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NOMINATION OF GEORGE HAROLD KING, JR.
HEARING
BEFORE THJD
COMMITTEE ON BANKING AND CURREN~
UNITED STATES SENATE
EIGHTY-SIXTH CONGRESS
SECO!l."D SESSION
ON
'.l'HE NOMINATION OF GEORGE HAROLD KING, JR.,
TO BFJ A MEMBER OF THE BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
FEBRUARY 4, 1960
Printed for the use of the Committee on Banking and Currency
UNITED STATES
GOVERNMENT PRINTING OFFIClD
613116
WASHINGTON : 1960
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COMMITTEE ON BANKING AND CURRENCY
A. WILLIS ROBERTSO!'., Vlr~lnta, Chairman
J. W. FULBRIGHT, Arkansas
JOH:-- SPARK!\IA:si, Alahama
J. ALLE!I. FREAR, JR., Delaware
PAUL H. DOUGLAS, Illinois
JOSEPH S. CLAHK, Pcnnsylrnnla
WILLIA!\! PHOX!\URE, Wisconsin
ROBERT C. BYRD, West Virginia
HAHHISO:\' A. WILLIAMS, JR., N~w Jers<'Y
EDMUXD S . .\IUSKIE, Maine
J.
HOMERE. CAPEHART, Indiana
WALLACE F. BF.:-:--ETT, Utah
PRESCOTT BUSH, Connecticut
J. OLEXX BEALL, l\larylan<l
JACOB K. JAVITS, Xew York
H. YINGU'1G,
MATTHEW HALE,
Chit/of Staff
Chit/ Caun,cl
II
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NOMINATION OF GEORGE HAROLD KING, JR.
THURSDAY, FEBRUARY 4, 1960
U.S., SENATE,
CoMl\lITTEJ<: ON BANKING AND Cmm.ENCY.
W ashington,'D.C.
The committee met, pursuant to call, in Room 5302, New Senate
Office Building, at 10 :35 a.m., Senator John Sparkman presiding.
Present: Senators Robertson, Fulbright, Sparkman, Frear, Proxmire, ,villiams, Bennett, and Heall.
.
Also present: Senator Stennis.
Senator SPARK:\IAN. Let the committee come to order.
The chairman is detained at another committee meeting, one at
which he had to be present. He hopes to be here a little later. However, this meeting may not last that long.
"'e have another difficulty in that the Senate is meeting early this
morning, so I think we will proceed.
Senator Stennis is here this morning. Senator Eastland would have
been here except for the fact ihat he is sick.
The purpose of this meeting is to consider the nomination of
George Harold King, Jr., of :Mississippi, to be a member of the Board
of Gornrnors of the Federal Reserve System for a term of 14 years
from February 1, 1%0. It is a reappointment.
,ve are glad to have Senator Stennis with us. Senator Stennis,
as I understand, you have another appointment you must get to. If
you want to make your statement now, we shall be very glad to hear
you.
STATEMENT OF JOHN STENNIS, A U.S. SENATOR FROM THE STATE
OF MISSISSIPPI
Senator STENNIS. Thank you, Mr. Chairman.
It is a privilege to be here before this Committee and an added one
to present Mr. King to the committee. He is no stranger to you.
He was here last year. He lias already served almost a year in this
highly important office.
I have been very much impressed with his attitude toward his duties; in talking to him before he served and afterward. But I will let
him speak for himself.
He is one of our highly respected and valuable citizens, experienced
in the banking and financial world as well as in agriculture and
other activities. ,ve were fortunate enough to inherit Mr. King
from the State of Louisiana some 12 years ago. I am very much
pleased, indeed, w_ith his tenure 11~d appr~i11te the _confidence that
you have shown him before. I believe he 1s worthy m every·way of
1
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NOMINATION OF GEORGE HAROLD KING, JR.
this high and important office. The Federal Reserve System is a.n
unusual product of the Congress; and this committee is the Senate's
guardian and watchdog of their activities.
I thank you again, and I am delighted to present Mr. King to
you gentlemen.
·
Senator SPARKMAN. Thank you, Senator Stennis.
Before you go, in order that the record may speak the full truth,
may I call your attention to the :fact that ::\fr. King's roots are really
in Alabama.
Senator STENNIS. Yes.
Senator SPARKMAN. His grandfather came :from Louisiana.
Senator STENXIS. It. is one of the many things which our sister
States of Alabama and l\Iississippi share.
Senator SPARKMAN. Thank you.
All right, }Ir. King, do you want to make a statement or do you
just want us to ask you questions?
STATEMENT OF GEORGE HAROLD KING, J'R.
Mr. K1xo. Thank you, Senator. I do not have a prepared statement
I would like to simply say it is a privilnge to come over here before
this committee. I :felt very privileged last year to be here, and I will
say that when I was a little boy I never dreamed I would have the
privilege o:f appearing before 1\ Senate committee, and particularly
one such as the Bankmg and Currency Committee, two times. So
I am proud of it. and I appreciate the oppo11unity to come over here.
I think thu.t as to anyone in my position who might possibly be
projected into the future as far as 14 years in a field as important
today as the money and credit field o:f our country, Senators certainly
hM·e a right and a responsibility to look into the person being projected that :far in advance. So, as I say, I am very happy to be here.
I :feel it is a_privilege.
Senator SPARKMAN. Thank you, Mr. King.
We have been :furnished a biographical sketch. Without objection,
it will be printed in the record.
(The biographical sketch of Mr. King :follows:)
B100RAPHICAL SKL"'I'CH OF GEORGE IIARow KiNo, JR.
General: Born August 18, 1920, at Oakdale, La.; father, George Harold King
(see Who's Who In America) ; Mother, French Freeman. Graduated Glenmora
(La.) High School, 1937: best athlete award, 1936; activities award, 1937;
attended Louisiana State University 1937-41; member Sigma Chi Fraternity;
member "L" Club (varsity letter club) ; graduated in 1941 with Bachelor of
Science In accounting; also attended University of Colorado Summer School
1939, 1940, 1941.
Mllltary service: Entered active duty In U.S. Naval Reserve as ensign on
May 1, 1942; released to inactive duty February 2, 1946, with rank of lieutenant.
Family: Married Daudrllle Elaine Hollaway of Melvllle, Le., on May lit
1942; chlldren, Linda Elaine King, born November 30, 1944; George Harold
King III, born November 21, 1946; Lisa Hollaway King, born Febuary 3, 1956.
Commerce and industry : Treasurer of King Lumber Industries, Canton, Miss.,
from 1946 to 1949; executive vice president llY.>0---58, president 1958. King
Lumber Industries operates lumber, oak flooring, woodworking, and woodpreserving plants In Mississippi and Louisiana ; presently employs O"Yer 600
persona In manufacturing ; engaged In commerce through extensl ve marketing of
wood products; has extensive timber holdings and timber lett81!S In Louisiana;
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;NOMINATION OF GEORGE HAROLD KING, JB.
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domestic and foreign shipments o! lwnber and oak flooring ; also engaged in
.mineral leasing of lands.
Agriculture: Started herd of purebred Hereford cattle In 1948 known as King
Herefords, Canton, Miss.; farm size, 405 acres; 125 brood cows. In January
1957 exhibited champion Hereford bull at National Western Livestock Show,
Denver, Colo. This animal IJred and raiised by King llereforcls, Canton. Miss.
Produce of herd sold throughout the United States and Mexico. Received
commendation from Mississippi Legislature on March 26, 1956, for accomplishments in cattle breeding; director, American Here.ford .Association 1956 to date;
director, Mississippi Hereford Association 1949 to date.
Federal Reserve System: .Appointed director of New Orleans branch of
Federal Reserve Bank of Atlanta in January 1956; served as chairman of New
Orleans Branch Board, 1968; appointed to Board of Governors March 25, 1959.
1liscellaneous: Deacon First Presbyterian Church; Director, Mississippi
Economic Council ( State chamber of commerce) ; member Rotary Club; member
Jackson Country Club ; member, Madison County Country Chlb.
· Senator SPARKMAN. Senator Proxmire.
Senator PROXMIRE. Mr. King, you were appointed on March 25, so
you have served a little less than a year.
Mr. KINo. Yes, sir.
Senator PROXMIRE. What is the responsiblity of the Board of
Governors? By that, I mean, do~you feel that the Board of Governors
is responsible primarily to the Congress? Do you fool there is any
degree of responsibility at all to the administration, the President, or
do you feel the responsiblity is inherent in the statutes that have been
set up and you have a responsibility to serve the public interest, by
your own light!-, without a direct responsibility to either Congress or
the President 1
Mr. KING. I feel, sir, it is near your last suggestion, although I
feel that the responsibility is really to all segments of the Amencan
interest1 as I understand 1t. I thmk the Board must be completely
mindful at all times of the interest of the public.
Certainly, the Federal Reserve System is a creature of the Congress
and Congress has the right and responsibility to oversee it and to alter
it if they see fit in any way. This imposes on a member of the Board
an extreme trust and responsibility to conduct that office in such a
fashion that it will truly serve the best interests of the American
people.
Do I make myself clear 'I
Senator PROXMIRE. Yes; that is a nice general statement.
I would like to be a little more specific. What kind of consulting
obligations do you feel a member of the Board of Governors might
have? Do you feel it would be desirable or useful that he should
consult with, for example, the Secretary of the Treasury or the Assistant Secretary of the Treasury¥ Do you feel thut it would be useful
for him to consult with, say, the chairmen of the Banking and Currency Committees of the House and Senate or not ?
Mr. KING. Yes, sir; I think a member of the Board should feel free
to consult with anyone and everyone whom he felt could give him
some thinking that might benefit the public interest. That is, to permit him to become more enlightened, so that his decisions might be
sounder ones for the country.
Senator PRox11nRE. Let me move into a little different area.
As a member of the Board, do you re~arly try to acquaint yourself
with the views of the Secretary of the Treasury and with the chairmen
of the committees of the two Houses of Congress on monetary pol icy 'I
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NOMINATION OF GEORGE HAROLD KING, JR.
Mr. KING. No, sir. I have not tried to become familiar with the
views, specific views, in regard to any specific que.stion, of the Secretary of the Treasury or of the chairmen of any conuruttees. I have
not tried to find any specific answers to any specific questions from
any of those people, and I will say that I have had no one even
suggest to me what I should think.
Senator PROXMIRE. Then, I take it your advice comes primarily
from the employees of the Federal Reserve Board, who have a responsibility as monetary experts to advise you and other Board members
on actions taken with regard to our monetary policy. Is that correct¥
Mr. KING. Sir, I have received the benefit of, not advice, but what
I would consider enlightenment on any subject that I have cared
to discuss at the Board with the staff. I have found that the staff
of the Federal Reserve Board helps on both sides, pro and con. And,
as far as I have been able to see, they are very, very much concerned
that any subject in any decision is developed in an objective manner.
I ha,·e found that they will pursue, not :u·gue, but pursue either
side of the question in order to satisfy themselves that that member
of the Board may really make an objective approach to any question
that comes up.
Senator PROXMIRE. Do you try to follow the thinking of the professors of monetary policies at leading universities or the leading
economists of banks and of industry and so forth i
Mr. KING. No, sir; I do not try to follow the thinking-Senator PROXMIRE. I am not saying you try to follow their thinking. What I am trying to say-I put it badly-is: Do you follow
the discussions, the controversies, that are going on in this area so
that you can enlighten yourself on what the thinking is, and what
developments are going on, so you can iarrive at decisions based on
the best and most competent and expert authority i
Mr. KING. Yes, sir; I do. I follow their opinions and views and
read them all I can, in the amount of time that I have, with a great
deal of interest. It is one of the things, to me, in trying to find the
right answer for the country, and I am very happy to take access to
all of the information and informed points of view that I can find.
Senator PROXMIRE. I want to go back a little bit because I want
to be completely fair. I wonder if you follow the expressions of
the views of leading members of Congress who have opinions and
express them in the Congressional Record or express them in committee
reports and so forth i
Mr. KING. Yes, sir; I do.
Senator BENNETT. Mr. Chairman, will the Sena.tor yield i
Senator PRox:mRE. I yield; yes.
Senator BENNETT. I wonder if the matter would be clearer if we all
understood what you mean by "follow." "Follow" can mean two
things-either keep in touch with or be guided by.
Senator PROXMIRE. I thank the Senator from Utah for a clarification. Of course, I meant, and I am sure the nominee meant, "keep
in touch with," and not "be guided by."
He made his position emphatically clear a little earlier in saying
he was not guided by the opinions of either Members of the Administration or the Congress.
Senator BENNETT. "Follow" has that dual meaning.
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NOMINATION OF GEORGE HAROLD KING, JR.
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Senator PaoxMIRE. I think that is an excellent clarification.
Mr. KING. I meant "keep in touch with." That was the essence
of what I was trying to say.
Senator PROXMIRE. I would like to inquire as to your relationship
with the Chairman of the Board. Do you usually consult with him
before you arrive at your own decision W
Mr. KING. No, sir; I do not.
Senator PROXMIRE. You arrive at your decision independent]y W
Mr. KING. Yes, sir.
Senator PROXMIRE. You do not consult with other members of the
Board, either before you arrive at specific decisions-Mr. KING. No, sir; we do not. I m1l say that due to the procedure
that is used at the Board, which I think is a very good one, the four
junior members express their opinions on a certain subject, or other
matter up for decision, first. Thereby, you have no way of knowing
what the chairman or the other two senior members of the Board
think.
Senator PRoxMmE. So it is kind of reverse seniority W
Mr. KING. Not completely in the sense thatSenator PROXMIRE. As far as speaking out.
Mr. KING. Some of the more senior ones speak before I do as a
general rule, although, on certain occasions, I will be called on to
speak first and without any knowledge of what anyone else thinks.
As I say, I think this is a very healthy procedure.
Senator PROXMIRE. During the last several months, the Joint Economic Committee has had a series of hearings on all aspects of our
economy. One of the most significant, I thought, was their hearing
on monetary policy. They had four outstanding experts on monetary
policy appear, one of whom was Professor Friedman of the University
of Chicago. Professor Friedman, as I understand it, is recognized
as an outstanding conservative monetary economist. But he had
rather drastic views on the Federal Reserve Board.
As I recal1, his views included the opinion, for example, that the
country might be better served if the Federal Reserve Board surrendered its power over both the redisoount rate and varying reserve requirements. How do you fool about this opinion of Professor Friedman¥
Mr. KING. Well, sir, the Congress, in the original Federal Reserve
Act of 1913, stated that one of the purposes was to provide rediscounting for commercia] banks. This has been continued in the law
as one of the System's tools of monetary policy and it has been used.
If the Congress felt that it should be removed, that would be in the
Congress' discretion to remove it. As to any automatic surrender of
a tool that has been best.owed on the Board by the Congress, I would
not think that would be a wise approach.
Senator PnoxMIRE. You fee] that these two tools have been useful
and are necessary and desirable for the Federal Reserve Board to do
the job it should perform?
Mr. K1No. Yes, sir; I think the Federal Reserve Board should have
as many t.oo]s as it can to try to accomplish its true purpose.
Senator PROXMIRE. The principal conclusion of three of these four
economists, as I understood them, was that the Fed.era.I Reserve Board
ought to follow a policy of what might be ca.lied policy neutrality.
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NOMINATION OF GEORGE HAROLD KING, JR.
In other words, they felt that the Board mi~ht expand the money
supply at a regular rate, the regularity being m accordance with the
growth of our country. That is to say, make the expansion of the
money supply conform with the increase in the gross national product,
roughly. Professor Friedman suggested an annual increase of about
4 percent. He said it would be 3 percent if the money only included
demand deposits and currency, 4 percent if it included time deposits,
too.
He argued this very persuasively, in my judgment, and Professor
Seldon seemed to agree. Professor "Wiesner took a little different
tack, but he felt that this general policy might be desirable.
How do you feel about this?
Mr. Krno. I think that is a very good point, Senator. The money
supply of the country has grown more or less through the yea.rs, and
that is a very, very healthy thing. However, it is my understanding
that in recent years people have learned how to use money and turn
it over more rapid}~, increasing what is commonly referred to as the
"velocity of money.'
"\Yith this increase in velocity, I do not believe that it has been necessary to increase the money supply, itself, as much as would have
been necessary if t.he velocity had not been increasing so much. And
I think it is conceivable that the country may be reaching more or less
a plateau on its velocity, that people have really learned to use their
funds and keep them busy just about as much as they possibly can.
In fact, they have more or less perfected this velocity of money and
that might call for additional increases in the money supply.
As to trying to govern the money supply by any exact percentage
per year, I think this would be attempting to substitute some formula
for judgment. My own opinion is that the subject is a complex one
and is of a kind that is better left to judgment, rather than to try to
make some such formula that would apply year in and year out.
Senator PROXMIRE. The position of Professor Friedman and Professor Seldon was that the record of the Federal Reserve Board has
not been very good. He argued that there is a lag between the
action of the Federal Reserve Board and its total reaction on the
economy. He argued it might vary from 4 months to 20 months.
The Federal Reserve Board for instance might fail to take action
to increase the money supply as rapidly as the GNP will increase.
Interest rates tend to rise, but the evil effect on the economy would
not be felt for quite a period. And at the time it is felt, we mi~ht
be in a period of recession rather than in a period of prosperity.
He did not question the sincerity and expertness of the Federal
Reserve Board. He just felt nobody has been able to predict. If
you could predict where the economy was going to be 6 months or
18 months from now, you could make fabulous amounts in the stock
market and lots of other ways. But this is something that is unpredictable. And the safest and fairest way to operate under these
circumstances would be to have a regular monetary increase and let
the market forces, the free play of supply and demand and so forth,
work its way on the economy without an attempt to look into a
crystal ball and foresee what the economy is going to be like several
months from now.
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NOMINATION OF GEORGE HAROLD KING, JR.
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Mr. KING. Well, sir, I think if the Board took that approach, that
it would be-Senator PROXMIRE. What this goes to, and I think the onlr technical question I can ask on this is: Do you think that there 1s such
a lag 1 Do you think that the effect of an action by the Federal
Reserve Board, using any of its three weapons, is fairly immediate,
or do you think there is a lag of 6 months to a year and a half before
it really is effective 1
Mr. KING. I think there is, certainly, some lag in effects of actions
by the Federal Reserve. But, as I have understood it since I have
been on the Board, we have not been contracting the money supply.
It has been, to me, more a matter of some restraint on credit
expansion.
What was your quest.ion 1
Senator PROXMIRE. The question was on the lag. That was the
thing I was focusing on here.
Mr. KrNG. So, naturally, there is some time that elapses from the
time any additional restraint might be placed on t.he credit markets,
for example, and the time that it manifests itself through ca.rloadinla!S
:from a manufacturing plant.
I am very conscious of this because I have been in the manufacturing business, and I am cognizant of the fact that the effect on an
order file of a mllillufacturmg plant that is built under today's circumstances, may not manifest itself or show itself in the statistics
for as long as 4 to 6 months. So I am well aware of the time that
elapses from the time an action is taken, say, to restrict credit in any
way, and the time that it really makes its impact in a statistical
form.
Does that answer your question~
Senator PRoxMmE. It does.
Then, you agree with Professor Friedman that there is a lag.
There is and, therefore, Federal Reserve policy does require prognostication. It does require a prediction as to what the ec.onomy
is going to be like 6 months or 18 months from now.
The only quest.ion is on the basis of your experience both as a
member of the Board and before you were a. member of the Board.
Do you feel that the Bon.rd has a capacity to look clearly in the
crystal ball 1
Mr. KrnG. ,veU, sir, I can only say that the Board, to my knowledge, does try to the best of its ability to see ahead as far as possible.
People naturally, become more familiar with this :P.rocess as they
work at it. And it would be my opinion that this ability to forecast
would improve, perhaps not greatly, but would continue to improve as
time goes along.
Senat.or PRoxMIRFh Many of us, of course, nre fnmiliar with what
happened in 1956 and 1957 and feel that the Bonrd was much too
slow. We feel we can go back and point out. many, many cases where,
in our judgment, the Board was increasin~ the rediscount rate, for
example, at a time when the recession either had already started
or was, ohviouslv, in our judgment, going to follow and did, indeed,
follow afterwar<ls, as happened in 1957.
I would like to refer quickly to a spe('ch that was made very
recently by an adviser to the Bo11rd of f'nfferno1-s, Woodlief Thomas, a
51395-60-2
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NOMINATION OF GEORGE HAROLD KING, JR.
splendid gentleman with great ability. His speech was distributed
to all members of this committee by the chairman of the committee,
the Senator from Virginia.
There are three pomts he made that particularly concern me, and
I would like to ask your opinion on them.
Mr. Thomas, in the course of his speech, argues that interest rates
are not really high now; that they are high as compared with what
happened in the 1930's and 1940's but that was an artificial situation.
I think he is right about being artificial, but, as compared with
the 1920's and the period before World War I, they are not particularly high, that they are comparable. I am disturbed by this comparison; I feel the economy has changed enormously since the 1920's
and the comparison is not very apt with the period of 1890, to go
back that far. Obviously, there have been serious, critical changes m
our economy. The fluctuations have been ironed out very greatly.
We do not have the kind of depressions we did. \-Ve do not anticipate
having them.
I wonder whether or not the interest rates at the present time could
be regarded as high or about right on a long-term basis; or low.
Mr. KING. Well, sir, trying to say whether they are high is just
a matter of saying something in relation to something else.
.
Senator PROXMIRE. That 1s right.
Mr. KING. My own view is t.hat I think interest rates that are somewhat lower than the present level are desirable for the country if
we do not, thereby, risk inflation and endanger our reserves. And I
particularly have in mind our gold reserves. Or we do not damage
the purchasing power of the currency.
In other words, I think that the Board as a whole, and the System
as a whole, does not have any desire to have interest rates at any
certain level, but that their desire is to protect the integrity of the
dollar and possibly, as the Joint Economic Committee report has
suggested, that it has had to use monetary policy to too great a degree
because of not using fiscal policy enough. I would certainly hope that
fiscal policy would be used to a greater degree.
Therefore, by lessening the necessity for the amount of judgments
that are and have had to be exerted in the monetary policy field-The CHAIRMAN. Off the record a moment.
(Discussion off the record.)
The CnAIRMAN. I would hke to make the statement that the chairman is glad to welcome Mr. King again before our committee and to
tell him that he is following his work on the Federal Reserve Board.
The chairman has received high commend11tion from other members of
the Board of Mr. King's services as a Board member. And, personally, the chairman feels that the confidence imposed in Mr. King
when he voted his confirmation last l\farch was not misplaced.
Senator PROXMIRE. Mr. Chairman, I have a series of questions, a.nd
I realize other members may have, too. Perhaps it might serve the
interests of the committee better if I yielded to other Senators and
then came back at the end. I am extremely interested in this whole
question.
I have great respect for the nominee. I think his answers have been
responsive so far, but I want to proceed at greater length. Some of
the members may have other appointments, so I will defer to them.
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NOMINATION OF GEORGE HAROLD KING, JR.
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Senator SPARKMAN. Other members of the committee~
Senator BENNETT. Thank you, Mr. Chairman. I sim_ply want to
follow the chairman in expressing my faith in the nommee and my
appreciation of the record he has made and my faith in the basic
judgment of the Federal Reserve Board in these trying times.
I recognize that my friend from Wisconsin and I have a completely
different approach to the economic principles involved in this situation. I cannot believe that there is any reason to have a Federal
Reserve Board if we have an automatic money supply and attempt to
maintain a fixed rate of interest. There is no use having men with
judgment. vVe might just as well turn the thing loose and let the
consequences come. And they will come, and that will be a retreat,
that will be a loss in the fundamental faith in the American currency.
Senator PROXMIRE. Will the Senator yield at that point for one
clarification?
Senator BENNETT. Yes, surely.
Senator PROXMIRE. I want to make it absolutely clear I do not
believe in pegging the rate of interest at all. I oppose that very
strongly. As I understand Professor Friedman's suggestion, it
would not do that at all. But what it would do is increase the money
supply at a regular rate. The rate of interest would fluctuate, depending on market forces.
Senator BENNE'IT. I think the effect of Mr. Friedman's ;program
might be to permit the market to operate freely. But it would
operate, in my opinion, to produce a constantly mcreasing rate of
inflation and a continued diminution of the value of the dollar.
The Senator from Wisconsin and I, having worked together on
these problems, recognize the differences that exist between us. But
the Senator from Utah is disturbed a little bit, frankly, at the use
of this hearing as a means of discussing, of bringing up again, this
technical controversy. It seems to me the problem before us is
whether or not this gentleman has the capacity to serve on the Board
under the existing laws. If we in Congress feel that the present
setup, the present program, in which the Federal Reserve Board is
engaged by law should be changed, we should talk about changing
the laws.
I want to express my confidence in the ability of Mr. King to
carry out his responsibilities under the existing law.
That is all I have to say, Mr. Chairman.
Senator SPARKMAN. Senator Frear.
Senator FREAR. I will not delay the Senator from Wisconsin as
I am interested in his questions, also, but I do appreciate this opportunity, Mr. Chairman. I voted for the President's nominee to be a.
Governor of the Federal Reserve Board when he appeared before this
committee the first time. Like the chairman, my confidence, I think,
at that time was well founded, and I expect to vote for his confirmation again.
Perhaps this is not the time to discuss and debate the merits of
the Federal Reserve System. I might have views that would coincide
or differ from those of the Senator from Wisconsin or the Senator
from Utah. But I must agree that if we are going to keep the
Federal Reserve System and; at the moment, I see no strong reason
to discard it, that we should back the System and its Board of
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NOMINATION OF GEORGE HAROLD KING, JR:
Governors. Perhaps it may be a. legisla.tive matter in many respects,
as I gathered from the questioning this morning. I commend Governor King for his answers, whether I am in total agreement or not.
The System has performed a very n~ry function, and I doubt
if we could have maintained our position m domestic and world
economy without its services. I hope that as conditions change,
which might necessitate legislative action regarding the System, the
Members of Congress will not hesitate at any time to recognize this
and make what, m their opinion or desire, changes are needed.
But may I sa.1, to you, Governor King, that I am very happy that
I had this privilege of coming back and listening to you and again
have the opportunity of voting for your confirmation. This may
expose my vote in advance, but I think it is no secret. I shall do
it, sir.
Mr. KING. Thank you, sir.
Senator SPARKMAN. Senator Williams1
Senator WILLIAMS. I have no questions, Mr. Chairman.
Senator SPARKMAN. Senator Proxmire.
Senator PROXMIRE. Thank you, Mr. Chairman.
I think when I was questioning you, Governor King, we were talking
about interest rates, whether they were low or high, with reference to
the period back in the 1920's and before. You said that the international situation would influence you to some extent in your judgment on the level of interest rates. I would like to follow that up
with one question with regard to Mr. Thomas' statement. And that
is that he points out that interest rates are lower in America than they
are in other countries. This has been true. And they have been
lower for a long time; and substantially lower.
I think the question you raised on international balance of payments
and so forth goes to the heart of this.
I am just wondering if, in your judgment, it may be necessary for us
to have a higher rate of interest, and whether we might consider it
desirable if we ga.ve emphasis to the much higher rate of interest
that other countries have.
Mr. KING. I am not sure I understand exactly the question, Senator.
I think I understand the subject, but I don't know exactly what specific
point you want.
Senator PROXMIRE. Do you feel the higher rate of interest in other
countries is one of the factors which should be taken into consideration
in determining our own pro!!Tams j
Mr. KINo. Yes, sir; I think it is one that we must be aware of, just as
we must be aware of many, many other thinO's, I think that any
changes in policy by the Federal Reserve Board, as long as it is maintained in its present form, will have to be made in the light of all of the
circumstances prevailing at that particular time. I do not think it is
really possible to project into the future and then say that a person
absolutely will or will not do a particular thing. It depends on the
circumstances at the time.
As I said, it is a tremendous trust and responsibility that the Congress has pla.ced on the Board, and I hope that I am-I believe that I
am-well aware of this trust.
I do not think that the international rates would be the controlling
factor, necessarily, at any time. However, it is conceivable that some
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.NO¥1NATION OF GEORGE HAROLD KING, JR,
11
action at some time would be necessary, purely because of the international structure. I have no desire to ma.intam interest rates at any
particular level.
My personal feeling, being a borrower rather than a lender, is
for rates to be as low as possible without damaging our currency or
without inflicting any inflation on the country. But, from my personal standpoint, I would rather pay, if necessary, some higher
rate than to accept the consequences of the inflation that would go
along with a more or less unlimited release of credit.
Senator PROXMIRE. It is a fact, though, is it not, that we have had
that lower rate of interest than other countries for many years and
that during most of this period, far from an unfavorable balance of
payments, we have had a, favorable balance of payments. There
are many, many factors affecting the balance of payments other than
interest rates. Is that not a con-ect conclusion 1
Mr. KING. I think so, sir.
Senator PROXMIRE. So it is perfectly possible there is nothing inconsistant with our having a lower rate of interest than other countries
have and having a responsible and thoughtful and effective international monetary policy.
Mr. Knrn. Yes, sir; I think that is partly a result too, of the
stability of this country relative to other countries of the world-Senator PROXMIRE. That is an excellent point.
Mr. KING. Of their respect for our ability to face and meet our
problems in a head-on and realistic manner. I think this confidence
lS a factor that is terrifically important in our maintaining as low
a level of interest rates as possible and in maintaining the reserves
that we need for this country to go ahead on.
Senator PRoxMIRE. My good friend from Utah has indica,ted that
my line of questioning may not be appropriate for the consideration
of a nominee to the Federal Reserve Board. I feel it is important,
not only to get the caliber of your thinking, but also to get your views
and your opinions and your feelings and your convictions on our
monetary policy. We do have the power of acting on your appointment, of course, and, as many, many speeches on the floor of the
Senate have indicated, we have a very deep interest. I think if we are
going to criticize the Federal Reserve Board, we should know what
we are talking about.
We have before us this morning an expert on Federal Reserve
polic;r. You are a Governor of the Federal Reserve Board. Therefore,1t seems to me it is very useful to get your viewpoint.
I have an open mind on these things. I am learning as I go along,
and I am sure I am going to learn this morning. That is one reason
why I ask you these questions.
Mr. Thomas made this statement in his speech to n group of mortgage bankers recently. He said:
It seeme to be believed that interest rates could be prevented from rising by
legislation which places ceilings on rates that the Treasury can pay or on
those that lenders can charge on mortgages.
I do not think that anybody seriously, at least no Member of the
Senate, thinks we can prevent interest ,rates from rising generally by
legislation. We think that we can, if not prevent, have an influence,
though. Would it not seem logical to you that if the Federal Govern-
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NOMINATION OF GEORGE HAROLD KING, JR.
ment, for example, should hold down interest rates on long-term
Government bonds, admitting this may not be a wise policy-T think
it is a wise policy for us to do tha~ but many people disagre&-that one
consequence would be that the uovernment would not enter in the
long-term competition for limited funds and, therefore, that policy
might have the effect of ke.eping interest rates-might have the tendency, at least, of keeping long-term interest rates-down. Is this
not a correct conclusion?
Mr KING. Senator, I am sorry, but I am not sure I get the specific
point.
Senator PRoxMIRE. Let me ask it again.
\Ve have, as you know, a 41/4-percent limit on the interest rate the
Government can pay on long-term bonds. My question is: If we
should eliminate that limit, as the President has asked us and a.s the
Chairman of your Board has said we should do, would not one consequence be to permit the Federal Government to get into the long-term
Government bond market to bid up the price of money because they
are borrowing money i The Treasury says they would borrow $20
billion. Would this not have the effect of increasing interest rates
generally for schools, for hospitals, for corporations, for various
others, who a.re also in that market now, just having another big
competitor get in. The demand for money would go up. Therefore,
the price of the money would go up.
Is that not logical W Would that not follow 'l
Mr. KING. Well, sir, at the present time, we have more of the
demand concentrated in the short term.
Senator PRoXMIRE. I recognize that. I am not asking you about
that. That is true, and right now, I am not asking whether or not
this would be a wise policy or unwise overall. I am just asking
·because I want to get a reply to the statement that Mr. Thomas has
•made or implied. I want to know if it is not true that by legislation
we can tend, at lea.st, in some areas, to prevent interest rates :£rom
•increasing.
Mr. Krno. By legislation i
Senator PROXMIRE. In other words, by legislation, which restrains
the Government from entering this field. Is there not a tendency to
keep the demand for long-term funds lower and, therefore, diminish
the pressure on interest rates for long-term Government bonds 1
Mr. Krno. I do not believe that the mere lifting of that particular
ceiling would produce higher interest rates.
Senator PRounRE. Long-term interest ratesi You do not think
that another $20 billion of demand for money by the Federal Government in that area would have a tendency of creating of long-Mr. KING. It would relieve that amount of demand from the short
term.
Senator PROXMIRE. I recognize that. We are talking just about
long term now. I think you are right about short term.
Mr. Knrn. And I do not know, sir, as it depends on so many
things. I do not believe it would make it rise. If it di<l, I do not
believe it would be appreciable. It would be of a very, very minimum nature, if it di<l. It could conceivably go either way, a little
bit, but I think it is more a. matter of the economic stru~ture as a
whole than of any certain sector.
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NOMINATION OF GEORGE HAROLD KING, JR,
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Senator PRoxHIRE. You have answered the question. We disagree, perhaps.
·
The final conclusion by Mr. Thomas-this is the last question with
regard to his speech-was :
. It may be concluded that attempts to control the level or the structure of
Interest rates by dlrect governmental action Is likely to meet with failure and
to have disastrous consequences.
Is it not direct governmental action when the Federal Reserve
Board raises the rediscount rate, when it ·lowers reserve requirements, when it engages in open-market operations 1 This is a Government agency which is acting. Heaven knows, it is acting directly. Does it not have an obvious effect on interest rates?
Mr. KING. Yes, sir. I would think it would have an effect on
interest rates. What Mr. Thomas may have had in mind would be
if Government policy were to try to maintain interest rates at a
certain level, at an exact level, and the only means through which
this could be accomplished would be through the creation of more
Federal Reserve credit, which would undoubtedly lead to more
inflation.
Senator PROXMIRE. He does not say to peg interest rates. I agree
that is a bad policy. He says, "attempts to control the level or
the structure of mterest rates."
It seems to me if the Federal Reserve Board is not doing that,
I am a little puzzled by what they are doing. At least one of the
consequences of their action is to vary the interest rate, to vary
the level and the structure of interest rates and its direction, and
it is a Government agency.
Let me move on to another area.
Senator BENNETT. Before you leave· that area, may. I ask the
witness one question which I thmk fits into it?
Senator PROXMIRE. Very happy.
Senator BENNETT. Does the Federal Reserve Board lead or follow
the feneral level of interest rates when it changes the rediscount
rate.
Mr. KING. Well, sir, I can only speak from the time that I have
been on the Board, which has been about 10 months. I do not
think the Board or System tries to particularly or necessarily lead
or follow. It tries to deal with the developments on a day-to-day
and a month-to-month basis with the decisions made in the best interests of the country as a whole.
Since I have been on the Board, the System has increased some
restraint on credit. It has not been a contraction of credit or money,
but rather a fairly mild restraint. I think this is a good thing.
Senator BENNETT. Has the Board raised the rediscount rate since
you have been on the Board?
Mr. KING. Yes, sir. The Board has raised the rediscount twice
in that time. In both instances, this was done subsequent to the
raising of the prime rate by the commercial banks.
Senator BENNET!'. So in both instances, the Board followed rather
than led the market?
:Mr. KINo. That is correct.
Senator BENNETT. Thank you.
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f'lO,MINATION OF· GEORGE HAROLD KING, JR.
- Senator PRox.MIRE. I thank the Senator from Utah. He may have
a very good point there. He usually does have an excellent point.
;Maybe with regard to rediscount rate, it is more less a passive
instrument.
It would certainly seem, however, that the Federal Reserve Board
lias active instruments, to wit, open-market operations. And I would
assume that usually, not always, but usually, fluctuations in the reserve requirements are not forced by any discrepancy in interest
rates. They a.re simply an action taken because they feel more
money is needed in the economy. Is that not your judgmenti
That when the Federal Reserve Board reduces reserve requirements and therefore increases the money supply, this is not taken
to foliow anyi.;hing that has happened in the supply a.nd demand
for money. This is simply ta.ken because, in their judgment, the
economy needs additional money as it grows.
Mr. KING. That is right. That is one method of increasing the
money supply. The other one, of course, as you know, would be
through open-market operations.
Senator PROXMIRE. Yes.
I call attention of the nominee to the present situation. The
Federal Reserve Board, according to your own words, has followed
a moderate policy of not contraction but of restraint. They have
expanded the money supply, but less rapidly than the economy has
grown, perhaps. Do you think it is a good policy for the Federal
Reserve Board and its advisers to pay attention to such elements
as in the economy of the stock market i
.
In other words, as I understand it, the stock market has a. fairly
good record, certainly not a perfect record, but a fairly good record of
preceding industrial falls or drops, preceding it by corresponding rise
m stocks or fall in stocks.
Is it your judgement that this is a factor that should be noted,
observed, and evaluated 1
Mr. K1NG. Yes, sir; I think so, definitely.
I think that every
bit of information that we can get is of help in trying to arrive at
an intelligent decision.
Senator PROXMIRE. Is it not true that the stock market is the best
judgment of the Nation's investors on wha.t is ioing to be the
future level of profits a.nd industry j At least, this is one element of
what goes into making stock rises.
Mr. KING. It is a. good element, but I think, at times, it is extremely
difficult to understand.
Sena.tor PROXMIRE. Sometimes it is completely wrong, too. But
by and large the record, as I have seen it compared, is fairly good.
They are right more than they are wrong.
The stock market dropped in January very very sharply. As I
U!}dersta.nd it, it wiped out the entire gain of 1959, and we a.re
virtually back to the level of early 1959---the stock market indexes.
Would you consider this to be, at least, one factor which would
pe1:5uade you to consider the possibility of a change in monetary
pohcyi
Mr. KING. It would certainly influence my thinking, yes, sir.
Sena.tor PRoxMmE. You a.re familiar with the Nationa.l Industrial
Conference Boa.rd? You have heard of that organization i
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NOMINATION OF' GEORGE HAROLD KLNG,. JR;
ls!)
Mr. KING. No, sir; I do not remember it. I might have heiud of it,
but I do not recall.
Senator PROXMlRB. The National Industria.l Conference Board is
a large business organization, economic organization, which attempts
to ,ippruise what is going on. One of the things they do is to make
,
periodic surveys of the plans of executives.
-The National Industria,l Conference Board recently tried to assess
the impa,ct of so-called credit restraint on the plans a.nd programs of
American business. They interviewed some 228 manufacturers, and
it was interesting to me to discover that the;r concluded that credit
restmint has had virtua.lly no effect, in the Judgment of 228 manufacturing concerns, which I preswne were typical because this is a
very responsible and careful organization, on their plans for the
futmre-the pla.ns :for expo.nsion and their plans for growth and
their plans for pricing. It had no consequence whatsoever.
Would this kind of finding influence you in your judgment as to
the effieaey or effectiveness of monetary policy¥
Mr. KINo. Yes, sir. I would be affected and ta.ke all of that, any
information I could get, into consideration. I think that it is inconceivabl~, thou~h, tha~ there would not hav~ been some reduction in
expansion of mdustnal output because of interest rates.
, I have personal friends that I know that 'are in business that put
off-. Sena.tor PRO.'CMIRE. I agree. There are some individuals that are
affected.
,
I will call your attention to the fact that during the period of
credit restriction between 1955 and 1957, we had a tremendous expansion in business plant, business equipment, business expan.sion. And the U.S. News & World Report, in the cur,rent issue,
makes this finding: What is tight money doing to business operations i Not much, according to a survey of 228 manufacturers by
the N ationa.l Industrial Conference Board.
And then they go on to say that international finBlncing is ex,{>OOted
to take care of investment plans by 90 percent of the firms rn the
N n.tional Industrial Conference Board list. These are the big firms,
the firms that really make the big investments and constitute the
biggest fnctor in our economy.
Mr. KING. I would say this, sir, that to the best of my knowledge,
the System's intention is not to sto;r.> anybody from domg anything
per se, but rather one of not expandmg credit so that it inflicts more
rnftation on the N ution. That is the basic approach that I t-ake to the
problem of-Senator PROxHmE.' So that you <lo, you would, recognize that it
appears to be a fact that many of the bigger business firms a,1-e not
affected. They do not postpone their expansion plans. They <lo not
limit their operations on the basis of monetary policy.
•
I think you and I perhaps could agree that smuHer firms do. I
had a. small printing firm, for example. We expanded in 1955, but
if we had waited a little while later, we probably would not have done
it. And I think that is true of the smaller firms. The big- firms, the big
element in the economy, however, on the basis of this evidence of
1955-57 st>em to go ahead regardless of-Senator BENNETI'. May I make a comment¥
0139ll-60-3
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NOMINATION OF GEORGE HAROLD KING,1 JR.
Senator PRoxl\DRE. I wish you would.
,
Senator BENNETT. I think it is healthy that American business can
expand out of self-generated income rather tJ1an putting additional
pressure on the credit market.
Senator PRoxl\nRE. I would agree 100 per<'~nt with the Sen&tor
from Utah.
Senator BENNE1T. I am sure t hnt is true of many small firms as well
as many big finns.
·
.
Senator PROXl\lIHE. I think it. is true, too. My point was, however,
if one purpose of credit restraint is to bank the fires of inflation by
discouraging borrowing, t.he effectiveness is very questionable in view
of the fact that the manufacturers pay no attention to it -and expand
anyway.
Senator · BENNETT. They do not expand by borrowing. Your
article says they expect to expand from internal capitalization, which
I think is good.
Senator PROXMIRE. I think it is good, too. I simply argue that
credit restraint or tight money, whichever you want to call it, has not
been effective and seems to be not effective on the basis of the very
late.st judgment of manufacturing executives in stemming the borrowing of manufacturers.
.
Mr. KINo. Well, sir, I do not think monetary policy can affect
everything and aeeomplish the ideal in everything at all.
·
Senator PRoxMIRE. I think you are right.· It has a devastating
effect on the cost of finn,ncing schools and hospitals and municipal
activity generally, although that, is questionable, too.
·
Let me come to this point. The Federnl Re.-,erve made a study
Inst summer which was just made available, a study of State and
lO<'al bond financing durin::r the first half of l!)fi8. And one of the
purposes of the study was to detem1ine what effect high interest
rates had in postponing consti,wtion.
·
·
This might he a wry important effe.ct in diminishing the pressure on
priees hy eneourag-ing people to postpone consh11ction to a later date.
That 111ay he very desirable in a period of inflation. Wlrnt they found
wa-, very stnrtliiig to me. They studied some $2,68/i million in dollar
n,l11me of issnes during the first half of 19/i8. And it wa8 a very
competent, fine smTey by yonr own organization, the Federal Reserve
fionrd. They found of tlwse $~,H8n million, only $-Hi million in conft.ruction was delayed, stMe and local.
·
What does that. mean? Does it not mean t.hnt, once a~ain, this tight
,,oney poli_cy is no! h:wing th_e effect of ~iminishi_n~ the pressure on
J•rices by drsconrµgmg borrow111g and busmess achv1ty?
Mr. Knm. As I saicl earlier, I think really the purpose of the System has been to restt-ain inflation more than to try to slow anything
down or to stop unyhody from doing unything. I think-Senator Prmx:m1m. If yon do not stop them from doing anything,
how do von stem the pressure on pri<'es?
Mr. lt1xn. Well, sir, it is up to each individual to make his own
decision UR to whether he will or will not do something according to
the interest rateR. Frankly, I do not think that the rates that, are in
general effect. now are prohihit.ing anybody with a legitimate demand
for credit or legitimate loan from getting credit.
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NOMINATION O~ GEORGE HAROLD KING, JR.
17
Senator PROXMIRE. As I understand it, there a.re just ,two ways that
the higher interest rates can mollify the effect of inflati(!n. Number
one is by tending to discourage borrowing. Number two 1s by encouraging saving.
We have been discussing borrowing. And on the basis of the evidence that I have been able to find-these are just two examples and
there are many-as you know, there seems to be very little effect in
discouraging borrowing. People pay more when they build their hospital or build their school or build their plant if they have to boITOw
money for it. There is a selective kind of inflation, but they do not
postpone it. They still do it, and it still has this same effect on
inflation as it would have if mterest rates had not been increased.
So the borrowing aspect of this thing, it seems to me-the saving
would be something else. I want to come to that in a minu~but
the borrowing aspect, it would seem to me tJ1at the evidence is clear
that credit restramt has not been successful in· inhibiting borrowing.
Mi-. KINo. I think it all points up the limitations that monetary
policy has and points up the need1 as the J<?int Economic Commit.tee
report has shown, for greater use ot fiscal pohcy.
Senator FULBRIGHT. w·m the Senator yield for questions?
Senator PROXMIRE. I would be delighted to yield.
Senator FULBRIGHT. Ma_ybe you have covered this, Mr. King, but
what do you think would be the effect if the budgetary surplus were
$12 billion instead of $4 billion i
. Mr. KING. A budgetary surplus?
Senator FULBRIGHT. A. Federal budgetary su:rylus. The bud~t
recently submitted to C o ~ provided a $4 billion surplus, which
is much less than our deficit last year. In other words, if this year's
surplus balanced last year's deficit, instead of only a $4 billion surplus,
what would have been the effect upon the interest rates; this problem
you are speaking of i
Mr. KING. I think that would tend to lower the interest rates,
Senator. I would think that would be the normal conse.quence.
Senator FULBRIGHT. Do you think it would be beneficial to our
whole fiscal policy, including this matter which is causing so much
concem now, the balance of international payments, if "''e hnd a. budgetary .surplus of $12 billion?
Mr. KING. Yes, sir; I think it would be a very, very healthy thing
for the country.
·
Senator FULBRIGHT. Did the Federal Reserve Board recommend to
the administration that they have a. $12 billion surplus instead of n
$4 billion surp!us 1
Mr. KING. No, sir; J do not think the Board, since I have been on
. it, has recommended anything along that line to the administration. I
mean, we reall,Y do not, to my knowledge, include in recommendations
to the admimstration in that particular field. We feel that our
own-Senator FULBRIGHT. The point the Senator was making illustmtes
the limitations of monetary policy. If the Board is interest~d in
keeping the level of our economy on a reasonable basis, why does it
not make a recommendation that. it believes n budgetary surplns of
$12 billion would be beneficial tot he economy?
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NOMINATioit o:r· GEORGE ruaoLn 1mro, JR.
Mr. KING. Well, sir, I would certainly be !dad to recommend that
to anybody, but I am a junior member of the Board and, as such, have
not been called upon by the administration for an expression along
that line. I would be glad to give anyone that thinking of mine, but
I would not presume to advise the'Pre8ldent about--Senator FULBRIGHT. Do I understand that the adminstration does
not consult the Federal Reserve System on importa.nt matters such as
how the budget should be balanced and how our Government's fiscal
policies are set up W I do not mean you personally; I mean the Federal
Reserve System and the Board. They are not consulted¥
Mr. KING. There is certainly some contact between the administration and the Federal Reserve Board. I personally have had ver,,
very little. I make up my mind and cast my vote on ench matter m
an entirely independent manner.
Senaoor FuLmlloHT. The anministration is in a very critical situation, it seems to me. It would be perfectly proper if the Board feels
this way that they make a recommendation to try to straighten the
administration out. Itis in bad shape, apparently.
Mr. KING. Well, s":t I think the Board has been more concerned
with trying to deal with its own direct statutory responsibilities.
Senator FULBRIGHT. But it is tied in with this other problem. I
know the other members of the Board's staff, I have heard, thought
that we ought to take off this ceiling on the interest rates in behalf
of the Government's bond policy, in behalf of a better fiscal situation.
You do recommend t.hat, do you not, that we remove the 4¼-percent
ceilingi
Mr. Kurn. I think it would be in the best interests of the country
to remove it, at least on a temporary basis.
Senator FULBRIGHT. It is my understanding you all recommended
that. I think you recommended it to this committee.
In answer to questions, you said, "Yes," you think that it is a good
thing. Isthatnotso9
Mr. KING. Yes, sir.
Senator FULBRIGHT. I do not see why you are being so backward
about recommending to the administration some more sensible policies
with regard to its budget.
Mr. KING. Well, sir, I think the Board has had no desire to appear
to be suggesting or advising the Congress or to the administration as
to what they should do.
Senator FULBRIGHT. In answer to my question, then, you would
recommend, if you were asked, that there he a larger surplus 1
Mr. K1No. Yes, sir.
Senator FULBRIGHT. Of course, there are two ways to do that. One
is to cut expenditures, if they can; and, if they cannot, they ought t.o
increase taxes, should they not?
Mr. KINo. That is correct, sir.
Senator FrLBRIGHT. Do you think an increase in taxes is justifiable,
assuming they cannot find any way to cut expenditures?
Mr. K1No. That would be a matter that I am glad the Congress
would have to decide, Senator.
Senator FrLBRIOHT. I know we need advice. I nm asking your advice. You are here to give us advice.
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_NOMINATION OF GEORGE HAROLD KING, JR.
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Mr. Knm. I would not recommend it is as long as we could maintain
something like a $4 billion surplus.
. Senator FULBRIGHT. Now you are backing up. You said $12 billion would be much better, and it would be good for the country.
Why not 121
I think it would be perfectly proper for you to answer. You are
supposed to give us advice, both the Congress and the country. You
are experts on this. You have nothing else to do, but contemplate
these problems.
Mr. KING. I think a $4 billion surplus would be a fine thing. I
think $12 billion would be better. But I would not recommend raising taxes to try to increase the surplus from 4 to 12.
Senator Fm.BRIGHT. Wh.y not a
Mr. KING. Because I think, in the light of the circumstances that
we are in today and what the country is trying to do and the position
it is in trying to get and provide a climate for people to go ahead
and develope their full capabilities and possibilities, that it would be
.undesirable.
Senator FULBRIGHT. Is it true that the net Federal take out of our
gross national product is no more now than it was in 1953 ~ Is that
not true¥
Mr. KING. In the form of taxes~
Senator FULBRIGHT. Yes.
. Mr. KING. I thought it had gone up, Senator. I do not know the
exact figures.
Senator FULBRIGHT. Your staff, I think, can tell you that the percentage of the gross national product today is no more than it was
in 1953.
Is that not right, Mr. Young 9
Mr. YouNG (Ralph A. Young, adviser to the Board). That is
about right, yes, sir.
Senator FULBRIGHT. And we have a. growing economy. Why
would you hold it back to the same level as 1953 ¥
Mr. KING. I do not think it would be a matter of holding anything
back. I think that the lower the taxes are in general, the more it
stimulates people to go ahead with business enterprises that benefit,
in my opinion, all of America. I do not think there is any such
thing as saying that this level or that level is too high or too low.
But I think that there is some point there where it does discourage
people from going ahead.
So I would approach tax increases-alt.hough, as I say, that is
not in my field. But since the Senator has asked me about it, I
want to tell him what I think to the best of my ability. I think
that increases only discourage this type of thing. And I think that
it is fine for this country when people are encouraged to go ahead
and are able to profit if they risk. Through the risk, they provide
jobs for people of this country and, of course, that will be one of the
tremendous problems that we have in this next several years ahead.
It is consideration for the employment in the country that there
are jobs for all of these people that will be here.
Senator WILLIAMS. Mr. Chairman, will the Senator yield 1
Sena.tor PRox~1:IRE. I yield to the Senator.
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NOMINATION OF GEORGE HAROLD KING, JR.
Senator WILLIAMS. I wonder, in this connection, Mr. King, what
you consider a healthy rate of fowth in this country 1
Mr. KING. Well, sir, I wil admit that that is one that has me
slightly buffaloed. I do not know exactly how it would be measured.
I have heard people measure it in terms of gross national product,
and I think that is certainly an important thing. But I think growth
is something to be achieved through a climate of as much freedom
as possible for the citizenry to go ahead in, rather than to try to
artificially achieve any certain rate of growth. I think in producing
the climate for ex:pansion of the country, in producing a chmate that
will permit its mtizens to be encouraged to try to expand their
investments and their plant and operations, that we will truly achieve
more growth than in trying to more or less, through governmental
means, force a certain amount of growth.
Senator WILLIAMS. Are you now satisfied with the climate and
the opportunity for w-owth at this time 1
Mr. KING. No, sir. I confess, I am never completely satisfied
with an;ything, I am afraid. I am more inclined to hope that we
can contmually perfect our system. I think that we have been having
a reasonable growth in this country.
·
As I go about the country and into other cities and observe industries, such as aircraft, and I see the tremendous expansion that we
have had in this country in the last few years, I think that we
really have had considerable growth. Now, I do not know exactly
how 1 could measure that in any percentage, for example. But from
what my eyes tell me, we have had a considerable amount o:f growth.
I am not against more growth, because I am for the Government providing the most :favorable climate possible, conducive to its citizenry
to go ahead and provide this growth.
Senator WILLIAMS. Thank you.
Senator Paox1mRE. I want to return in a minute to the effectiveness o:f monetary policy. But before I do that, I want to follow up
the questioning of Senator Fulbright.
TI1e Chairman of the Board o:f Governors o:f the Federal Reserve
System, Mr. Martin, speaks out :frequently and with great effectiveness on the editorial pages of America. Also, o:f course, we listen
to him. I read everythmg he says. He is a very persuasive man
when he speaks out. Does he speak out as an individual, or does
he consult you and clear what he says with you and the other six
members o:f the Board?
Mr. KING. Well, certainly, sir, he is :free to say many things on
his own by virtue o:f his position. Official Board matters, though,
such as any policy decision or any action, including replies to the congressional committees and the like, o:f course, come before the Board
for its inspection, criticism, or alteration.
Senator Paoxl\lIRE, He makes his recommendations to Congress,
which he_ h~s done :frequentl)'. on various policies, including the' 4¼percent hm1t, after consultat10n with you and other members of the
Bon rd, or does he do that as-:.:\Ir. Kern. Oh, no, sir. He does that in consultation with the
Board during regulnr Board meetings.
Senator PROXMIRE. You have had an opportunity to pass on that
with your approval or disapproval?
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NOMINATION OF GEORGE HAROLD KING, JR.
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Mr. KING. Yes, sir.
Senator PROXMIRE. Can you tell me, or is it private, as to how that
vote went?
as it unanimous?
Mr. KING. Well, sir, I would not think it was proper for me to-Senator PROXMIRE. That is all right. Just say it was an executive
decision.
Mr. KING. That is right, sir.
Senator PROXMIRE. You say that you thought we should have a.
:surplus of $4 billion, which it just happens 1s the figure that the
President recommended. Do you favor the President's recommenda.1ion for an increase in the gas tax and the postal increase that he
recommended?
Mr. KING. I am sorry, Senator, but I am not qualified on those.
-i know nothing about those particular fields.
Senator PROXMIRE. That is the only way we can have the surplus,
unless :you say we oug~1t to ha. ve other taxes.
.
Mr. ·KING. Well, sir, I really do not know anythmg about those
-particular taxes. I think it is outside my field.
Senator PROXMIRE. When you said a $4 billion surplus, you apparently meant we ought to have as big a surplus as possible.
Whether we have those taxes or do not have them is a. matter of-Mr. KING. That is right.
Senator PRoxMIRE. To return to the effectiveness of monetary
policy, y:ou agree that it has its very substantial limitations? I
would hke to turn to the savings aspect and call your attention to
-a Wall Street Journal article just yesterday which had this to say:
,v
The best overall gage of savings is the Commerce Department's figure for
.>ersonal savings. This is the difference between personal after-tax income
and personal consumption expenditures. The Department's figures for the
full year of 1959 are not complete, but the President's Council of Economic
AdvJsers estimates they will show personal savings last year totaled $23.3
·billion, down from $23.5 billion in the previous term. (Very close to the
·same, but a slight drop.) The 1959 figure would amount to 7 percent of
.after-tax income down from 7.4 percent in 1958 and the lowest percentage
.tor any year since big spending 1955.
The fact is that this year we have the highest interest rates we
have had in 30 years. Yet, the evidenoo is overwhelming that
-people are saving less.
This article goes on to point out that the most savings executives-they talked with a. number of bank executives-doubt that
bigher interest rates induce consumers as a group to save a larger
percentage of their income. Therefore, it would seem that if high
mterest rates do not discoura~e borrowing, if they do not encourage
savings, what real effect do tney have in dampening the flames of
inflation?
Mr. KING. Well, sir, they have a limited effect on it, I think, as
there are so many other factors bearing on the problem. I tlunk,
though, how bad it would be if it had not been for what dampening
-effect it does have. I think I recognize limitations of monetarv
policy, but I am very happy that the System has done what it has
done to try to maintain the integrity of our currency.
I am inclined to think that if the rates had been lower in general,
how much less the saving would perhaps have been and how much
more inflation we would have had. I think the Federal Reserve
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.N0114JNATION OF GEOnGE !LUWJ,,D KING, ·JR.
System certainl_y does not try to make a case for stopping inflation,
but rather of doing what it can to keep the value of the dollar as
stable as possible.
Senator PROXMIRE, Is not this the same thing t What is the
difference between stopping inflation and doing what it can to
stabilize the dollar i
In other words, if it is not taking any action that is going to
stop inflation, then it is not doing anything that is going to stabilize the dollar.
Mr. KrNo. Yes, sir as I say, I think their ideas a.re to do what we
can to be helpful, reJizing that we cannot do the complete job. But
the realization that we cannot do everything is no reason to do
nothing.
.
Senator PROXMIRE. What effect can the monteary policy have if it
does not substantially discourage borrowing and if it does not
encourage savings 1
Mr. KrNo. I think it is the alternative that we have to think about
which is the result of what would follow from releasing credit in
greater and unwarranted quantities through openmarket operations or
through reserve requirements.
Senator PROXMIRE. Mr. King, this is a matter of degree and, of
course, when we speak as polemicists-I am not accusing you of being
one1 but what we do is accuse our opponents of having a very extreme
position, and we attack that. I have never advocated any sudden,
huge expansion of the money supply. I do not think Senator Douglas
has or those of the 'rest of us who disagree with the Federal Reserve
have done so. What we have advocated is that we have a moderate
expansion and keep pace with the growth in the gross national
product.
Why do you think that this would tend to be inflationary¥
Mr. KING. I think it is just a matter of common experience that
the more credit that is turned loose-and even on pure economy
theory-the more money there is to buy the same amount of goods,
and that is necessarily going to produce a certain amount of inc.rease
infrices that are not related to increase in productivity.
am, frankly, in favor very much of providing what increases are
proper for the money supply to be able to go ahead and do its part
m the achievement of the maximum growth and development consistent with as much stability of the currency as possible. It is a
very inexact thing, and I am reminded of the Radcliffe report issued
in England this past year.
They studied for 2 years, and 100 of the most learned people on the
subject participated. When I got through it, I came out with the
conclusion that they, too, realize it was a com_plicated subject, and
that they had not been able to really say anythmg absolute, eitherthat it is more a matter of whether human beings are to be entrusted
with the responsibility to make these decisions or whether there is
a way of domg it by a machine of some kind to grind out answers
and policies.
I am aware of the frailties of humanity and of the :frailties of my
own mental faculties. I merely hope to do the best I can for the
country, and I can assure you, Senator, that my devotion is to this
country more than anything else. I intend, if I am confirmed, to do
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NOMINATION OF GEORGE HAROLD KING, JR.
23
the best I can for the country. I am not an expert1 Senator. I have
been on this job for about a yea.r, and I have tried to apply myself,
and I have done the best that I know how.
With your permission and the permission of the Senate, I will
continue to try to learn with, I think, a very, very open mind, based on
the dedication for what I feel is a great sense of responsibility to the
American people as a whole, not just to the American people today
or those of us that are occupying this room or those that are on earth
today, but also to those that will come along in the future. I think
in having this sense of responsibility, it is awfully hard to say that
this, that, or the other is absolute m the field of monetary policy.
I just propose to do the best I know how to do and to try to continue
to learn. I do not pose, as I say, as an expert. If I stay on the
Board for possibly several more years, then perhaps I might be
considered as being one. At least, I should hope to become more
expert than I am now. But that is simply my intention. It is just
to do the best that I know how to do.
Senator PRoxMIRE. I think that is a very commendable statement of
intentions.
I realize there are no final definitive answers. But this is one of the
reasons why, with human frailty, with its tendency for agencies to
become the satraps of the industry they are supposed to regulatethat is why some of us are thinking about the possibilities of limiting
the power of the Federal Reserve so we would have a regular increase
in the monetary supply rather than have one that is subject to crystalball gazing and guesses and one that seems to be resulting in higher
and higher interest rates.
I would like to call your attention to some figures that I have noted
over the past 8 or 10 years. The fact is that our money supply has
increased between 1952 and 1959 at a fairly regular rate from $129
to $140 billion. At the same time, the gross natioua,l product has
increased from $347 to $480 billion.
In order to make this simple, the fact is that the ratio of the money
supply to gross national product has declined sharply from 37 percent
in 1952 to 36 percent in 1953 and went back up to 37 percent in 1954 as
the Federal Reserve Board tried to expand monetary supply to meet
the recession problems. Then, they contracted it agam to 34 percent in
1955 and 33 percent in 1956 and 31.5 percent in 1957. They let it go
up a little in 1958---not much-to 32.7. Now it is down to 29 percent.
It is the lowest relationship that we have had in 30 years.
The result of that has been to increase interest rates on Treasury
bills from 1.8 percent in 1!)52, 1.9 the next year, and so forth, up to
4.6 percent today.
It has had the effect of increasing AAA bonds from 2.96 to 4.6
percent.
l\fy que,gtion is: Is this policy of keeping the money supply
stringent in relation to the gross national product wise in view of
the very sharp increase in interest rates over the past 8 years?
Mr. K1No. Well, sir, I think generally that the monetary policy
has been wise over the past 8 years. While I have not been there
for thnt period and thus am not qualified to say, I nevertheless
think that it is entirely possible that the Board, the System, has
1
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NOMINATION OF GEORGE HAROLD KING, JR,
done some things that it would have been somewhat better in retrospect to have done in a different way.
Senator PROXMIRE. Let me go to some more specific points on this.
When the interest rate increased from roughly 2.1 percent up to 4.1
percent on long-term bonds, municipal bonds, it meant that the cost
of interest in financing the building of a school, a $1 million school~
went up by $300,000 if it is financed over a 30-year period. It
went up by that much without providing another brick, and without
providmg a dollar's increase in salary for the people working on it.
It did provide great discouragement for school builders a ~reat
burden on property taxpayers in various local districts. This 1s a.n
enormous price to pay for a monetary policy which a Governor of
the Federal Reserve Board admits is very limited in its impact, a
monetary policy which cannot point to any specific benefits it has
had in dampening the effects of inflation.
The school example that I pointed to is exactly the same with
regard to hospitals. It is the same with regard to all kinds of things
which this country urgently needs. The effect has been to increase
the price very greatly, to some extent to discourage building or to
result in building only at. very great cost.
l\:Ir. KING. Well, Senator, 1 can say that I do not believe I have
any bias toward high interest rates or toward the institutions that
we regulate. I would say, rather, if I had any, it would be on the
other side because of my personal background, which I cannot erase
in any way. I cannot get rid of the fact that I am from industry,
primarily, before I came on this Board to which I now devote my
full time. That industry is directly connected through its operations,
its profits or losses-and we have had losses-with the construction
busmess. So I certainly have no desire to dampen construction.
As I say, if I had a bias, it would be in that direction. I
certainly-Senator PRox:1rrnE. You recognize, then, the very adverse consequence on school construction and on education in America i The fact
is that this high-interest-rate policy has greatly increased the cost
of school construction to local school districts.
Mr. KING. ·wen, Senator). the only schools I am familiar with
are the ones in my home .:,tate. And even in spite of monetary
policy of the past several years-as I say, I do not propose to defend
every action of the Federal Reserve System back into history, but
only that I have approached it from the standpoint of trying to do
what I can while I am on the Board in the interests of the country.
But in our State, our schools are going ahead very well.
There :ire some case,s, naturally, where the people in our municipalities want to do all at once everything that they could reasonably
do in a period of several years. They would like to constrict it all
into one period. Naturally, if they do this it will put a load and a
strain on the credit markets, which has a tendency to-not a tendency-but rather, which certainly adds to the cost of the buildings.
But I believe, frankly, that what restraint has resulted to that particular field, it has been worth it to the community to bear that amount
of restraint rather than to have borne the alternative, which would
have been Federal Reserve creation of inflationary credit in larger
and larger amounts.
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NOMINATION OF GEORGE HAROLD KING, JR.
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Senator PROXMIRE. No. Supposing they simply followed a policy
beginning, say, in 1954-1955, of maintaining a ratio of 34 percent, a
moderate ratio much lower than it has been during most of the past
30 years-a little bit higher than the 1920's, but not a monetary stringency so that interest rates are now at the lowest level since-Mr. KINo. Well, Senator, I think you will have to recognize that
the velocity of money during that period, the rate at which people
have found it possible to turn money over-Senator PROXMIRE. Of course. The velocity of money cannot do
anything else if the money supply is low and the gross national product increases. By definit10n, the velocity of money is bound to go up.
By definition it cannot do anything else. It is bound to follow. If
you diminish the money supply, cut it in two, and if the gross national
product somehow maintained its level, then you just have a doubling
lil velocity. It is just automatic. So when you say velocity takes
care of it, sure, it does.
The way you can tell the effect of this velocity taking care of it is
in the interest rates and what happens to the interest rates. 'What
has happened is, as I have shown, it has increased enormously, not
only for Treasury bills and the taxpayer's costs, but also for people
who want to build schools, hospitals, and for individual companies or
businesses.
Senator BENNETI'. Will the Senator yield i
Senator PRox~nRE. Yes.
Senator BENNETT. I have been following the Senator's reasoning.
If we carry it to a logical conclusion, the solution of the problem IS
to supply all the money the market demands in terms of-Senator PROXMIRE. May I answer my friend from Utah by saying
the "logical conclusion" is ridiculo ad absurdum. You can make an~
argument ridiculous by then saying, "provide an infinite amount. '
What I am saying is we should simply have a moderate policy of
fairly neutral action by the Federal Reserve Board, not pegging interest rates, but keeping the supply of money at a level so 1t keeps
pace with the growth in the economy.
Senator BENNETT. To me, there IS a very definite necessary relationship between the supply of money and the savings of people. I have
been listening to your questioning of the witness, and it seems to me
you have put the whole burden on the amount of increase in the supply
of money for credit.
As a matter of fact, money and credit are not wealth, and the people
who borrow money to build school buildings or buy houses are limited,
eventually, by the amount of actual savings, wealthi that the people
are willing to contribute to the process. If we doub ed the supply of
money tomon-ow, we would not increase wealth by $1. But eventually, we would double the price of everything we put out.
This concentration on the fiscal supply of money as the solution of
this problem seems to me to be essentially falacious.
Senator PROXMIRE. May I answer my good friend from Utah by
saying that the only element in the economy over which the Federal
Reserve Board, in my judgment, has any degree of control is the
money supply. I would agree 100 percent with my good friend from
Utah that this is not the whole answer at all. I am saying it is an
answer that affects interest rates. It is an answer that affects inflation
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NOMINATION OF GEORGE HAROLD KING, JR.
very slightly on the basis of the best evidence we can find that has not
been contradicted. But it is an answer which has very serious consequences on the American people in many, many very serious ways.
And I am trying to get from the nominee his thinking a.bout the
consequences, not only on the economy as a whole and in general, but
the consequences on our schoolchildren and the consequences on people
who want to buv a home and build a house.
Senator BEN.NETT. The thing that bothers the Senator from Utah
is that you set up your premise which, to me is not stable or sound,
that the failure to increase the actual supply of credit is the sole reason
for the rise in the interest rate. Then you finally bring yourself to
the point, as I have tried to follow you, that the monetary policy of
the Federal Reserve is to bear the whole responsibility for the situation
you feel is bad.
Actually, I think over the last 3 or 4 years the supply of available
credit in this country has substantially increased, as has the supply
of savings. I do not agree with the premise of the Senator that the
policies of the Federal Reserve Board have not increased savings and
therefore, they have no effect on that phase of the inflat.ion problem
and they have not dampened down borrowing. Actually, we have
no way of testing what the situation would have been like if the policy
the Senator proposes had been followed out. But, looking back a.t
history, generally, when those conditions existed, we have had high
inflation. I feel the record should not be based entirely on the idea
which I think the Senator, probably unintentionally, is putting into
the record that the Federal Reserve, by failing to increase the money
supply at a rate consonant with the increase in the gross national
product, has somehow been solely responsible for the rise in the interest rates and this, in turn, has choked off, or has helped to choke off,
our growth.
Senator PROXMIRE. May I rerly to my good friend from Utah by
saying that perhaps the word 'solely" would not be correct and, as
the Sena.tor from Utah said, this was unintentional.
Let me say it is intentional on my part to say that the one conscious
agency in our society that has been influencing in a planned way, in an
orderly and thoughtful way, the rate of interest has been the Federal
Reserve Board. Perhaps the Treasury to some extent, but I thinkthe Federal Reserve Board has primarily done this. Let me show
you that in 1952 the ratio was 37 percent of money supply to gross
national product. The interest rate on bills was 1.8. The next year,
the ratio dropped, interest rates went up-36 percent and 1.9. The
next year-this was a recession year, 1954-the ratio went up again.
The money supply was increased and interest rates dropped. They
dropped all the way down to 1 percent.
The next year, the ratio was diminished as the money supply failed
to increase as 1!l"OSS national product increased. '\Yhat. happened to
the interest rates? They went up sharply. The next ye.ar the same
thing happened. Money supply wns maintained almost static. As
the woss nationa] product grew, interest rates shot up to 2.7 percent.
The next year, exact Jy the same thing happened. The ratio dropped
down to 31.5; interest. rates went up to 3.3. The next. year the Federal
Reserve Board followed t.he policy of credit ease. They increased the
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NOMINATION OF GEORGE HAROLD KING, JR.
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money supply. The gross national product remained a.bout the same.
That was the recession year of 1958. Interest rates dropped to 1.8.
And this year, 1959, during the middle of the year, the ratio was
29 percent. It is even less now, I believe, and interest rates went up.
I say this is direct, immediate; this is as explicit and specific as we
can possibly get. This is one agency which has ama.zing control over
the element in the economy that they are supposed to control, and
that is the interest rate. I do not know how anybody can dispute that
in view of these figures.
Senator BENNE'IT. I think they are not charged with control of the
interest rate; they are charged with the management of the money
supply, and the interest rate changes as an automatic result. I think
t.hat is one of the basic differences between me and the Senator from
Wisconsin and one of the things that I think is the basic fallacy in
his assumption that the Federal Reserve Board is cha.rged with the
responsibility of fixing interest rates.
Interest rates are an effect; they are not a cause.
Senator PRoxMmE. They are an effect that follows inevitably, I
think, from this policy.
I do not want to detain the nominee too long. You have been very,
very patient as well as responsive in your replies. I would like to
call your attention, however, to two other things. One is the front
page of the Wall Street Journal just 2 or 3 days ago. George
Shea who wrote this is a very fine financial writer, and I think we
can agree the Wall Street Journn.l is one of the leading financiaJ
papers in the country. Mr. Shea in the Journal has just pointed
out our economy is well below capacity in most industries. Automobiles will be far below the 8 million capacity which ther achieved
in 1955. Machine tools will be below two-thirds of capacity. Steel
is about 95 percent of capacity now, but they are replenishing inventories because of the strike situation, and they are expected to
operate during most of the year at 80 or 85 percent of capacity.
So we do not have a situation which has excess demand putting
pressure on capacity and driving up prices in that sense.
Also, I would like to call your attention to the point that the most
recent figures we have on employment is that 5.2 percent of the work
force, far more than 3 million men, are out of work now, looking for
work, bidding for work. There is an excess labor supply.
Under these circumstances, it is apparent that we do not have a.
shortage of human resources, and we do not have a shortage of
factory capacity and the ar~ment that we have. an excess of demand
that is likely to cause an mflationary situation, it seeme to me, is
a.nswered by the cold, hnrd facts of life that show, on the contrary,
we have an excess capacity and an excess labor force.
Under these circumstances the argument for further credit restraint
is answered fairly conclusiveiy by the facts of life, particularly in view
of the fact that the stock market appears to be anticipating a further
diminution in industry Rctivity toward the end of the year and in
view of the fact of the Nationa] Industrial Conference Board and
others suggesting that they are going t.o taper off industrial activity.
I would Ii ke your reaction to that.
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NOMINATION OF GEORGE HAROLD KING, JR.
Mr. Krno. Senator, those are all factors I would take into consideration in arriving at a decision. There are, of course, many
other factors that would have to be considered in connection with
that. I will say to you, sir, that I very strongly dislike seeing
people out of work.
As a matter of fact, the business that I came from-and I am
not an official any more-has a plant in Monroe, La., that manufactures oak floormg. The plant 1s shut down right now. Normally
there are about 125 people there, and I hate to see those people out of
work, Senator. I have had a very close relationship with them. They
are not numbers on a piece of paper to me. They are real people.
So I have a very, very keen awareness of people that are out of work.
But that has happened on occasions.
I suppose that my main interest in being on this Board was to
attempt, within the framework of my capabilities, to help make
decisions that would minimize unemployment and would permit the
country to go ahead on an even keel toward sustainable growth
as much of the time as possible, because the ups and down of the
economy can have very, very terrible effects on business, and that
has an effect on unemployment.
So I am probably more interested in this job because of an
awareness of these things that you talk about. As I have indicated
I certainly oppose unemployment. I do not think, though, that
the answer to call of the ills that we have is for the Federal Reserve
to grind out more and more credit.
In fact, Senator, I think it is really an unreasonable position to
say that the Federal Reserve is responsible for all this problem
that we are in. I think that the Congress must take its full share
of the responsibility. And my hope 1s that if I am permitted to
continue in the Federal Reserve that we can conduct our policies
in harmony with the Congress toward a concerted effort to give the
American people more stability.
Senator PROXMIRE. I would like to ask you about two specific
problems. One is the 3-percent limit on time deposits for national
banks, which the Federal Reserve has maintained. There is a
feeling on the part of many people that this may be a concession
to the industry, that, obviously, the national banks have an interest
in limiting competition among themselves and limiting the amount
they have to pay out to time depositors. And I am wondering, in
view of the very sharp increase of interest rates generally, in view
of the feeling that the Federal Reserve Board has expressed that
Congress is delinquent by not taking the 4¼ percent interest off
long-term bonds, why the Federal Reserve Board does not permit
the nation! banks in this country to be competitive, too, and not
maintain this artifically lower pegged interest rate which is in the
interest of the banks, certainly, and not the general public.
Mr. KrNo. Senator, I can give you only my own thinking on
that. The subject has been discussed pro and con at the Board on
many, many occasions.
The Congress, in what I consider its wisdom, has required the
Board to place a maximum limit on the interest that member banks
may pay on time and savings deposits. And the Board increased
that maximum about 3 years ago, I think. That was before I
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NOMINATION OF GEORGE HAROLD KING, JR.
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-came on the Board. It was then moved from 2½ to 3 percent, and
the FDIC took the same action for nonmember insured banks.
I agree very wholeheartedly that, if the present general interest-rate structure continues, there is no reason to deny people a
higher rate of return on savings deposits unless it might involve
some danger by placing the banks in competitive positions of having
to bid too highly to get deposits. The mere moving up of the
maximum, however, would not require the banks to pay hi~her rates
since the maximum rate, whatever it is, is only permissive. But,
then, if the maximum {ermissible rate were ever moved down as
the general structure o interest rates moved lower, that would be
a harder action in the sense that it would require banks that were
paying the maximum to reduce their rate. Therefore, the movement of the rate up can be said to be an easier thing than a
movement down in the ceiling.
My belief is that an increase in the past, and I am not speculating on the future because I will have to decide that in the
light of the conditions at the time, but in the past, though, it has
been my belief that an increase in it might help to shove the whole
structure into higher ground, which I think could have the effect
of making the next drop a sharp drop and, therefore, contribute
to a more rigorous up and down.
As I said earlier, I am more concerned with trying to straighten
out these ups and downs or make them as little up as possible and
also as little down as possible and to let the economy ride along on
as much of an even keel and with as much stability and sustainable
growth as possible.
Senator PRoxMIRE. This is your province. It is something which
you should have a conviction about what Congress should do. Would
you recommend that Congress just knock off this Federal Reserve
power to determine, fix, the maximum limit on time deposits and
let it be competitive 1
Mr. KING. No, sir; I would not.
Senator PROXMIRE. If we did eliminate this power, you would not
have to worry about the argument you are making now that you
have trouble lowering it. It would be competitive. That would be it.
Mr. KING. I would rather have the trouble of doing it, Senator,
than to have it left wide open. You would risk too wide open
competition. I think the legislative history shows that a reason for
enactment of the law was to ·attempt to eliminate wide open competition of banks for savings deposits, and I am aware of the fact that
today this places commercial banks in rather poor competitive position
with other savings institutions and also even with-Serrator PROXMIRE. Why should they not be competitive i
Mr. KING. Sir?
Senator PROXMIRE. Why should they not be competitive 1
Mr. KING. Well, sir, I think that they should be. I think it is
really more a question, though, of whether it is better to throw
down safeguards or to keep them where they can be maintained in
the absence of safeguards in other fields. I think it is entirely true
that the scramble for the funds of other people in the form of this
fellow bidding more and this one bidding more and this one bidding
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;NOMINATION OF GEORGE HAUOLD KING, JR.
more contribute.s to a subsequent drop in the economy that is very,.
very hard on people.
Senator PROXMIRE. You have a scramble now with savings and
loans bidding it up.
Mr. K1NG. Yes, sir; that is right.
Senator PROXMIRE. This is just one artificial limitation. One area
does not provide a blanket overall limitation for all institutions.
Mr. KING. That is correct, sir.
Senator PROXMIRE. It seems to me inefficient and, in a sense, it
handicaps the national banks although I can see why they would
be interested in maintaining it.
Mr. KING. I will say this, too: If I thought this developed to a
critical enough point, I would probably conclude I had to vote to
raise that mmimum. The Board has not voted on this. I am expressing an opinion here that has not been an official position I
have taken on the Board. We have discussed it as I indicated earlier.
Senator PROXMIRE. You have an open mind on it?
Mr. KING. Yes, sir.
Senator PROXMIRE. All right.
I just have one further area of questioning, and that is with regard
to reserve requirements. There has been criticism which may or
may not be well founded of a policy the Federal Reserve Board
follows, which is mighty profitable for the banks and mighty expensive for the taxpayer. This is to increase the money supply whenever
the Federal Reserve increases it, by lowering reserve requirements.
On the other hand, the way the Federal Reserve contracts the mon~
supply when it does this is by engaging in open-market operations. If
open-market operations were used as a means of increasing the money
supply, it would be done by the Federal Reserve Board going into
the bond market, buying bonds and receiving the income that
private banks now receive from those Federal bonds. And if they
did this over a period of 8 or 10 years, it would mean a very substantial procurement of Federal bonds. It would mean a sharp reduction m service on the national debt, and it would be in the great
interests of the economy for our Nation. We could reduce our Feder11l
cost by hundreds of millions if the Federal Reserve followed this
policy of expanding the money supply by open-market o~rations
mstead of reserve requirements, although the banks might not
enjoy profits that they enjoy under present Federal Reserve policies.
How do you feel about that?
Mr. KING. Well Senator, I feel that they are both tools for a
flexible monetary policy. I think that it is very advisable to leave the
Board, if the people who are appointed to it are considered compPtent
to make reasonable decisions-that it is better-Senator PROXMIRE. Let me just interrupt at this point to say it is
my understanding that the members of the Board feel they ought to
be 10 percent down from 16 percent now. That would mean a very
great mcrease in the supply of money over a period of many years.
It would mean a great unprovement in bank earnings. It would
also mean that the Federal Government would be forgoing a mighty
substantial revenue it should be enjoying. So it 1s a matter of
whether you are for the taxpayers or the bankers.
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NOMINATION OF GEORGE HAROLD KING, JR.
31
Mr. KING. Well, Senator, I can assure you I have no bias toward
the reserve requirement route of increasing the money supply. I think
that it is-Senator PRoxMmE. Why does the Board always do it this way W
Why does it not ever do it by open-market operations?
Mr. K1NG. It has not been done since I have b~n on there, sir.
Reserve requirements have not been-I am not competent to defend
the Board and the System for all of their actions in the past.
In fact, I might disagree sometimes with some of the actions--Senator PRoXMmE. May I say that we passed a bill last year. I
was the author of a similar bill. The bill we passed was the chairman's bill, but my bill was similar to permit banks to count vault
cash. This bill meant that credit could be expanded. This was my
understanding. But we made it clear that the new law should not be
used for this purpose. The law was simply a means of correcting
inequities and permitting the country banks to take advantage of their
vault cash and thereby create a more equitable situation.
However, it is my understanding also tha.t the Federal Reserve
Board has permitted banks to count some degree of their vault cash
now in accordance with the law and has not contracted reserves when
they did it. So the effect has been to expand bank reserves. The
Federal Reserve expanded the money supply by following this route
in recent months. Is this not correct~
Mr. KING. Yes, sir, that is correct, although the increase in relation
to the total is rather small. The Board felt that it was desirable to
make a start in implementing the act, although an ideal time to implement that feature of the act would be in a time of decreased activity.
The Board had a very strong feeling of not. wanting to do anything
through vault cash to affect the overall economy one way or the other.
Consequently, the action, which was of a seasonal nature, was ra.ther
small and was, I should say, a start toward effectuating the purposes
of the act.
Senator PRoXMmE. Your answer is what worries me because it implies that, given a period when you think the money supply might be
mcreased, that you are going to follow a policy of permitting vault
cash to be counted as soon as you can, which is a matter of expanding
bank reserves and thereby the money supply by permitting the banks
to increase their loans and enjoy more profits.
It is not the way of expandmg the money by increasing the Federal
R.eserve Board purchases of Government bonds.
Mr. KING. Senator, my own proposal andflan which I presented to
the Board-even though I was junior and recognized my neophyte
status, I did present a plan to the Board. My plan called for increases
in reserve requirements to offset the vault cash permitted to be counted.
My plan was not accepted, and it did not hurt my feelings at all be.
cause I realize that I was very, very junior. And, on further thought,
I realized that possibly any action to permit the counting of vault
cash in large amounts and offsetting with reserve requirements might
have an adverse effect on the economy as a whole, and that it would
possibly be better, in the light of the views of those with more experience with the subject than I, to more or less abandon my approach to
the matter at the time.
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NOMINATION OF GEORGE HAROLD KING, JR.
But I think that should be fairly strong evidence that I do not lean
toward increasing the money supply in that direction alone.
Senator PRounRE. So your method of increasing money supply
would be by open-market operations i
Mr. KING. "\Vell, sir, I would not want to make a statement as to
what I would do in the future in the light of the then existing
circumstances.
Senator PRounRE. You feel on the basis of what the current situation is that that might be a wiser way. You would certainll consider
as an advantage of open-market operation that it is a way o reducing
the cost of servicing the national debt. That would be an important
consideration for you¥
Mr. KING. That would be an important consideration.
Senator PROXMIRE. I think that is all I can ask.
Mr. KINo. Yes, sir, it would be.
Senator PROXMIRE. Thank you.
Mr. Chairman, I would like to make one correction for the record.
I inadvertently used the index of AAA bonds with corporations
before, and I should have used the Standard and Poor Municipal
Bond Index, which is even more decisive in the point I wanted to
make.
Between 1952 and currently, the inter~<Jt rate has gone up from 2.19
to 4.2. And, as I calculate, the cost of a $1 million school over a
30-year period, it has increased by $300,000 or nearly one-third of the
total cost because interest rates have increased as they have since
1!)52.
I would like to tell the nominee that he has been most patient. I did
not mean to make a marathon interrogation, but it appear I have done
so. You have been very kind and thoughtful in your answers. I
certainly did not mean to do anything improper in questioning you
about your views. I do think when a man is appointed to the Federal
Reserve Board to be one of the seven money managers of this Nation
for a 14-year period, that we have a duty to find out your views,
your opinions, and, in doing so, of course, attempt to evaluate your
ability as well as to just get the facts about your biography .
.Mr. KINo. I agree with you entirely, Senator. I have really enjoyed
today. I think I have enjoyed this more than any day I have been
in
ashington, frankll.
Senator PRt>XMIR.F.. I·m glad to hear it. Thank you very much.
Senator SrARIDIAN. Mr. King, I shall not detain you longer. The
hour is late. Let me see if I can more or less summarize your view as
stated in the early part of y-our questioning.
That is when you were discussing guidelines you would use. You
consider the acts of Congress, the laws passed by Congress, as being
your guidelines?
Mr. KING. Yes, sir.
Senator SPARKMAN. But that does not mean that you disregard
opinions of others such as Senator Proxmire? You would take
these as advisory and consider them along with other factors~
I believe from your comment that you must have read the report
of the ,Toint Economic Committee issued recently?
Mr. Knrn. Yes, sir.
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NOMINATION OF GEORGE HAROLD KING, JR.
33
Senator SPARKMAN. You are familiar with the various recommendations made in it i
l\fr. KINo. Yes, sir.
Senator SPARKMAN. Senator Bennett, anything further~
Senator BENNET!'. No further questions.
Senator SPARKMAN. Thank you very much, Mr. King.
Off the record.
( Discussion off the re~ord.)
Senator PROXMIRE. Mr. Chairman, I move the nominee be favorably
recommended.
Senator SPARKMAN. All right.
Senator BENNET!'. Second the nomination.
Senator SPARKl\lAN. A motion has been made and seconded.
Those in favor say, "Aye."
~enator Pn0Xl\1IRE. Aye.
Senator SPARKMAN. I vote, "Aye," and I am voting Senator Robertson, Senator Fulbright, Senator Frear, and Senator ,vmiams, "Aye."
Senator BENNETI'. I will vote Senator Capehart, Senator Bush,
Senator Beall, in addition to myself, "Aye."
Senator SPARKMAN. If there are others, I would suggest they be
giwn an opportunity to indicate their vote.
Thank you very much, and it will be reported favorably.
The meeting stands in recess.
("Whereupon, at 12 :35 p.m., the committee recessed subject to call of
the Chair.)
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