this inflation
that you have been resisting ?
Mr. MARTIN. Prices, Mr. Patman, have risen far more than I would
have liked to have seen them rise in the last year and a half.
Chairman P A T M A N . All right. Let's break that down. What kind
of prices? Monopolistic prices, fixed prices, or prices in the open,
free market, like agriculture? Certainly agricultural prices have not
gone up. Which prices do you mean ?
Mr. MARTIN. Well, recently agricultural prices have gone up
slightly, but that is a demand-supply situation.
But in the overall economy, as evidenced by the general price index,
the pressures on prices have tended upward for the last year and
a half.
Chairman P A T M A N . And you have beenfightingthe price increases ?
Mr. MARTIN. We don't want those price increases to come about
through credit expansion.
Chairman P A T M A N . Through credit expansion.
Now, do you feel that in fighting inflation, you have all the weapons
or tools that you need to do an effective job as an Open Market Committee or as a Board of Governors ?
Mr. MARTIN. Well, we have general monetary controls which we
apply. I think there are selective controls, such as housing credit and
consumer installment credit, which we had at one time which could
be used as supplements, but certainly not as alternatives to general
But in an overall sense, the Federal Reserve Board has at the
present time authority which we have been exercising in the field
of overall money policy.
Chairman P A T M A N . D O you feel that is adequate, Mr. Martin, to
do an effective job ?
Mr. MARTIN. Well, it is not adequate to do an effective job if the
budgetary policy and the fiscal policy of the Government run com-


POLICY I 1 9 5 5 - 5 6


pletely counter to it, because money and credit policy is only one of
the factors, important factors, in the problem.
I thinkfiscaland budgetary problems are
Chairman P A T M A N . Equally important ?
Mr. M A R T I N (continuing). Equally if not at times more important.
Chairman P A T M A N . In your conferences with the Treasury, and
since you have mentioned housing in particular, do you have in your
conferences Mr. Cole, who is head of the Federal Housing Administration?
Mr. M A R T I N . I have conferred with Mr. Cole once or twice. I have
not recently had the privilege.
Chairman P A T M A N . Once or twice.
You confer with the Treasury regularly ?
Mr. M A R T I N . I confer with the Treasury regularly, that is correct,
Chairman P A T M A N . Well now, if your object is not increasing
interest rates, No. 1, which I am not charging but I think it has
resulted in that, but if your object is to reduce the demand for housing, why did you not prevail upon Mr. Cole and the administration
to raise downpayments, which they had the authority to do, on
homes, and also shorten the term of the mortgages which would increase the monthly payments and certainly retard the production of
homes? Why did you not consider that, instead of just arbitrarily
raising interest rates, Mr. Martin?
Mr. M A R T I N . Well, we have no responsibility, direct responsibility,
in the mortgage field or the housing
Chairman P A T M A N . Did you try to do that ? Did you try to reach
Mr. Cole and try to do that ?
Mr. M A R T I N . N O ; I can't say that I directly talked to Mr. Cole; but
the Board has from time to time, in our conferences with the Government, expressed its general point of view that in a time like the
present, we should be careful.
I want to point out we don't want to reduce the level of housing at
all. We merely want to have as much housing and as much of everything as we can have without producing inflation.
Chairman P A T M A N . I know. But your statements, your statements,
Mr. Martin, do not—of course, they do not contradict your desires or
wishes, but they make them impossible.
Mr. M A R T I N . Well, it is a complex operation, and what we are
trying to do here
Chairman P A T M A N . And your statement is that you have not made
an effort to get the administration to stop the housing boom, if you
call it a boom, in the way and manner that I have indicated, by shortening the terms of the mortgages, which they have the right to do,
or raising the downpayments, which they have a right to do.
Mr. M A R T I N . Mr. Patman, in several meetings with administration
officials, I have stated that to be one of the desirable objectives, in my
opinion. But again, it is not my specific responsibility.
Chairman P A T M A N . I realize that.
Mr. M A R T I N . And only an opinion that I am basing
Chairman P A T M A N . Mr. Martin, what you have done every time
has been to raise interest rates. Now, you mentioned over here that it
has been estimated that a rise of only 1 point in the Consumer Price
Index would cost the American public $21/2 billion a year.



MONETARY POLICY I 1 9 5 5 - 5 6 78

May I invite your attention to the fact that the only weapon that
you have used has been to arbitrarily and automatically increase
interest rates, and with the knowledge that a 1-percent increase in
interest rates on debts of $700 billion, means ultimately an increase to
the American people of over $7 billion a year, not just $2% billion a
year on a 1-point cost of living increase. It means a $7 billion increase, which amounts to a $40 increase for every man, woman, and
child in America. For a family of 5 it is $200 a year, in hidden taxes—
in hidden taxes—the worst kind of hidden taxes, and that means that
purchasing power has been diverted from the purchase of necessary
things, conveniences and comforts, and even luxuries of life, to the
payment of interest and service charges. I cannot see why you would
not tiy to find some other tool to use, some other weapon to use, which
would not be so devastating or destructive to the economy and to the
Did you try to find other weapons to use, Mr. Martin ?
Mr. M A R T I N . We have always avoided endeavoring to see interest
rates go up. I have repeatedly stated
Chairman P A T M A N . You have raised them 6 times in the last 2 or 3 —
how long has it been since you raised the interest rates ?
Mr. M A R T I N . The interest rates were not raised by us specifically,
Mr. Patman.
Chairman P A T M A N . What is the discount rate?
Mr. MARTIN. The market process—the discount rate is the rate we
charge member banks, Mr. Patman.
Chairman P A T M A N . I know. You are not expecting us to be that
naive. Now, what is it done for? You raise the discount rates to
raise the interest rates; do you not?
Mr. M A R T I N . We have tried very hard, Mr. Patman, to let the interest rates follow the course of supply and demand, and to see that
money was available, but at a price so that we did not vitiate the forces
of the market.
Now, when the demand became so much in excess of the supply of
savings, there were obviously pressures on interest rates. I would like
to see interest rates as low as it is possible to have them at all times.
I am not in favor of high interest rates. I want interest rates as low
as it is possible to have them without producing inflationary pressures.
But you must remember that when the demand and supply factors,
which are always with us, are tipped in the direction of demand exceeding supply, that the saver, as well as the borrower, has some influence
and some rights in the economy, and that the interest rate, the role
of interest rates, comes into play at that time in terms of a higher
interest rate.
Our discount rate has tended to follow the market, not to lead the
market, in my judgment. We have attempted minimum intervention in the market, not trying to make the rates.
We do not believe we make business; we do not believe that we make
interest rates.
Chairman P A T M A N . All right. Let's see.
The President, at a news conference during the election, told a
reporter that his administration did not set interest rates. You
remember that; do you not ?
(The article referred to follows:)

60 MONETARY POLICY I 1 9 5 5 - 5 6


[From the Washington Post and Times Herald, December 6,1956]


(By Bernard D. Nossiter, staff reporter)
President Eisenhower yesterday disclaimed responsibility for the Federal
Reserve Board's credit-tightening moves, declaring that the agency is independent.
He did not comment directly on a reporter's statement that the administration
had helped lift interest rates. But he said at his news conference, "The Federal
Reserve Board is not under my control, and I think it is proper that the Congress
did set it up as an independent agency."
He thus reaffirmed a position he took last April. Mr. Eisenhower characterized a suggestion that he could influence the Board as a "premise that isn't
quite correct."

He thereby sought to blunt Democratice charges that his administration had
fostered tight money policies hurting local governments, home buyers, small
business, farmers and other.
The President's replies dealt with a relationship that has troubled congressional committees.
Legally, the Board is responsible solely to Congress. The President's only
formal connection is the appointment of the 7 Reserve Governors to
their 14-year terms. The present Chairman, William McChesney Martin Jr.,
was named by Mr. Truman and renominated by Mr. Eisenhower.
As a practical matter, close links are maintained between the Board and
the executive branch. Martin has testified that "in taking any important action,
the Board gives careful consideration to policies indicated by the executive
* * * in order that its policies and those of the Government as a whole may
be integrated to the fullest extent practicable."
Martin lunches with Secretary George M. Humphrey at the Treasury on
Mondays; Under Secretary W . Randolph Burgess returns the call on Wednesdays. In between, there are continuous consultations between the Treasury
and Reserve staffs. Martin also consults frequently with Arthur F. Burns,
Chairman of the President's Council of Economic Advisers.

But a dramatic example of the Board's independence was displayed in April
when it approved increases in discount rates despite administration opposition.
The discount rate is the charge paid by commercial banks on loans from Federal
Reserve banks.
Both Humphrey and Burns questioned the move before it was taken. The
President's economic aide, Gabriel Hague, was present at one of these talks.
Secretary of Commerce Sinclair Weeks and Secretary of Labor James P. Mitchell
criticized the rate rise later.
When the rate was raised again in August, the administration maintained
a discreet silence, although it is believed it approved.
In a speech Thursday, Burgess pointed to the heavy loan demands and said
if the Federal Reserve "encouraged an expansion * * * the result would be
inflationary." He added that "too freely available loans would make matters
worse by encouraging even more feverish bidding for scarce resources at higher
and higher prices."
While discount rate changes which affect all other rates get major attention,
a major Federal Reserve influence over money supply today is achieved through
its open market operations. By buying and selling Government securities
with newly created money, the Board adds or subtracts to commercial banks'
Since banks must keep a specified portion of their deposits on
reserve with the Board, their power to lend depends on the amount of these

Mr. M A R T I N . I think I probably do, yes, sir.
Chairman P A T M A N . And you also remember that he had to accept
the interest rates that you establish at the Federal Reserve. You
remember that, do you not ?
Mr. M A R T I N . Well, I would have to have the President's statement
directly in front of me. But, regardless of who said it, the interest


MONETARY POLICY I 1 9 5 5 - 5 6 80

rates are not set apart from the forces of the market. If they are,
we are not
Chairman P A T M A N . Well, the President thinks so.
Mr.MARTIN. What?
Chairman P A T M A N . The President thinks so. He thinks the Federal Reserve establishes the rates.
Mr. MARTIN. Well, I won't comment on the
Chairman P A T M A N . He said he was not responsible because the
Federal Reserve establishes the rates, and I think everybody else
thinks the Federal Reserve establishes the rates. I think so.
And Mr. Eccles testified one time—I think he knows a little bit
about the Federal Reserve System—he said that you could establish
the rate at 2y2 percent on Government bonds and keep it that way
indefinitely if the Federal Open Market Committee had the same
power it has now, just keep it there indefinitely.
Mr. MARTIN. Mr. Patman, as I have testified before, we could do
that if we want to depreciate the dollar at the same time.
Now, I assume we are trying to have a dollar whose purchasing
power is maintained in the interest of all of us.
Chairman P A T M A N . Certainly.
Mr. MARTIN. The little man, the pension fund, the saver.
Chairman P A T M A N . But in doing that, we do not want to create
more injustices and inequalities and discriminations; and the view of
many people right now is that this is creating more injustices and
inequalities than necessary.
You have raised this rate six times, Mr. Martin.
Now, thefirsttime, did you seriously consider other tools and methods that you had to deal with it, and without raising the rate?
Mr. MARTIN. Well now, again, we are not responsible or we have
no direct authority in the field of the budget or fiscal policy or other
instruments outside of the money and credit field. But I insist that
in raising the rate, the rate was moving up—and don't forget, this is
the rate at which we permit banks to borrow from us.
Chairman P A T M A N . That is right.
Mr. MARTIN (continuing). The rate was moving up in response to
the demand for credit.
Now we are living in a period of prosperity, and the problems of
prosperity—I regret any injustices or inequities that occur at any
time in the community, but the economic problems of prosperity are
frequently more difficult than those of adversity.
I am awfully glad we are wrestling with the problem of prosperity,
however, and not with the problems of deflation at the moment, but
these inequities and inequalities we always regret. What we are dealing with is a highly prosperous economy, and we are trying to serve
the interests of all of us by having a dollar which we believe underlies
everybody's stability and which is of benefit to the little man as well
as to the big man.
Chairman PATMAN. We do not argue with you about your objective. We are all in accord with your objective, Mr. Martin.
Mr. MARTIN. You and I are in complete agreement with our objective.
Chairman P A T M A N . The only argument we have with it is the
method used.
Mr. MARTIN. The method.


POLICY I 1 9 5 5 - 5 6


Chairman P A T M A N . In other words, a lot of people think you are
just doing it to help the money lenders and the bankers. I do not
charge you are doing that at all. I think you are acting conscientiously and sincerely.
Mr. M A R T I N . Right.
Chairman P A T M A N . But at the same time, when you are doing it six
times and you never can find any other method, there is a lot of corroboration to people who just want to make that charge.
Mr. M A R T I N . Well now, let me just make one comment there, Mr.
Patman, because you and I are seeking the same objectives.
Chairman P A T M A N . That is right.
Mr. M A R T I N . During the last year and a half, we have had a steady
increase in the gross national product, and tight money, so-called tight
money, which has been an excess of demand over supply, has not been
a sign of bad times or of disaster or of collapse.
It has been one of the strengths in our economy, an indication that
we could have rising interest rates and that the saver could benefit as
well as others, and that the economy could go ahead.
At no time have we wanted to see the economy strangled or the
standard of living reduced. We have tried to induce saving and to
reduce spending so as to sustain our prosperity.
Chairman P A T M A N . Y O U have not exhausted all your methods by
any means, to handle this thing without increasing interest rates, if I
know anything about it at all.
You take, for instance, the margin requirements, although it is a
minor matter, yet if you have inflation the first thing you want to do
is to make your regulation so that people cannot speculate in the stock
market, because that is certainly something which creates an inflationary condition.
That is number one. Of course, it is small, I will admit that.
Mr. M A R T I N . We made two changes in margin requirements.
Chairman P A T M A N . I know, but not lately, not lately.
Mr. M A R T I N . But also, the volume of credit in the stock market
has—Chairman P A T M A N . I say it is not a major one, but if you were
really fighting inflation, that might show that you are not as much
interested in that portion, you are not willing to stop that part of
inflation; that you are willing for that to go ahead.
Mr. M A R T I N . We don't think this
Chairman P A T M A N . We have from 4 to 6 billion dollars in the banks
of the country at all times without interest. Now, if you want to
stop inflation, why is that money not withdrawn ? There is no reason
for it being there, anyway, with the use of the Federal Reserve for
that purpose, to take care of any tightness in the banking system. It
is not necessary. They are not needed. They are not drawn on—from
3 to 6 billion dollars there at all times.
If you are fighting inflation, why do you not have that money withdrawn, because as it is, it is a basis for an expansion of six times that
much in new money, and that is very inflationary. Yet you let that
go ahead. You do not say a word about that, and the stock market;
but you jump on the home builders and the small-business man and
You talk about farm prices going up. They haven't gone up to the
farmer; they have gone down for the farmer.


MONETARY POLICY I 1 9 5 5 - 5 6 82

Mr. MARTIN. Well, I pointed out the demand-supply situation in
farm products, and the—what we have tried to do is to let the forces
of supply and demand have some play, and intervene to a minimum
in the market.
Chairman PATMAN. I am talking about methods that you could use.
You could suggest more taxes. That is the best thing against inflation.
Mr. MARTIN. Well, I have
Chairman PATMAN. Or you could reduce the national debt. That
is a good thing to stop inflation. And you have not suggested either.
In other words, the Board has arrived at only 1 conclusion, high
interest, every time, 6 times—high interest. And you never considered
any of these others, so far as I know.
That is what I am asking you, if you considered the taxes, reduce
the national debt, reserve requirements. You have the power. It has
been used by the Board a number of times. Eeserve requirements; a
good method.
Mr. MARTIN. Well now, take reserve requirements
Chairman PATMAN. Let me name them all first, and then you can—
if it is all right with you, Mr. Martin.
M r . MARTIN. Y e s .
Chairman PATMAN.

And then the open market; it is a natural. You
can do anything with the open market. You have unlimited power to
buy and sell securities; you can make the money tight, money easy.
You have complete control over it, and you have the Bureau of Engraving and Printing over here to back you up in it.
And not only that; these housing payments can be changed, and you
have a number of ways.
But as it is now, if you make it hard for everybody by raising interest
rates, the inequalities and injustices, the way I see it, are that the little
man is hurt, the farmer is hurt, the home builder is hurt, but the bigbusiness man who is expanding about 35 or 36 billion dollars a year
is not hurt at all. He is going right ahead. He is not stopped for the
reason that he has retained earnings, which is costless capital to them.
He has depreciation. And then he can go into the banks; he can see
that money is going to be tighter, and a prudent businessman will go
into the bank and say, "Money is going to be tighter. I am going to
tie up some funds for the next year or two." That is what they all do.
That makes it harder on all the other people. So it looks like you
are favoring the big-business people who can get the benefit of all this;
and the rank and file over the Nation are harmed and hurt by it.
Mr. MARTIN. Well, now, would you like me to comment on those,
Mr. Patman?
Chairman PATMAN. Yes, sir; if you will. [Laughter.]
First, here is what I want you to comment on. I want your comments on why, every time, you just found the only weapon to use was
to raise interest rates, and you could not at any time use one of these
That is what I would like you to comment on, in particular.
Mr. MARTIN. Well now, I want to start by saying thatfiscalauthority
is not ours, and the budget authority is not ours. I have discussions
with the Secretary of the Treasury in those fields, but those are important devices that can be used that are not within the control of the
Federal, and I am limiting my remarks to the authority and respon-


MONETARY POLICY I 1 9 5 5 - 5 6


sibility of the Federal Reserve, not to the whole gamut of devices that
can be used.
Now, we have tried to approach this with a sincere desire to build as
high levels of employment and as high a standard of living as is
possible, recognizing that we have a responsibility in the money and
credit field here, but that we are not all-controlling; that business has
got to make its own decisions and develop its own technology.
Let's take the items that you suggest. We have operated in the
open market
Chairman P A T M A N . Y O U have what ?
Mr. MARTIN. We have operated in the open market consistently.
Chairman P A T M A N . But only in short-term securities.
Mr. MARTIN. We have tended to confine our operations to short-term
Chairman P A T M A N . H O W long have you confined your operations
to short-term securities and not gone into the long-term market at all ?
Mr. MARTIN. With very few exceptions, for a period of several years,
because we have preferred to deal in the nearest equivalent to money
that there is, so as to have the minimum of interference in the market
itself, give the market an opportunity to have as much of a play as
Let's take reserve requirements. Supposing we had, instead of
raising the discount rate, supposing we had raised reserve requirements. We would have put much more pressure on the market. We
would have forced interest rates higher.
Chairman P A T M A N . It would not have automatically done it, Mr.
Mr. MARTIN. Almost automatically.
Chairman PATMAN. It would have been gradually in certain areas.
It would not have hit every area at the same time.
Mr. MARTIN. Oh, yes; in my judgment it would, Mr. Patman. It
would have been a blunter and a more severe instrument than the
modest adjustments that we made in the discount rate, permitting
the money supply to expand so that money continued to be available,
but that the cost of it rose gradually in terms of the demand for money.
Now, if that demand slacks off, why, the interest rate will tend to go
down also; and if the demand continues, it will go up.
Now the minor adjustments we have made through our open-market
operations: We have been consistently and persistently in the open
market trying to keep our operations to a minimum, but to see that
the money supply had a reasonably steady flow.
That is why we avoided in this period the more blunt instrument of
increasing reserve requirements. We want the banks to have adequate
reserves. We do not want to starve the economy, but also we don't
want this gap between saving and investment to be closed by bank
credit, because that endangers the solvency of all of us, and is bound
to have an impact.
Chairman P A T M A N . All right.
Now, on that bank credit, the other day you authorized an increase
to 3 percent in the payment of interest by commercial banks on savings
and time deposits.
M r . MARTIN. Y e s .
Chairman PATMAN.

Well, now, I do not see how you could consider
that meeting and trying to stop inflation, because, No. 1, whenever



POLICY I 1 9 5 5 - 5 6 84

you raise it you induce people who have their money in a Federal
savings and loan to bring it from the Federal savings and loan, where
it can only be loaned 1 time, to put it in the savings department of
a bank where it can be loaned 20 times, do you not ? And not only that,
you cause a race between the savings and loans and the commercial
banks on the interest rates that they will pay, just like you have got
it now on the housing loans; you have got the FHA in competition
with the Veterans, raise one and then raise the other. You have got
a race on between the savings and loans and the commercial banks.
How does that help to fight inflation, Mr. Martin?
Mr. M A R T I N . Mr. Patman, that regulation Q had not been changed
for roughly 20 years, as you know.
Chairman P A T M A N . I am talking about the present situation right
now, when you are fighting inflation.
Mr. M A R T I N . All right. I welcome your interest in that as to
whether it will fight inflation or not. We have to experiment a bit
and see—by "experiment," I mean we are not absolutely sure, ourselves, what will be produced by that adjustment.
But no change had been made in that rate for a period of about 20
years. Now, this is a permissible rate. The banks do not have to pay
the 3 percent. This is a limit which they can authorize, or not, as
they see fit.
But in 1933 and 1935, in order to protect the solvency of the banking
system, we eliminated the payment of interest on demand deposits,
and I think that should be retained.
Chairman P A T M A N . Well, the law did that, Mr. Martin.
Mr. M A R T I N . The law did that. I didn't mean the Federal; I
meant the law.
Chairman P A T M A N . I think it was just put in there for the emergency, and it has remained there ever since. I do not think it was
ever intended to stay on the books.
Mr. M A R T I N . Well, I think it has some advantage, but when you
come to the time and savings deposit area, certainly the interest-rate
structure has changed in the last few years, and to deny banks that
want to pay more interest the right to pay rates that would be more
in line with the current rate seemed to us to be an unwarranted intrusion on our part in their managerial capacity, and we felt that we
were warranted in doing that.
Chairman P A T M A N . For that reason.
Mr. M A R T I N . N O W , it may create some of the problem that you are
talking about, and I welcome and share your apprehension as to
whether it might not—it may not achieve all of the things that we
think of it.
But our purpose there—and I am inclined to think in the long run it
will—our purpose is to reduce spending and increase saving, with a
little higher rates.
Chairman P A T M A N . All right, I am going to ask about that later.
Mr. M A R T I N . All right.
Chairman P A T M A N . At this time I want to ask other members of
the Board if they are in accord with your statement that the Federal
Open Market Committee should only engage in buying and selling
short-term paper, and not engage in long-term paper.
Mr. M A R T I N . Well, any member

60 MONETARY POLICY I 1 9 5 5 - 5 6


Chairman P A T M A N . If all members are in accord with you on that.
Mr. MARTIN. I won't speak for all the members. They are at
liberty to speak for themselves.
Chairman P A T M A N . IS there any member who wishes to be recognized on that point ?
Mr. HAYES. Yes, Mr. Patman. I would just like to say this: As
you know, I am brandnew in this System. I haven't had more than,
much more than, 4 months to get acquainted with it.
I am aware, in a general way, of some of the discussion that has
gone on in the past on that subject. But I certainly haven't had an
opportunity to form any strong conviction on it.
I would like to add this: that in my observation during these
months, the present policy of sticking to, practically sticking to,
short-term securities has worked very well. There has been no
occasion that I have seen to bring up the point.
It doesn't seem to me that it has been a practical consideration. I
think things have worked well under the present technique of shortterm issues.
Chairman P A T M A N . All right. Thank you, Mr. Hayes.
One other point, and I want to yield to Senator O'Mahoney, because
he has a crowded schedule today and he wants to ask some questions.
Mr. Goldenweiser was recognized as one of the greatest experts of
the Federal Eeserve System; was he not, Mr. Martin ?
M r . MARTIN. H e w a s o n e o f t h e t o p m e n .
Chairman P A T M A N . Dr. E. A. Goldenweiser.

And his writings
and views are always respected by those in the banking fraternity.
Mr. MARTIN. Always respected; but Dr. Goldenweiser was not
always infallible, any more than any of the rest of us.
Chairman P A T M A N . YOU are anticipating what I want to read.
You see, Dr. Goldenweiser said in this book on Banking Studies;
he said:
It is generaUy true that a period of very high interest rates is followed by
a business recession, while a period of low interest rates is likely to be followed
by business recovery.

Now, where that is important—just like some of the businessmen
here testified yesterday, that a prudent businessman, when he can see
rising interest rates, goes in and borrows money in advance. Sometime you are going to reach the top; we do not know when it will be.
I want to ask you about that after Senator O'Mahoney gets through,
but sometime we are going to reach the top, and then it is bound
to be just like Dr. Goldenweiser says here, there is going to be a recession, because as you start down people will not be anxious to
borrow funds, because they will pay more for them bv borrowing
them in advance; they will be anxious just to hold tight, sit tight,
and wait and see how low they finally go, and this will tend to be
a depressing situation.
Do you not agree to that ?
Mr. MARTIN. Well, let me comment on that, Mr. Patman. If we
think that the Federal Eeserve Board, or any other agency of Government, has the power to eliminate all recessions in the economy,
I think we are making a serious overstatement of our ability. Eecessions come from a great many causes, among them being overcon-


MONETARY POLICY I 1 9 5 5 - 5 6 86

fidence and incompetence and inefficiency, and all the other factors
that human beings engage in that lead to maladjustments.
Now, those who attach so much importance to monetary policy
as to think that it will destroy the economy and create a recession
have more faith in monetary policy per se than I have, and they
have less faith in the economy than I have.
It is my conviction that, with the normal ingredients of growth
which we have in the economy today, and with the human fallibility
of people such as we have, there may be mistakes made in money
and credit policy from time to time; but that, as long as we provide
a reasonable availability of funds, the demand and supply factors
in the economy are such that the ingenuity and the ability and the
competence of the American businessman will be able to overcome
those mistakes, and that we will rebuild and go back up.
Now, I have a great deal of faith in the American economy. I
don't think any o f us has found a means of pulling a lever to make
these adjustments.
You remember that you and I discussed the 1953-54 recession at
length. Now, regardless of whether the Federal Reserve, and the
Treasury had been perfect in their handling of the money market,
and I don't think we were, as I testified before you, I still think there
would have been a recession at that time, because there had been an
ebullience in the economy in the post-Korean period which had to be
corrected; it had to be corrected by the minor recession, inventory
recession, that we had, because these forces of demand and supply
are the only means we nave
Chairman P A T M A N . Y O U are overlooking higher interest rates, too.
Mr. MARTIN. That adjustment was made by the market. If business starts declining actively in this country, interest rates will start
declining also. I hope it won't.
Chairman P A T M A N . Let me make this statement; I want to yield
to Senator O'Mahoney.
I am not objecting to the unavailability of money so much as I am
to the fact that only a few people can get that money; and I am not
objecting to the fact that construction money is not available so much
as I am objecting to the fact that only a few people can get that construction money, and it is not for home building, it is not for small
business, and it is not for agriculture; it is for the people who are
spending for plant and equipment and who are getting their funds
mostly from the consumers in the form of high prices.
I want to yield to Senator O'Mahoney.
Senator O ' M A H O N E Y . Thank you, Mr. Chairman.
May I say first that I feel personally very grateful that all of the
members of the Board and your associates have come to us today, Mr.
Martin, to testify with respect to this problem. I think that there is
probably no problem, save only the Middle East problem, that demands
more public attention than this one.
That explains why television wanted to take your picture this
morning while you were testifying.
In preparation for this hearing, I hastily sent out, toward the end
of last week, a letter to the president of every bank in the State of
Wyoming, in order that I might have the benefit of the advice of these
gentlemen with respect to the problem.

60 MONETARY POLICY I 1 9 5 5 - 5 6


I am not going to read all of these letters to you. I am going to read
extracts from only two.
The first one which I choose comes from a banker whom I have
known many years, in an agricultural area, and I read his because
he is a Democrat, a riproaring Democrat, and a good supporter of
mine. Now, this is what he says :
I have given this matter consideration, and in my opinion the Federal Reserve Board is taking the proper steps. A runaway inflation, probably followed
by a bust, would cause more suffering and dislocation of business than will
likely result from the policy of tight money now being pursued by the Federal
Reserve Board.

I thought it might make you feel good if I should read that to you
at the start. [Laughter.]
Now I am going to read an extract from a Eepublican banker
[laughter] who takes a good deal of interest in politics. Some people
seem to think there is a difference between politics and business and
between politics and government; but, of course, under the American
system, politics is only the art of making the Government do what
the people think the Government ought to do in their best interests.
Now, this is the Eepublican banker. You see, I refrain from giving
the names, but I will be glad to show the letters to you personally.
Mr. MARTIN. Eight.
Senator O ' M A H O N E Y . I have not received all of the letters yet.
A look at the statements—

I am reading now from this letter—
A look at the statements of commercial banks throughout the Nation will
reveal that the relative percentage of deposits they have invested in Government securities is going down, and the amount of funds invested in loans is
going up. In other words, our banking system is becoming less liquid.
It would be bad indeed if the time should arrive when, because of this
stringency, the banks will be forced to resort to selling Government bonds on
the present market in order to provide cash for their deposits.

These extracts I have read are just for the purpose of having a little
interlude here before I refer to some of the statements made in your
testimony, Mr. Martin, and some of the testimony which was offered
to us yesterday.
I would like to ask you to turn to page 4 of your statement. In the
middle of the page there is this paragraph:
The System has sought to keep constantly alert to changes in economic and
financial conditions, and to adapt its operations accordingly—leaning against the
breezes of inflation and deflation alike, as I have put it a number of times.

Now, what are the technical steps which you take to keep alert to
the changes throughout this vast country of ours ?
Mr. MARTIN. Well, every 3 weeks, and sometimes oftener, Senator,
the Open Market Committee meets. They have economists in the
12 banks and the 24 branches that are reporting to them constantly.
This committee meets as a committee of the 7 members of the Board
and the 5 members of the Open Market Committee, and also the other
presidents of the Eeserve banks come in to those meetings. They do
not have a vote, but we ask them to come in, also.
It places a particular hardship on those in the Far West, from San
Francisco or Texas and other places, who fly in, but they have been
very regular in their attendance.



POLICY195 5-56

We review, wTe have a Department of Research and Statistics in the
Board, and we review all these reports that we are getting daily, and
go over them and try to assess them, evaluate them, and try to oring
to bear all of the best thinking that we have in the System.
We do that formally every 3 weeks.
The head of our Department of Research and Statistics is doing it
daily. We also have directors from all of these banks. There are
12 banks and 24 branches, roughly 260 directors. We ask those men
to send us, either to the Board or through their local Reserve bank,
any straws in the wind that they see, because we are dealing with the
future as well as present, you see.
Our statistics at the present may be very good, but there may be
signs of danger in the future. So that we are trying to bring in, to get
as many straws in the wind as we can.
We also have a Federal advisory council. Mr. Fleming, here in
Washington, is the president of that. That is composed—that is a
statutory group which is
Senator O ' M A H O N E Y . Y O U mean Mr. Fleming, the president of the
Riggs National Bank, or chairman of the board ?
Mr. M A R T I N . Of the Riggs National Bank, or chairman of the board.
Senator O ' M A H O N E Y . We have several Flemings in the Government. This man is outside of Government?
Mr. M A R T I N . That is right.
And this is a statutory group that was set up in the Federal Reserve
Act. They are 12 men. They meet with us quarterly, and we ask
them to send us any straws in the wind that they get.
Senator O ' M A H O N E Y . Now then, Mr. Elliott Bell testified yesterday
and expressed the opinion that the tight-money policy, so-called, has
been injurious to the building of homes, it has been injurious to small
business, it has been injurious to the building of schools by municipalities and local districts.
Has that been reported by your various members?
Mr. M A R T I N . We have had constant comments on that, on those
points, and there are differences of opinion.
Senator O ' M A H O N E Y . I felt sure that, of course, you had the information about it.
Now, is it your opinion that if the high-interest rate on school bonds
prevents communities and States and school districts from building
schools which the schoolchildren of the Nation need, nevertheless you
should follow a policy which would keep the rate on such bonds up ?
Mr. M A R T I N . Well, Senator, the point there is whether it would
help to have a school issuefinanced,say at S% percent, and then, after
the money was raised, to have the price of the materials that go into
that school increased by, let's say, 15 percent?
Senator O ' M A H O N E Y . I S it a necessary conclusion that they would
Mr. M A R T I N . Certainly that is the tendency—if the demand for
credit—if there is intense utilization of resources, certainly that is the
tendency. And it is happening all around the country.
Senator O ' M A H O N E Y . I come from a State the resources of which
have not begun to be developed.
I can say that for the whole Rocky Mountain area.
I can say for Texas that the resources of that State have not been

60 MONETARY POLICY I 1 9 5 5 - 5 6


Would it be inflationary if schools could be built to make a new demand upon those resources ?
Mr. M A R T I N . I am completely with you, Senator, in believing that
the resources of this country have scarcely been tapped. It is a matter
of time and in the way they are tapped, the business process.
Recently—I will give you one example on the school issue, since
you have raised it, that came to my attention several months ago—in
the State of Tennessee, a school issue could be financed in one place
at 4 percent.
Actually they were limited by law to 314 percent. I think that
school issue would have done well to have taken the 4 percent money.
And I think this has happened in hundreds of other places, if the
demand for the school was there. Or they should have deferred it
until a time when perhaps the cost of labor and materials may not be so
rapidly rising.
Senator O ' M A H O N E Y . Mr. Levitt, of New York State, testifying
before our committee yesterday, said that there was a substantial
amount of school building that had been postponed because of this
high interest rate.
And in the New York Times of this morning on page 46, I find a
story headed, "Employment Dips 900,000 in Month. Decrease is
Almost Entirely in Agriculture. Number of Jobless up 5b0,000."
If it be true—and I think these are official statistics—that unemployment is beginning to appear, perhaps, it ought to be a signal to your
Board that a change in policy is necessary.
Would you think so?
Mr. MARTIN. I certainly think we should be alert, Senator. And
as I say, those are the forces in the economy that in my judgment are,
in the long run, controlling.
I have a chart here which Mr. Young gave me on the cost of apartments and buildings, how they have been rising, which you might like
to have for the record just as a matter
Senator O ' M A H O N E Y . Which Mr. Young?
Mr. MARTIN. Mr. Ealph Young, the head of our Department of
Senator O ' M A H O N E Y . Not Robert Young?
Mr. MARTIN. N O , it was not. [Laughter.]
Senator O ' M A H O N E Y . NOW then, may we keep this?
Mr. MARTIN. Oh, certainly. Certainly.
(The chart is as follows:)




I N D E X : 1947-1949=100





2 5



5 2

c o



Senator O ' M A H O N E Y . I would like to look at it again.
On page 57 of the New York Times this morning I find this heading— I haven't had time to read the article—Three Savings Banks
Actually Increase Interest From 3 to 314 Percent.
I think it has been pointed out by the chairman that the savings and
loan associations are competing for savings with much higher rates of
interest. And of course, I know that the savings and loan associations
operate under different circumstances from the banks. But this indicates, does it not, that there is a shortage of money, that is, money is
less than is demanded ?
Mr. MARTIN. That is correct.
Senator O ' M A H O N E Y . Your judgment is that the demands are so
great that we cannot allow them to be supplied, because it would drive

60 MONETARY POLICY I 1 9 5 5 - 5 6


up the cost of living, the cost of materials and other things. You
have jio doubt about that at all ?
Mr. M A R T I N . Well, unless all previous experience is wrong, if our
analysis is correct, the economy is trying to buy more than there is in
the aggregate at a given time and additions to the money supply will
put prices up.
Senator O ' M A H O N E Y . But you change your opinion every once in
Mr. M A R T I N . Oh, exactly. And these articles that you are reading
us will be considered by the Open Market Committee. We just had a
meeting yesterday
Senator O ' M A H O N E Y . Perhaps you will have one tomorrow.
Mr. M A R T I N . We will consider that item that you refer to.
Senator O ' M A H O N E Y . Can I wire my banks in Wyoming
Mr. M A R T I N . I would not.
Senator O ' M A H O N E Y . That there will be such a meeting?
Mr. M A R T I N . I would not be too precipitate about it. But it will
be a factor that will be considered.
Senator O ' M A H O N E Y . My point, Mr. Martin, is, that you gentlement come to a judgment about this, and it is based upon the material
that you gather through your staff. Is it not ?
Mr. M A R T I N . We come
Senator O ' M A H O N E Y . And necessarily, there is a time when you
feel that interest could go too high. I understood you to say so in
response to one of Mr. Patman's questions.
Mr. M A R T I N . I do. I think—a modest rise in interest rates certainly tends to reduce this gap between saving and investment. And
when that gap is eliminated why the pressures move in the opposite
Senator O ' M A H O N E Y . Well now, when we are unable to build schools
enough to educate our increasing population, when it is known that
Soviet Russia is concentrating upon the education of the youth and
wefindourselves with less room than necessary to educate our children,
do you think that that is a consideration which your Board ought to
give considerable weight to in determining what the rate of interest
shall be?
Mr. M A R T I N . Well, again I return, Senator, to the fact that I do not
think we make the interest rates. Mr. Patman and I have a slight
disagreement on that, but I think that we do a lot of talking about
administered prices.
Senator O ' M A H O N E Y . Y O U fix the discounts, don't you?
Mr. M A R T I N . What?
Senator O ' M A H O N E Y . Y O U fix the discount rate?
Mr. M A R T I N . We fix it in accord with supply and demand if the
banks have no necessity to come to us to borrow funds then the discount rate does not mean anything.
Senator O ' M A H O N E Y . Why doirt we close up the Federal Reserve
banks if you don't have any part in it? Why do we talk about tight
Mr. M A R T I N . The Federal Reserve
Senator O ' M A H O N E Y . Let us get this straight. In your judgment
do you or do you not have an influence upon the rate of interest f
Mr. M A R T I N . We have an influence, but it is not in my judgment the
controlling influence. If we make the controlling influence we are not
performing our function, as I understand it.


MONETARY POLICY I 1 9 5 5 - 5 6 92

Senator O ' M A H O N E Y . NOW then, let me ask you a question:
When this administration began, the Treasury Department issued
the now 30-year bond, at
percent interest. In a short time it was
selling at a big premium. Now it is selling below par.
The theory was that the Federal Government could increase the
rate of interest upon long-term bonds in order to reduce the amount
of short-term obligations that were outstanding.
But there has been a great change and the market for these 30-year
bonds has fallen off.
I find in the New York Times this morning on page 61, that the
3% percent bond—that same long-term bond that I am talking about—
is selling "demand 98.2."
When the bonds of the United States are selling below par, isn't that
a danger signal ?
Mr. MARTIN. Senator, I hope that the United States issue can always
in the open market sell at par and above.
But you have the finest security in the world when you have the
United States security today. You know now—wait a second—you
know when the interest comes
Senator O ' M A H O N E Y . I am glad to know that your answer is on
the record.
Mr. MARTIN. When the interest comes due it will be paid. You
know that. When the principal comes due it will be paid. You have
no worry about that.
The only worry you have is depreciation of the dollar. We have a
responsibility to people. It is unfortunate if they have to liquidate
early but we have a responsibility to see that they are paid off in their
interest and in their principal in terms of the dollar they put into it.
We have not always been successful in that, but our purpose with
a Government security—if it becomes interest-bearing money—if it
isfixedby fiat of the Government and has no market adaptability and
if you depreciate the dollar to maintain it at par
Senator O ' M A H O N E Y . I am not talking about fiat money. We are
not going to get into that debate. Lincoln fought the Civil War with
greenbacks and Lincoln did a good job, but it is irrelevant here.
I am prompted to ask this question because the First National City
Bank of New York, in its monthly economic and business lettter of
September 1956, expressed concern over the gold position of this
country. It pointed out that:
The continued growth of foreign dollar holdings of interest to Americans is
that, while these dollars constitute assets to their foreign owners, they are
liabilities in the monetary system of this country.

The letter goes on to refer to the expansion of foreign holdings
of short-term obligations of the United States Treasury and then it
continues to the effect that—
foreign short-term dollar assets, including deposits and United States Treasury
obUgations, total around $14% billion, equal to 66 percent of our gold stock,
presently standing at $21.8 biUion, compared with 31 percent in 1949.
M r . MARTIN. I w a s
Senator O ' M A H O N E Y . I

am interested—and I think it is important
in discussing the amount of American dollars held in foreign countries. Do you know what that quantity is ?
Mr. MARTIN. I do not have thefigureoffhand. I could get what our
estimate is. It is probably several billion dollars.

60 MONETARY POLICY I 1 9 5 5 - 5 6


Senator O ' M A H O N E Y . Several million?
Mr. M A R T I N . Several billion.
Senator O ' M A H O N E Y . Several billion?
Mr. MARTIN. Several billion. I do not have it exactly.
Senator O ' M A H O N E Y . Will you please put the accurate figure in the
record ?
Mr. M A R T I N . I do not think we can get the exact figure. I will try
to get the best figure.
Senator O ' M A H O N E Y . Get the approximate. And let it be inserted
in the record here.
Mr. M A R T I N . I will be very glad to.
(The following was subsequently received for the record:)
Foreign holdings of United States currency have been variously estimated at
amounts ranging between $0.8 biUion and $2 billion. The lower figure (actually
$839 million for the end of 1955) is the estimate of the Department of Commerce;
it is based on the Department's computation of the international flow of payments to and from the United States. The higher figure is an estimate made 3
years ago by some members of the Federal Reserve stall; it was based on the
total United States currency in circulation and the estimated holdings of United
States individuals, corporations, and public agencies. Both figures should be
considered as very rough guesses. Exact estimates are impossible because, even
if all domestic holdings could be ascertained without error, there still would be
no way to find out how much of the remainder was actually held abroad and how
much was lost and destroyed abroad during the recent unsettled periods of war
and revolution.
In addition to these holdings of United States currency, foreign residents and
governments held, at the end of October 1956, $7.3 billion in deposits with the
Federal Reserve banks and United States commercial banks.

Senator O ' M A H O N E Y . A S to American dollars, the fact is that they
are in foreign hands at the rate of at least $2 billion?
Mr. MARTIN. I would think that was a conservative estimate.
Senator O ' M A H O N E Y . Is it not a fact that those dollars in foreign
hands can buy gold in Europe?
Mr. M A R T I N . That is correct.
Senator O ' M A H O N E Y . Is it a fact, or is it not, that these American
dollars are now being invested by foreigners in the issues, bonds, notes
and bills of the Treasury which are selling below par?
Mr. M A R T I N . If they hold—yes; some of them are; yes.
Senator O ' M A H O N E Y . D O you know how much ?
Mr. M A R T I N . N O , I don't.
Senator O ' M A H O N E Y . Don't you think it is a serious question ? The
Government is talking about asking Congress to increase expenditures
for foreign aid and yet the same countries to which this aid will go are
holders, according to your testimony, of American dollars which they
invest in depreciated securities of the United States? Isn't that a
situation which should give you and your Board and your regional
presidents pause for serious thinking on this question?
Mr. M A R T I N . Well, I don't see any reason to differentiate between a
foreign holder of United States dollars and the domestic holder.
Senator O ' M A H O N E Y . This is the fact that I see to differentiate.
It is that the national debt of the United States now stands at about
$278 billion, if this new borrowing is floated; isn't that correct?
Mr. M A R T I N . That is correct. That is correct.
Senator O ' M A H O N E Y . The ceiling is $ 2 7 5 billion except for certain
gimmicks to excuse it, to let it go above on the belief that before the
fiscal year is out receipts will be such as to bring it down.



MONETARY POLICY I 1 9 5 5 - 5 6 94

Well, if we are going to expand the expenditures abroad, if we are
going to increase the appropriation for defense, as Secretary Wilson
said the other day, coming from a conference with the President—he
didn't say how much, but ne said there would be an increase—and we
are already in debt above the limit, does it not mean a great deal to us
whether or not those who are to be the beneficiaries of our foreign
economic aid are getting over 3 percent interest on the short-term and
depreciated issues of the Treasury of the United States?
Mr. MARTIN. Well, you raise a serious problem. I am not trying
Senator O ' M A H O N E Y . That is why I am worried about it.
Mr. MARTIN. Well, I am worried about the whole overall picture,
Senator O ' M A H O N E Y . Has your Board given any considerations to
Mr. MARTIN. Our Board discusses this and all other aspects at every
meeting, sir.
Senator O ' M A H O N E Y . Then will you give us for the record the exact
figures on these phases which we have just been discussing?
Mr. MARTIN. I will be very glad to do the best I can.
Senator O ' M A H O N E Y . Let us have it all on the record, so the public
may know, too, what the danger is.
Mr. MARTIN. I will be glad to get it. Our overall solvency is a
matter of the greatest concern to all of us at all times.
Senator O ' M A H O N E Y . Of course it is.
(The following was subsequently received for the record:)
At the end of October 1956, foreign residents and governments held $4.7 bilUon
in United States short-term Treasury paper (bills and certificates) and $1.2
billion, in United States long-term Government securities (notes and bonds).

Senator O ' M A H O N E Y . And since we are engaged in an economic war
with Soviet Russia, everybody, and particularly those of us who are
in Government and those of us who are in the independent boards
which think they are outside of Government sometimes, should pay a
great deal of attention to what this situation is.
You will agree with that, won't you ?
Mr. MARTIN. I certainly agree with that.
Senator O ' M A H O N E Y . Perhaps now you will agree with me that
there ought to be a meeting of the Board tomorrow ?
Mr. MARTIN. Well, I may say, Senator, that the Board meets every
Senator O ' M A H O N E Y . And will take this up.
Mr. MARTIN. This is not the Open Market Committee but the Board
itself meets every day.
Senator O ' M A H O N E Y . Let us get the Open Market Committee meeting at an early date.
Mr. MARTIN. We will try to keep them meeting.
Senator O ' M A H O N E Y . Mr. Moore of our staff points out that in the
Federal Reserve Bulletin for October 1956, there are the figures.
Would you read those into the record?
Mr. MOORE. The significant ones are the purchases, the net purchases by foreigners of Government securities in bonds and notes in
1955, which were $529 million.
Looking at the detail of that, it is largely accounted for by Switzerland, United Kingdom, and Canada.

60 MONETARY POLICY I 1 9 5 5 - 5 6


During the current year there have been net sales in March of a
substantial proportion, of $236 million.
The last tew months have been running net purchases of quite a
small magnitude, 13, 16 and 27 million, respectively, in May, June,
and July.
Senator O ' M A H O N E Y . Switzerland and what other country?
Mr. MOORE. Switzerland, United Kingdom, and Canada: 1955 the
Swiss bought 147.
Mr. MARTIN. We will try to bring it up to date for you.
(The following was subsequently received for the record:)
In August and September 1956, foreign residents and governments and international institutions made net purchases of $81 million of United States Government notes and bonds; of this total, $73 million was purchased by international
institutions and 8 million by foreign residents and governments. In the same
period, net purchases of United States corporate securities by foreign residents
and governments and international institutions amounted to $36 million, of
which $2 million was purchased by international institutions and $34 million by
foreign residents and governments.
Total net purchases of United States Government and corporate securities by
foreign residents and governments (excluding international institutions) thus
amounted to $42 million; Switzerland accounted for net purchases of $27 million,
the United Kingdom for net purchases of $21 million, and all other countries
together for net sales of $6 million.

Senator O ' M A H O N E Y . It is my understanding that the banks of
Switzerland give no information of any kind with respect to the
actual beneficial holder of such trust accounts, so that this refusal
to reveal the names and the identities of the holders of these dollar
accounts, affords a cloak behind which those attempting to avoid public
scrutiny can hide.
If you will, please, let me point this out: Earlier in the present
year a writer for the Scripps-Howard Newspapers chain wrote an
article which was based upon the assumption that there might be a
danger that Soviet investments were being made in these securities
of the United States.
If that be true, it is a matter of serious concern underlying that
everybody who has any interest or power over our financial system
should know exactly all of the time the course of foreign investments
in our depreciated securities.
The United States today has the greatest debt that was ever undertaken by any Government m all history. There is no question about
that, is there? And the debt is not decreasing.
The world crisis is so great that we do not know how much more
the President will ask Congress to authorize to be borrowed in order
to defend ourselves in this crisis.
So that it is not a matter of what speculators in Wall Street think
about it, nor those who wish to sell real estates, nor corporate executives who want to expand plant facilities, norfinancerswho want to
get a larger income from their loans than they are now getting.
You will not demur to the statement, will you
Mr. MARTIN. The questions you raise are very pertinent.
Senator O ' M A H O N E Y . Let me add this further statement. You will
not demur to the statement that the banks have profited upon tight
Mr. M A R T I N . T O the extent that they have made loans at higher
interest rates, yes. To the extent they have had to sell Government
securities at a loss that has been diminished somewhat.


MONETARY POLICY I 1 9 5 5 - 5 6 96

Senator O ' M A H O N E Y . Y O U will let me ask you to answer this question. Do you think that the fiscal policy of the Government of the
United States should be carried on exclusively for the interest of the
Mr. MARTIN. Certainly not, sir.
Senator O ' M A H O N E Y . I knew you answer would be "certainly not."
But throughout the history of this Government and every other Government, there always has been a struggle between the money power
and the people.
And the question is where to determine to draw the line. The Federal Reserve Board was set up to try to do that. It is your authority
and it is your responsibility.
But the record is here clear that a substantial part of the American
people are suffering because of high interest rates and all of my
questions have been in the attempt to determine what factors enter
into your judgment in the rules and in the decisions that you make.
Will you be good enough to comment upon that now ?
Mr. MARTIN. Well, the factors that we consider outside of the statistical indices of business at every meeting have to do with the basic
requirement of Government finance. We have to consider the needs
of the Treasury.
We are not authorized by the Congress to ignore the appropriating
authority of the United States Government. We are here to help the
Treasury without giving the Treasury an automatic rate adjustment
to the market.
Senator O ' M A H O N E Y . The questions which I have asked you have
come to the peak of the most importance one with which you agree.
I have a lot of other minor questions which I could ask you but I
do not want to take that time.
I thank you for your very frank responses to the queries I have
made. And I hope that the other members of the Board who may
feel moved to make any comment now will do so.
Mr. MARTIN. May I make a concluding comment on what you said,
Senator ?
Senator O ' M A H O N E Y . There is an invitation to all of you to speak,
Mr. MILLS. Mr. Chairman, Senator, you have posed
Senator O ' M A H O N E Y . This on the record ?
Mr. MILLS. A very—yes, sir—a very important question and raised
concern about the problem of international investment. You have
focused your discussion on investment within the United States by
foreign nationals, a type of investment which in the opinion of many
people is to be welcomed in that it represents a compliment to the
security of and faith in the obligations of the United States
But against the investment of foreigners in securities of the United
States, I am sure you have in mind that there are offsetting investments
of a considerably greater magnitude on the part of United States
citizens and United States businesses in foreign lands that are contributing to the development and the benefit of those nations to the same
degree that investment by foreigners in the United States has in the
past and continues to be beneficial to the economy of the United States,


MONETARY POLICY I 1 9 5 5 - 5 6


In other words, the concern that you express, in my humble opinion,
has two facets. And I do not share it, frankly, in the way that you do
that we should not welcome and may not have benefited from the
investment that you refer to.
Senator O ' M A H O N E Y . I hope I haven't given you the impression
that I am against foreign investment in the United States. I certainly
am not.
I am merely pointing out to you the condition that admittedly exists
at a time when communism is waging an economic war against us and
when the leaders of communism are leaving no device unused to
weaken our economy.
And I am urging you gentlemen to beware and to give it more
consideration than apparently it has had.
Mr. MILLS. Senator, I must apologize for not getting the intent of
your discussion, but it might be inferred that foreign investment in the
United States was a tool of communism to undermine our economy.
Senator O ' M A H O N E Y . I said that the Scripps-Howard chain of
newspapers published during the past few months a serious article
by one of its staff writers who was assumed to be an expert, at least,
who made an examination into the question and who intimated that
the Communists were doing precisely that. It is not my statement.
I am just looking at the facts which are presented to me in the daily
press and the facts which I gather when I ask questions of gentlemen
like yourself.
Mr. MILLS. If I might say so, when you have the advantage of the
statistical records that can be presented to you, it is my belief that you
will reach the conclusion that foreign investment in the United States
is a small factor in the overall magnitude of our economy.
Senator O ' M A H O N E Y . May I interrupt you to say, Mr. Mills, that
I hope that you will keep an open mind until you yourself have looked
over these statistics again. I am only asking for information.
Mr. MILLS. Indeed I will, sir.
Senator O ' M A H O N E Y . I am not arguing with you as to whether you
are^ right or the Scripps-Howard writer was right, but if there is any
basis for what he placed in that article it is a very serious matter.
Mr. BALDERSTON. Senator, may I express appreciation of the point
that you have made that the soundness of our economy is our first
bulwark in the cold war you have mentioned and that the integrity
of the dollar is an essential part of maintaining that soundness.
(Question posed to Mr. Martin by Senator O'Mahoney, by telephone,
December 1 7 : )
Senator O'MAHONEY. The First National City Bank of New York in its economic letter of September 19, 1956, expressed concern because of the gold
position of this country. It pointed out that "The continued growth of foreign
dollar holdings of interest to Americans is that, while these dollars constitute
assets to their foreign owners they are a liability in the monetary system of this
The bank letter goes on to refer to expansion of foreign holdings of short-term
Government obligations of the United States Treasury; then refers to statements
"that foreign short-term dollar assets, including deposits and United States
Treasury obligations, total around $14 y 2 billion or 66 percent of our gold stock
presently outstanding at 21.8 billion, compared with 31 percent in 1939." This
can be found on page 104 of the bank's September letter. It would be helpful
in furnishing the material that I requested if you would deal with this also.
There is a lot of rumor that should be corrected. I am concerned about the
general aspect of this business.


MONETARY POLICY I 1 9 5 5 - 5 6 98

(The material requested follows:)

Washington, December 19, 1956.


United States Senate, Washington, D. G.
DEAR SENATOB O'MAHONEY : This refers to your telephone caU to me the other
day raising a further question with respect to the relation between United States
gold reserves and foreign dollar holdings.
Attached is a brief memorandum, prepared by the Board's staff, which I think
will answer the question you have in mind. A copy of this memorandum has
been sent to Mr. Lehman, clerk of the Joint Economic Committee, for inclusion
in the record of the hearings last week.
Sincerely yours,
W M . MCO. MARTIN, J r .

A s to the problem of the relation between United States gold reserves and
foreign holdings, the following facts may be noted.
First, it is not quite correct to compare all foreign dollar holdings directly
with our gold reserves, since only foreign governments and monetary authorities
are permitted to purchase gold from the United States; private foreign dollar
holdings cannot be converted directly into gold. On September 80, 1956, foreign
dollar holdings (including not only deposits with United States banks but also
holdings of short-term Treasury paper, bankers' acceptances, and other shortterm assets) amounted to $13.2 billion, of which $7.9 billion were held by
governments and monetary authorities, and $4.3 billion by private individuals
and corporations.
Second, it is true that foreign doUar holdings have increased considerably
since the end of the forties, while out gold reserves have slightly decreased.
Table I shows the development of our gold reserves and foreign dollar holdings
between 1919 and 1956. I t will be observed, from the table, that our gold reserves have not changed much since the end of 1953 and that the ratio between
our gold reserves and foreign doUar holdings, although it is now smaller than it
was during the thirties and forties, is about the same as during the last twenties.
Third, the increase in foreign dollar holdings and in foreign gold reserves
is in line with expansion in the volume of international trade, the restoration
of more normal international financial and commercial relations, and the growing importance of the United States as a world banker. Table I I shows the
imports and the gold and doUar reserves of foreign countries (excluding the
Soviet bloc) in 1928, 1938, 1948, and 1955. It will be observed, from this table,
that the ratio between foreign reserves and imports in 1955 was not much larger
than in 1928 or 1948, and much smaller than in 1938.
W e are watching these devolpments continually. In my judgment our international gold position will not prove embarrassing so long as we pursue effective
monetary policies. Confidence in our currency and in the stabiUty of its purchasing power is crucial abroad no less than at home.
TABLE I.—United States gold stock and foreign dollar holdings

End of year

States gold
(2): (1)
(millions of (millions of (percent)



End of year


194 5
195 1
195 5
1956 (Septem

States gold
(2): (1)
(millions of (millions of (percent)








60 MONETARY POLICY I 1 9 5 5 - 5 6


TABLE II.—Imports and reserves of foreign countries (excluding the Soviet bloc)
(c. i. f.)
(billions of





Gold and
reserves at
end of year
(billions of



Senator O ' M A H O N E Y . Thank you very much, Mr. Balderston.
Thank you, Mr. Chairman.
Chairman P A T M A N . Thank you, Senator O'Mahoney.
You mentioned a while ago, Mr. Martin, in answer to Senator
O'Mahoney, when he asked you if the banks aid not profit more than
any other group by reason of higher interest rates, that the banks
also suffer harm or losses.
And you mentioned specifically that they were compelled to sell
Government bonds at a loss in order to provide reserves.
I think you should point out, Mr. Martin, that the banks are pretty
well protected on Government bonds. If they buy them at par they
can always keep them on their books 100 cents on the dollar for all
examinations. That is correct, isn't it ?
Mr. M A R T I N . That is correct.
Chairman P A T M A N . If they go down to 7 5 they can still carry them
for 100. Therefore, it does not jeopardize the capital stock of the bank.
But that is not the important part. You failed to mention the fact
that our tax laws are so written that if the banks are compelled to
sell a bond at a loss, the net of capital losses over capital gams fully
offset against the banks taxable income.
In other words, the losses on the sale of their bonds can offset the
profits the banks make from higher interest rates. This reduces
their current year's tax liability.
Furthermore, the bank has this advantage. When the bonds go
down and they sell, they can immediately buy another issue. They
do not have to wait 30 days like people have to wait on stocks. They
can immediately buy another issue right close to it. And as that bond
goes up in value, and goes back to par, and they sell it, their profit is
taxed at the 25 percent rate. Losses are offset against income taxable
at 52 percent. Gains are taxed at 25 percent.
So they are not hurt so much.
Furthermore, another point which you did not point out, was that
they obtain these powerful dollars when they sell the bonds which
are used as reserves. Upon each dollar of reserve they can extend
$6 in loans.
So that the banks are not crippled too much in this operation.
You did not intent to leave the impression that they were greatly
harmed, did you, Mr. Martin ?


MONETARY POLICY I 1 9 5 5 - 5 6 100

Mr. MARTIN. NO, I merely made the comment, Mr. Patman, that
while they were getting more interest on loans, if they made the
conscious choice of selling a security in order to make a loan because
they didn't have adequate reserves, and if those securities had declined
that would to some extent offset their return.
Chairman P A T M A N . But don't you think you have an unusual advantage there when they can use that loss that they have on that bond
to offset any gains that they have in the way of profits ?
Mr. MARTIN. Individuals can do that also.
Chairman P A T M A N . On short term?
M r . MARTIN. Y e s .
Chairman P A T M A N . They cannot do it on long term, can they ?
Mr. MARTIN. I would make
Chairman P A T M A N . But the bank is not restricted either way, long

or short, makes no difference.
Mr. MARTIN. Well, I am really not competent to testify on the tax
Mr. HAYES. Could I say something ?
Chairman P A T M A N . Yes, sir.
Mr. HAYES. If I may at this juncture, because you raise the question of the banks profiting from it, I should like to point out the effect
on the banks of the sales of Government securities.
I am impressed by the fact that the banks have bought most of
their Government bonds during the periods of relative ease, when interest rates were relatively low and prices have gone relatively high,
and have had to sell them when prices were declining in order to raise
funds for loans.
And I have here some interesting charts that show that very
graphically, if you are interested in them.
Chairman P A T M A N . What does it show? if you don't mind summarizing it for us ? And we will insert it m the record at this point.
(The charts are as follows:)

60 MONETARY POLICY I 1 9 5 5 - 5 6


Billions of dollars

* Last Wednesday of each month.
* Average of daily figures. Old series.(new series, including 3 1/4's of 1978-83 and 3's of 1995.
shows similar pattern with somewhat higher rates.for period from May 1953 onward}.


MONETARY POLICY I 1 9 5 5 - 5 6 102


B i l l i o n s of d o l l a r s

* Last Wednesday off each month.

60 MONETARY POLICY I 1 9 5 5 - 5 6
Billions of dollars



Mr. HAYES. It shows that the Government bond holdings of banks
in 93 leading cities rose from a low point of $18 billion in 1953 to
nearly $18 billion in 1954 and then their holdings declined.
Chairman PATMAN. Didn't they buy in 1953 when they were low ?
Mr. HAYES. NO ; the price of the bonds was quite high all through
1954 and that is when most of this increase in holdings occurred. The
peak occurred at the end of 1954. And then those bond holdings
dropped off steadily during 1955 and 1956, and at that time prices
were dropping steadily.
The charts on notes and certificates show about the same thing, although it is not as smooth a curve.
Chairman PATMAN. But, Mr. Hayes, you are acquainted with the
facts and they are to the effect that the banks bought these bonds when


MONETARY POLICY I 1 9 5 5 - 5 6 104

they were low in 1953, and they sold them when they were high in 1954.
And the banks dealing in those bonds made a profit in 1954 in excess
of what they had made the year before of 966 percent.
My authority for that statement is the Federal Deposit Insurance
Corporation report.
So they really made lots of money buying when bonds were low and
selling them when prices were high. And, of course, they could get
the benefit of capital gains, too.
Mr. H A Y E S . If I may comment on that.
Chairman P A T M A N . Yes, sir.
Mr. H A Y E S . I have somefigureshere showing earnings of the banks,
member banks
Chairman P A T M A N . Yes, sir.
Mr. H A Y E S . During the jears 1946,1949,1952. and 1955.
During that period the interest earnings on Government securities,
over the period as a whole, hardly changed at all.
Chairman P A T M A N . Which years—you do not have them all.
Mr. H A Y E S . From 1 9 4 6 through 1 9 5 5 . I am just taking those 2
And if you will compare those 2 years the interest earnings from
Government securities differ very little.
Chairman P A T M A N . What were their earnings on Government securities in 1953?
Mr. H A Y E S . I do not have 1953.
Chairman P A T M A N . I know, but it is necessary to have that because
that is the point.
Mr. H A Y E S , But 1952 was 929 million. ^
Chairman P A T M A N . How much was it in 1954?
Mr. H A Y E S . I don't have 1954.
Chairman P A T M A N . They are the important years. Can you get that
for us?
Mr. HAYES. I can give you the overall earningsfiguresfor 1 9 5 3 and
1954, and the net profits
Chairman P A T M A N . I am talking about profits on Government
Mr. HAYES. I can get that for you.
Chairman P A T M A N . Y O U can get that for me. Will you put it in
the record at this point?
M r . HAYES.


(The data on member bank earnings, expenses, and profits are shown
in the following table. Net profits or losses on securities are shown in
the footnote; data on profits or losses on Government securities only
are not available, but they account for the bulk of the figures.)

TABLE I . — M e m b e r bank earnings

and expenses,


[Millions of dollars]


Total earnings
United States Government's
Loans. __
All other
Total expenses
Salaries and wages
Interest on time deposits
All other
Net current earnings before income taxes
Net additions or deductions, total *
Net profits before income taxes.__
Taxes on net income
Net profits
Total capital accounts











$2, 402. 5




$3, 264. 7

$3, 668. 7

576. 7

1,043. 7


699. 3


2, 003.0

2, 305. 9


2, 711. 2
1,048. 5



1 650. 0


1, 888. 9


2, 231.9

2, 501.1

2, 781. 5

2, 998. 5

3, 265.1


235. 9

250. 5



1,125. 3
305. 5

1, 243.6

1,371. 5


1, 571. 4



1, 033.1
8, 629.8

1,096. 7

1,149. 9

-190. 2
1, 246. 5
9,947. 0

1, 618. 6

1, 557. 5

U, 724.0

2,077. 5
1. 676.0
12, 499.0


$4, 590. 2


$o, 342. 6

i Included above in net additions or deductions to earnings are security net profits or losses, net recoveries or chargeoffs on securities, and net transfers from or to reserves for
securities, as follow s:
Net additions or deductions













When security net profits, losses, recoveries and chargeotfs, and transfers from or to reserves arc adjusted for actual recoveries credited and losses charged to valuation reserves
each year, the actual net profits or losses on securities are as follows:
Net additions or deductions.
• Not available.
Source: Federal Reserve bulletins.









-128. 6

+315. 5

-189. 3


MONETARY POLICY I 1 9 5 5 - 5 6 106

Chairman P A T M A N . Won't you admit for the record they were
Mr. HAYES. I would have to look at those figures.
Chairman P A T M A N . Don't you have any recollection on it?
Mr. HAYES. I do not have on this particular figure. I would like
to put in this table on the overall profit of the members banks.
Chairman P A T M A N . That is not important in this particular
Mr. H A Y E S . I think it is, Mr. Patman.
Chairman P A T M A N . G O ahead.
Mr. HAYES. The net profit was a product of both the interest earnings net and of expenses and profit or loss on sales of securities and
other adjustments or recoveries and so on.
And that net figure for all member banks shows afigure—well,in
percent of capital funds, it shows these following figures:
For 1952, 7.9 percent; for 1953, 7.8 percent; for 1954, 9.3 percent;
for 1955,7.9 percent.
(The table referred to follows:)

T A B L E II.—Ratio

of net profits to total capital, member banks and leading corporations, 1946-55

All member banks:
Net profits (in millions)
Capital (in millions)
Ratio (percent)
Central Reserve New York City banks:
Net profits (in millions)
Capital (in millions)
Ratio (percent)
Leading corporations—Percent return on net assets:
Total manufacturing
Total mining
Total trade
Total transportation
Total public utilities
Total amusements, services, etc
Total finance
Grand total














































* As reported by the First National City Bank's monthly letter. Book net
the beginning of each year are based upon the excess of total balance-sheet





Source: Bank data from Federal Reserve Bulletin.




MONETARY POLICY I 1 9 5 5 - 5 6 108

And you can see, in 1954 it was somewhat higher than it had been,
but at no time was it a very high figure, particularly if we compare it
with returns in other businesses which are also shown here.
The point of that, I think, is that in 1955, when interest earnings
were very good, the net profit went off sharply from 1954 because of
the losses taken on the sales of Governments m 1955.
Chairman PATMAN. The Government bonds for some reason went
down, took a nosedive in 1953; the banks bought the bonds low. They
sold them high in 1954 and made a profit of $417 million securities
sales in that year.
In 1955 they started another nosedive; didn't they?
Mr. HAYES. Mr. Patman, the point of this chart that I mentioned
Chairman P A T M A N . What we are trying to find out is when they
are going back.
Mr. HAYES. The point of this chart I mentioned, first, was to show
that most of their purchases were made in 1954 when prices were
relatively high. And most of the sales were made in 1955 and 1956
when they were low.
Chairman PATMAN. I have the latest annual report of the Federal
Deposit Insurance Corporation for 1955, and it shows the following
information on the insured commercial banks: Their net profits after
taxes averaged $1,163 million for the 3 years 1953,1954, und 1955, compared to an annual average of $865 million in the preceding 6-year
period 1947-52. On the ratio of net profits to capital accounts the
average for the 1953-55 period was 8.4 percent as compared to 8 percent for the 1947-52 period. It might be noted that in the 1947-52 period profits were rising faster than capital accounts, while in the recent
period capital accounts have risen faster than the increase in profits,
so that the increase in the current rate of profit on capital account
over that for the 1947-52 period actually tends to understate the increased profitability of banks.
The ratio of dividends to capital accounts for the 1953-55 period has
risen from 3.7 to 3.9 percent* for an average of 3.8 percent. In the
1947-52 period the ratio of dividends to capital accounts averaged
3.5 percent.
Kates of income for insured commercial banks on their holdings of
United States Government obligations rose from 1.80 percent on each
$100 in 1952 to 2.09 percent in 1955. This increase was greater than
that for the 6-year period 1927-52, when average rates of income of
insured commercial banks on United States Government obligations
rose from 1.54 percent per $100 to 1.80 percent. In 1955, the average
rate of income received by commercial banks on their holdings of
United States Government obligations was more than a third higher
than in 1947. In contrast, their average rates of income on other
securities in 1955, Sf.15 percent per $100, was lower than the 2.16 percent for 1947.
Mr. Martin, will you please supply us with a memorandum on the
Federal income taxation of commercial banks? We want you to do
that. We would like the memorandum to describe the general provisions under which those banks are taxed, as well as any provision
of the code which have special application to commercial banks.
We are particularly interested in the code's provision with respect to
determination of income and tax consequences when premiums or dis-

60 MONETARY POLICY I 1 9 5 5 - 5 6


counts on bonds including tax-exempt bonds, are involved, and the
treatment provided when gains or losses are realized upon the disposition of bonds.
Do those provisions of special applicability involve significant revenue losses for the Government? Are these provisions, in your opinion, likely to affect the decisions of portfolio managers in such a way
that the Government bond market as a whole is influenced for tax consideration as such?
Do the standards applied by the examining agencies in respect to
the handling of discounts, premiums, losses, and recoveries conform
to the requirements of the Internal Revenue Service?
Those are the questions, generally, we would like to have answered.
But we would like to have a complete study. And I think it is
appropriate to ask you that now, in view of the fact that you do not
seem to be clear on what the tax situation is concerning the commercial
Are you willing to furnish us that information, Mr. Martin?
Mr. M A R T I N . I will do the best I can. I will consult the Treasury
on it, because it is primarily a tax problem.
Chairman P A T M A N . I know, but you people have the information
over there.
Mr. MARTIN. I will try to get the best memorandum that I can for
you on that, but it will take a little time to prepare it. I want to point
out that taxation is not our field.
(The requested memorandum on Federal Income Taxation of Commercial Banks appears just below at the conclusion of the record of
the morning session.)
Chairman P A T M A N . I understand. There seems to be—I do not
claim that you are dodging it; I am not making that charge at all—
but you are pretty quick to point that out. And you do have a lot
of power of which you do not say much about. That is where I argue
with you.
I want to read you a communication I have just received from a place
in California :
In connection with your current probe of tight-money situation, let me urge
legislators to investigate unfairness of FHA law.
While buyers of houses are protected by law, through law stating they can
pay no more than 1 percent premium to lending agencies, sellers have no such
protection. Result is, in present emergency sellers are in vulnerable position and
easy prey for mortgage companies who charge sellers exhorbitant discount rates
for providing money.
This is manifestly unfair and highly inflationary. Why should sellers have to
pay 8 percent to procure money for sale of property which is security enough
through intrinsic worth.
Further, let me suggest that someone in Washington is leaking advance news
of rate hikes, thus encouraging lenders to staU in negotiations.

Now, of course, you can say that that is FHA, that you have not control over it; which is correct. But you have control of the tight money
that is causing these people to charge the sellers even 8 percent in order
to sell their property.
In addition to getting the mortgage, selling at a discount, sometimes as low as 10 and 12 percent—m some cases 14 percent discount;
I have heard of those—they are making the sellers pay a discount, too.
The law protects the veteran buyer. He cannot pay more than 1



MONETARY POLICY I 1 9 5 5 - 5 6 110

But since the law is protecting the veteran, they go over and make
the seller to the veteran pay.
That looks to me like against conscience. Something ought to be
done about that. I don't know whether you can do anything except
to maybe loosen up on this money a little bit, because we have had an
awful drought in this country, down through the Middle West. And
it is a terrible thing.
And we don't have, and we haven't had, much rainfall. We have
not had much water there. And we are suffering.
But other sections of the country are not suffering from the drought.
That is the way it is with this money. We have a drought of money
in certain sections only.
In New York they have plenty of money. The big business fellows
can get all of the money they want for plant expansion. But the
little fellows out over the Nation, they are m a drought, a very severe
drought, a money drought.
I just hope tomorrow, instead of raising the discount rate again, I
hope that you will do something about relaxing it, I mean, relaxing
the tension and let us have a little easier money.
It is about 12 o'clock. Do you have the Manager of the System
open market account here? Maybe I should ask Mr. Hayes that?
Mr.HAYES. He is here, Kobert G. Kouse.
Chairman P A T M A N . He will be here this afternoon ?
Mr. H A Y E S . Yes, he will.
Chairman P A T M A N . We want to ask him some questions.
Without objection, we will stand in recess until 12 o'clock this
(Thereupon, at noon, the committee stood in recess, to reconvene
at 2 p. m., this day.)
Question: Will you please supply us with a memorandum on the Federal income
taxation of commercial banks? We would like the memorandum to describe the
general provisions under which those banks are taxed, as well as any provisions
of the code which have special application to commercial banks. We are particularly interested in the code's provision with respect to determination of
income and tax consequences when premiums or discounts on bonds, including
tax-exempt bonds, are involved, and the treatment provided when gains or losses
are realized upon the disposition of bonds. Do those provisions of special applicability involve significant revenue losses for the Government? Are these provisions, in your opinion, likely to affect the decisions of portfolio managers in
such a way that the Government bond market as a whole is influenced by tax
considerations as such? Do the standards applied by the examining agencies in
respect to the handling of discounts, premiums, losses, and recoveries conform
to the requirements of the Internal Revenue Service?
Answer: Federal income taxation of commercial banks and the problems arising
from such taxation form a highly technical area of Federal tax policy. This
particular segment of Federal economic policy is not, of course, the primary
responsibility of the Federal Reserve System but rather is the province of the
United States Treasury and of Congress. These provisions of the Internal
Revenue Code, however, do have some bearing on Federal Reserve actions. Our
comments regarding the extent to which these tax provisions have an impact
on problems faced by the Federal Reserve were set forth to you in my letter of
November 4, 1955, in response to your query of October 17, 1955. At that time
we also furnished you a memorandum giving some background information regarding the tax treatment of commercial bank capital gains and losses in Government securities. A supplementary memorandum prepared by the Treasury Department is attached which describes the technical features and answers some
of the questions you pose.

60 MONETARY POLICY I 1 9 5 5 - 5 6


The tax treatment accorded bank capital gains and losses, as mentioned in
the accompanying memorandum, does have some effect on the decisions of porfolio managers and at times these decisions do have some effect on the action
of the Government bond market. As we stated to you in our letter of November
4, 1955, the present provisions of the Internal Revenue Code no doubt make
some banks less reluctant than they otherwise would be to sell securities on
which they have capital losses and shift into other assets. The possibility of
using net capital losses to offset fully ordinary operating income and of simultaneously establishing a new low potential capital gains base encourages switching activity in the Government securities market and thus increases the volume
of trading. This is especially the case in periods, such as the present, when
low bond prices (relative to recent years) coincide with the end of the year and
many commercial banks act to establish a loss position in their bond portfolios.
When a bank engages in this type of operation its total holdings of securities
are unchanged. However, commercial banks may also be encouraged by these
tax provisions to undertake the sale of United States Government securities
without an offsetting purchase of some other issue. They then are able to acquire
some other asset such as a higher yielding commercial loan, the securities sold by
the banks being purchased in large part by other investors. This kind of activity has also been characteristic during the current business upswing and has permitted the banks to be quite responsive to cyclical credit needs in channeling
funds from savers to those seeking funds.
It should be pointed out, as mentioned in our letter of November 4, that the
sale of Government securities by banks does not add to the total reserve base
or credit-extending capacity of the banking system, except when the securities
sold are purchased by the Federal Reserve. Sales to other banks or to nonbank
investors result in the shifting of reserves among banks, although sales to
nonbank investors may reduce deposits and required reserves, thus making possible new extensions of credit in an amount corresponding to the securities
With respect to the handling of discounts, premiums, losses, and recoveries on
securities, the Internal Revenue Service and examining agencies follow substantially the same standards, for example, with respect to bonds bought at
a discount, neither permits a writeup above cost. It should be noted, however,
that with respect to bonds purchased at a premium, examining agencies insist
that the premium be charged off or amortized on a consistent and reasonable
basis to maturity or to date of sale. For tax purposes, Internal Revenue Service
permits the taxpayer to report the difference between cost and the maturity
or sales price of wholly taxable bonds as a loss or gain, or to amortize the
premium over the period to maturity or earlier call date. For tax-exempt
securities an adjustment must be made in the basis of the bond as described in
the Treasury memorandum.



Banks, as corporations, are taxed on their income under the provisions of the
1954 Internal Revenue Code applicable to corporations generally. For the most
part, banks are treated in the same manner as other corporations in regard to
the major aspects of corporate income taxation, such as tax rates, the kinds
of income reported, the type of deductions permitted, and the treatment of gains
and losses on capital assets other than bonds and other evidences of indebtedness.
There are only a few sections of the law that are specifically directed to banks.
In subchapter H, chapter 1 of the 1954 code, relating to banking institutions,
sections 581-584 set forth rules of general application to banks, including the
definition of a bank, the treatment of losses on securities held by a bank, the
deduction by banks of amounts paid to the Federal Government on certain
preferred stock owned by the Government, and the treatment of common trust
Sections 591-594 of subchapter H establish special rules for mutual savings
banks, cooperative banks, and domestic building and loan associations with
respect to deductions for dividends paid on deposits (similar to the deduction
for interest paid on savings deposits by commercial banks), deductions for
repayment of certain loans made by the Federal Government before 1952, the


MONETARY POLICY I 1 9 5 5 - 5 6 112

treatment of bad debt reserves, and the provision of an alternative tax for mutual
savings banks conducting life-insurance business.
The remaining specific bank rule, section 601, relates to a special deduction
for bank affiliates.
In addition "to the specific provisions of subchapter H, there are several sections of the law which apply to corporations generally but which have special
importance for banks as a result of their particular economic function. These
sections relate to the treatment of bad debts in the case of commercial banks
(sec. 166 and the regulations), the amortization of bond premiums (sec. 171),
the nonrecognition of gain or loss on exchange of property (sec. 1031), and
the treatment of bonds bought at discount (sec. 1232).

A. Reserve for bad debts
On the basis of section 166, banks and other taxpayers may deduct from gross
income wholly or partially worthless bad debts in the year the losses are
sustained. As an alternative, the taxpayer may establish a reserve for bad
debts and take a current deduction for reasonable additions to such a reserve.
The principal use of the reserve method by banks is in connection with accounting for losses on loans. The regulations supporting section 166 prescribe
two methods of determining the annual additions to bad-debt loan reserves.
One method is based on a 20-year moving average (including the taxable year)
of the ratio of actual losses on loans to total loans. The alternative method,
which involves a similar set of computations, is based on a bad-debt ratio derived from the loss experience of any 20 consecutive years since 1927. Under
both methods the current addition to the reserve is determined by multiplying
the bad-debt ratio (average of losses to loans over the given period) by the
loans outstanding at the end of the taxable year to obtain the maximum tentative reserve addition. The actual addition is either this amount or any smaller
amount which will make the reserve at the end of the taxable year equal to
three times the maximum tentative reserve addition. Thus the current additions to bad-debt reserves are directly limited and the reserve itself is limited
The moving-average reserve method was first provided in 1947 and the alternative fixed-period method was authorized in 1954. The latter method, insofar
as it allows the banks to use a larger bad-debt ratio than the moving-average
method, results in larger current additions to reserves and total reserves. A
bank on the moving-average method is allowed to switch to the fixed-period
method without obtaining the Commissioner's permission. If a bank is on
the fixed-period method, it may elect to use any 20 consecutive years and, consequently, may change from one set of years to another at any time without
In addition to bad-debt reserves against loans, banks—as distinct from other
corporations—may elect as a result of section 582 (a) to treat bonds and other
evidences of indebtedness with interest coupons or in registered form as bad
debts if they become wholly or partially worthless. This allows the banks
ordinary loss treatment on such securities either as a current deduction or as a
reasonable addition to bad-debt reserves for bonds. Specific reserve methods
are not prescribed in this case but any reserve for losses on bonds may not
merely reflect marketfluctuationsin bond prices.
B. Worthless stock in affiliated bunks
Under section 582 (b) a bank is allowed to treat worthless stock in an
affiliated bank as ordinary loss, provided the bank owns directly at least 80
percent of each class of stock of the other bank. This provision represents a
change made in 1954 from prior law. According to the report of the Senate
Finance Committee:
"Under present law (1939 code), losses on completely worthless stock or
securities owned in an affiliated corporation are allowed as an ordinary loss
if 90 percent of the aggregate gross income of the affiliated company for all
taxable years was derived from sources other than investment income. In
the past banks have not qualified for this tax treatment because most of their
income is derived from investment sources.
"Both versions of the bill (H. R. 8300) remove this restriction in the case
of banks by treating stock held in an affiliated bank as a noncapital asset. This
provision places banks on a parity with other business corporations. Although
the principal qualification of other types of business affiliates entitled to such

60 MONETARY POLICY I 1 9 5 5 - 5 6


tax treatment is noninyestment income, this rule was adopted to limit the
tax benefits to companies whose affiliates were engaged in the same general type
of business as the parent, rather than those used as a dumping ground for undesirable investments. Since loans and investments are the stock in trade of
banks, it appears discriminatory not to allow banks a similar opportunity to
take an ordinary loss on worthless stock in an affiliated company."
C. Gains and, losses on bonds and other evidences of indebtedness
Banks, unlike other corporations, are allowed by section 582 (c) ordinary loss
treatment on the sale or exchange of bonds, debentures, notes, or certificates, or
other evidences of indebtedness, issued by any corporation (including one issued
by a government or political subdivision thereof), with interest coupons or in
registered form, if such losses exceed the gains of the taxable year from sales or
exchanges of such securities. On the other hand, if in the taxable year gains on
sales of bonds exceed losses on such sales, the net gain is subject to tax as a
capital gain at a 25 percent rate.
This treatment is substantially the same as that permitted under section 117 (i)
of the 1939 code, which came into being with the Revenue Act of 1942. The
justification for section 117 (i) advanced at the time was that bonds were a
necessary type of investment for banks. Moreover, section 117 (i) parallels the
treatment under section 117 (j), which was enacted at the same time, and relates
to depreciable and other real property used in a taxpayer's trade or business and
held for more than 6 months, except for property includible in inventory or held
primarily for sale to customers.
Section 1081 (a) also relates to gains and losses and provides, generally, that
on exchanges of property held for productive use or for investment no gain or
loss shall be recognized, but an exception is made for exchanges of stock in
trade, bonds and other evidences of indebtedness, and equities. It is this exception which is of interest to banks since it means that on any exchanges of
bonds at a gain or loss, the gain or loss will be recognized. Gain on exchange of
bonds would be taken into account as capital gain. Losses, on the other hand,
would be treated as ordinary losses provided the conditions of section 582 (c)
were met, i. e., total losses exceeded total gains.
It should be recognized, however, that insofar as losses on exchanges of bonds
are concerned the key provision is section 582 (c). In other words, as long as
section 582 (c) allows banks ordinary loss treatment on the sale or exchange of
bonds, provided losses exceed gains, it is immaterial that section 1031 (a) states
in a negative manner that gains or losses on such exchanges will be recognized.
Estimates of the revenue effects of allowing banks full deductions as ordinary
loss for net losses on sales of bonds, debentures, etc., will vary with the assumptions made. The latest available data from the corporate Statistics of Income
for 1953 show the item "Net Loss, Sales Other Than Capital Assets" as reported
by banks and trust companies to tbe $212 million, of which $197 million was reported by those with net incomes. The bulk of this item is assumed to be losses
on sales or exchanges of bonds. In the absence of the provision for deduction
as ordinary loss, it may be assumed that this amount of capital loss could be
offset against capital gains currently or through a loss carryover to other years.
The net effect of the ordinary loss treatment is thus to allow a deduction effective
against income at a rate of generally 52 percent rather than 25 percent, or a
differential of 27 percent. Thus, for 1953, there would have been a maximum
revenue effect of $53 million, on the assumption that the same volume of sales
and exchanges would have been transacted in the absence of ordinary loss treatment. If, however, it were assumed that without this tax treatment, the volume
of loss on sales and exchanges would have been substantially contracted, as is
probable, the revenue loss would, of course, be commensurately smaller.
D. Amortization of bond premiums
In purchasing bonds for investment purposes, banks at times buy bonds at a
premium, equal to the excess of a bond's purchase price over its redemption price.
Under section 171, banks and other taxpayers are allowed to amortize the bond
premium to maturity or earlier call date and to deduct from income in each
taxable year the portion of the premium amortized in that year. By this procedure the premium is gradually recovered over the remaining life of the bond.
In effect, this provision provides an appropriate current adjustment of the interest to its approximate real amount.
The bond premium amortization rule applies, however, only to bonds the
interest on which is wholly or partially taxable. Tax-exempt bonds, as is the



1955-56 114

case with municipal bonds, are specifically excluded from tlie provisions of
section 171.
A distinction is also made between callable and noncallable bonds in connection with the period over which the premium may be amortized. As noted above,
the premium may be amortized to maturity or earlier call date, except that in
the case of wholly taxable bonds issued after January 22, 1951, and acquired
after January 22, 1954, the premium may be amortized to the nearest call date
only if that date is more than 3 years from the date of original issue. Therefore,
bonds with a very short call feature, such as 30-day callable bonds, may not now
be used as vehicles of tax abuse as was the case under prior law.
When a bank or other taxpayer amortizes bond premiums, a compensating
adjustment of the basis of the bond must be made to insure that a double deduction of the premium does not occur; that is, to insure that there is not a loss on
sale or redemption of the bond attributable to the amortized portion of the
premium in addition to the deduction for the amortization of premium. Even
though tax deductions for amortization of premiums on tax-exempt bonds are
not allowed, the adjusted basis of such bonds must be reduced over time as if
the premium were being amortized. The reason is, of course, that if reduction
of basis of tax-exempt bonds bought at a premium were not required, losses
would arise on sale or redemption of the bonds (attributable to the premiums),
a result inconsistent with the rule that premiums on tax-exempt bonds cannot
be amortized and deducted currently.
The general rules relating to premiums on tax-exempt bonds applicable to
investors are also applied to banks and others who are dealers in tax-exempt
securities, except where a dealer buys short-term municipal bonds at a premium
which are disposed of within 30 days of purchase or the bonds' earliest maturity
or call date is more than 5 years from the purchase date. The effect of these
exceptions is to allow the dealer to realize an ordinary loss upon sale or redemption of such bonds. Recently the staffs of the Joint Committee on Internal
Revenue Taxation and the Treasury Department recommended to the Subcommittee on Internal Revenue Taxation of the Committee on Ways and Means that
the 30-day and 5-year rules be removed so as to treat dealers and investors in
tax-exempt bonds in the same manner.
E. Bonds bought at discount
Section 1232, relating to bonds and other evidences of indebtedness, is another
general provision of the code in which banks as substantial purchasers of bonds
have an interest. Specifically, this section states, in part, that a portion of
any gain realized on taxable bonds bought at a discount and which were originally issued at a discount will be taxed as ordinary income.
To summarize briefly, when a bond is issued at a discount, the difference
between the bond's issue price to the public and its redemption price at maturity
is called the original issue discount. Any gain on sale of the bond which represents recovery of this discount is taxable as ordinary income and gain in excess
of the discount is treated as capital gain. Where a bond is sold before maturity
the original issue discount is spread pro rata over the entire life of the bond.
This procedure reduces the amount of the total discount which is recovered as
ordinary income at the time of sale. In connection with the computation of
original issue discount, it should be noted that where the discount is less than
one-fourth of 1 percent of the redemption price multiplied by the number of
complete years to maturity, the original issue discount is deemed to be zero.
Thus, any gain realized by the bondholder would be a capital gain. This rule
serves to eliminate cases in which the ordinary income part of any gain is likely
to be very small.
F, Deduction of dividends paid on certain preferred stock
According to section 583, which conforms substantially to section 121 of the
1939 code, the dividends a bank pays on its preferred stock owned by the United
States or any instrumentality thereof which is exempt from Federal income
tax are deductible from gross income. This provision reflects the fact that
at times certain Federal agencies advance funds to banks in financial difficulties
in exchange for preferred stock in order to sustain the banks and to protect the
O. The treatment of common trust funds
Banks often establish common trust funds for the collective investment and
reinvestment of funds placed in their care as trustees, executors, administrators,
or guardians. Section 584, which relates to the tax treatment of such trust
funds, provides, essentially, that a common trust fund shall not be considered

60 MONETARY POLICY I 1 9 5 5 - 5 6


a corporation and that the income of the trust fund shall be taxable in the hands
of the individual participants. In other words, the common trust fund is viewed
as a conduit and is treated more or less like a partnership.
27. Special deduction for bank affiliates
A holding company affiliate of a bank is allowed by section 601 a special
deduction in connection with the computation of accumulated taxable income
and undistributed personal holding company income. The deduction is allowed
in the amount of earnings or profits of the affiliate which, in compliance with
the law, has been devoted during the taxable year to the acquisition of readily
marketable assets other than bank stock. To obtain this deduction, the Board
of Governors of the Federal Reserve System must certify that such an amount
of the earnings or profits of the holding company has been devoted to the
prescribed use.
This section of the 1954 code corresponds substantially to section 26 (d) of
the 1939 code.

Chairman P A T M A N . The committee will please come to order.
Is the manager of the open market account available now?
M r . ROUSE. Y e s , s i r .





Chairman P A T M A N . Give your name to the reporter, if you please.
Mr. ROUSE. Robert G. Rouse.
Chairman P A T M A N . I S Mr. Robert V . Roosa in your office?
Mr. ROUSE. He is a vice president of the Federal Reserve Bank of
New York, and presently in charge of research and statistics. He
was associated with me in the open market function until comparatively recently.
Chairman P A T M A N . You are acquainted with his book?
M r . ROUSE. Y e s .
Chairman P A T M A N . I

think it was written on Federal Reserve Operations in the Money and Government Securities Markets. He was
with the Open Market Committee quite a long time, was he not?
Mr. ROUSE. Yes, he was with the function for approximately 3
years. He is still interested in it, of course, as an economist.
Chairman P A T M A N . Y O U have complete charge of what you call
the open market account for the New York Federal Reserve Bank?
Mr. ROUSE. Yes, sir; I am manager of the account.
Chairman P A T M A N . And you were selected by Mr. Hayes of the
New York Federal Reserve Bank, or by the Board of Directors ?
Mr. ROUSE. I was selected originally by Governor Harrison and
Allan Sproul in November 1939, approved by the directors of the
bank, and approved by the Federal Open Market Committee.
That was an annual process thereafter, and it has been carried out
through March of this year, when I was last selected and approved
by the Committee.



POLICY I 1 9 5 5 - 5 6 116

Chairman P A T M A N . Y O U are employed by the bank ?
Mr. ROUSE. I am a vice president of the bank.
Chairman P A T M A N . And approved by the Open Market Committee?
Mr. ROUSE. Correct, sir.
Chairman P A T M A N . Including the Federal Reserve Board ?
M Y . ROUSE. Y e s , s i r .
Chairman P A T M A N . Where do
Mr. ROUSE. From the Federal
Chairman P A T M A N . From the

you get your pay ?
Reserve Bank of New York.
Federal Reserve Bank of New York.
You are hired and paid by the Federal Reserve Bank of New York?
Mr. ROUSE. That is right, sir.
Chairman P A T M A N . In your operations in connection with the
open market, you buy and sell Government securities for all the 12
Federal Reserve banks?
Mr. ROUSE. That is correct.
Chairman P A T M A N . Under the 1 9 3 5 act, no other bank has any
right to buy or sell securities, but each bank is obligated to carry out
instructions from you ?
Mr. ROUSE. They are obliged to sell or buy as the account sells or
Chairman P A T M A N . When you buy, say, a million dollars worth of
Government securities, you give a check on some bank, do you not?
Mr. ROUSE. We give our own check.
Chairman P A T M A N . Y O U give a check on the Federal Reserve Bank
of New York?
M r . ROUSE. Y e s , s i r .
Chairman P A T M A N . H O W

do you allocate that million dollars among
the 12 Federal Reserve banks?
Mr. ROUSE. It is in accordance with the daily averages of the total
resources of each bank, pro rata.
Chairman P A T M A N . In other words, you will determine the daily
average of the resources, value of the resources, of each bank, and
then that million dollars will be allocated to each bank in proportion ?
Mr. ROUSE. That formula was adopted by the Federal Open Market
Committee. This is done annually. As of February 28, or some such
date, we each year allocate the securities if, by reason of the application of that formula each day, or each day that a transaction takes
place, some variance has developed during the year; and the Committee has the opportunity to reassess the propriety of that formula
at any time that it sees fit.
Chairman P A T M A N . If there is any—in other words, if it is not
properly balanced, you make the adjustment at the end of the year?
Mr. ROUSE. The Committee authorizes an adjustment in the formula.
Chairman P A T M A N . If it is necessary for New York banks to transfer bonds to, say, Dallas, Tex., Dallas, Tex., will send you Federal
Reserve notes to pay you for them?
Mr. ROUSE. It is done through the interdistrict settlement fund.
Chairman P A T M A N . N O W then, suppose you should buy a million
dollars worth of bonds from the Dallas bank, and the Dallas bank
said, "I want Federal Reserve notes in payment of these bonds, a
million dollars," how would you go about getting those notes delivered
to the Dallas bank?
Mr. ROUSE. We have never had that question come up, Mr. Patman.
Chairman P A T M A N . I beg your pardon ?

60 MONETARY POLICY I 1 9 5 5 - 5 6


Mr. ROUSE. That is a new—I don't think I understand your
Chairman P A T M A N . Well, you see, these Federal Reserve notes, of
course, are printed by the Bureau of Engraving and Printing here in
Washington. In some way you get that million dollars worth of
Federal Reserve notes to pay that Dallas bank. How would you get
those notes? How would you get them away from the Bureau of
Engraving and Printing?
How would you get them delivered to the New York Federal Reserve Bank for that purpose?
Mr. ROUSE. It is a bookkeeping transaction through the interdistrict
settlement fund, I believe, which is carried out at the Board of Governors' office.
Chairman PATMAN. In practice, it is a bookkeeping operation. But
the truth is, all the bonds that you have—and you have about $25
billion worth of bonds, do you not ?
Mr. ROUSE. Something less than that; yes, sir.
Chairman P A T M A N . About 2 4 or 2 5 ?
Mr. ROUSE. About 24.
Chairman PATMAN. Every one of those bonds have been bought,
not on the resources of the Federal Reserve banks, but on the credit
of the Nation by exchanging Federal Reserve notes for them, have
they not?
Mr. ROUSE. Yes; they are bought by the—out of Federal Reserve
Chairman P A T M A N . N O ; you are mistaken there, are you not ? You
do not say that they are bought with Federal Reserve funds. The
money is created by those bonds. Do you not understand that?
Mr, ROUSE. It is created—yes, indirectly.
Chairman P A T M A N . Well, directly.
In other words, if you buy bonds, you must pay for them, and those
$24 billion worth of bonds were paid for, but not by Federal Reserve
bank funds; they were paid for by Federal Reserve notes.
Now, I will not insist on your answering that. I will ask Mr. Martin
to answer that.
Is that not correct, Mr. Martin?
Mr. MARTIN. It would be the same thing, sir.
Chairman P A T M A N . In other words, that is where the power to
create money comes in through the Federal Reserve.
M r . MARTIN. Y e s .
Chairman PATMAN. YOU

create the money. In other words, the
money is printed, it is paid for the bonds, the $24 billion worth of
Mr. MARTIN. We have the power to create money.
Chairman P A T M A N . And you did do it to buy these bonds?
Mr. MARTIN. In the purchase of bonds, we ease the money market;
in sales of bonds
Chairman PATMAN. I am not talking about the reasons or arguments. I am just asking.
Mr. MARTIN. I was just talking about the process. The purchase
of bonds would ease the money market, and the sale of bonds would
contract it.
Chairman PATMAN. Let's divorce it from any argument about any
market, easy or hard, and confine it to the bonds that you already have.


MONETARY POLICY I 1 9 5 5 - 5 6 118

You have $24 billion worth of bonds. Now, those bonds were bought
by giving of Federal Reserve notes in exchange for the bonds, were
they not?
Mr. MARTIN. Well, Federal Eeserve credit.
Chairman P A T M A N . What is that?
Mr. MARTIN. Federal Reserve credit. They were not specific
Chairman P A T M A N . That is what I mean. But every one of them
is an obligation of the United States Government, is it not?
Mr. MARTIN. That is correct.
Chairman P A T M A N . And every one of those notes that you trade
for those bonds of the Government says on its face that it is an obligation of the United States Government?
Mr. MARTIN. That is correct.
Chairman P A T M A N . And that is what makes it good.
Mr. MARTIN. That is right.
Chairman P A T M A N . NOW then, whenever you take that Government
obligation from the Bureau of Engraving and Printing and you trade
it for $24 billion worth of bonds which you have, and you have those
bonds now, you draw interest on those bonds, do you not?
M r . MARTIN. W e d o .
Chairman P A T M A N . About

$600 million a year; and, although you
traded one Government obligation for it, you keep the bonds and you
do not cancel them. They pay interest, and you use that $600 million
in any way that is allowed by law, for administrative purposes in the
operation of the Reserve banks. And then, of course, after all the
deductions have been made, why, you pay 90 percent of the remainder
into the Treasury of the United States?
Mr. MARTIN. That is correct.
Chairman P A T M A N . The point I am trying to make, Mr. Martin,
is, I am trying to answer a fallacious argument that is going over the
country: No. 1, that these reserves that the member banks have in
their Federal Reserve Banks are used to buy these bonds. That is a
fallacy, is it not?
Mr. M A R T I N . That is a fallacy.
Chairman P A T M A N . That is a fallacy; it is not true.
Mr. MARTIN. That is right.
Chairman P A T M A N . All right.
No. 2 is that the banks own the Federal Reserve Banking System,
and it is run by the banks, it is operated for their benefit.
That is a fallacy, is it not?
Mr. MARTIN. That is a fallacy.
Chairman P A T M A N . N O W , the reason it is a fallacy is because the
stock in the bank does not mean anything to the operation of that
bank, does it? In other words, it is not used.
Mr. M A R T I N . The stock in the bank is not proprietorship.
Chairman P A T M A N . It is not used at all, is it? There is no use that
that stock is put to?
Mr. MARTIN. Well, the
Chairman P A T M A N . The member banks.
Mr. MARTIN. There is a use put to it in the sense that it provides
participation in the vote.
Chairman P A T M A N . That is kind of psychological, to make them
feel they are part of the System,
Mr. M A R T I N . No. It creates the power to vote.


MONETARY POLICY I 1 9 5 5 - 5 6


Chairman P A T M A N . The what?
Mr. MARTIN. It creates the power to vote.
Chairman P A T M A N . The power to vote for
Mr. MARTIN. It is not proprietorship.
Chairman P A T M A N . The power to vote for directors to run the bank.
M r . MARTIN. Y e s .
Chairman PATMAN.

Well, that is easy. That is nice. [Laughter.]
I was wondering what they did.
But they paid in about $300 million ?
Mr. MARTIN. That is right.
Chairman P A T M A N . In stock. And that stock now is there, but
it is really useless to the banking system except make them believe,
"Now you have got an interest in this thing, and that determines your
participation in electing directors."
But do they vote according to the amount of stock they have?
Mr. MARTIN. N O ; not precisely.
Chairman P A T M A N . Well, you see, that is knocked in the head, too,
is it not? What I mean is, it is not used for that purpose.
All right.
So it is used to give the bankers a feeling that they have an interest
in the Federal Reserve System when they don't have any interest
except they get 6 percent interest on that stock, 6 percent dividend;
is it not?
Now, is it not a fact, and we have gone over this before, that the
Federal Reserve System and the Federal Reserve banks are Government institutions operated for the Government ?
Mr. MARTIN. The Federal Reserve Board is clearly Government.
The Federal Reserve banks, under our setup, are quasi-Government.
Chairman P A T M A N . Are quasi-what?
Mr. MARTIN. Quasi-Government; they have an independent board
of directors.
Chairman P A T M A N . All right, let's examine that. #
That stock, or that word 6*stock" is a misnomer, is it not?
Mr. MARTIN. If you are talking about stock in terms of proprietorship—ownership—yes.
Chairman P A T M A N . Well, of course that is what stock is; yes.
Normally that is what stock is; when you say "stock," you mean a
proprietary interest of some kind, do you not?
Mr. MARTIN. In the ordinary sense, yes.
Chairman P A T M A N . That is right, in the ordinary sense.
Mr. MARTIN. You and I are in agreement that it is not proprietary
Chairman P A T M A N . Yes.
Therefore, this does not convey any proprietary interest at all, and
the word "stock" is a misnomer. It is not a correct word at all. It is
just an involuntary assessment that has been made on the banks as
long as they are members.
Now, they go out, the money is refunded to them. But as long as
they are members, they get 6 percent annually on that.
And as evidence of the fact that they do not have any proprietary
interest, which you admit, is the fact that this so-called stock cannot
be sold, it cannot be hypothecated, and as a convincing and unanswerable argument that the banks have no interest in the Federal Reserve
System as such,financialor proprietary interest, the law specifically



POLICY I 1 9 5 5 - 5 6 120

rovides that, in the event of the liquidation of a Federal Reserve
ank, that after they get their $300 million stock back, the Government gets everything else. That is right; is it not ?
Mr. M A R T I N . That is right.
Chairman P A T M A N . N O W , if the banks had any proprietary interest
in that, they would get what was left after liquidation, would they
Mr. M A R T I N . Well, you and I are in agreement it is not proprietary
Chairman P A T M A N . Yes.
Therefore, the statement that the banks own the Federal Reserve
System is not a correct statement, is it ?
Mr. M A R T I N . The banks do not own the Federal Reserve System.
Chairman P A T M A N . That is right.
Mr. M A R T I N . But the banks do participate in the management.
Chairman P A T M A N . It is an agency operated in the Government's
interest by public members, seven members of the Federal Reserve
Board, each one selected for a term of 14 years, and he cannot succeed
himself after hefillsout the whole term.
Of course, he can fill out two or three part-terms and make it 25
years. That would be all right. And they are selected by the President and confirmed by the Senate.
Mr. M A R T I N . That is correct.
Chairman P A T M A N . N O W , you state—I am about to get off of this
gentleman over here, and I will go back and ask him another question.
Senator O ' M A H O N E Y . Y O U are going to let him up ? [Laughter.]
Chairman P A T M A N . I think I had better ask Mr. Martin this instead
of this gentleman:
I believe you have stated repeatedly, Mr. Martin, that the Treasury,
in sizing up what kind of interest rate should be charged—and Mr.
Humphrey has testified a number of times before this committee, I
know, to that effect—that the Treasury will call in people who are
dealers and people who have something to do with the sale of Government securities, and that they talk to the Treasury, and then they
talk to you.
Almost invariably they go from the Treasury to your shop, do the}'
Mr. M A R T I N . They frequently do; yes, sir.
Chairman P A T M A N . They frequently do, and they are the ones that
are consulted for the purpose of determining the interest rate that
should be paid on Government bonds; I mean they are the ones that
the Treasury uses. And you, of course, either say "yes" or "no."
Mr. M A R T I N . We consult with the Treasury. We don't say "yes"
or "no" on their interest rate. We are glad to give them the best
advice that we have about what we think the market is.
Chairman P A T M A N . D O you really believe we have a free market
in Government bonds, Mr. Martin ?
Mr. M A R T I N . Well, all freedom is relative, but I say there are forces
in the market place, as I have repeatedly said to you, that are stronger
than both the Federal Reserve and the Treasury together. Some
people question that, but I think that is where the law of supply and
demand comes in.
: Chairman P A T M A N . Y O U would not positively and without reservation say that there is a free market at all times in Government bonds ?


POLICY I 1 9 5 5 - 5 6


Mr. M A R T I N . I would say that there is some intervention, as was
provided in the Federal Reserve Act, in the market, but that generallyspeaking, the market forces are permitted to operate.
And since the Treasury-Federal Reserve accord in 1951, the market
forces, the market has been relatively free.
Now, that does not mean that we step completely aside and let the
market become the law of the jungle. We are there as a guardian.
We are trying to develop a climate and a general situation in which
the players on the field have the best conditions to operate in.
But we do not make the market.
Chairman P A T M A N . I am not going to pursue that accord further,
but you have dug up a real snake that I want to help you kill on that.
Senator O ' M A H O N E Y . Mr. Chairman, may I ask a question on that
point ?
Chairman P A T M A N . Yes, sir.
Senator O ' M A H O N E Y . Your answer is a qualified one, is it not, Mr.
Mr. M A R T I N . Yes; it is qualified.
Senator O ' M A H O N E Y . Y O U do not want this committee or anybody
who reads or hears this testimony to believe that you are saying that
there is a free market in Government securities. There is not, is there ?
Am I not right ?
Mr. M A R T I N . There is not a completely free market in Government
securities. We are watching over it from time to time.
Senator O ' M A H O N E Y . It is as free as you will allow it to be.
Mr. M A R T I N . It—there are
Senator O ' M A H O N E Y . Y O U do not want a free market in Government
bonds, do you?
Mr. M A R T I N . Yes, indeed, I want the forces of the marekt to be permitted to play, but I don't want
Senator O ' M A H O N E Y . Let's follow this through.
You cannot get any answers to any questions, particularly to a complex question involving money, unless you are clear about your definitions.
Now, a free market, in the question which I am directing to you, is a
market in which the law of supply and demand alone operates. It will
go up or it will go down according to the forces which operate in the
market, without Government intervention which will affect it. That
is a free market.
Mr. M A R T I N . Well, we have some Government intervention in this
Senator O ' M A H O N E Y . That is the whole point.
Now, the whole issue here is to what extent and how should Government intervene? The Federal Reserve Board does intervene. Some
people who come to us tell us that your intervention is bad for them,
and for the economy of certain regions.
Others tell us that your intervention is good.
Your explanation of the intervention is that you want to prevent inflation. But you cure inflation or prevent inflation by providing a
certain amount of inflation in the cost of money. When you raise the
interest rate, all in the world you are doing is raising the price of
money; is that not right ?
Mr. M A R T I N . No, Senator. The cost of money, it is the demand for
money which creates the inflation. We could


MONETARY POLICY I 1 9 5 5 - 5 6 122

Senator O ' M A H O N E Y . But you can control the interest.
Mr. MARTIN. We could control the interest at a price which would
be depreciation of the dollar. Now, if you want us to control it in that
way, it can be done.
Senator O ' M A H O N E Y . Don't you see, you are changing the subject.
Mr. MARTIN. I don't think so. I don't think you can cover this
subject except by looking at it as a process.
Senator O ' M A H O N E Y . N O matter—accepting your answer just as
you made it, it nevertheless is true, is it not, that you have intervened,
that you have raised the cost of money, and that you have done so for
the express purpose of preventing the price of other commodities from
Mr. MARTIN. Let's put it this way: We have not supplied all the
money that is required to prevent a rise in interest rates.
Senator O ' M A H O N E Y . Will you repeat that, please ?
Mr. MARTIN. We have not supplied all of the credit which is necessary to prevent a rise in interest rates.
Senator O ' M A H O N E Y . That is precisely true. You have not supplied all the money which the free market demands; you assert, and
I think with propriety, that the object of your doing this is to prevent
But the sad fact is that it does not prevent inflation, because all you
have got to do is look at the prices in the Economic Indicators to know
that the prices of all goods except farm commodities have been going
up, and particularly have the prices of dividends been going up, the
value of securities going up, but the income of the farmer has been
going down. And if you will pardon me while Mr. Moore hands me
this document, prepared by the Council of Economic Advisers and
printed under the authority of this committee, thefiguresI am going
to read to you now will explain why so much complaint about this
matter comes from rural areas.
Sometimes it is hard to find the exact page where these figures
appear. Let's get it piece by piece.
Here it is—page 7, entitled "Farm Income," shows that the farm
operators' net income, excluding adjustment for inventory change,
which in 1951 wfis $14.8 billion, has fallen every year since then until
in 1955 it had fallen to $11.3 billion.
Now, while that was going on, the returns from dividends were
increasing: Dividends in 1950 amounted to $9.2 billion. In 1952 they
were $9 billion flat, in 1953, $9.3 billion, in 1954, $10 billion, and in
1955, $11.2 billion.
At the same time, personal interest income was increasing from
$10.6 billion to $16.1 billion. In other words, while the farm economy
was going down, the income of those who have dividends, who
receive dividends for income and who receive personal interest, collect the interest.
So not only is the home builder paying more money? more interest
for the money that he borrows, not only is the small-business man paying more interest for the money that he borrows, but the Government
itself is paying more money, more interest for the money that it
Under your policy, the cost of money to the Government of the
United States and to a vast segment of the people of the United States
has increased, and some have complained about it.


MONETARY POLICY I 1 9 5 5 - 5 6


Now, it is your policy that does it. I will admit there are other
factors—of course, there are other factors—but you have spoken very
frankly against pegging bonds; have you not?
Mr. M A R T I N . I have, indeed.
Senator O ' M A H O N E Y . Y O U do not believe that bonds should be
pegged. You could peg them; could you not ?
Mr. M A R T I N . We could.
Senator O ' M A H O N E Y . But the reason you do not believe in pegging
them is because you believe that that would cause inflation ?
Mr. M A R T I N . Because the price of that would be too great.
Senator O ' M A H O N E Y . The price would have to be too great.
I am not arguing whether you are right or wrong. I am just trying to get the facts right out here on the table where we can all look
at them and see them, without a misunderstanding of what we mean.
So here, somewhere along the line, because of this judgment which
you have just repeated, you intervened as a Government board, and
you changed the rate of interest.
Now, it injures some people; it certainly helps the banks. It helps
those who collect interest, who loan money, but it does not help those
communities which want to build schools, the communities which want
to build roads, the people who want to build homes, the businesses
which want to expand.
Now, am I wrong in that statement of fact?
Mr. M A R T I N . Well, I think there are two sides to it, Senator. The
demand for credit is what is creating the increase in interest rates.
The Federal
Senator O ' M A H O N E Y . Why do we have an increased demand for
Mr. M A R T I N . Because the people are trying to do too many things
too fast.
Senator O ' M A H O N E Y . That is your judgment.
Mr. M A R T I N . Well, that seems to be borne out, I think, by the facts
in terms of prices. We could supply all the money that everybody
is requesting today.
Senator O ' M A H O N E Y . D O you think that the people who want to
build more schools for their children want to do it too fast?
Mr. M A R T I N . I am not passing a judgment on whether they are
doing it too fast or not; I don't know. But I am saying that they
have to face up to what I was discussing with you this morning,
whether they would rather pay $3^ million for that school instead
of $3 million for that school.
Senator O ' M A H O N E Y . What I want to point out to you, sir, is the
conflict between two different branches of the Government. You
do not want to take the steps that would make the cost of money less to
the communities which want to build schools; but we understand from
the announcements that come from Augusta that the President is
going to ask the Congress to appropriate money to build schools, to
aid the States in building schools.
Now, will that not be inflationary, too, by increasing the expenditure? Would it not be better, by a lower interest rate, to get that
money from investors, particularly when the investors might be in
the very school districts?



POLICY I 1 9 5 5 - 5 6 124

Mr. M A R T I N . If the people of the United States wish, through their
Congress, to depreciate tneir dollar in order to build schools, that
is certainly within the purview of Congress.
Senator O ' M A H O N E Y . Well, now, Mr. Martin, I have never been
very much impressed by this talk about depreciating the dollar, because I know that thepurchasing power of the dollar has been steadily
decreased since this Government was founded.
You will agree with me on that, will you not ?
Mr. M A R T I N . I think it has been depreciated often far too much.
But I don't think we are asked to
Senator O ' M A H O N E Y . The falling price of the dollar has accompanied steadily the increasing prosperity of the Nation.
Mr. M A R T I N . Well, that I don't agree with you on, Senator.
Senator O ' M A H O N E Y . I will show you a chart produced by one of
these Cleveland banks which was presented to us several years ago,
which shows thefluctuationsof the dollar. And the better we have
grown, the prouder we have grown, the more productive we have
grown, the less we have been able to get for the dollar, because we
have so many of them. The dollar is merely an instrument of doing
these things.
Mr. M A B T I N . Here are wholesale prices which have been given to
me by Mr. Young, which shows the fluctuations. Now, you can always handle a situation of this sort by outright depreciation of the
dollar, but there are many factors that go into each one of these
situations, and I do not think that the inflation has improved at any
time the prosperity of the country.
Senator O ' M A H O N E Y . Here is a chart on wholesale prices, too, and
this comes from the Council of Economic Advisers.
Mr. M A R T I N . I am quite sure it will agree substantially with this.
Senator O ' M A H O N E Y . Very likely, but what does it show? It shows
that the prices, the industrial prices, have been rising, in 1952, 1953,
1954, 1955, and 195.6, the same period during which you have been
raising the interest rates; that all commodities have risen from index
110 in 1952 to an index of about 116 in 1956; whereas the prices of
farm commodities have fallen from an index of 100 in 1952 to an
index of about 89 in 1956.
So what has your increase in interest rates been doing?
Mr. M A R T I N . Are you suggesting that our policy has not been
progressively severe enough?
Senator O ' M A H O N E Y . I am suggesting, sir, that your policy has
not been effective, that one segment of our economy is suffering and
another segment of the economy is profiting from the policy that
you followed.
Mr. M A R T I N . Well, I don't agree with you on that.
Senator O ' M A H O N E Y . Y O U do not deny that dividends have
Mr. M A R T I N . Well, is that bad ?
Senator O ' M A H O N E Y . What?
Mr. M A R T I N . I S that bad?
Senator O ' M A H O N E Y . But farm prices have fallen.
Mr. M A R T I N . Well
Senator O ' M A H O N E Y . That is bad.
Mr. M A R T I N . There are two different sets of premises that you are
dealing with.


POLICY I 1 9 5 5 - 5 6


Senator O ' M A H O N E Y . N O ; I am making them all out of one chart.
Mr. M A R T I N . Oh, no. The supply and demand in securities and
the supply and demand for farm products are two different sets of
factors, and that is what we cannot get away from.
Senator O ' M A H O N E Y . Let me put it this way, Mr. Martin. You
are too nice a man to argue with, although I would enjoy it, but I
just want to sty to you that I would like to have you write another
paper to submit to this committee, in which you will undertake to
show that the policy has actually been successful and could not be
varied one way, one jot or tittle either way, for the benefit of the
Mr. M A R T I N . Well, for the sake of the record, let me say that we
have never claimed that our policy has been a hundred percent perfect,
and w& never will. It is not the nature of this problem that you can
have a hundred percent perfection.
But I will say that so iar as making the blanket charge that because
there have been increases in prices the policy has failed, let us never
forget that there are budgetary and fiscal problems, also; but the
real test is how much higher would those prices have risen if the
law of supply and demand in the money market had not been permitted to operate to dampen down somewhat the rate of spending
and proceed to move in the direction of increasing savings.
That gap between savings and investment has to be met by some
Senator O ' M A H O N E Y . Well, you are buying bonds right now in
order to supply more money for the Christmas trade; are you not?
Mr. M A R T I N . That is correct.
Senator O ' M A H O N E Y . That is a justifiable purpose, in your mind?
Mr. M A R T I N . That is right.
Senator O ' M A H O N E Y . But it would not be a justifiable purpose, in
your mind, to buy bonds to stabilize the Federal bond market and
prevent a further decline in those bonds ?
Mr. M A R T I N . Except in the instance of a disorderly market, we
would think that buying bonds just for that purpose, under present
Senator O ' M A H O N E Y . H O W about for building of schools? Do
you not think you might as well help the building of schools as help
the retail merchants to supply the Christmas trade ?
Mr. M A R T I N . Well, now you are in a different field.
Senator O ' M A H O N E Y . I have to jump around to different fields to
keep up with you.
Mr. M A R T I N . On the building of schools, I make no observation as
to its desirability or trndesirability, but I want those schools to be
built with the price of labor and materials which will give the users
of those schools the maximum value, and minimize their expenses in
creating those schools.
Now, if it requires them to delay a little bit from time to time, I
personally would think it would be preferable to delay than for everybody to rush in for a limited supply of steel and building materials
and bid the prices up.
That is where I come back to this demand factor.
Senator O ' M A H O N E Y . But when you delay the building of schools,
you are delaying the education of children; and nature seems to have
provided a limit to the life of man. It has been extended a little bit





195 5 - 5 6

by tlie decrease in infant mortality, but the old rule of three score and
ten seems still to apply, if the obituary notices in the newspapers are
indicators, and I think you can well make a selective exception from
your rule in the case of building schools.
Mr. MARTIN. Well now, how many exceptions do we make?
Senator O ' M A H O N E Y . That would be up to you. You make some
exceptions, you have made six different changes,1 the chairman tells
Mr. MARTIN. Well, those have been impersonal. They have not
been directed toward helping schools or houses or automobiles.
Senator O ' M A H O N E Y . I led off with the one which was specific,
and that was the Christmas trade. I asked you that question.
Mr. MARTIN. Well, we have a definite responsibility to supply the
seasonal needs of all business, not just the Christmas trade.
Senator O ' M A H O N E Y . NOW you see why I have to jump from field
to field with you. [Laughter.] You cannot defer the need of education or training.
Mr. MARTIN. I would like to associate the Board a hundred percent
with the desire for education [laughter], and we are all united in our
belief that education is of paramount importance.
Senator O ' M A HONEY. Let me ask you to go one step further, and
announce that the Board is united in its determination to do what it
can to help the school districts and States of tlie United States to build
the schools they need.
Mr. MARTIN. Without depreciating the American dollar.
: .
Senator O ' M A H O N E Y . How are you going to de^IL with the social
demands of the country ?
May I say this? And then I am going to close my questioning.
Of course, Mr. Martin, this is a people's country, not in the sense
that the Soviet use that phrase, but in the sense that was stated in
the preamble to the Constitution of the United States. This Government was founded to improve the general welfare.
All of the founders of our Government agreed upon that, and all
through our history we have had battles between the Congress and the
banks to prevent the banks from running the Government in a way that
would be injurious to the social progress of the people.
I do not mean to tell you the story of Williami Henry Harrison and
John Tyler. Tyler was a Democrat. He was nominated for VicePresident on the Whig ticket because the Whigs thought they could
win that way, and only in that way; and one of the purposes of the
Whig Party was to reestablish the United States Bank which Jackson
had destroyed because he felt that it was taking too much control over
the trend of Government.
Tyler tried his best to agree on a charter for the new bank, and made
3 or 4 changes. He vetoed the bill.
Then it was changed, and he couldn't take it. He vetoed it again.
So his inherent support of the right of the people to Jiave these social
improvements through the Government overcame his desire to cooperate with the ultraconservative Whigs, who thought that money was
more important than people.
That is the same issue that we have now, but it is made much more
acute by reason of the facts which we have developed this morning.
The conservative and customary methods of fiscal policy which



195 5 - 5 6


could be justified when the national debt of the United States in 1939
was less than $50 billion cannot be justified now when the national
debt of the United States is $278 billion, and at a period when we must
remember that so much of that debt, practically all of it, is money that
was spent for destruction, not for productive enterprise at all.
There has been many a wise word said with respect to interest, that
it should be paid only on productive loans. That is to say, for projects
that create new wealth or earn a legitimate profit, as distinguished
from destructive loans or loans that were made to recover from disaster or to wage wars or things of that kind.
We cannot govern this interest problem by shutting off the desire
of people in some enterprises to expand and progress, while we grant
to others the privilege to expand and progress.
Mr. M A R T I X . Well, Senator, I would just like to say that this money
power that you have been discussing has been with us as a problem, as
you state, from the early days of the Republic.
Senator O ' M A H O N E Y . Right.
Mr. MARTIN. And we have evolved a means of handling it whereby
Congress placed a trusteeship over it and wrote a trust indenture in
the Federal Reserve Act.
Senator O ' M A H O N E Y . Let me say that the Federal Reserve Board
is doing much better than was done before the Federal Reserve Board
was created, but you are working under very much more difficult
Mr. MARTIN. Well, I want to reemphasize what I said this morning,
that we welcome this inquiry.
Senator O ' M A H O N E Y . Fine.
Mr. MARTIN. We appreciate the opportunity to review this problem. Our responsibility is an impersonal one with respect to the allocation of resources. Now, it is up to us to present, under the
Federal Reserve Act, to you what the price is if you are going to
create money in excess of the requirements at a given time, which will
iro into increases in prices.
Senator O ' M A H O N E Y . What I have been trying to find out, unfortunately without success, all day long is: What is the yardstick by
which you measure the amount of money that ought to be created ?
Mr. MARTIN. Well, the yardstick—there is no firm yardstick, but
we have looked on the normal growth of the country in terms of perhaps 2, 3, 4 percent, no fixed formula, and we have added to the money
supply generally for that purpose. But we have to gage things in
terms of the demand and supply of credit and business activity.
Now we have increased the money supply 1 y2 percent over this past
year, but the velocity of money has been considerably higher than that,
so that a 3- or 4-percent increase during the recession of 1953-54, in
terms of the actual use of money, probably contributed less than the
li/2 percent that we have been adding today.
But, generally speaking, we have tried to make money available at
all times, and although many people say that it hasn't been available,
we question it. We have studied it very carefully. It has been available, but the cost of it has been rising because of the demand factors,
where the root of inflation comes; the demand factors, not the cost
factors, have been the ones that have overpowered the money supply
in such a way that interest rates rise; and the saver, under these circumstances, should receive a higher return. And we think this bene-




195 5 - 5 6

fits the little man, the pension holder, the small savings account, because let me point out that stable prices are one of the greatest blessings, in my judgment, that the little-business man can have.
The big-business man can defend himself against increases in prices
of a jagged sort, but the little-business man is pretty helpless when it
comes to a price level that goes haywire.
Chairman P A T M A N . What about the price level of.interest?
Mr. M A R T I N . We are trying to pull all these things together.
1 am sorry, Mr. Patman.
Chairman P A T M A N . I say, you talk about how injurious a price
level is, an erratic price level, on the. little mail. What about the price
level on interest; isn't that destructive to the little man where it goes
Mr. M A R T I N . Again, I say I would like to have, and you would, too,
as low interest rates as we can have.
Chairman P A T M A N . Yes, sir.
Mr. M A R T I N . But something has to give at given points, and I think
that using the credit mechanism as one of the governors on the flywheel
of the economy, as I frequently express it, is about the most satisfactory way consonant with free institutions that we have so far devised
to handle this money problem, that is a very real one, which Senator
O'Mahoney so appropriately raises.
Chairman P A T M A N . The way it looks like, the people that you are
asking to give are the small-business people, the schools, the municipalities, the home builders and you state here that there is only so
much—in effect you say that—so much labor available and so much
of materials available, and if you make credit easier, it will not cause
any more housing; it will just take away from somebody who is now
getting it.
Now, this morning you said something about administered prices
and you did not conclude. I wonder if you would mind finishing
your statement on that.
Mr. M A R T I N . I do not really recall what I said this morning.
Chairman P A T M A N . All rignt, let me ask you anew: Do you recognize administered prices ?
Mr. M A R T I N . Well, I recognize the fact that in certain inrhi«.
Chairman P A T M A N . Prices arefixed?
Mr. M A R T I N , (continuing) . Prices are fixed.
Chairman P A T M A N . Administered?
Mr. M A R T I N . Y O U have to determine prices.
Chairman P A T M A N . All right.
Now, what percent of the prices are administered prices?
Mr. M A R T I N . That I don't know.
Chairman P A T M A N , Well, they are in the big industries, are they
not ?
Mr. M A R T I N . Well, they tend to be there, because the demand and
supply factors can be gaged a little bit better there.
Chairman P A T M A N . Well, they are, as a matter of fact, they are in
the big industries.
All right. Now, the big people are getting these loans, so the same
people who are benefited under the high interest rate, because they
can get loans and other people cannot, they already have charge of the
pricing, the administered prices.



195 5 - 5 6


Mr. M A R T I N . Let me make
Chairman P A T M A N . What evidence have you—you state that if you
made it possible for all the little people to scramble for it, it would
just mean that they would have to pay more to build a schoolhouse
and more to build houses, and you wouldn't get any more done, but
what proof do you have that they are not going to raise these administered prices anyway? They have a right to do that anyway,
I mean they have that power.
Mr. M A R T I N . Let me make a comment about this little man that is
being denied the credit. I don't know whether he is being discriminated against. I don't honestly know. There may be some of it because this is a free society, and some people tend to take the easier
Bint we have tried in our administration of credit—we don't control
the free enterprise system, but we have tried to point out that we want
credits judged on as sound a basis as possible, and there are many
banks that tell us they actually favor the little man as distinct from
the big man.
But one of the important things about a big man is financial, one
of the reasons you try to get bigger is that you havefinancialstatus
that the little man doesn't have.
I frequently pointed out that between two prize fighters, a good
big man will usually beat a good little man, because that is just muscle,
and most little men are trying to get bigger.
Chairman P A T M A N . H O W ao you compare that with the big fellows
getting tHe money ?
Mr.MARTIN. I don't know whether the big fellows do and the little
fellows don't.
The point I am making is, we are trying to gather data on that, but
right now the assumption is made that I am not absolutely sure is
correct, that all the big men are getting the money.
NQW, this is borrowed money, mind you.
Chairman P A T M A N . I know, but they are on the board of directors.
Mr. M A R T I N . It doesn't help a man to borrow money and get into
Chairman P A T M A N . They can lend it to themselves, in effect.
Chairman P A T M A N . I want to ask you a few questions. I hope it
will not take too much time.
You mentioned about the wholesale prices there a while ago. I
wish you would get that chart again.
It has been my argument, Mr. Martin, that the darkest day for
the farmers in the history of this Nation was March 4, 1951, when
the Federal Reserve Board seceded from the executive, declared their
independence, and said they were going to go their own way and let
interest rates go up.
That is, in effect, what was said. And from that day on, interest
rates commenced going up. Look at that chart, and I will venture
to say on farm prices that you will find from March 4, 1951, every
year since that time the line is consistently downward. Is that not
right ? From March 4,1951—I know it is right, because I have seen
many of your charts.
You see, the farmer pays both ways. You know, there are people
who can protect themselves on interest rates as it goes up—say there


MONETARY POLICY I 1 9 5 5 - 5 6 130

are 10 middlemen between the farmer and consumer, each one of these
middlemen will take into account increased interest, and they will take
it out of the price of the farmer's product. This accounts in part
for the fall in the farmer's share of the consumer's dollar spent on
farm products.
Moreover, higher interest rates are reflected in the price of farm
machinery, from the cost of the ore, the barges on the Great Lakes,
aiid in the st^el mills and fabricating plants, in transportation. It
all comes right-down to the farmer, every one of them lrnve added the
higher cost of interest on every transaction.
Therefore, the farmer has paid it both ways, because he is the only
unprotected person.
. Mr. MARTIN. Let. me just introduce, into the record here that in the
last year, farm prices have gone up 4 percent. During this period, the
demand for money has exceeded the supply, and interest rates have
been rising.
Now, the farm problem is not one that I am an expert on, but it is
essentially a matter of supply and demand.
I might ask, if you would permit it, to have Governor Shepardson,
who has had experience in farming, to make some comments on the
farm problem.
Chairman P A T M A N . I don't want to get it off on that, angle right now
[laughter], not that I wouldn't be interested, but I know what your
story is. We have some good fox dogs down South, and when we
have a good fox dog and we are on a trail and that fox dog takes out
after a cottontail rabbit, why, we don't consider him a good fox dog
any more. He is a cottontail rabbit dog. So I do not want to go off
at $in angle, and the main thing is about high interest rates, and I do
hot want to get off on the farm program, not that I am not interested
in it, but because it does not dovetail in with what we are doing here
now, and we have a lot of things to cover.
If we have time, I will be very glad to do it. If he wants to file a
statement, we will be delighted to have it in the record, Mr. Martin.
I want to get back to Sir. Rouse over here, the manager of that
greatest account on earth..
What is normally the aggregate of business done by your office in the
course of a month, Mr. Rouse ?
Mr. ROUSE. I haven't those figures in mind, Mr. Patman, I am sorry.
Chairman PATMAN. Well, would you say a hundred million dollars?
Mr. ROUSE. Probably in excess of that.
Chairman P A T M A N . T W O billion dollars ?
Mr. ROUSE. I wouldn't know.
Chairman P A T M A N . In the course of a year, what would it run ?
Mr. ROUSE. I can't give you afigure,I AM sorry.
Chairman PATMAN. Y O U couldn't even estimate ?
Mr. ROUSE. It is a large figure.
Chairman PATMAN. You couldn't even estimate ?
Mr. ROUSE. N O ; I would rather not, because in some years it has
been very little, and some years it has been a lot.
Chairman PATMAN. Well, last year, for instance ?
Mr. ROUSE. You have this matter of purchases and sales, in some
cases the purchases might run 2 to 1 to sales because of redemptions of
securities at maturity.



195 5 - 5 6


Chairman P A T M A N . I know, Mr. Rouse. I did not expect any involved answer on this. I did not think it demanded any. But you
ought to have an idea within $5 billion of how much business you did
last year.
Mr. ROUSE. Perhaps—well, just say it was noticeably less than $5
Chairman P A T M A N . Less than $5 billion.
How much was it this year ?
Mr. ROUSE. I haven't afigurein mind at all.
Chairman P A T M A N . Y O U do not know. But everything is done in
the open market; in other words
Mr. ROUSE. I will say this: that between runoffs sales and purchases, the amount of securities in the account now is almost the same
as it was thefirstof the year.
Chairman P A T M A N . About the same as it was the first of the year.
All right.
Now then, in your selection, you were selected by the Federal Reserve
Bank of New York, as you stated.
Now, these directors that run the Federal Reserve bank in New York
are just like all of the other 11 banks, are exactly alike for the New
York bank, except the New York bank lias the account, the open
market account, and you run it for that bank.
All right. These 9 directors who have charge of that bank, they
are selected, are they not, 3 class A, they are selected by the big banks,
1 of them; 1 of them by the medium-sized bank; 1 of them by the small
bank, is that right ?
Mr. ROUSE. Three bankers, that is correct.
Chairman P A T M A N . Three banks. That is, three of them, that is
class A.
Class B, they are, of course, bankers ?
Mr. ROUSE. NO. Class A are bankers. Class B are
Chairman P A T M A N . They are bankers.
Mr. ROUSE. Class B are not bankers.
Chairman P A T M A N . What is that ?
Mr. ROUSE. Class B are not bankers.
Chairman P A T M A N . Not bankers ?
M r . ROUSE.


Chairman P A T M A N . They hold an interest in banks. You mean
to say they cannot own an interest in banks ?
Mr. ROUSE. They may.
Chairman P A T M A N . Why, of course they can.
Mr. H A Y E S . May I inject a word ?
Chairman P A T M A N . And the majority of them do have an interest
in banks.
Mr. H A Y E S . I would like to answer, in the New York bank it just
happens that no one of our B directors owns any bank stock.
Chairman P A T M A N . The banks selected them, did they not ?
Mr. H A Y E S . The banks selected them.
Chairman P A T M A N . The banks selected every one of the class B's,
that is, three of them. All right.
And the bankers evidently thought they were sympathetic, or they
would not have selected them.
Now then, the class C, that is the Chairman of the Board, used
to be—and I guess he is—a Federal Reserve agent, and two more.



POLICY I 1 9 5 5 - 5 6 132

Do you ever bring them in to your conferences here in Washington,
Mr. Martin?
Mr. MARTIN. Yes; we justfinisheda conference.
Chairman P A T M A N . About the class C directors.
Mr. MARTIN. With the Chairman and Deputy Chairman* two of
the class C directors. We did not have all three of the class C.
Chairman PATMAN. But you recognize the class C directors?
Mr. MARTIN. Yes; we do. We do; indeed, we had a very
Chairman P A T M A N . And this bank is set up just like the other
banks. The six selected by the banks have two-thirds of the directors
who run that bank, don't they, Mr. Rouse ?
Mr. ROUSE. Yes, sir; two-thirds of the directors are elected by the
Chairman P A T M A N . Thev select them ?
Mr. ROUSE. Selected by tne banks.
Chairman P A T M A N . Therefore, the private bankers select the officers and agents of the bank, including yourself who run this biggest
business on earth, using the Government's credit frrtm the Bureau
of Engraving and Printing, and trading it for United States Government bonds.
Mr. Martin, don't you think that the Federal Reserve System should
be divorced—while you are talking about divorcing yourself from the
executive—don't you think you should divorce yourself from the
private banks?
Mr. MARTIN. Wfell, do you think that the Department of Agriculture
ought to be divorced from the farmers ?
Chairman PATMAN. Well, that is not exactly the same question.
Mr. MARTIN. Well, I thinkChairman P A T M A N . YOU see, no——
Mr. MARTIN. Same elements in it.
Chairman PATMAN. They don't use cotton and wheat as a medium
of exchange.
Mr. MARTIN. Well
Chairman P A T M A N . If they used the cotton and wheat and pork as
a medium of exchange, why your question would be a valid one.
But here we are talking about the creation, issuance, and distribution
of money, that affects everybody. It does not take a banker
Mr. MARTIN. We have special supervisory laws with respect to banks
that we do not have for a ^business—air businesses. And I think they
should be carefully supervised, but to say that the bankers of the
United States control and dominate the System is not, in my judgment,
correct, but that we need the bankers of the United States who are
dealing every day in money and credit—if we are going to deal in
money and credit at all, it seems to me obvious on the face of it.
Chairman P A T M A N . Well, it is all right to get their views and
suggestions and judgment, but it would be just as reasonable to me,
like Woodrow Wilson said, to have the railroad owners run the Interstate Commerce Commission, and fix freight rates, as to let the bankers
be on these policymaking boards and fix interest rates.
Now, I do not impugn the motive of a single banker—not a one—
they are good, patriotic American citizens. I do not have any grievance against any of them. I do not distrust them. I do not question
their honor or their integrity.
But I am talking about from a self-interest standpoint.

60 MONETARY POLICY I 1 9 5 5 - 5 6


Here is the Federal Reserve Board, composed of 7 members—you
are surrounded by 24 bankers to do your job. You have 12 on the
Advisory Committee, selected by the private bankers who have the
power of going in there and seeing what you are doing, ask you questions, and why you want to do it this way or that way, representing
the private bankers.
Then you have 12 presidents of Federal Reserve banks selected by
the banks.
So this Board of 7 is surrounded by 24 bankers, to do their job.
And I am just hoping in divorcing yourself from the Executive,
you would also make a recommendation to Congress about divorcing
yourself from the private banks.
Mr. HAYES. Could I make one observation ?
Chairman P A T M A N . Yes, Mr. Hayes.
Mr. HAYES. I would like to take exception to the statement that the
presidents are selected by the private bankers. You have traced this
chain of authority through the directors.
Chairman P A T M A N . Wait just a minute. Maybe I made a misstatement. Selected by—representatives selected by the private
Mr. H A Y E S . I misunderstood you then.
Chairman P A T M A N . That is the only statement I intended to make
and did make.
Mr. H A Y E S . I did want to point out, too, that the presidents, after
being initially selected by the 9 directors, who include 3 directors
chosen by the Board of Governors, must still be approved by the
Board of Governors; that is, the appointment both of the president
and of the first vice president cannot become effective until approval
by the Board of Governors.
Chairman P A T M A N . That is right.
Well, of course, they would pick out somebody like yourself, a good
man, that they could not turn down. I am not questioning the motives
or impugning their motives, of anybody in connection with this.
Mr. Martin, interest rates have gone up; discount rates 200 percent
since 1947. Did you know that in discount rates
Mr. MARTIN. Well
Chairman P A T M A N . The private acceptance, 9 0 days, have gone
up 2 6 6 . 7 percent. The prime commercial paper for 6 months has gone
up 2 5 2 . 4 percent since 1 9 4 7 . And the 3 months' bills have gone up
4 3 4 . 3 percent.
The 9 to 12 months' bills have gone up 267 percent, in 3 to 5 years,
issued, I assume in notes, 172.7 percent.
I do not know of anything in the commercial or business world
that has gone up any more than that, do you?
Mr. M A R T I N . Disposable personal income has also had a spectacular
Chairman P A T M A N . Not that much.
Mr. M A R T I N . These are comparative figures. But disposable personal income, as I pointed out in the statement this morning, is up,
I think, $21 billion over a year ago.
And tight money in the sense we are talking about it today, in one
sense it is almost loose money because money has been flowing so freely, in so many directions, it has not seemed to have had any retarding



MONETARY POLICY I 1 9 5 5 - 5 6 134

effect on disposable personal income and we have had a relatively
stable price level.
I have been sorry that it has gotten out of hand recently.
Chairman PATMAN. Relative, but how, Mr. Martin, did you get
that price level? How did you get it? Industrial prices, as you
know, have gone up. They have consistently gone up.
Now then, that price level has gone up. If the farm prices had
gone up, too—but farm prices were depressed, just enough to make
the average an even price level—if it had not been taken out of the
hide of the farmer, this price level would have gone way up.
You will have to admit that if farm prices had not gone down as
much as they have, this price level would not have remained stable,
would it ?
Mr. MARTIN. That is true. Mr. Patman, from about the middle
of 1955, up to that time, we had overall reasonably stable prices.
Now, I have regretted—and that is one of the reasons we have
been so alarmed about the current trend and have wanted to do what
little we can through money and credit policy to alert the country
to the danger of price increases which have been showing a persistent
.tendency to move upwards over the last 6 or 7 months.
Chairman P A T M A N . H O W about the increase in interest rates? Interest is part of the cost of doing business. It is a price increase.
Mr. MARTIN. The role of interest in the economy is that it is one
of the prices, but, as I have pointed out, to satisfy all of the demands
for money, at a time of intensive utilization of resources, can do nothing but add to the price of money.
And one of the restraining influences of interest rates is that interest rates tend to reduce spending and to give an incentive to savings.
That has been one of the few equilibrating forces that we have ever
developed on a strictly impersonal basis in the economy.
Chairman P A T M A N . All right. Now then, you have known Professor Bogan, don't you, you know of him ?
Mr. MARTIN. I have high regard for Professor Bogan.
Chairman PATMAN. I have before me a statement he made about
the financial situation, about the savings lag, in the face of high
interest rates, in which he says, right on that point—I am quoting:
As has often been the case, the volume of personal savings is not proving
responsive to higher interest rates. The volume of savings, of individual savings, is determined in the main by established habit patterns, rather than the
rate of return.

In other words, savers do not act quickly that way. It is some
sort of a pattern. And I do not see how anybody can safely contract
or provide for the future at all when they do not know how low these
bonds are going to get. They do not know, but what they are going
as low as the British bonds that are now below 60—3y2 percent bonds.
They do not know how high this interest rate is going.
Is there any limit beyond which you will not permit these bonds
to sink, Mr. Martin?
As a representative of the Open Market Committee, charged by
Congress—and I am glad you brought that up—every statement you
issued could properly be worded, "The Federal Reserve Board has
taken the following action for Congress," because every action you
take you take it for Congress, don't you ?


POLICY I 1 9 5 5 - 5 6


Mr. M A R T I N . We are the agent of the Congress.
Chairman P A T M A N . That is right. You are the agent of the Congress. And every action you take, you take it for Congress. And
whether Members of Congress recognize it or not, each and every one
is responsible for your action. Each and every one of them.
Mr. M A R T I N . Exactly, and on this matter of contract there is nothing more destructive of contractual relationships than a dollar that
people do not have confidence in.
Chairman P A T M A N . H O W can they have confidence in the bonds
and the interest rate like it is—how low will you let these bonds go?
In other words, is there a limit beyond which you will not permit
these bonds to descend ?
Mr. M A R T I N . I have not place, no limits of any sort on this matter.
But I think we have to recognize that there is an equilibrating force
at work.
I have here a table which shows that net personal saving is tending
to increase, and when the gap between savings and investment is gradually filled, as it will be in due course, this equilibrating force will
come into play again. And the business process as we have known
it, has made it possible for us on a general basis to attain a definitely
higher standard of living.
Now, the future of this country is unlimited. Our greatest economic
problem is this: if we travel too fast we are going to get into a lot of
Chairman P A T M A N . Y O U do not depend on savings entirely, do you,
Mr. Martin—don't you depend on created money ?
Mr. M A R T I N . If we create money—when the demand for money—
when people are trying not only to spend more money than they have,
but to buy more goods in the aggregate than there are—if we create
money at that juncture in the economy, then all we do is add upward
pressures on prices.
Chairman P A T M A N . N O W , about helping savers, all of which I am
for—I want to help the savers—but do you believe that it is in the
interest of the country to have an interest rate so high for savers
that they will be satisfied with the return they get in the form of interest from their savings or is it in the interest of the country to have the
interest rate low so that they will be looking around, let their minds
be feeding around and finding opportunities to invest money and go
into private enterprise, and let it become a part of venture capital and
make more money.
Which is better for the people, to have an interest rate that will
induce people just to be complacent and say, "I am satisfied"
Mr. M A R T I N . I want to restate
Chairman P A T M A N . Or is it best to have a rate that they will want
to improve on by investment into the private enterprise system.
Mr. M A R T I N . I want to restate my position on interest rates. I do
not favor high interest rates. I want interest rates as low as we can
have them without producing inflationary consequences because I
believe you will have a greater formation of capital that way.
But if the alternative is to have inflationary pressures, I believe you
do a great deal more damage to this little man that we are talking about
than by any other single thing in the society.
Chairman P A T M A N . Y O U still are fighting inflation, but you cannot
tell us where it is.


MONETARY POLICY I 1 9 5 5 - 5 6 136

Mr. MARTIN. I always do everything within my power to resist
Chairman P A T M A N . I don't blame you at all. But remember this,
that you have plenty of ways to resist inflation, but you have not one
way to resist deflation.
Mr. MARTIN. Let me just make
Chairman P A T M A N . That is a correct statement, isn't it ?
Mr. MARTIN. A statement that I made this morning. I do not
believe that a money and credit policy can make business, in itself. It
produces a climate in which business can perhaps thrive and flourish.
But when we talk about this business of inducing or producing a
depression or a recession, when money is available, I say that those
people have more faith in the power of money policy than I have, and
less faith in the strength and vitality of the economy than I have.
I have complete confidence that over a long period of time the
American economy is strong enough to survive even a few mistakes
of the money powers, because it is the ingenuity and the workmanship and the sMll and the resources and the vitality of America that
we are discussing now that cannot be destroyed by modest adjustments
from time to time.
Mr. P A T M A N . Mr. Martin, talking about this school situation, and
the housing situation, I want to ask you about two things. Under
the law the Federal Reserve Open Market Committee can buy Government bonds. And the Federal Reserve Open Market Committee can
buy any bonds that are guaranteed by the United States Government,
whether housing bonds, school bonds, or anything else; can't they?
Mr. MARTIN. Well, we can. We haven't as a rule.
Chairman PATMAN. Y O U have the power, but you have not done it;
have you ?
Mr. MARTIN. We have not done it; that is right.
Chairman P A T M A N . Why don't you arrange to do it? Now these
schools are suffering. Mr. Levitt up here at New York gave an illustration where one school district is paying an increased rate of interest
that amounts to as much money—the increase now—that would build
an additional schoolhouse that would house 900 students, just in 1
school district.
That is an awful penalty for those people to pay on these long-time
bonds that are tax exempt.
And you have the power to stabilize that market. If it takes a
congressional act, you can get it, if you will ask for it.
The same way on housing. And a lot of these mortgages are
guaranteed. I don't know whether they come within the regulations,
exactly, or not, but if they do not, if you would ask for the power you
would get it from Congress.
You would not have the least trouble getting it and you could solve
both the housing problem and the school problem through the Federal
Reserve banks.
So I suggest to you, you start working on that, Mr. Martin, and
give a little consideration to it. Will you do that ?
Mr. MARTIN. Well, I want to associate the entire Board again with
an interest in education and
Chairman P A T M A N . All right, act.
Mr. MARTIN. The welfare of the country.
Chairman P A T M A N . And the school system in particular.


POLICY I 1 9 5 5 - 5 6


Mr. M A R T I N . And the school system in particular.
Chairman P A T M A N . Actions speak louder than words. And I have
shown you how to do it.
Mr. M A R T I N . Let me also say as to the people that are educated in
those schools, the boys and girls of tomorrow—that if the savings,
the saving and investment fabric which has made this country strong,
are destroyed by the process of building school buildings for them at
rates that have been forced upon an unwilling market by an unending
stream of fiat-created money—that they will be very sorry that something has gone out of American life.
Chairman P A T M A N . Y O U are in effect saying, Mr. Martin, whether
you intend to or not—and again I am not impugning your motives or
questioning your motives at all, but you are in effect saying that it is
better for the economy that this school district in New York State pay
a million and a half dollars more in interest than it would have had to
pay 2 years ago—it is better for them to do that—than to spend that
money to house, to have a place to educate 922 additional students.
And that thing can be multiplied by thousands of school districts
all over the land.
In other words, what you are doing is in opposition to our educational program, Mr. Martin. You are stiffling education in this
Mr. M A R T I N . Not in the slightest. You and I are in complete agreement on our objectives. We differ on the methods we use to get there.
Chairman P A T M A N . N O W then, let us take industrial loans. You
have a right under the law to make small-business loans, don't you ?
Mr. M A R T I N . That is right, sir.
Chairman P A T M A N . H O W many have you made the last year ?
Mr. M A R T I N . I defer to Mr. Erickson. I do not know that we have
made any.
Mr. ERICKSON. We have made some.
Chairman P A T M A N . Ten million or one million ?
M r . ERICKSON. $ 3 0 0 , 0 0 0 .
Chairman P A T M A N . H O W

much money do you have for that
purpose ?
Mr. ERICKSON. There is no special amount.
Chairman P A T M A N . Isn't it $ 1 3 4 million ?
Mr. M A R T I N . About $ 1 3 4 million.
Chairman P A T M A N . Why do you say there is no specified amount ?
Mr. M A R T I N . We have not allocated any specific amount.
Chairman P A T M A N . You do not have to allocate it. It is there.
Mr. M A R T I N . That is correct.
Chairman P A T M A N . Congress put it there, specified, earmarked it.
Mr. M A R T I N . That is correct.
Chairman P A T M A N . Isn't it a fact that you refused to use it, because
you said the RFC was making those loans, and the RFC could do
a better job? The RFC has terminated. There is no more RFC.
There is no satisfactory agency making Small Business Administration loans.
Why don't you get back in there and help these small-business people? That $ 3 0 0 , 0 0 0 is just a drop in the bucket. It does not mean
anything, $ 3 0 0 , 0 0 0 a year. I know you are not bragging about it.
Mr. ERICKSON. That is the only request we have had.
Chairman P A T M A N . It is?


MONETARY POLICY I 1 9 5 5 - 5 6 138

Mr. ERICKSON. Yes, sir; the only request.
Chairman P A T M A N . Your Public Relations Department has not
been working.
Mr. ERICKSON. In answer to that we had floods in Connecticut and
Massachusetts, last year, and we sent around to all of the banks notice
of 13-B and did not get a single request.
Chairman P A T M A N . That goes to the public relations ability of
the people that you have. You have unlimited funds, because if you
need more money, take more greenbacks out of the Bureau of Engraving and Printing, buy more bonds and keep the interest and spend It
for that purpose. That is the way you can do it. That is the system.
All right.
So you can have plenty of public relations men to spread the word.
And I hope you get busy. If you need more money, I believe Congress would give it to you out of your funds because you have plenty
of funds down there to be used for that purpose.
Senator O ' M A H O N E Y . I want to call your attention, Mr. Martin, to
this. I know you are familiar with this publication, the Economic
On the first page there appears at the bottom of the page a table
or graph, indicating the variations in Government spending, Federal,
State, and local.
There is, also, a table showing business spending, and consumer
spending. This is all intended to show up the Nation's income, expenditure and savings.
In this latter—in the table I first spoke of, at the bottom of the
page—it appears that Government spending in 1950 was slightly
below $50 billion. It increased to a peak of about, oh, maybe $60
billion, in 1951. It leveled off, though gradually increasing, until
in 1953 it would figure about $75 billion. And then it began to fall
off again, until 1955, when it rose above $75 billion, where it stayed
during 1956.
And now with pronouncements that we are receiving because of
the increased burdens that the Government will have to face for
national defense, and for economic aid to foreign countries, the
lowest estimate of increased spending for the next budget year that
I have heard is about $3 billion.
There is very little possibility, apparently, of cutting down domestic
Don't you agree with me that this tremendous amount of Government spending makes an altogether new problem from that which
existed at the time the Federal Reserve Board was created ?
Mr. MARTIN. I think in degrees it is different; yes, sir.
Senator O ' M A H O N E Y . Well, isn't it actually utterly different in
substance as well as in degree ? Government expenditures, so far as
defense is concerned, is something vastly greater than it ever was
before. Until we became involved in World War II, why, we didn't
know what the cost of defense would be.
I was chairman of the Defense Subcommittee on Expenditures, and
I remember when the cost of an improved airplane, toward the end of
the war, would be about a million and a half dollars.
Now, these new jet airplanes that are being built for civilian traffic
cost about $8 million apiece.


POLICY I 1 9 5 5 - 5 6


The expenditures that we have to make for the Army, for the Navy,
and for the Air Force, are incomparably greater than ever before
imagined and they are increasing steadily, particularly in the field
of guided missiles, and the supernuclear weapons.
This utterly changes our situation. Don't you agree?
Mr. M A R T I N . Well, I don't think that it changes it in the sense of
the desirability of a stable dollar. I think that it certainly is a very
complex and difficult problem; but if you compare all of these relationships, the gross national product, the growth of the country, the
size of the debt, you still have
Senator O ' M A H O N E Y . When Government expenditures increase, do
they not have a necessary effect upon the dollar?
Mr. M A R T I N . Well, unless they are
Senator O ' M A H O N E Y . You cannot avoid it, can you?
Mr. M A R T I N . Unless they are properly financed. We have a financing problem and we also have a problem of
Senator O ' M A H O N E Y . To me it seems like putting on a new tire,
when I was a boy. When you got it on the rim on one side it wTas
bulging out on the other, and it was a day's job sometimes to get that
tire on.
You gentlemen are old enough to have experienced that, are you
M r . MARTIN. Y e s .
Senator O ' M A H O N E Y .

That is what we are dealing with now when
we are trying to fit this Governmentfinanceto the demands put upon
it, is it not?
Mr. M A R T I N . We have a very difficult problem that
Senator O ' M A H O N E Y . And when the national debt exceeds the debt
limit that Congress has placed upon it, does it not throw out of balance
completely the desire of Government leaders to talk about a balanced
budget ? They have to change their course of action almost every 6
months and they have done it, have they not ?
Mr. M A R T I N . They have a very difficult problem, indeed, sir.
Senator O ' M A H O N E Y . Well now, I will just say this to you: I believe
very definitely and fundamentally that if we are going to win the
cold war with Russia we had better concentrate all of your fiscal
policies to see that the social and human goals of the masses of the
people are protected from depression of any kind.
We would much rather go out of balance somewhere else than out
of balance in improving the standard of living and the culture of the
masses of the people who make up this Nation of ours. They are the
very foundation of it.
That is why I respectfully will urge upon the Federal Reserve
Board to forget the theories and the sound principles, even, which
may have been sound when we did not have this great international
problem, and place first of all in our consideration the maintenance
of a sound people rather than a sound dollar.
Mr. M A R T I N . Let me say, Senator, that I agree with you completely.
And I frequently say the dollar should be our servant and not our
Senator O ' M A H O N E Y . Right.
Mr. M A R T I N . But we should have—and we will have this strength
to stand up in the free world only as we are strong industrially and



POLICY I 1 9 5 5 - 5 6 140

economically, and as our standard of living is growing on a sound
basis, and we have sustainable jobs, which is our problem today.
The actions which the Federal Reserve Board have been taking in
accord with the forces in the money market have been designed to
prevent deflation, with the understanding that preceding inflation will
lead to a more drastic deflation than perhaps we could afford to have.
And therefore, an ounce of prevention is worth a pound of cure.
There are many, many facets to that, and it is a very complex problem. And no one on this Board thinks that we have all of the answers.
Senator O ' M A H O N E Y . Mr. Chairman, I want to say, because I must
go, that I feel that the Federal Reserve Board should be complimented for the frankness it has employed in answering the questions
which we have propounded to its members here.
I feel that they have come here with a completely sincere desire to
reveal all of the factors that can be revealed, and by that I mean can
be revealed only because of the complexity in revealing these things.
You are telling whatever we want to know. And if we were
smarter men maybe we could ask smarter questions. But I think
maybe you would have some smarter answers, too. I feel that you
are doing the best you can. And I thank you for what you have presented here today so far as I am concerned.
I still feel, however, that the problem is not settled, and that members of the Board must keep an open ear to all factors of the economy,
before they reach a sound solution in the next Congress, which I
hope we shall, as to what shall be done.
Of course, I thank the chairman for the magnificent way in which
he has been handling this matter.
I beg to be excused now. I have some constituents here.
Chairman P A T M A N . Thank you, sir. You have made a great contribution to our hearing.
Senator O ' M A H O N E Y . I have some of my constituents here—young
students—to see the Federal Reserve Board.
Chairman P A T M A N . The Open Market Committee.
Senator O ' M A H O N E Y . Thank you very much.
Chairman P A T M A N . Mr. Shepardson, I feel like I ought to ask if
you want to reply to what was said here about the farm situation in
view of Chairman Martin's statement. If you would like to comment
on anything that has been said, you have the opportunity now to do so.
Mr. SHEPARDSON. I might say this just briefly.
It is true that the farm prices declined from 1951, until the recent
upturn this year. And that all too slight, I admit.
But that was not a result of availability of money or cost of money.
The farmers of this country expanded facilities tremendously to meet
the war and postwar demands when other countries were out of
Chairman P A T M A N . Mr. Shepardson, would you take that chart
there and look at it, and answer this question: if it is a fact that what
the farmers received was going up, until March 4, 1951, and every
year since that time it has gone down.
Mr. SHEPARDSON. I think it hit a peak in 1947, if I remember right;
then it dropped.
Chairman P A T M A N . I want to go to March 4 , 1 9 5 1 .

60 MONETARY POLICY I 1 9 5 5 - 5 6


Mr. SHEPARDSON. It dropped from 1 9 4 7 to 1 9 5 1 , came back up in
1951 on account of Korea, not on account of money—on account of
another demand for food, and agricultural products.
And as that demand fell off, agriculture is suffering today primarily
from the burdens of surpluses that are hanging over the market.
The one thing that has been a partial offset, that has saved us from
the decline that we had back in the thirties, was the fact that the rest
of the economy has been moving at a high level.
There has been a high consumer purchasing power that has softened
what might have been a much worse drop in prices than there has been.
But the decline in farm prices is strictly a relationship of supply
against a declining demand—the war and the immediate postwar and
Korean demand that we had for farm commodities both here and
Mr. P A T M A N . Thank you very kindly, sir.
Now, Mr. Martin, in furtherance of that suggestion I made that the
Federal Reserve could support these bonds, may I suggest to you
that since the RFC has gone, and you have the authority, and if you
need any more authority I am sure that Congress would grant it to
you—that the Federal Reserve banks could do what the RFC used
to do, buy up all of these school bonds and road bonds and city bonds,
and State bonds where they could not get a market for them, and where
they could not get a reasonable price.
The RFC made millions of dollars out of it, didn't lose a penny,
and sold them out to the market evenly and everybody profited by it.
Now, the gentlemen in these Reserve banks, they do not have too
much to do now since the central bank was organized.
You took most of their powers away from them. And you could
give them something to do on that, on these municipal bonds and school
bonds, in particular, and these small business loans, these industrial
And I can remind you, too, that the first investment that was made
as an open market transaction was the Federal Reserve Bank of New
York buying $5 million worth of securities from New York City. Do
you remember that ?
M r . ROUSE. NO.
Chairman PATMAN. Or reading about it ?
M r . ROUSE. NO.
Chairman P A T M A N . YOU see, the bankers, they

were almost having
running fits because they were going in the hole all of the time on the
Federal Reserve, and they could not get the money from the member
banks, and it looked like they were going to have to go to Congress and
ask for an appropriation.
The bankers are pretty smart fellows. They began to think about
it, "Now, what can we do?"
And some banker said, "Well now, we have the power to create
money. Let's create money and buy some bonds. And use the interest on the bonds."
And that is exactly what they did on that first purchase of $5 million of securities from the city of New York, not Government
And so I humbly suggest that to you, Mr. Martin.
And I join Senator O'Mahoney in thanking all of you members—
members of the Open Market Committee, which includes, of course,


MONETARY POLICY I 1 9 5 5 - 5 6 142

the Federal Reserve Board—for your frankness and for being so
forthright in answering all of the questions.
Mr. Martin always answered all of the questions, as all of the rest of
you always do the same thing. Every question that is asked you try
to give us an honest answer and we appreciate that.
I know it is nearly the time that some of you wanted to go. We do
not want to hold you too long.
But, Mr. Martin, if we submit to you any questions before we close
this record, I assume you- would be willing to answer those questions
and let it appear in the record as part of the hearings.
Mr. MARTIN. Be very glad to.
Chairman P A T M A N . And the other members would do the same
Mr. MARTIN. T O the best of our ability.
Chairman PATMAN. Mr. Hayes, the hour is getting late; I wonder
if you could run rapidly through your statement. We expect to have
some more hearings, later. You know we have just scratched the surface of this thing and can go into questioning at that time.
Mr. HAYES. I would like to direct my comments today principally
to the method of operation of the Federal Open Market Committee
and the role of the Federal Reserve Bank of New York in executing
the Committee's instructions. As a practicing central banker of less
than 5 months' standing, I certainly make no claim to expertness in
these matters, but it occurs to me that your committee might like to
have the views of a newcomer like myself, taking my first look at the
way in which this very vital function of national monetary and credit
control is handled.
It goes without saying that the Federal Reserve Bank of New York,
of which I have the privilege of being the chief executive officer, undertakes a great variety of important activities, most of which are related
in some degree to the operations of the Federal Open Market Committee. I am thinking of such things as handling the reserve and borrowing accounts of the member banks, the provision of currency, the
processing and crediting of checks received for collection, the expediting of wire transfers of deposit balances among banks and of Government securities among investors, the calling and disbursement of funds
for the United States Treasury, the handling of transactions for foreign central bank and government accounts representing settlement of
the United States balance of payments with other countries, and the
supervision of member banks. These activities, most of which we
undertake in common with the 11 other Federal Reserve Banks, have
a great deal to do with the System's major responsibility of contributing to an efficient and adequate money and credit mechanism for
the Nation. But they are sometimes referred to as "defensive" or
"passive" operations, in contrast with the three "dynamic" or "active"
instruments—reserve requirements, discount rates, and open market
operations—which are employed in our efforts to minimize both inflation and deflation and to facilitate sturdy economic growth.
To discuss the Federal Open Market Committee's activities without
referring to all three of these instruments would be quite misleading.
For while it is true that the Board of Governors alone has the responsibility for determining reserve requirements, and while discount rates
are established by the individual Reserve banks—subject to review
and determination by the Board of Governors—in practice the Fed-

60 MONETARY POLICY I 1 9 5 5 - 5 6


eral Open Market Committee has become the principal forum in which
these two instruments, as well as that of open market operations, are
discussed and weighed by representatives of the entire System in arriving at a system wide consensus as to what should be done at any
given time in the field of general credit control. The emergence of the
Federal Open Market Committee as the meeting place where representatives of all parts of the System's complex structure can be brought
together, for joint discussion of interrelated responsibilities, is one
of the most interesting, and also probably one of the most constructive
developments in Federal Reserve history.
Meetings of the Federal Open Market Committee are generally
held every 2 or 3 weeks in Washington, so that I have been privileged
to attend some 6 or 7 times since I became associated with the New
York Reserve Bank. As you know, the Committee consists of 12
members, including the 7 members of the Board of Governors and 5
of the Reserve bank presidents. The president of the New York
Reserve Bank is continuously a member, while the other four presidents are appointed in rotation. The 12 members of the Committee,
which was established by statute, sit and reach decisions as responsible
individuals, not as representatives of any constituency. Each must
find the answer, in the light of all the facts and his own conscience,
to the question: "What policy of credit control would be the best policy
under present conditions for the economy of the United States?"
Naturally each member brings to the Committee the full benefit of any
special information available to him, including-—in the case of the
Reserve bank presidents—information concerning economic conditions in the various districts and the views concerning them held by
businessmen and others; but each member also gives careful consideration to nationwide conditions and makes his final judgment on that
The 7 presidents who are not, at the time, members of the Federal
Open Market Committee nevertheless attend these meetings regularly by invitation and participate in the discussions on the same basis
as the 12 Committee members, with the sole exception that they have
no vote on matters requiring a vote. Thus the Committee obtains a
firsthand report on conditions in each of the 12 Federal Reserve districts. During the periods between meetings, the 7 Governors and
the 12 Presidents are of course pursuing their various other duties,
but they are also preparing for the coming deliberations of the Federal
Open Market Committee by observing the results of policies established at previous meetings, gathering new economic data, and continually reviewing their judgments of past decisions and current
events. In New York, for example, our senior officers gather at least
once each week to review important developments, and we have another
special meeting of officers a few days in advance of each Federal
Open Market Committee meeting for the special purpose of discussing the current state of business and credit conditions, Treasury
finance, and related matters, and what type of credit policy seems
best suited to this state of affairs.
At each Federal Open Market Committee meeting the procedure
is to have the Manager of the System Account, who is also vice president in charge of the securities function at the New York Reserve
Bank, lead off with any observations he may wish to make on what
has actually happened in the Account and in financial markets in


MONETARY POLICY I 1 9 5 5 - 5 6 144

general since the last meeting. He will already have furnished each
member of the Board of Governors and each president with special
written reports that are complete through the close of business on
the preceding day. Thereafter two of the senior staff members of
the Board of Governors present a comprehensive and detailed summary of current business and credit conditions in the country as a
whole. After this the Chairman, following such introductory remarks as he considers appropriate on domestic or foreign developments, calls on each president and each governor, in turn, to give
his appraisal of the current situation and to state his views concerning appropriate policy in the circumstances. Customarily the president of the New York Reserve Bank is called on first, and, because
of the location of the bank in the country's money center, I usually
talk of business and credit developments and expectations in national
terms, and of the open market and other Federal Reserve policies I
would consider appropriate in the light of those developments. The
other presidents usually start off with comments on conditions in their
particular districts and they, too, give their views as to credit policy.
Likewise each member of the Board of Governors states his opinion
concerning the appropriate policy after discussing any particular developmeents in the country's economy which appear to him pertinent.
Generally the last man to comment is the Chairman of the Federal
Open Market Committee, who is of course also Chairman of the Board
of Governors. He summarizes his own appraisal of the situation
and then undertakes the difficult task of pulling together the threads
of all the preceding discussion and expressing the consensus of the
meeting in terms of, first, how the directive to the New York Reserve
Bank should be worded and, second, what specific actions are called
for in the way of open market purchases or sales or other credit control measures—perhaps mentioning, for example, the possibility that
consideration may be given to discount rate changes Dy the various
Reserve banks, or to changes in reserve requirements by the Board
of Governors. The Chairman then gives all present a chance to state
whether they agree with his understanding of the consensus. The
Manager of the System Account is asked whether the instructions
are sufficiently explicit to enable him to carry out the Committee's
wishes effectively, and at this point the Committee has an opportunity
to convey to the Manager any nuances of policy which they think
should be kept in mind.
I have been greatly impressed by the effectiveness of this whole
procedure in bringing together a variety of disinterested and objective
views on our country's economic conditions and problems, and then in
deriving from these a reasoned consensus as to monetary and credit
policy. Often the opinion of any one member is not yet crystallized
when he arrives at the meeting, and it may well be modified during the
meeting by this process of give-and-take. On the other hand, I think
it is pretty clear that with 19 well-informed people having a full
opportunity to present their views, on the basis of data assembled by
able staffs throughout the System, it would be quite impossible for
any one man holding an extreme position to dominate the Committee
and dictate the Committee's conclusions. Indeed, the thinking of any
one man may not be fully in accord with the consensus; the consensus is
acceptable because it is a fusing of all the views, and it provides a
workable basis for operations. Over time, such a consensus is bound to

60 MONETARY POLICY I 1 9 5 5 - 5 6


be far more reliable than the occasional flash of insight that a single
individual might produce.
I have been struck by the degree of harmony which has been achieved
in this whole procedure. It has almost always been possible, without
even the formality of a vote, to reach a consensus through the giveand-take of reasoned discussions.
As I have already indicated, the general conclusions of the Committee as to credit policy are set forth in the directive issued to the
Federal Reserve Bank of New York. The directive is amplified by
the statement of the consensus and by the full discussion, all of which
are of course noted in the Committee's minutes. From this point on;
and until the next Federal Open Market Committee meeting, the primary responsibility for conducting open market operations is in the
hands of the Federal Reserve Bank of New York, acting in accordance
with the instructions of the Committee. With the country's money
market and securities markets centered in New York, most open market operations must necessarily be executed there, but I would like to
stress that the New York bank is acting at all times for the System as a
whole on the instructions of the Committee and is at all times responsive to the Committee's wishes. In my capacity as a member and
Vice Chairman of the Federal Open Market Committee, I am in a
position to help interpret the Committee's wishes to the Manager, and
he himself has of course been present at the last meeting when he was
specifically instructed on the varied detailed considerations which the
Committee wishes him to keep in mind. He knows, for example,
approximately what member bank reserve position the Committee
believes appropriate, or he may have been told to give only secondary
consideration to this factor and for a time to be guided primarily
by such factors as the tightness of the banking structure in the money
centers, the degree of market pressure suggested by United States
Treasury bill rates and other money market rates, the impact of a
large Treasury borrowing operation, and even more broadly by that
on-the-spot appraisal of current attitudes and actions which is described as the "feel" of the market.
A comprehensive procedure has been worked out for keeping the
Board of Governors and the other members of the Federal Open
Market Committee promptly and fully informed on market conditions
and all actual transactions for the System account, as well as on contemplated transactions. One of the most effective tools to this end is
the so-called daily conference call at 11 a. m., each business day, when
the manager of the account or his assistant talks by telephone with the
economic adviser and a senior economist of the Board of Governers.
The presidents of those Federal Reserve banks outside of New York
who are currently serving on the Committee also participate by longdistance telephone in these discussions on a rotating basis, 1 President
sharing in the call for a period of 2 or 3 weeks. At the New York
Reserve Bank, the first vice president or I often "sit in" on the telephone call and many times both of us are present. (The first vice
president is, in conformity with the statute, my alternate as a member
of the Federal Open Market Committee.) The manager of the account summarizes conditions in the money and capital markets, the
various reports or comments received from the dealers in United States
Government securities, the reserve position of the principal New York
banks, and the reserve position of the country's member banks as a


MONETARY POLICY I 1 9 5 5 - 5 6 146

whole—together with the New York Reserve Bank's expectations as
to changes in this national reserve position day by day for the next
few weeks. The manager then indicates whether these available data
and expected developments point to a need for open market operations in order to fulfill the Federal Open Market Committee's instructions, i. e., whether Treasury bills should be purchased or sold, whether
repurchase agreements should be made with dealers, whether holdings
of acceptances should be increased or run down, and in approximately
what amount any or all of these might be considered. Participation
in the call provides the economic adviser to the Board of Governors
* and the other president who is taking part in the call, the opportunity
and responsibility of contributing their views as to existing conditions
and the proposed course of action, particularly as these relate to the
policy set at the most recent Federal Open Market Committee meeting.
Usually there is immediate agreement, but suggestions may be made
which result in some modification of the manager's program. Immediately following this conversation, a full summary is prepared at
the Board and distributed to all of the Governors in Washington; the
same summary is sent by wire to the various Reserve bank presidents.
The staff of the Board of Governors is advised periodically during
the day by telephone on all details concerning actual operations and
market developments. In addition, a written report is submitted
daily to the Board of Governors by the New York Reserve Bank with
copies to the interested officers of the other Federal Reserve banks and
branches. At the end of each statement week a full written report is
submitted by the manager to the members of the Federal Open Market
Committee and to the other presidents. These reports not only provide a complete statement of all actions taken but they also give a full
running record of conditions in the money and capital markets, with
emphasis on interest rate changes and on the behavior of United States
Government and other security prices. Prior to each Federal Open
Market Committee meeting, as I have mentioned earlier, a detailed
recapitulation of all major market developments and all transactions
since the last previous meeting is prepared for submission to all Committee members and the other presidents.
Questions may occur to the account manager between Federal Open
Market Committee meetings, perhaps as a result of some unforeseen
development at home or abroad, which appear to call for an interpretation of some policy decision reached at the last meeting. If it
is a minor matter, the question may be settled by discussion with the
president or first vice president of the New York bank, but if it involves a major policy consideration, we may decide to consult by
telephone with the Chairman, or, in his absence, with the Vice Chairman of the Board of Governors or some other member of the Committee. Or the initiative may come from Washington; i. e., Chairman
Martin or Vice Chairman Balderston may telephone me and raise some
question or make some suggestion having to do with interpretation of
the current Federal Open Market Committee policy. If very urgent
questions arise, it is possible to arrange on short notice for a telephone
meeting of the Federal Open Market Committee to deal with whatever
emergency may exist.
We in the New York Reserve Bank encourage the governors and
the other Reserve bank presidents, as well as senior members of the
staffs of the Board of Governors and of the other Reserve banks, to

60 MONETARY POLICY I 1 9 5 5 - 5 6


spend as much time as they can spare visiting our trading desk,
observing the manager and his assistants carry out open-market operations, and familiarizing themselves with the actual market atmosphere
in which these operations are conducted. I am happy to say that we
have had fine visits of this kind recently from the chairman and
several of the governors and presidents.
The chief point which I would like to emphasize is the high degree
of close contact and close cooperation existing between the Federal
Open Market Committee as the originator of all open-market policy
and the Federal Reserve Bank of New York as the executor of this
policy. In my brief experience with the System I have felt that this
whole mechanism works very effectively in the public interest.
I have already touched upon the importance of the New York
money and capital markets, which is the basic reason for placing
the responsibility for execution of the Federal Open Market Committee's policies on the Federal Reserve Bank of New York. Perhaps
it would be useful at this point to explain briefly just what is meant by
the Nation's "money market" and how the New York Reserve Bank's
trading desk is organized to keep in intimate touch with that market.
The money market has been defined as the active market for money
and close money substitutes which financial institutions and others
rely upon to provide the liquidity needed in the usual course of their
operations. Commercial banks, Government securities dealers, investment bankers, other financial institutions, nonfinancial corporations, State and municipal governments, and others turn to the money
market to adjust their cash positions—supplying funds when they hold
surplus cash, withdrawing or borrowing funds when they need cash.
The instruments employed (in addition to bank borrowing at the Federal Reserve banks) might be short-term Government securities, marketable private short-term paper, demand loans, or Federal funds—
money that is good at the Federal Reserve banks today, purchased with
money that will not be collected funds until tomorrow. The money
market through which all these day-to-day cash adjustments are made
is national in scope, but the residual shortages or surpluses of funds
come to focus in New York at the large New York banks. The extensive correspondent and customer relationships of these banks, and
the purchase and sale of money market securities by the specialized
dealer firms located in New York, provide facilities upon which all
other regions depend to settle their shortages or use their excesses.
By providing a mechanism whereby interest earning investments
may be converted readily into cash, and short-term money needs can
be met through borrowing, the money market provides a degree of
liquidity to debt instruments and a degree of flexibility to investment
and borrowing practices that are essential to the functioning and the
growth of a highly developed industrial and financial system. The
participants in the money market are as varied as the economy itself.
Business corporations are important and may come to the money market with temporary cash accruals to invest in short-term Treasury
securities, bankers' acceptances, sales finance company paper, or other
instruments. The corporations have to be confident of a market for
their investments so that the latter can be liquidated readily when
these funds are needed to pay dividends or taxes, or for operating
purposes. Confidence in the liquidity of their investments has made
it possible for them to make money available to others seeking money


MONETARY POLICY I 1 9 5 5 - 5 6 148

rather than holding these funds in idle cash balances. State or local
government may have funds from tax collections or from the sale
of a bond issue that are not immediately needed and are temporarily
available for investment. Foreign central banks accrue dollar reserves that may be invested in Treasury bills or bankers' acceptances.
All of the financial intermediaries—life insurance companies, such
Government agencies as the Federal intermediate credit banks or the
Federal home loan banks, or any others—participate in the money
market at least some of the time, either as borrowers or lenders of
short-term funds.
Of course, the 14,000 commercial banks in the United States, or a
considerable number among them, are the principal participants in
the money market. The deposits held with them are check-book money
and may be withdrawn without notice. It is particularly important,
therefore, that commercial banks hold adequate secondary reserves in
the form of liquid short-term investments to provide a potential source
of cash to meet withdrawals. Moreover, commercial banks are required
by law to keep minimum cash reserves against deposits; in the case of
Federal Eeserve member banks, these reserves must be kept with the
Eeserve banks. Since cash reserves earn no return, it is m a bank's
interest to limit its cash reserves as nearly as possible to the amount
required by law. In doing so, however, constant recourse to the money
market is necessary, either to borrow money or to sell short-term investments when an excess of withdrawals over deposits pulls money
away or to lend or invest short-term funds if an excess of deposits
over withdrawals temporarily provides excess cash.
It is through the complex interrelations of this network of shortterm financial transactions that the money system is kept working
smoothly, from day to day, meeting the vast payments requirements
of a vigorous, growing economy. The great bulk of the enormous
movement of funds through the banking system each day works itself
out through an offsetting of funds available against funds required
on a local or regional basis, but a net residual of available funds or
need for funds remains. It is in absorbing or supplying these residual
funds that the central New York money market is of crucial importance. And it is here that the net dependence of the entire financial
structure upon the Federal Eeserve is brought most clearly into focus.
That is why the operations of the arm of the System located in New
York necessarily fill a central role in exerting the marginal degree of
easing or restraining influence that is needed, if monetary policy is to
exert a determining marginal force upon the availability of money
and credit for the country as a whole.
These operations in New York include, of course, a host of varied
functions that are also being performed by the System's 35 other
arms—the 11 other Federal Eeserve banks, and the 24 Federal Eeserve
bank branches, located throughout the country. They include, notably, the discount mechanism through which banks may borrow
directly to meet short-run adverse swings in their reserve positions.
That is a vast subject in itself. The only special significance of New
York in this zone of System activity is that so much of the borrowing
need that converges on the large New York City banks results from
the residual of pressures exerted on these banks by their correspondents

60 MONETARY POLICY I 1 9 5 5 - 5 6


What is more or less unique in New York is the location there of the
active center of the trading market in the United States Government
securities. Because all banks and others may turn to the purchase or
sale of Government securities, as the first line of defense for employing
or obtaining money market funds, that market becomes a ma] or zone
for the exercise of System responsibility at its own initiative. By buying or selling short-term Government securities, or by advancing funds
at times to the dealers who are continuously making markets in these
securities for all classes of investors, the Federal Reserve can bring
about the general degree of tightness or ease that is most likely to
fulfill the broad dynamic aims of monetary and credit policy.
I will not try, here, to describe that market in any detail. What
I do want to attempt, very briefly, is to outline the procedures followed
by our own trading desk, in carrying through each day the instructions
of the Federal Open Market Committee. Perhaps I should note parenthetically that our use of the term "trading desk" does not imply that
we "trade" in the usual sense—with a view to making profits. Our
desk, is, in reality, a listening post and a "transactions desk" where
orders are executed.
This desk at the Federal Reserve Bank of New York has direct telephone lines with the principal dealer firms and with the commercial
banks in New York and Chicago that have Government securities
dealer departments. A group of specialists on the desk are in constant
communication with these firms, which are in turn in touch with banks
and other investors all over the country, and the composite picture
that elolves hour by hour from these conversations and from direct
reports from the principal New York banks will show the balance
of forces that is taking shape in the money market. Price and yield
quotations from various dealers for all Government securities and
United States agency issues, the latest Federal funds rate, overall
changes in stock prices, and other information are chalked up on a
large quotation board to provide statistical background for the reports
and comments that are constantly pouring in. In a real sense, the
trading desk is the Federal Reserve System's listening post in the
money market as well as its operating arm.
Discussions at meetings of the Open Market Committee with respect
to its instructions to the Federal Reserve Bank of New York usually
include among other things reference to the degree of pressure—ease
or tightness—that the Committee wishes to maintain in the money
market in pursuit of its broad policy objectives. The discussion may
sometimes include mention of targets in terms of bank reserve positions
or short-term interest rates that would be generally appropriate to
the current phase of credit policy. But it is recognized that statistical
measures are not always satisfactory guides to the condition of money
and credit availability which the Committee wishes to maintain and
that the "feel" of the market, as interpreted by specialists, must be
the principal day-to-day guide—that is, the things that close observation can reveal are invaluable ^ids from the standpoint of the timing
of operations.
However, I would not wish to leave the impression that the open
market operations for the Federal Reserve System are guided largely
by educated intuition. Back of the day-to-day decisions to buy or sell
Government securities or to enter into repurchase agreements with
dealers lies an intensive evaluation of the supply and distribution of



MONETARY POLICY I 1 9 5 5 - 5 6 150

bank reserves and of the forces that are likely to influence the .money
market currently and in the near future. A group of money market
specialists works constantly at forecasting the additions to or withdrawals of funds from the national money market which may be expected on the basis of patterns previously observed in changes occurring during a week, month, season, or year. Estimates are made of the
daily flow of Treasury receipts and expenditures to determine if the
Treasury will be supplying or withdrawing funds from the market.
Other specialists keep records of scheduled security flotations by
corporations and Government bodies, including the Federal Government, and the expected influence of these operations on interest rates
and market conditions is included in the total picture. Detailed data
are compiled on the positions of the New York banks, including their
borrowing from the Eeserve bank and in the Federal funds market.
And many other statistics and reports—more than I could detail in
this statement—are poured into the hopper each day to form part of
the background against which operating decisions are made.
The piecing together and interpretation of the bits and pieces of
statistical data, market reports, developments in psychology and news
items that goes on constantly in the securities department of the Federal Reserve Bank of New York is directed toward a single purpose—
the execution of the policy instructions of the Federal Open Market
Committee. By 11 o'clock on most mornings enough of the overall
picture will have been assembled to give a reasonably clear idea of the
action, if any, that will be called for, and it is then that the conference
telephone call—to which I referred earlier—is made. From that point
on, subject to any questions that may come in from the members of
the Committee or their staffs, the job becomes the highly specialized
technical operation of choosing the right methods, and the right time,
to effect the marginal degree of influence upon the volume of bank reserves, and the state of the money market, that will best carry through
the general aims of System policy.
We have already had occasion this morning, particularly through
Chairman Martin's testimony here, to discuss what has been done
through recent weeks and months. If there are further questions,
either as to techniques or as to objectives, perhaps the best way to give
you the answers you require will be for me to attempt to respond
directly to those questions.
Chairman P A T M A N . Y O U gentlemen are, I guess, the most important
people in the United States now in our economy. You have more
power than the Congress. You have more power than the Congress
of the United States.
Mr. R O U S E . I have a complementary statement that I would like
to put in the record, too. I covered part of it in response to your
questions but the rest is my role.
Chairman P A T M A N . Certainly, you may do so.
Mr. R O U S E . Thank you.
(The prepared paper by Mr. Rouse is as follows:)

This brief statement is intended to give your committee a thumbnail description of my role as manager of the Federal Reserve System's open market account.
I was appointed System account manager in November 1939, succeeding Mr.
Allan Sproul; Mr. Sproul, in turn, had succeeded Mr. W. Randolph Burgess.
I was selected for the position by the board of directors of the Federal Reserve

60 MONETARY POLICY I 1 9 5 5 - 5 6


Bank of New York, on the recommendation of President Harrison and Mr.
Sproul, and my selection was approved by the Federal Open Market Committee.
My official title at the Federal Reserve Bank of New York is vice president.
Under the operating procedures of the Federal Open Market Committee, the
Federal Reserve Bank of New York has been chosen by the Committee to carry
out all purchases and sale transactions in Government securities for the account
of all 12 Federal Reserve banks. I have the responsibility of supervising the
execution of those transactions in accordance with instructions of the Committee.
The selection of the Federal Reserve Bank of New York is the logical consequence
of the fact that it is physically located in the Nation's money market center,
where the great bulk of all transactions in United States Government securities,
and in other money market instruments, actually takes place.
Mr. Hayes has described the manner in which meetings of the Federal Open
Market Committee are conducted and my participation in those meetings as
manager of the System open market account. There are two reasons for my
being in attendance at the meetings. First, it is my responsibility to report upon
the manner in which instructions adopted at the last meeting have been executed
in the market, and to answer any questions on the conduct of these operations
that any member of the Committee might raise. After my report, the first order
of Committee business is to approve the operations for the System account during
the period since the last meeting. My second reason for attending the meetings
is to learn firsthand the Committee's intentions as they are developed in the discussion of policy during the meeting. It is never possible to get into a written
directive or into the minutes of the meeting the shadings and nuances that may
be contained in the policy objectives the Committee establishes.
The instructions given to me by the Committee are of two kinds: First, the
instructions on monetary and credit objectives that are to be achieved through
operations during the period until the next meeting and, second, the continuing
instructions that establish certain rules of procedure that are to be followed
in the course of the System account's participation in the Government securities market.
The Committee discussions of immediate policy objectives at times include
guideposts which my associates and I must keep before us in making day-to-day
operating decisions. For example, the Committee sometimes establishes reserve
targets. During a "restrictive" phase of credit policy it might be the Committee's intention that member bank excess reserves at the Federal Reserve banks
should be prevented from rising above some particular range, or during a period
of "easy money" policy, the Committee might direct that open market operations
be conducted at least partly with a view to increasing excess reserves. At other
times the Committee might be particularly interested in the developments in the
capital markets and the direction and degree of change in interest rates. Reserve
measurements are not always satisfactory measures of the true availability
of credit and money, and movements of interest rates might give a better reflection of prevailing credit conditions. These guides might be among the 3 or
4 considered particularly important by the Committee at a given time. But
the Committee will not expect to be able to blueprint the course of market
developments, even for a few days ahead, and therefore would not set rigid
targets for any of these guides, nor try to spell out in detail various alternative
sets of possible developments and targets. Enough is said to make clear to my
associates and me the degree of general pressure that the Committee wants
maintained, and the relative importance of various guides in the circumstances
then prevailing. Reliance must then be placed upon the judgment of the manager
and his associates to interpret the meaning and implications of the stream of
developments and of changing psychological attitudes occurring in the markets
from day to day to achieve the proper timing in carrying out the instructions
of the Committee.
Managing the System open market account to achieve the objectives established
by the Committee calls for the assistance of many specialists. For many of
these needs we call on the services of skilled technicians who also serve jointly
some of the other operating or service functions of the bank. For example, it is
necessary to have forecasts of changes in bank reserves that are likely to occur
as a result of a great variety of developments that are quite independent of open
market policy—our open market operations must take account of these influences.
Such forecasts are, in fact, prepared each morning for our use. Back of their
preparation lies a pyramid of statistical information and knowledge of past
performance that is used by our money market specialists in drawing up their
forecasts. Other specialists are constantly analyzing developments in all of the


MONETARY POLICY I 1 9 5 5 - 5 6 152

securities markets so as to provide the account management with the necessaryinformation required for interpretation of the hour-by-hour course of developments in these markets. Demands for bank credit are likewise important in
appraising the pressure of credit demands in the market—and for some kinds of
credit this is significant not just monthly, or weekly, but daily and even hourly.
The economists at the bank help materially in keeping us informed on critical
aspects of these developments.
All of us engaged in open market operations are thus constantly in touch with
the money market and the Government securities market so that each new
development, as it exerts its influence on credit conditions, can be included in
the overall view of market conditions that we form from day to day. The most
important part of my role as manager of the System open market account in
carrying out the Committee's instructions is this never-ending appraisal of market
influences. A decision to buy or sell Government securities results from the
interpretation that my associates and I place upon the various conditions at
work in the market and upon our judgment as to what would be required against
this background to achieve the Committee's objectives. In passing, I might call
your attention to one point which my comments have probably already made clear;
managing the System open market account is not a one-man operation. While
responsibility for final decisions is mine, I rely heavily upon the competent staff
of market specialists, traders, statisticians, economists, and others at the Federal
Reserve Bank of New York to assist me. In addition, I am able to discuss dayto-day problems of policy execution with the Vice Chairman of the Committee,
Mr. Alfred Hayes, or his alternate, Mr. William Treiber, at the New York Reserve
bank. And when more serious matters arise on which I wish guidance, I may
contact Chairman Martin or request a telephone conference with the full
I mentioned earlier that the system account manager operates under two types
of instructions from the Federal Open Market Committee. The first are the instructions for the execution of current policy that I have just briefly described.
The second are more detailed operating instructions that establish certain procedures and methods of operation for the system account in the Government
securities market. Among these there is the instruction that the manager should
buy or sell at best prices in the execution of system account transactions. In
the actual conduct of a system operation, dealers are asked to offer us securities
if we are buying or, if we are selling, to bid for securities offered by the system
account. The dealers quoting the lowest prices when we are buying or the highest
prices when we are selling will get the system account business. Of course, the
decision as to the total amount to be bought or sold for the system account at
any time is made by the manager, within the framework of committee instructions and review. In this connection, the Open Market Committee establishes a
limit on total purchases or sales for the system account between meetings of the
committee. If market conditions appear to me to require that purchases or sales
in excess of this authorized amount should be made, I must refer back to the
committee for authorization to enter into these additional transactions.
It has always seemed clear to me that as manager of the system open market
account, operating under the Federal Open Market Committee, I am answerable
directly to the committee for the manner in which I discharge my responsibilities.
My function is that of a specialist designated to carry out day-to-day operations
under the direction of the policymaking Federal Open Market Committee. In
this capacity it is part of my responsibility to keep the members of the committee
fully informed on all operations for the account and the reasons which give rise
to each operation. Mr. Hayes has outlined the conference telephone calls and
the steady stream of reports originating in the securities department of the
Federal Reserve Bank of New York. These calls and reports are intended to be
as informative as it is possible to make them, and through the years we have
attempted to improve this flow of communications between the manager of the
account and the Open Market Committee.

Chairman PATMAN. And any of you can add anything that you
think is material and germane, including you, Mr. Shepardson.
What is the status of the consumer study, Mr. Martin ?
Mr. MARTIN. The consumer credit study will be completed and will
be published early next year.
Chairman PATMAN. Early next year?
Mr. MARTIN. I won't set a specific date on it.




Chairman PATMAN. You had some staff papers on the 1 9 5 3 , 1 9 5 4
recession. Have you finished those ?
Mr. ENSLEY. If I may, Mr. Chairman, at the time of our hearings
2 years ago it was a little premature to make complete evaluation of
the monetary experience during the 1953-54 period. I believe you
indicated at that time that you had staff projects, looking into that
It is my Understanding that since then, staff papers have been prepared and circulated to academic and labor and business and banking
Would you comment on your plans for the ultimate disposition of
those papers.
Mr. MARTIN. Mr. Young informs me—Mr. Young, who is head of
our Department of Research and Statistics—that these were just working papers and that they would require quite a bit of work.
Mr. ENSLEY. I appreciate that.
Mr. MARTIN. We are working on them and reviewing them in the
light of these meetings we have been having with various groups that
have been giving us some ideas and comments on them.
Mr. ENSLEY. I have heard some very favorable comments about
them. And it seemed that their publication might have some merit.
Mr. MARTIN. It might be that the Board would take under consideration publishing them after we have had a chance to edit them suitably
in the light of all of the comments we have received.
Chairman PATMAN. Just one other thing, Mr. Martin, about a
request for a Federal Reserve survey that I will make of you, if it is
There is a dispute about the effects of tight money on small business.
In the absence of authoritative reports there have been private surveys
which are contradictory.
For example, Standard Factors Corp. surveys show small business
getting less loans, the ABA survey and the Mellon Bank study of its
own lending, shows small business getting more.
I want to ask you, Mr. Martin, to make this survey.
A good way to do it would be to repeat a survey which the Board
made as of October 5, 1955. This shows the amount of loans outstanding by size of borrowers, cross-classified by size of bank.
If the same survey were made as of October 5, 1956, we could by
comparing to the report as of a year ago, tell, (1), what the effects of
tight money have been on the small borrowers against big borrowers;
and (2) what the effect have been on the small banks against big
It previously covered business loans of all member banks, and appeared in the Federal Reserve Bulletin for April 1956. The tabulation
shows 7 size classes of borrowers and 10 size classes of banks.
Would you have that survey conducted, Mr. Martin?
Mr. MARTIN. We will do our very best to get further data on this
subject, Mr. Patman. We are deeply interested in it, you know.
Chairman PATMAN. Yes. I know you are.
Mr. MARTIN. And want to do everything we can.
Chairman P A T M A N . And that $ 1 3 4 million you have for small
industrial loans will last too long at the rate of $ 3 0 0 , 0 0 0 a year. We


MONETARY POLICY I 1 9 5 5 - 5 6 154

hope you will find some way to pep it up, the opportunity for these
little fellows to get these loans.
Mr. Frischknecht, do you have some questions ?
Would you consider sending yours in like I am sending mine in?
Mr. FRISCHKNECHT. Mr. Martin, I am Dr. Frischknecht, legislative assistant to Senator Watkins. He could not be with us today.
He is on his way back to Washington from Hawaii.
I just spoke with him by telephone from San Francisco. He asked
me if I would convey to you and the members of the Board his sincere
thanks for the good job which you have been doing the past 3 or 4
I do have some questions I would have liked to have asked you. I
think they might have added a little perspective to the discussion that
has continued at quite great length here today, but I suspect, as the
chairman indicated, that we may have another opportunity before too
long to hear from you again.
And Senator Watkins will be here at that time. So with that little
explanation I will forego any examination.
Mr. MARTIN. We will await receipt of those questions, or if you
wish to submit them we will try to answer them now.
Chairman P A T M A N . We can submit them in writing if it is all right.
Mr. MARTIN. That will be perfectly all right.
(Supplementary questions later submitted to Mr. Martin by letter
and his answers to them are covered in the following.)


1. Credit the lifeblood of our economy: An early economist to whom modern
economists are greatly indebted was a French surgeon, Francois Quesnay.
Quesnay's ideas about how the economy functioned were influenced by his knowledge of the circulation of blood in the human organism. Following along Quesnay's line and viewing credit as the lifeblood of our present-day economy, these
questions occur to me. Our economy is a vital living organism. Will it be made
healthier by curtailing its flow of lifeblood? Do we heal disease by general
bleeding or do we treat specific infections?
Modern medicine puts great emphasis on the necessity of maintaining a general environment propitious to health. While analogies are imperfect, we would
agree in general that credit may be likened to the lifeblood of our present-day
economy. However, pursuing your analogy, we would diagnose the credit situation today as one of high blood pressure for which the remedy is neither bleeding nor pumping more blood into the system but a general therapy to alleviate
the high pressure affecting the entire economic body.
2. Thirty years of penicillin for a minor infection: When you or I get an
infection and come down with a fever we first try to build up our production of
antibodies to bring that fever down. If the infection persists and the fever
mounts, our physician may administer and prescribe penicillin for a week or 10
days, enough to curb the infection and bring the fever back to normal. You
wouldn't think much of that doctor if he put you on penicillin for 30 years to
take care of a 10-day infection? Yet in many cases the high interest rate cure
for today's alleged inflation will have to be taken every day over the next 20 to
30 years.
Lower interest rates offer incentives for borrowers when resources are available and higher interest rates offer an incentive to defer borrowing when resources are unavailable. It is true that the borrowing costs on a 30-year obligation incurred 2 years ago would be less than the borrowing costs a borrower
would incur in today's market. This illustrates the strong incentives interest
rates, particularly on long-term loans, exert toward sustaining high-level employment and maintaining the value of the dollar in the economy. If 30-year money
were available to borrowers at the same interest rate as 2 years ago, higher prices
for resources and output generally would more than offset the lower borrowing

60 MONETARY POLICY I 1 9 5 5 - 5 6


3. Why should United States support a plan that drives its bonds down and
makes it pay more? What would you say of the businessman who used his
full power and influence to force down the market price of his company's obligations and gave enthusiastic support to a plan whereby he would have to pay more
and more for the use of credit extended by lenders who had gotten it from him
originally at no cost to themselves? No doubt you would find it difficult to
find such a businessman—he either would be broke or in a mental hospital.
Can you tell me why precisely the same pattern of conduct pursued by the
United States Government is considered perfectly proper and sound?
Successful businessmen usually evaluate specific costs in terms of the total
effects on their operations. It would be the height of folly for the United
States to inflate the currency under the impression that this would lower the
cost of running the Government. Actually, the country would pay for this folly
many times over in the shape of higher prices for everything it buys.
4. Inflation and shortages: Inflation or sharply rising prices are usually associated with physical shortages. Would you say that inflation is more likely
to be prolonged when employment, output, and incomes are rising and plant
capacity is being expanded, or when credit is tightened with the inevitable
rise in interest rates operating to restrict output, reduce the demand for workers
and lowering incomes? Assuming that people in the United States desire not
only to maintain past standards but to raise them, which policy would you say
is more likely to result in permanent inflationary pressure?
We would not agree with this statement of the problem. Inflation arises
when aggregate money demand is in excess of the capacity to make available
the goods demanded. Attempts to increase money demand still further under
conditions of intensive use of resources induces a competitive scramble for the
available goods and thus increases prices. It should be noted that many industries are currently operating at capacity and the gross national product is the
highest on record and still rising.
5. Safety factor versus speculative returns on governments: Assuming you
want wide ownership of the Federal debt in the hands of permanent investors,
which would you say is more likely to help you achieve such an objective—a
policy that promotes confidence in the safety of the principal invested in a
Government obligation, or one that creates opportunities for speculative gains,
discounts and higher yields ?
The record shows that the continued erosion in the purchasing power of the
dollar that occurred prior to 1951, when United States Government prices were
pegged at par, had serious adverse effects on the efforts of the Treasury to
promote widespread ownership of savings bonds on the part of permanent
investors. A policy designed to protect the value or purchasing power of the
dollar is certainly most likely to encourage the "wide ownership of the Federal
debt in the hands of permanent investors."
6. Would you say that since the accord the role of power of banks and
investment houses in influencing the allocation of our resources have been considerably increased? From the standpoint of democratic government would you
regard this as strengthening or weakening it?
The "role and power of the banks and investment houses in influencing the
allocation of our resources" has been changed radically since the accord in that
they are no longer shielded from fluctuations in interest rates and prices in
the market. This exposure of the financial community to the sanctions of the
market would seem to strengthen democratic processes. These institutions
affect allocation of resources through investing the savings that are placed
with them for administration. Total savings have been increased since the
accord, but there has been no particular trend in the proportions of the total
that have been invested or allocated through the medium of financial intermediaries as a group, on the one hand, and through the process of direct investment by individuals, on the other. Stability in the purchasing power of the
dollar since the accord has increased the confidence of savers and the willingness of people to save in dollar form. This has financed the great growth of our
productive capacity in recent years.
Do you think that the price of money allocates the supply of credit?
In our judgment, it helps. This influence is illustrated in the answer to
question 9.
8. Could you have limited the growth of credit to the same extent without
raising interest rates ?
Interest rates rose in response to the basic supply-and-demand situation.
When resources are being fully utilized, growth of credit cannot be limited
without a rise in interest rates unless you have a credit-rationing system so


MONETARY POLICY I 1 9 5 5 - 5 6 156

all embracing as to be administratively impractical and inimicable to our
system of democratic government.
9. Do you think credit policy has effectively restrained the plant and equipment
boom? If so, how?
The rate of construction of plant and equipment has surged 25 percent
ahead of that of a year ago. This boom has accentuated the demand both for
construction labor and for the materials used by the construction industry.
As a result prices have risen. However, credit policy and fiscal policy have
exerted a moderating influence. The recently released report of the McGrawHill Publishing Co. concerning business plans for capital spending in 1957 and
1958 states: "Difficulties in construction and in delivery of equipment have
delayed some 1956 expenditures until 1957. And in some industries, a part
of 1957 spending is being rescheduled for 1958. Cash shortages—resulting
from lower profits and tight credit conditions—have been important in some
cases. However, the main effect has been to stretch out plans for expenditures.
Very few cancellations are reported." It may be noted that, "For 1957, business
now plans to increase spending 11 percent compared with an increase of 21
percent in 1956. A considerable portion of the increase represents spending that
was originally planned for 1956 and has been deferred until 1957."
At an earlier date we described for you the mechanism through which our
credit policy operates to restrict inflationary expenditures. In our answers
to the 1952 questionnaire submitted by the subcommittee of the Joint Economic
Committee on Monetary Policy and Management of the Public Debt, of which
you were chairman, we stated (question 31, pt. I, pp. 373-374) :
"The sensitivity of borrowers to changes in the rate of interest varies widely.
In certain fields of long-term investment, such as housing and public utilities
(which are large and important fields), interest costs are particularly significant,
and a comparatively small increase in interest rates can have a substantial effect
in decreasing or postponing the demand for capital. Even in other fields where
the rate of interest plays a less important role in costs, fringe borrowers may
still be deterred from borrowing in case interest rates rise, while other borrowers
may decide to get along with a smaller investment in inventory or in plant and
equipment. The higher the long-term rate becomes, the more likely becomes the
expectation that this condition is temporary and the more likely will be the
tendency for long-term borrowers to postpone investment outlays
in the
expectation of borrowing later at a considerable saving in interest cost.
"The effect upon the borrower of the rate of interest considered as a cost of
current investments, as described above, is far from being its only effect. An
increase in the rate of interest has a further influence, and an important one,
in that it reduces the money value of existing assets.58
"Income earning assets are valued by capitalizing the expected income at the
going rate of interest with due allowance for risk. When interest rates rise,
the market value of such assets tends to decline, unless actual or expected
earnings rise at the same time, since their earnings are capitalized at a higher
rate of interest. This results in a basic change in the relationship between
prices of existing assets and prices of new producible wealth which, together
with changes in expectations as to profits and risks due to the changed credit
and monetary situation, shifts the balance of entrepreneurial decisions toward
holding or buying old assets, and adapting old assets to new uses, rather than
buying new ones whose production would involve adding to the demand for
materials and labor. Values of fixed-interest-bearing securities also decline as
market interest rates rise, a development which reduces the liquidity positions
of their holders and tends to discourage spending, both with borrowed funds
and otherwise."
66 In a highly developed economy such as the United States, the volume of accumulated
capital assets is very great in relation to current income. Small percentage changes in
the value of such assets involve large dollar amounts. In a recent study by Raymond W.
Goldsmith, which is now in process of publication, it is estimated that for the 145-year
period 1805-1950 the average yearly rate of growth reproducible tangible wealth in the
United States was about 41/4 percent, or about 2 percent on a per capita basis. At the
end of 1948 reproducible tangible wealth owned by individuals, business, and farmers was
valued at approximately $600 billion. Although not all of this represents assets whose
value is directly affected by changes in interest rates, the figure serves to give some idea of
the magnitude of reproducible assets involved. In addition, values of income-producing
lands are affected, as are values of negotiable claims not represented by real assets. The
study is a part of a comprehensive inquiry into savings and investment in the American
economy, financed by a grant of funds from the insurance companies investment research
committee, with the joint participation of the two associations of life-insurance companies.

60 MONETARY POLICY I 1 9 5 5 - 5 6


10. Do you agree with Secretary Humphrey that savers and investors need
to have even greater incentives in order to overcome this alleged shortage of
capital? Do you feel that higher interest rates are part of the generally greater
incentives they should be offered ?
Yes, as long as savings are inadequate to meet investment demands. The
record of 1956 shows that higher interest rates have encouraged individuals
to increase their money savings.
11. Do you think that we face a capital shortage in the United States?
Please explain how low interest rates from 1932 to 1952 contributed to this
alleged capital shortage.
At present there are unsatisfied capital demands which cannot be met from
existing resources at present levels of savings. During the period 1932-40, low
interest rates offered an incentive for capital investment, but investment demands were small relative to savings. During the period of wartime inflation,
savings were borrowed by the Government to help finance the war effort, and
such investment as occurred was concentrated in war-supporting activities.
Siince the war, real capital formation has been high, partly because of the carryover of accumulated backlogs and partly to provide for our current and
prospective high rates of growth. The low interest rates, maintained artificially
from 1946 to 1951, fed the inflation that took place in that period and seriously
eroded the purchasing power of the dollar.
12. If people are induced to save more, won't this mean they will spend less
on goods and services? If business is increasing its productive capacity and
consumers are to buy less, what will happen to the business operating rate?
How will this affect investment?
The problem of economic stabilization policies is to attain an appropriate
balance between consumption, saving, and investment.
13. Is there a danger that high interest rates may become a permanent habit
in the United States? Would this be a desirable development?
The level and structure of interest rates that prevails at any time must reflect
the relationship between current borrowing demands and the volume of saving.
Interest rates in this country today are not a hibit; the great danger is that
inflation may become a habit as it has become in several unhappy countries
abroad. In this connection it should be borne in mind that the cheap money
policies pursued in some countries have not brought about low interest rates.
The countries which have allowed their money supply to expand without restraint
generally have the highest rates of interest—and those which have exercised
restraint have the lowest rates. In Switzerland the yield on government bonds
is about 3^4 percent, a little below the level in the United States. In France it
is about 5 ^ percent, and in Mexico, Brazil, and Chile it is over 10 percent.
14. If you had 110 alternative to choose from except a policy that led to mild
inflation or one which led to outright deflation, which would you choose? Why?
Under our economic and political institutions, a mild inflation, deliberately
accepted as a policy, would be certain to set the stage for an unhealthy boom
and eventual collapse. A choice, therefore, is not open. The aim of monetary
policy is to contribute, so far as it can, to steady economic progress.
15. What policies or institutional setups should we have, if any, to insure that
certain social demands for schools, housing, highways, etc., do not get lost in the
scramble for the relatively scarce credit resources?
This question relates to broad governmental policies, which go beyond the
responsibilities of the Federal Reserve System for regulating overall monetary
and credit conditions with a view to orderly growth in the economy as a whole
and a stable value for the dollar. The worthwhile social demands referred to
have, properly, the power of Government behind them—the power to tax and
appropriate, the power to borrow, the power of eminent domain. The question
is not one of inadequate power—but how much of the resources of the country
should be preempted to these purposes at any point in time. Basically, public
facilities are financed out of revenues and to this extent are not affected by conditions in the capital markets. When the decision is made to finance public facilities by borrowing, the funds sought must be bid away from other borrowers.
There are various devices by which this money can be attracted for these special
purposes—subsidies, tax exemptions, direct loans, etc. None of these provides a
fundamental solution, however, to the problem of scarcity of physical resources.
So long as demands for goods and services outrun productive capacities, any
program to provide preferential treatment of one class of borrowers will add to
the cost of borrowing by other groups and add to the cost of basic materials for
all borrowers.


MONETARY POLICY I 1 9 5 5 - 5 6 158

Chairman P A T M A N . I did not finish out the question that I intended
to finish a while ago about the statement that Mr. Roosa made in his
You know there has been quite a bit of discussion in here as to who
is consulted when you are trying to arrive at just the exact rate that
should be used on a bond issue like the
percent, or the others, and
who is the go-between, between the Treasury and the Open Market
Committee, and the people who buy, the dealers.
And this statement in here indicates something I think that is of
interest. It says:
The senior managements which set the broad policy outlines for the various
Government dealer firms, bank and nonbank, do so on the basis of tested experience in the rough and tumble of the whole range of financial markets.

In other words, it is the senior managements which set the broad policy
outline for the various Government dealer firms, banks, and nonbanks.
They are the people that he says that you confer with in arriving at
the interest rate, but, of course, I guess you say that you confer with
a lot more people besides them.
Mr. MARTIN. Well, that is the Treasury's primary responsibility.
And we give the Treasury all of the assistance we can in coming to
a satisfactory decision. The number and the people that are conferred
with are entirely in the Treasury's hands.
Chairman P A T M A N . We want to leave this meeting on a good note.
Is there any one of you members that would like to say anything
before we conclude the hearings today and, really, for this year,
because we will not have time to expand on it this year ?
Would you, Mr. Martin ?
Mr. M A R T I N . NO. I have probably talked too much, Mr. Patman.
Chairman P A T M A N . We want to thank you very much for the forthright answers you have given. You are always giving us the information as you see it. And we appreciate all you gentlemen coming here.
Without objection, I will insert at the conclusion of the record a series
of tables containing data pertinent to today's discussions.
I said at the outset of these hearings that I did not anticipate
that we would have time to work out and prepare a formal subcommittee report.
The course of the hearings has however raised a good many questions in my mind, and I should like to hold the record open long
enough to place in it a statement of my personal views upon the implications of recent monetary and credit policies and practices.
Unless there is something else to come up, we will reserve the right
to submit those questions and we will stand adjourned subject to call
of the Chair.
(The statement just referred to, made available to the press on
December 17, 1956, follows:)

The Subcommittee on Economic Stabilization has just concluded another of its
periodic reviews designed to check on the adequacy and effectiveness of an important stabilization instrument—general monetary and credit controls.
At the opening of these hearings I stated that they were in no way intended
to undermine or threaten the Federal Reserve System as it is presently consti-

60 MONETARY POLICY I 1 9 5 5 - 5 6


tuted. Our objective rather was to gather information as to recent and current
monetary and credit policy and its effects on various segments of our economy.
It was not originally intended to issue a report or recommendation after these
hearings but rather to study the record and to consider it in connection with the
annual report of the Joint Economic Committee due March 1.
However, in view of the unprecedented public interest that has been manifested
in the brief 2-day heading and the concern of many groups about the problems
that were discussed before the subcommittee, I deem it appropriate to issue the
following statement which incorporates some preliminary impressions.
First, the 2 days of hearings served to make me feel even more strongly than
before that the time is past due for a thorough reexamination of our entire
monetary system and particularly a reevaluation of the role and goals of monetary policy. Mr. Elliott Bell has made an important contribution by indicating
some of the specific areas that need study. Without detailing his suggestions
here I will say that I find myself in broad agreement with Mr. Bell as to the
areas that need study. As to the vehicle for that study I differ with Mr. Bell.
Suffice it to say that my reasons for differing with him are that I believe this is
an area where the Congress has an inescapable constitutional responsibility.
I believe we might well combine Mr. Bell's proposal with mine by having a joint
congressional monetary committee assisted by outstanding qualified experts in
the field of banking and public finance.
My second impression gained from these hearings is that there has been an
exaggerated importance attributed to the monetary and credit powers of the
Federal Reserve as instruments that can guarantee us stability and growth.
Chairman Martin has made an important contribution to public enlightenment
in once again warning that monetary policy is "only one factor" and that "it
is not adequate to do an effective job if the budgetary and the fiscal policy of
the Government runs completely counter to it."
In this connection there was apparent unanimity throughout the hearings
that the main stimulus to the current inflationary pressures that the Federal
Reserve is attempting to restrain through its restrictive monetary policy and
higher interest rates and the greatest threat to instability have come from
the capital goods area, and particularly from the plant and equipment expenditures boom. This points up a serious lack of coordination between the fiscal
authorities and the monetary authority. For the expansion of plant and equipment expenditure was stated by the Secretary of the Treasury to be the primary
objective of Administration tax policy. As he put it, "investment is the goose
that lays the golden eggs."
Moreover, within the area of plant and equipment spending credit restraint
has operated unevenly. As Chairman Martin pointed out, an important advantage big firms have is their financial status. The little man does not
have it. That means that when the supply of bank credit is restricted and
commercial banks and other lenders must resort to rationing, they will naturally extend credit to those whom they judge to be the soundest risks, the
big firms with financial status. The small business is in effect being denied
the right to scramble.
This leads to a third impression gained from these hearings. The Federal
Reserve operates on the theory that by restraining generally the supply of
credit and thereby denying credit to some would-be capital users, it is preventing a wild scramble for limited resources which could only raise prices
without increasing the supply of resources. Ignoring for a moment the questionable assumption that resources are completely inelastic, it is pertinent
to point out that the price increases that have been greatest occurred in metals
and metal products, construction materials, and machinery.
These are the so-called administered price sectors. That is to say price decisions are not responsive to short-run interaction of supply and demand in
the market. Instead they are fixed more with an eye on the probable effects of prices and profits on the attraction of new firms into the industry.
Since in the administered price industries an important consideration is to
limit the number of producers, it is likely that prices will not respond freely
to unrestricted supply and demand forces. It is also true that prices will
be raised on the basis of other factors which changes in the supply of credit
and the interest rate will importantly affect. Thus the price will unquestionably be fixed to reflect a rate of return that takes into account the capitalization
of invested funds at the going rate of interest. Therefore with respect to administered price sectors rises in interest rates, due to restriction of credit, play
a more important role in raising prices than the restriction of credit does in


MONETARY POLICY I 1 9 5 5 - 5 6 160

preventing prices from being pushed up by the pressure of market demand and
supply forces.
Conversely it is true that in the areas characterized by sensitivity to market
forces of supply and demand, rising interest rates are less likely to be passed on
pricewise because of the sharp competitive situation that confronts each seller.
The textile industry is a good example.
It would appear that the monetary authorities do not appreciate sufficiently the
effects of credit restraint in areas characterized by administered prices.
A fourth impression created by these hearings is that under existing policies
we have no way of assuring that certain social needs for schools, housing, highways, etc., do not get bypassed in the scramble for scarce resources. The machinery we rely on for rationing a curtailed supply of credit is not primarily influenced by social needs and priorities. The result is that many school districts
have had to pay excessively high interest rates, in some cases enough to buy a
school that could house an additional 900 pupils. In too many instances school
districts have had to postpone bond issues because of the lack of investors. W e
cannot afford to postpone school facilities too long, especially in the light of the
challenge that the Soviet Union is making to our technological leadership. And
even if this challenge did not exist, education as a social need cannot be treated
as impersonally in the allocation of resources as, say, the demand for racetracks
or nightclubs.
It is evident that, assuming we want to continue to fight inflationary forces
with some measure of restraint on credit, we must decide upon the type of
machinery we want to ration the curtailed supply.
A final impression gained from these hearings is that not sufficient attention
is being given by the monetary authorities on the harmful effects of higher interest rates on income distribution. The main concern seems to be with stimulating
savings by offering higher interest rates as an inducement. It is well known
that the man of moderate means does most of his savings through purchase of
life insurance, payment of principal on home mortgages, etc. The really big
savers are those with very large incomes. The effect of raising interest rates may
well be to increase savings by increasing the income of the highest income receivers. This will tend to redistribute income and purchasing power in the same
uneven way that led to the widening gap between consumption and productive
capacity in the late 1920's. W e do not want to stimulate savings at the expense
of a widespread distribution of purchasing power which is the most potent
incentive ever presented to a prospective investor.
W e must at all times be equally vigilant to the dangers of deflation as we are
concerned now about the dangers of inflation.

(By direction of Chairman Patman the following tables are made
a part of the record:)
Farm wage rates, railroad freight rate indew, and total transportation Mil for
farm food products, 1947, 1955, and 1956


Transportation bill for farm food products (billions
of dollars)1
Railroad freight rate index (index No. 1947-49=100)3.
Farm wage rates, composite (dollars per hour)4





P 130

Percentage increase




1 Estimates of total expenditures by shippers tor transportation (except local hauling) of farm products
for civilian consumption by rail and truck, including private trucks. Principal causes for increase are
change in rates, volume shipped, and length of haul,
a Not available.
a Combined index for railroad freight rates on livestock, meats, vegetables and fruits, wheat and cotton.
* For October 1947 and October 1956.
Source: U. S. Department of Agriculture.


60 MONETARY POLICY I 1 9 5 5 - 5 6

Bond yields and money market rates, 1947, and week ending Dec. 1,1956
Week ending
Dec. 1, 1956
U. S. Government securities (taxable):
3-month bills 1
9- to 12-month issues2
3- to 5-year issues 3
Due or callable from 10 to 20 years
Due or callable at 20 years or after
Local housing authority temporary notes (tax exempt)
High-grade municipaljbonds 6
Corporate bonds:8
Prime commercial paper, 4 to 6 months
Prime bankers' acceptances, 90 days
Federal Reserve discount rate 10






7 3.45



• 3.71







1 Rate on new issues within period.
2 Includes certificates of indebtedness and selected note and bond issues,
s Includes selected note and bond issues.
415 years or more.
« Last sale of notes in 1947 and sale of Dec. 4,1956.
• Standard & Poor's Corp.
* Week ending Nov. 28.
8 Moody's Investors Service.
» Week ending Nov. 23.
Advances of member banks secured by Government obligations and discounts of and advances secured
by eligible paper.
Source: Board of_Governors, Federal Reserve'system.

Average prices paid by farmers at independent stores Sept. 15,1956, compared to
Sept. 15, m7
Sept. 15,

Sept. 15,

Percentage increase (+) or
decrease (—)















Commodity and unit
Food: Coffee
Men's overalls.
Women's shoes
Household operation:



Household furnishings: Living-room suites
Building materials: Framing lumber (2x4x16)
thousand board-feet.
Motor supplies: Gasoline
Motor vehicles:
Automobile: Ford, 6-cylinder, Mainline 1
Tractor: 20-29 belt horsepower
Farm machinery: Combine, 5- to 6-foot cut, power takeoff
Fertilizer: 3-12-6
..tonLivestock: Feeder cattle
100 pounds.
Feed: Mixed dairy, 16-percent protein
Iron and steel items:
Milk can, 10-gallon
Nails, 8-penny, common
poundBarbed wire:
spool of 80 rods.
Poultry netting (5x150 feet)
rollFence po^ts, steel
Gates, farm, galvanized, 14 feet
Iron pipe, galvanized, lH-inch diameter..





16. 70








i For July 1947 and 1956. This model was a 2-door sedan in 1947 and a 4-door sedan in 1956.
Source: U. S. Department of Agriculture.



MONETARY POLICY I 1 9 5 5 - 5 6 162

Average prices received by farmers for farm products in United States, Nov, 15,
1956, compared to Nov. 15,1941
Commodity and unit

Cotton, American Upland
Tobacco, all
Beef cattle....
All milk, wholesale

Nov. 15,1956 Nov. 15,1947

per dozen—



(+) or decrease (—)

Source: U. S. Department of Agriculture.

(Thereupon, at 4 p. m., the hearing was adjourned, subject to call
of the Chair.)