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NOMINATION OF ABBOT L. MILLS, JR. FRIDAY , F E B R U A R Y 7, 1958 UNITED STATES SENATE, SUBCOMMITTEE ON FEDERAL RESERVE OF THE COMMITTEE ON BANKING AND CURRENCY, Washington,D.C. The subcommittee met at2:35 p.m .,pursuantto call,in room 301, Senate Office Building,J. Allen Frear,Jr., chairman of the subcom mittee, presiding. Present:SenatorsFrear,Robertson,Douglas,and Proxmire. Also present: Senator Neuberger. Senator FREAR. The Subcommittee on the Federal Reserve will come to order. As youknow, this meeting is called foradviceon the reappoint ment by the President of Mr. AbbotLow Mills,Jr.,to be a member of the Board of Governors of the Federal Reserve System for aterm of 14years from February 1,1958. We will insert Mr. Mills'biographical sketch in the record atthis point. (The biographicalsketchofMr. Mills follows:) Born : Portland,Oreg.,September 26,1898. Father : Abbot Low Mills. Mr. A. L. Mills,Sr.,was for many years president of the First National Bank of Portland, and prominently identified with Ore gon's civic and commercial life. Mother : Evelyn Scott Lewis. Married : Katherine Ainsworth,August 4,1924. Children : Katherine Mills, Abbot L. Mills, Sarah Mills Harball, John Ains worth Mills. Education : Grammar ool, Por nd, Oreg.; Middlesex School, Concord, Mass.;Harvard University,bachelor of arts degree,class of 1921. Military service : Commissioned second lieutenant, Infantry, United States Army, September 18, 1918. Attached to SATO Unit, Georgia School of Tech nology. Honorably discharged December 1918. Business connections : Entered employ of the First National Bank of Port land, October 1, 1920, as messenger . Served successively as assistant cashier and vice president to December 31, 1932, except for the year 1923,or there abouts, during which served with the affiliated Pacific Coast Joint Stock Land B an k as assistant secretary . Employed by the United States National Bank of Portland, Oreg., January 1, 1933, to February 1952, serving as assistant vice president, vice president, and first vice president. Also served as director of the United States National Bank ofPortland and ofthe United States National Corp. Present outside activities: Director, National Committee on Boys and Girls Club Work , Inc. Member, committee to visit the department of economics,Harvard University. Overseer, Whitman College. Previous public service: Served two mayors of the city of Portland on com mittees having to do with municipal finance. Member,Governor's Committee on Small Business. President,Portland 4- H Club Advisory Council. 2 NOMINATION OF ABBOT L. MILLS, JR. Director,Oregon Tuberculosis & Health Association. President and member of board of trustees of Reed College. Member of Multnomah County Selective Service Board No. 5. Member of merit system council,Oregon State Welfare Commission. Member,board of hospital trustees,Good Samaritan Hospital. Fiscal assistant in the office of the Secretary of the Treasury (1942). President and treasurer,Harvard Club of Oregon. Vice President,Harvard Alumni Association (1952–53). Trustee,Portland Art Association. Trustee,Multnomah Amateur Athletic Club. President, treasurer, and director, Portland-Multnomah County Community Chest. Director,Portland-Multnomah County,American Red Cross. Director, Portland Chamber of Commerce. Director and treasurer,the Visiting Nurse Association. Director and treasurer,Portland Open Air Sanitarium . Society memberships : American Academy of Political Science, American Economic Association,American Finance Association. Took office as a member of the Board of Governors of the Federal Reserve System on February 18,1952. Member,Advisory Board on Economic Growth and Stability. Senator FREAR. Mr. Mills,we are very happy to have you again before this subcommittee. Mr. MiLLs. Thank you,sir. Senator FREAR.We also noticethat we have present inthe room the Chairman of the Board of Governors of the Federal Reserve System ,Mr. Martin. W e are veryhappy tohaveyouhere,sir. Mr. MARTIN. Thank you,sir.. Senator FREAR. We would like you to proceed in your own way, Mr. Mills,on behalfof yourself,asto the reasons why you think you should be reappointed,with any supplementing statement thatthe Chairman ofthe Board mightwishtomake. STATEMENT OF ABBOT LOW MILLS, JR. Mr. Mills. Senator,if I may,the approach possibly would be to give the committee a very briefsketch of my business life. I am an Oregonian bybirth andhave, except for rather brief absences,lived my entirelife in the Stateof Oregon, Senator Neu berger'sState and my State, until I had the honor to be nominated and was appointed amember ofthe Federal Reserve Board in Febru ary 1952 to complete the term of Mr. Marriner S. Eccles. I have now served the remaining 6 years of thatterm. Prior to service on the Federal Reserve Board my entire business life for 30 or 31 years was in commercial banking. It was an experi ence and a period of life of which Iam proud,as I have always con sidered banking a field of trust and a means of rendering a species ofpublicservice. If you,as was true in my case,had had a longcommercial banking experience,and were deeply interested in the principles and respon sibilities of banking, you can readily imaginemy pleasure at the opportunity of exchanging a private for a public lifein the field of banking by membership on the Federal Reserve Board. The experience has been a very rewarding one and one that has broadened my outlook on and understanding of both private and public banking. And, I am sure,has addedto my capacity and I NOMINATION OF ABBOT L. MILLS, JR . 3 hope my competency to render public service in an effective way to the Government. Senator FREAR. Thank you. Mr. Martin ? STATEMENT OF WILLIAM MOCHESNEY MARTIN, CHAIRMAN, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM Mr. Martin. Mr. Chairman, I hope you do notthink I am in truding inbeing here,but I wanted to come up and tell you that I have served with Governor Mills now for over 6 years andI have not the slightesthesitation inrecommending him as aconstructive, com petent,and conscientious member of the Board of Governors, who calls his shots as he sees them . I am glad to say he does not always agree with me . That isthe way itshould be. And I have not had the slightest hesitation in hoping that you will see fit to reconfirm him to this position. Senator ROBERTSON. Has he beensatisfactory to you? Mr. MARTIN. His services have been completely satisfactory to me,sir. Senator ROBERTSON.And the reappointment issatisfactoryto you? Mr. MARTIN . Completely. Senator ROBERTSON. Doesheworkin harmony withtheother mem bers of the Board ? Mr. Martin. He works in harmony with the other members ofthe Board. We have had differencesfrom time totime,all of us, but none of them of a nature that would cause us to be disharmonious. Senator ROBERTSON. Do you find that he is industrious? Mr. MARTIN. He is industrious,competent,and constructive. Senator FREAR. Thank you very much,Mr. Martin. Senator Robertson ? Senator ROBERTSON. I have no furtherquestions. I am satisfied. I have been watchinghim work. He has been doing a pretty good job. Senator FREAR.That is an excellent recommendation. Senator Proxmire ? Senator PROXMIRE. I have heard some excellent comments on your character, your fine reputation, and experience. I am deeply im pressed,Governor Mills. Mr. Mills. Thank you. Senator PROXMIRE. If thecommiteee will indulge me,I would like to ask some questionsabout the policies that you and the Federal Reserve Board have followed. Mr. MILLS. Certainly. Senator PROXMIRE. I will be very quick and very brief. I am deeply concerned about our monetary policy. I would like toaskyou if you feelthat a monetary policy,thatis,adjustinginterest rates,isa very effectiveway,a moderatelyeffectiveway,or an ineffec tive way of restraining inflation or adjusting price increases. STATEMENT OF ABBOT LOW MILLS, JR.- Resumed Mr. Mills.Senator, I believe that monetary credit policy is an effective way of helping to restrain inflation but must beusedin con 4 NOMINATION OF ABBOT L. MILLS , JR. junction with other public and private policies to bear the full fruit thatisintended of it. Senator PROXMIRE. Inyour knowledgeof economichistory,doyou know of any time when ithas been clearly effective in limiting price increases? Let me put it this way,because I recognize thatthis issomething thatis fairly new and that we have not had andother countries have not had a policy of attempting to restrain prices by interest-rate policy. I am wonderingif you know of any era in which we have had a coincidence of raisinginterest rates which have restrained and re tarded price increases. Mr. Mills. Senator,you put thequestion in the light of history and it isdifficult to answer in line with history of,say,25 to 30 years ago. In the extremely active period of the 1920's the most advan tageous use ofmonetary policyin the United States was really only comingtobefullyaccepted. Thatbeingthe case,thereisdoubtinmy mindthatmonetarypolicy in the 1920'sand its effects would stand as a criterion for theuse and the resultsof monetarypolicy as ithasbeen conducted since 1951. Senator PROXMIRE. All right. Fine. Let us take the period since 1951. It is my understanding that between 1951 and 1956,by and large, interest rates increased somewhatand it isalso my understanding that during this periodprices increasedalso. Infact,I have seen a state ment recently in the New York Times— and this was not attributed to the New York Times itself,but was contributed by a responsible writer writing in the New York Times— that thiswas themost rapid peacetime inflation that we have experienced. Do you feel there were so many other factors that were at work pushing prices up that although monetary policy was a restraining factor itcould notovercome these other forces? Mr.MILLS. Monetarypolicy,Senator Senator PROXMIRE. Let me correct my position and say I recognize ofcourse that we were not atpeace in 1951 or 1952. Let me begin in 1953 through 1955,when we did have rising interest rates and rising pricelevelsinaneraofpeace. Mr. Mills.Monetary policy in the period 1955 to the fall of1957 was conducted in waysthat sought to restrain the expansion of bank credit andthetributaries ofbank credit,bycontrollingtheentire flow of expenditures so as to prevent the impact of expenditures from pressing upward on the price structure and causing prices to rise. SenatorPROXMIRE. I am told— ifI may interruptat that point— for example, between 1955 and 1956, and I think those were the years, we had a rising interest rate,and the most likely way in which this could be to restrain inflation would be to act to inhibitbusinesses from borrowing money and expanding. During this period we had a per fectlyenormous increaseinbusinessborrowing,whichSecretaryofthe Treasury Humphrey has testified and agreedwas principally respon sible for inflation that was going on during this period. Is that correct ? Mr. MILLS. Yes,itis,Senator. NOMINATION OF ABBOT L. MILLS, JR. 5 The economichistory and thecounsel thatwe getfrom theFederal Reserve Board's economists tell usthat the problemthatmonetary policy undertook to cope with had its roots going back to the era of World War II and then on intothe period of theKoreanexperience. And duringboth ofthoseperiods, asyouwillremember,thefirstand foremost public responsibility ofthecountry, was to win the battles thatwewerecompelledtofight. Indoingso itwas,ofcourse,necessary fortheFederalGovernmenttoborrowveryheavilyfromthepeopleof the United States. At the same time that these borrowings were undertaken to finance the material and the means with whichto engage in combat, it was equally necessary to restrict through priceand wage regulations and controls access to the goods that in peacetime our people ordinarily would wishtoenjoy. The effectwasthat with employment and incomes running at very highlevels, and the opportunitiesfor spending limited,the American people very patriotically and very properlyinvested their surplus income inUnited StatesGovernment securities. The result was that when the wars ended and the controls were lifted,thepeoplewho had previously acquiredUnited StatesGovern ment securities SenatorPROXMIRE.What periodisthisnow ? Mr. Mills. That would be true of both periods,Senator, as you recall. Senator PROXMIRE. 1946 and 1953. Mr. Mills.Yes; 1946and 1953. And throughthe intervening period allof thosesecurities were in,say,your hands and my hands and available to be immediately converted back into cash with which toacquirethethingsthatwe had beenpreviouslydeprivedof. The resultwas thatas all of theseliquid assetsbecame cash available forspendingbeforethemanufacturingcapacityoftheNationcouldbe expanded toproduce a sufficient volume of goods to meet the demand that was asserted for them Senator PROXMIRE. Let me ask you : Do you discriminate between the degree of control in the Second World War and the degree of controlsof theKorean war ! Mr. Mills. I would not fundamentally. Senator PROXMIRE. Were the controls of the Korean war far more limited and far lessstringent? Mr. Mills. That istrue. As the period between 1946 and 1950 when the Korean episode startedwasnotlongenoughtoallowanincreaseinthesupply ofgoods sufficienttomeet ademand thatwas fedfrom theconversion of liquid assets, the tremendous flow of expenditures that resulted asserted itselfinveryrapidlyrisingprices. Senator PROXMIRE.This analysis would indicate that weshould have accountable forthe price increase a heavy consumer demand rather than a heavy demand on the part of business for plant con struction,which was,accordingto the Secretary oftheTreasury,the principal force in our inflation in 1955 and 1957,am I right? Mr.Mills. Iwould agree with Secretary Humphrey regarding the inflationary influence of thedemand forplantexpansion. As econo mists analyzed the situation,the excess liquidity that was converted 6 NOM NATIO N OF ABBOT L. MIILS, JR . intoerpendituresand createdademand foraverywiderangeofgoods and servicesTerm Daturally encouraged our industrialiststo expand iberi testnent plant,so that they could turn out the additional ODIDOT thatwould meetthat gentand. Senator PRODMIE.A riott I agree with that. I think that is N T a Tert wie analysis of the statJob. D J Iwouldsepike topost ou iba iappearsthattherestrain pact ofDODELATI T WAS T r e e s limited inview of the S E D E X of the fact we did fat ibere was the bomo par to be peacetime periods of hste thisterm great dan De s a m e n N i b e S t o r i e s DOTIO Lighterest rates MUSI-DIDU . T to me thatthe a r e ratta pactof hard on ailmunicipal sicer DOTOwing has to be m e n i s i c o S a s o r BOTID on generally m i t t a r e L o w r i t o r i o me thatthe history Eyni y e r i n d e T AUN IR DAS E Da * -opast fromhigh be a O E T I E + 27 D a s K = toate areas of schools, ü n e generally and ise 2 7 of b a s s 723 B I S O L Es uding plant 1:1 5 s T R O L C U I L L E ! 1: Yes IF O R T E I Favo H i e r R Tepiacri : Thei m a g Se u r v i L i n g u a r a k a a t Fart I T B T o I L I N n C v e powers that STRE .E Dagent,those L i n g e r i e Ter S T E G I r ; Riti N u r i y e B a r of Gor . de impact of i ; 5 I T ' 2 s in i o D t u * Sition of n r n a che Board + - 5 0 e »* » : : : N'S : : • " prirciple, N a t c o u eally picant in 1 8 . S i tratta dit met gerus In i H t i In s v i N **a i' r* * But I . O N Tin to vielav Piet erger. R u t h i e to ask Petr 'e t to a e r o pg e s t e r n M u r r h i t i o n is noty e t "arters in 206 reach 1998 1 9 ," T. a r ir impor C e r e m o n i a P a r i s P a n i e r eo m > ,small c e r t a princi * * * * * * *1 3 ; volume of C a t e or allo 1. p o s a ro a statement. u n 22tres . I o T S T E D pozosophyof * *V ! n i M u t t e n ,if I a c increase NOMINATION OF ABBOT L. MILLS, JR. 7 in interest rates since 1953 or 1954 has cost the American taxpayer $ 142 billion becaused of increased servicing costs of the national debt . Mr. Mills. Senator,Icannot give you Senator PROXMIRE. I do not expect a precise answer,of course. mean,isitroughly in thisgeneral area ? I Mr. Mills. There isno question butthatthe risingcostofcarrying the Federal debt has laid an additional burden on the American taxpayer. But, in a sense,it can be regarded as a price that the American taxpayerhasshouldered as an alternative tobeing afflicted with the ravages of inflation and a constantly rising levelof prices and a depreciatingvalueofthedollar. Senator ProxMIRE. Allright. Fine. Do youfeelthatfiscalpolicy, that is,increasing taxesand decreasingspending,islikelytobequite a bit more effective than monetary policyfor restraininginflation,or isitprettydifficulttocomparethetwo? Mr. Mills.They are inmy judgmentquite different,buttheanswer is that when hearings such asthisare being conducted, the question ing and the discussion very largely turnson the expression “Fiscal andmonetarypolicy”;inotherwords,thereisacommunityofinterest between fiscal policy, meaning taxation and debt management, as directedby the Treasury,and monetary and credit policy as followed by the Federal Reserve System . The two different types of policiesmust be conducted in a manner that makes them companionsin serving the public interest. Senator PROXMIRE.Of course, we have not been doing that, have we,for various reasons? Let me ask:Do you feel that the Rural Electrification Administra tion is entitled to pay a 2 -percent interest rate underall the present circumstances,ordo you feel that all agencies ofthis kind should be requiredto pay the going interest rate that the Treasury has to pay? Mr. MILLS. Senator, that Senator PROXMIRE. Do you feel that is outside your field? Mr. Mills. No. But it is a subject that I would notbe competent to passjudgmenton for the reason thatI regarditasa decisionwhich has to be reached withintheHalls of Congress in decidinga balance between what mightbe decided to be social necessities and what,on the contrary,might be regarded as financial proprieties. Senator PROXMIRE.I haveonemorequestionand thatisthatIhave received letters from country bank people,that is,banksinverysmall towns in Wisconsin, who have pleadedthat I ask about the policy of the Federal Reserve Board with regard to reserve requirements for country banks. Their feeling is thatthepresent requirementsare too high,in view of the needs ofthe small businessesand small towns and in view of the needs of farmers. I have wondered if you had any viewson this or any notion as to whether there is any prospect as to reducing requirements? Senator Frear. May Iintercede on thisquestion! I certainly hope that Mr. Mills can answer the question,but Ido think that the witness should reservetheright in any answer hemight make, topreclude discussionswhich might tend tohave economic reverberationsin thestockmarket and otherplaces. Mr. Mills.Thank you,Senator. 21443–58_2 8 NOMINATION OF ABBOT L. MILLS, JR. I willtry toanswer the question by indicating that changes made from timeto timein the required portion of abank'sdeposits that must be set asidein a cashreserve, achieve theidentical purposes that are accomplished when the Federal Reserve System operates in theopenmarketand suppliesor withdraws reservesinthatmanner. Inother words,thereis a choiceof means for supplying or with drawingreserves. As faras individual banksareconcerned,thereis little difference whether those reserves reachthem inone way or the other,except thatwhere reserves aresuppliedthrough the open mar ketthey do not touchthe positions of individual banks immediately and heavily,but percolate and penetrate through the bankingsystem in amore deliberatemanner. Senator PROXMIRE. Do I understand youcorrectly, then,that you indicate that itmight disruptthe whole equilibrium betweencountry banks and the larger banks ifyou too sharply and drastically reduce the reserverequirementsbelowwhatthey arenow?Do you feelthere isan equilibriumestablished now thatifyou cut them itwouldbe up setting and the best thing to do wouldbe to attempt to adjust all reserve requirements in Washington ? Is that a fair interpretation or not ? Mr. MILLS. That is an awfully difficult question to answer con cisely. Senator PROXMIRE.I am askingthis asalayman. I havehadsome banking experience,but itwas a long timeago and itwasquite lim ited. I am sure,precisely, however,thatIhave been informed by people inWisconsinthatit issomething like6 percent forcountry banks. Is this about right? They would like to see this reduced to a lesser amount. Mr. Mills.It is5percent on their time deposits and 14 percenton their demand deposits. Senator PROXMIRE. Five percent is the figure; yes. Mr. Mills. As we would look at it, and SenatorDouglas as an economist, Ibelieve, would view it, thatwhat the Federal Reserve System hasdone inthe last several months is to broaden the credit basethroughsupplyingadditional reservestothecommercialbanking system on which they could expand the total of their loans and investment. The system's fundamental responsibility is to wield its influence inwhatever ways will always assure an appropriate creditbase and a supply of credit available to the bankingsystem for the uses of the general public. As a personal opinion,the statistical picture that I draw is that thereisat the present time a credit baseadequate to permit the com mercialbankingsystem to expand and increase its loans and invest ments; leeway,thatisto say,to move in that direction. Senator PROXMIRE. Thank you very much. I do appreciate once again yourverycompetenttestimony. Mr. MILLS. Thankyou,sir. Senator FREAR. I want to say to the Senator from Wisconsin that ItSenator hinkheh asaskedverygoodquestions. PROXMIRE. I think the Chairman . Senator FREAR. Senator Douglas? NOMINATION OF ABBOT L. MILLS, JR. 9 Senator Douglas. I would like to yield to my colleague,Senator Neuberger, who comes from Mr. Mills' State,and I would like to allow Senator Neuberger toproceed. Senator FREAR. Yes. Does the Senator from Oregon wish to sitthere or move to a more advantageous location? Senator NEUBERGER. This isquite allright,Mr. Chairman. Senator FREAR. As you know, Mr. Mills, Senator Neubergeris not a member of the subcommittee,but the courtesy of questioning is always extended to Membersof the Senate when requested. A re questwas made by Senator Neuberger and as chairman of the sub committee Iwasveryhappyto complywithit. We are very glad tohave SenatorNeuberger here and hope that the questionsand answers will supply us with the information we desire. Mr. Mills. Senator,I regard itasacourtesy and acompliment that Senator Neuberger wouldattend a hearing for a fellowOregonian. Senator DOUGLAS. There is one remark Iwant to make. We both must feelathome in the deluge of rain which we are now havinghere in Washington. Senator NEUBERGER. Senator Douglas enjoyed the rain in Oregon when hewas teachingat ReedCollege,where Mr. Mills was once pres ident and member of the board of trustees. Mr. MILLS. Yes,sir. Senator NEUBERGER.I thank the chairman for the courtesy of per mitting me to attendthishearing. I assure you I will be very brief, because Senator Proxmire asked very capably a few of thequestions inwhich I was interested. Iwant tomake clear that my specific interestin this matter,and the fewquestions I want to ask donotapply at allto Governor Mills' personalqualifications. Governor Mills isan esteemed citizen of my home cityof Portland,Oreg. He isa man of integrity,honesty,with a very fine personal reputation. I want the record to make that very clear. Mr. Mills. Thank you,sir. Senator NEUBERGER. Iwould also liketo put intherecord,ifI may, a telegram that I addressed to Governor Mills last night asking his views on certain matters pertaining to credit and anti-inflationary trends,and the replywhich he sentto me over his own signature on February 7. If the chairman and members of the committee have no objection, I would like to askthatthese be included in thehearing record. I will not impose on the time of the committee to read them at this time. Senator FREAR. Without objection,they will be admitted as part of the record. (The information referred tofollows:) WASHINGTON,D. C.,February 6,1958. Mr. ABBOTT L. MILLS,Jr., Board of Governors,Federal Reserve System , Washington, D.O .: Have been asked my views,as Senator from Oregon,on your reappointment to Board of Federal Reserve System , which is now before Committeeon Banking and Currency. Before making any comment, would appreciate knowing your personal views concerning effects and desirability of recent use by Federal Re serve of high interest and rediscount rate and reserve requirements. 10 NOMINATION OF ABBOT L. MILLS, JR. As a person familiar with economy of Oregon, you will know effects which these devices, intended as anti-inflationary,have had in restricting housing construction and thus in violently contracting markets and employment of Oregon'sbasic lumber industry. Other consequences have included drastic in creases in financing costs for essential public construction such as new schools, hospitals, and public works, as well as in the annual burden of Federal, State, and local debt service. Would appreciate receiving as soon as possibleyour comments on recent expe rience as guide to future Federal fiscal policy, in view of importance of your position not only on Federal Reserve Board butalsoon Advisory Board on Eco nomicGrowth andStabilityofPresident'sCouncilofEconomic Advisers. Sincerely, RICHARD L. NEUBERGER, United States Senator . BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM , Washington, February 7, 1958. Hon . RICHARD L. NEUBERGER, United States Senate, Washington, D. C. DEAR SENATOR NEUBERGER : This will acknowledge your telegram of February 6 requesting my personal views concerning the monetary and credit policies of the Federal Reserve System . It is the constant aim of the System to follow policies which, within their field of influence,will make the greatest contribution possible to national economic stability and growth. The System's policies are formulated against its reading of the prevailing economic climate, which during 1955, 1956, and the greater part of 1957 was one of unusual economic activity that,in the judgment of the System's policymakers, threatened the economy with possible damage from inflation. As you will recall, the problem of inflation was the subject last summer of an exhaustive congres sional inquiry. Inasmuch as the use of credit adds to the flow of total expendi tures which,when on a rapidly rising trend, assert an upward and inflationary pressure on prices, it was therefore incumbent on the Federal Reserve System to use its influence to moderate the expansion of credit on a national scale. It should also be said that in carrying out its policies,the System is keenly aware of the essential need of adequate sources of credit to a growing economy,and its policies have always been directed to the end of providing a credit base in keep ing with that objective. As you know ,the total of bank credit continued to grow during 1957,but at a less rapid rate than in 1955 and 1956. However, as during the greater part of 1957 an unusually heavy demand developed and converged on all types of credit, itfollowed that the pressure of that demand against the available supply of credit was reflected in its sharply higher cost, namely,a rise in interest rates. On the side of the supply of credit, its distribution, of course, rests with the various agencies by wh om it is held and who allocate it in accordance with their best judgments and policies. In that process of distribution at a time of an unusually high demand, it was quite natural that lenders experienced some difficulty in expeditiously meeting all of the demands for credit that were pressed upon them . In that latter connection, your telegram refers to the situation of the Oregon lumber industry, particularly as it is affected by conditions in the field of resi dential and commercial construction. From my observation and analysis, the funds on which the construction industry draws for its financing come very largely from savings and not from commercial bank -created credit. As you know , savings and loan associations, insurance companies, and mutual savings banks are the principal purveyors of real-estate-mortgage credit and rely for their loanable funds on the supply of savings which comes into their hands for investment. The year 1957 was noteworthy for a heavy demand for the use of savings funds with which not only to finance construction but also the expansion and modernization ofthe Nation's manufacturing plant. In the light of the com peting demands for the use of savings, real-estate-mortgage funds were not as freely available in 1957 as in earlier years due to their application to the financing of the Nation's plant-investment needs and to such other economically desirable public projects as schools, highways, sewage disposal systems, and hospitals Available statistics indicate that thedemand for savings with which to finance plant expansion has passed its peak,and in the processsavings funds are now becoming more readily available for real-estate-mortgage lending and for financ NOMINATION OF ABBOT L. MILLS, JR. 11 ing public programs. There are some indications that the volume of residential construction has stabilized and housing starts give some promise of rising. I should mention that the automatic shifting that occurs in the use of credit made available both through savings and from commercial banks is in line with the operation of a dynamic and flexible economy and in accordance with the spirit of our American free-enterprise system. In relating the Federal Reserve System's position to the processes of credit adjustments, you will recall that in its reading of the economic climate the con clusion was reached last fall that restraint over the expansion of bank credit could be moderated . Accordingly, the System acted progressively to broaden the base for the expansion of bank credit and in addition, the discount rate at Federal Reserve banks was reduced from 312 percent to234 percent. Partially in response to the Federal Reserve System's policy,and partially in response to a subsiding demand for credit that has released funds for renewed uses, interest rates have fallen sharply and credit, in my opinion, has become readily available to all qualified claimants for its use. In that connection, the interest rate at which States and local authorities can borrow in the market has fallen sub stantially, thereby decreasing the financing cost of the vitally important projects that are financed from bond issues. At the same time, the number of such worthy projects to be financed has continued to increase and their financial needs are being cared for. I hope that I have been able to portray to your satisfaction recent credit history. In summary, I would like to repeat that it is the Federal Reserve System's constant objective to exert its efforts to see that credit shall always be available in quantities adequate to meet the Nation's needs,and in those ways that are most conducive to economic stability and growth . I am sorry that I have not been able to reach you prsonally at your office but hope that I may have betterluck atsome early date. Sincerelyyours, (Signed ) A. L. MILLS,Jr. SenatorNEUBERGER. I thankthechairman very much . There are 2 or 3 questions I would like to askGovernor Mills. Senator FREAR. Ido not know the contents of these documents that have been inserted in the record,but I assume there is nothing in the telegramsthatwould violatethesecrecyorprerogativesoftheFederal Reserve System . Mr.Mills. No,indeed,sir. SenatorFREAR. Iassumed that would bethecase. Senator NEUBERGER. I thank the chairman and thank the Governor. The reason I imposed on the time of the chairman and the subcom mittee and Governor Mills to come here today is this:The State of Oregon is stricken today by some of the most alarming economic con ditionsany Statehasfelt sincethedepression. Today we have the highest unemployment rate in the Nation in Oregon,second in the Nation is Montana, third is the State of Wash ington. All threeoftheseare PacificNorthwest States. Senator FREAR. Delaware also has considerable unemployment. Senator PROXMIRE. Iwish to say that Wisconsin is competing. Senator NEUBERGER.We only wish to state, despitethe problems that the chairman and the Senator from Wisconsin have in their States,which are very real problems,as they are in Senator Douglas' State, thatour employment rate was down more than itwas inthe States of these Senators, drastic though itmay be in the State of the chairman. The unemployment rate,Senator Frear,in the State of Oregon,ac cording to thelatest announcements by the Labor Department, is 12.8 percent, which is approximately what it was during the great depression. 12 XOMINATION OF ABBOT L. MILLS, JR. The concept is very wide in the State where you and I have our bomnes that credit policies of the Federal Reserve Board are in sub stantial measureresponsibleforthis. I want to read justonesentence from an editorialin theOregonian of November 16,the leading paper in that State,which highly com mended your original appointment to the Federal Reserve Board, andthisisthatsentence: The wood jroducts industry of the Northwest is a prime exampleof an in dustry depressed by a building slowdown caused by highinterest and diminished Tedit A short time later,on January 5,in thecity of Salem,a prominent fellow banker of yours from Portland delivered a speech and I want to read the two sentences in the Salem Statesman ofJanuary 8,1958, which described that speech : Slowdown in bome construction in the United States caused mainly by tight money was blamed yesterday for bringing on Oregon's slump. F. M.Phillips, vice president and investment directorofthe First NationalBank of Portland, Juke to members of the Salem Kiwanis (lub in Salem, Oreg., today and to Irrow . The rest ofthe speech was inthat rein. You, Governor Mills, are a member of the Advisory Board of the Federal Reserve Board on Economie Growth and Stability in which capacity I believe you advised the President's Council ofEconomic Advisers,is that correct? Mr. Mills. It iscorrect to this extent,Senator,that the Advisory Board on Economic Growth and Stability is composed of repre tentatives of the different bureaus and departments of the Govern ment who consult with the Council of Economic Advisers who draw on their pool of experience in their particular fieldsof responsibility to reach in turn their own conclusions on the economic picture. Senator NEUBERGER.But you are a member of that Advisory Board ? Mr. Mills. That iscorrect,sir. Senator NEUBERGER.Governor Mills,in your opinion do you think that the credit policies followed in thelast 5 yearshavecontributed to the economic growth and stability of the Pacific Northwest? Mr. Mills. Senator,if we would feelfreeto divorceourselvesfrom sectionalism and look at all areas of the United States and then re yard the Federal Reserve System monetary and credit policy as ap plying to the overall situation inmy judgment, the Pacific coast has benefitedin thattheSystem'spolicieshavebeen conduciveto ageneral atmosphere of economic stability and have exerted a restraint over inflationary influences that could have been inimical to the best interestsofthe peopleatlarge,ifleft unattended. Senator NEUBERGER. Do you think there has been economic sta bilityand growth in ourState in the past5years? Mr. Mills. No,sir. I surely join with you that the Pacific North west States Oregon,Washington, and Idaho— States that are pe culiarly influenced by conditions in the lumber industry, have not enjoyed the same fruits of prosperity that have been true of other States. Senator NEUBERGER. As a member of the Federal Reserve Board from the Western States,are you concerned and alarmed about that? NOMINATION OF ABBOT L. MILLS, JR. 13 Mr. Mills. Senator,I am distressed that there has been one section of theUnited States,and asectionthatisparticularlydear tom e , that has notenjoyed thefullest measureof prosperity. But as shown by economic history, the fortunes of differentsectors and areas of eco nomic activity ina country as large as the United States ebband flow over a periodof time. At one time a sector of activity will advance inprosperitybeyond someothersectorandviceversa. Looked a inthatway IhaveeveryconfidencethatthePacific North west will indue courseenjoy thelevelofprosperity to which we would wish itto aspire and feelthat some encouragement in that direction can betakenatthepresenttime. ItoucheduponitintheletterthatIaddressedtoyoutoday,namely, thatnow that theverystrongdemand forcredit with which tofinance theexpansionofplantcapacity inthecountryhassubsided,theeffect of that conditionis thatcredit factors have been released which can now find employment in other areas of economic activity. There is now some slight indication that unused credit factors are engaging themselves more actively in the field ofconstruction than was true of some months ago.Also there are multiplying indications that funds for mortgage lending—and mortgage lending lives at the heart of residentialconstruction— are notonlybecoming more available,butat alowercostthanwas trueonlyashorttimeago. Senator NEUBERGER. Ihave oneortwo more brief questions. Youused the phrase,Governor Mills,"in due course"you believed theregionwecomefromwouldshareinthisgeneralprosperity. When you used the phrase "indue course,” justwhat doyou meanby that? Mr. Mills.Senator, throughoutthe whole mechanism of economic activities thereoccurs a constantshifting of economic forces from employment and assertion in one field of activity to reinforce activity ort of a shifting process that has in some other area. This is the s sort come tobe called arollingreadjustment,and whichoccurred between 1955and 1956– SenatorDouglasissmiling: Senator Douglas. That isa very historicphrase,"rollingreadjust ment.” But I am glad you applied itto 1955 and 1956 and not1953 and 1954. Mr. Mills. Senator,we will all remember that in 1955 the credit forces and theeconomic forces of the Nation focused very importantly on a growth of consumer credit and in avery rapid expansion of con sumer purchases of automobiles and other durable goods. It might be said that,asthepeakofactivitieswas passed inthatfield,thecredit resources and othereconomic factors thathad been engagedwerefreed and became employed in 1956 and on through 1957 inthe financing of this veryremarkableexpansion of our national manufacturing capac ity that has been alluded to and which has given us a more modern, efficient,and complete national plant than everbefore known. Thus you see thatwhere the resources that have been engaged in some particular activities are no longer needed,they are freed to find employment inother areas. You and I certainly hope that their new employment willbereflectedin improvement in our PacificNorthwest lumbering industry. SenatorNEUBERGER. W e certainlydo. Ihavejustoneotherquestion,Mr.Chairman,and I willnotimpose on theChairany further. 14 NOMINATION OF ABBOT L. MILLS, J R . You have indicated that you were aware,as I am,of what has happened in the Northwest, of the truly alarming unemployment ofthe 4 States of the Columbia Basin. For example,I learned recently from the Bell System that in our State in the first 7 or 8 months of 1957 Oregon had the greatest drop in what isknown asmain net demand fornew telephone service of any of the 48 States. Otherindicatorsareequally alarming. This is my question, Governor Mills: In your capacity as a member of the Federal Reserve Board, the only memberof the Federal Reserve Board from the Western States, from the Pacific Northwest States,which have been so stricken economicallyin recent years,doyou regard yourself as havingany specialresponsibility for trying to bring about fiscal or economic or monetary policieswhich will mitigate or alleviate this distress in the Northwest, or do you regard yourself as just one more member of the Federal Reserve Board without reference to the region from which you come! Mr. Mills. Senator, as I read the duties imposed on a member of theFederalReserve Board by statute, they must be performed and fulfilled without fear or favor or favoritism to any particular geo graphic area orto any particular sector ofthe economic activity no matter how sentimentally dear or close itmight be to you. Senator NEUBERGER. But there is somereference in the statute, is there not, to the fact that there has to be some geographic distri bution among the members? I am not quite clear. Is there not something there ! Mr. Mills. You arequiteright,sir. No Federal Reserve district, and there are 12 Federal Reserve dis tricts, can be represented by more than 1 member on the Board. “Represented” is a poor word. It is not representation because it is anational responsibility. But it was the spirit andphilosophy of the drafters of the Federal Reserve Act that it would be wise in a country so farflung as the United States to draw on the experience and the type ofbusiness or other backgrounds that would give a general nationwide sense. Senator NEUBERGER. I thank the chairman of this subcommittee so much for his kindness. I am very grateful to the chairman for permitting me to question,although I am not a member of the com mittee orthe subcommittee. And I want to thank Governor Mills for his patience and kind ness in replyingtomy questions. Mr. Mills. It has been a pleasure,sir. Senator FREAR. We thank Senator Neuberger for coming and ask ing some enlightening questions, and I can say that the unemploy ment situation in Oregon sounds asignal of distress to all of us. Senator NEUBERGER. Ithank the chairman very much. Senator FREAR. Senator Douglas! Senator Douglas. Mr. Mills, we have had the pleasure from time to time of having the Chairman of the Board, Mr. Martin, here be fore us. However, we are only able to meet with the other indi vidual members of the Federal Reserve Board every 14 years because you have a 14-year term of office and that is how often you come before us for confirmation. Like the 17-year locust, so to speak, NOMINATION OF ABBOT L. MILLS, JR . 15 which goes underground and comes out at the end of 17 years,you have a14-yearcycle. You will excuse me,therefore,if I ask somequestions not directed to you personally, because I have only the highest opinion ofyou, but at some of the problems which you face as a member of the Bo ar d . Isthatreferencesatisfactory? Mr. Mills. Indeed. Senator Douglas.From the early summer of 1956 until, let say, November or December of 1957, the Boardquite honestly followed the policy oftrying to check inflation by raisingthe rediscount rate and notpurchasingbondsonthe openmarket and not increasing the lending capacities ofthe banks. During thistime you were success fulin holdingdown the volume of loans which the bank had made, and there hasbeen a slight increase,perhaps1 or 2 percent,of total volume of short-term loans and demand deposits. During thistime, physical production increased and the physical volume of servicesincreasedby approximately 6 percent. You would expect,in accordance withtheoriginal quantity theory of money,that prices would fall by 6 or 7 percent. Instead, prices rose by 6 or 7percent. So in the midst of your efforts to restrain inflation wehad a very real inflation. Did you have a feeling of frustration while this was occurring? Mr. MILLS. Yes,Senator. That word expresses it very well. You referred tothe different times Chairman Martinhas appeared before various committees of the Congress;and as we,hiscolleagues view it,he has forcefully and unequivocally explained at all times the problemsof monetary policy and the perplexities with which it isfaced,and thedifficultiesofseekingtheutopia ofgeneral prosperity without inflation. Senator DOUGLAS.Here you had inflation despite a rather strict control over the amount of credit at the same time. You also had an advance in productivity which should have caused prices to fall by 6 or7 percent,but instead prices roseby 6 or7 percent. Do you have anyexplanation asto whythisparadox occurred? Mr. Mills. Partial explanations, Senator,one very important one beingthatalthoughtheobjectivesoftheFederal Reserve policywere effective in slowing down the growth in the money supply,the turn over,or the velocityof the use of that supplytoa veryreal degree negatedsome part oftheeffectivenessofthe policy. Senator DOUGLAS. That is true. Did itoccurtoyou thatthehigh-interest-ratepolicy actually might havecausedan increase inthe velocity? Mr. Mills. I cannot honestly saythat it occurred to me,but now as you posethequestion,an off-the-cuff answer would be that I would believethat higherinterestrateswould have some influenceon veloc ity. Senator Douglas.In otherwords,business presumably borrowson a short-timebasis primarily for thefinancingof theprocesses of dis tribution. If the cost of that borowing increases they will want to turn over their inventories more rapidly to diminish the cost,will they not? 16 NOMINATION OF ABBOT L. MILLS, JR. So,while policiescausing high interestrates may restrain the total volumeofborrowings,theymay also increase the rapidity with which the bank deposits thus createdare turned over. Is thatnottrue? Mr. MILLS. That is correct. Senator DOUGLAS.So in barring the frontdoor toinflation by poli cies which increase interest rates you admitted inflation through the back door. Let me hasten tosay that I do not regard the Federal Reserve Board as thevillians some of my colleagues do inthis matter. I also want to credit you with the best intentions. This is a field in which our knowledge is incomplete. But isitnottrue,really,thatwhileyourhigh-interestrate policies helddown thetotal volume of credit,they also stimulated thevelocity of the turnover of credit and this has led to creation of the inflation you weretryingto stop? Mr. MILLS. Senator,would you add that a furtherpropelling factor to that situation was the factthat during this period of enormously high economic activity American concerns tended to increase the volume oftheirbusiness and,in doingso,their balance sheetliquidity contracted in that their free cash and the securities that were con verted into cash were then invested in added inventories and added investments in accounts receivable ? The net effect in leaving busi ness with smaller holdings of cash was to put it under compulsion to obtain the most efficient results from the use of that cashby its more rapid turnoverand,by thesame token,to turn over their inven tories and their receivables as fast as it was possible. Senator Douglas. That isquitepossible. Itisa complicated thing, but it isquite possible. There is another question that I would like to ask. We are now in abusiness downturn and Iam glad to see you apply the phraseology, " A rolling readjustment," to describe the 1955-56 period and not to describewhat ishappening now- even though that was the term which Mr. George Humphrey applied to the 1953–54 recession. Do you think that the monetarypolicywhich you largely directover theFederalReservebankscanbeveryeffectivein arresting a downturn in business ? Is itas effective,for instance,in offsetting a recession or depression as you believed itwould be in checking inflation on the upswing! Mr. Mills. Senator, I am afraid the answer to that question will havetowait upon ourpresentexperience that— Senator DOUGLAS. But look,we are shooting the rapids now. We cannot wait until after this is over. We have to make a decision now . There are some sayingto Congress,"Don't doanything,don't change tax rates,don't change expenditures, don't alter fiscalpolicy. The FederalReserve willcarryus through. Justlet Pennsylvania Avenue handle this thing." And you say:“Wait until itisallover. Wait until the patientdies or recovers and I will tell you whether the prescription works." Mr. Mills. Senator,there might be justan elementofinstitutional modesty in that statement because we in the Federal Reserve do con stantly believe that monetary policy can be a contributing factor to revival. NOMINATION OF ABBOT L. MILLS, JR. 17 Senator Douglas.Do you think it is a very adequate factor in a downturn ? Mr. Mills. I cannot answer at this time because what it relates to is expenditure, and total expenditures arevery vastly influenced by the amount ofcredit that isinuse. The Federal Reserve System as made available a credit basethat,as it is employed most advan tageously,could have a stimulating economic benefit. Senator DOUGLAS. You are a practicingbanker,and I am sure you have been a student of banking, too. You undoubtedly have gone over thehistoryofthe1929depression;haveyounot? Mr. Mills. I livedthroughit,sir. Senator Douglas. Yes.You know what was happening in 1930, 1931,and 1932. The bankshad great lending ability. Their reserves in relationship to their deposits were high. There were large idle reserves,asI recall. There wasno effective restriction up on the lend ingcapacityofbanks. The New York Federal Reserve Bank followed the open -market policy underBenjamin Strong withthe advice ofIrvingFisher,buy ing governments and creating reserves which the banking system could,inturn,multiply fivefold orsixfold. Yet the lending did not hold up. Investments did not hold up. Interest rates were lowered, and still investments did not occur enough to help,because while the capacity was there,business did not want to borrow and banks were afraid tolend. So themere ability to lend does not necessarily create a loan. Have thoughts such as those crossed your mind as you have gone into the handsome offices that you have down on the Avenue each morning, reading the doleful news of the day in the Wall Street Journal ! Mr. Mills.Well,sir,indeedthey have,butthe problem that you have turned to,as I would see it, ispublic attitudes and public psy chology. As long as thereis a spirit ofconfidence and a reasonable willingness for venture-taking,you will find that confidence and that venturesomeness reflected in a demand for credit and from that de mand a useofcreditthat iseconomicallyhelpful. Senator DOUGLAS. Is it not true that the volume of the idle bank reserves has been increasing, on the whole, week by week inside the Federal Reserve System ? Mr. MILLs. That iscorrect,sir. Senator DOUGLAS. Does not that indicate that the demand for credit does not keep pace with the lending power of the banks! The demand forcredit,in fact,has fallen off! Mr. MILLS. Senator, we have found that there is a lag between the time that reserves become available to the banking system and the time atwhich theyeffecttheir— Senator Douglas. How long do you intend to wait to see whether this is just a normal lag orto what degree it is a disease of the patient? Mr. Mills. Sir, I am afraid that I have misled you. I mean the day that reservesbecome available to the System isnot the day that they are employed creditwise by the commercial banks into whose hands they come. SenatorDOUGLAS. I understood you. 18 N OM IN A TI ON OF A BBOT L. MILLS , JR . Mr. Mills.That isthedelayinglag. Senator Douglas. Iunderstoodyou. On theupswingthisistrue,theincreasedlendingcapacity ofbanks is very quickly translated into additional loans. It happens very quickly. You know that. Is that not true onthe upswing? When there are borrowers around,the banks do not like to have these idle reserves on their hands. They like to multiply them and get some interestonthislendingcapacityoftheirs;isthatnottrue? Mr. Mills. Indeed itis. But tobank lendingcapacity mightbe added theirinvestment capacity. As thedemandforcommercial, in dustrial,and agricultural loans, as they are termed,has fallen offand reserves have become more available,there is a very definite trend forbankstoemploy thosereservesininvestments. Senator Douglas. Are yousaying that the investments in capital goods havebeen increasing in these lastfew months;more money being put intoplantand equipmentthanbefore? Mr. Mills. No ;thathas fallen off. Senator DOUGLAS. Yes;exactly. Mr. Mills. But,you wouldbe pleased to analyze the statistics overthelast severalmonths to find that the commercial banking sys tem has increased its investments in State and local securities; where as Senator Proxmire mentioned sometime ago there was some con cernthat our publicneeds in areas of hospitals,schools,highways, could not be satisfied as expeditiously as desirable, the commercial banks with resources released fromother uses are filingthat gap by investmentsin Stateand localsecurities. SenatorDouglas.This isa longstory and I donot want to go into greatdetail. Tothedegreethatlocalbond issueshaveto be approved by municipal and county referendum,I notice a tendency forvarious referendums for increased bond capacityto bedefeated by thevoters in those districts, on the ground that they did not want a higher bonded indebtedness to be an ultimateobligation against their pocket As to State loans, I do not know. They are not subject to theoriginal restrictionsasarethelocalities. books. But this is a very important general issue and each person tends to pick his own idea as to what is the most important factor to take into account. The advocates ofmonetary controls,and I tend to be one myself, often do not sufficiently realize the importance of fiscal policy, par ticularly during a downswing. I refer not merely to increased ex penditures, butto tax cuts as well. Sometimes the authorities on monetary matters adopt a very pontificial attitude and lay down the law to legislators as to what they should or should not doin the field of taxation. By the way,did your Board take any attitude on the tax bill of 1954? Mr. Mills.Senator,I do not recall. We might have. Chairman Martin would k n o w Senator Douglas. You were new . That is one less subject of controversy. I believe it is to be announced next Tuesday that unemployment has reached 4.2 or 4.3 million. In addition, the involuntarily un employed should be the equivalentof another 1 million or 1.2 million, NOMINATION OF ABBOT L. MILLS , JR . 19 which wouldgetthecombinedpercentageofunemploymentup around -7.5 percentofthe total labor force. Would you think thatthis situa tion calls for a reversal of our current fiscal policies and that some added stimulation from the fiscal side is called for,or do you think that booms in the stock market Senator FREAR. I should like to caution the witness on answers which might affectthestockmarket. Mr. Mills. Senator,I am not going totryto attempt to answer the question, but I make the same reservation that was quoted before. Senator DOUGLAS. I know how intimately connected these matters are with stock speculation. While we are on thatsubject,Mr. Chair man ,I think probably we ought to have Mr. Martinup here on this point. I was inEngland whenan investigation was held into an alleged leak from theBank of England. I read the testimony each day with care as it appeared in the London Times and in the London financial papers. I was not satisfied with the ultimate decision made by the board of three that whitewashed the Bank of England, be cause of the open statements there that the Chancellor of the Ex chequer had told a number of persons about the increase in the bank rates. After some of these persons found out about the increasein the bank rate,it was prettyapparent that in some cases,the clerks and interests closely affiliated with them went into the stock market and soldgovernments as if fromthe top of their heads,but actually on theevidence oftheincreaseinthebank rate. The Chancellor of the Exchequer has been exonerated by the courts. But it brought to my mind the dangers that are inherent in this situation. The chairman cautioned us very properly about not pushing the witness to make an answer thatwould affect the marketfor govern ment bonds. I am gladthe chairman did and I do not wishto push the witness in that direction. I wonder,Mr. Mills,and I will talk over your shoulder also to the Chairman of the Board, how careful have you beenregarding your decision(a) on the open marketing purchases and (b)on the redis count rate,so that others do not know about it! Mr. Mills. Senator,to answer the first question, the open-market policies are formulated and actions are taken by the Open Market Committee which is composed of the 7 members of theFederal Re serve Board and 5 Federal Reserve bank presidents. Soyou might say that there isno outside interest represented in those discussions, and the proceedings and committee decisions are safeguarded from leaks as far as we believe itis humanlypossible to do so. The Federal Reserve banks are the initiators, by and large, of changes inthe discountrate. Senator DOUGLAS. You have had an effect on what the banks do. Mr. Mills. That is correct. Senator DOUGLAS. You give directions to thebanks,do you not,on the rediscount rate ? Mr. Mills. According to historic practice and by statutory direc tion,the discount rates are fixed by the Federal Reserve banks subject toreview and determination by theFederal Reserve Board . SenatorDouglas. Decentralized. 20 NOMINATION OF ABBOT L. MILLS, JR. Mr. MILLS. Yes,indeed. Senator Douglas. Itisdecentralizedand astothequestion of redis count rates you have nothing to do with it as a central body. Mr. MILLS.The Federal Reserve Board hasthe responsibility of reviewing and determining those rates. In otherwords,if the cir cumstances were feltto be exigent,the Federal Reserve Board has theauthority to negate a decision of the Federal Reserve banks. Senator Douglas. You have the power of veto and the power of initiation,do you not! Mr. Mills.There isanimpliedpower ofinitiation,which asfar as I know hasneverbeen used. Senator DOUGLAS.How broadlyisthis knowledgeof a veto exercise by you,or action initiated ordirected byyou,known? How broadly isthisknown? To what degree can you keep thismore or lesswithin thefamily,and whatsecurity system doyou have? Iam notimplying for a minute that you have not. What security do you have that requiresthatyour ownpeopleobserve strict punctiliointhematter? Mr.Mills.Senator,Iwould sayfromexperiencethatwecandepend on the characterof the individuals,who have access to that informa tion and formulatethosepolicies,toobservesecrecyqualifiedby what everminorfrailtiesofhuman naturemightconceivablyinadvertently produce aleak. But thehistoryofthe Board'soperationsin discount andopen-marketmattershasbeenremarkably freeofany embarrass ments ofthatsort. Senator DOUGLAS. And thatistrue of savings. You arenow speak ing of rediscount rates,as well the open-market operations? Mr. MILLS. Yes. Senator Douglas.You read the testimony in the Bank of England case,didyou not? Mr. Mills . Yes . SenatorDouglas.Diditsomewhatalarm you? Mr. MILLs.Itopened my eyes, Senator,to the greater freedom of discussion thatiscustomaryin English financial circles and as be tween their Exchequer and the Bankof England ascompared toour own experience. Senator DOUGLAS.Of course, in England, the Chancellor of the Exchequeris the ultimate power over the Bank of England and can directthe Bank of England to his policy. As a matter of fact,it startedwhen Mr. Thornycroft,theChancellorofthe Exchequer,made thedecisions,and told the Bank of England tocarry them intoeffect; isthat not true ? Mr. Mills. Itismy understandingthat when the Bank ofEngland was nationalized some years ago,such authority was vested in the Chancellor. Senator Douglas. I want the record to show this questioningof mine does not indicate theslightestsuspicionon my part ofthein tegrity of the present members of the Federal Reserve Board or the officials of the Federal Reserve Board. I want to say that. But my eyes were opened to the dangers involved in thetestimony. Off the record. (Discussionofftherecord.) Senator DOUGLAS. I again want to assure you that there is nothing inthebackpartofmy mindwhichcarrieswithitanysuspicion. NOMINATION OF ABBOT L. MILLS, JR. 21 Mr. Mills. Yes,sir. SenatorDouglas.But eternalvigilanceisthepriceofvirtue. Mr. Mills. Indeed. SenatorDouglas. Ihavenofurtherquestions. SenatorFREAR. Thankyou. Senator PROXMIRE. Could I ask a question which occurred to me when Senator Douglas wastalking? SenatorFREAR. The SenatorfromWisconsinmayinquire. SenatorPROXMIRE. Itseemstome thattheremightbe adangerthat risinginterest ratescould feed inflationbecause of the psychological impact involved. In other words,the people expectinterest rates to goincreasingly higher and then therewould be atendency to expand theirplants, beforetheinterestratesgohigher,andthefallininterest ratesmightdo preciselythe opposite. As interest rates begin to fall they might postpone theirborrowings until they go lower. From yourstudy and experiencedo you thinkthere might be this psychologicaleffectonbusiness! Mr. MILLS. Senator,we believe that there have been actual indica tions inboth directions,but never to theextent that therehave been any serious aggravation of either the desire to borrow or the wish to postponeborrowing. SenatorPROXMIRE. You recognizethattendency? Mr.MILLS. Yes,sir. SenatorPROXMIRE. Itisanotherlimitingfactoronmonetarypolicy? Mr. MILLS. Iwould believesopersonally,yes. Senator PROXMIRE. That is all I have. I thank the chairman. Senator FREAR. You arewelcome. Mr.Mills,thankyouverymuch. We enjoyedyourparticipationin this. I hated tocall you down on arainyday. At leastitistypical Washington weather. We are very happy that theChairman of the Boardaccompaniedyou hereandwearegladtoseehimandhavehis remarks. There may be a time in the future when we will ask the Chairman to come down and visit us again and keep us informed of the policies oftheFederalReserveBoard. Butinthemeantimewe areveryhappy thatyou wereheretoday,Mr.Chairman,andyourstaffaswell. Thank you forappearing Mr. Mills. Thank you,sir,and thank you foryour consideration, and thetimeyou allowedme,Senator. Senator FREAR. The subcommittee will go into executive session. (Whereupon,at3:55 p.m.the public hearing was concluded and thesubcommitteeproceededtootherbusiness.)