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NOMINATION OF GEORGE W. IIITCUEIJ,
HEARING
BEFORID TBID
COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
EIGHTY-SKVENTH CONGRESS
1!'IRST SESSION
ON
THE NOMINATION OF GEORGE W. MITCHELL TO BE A
MEMBER OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTJ<JM FOR THE REMAINDER OF THE
TERM OF 14 YEARS FROM FEBRUARY 1, 1948
AUGUST 15, 1001
Printed for the use of the
Committee on Banking and Currency
U.S. GOVEUN.ME:ST PRINTING OFFICE
74UO
WASHINGTON: 1961
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CO.\IMITTEE ON BAXKING AXD CUilRI~NCY
A. WILLIS ROBERTSON, Virginia, Chairman
H01\1EH E. CAl'EIL\HT, Indiana
WALLACE I'. REX:S.ETT, l'tah
PH~:SCOTT Hl'lill, Conrn>ctieut
J. OLE:>i1' BE.\ LL, '\laryland
JACOB K . .TA \'IT8, !\"cw York
JOHN U. TOW EH, Texas
JOIIX SPARK1\L\N, Ainhums
PAUL 11. DOl'GLAS, lllinois
JO,-;~:P![ S. CLARK, Pl'rtnsylnlllia
WILLL\1\I l'ROX:\IIHE, Wis('Onsin
HAHRISOX A. WILLIA\IS, Ji<., New Jersey
ED'\ll"'<'D S. l\IUSKIE, l\lai1w
El>WAHI> V. LOX<l, Missouri
MAUH!:S.E B. XEl'BEHOEH, 01"gon
MATTHEW HALE, Chief of Staff
II
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NO!HNATION OF GEORGE W. MITCHELL
TUESDAY, AUGUST 15, 1961
U.S. SENATE,
CoMMI'ITEE oN BANKING AND CuRRENCY,
Washing ton, D .0.
The committee met, pursuant to the call of the chairman, in room
5:302, New Senate Office Building, at 10 :05 a.m., Senator A. Willis
Robertson ( chairman) presiding.
Present: Senators Robertson, Sparkman, Douglas Clark, Proxmire, 1Villiams, Long, Capeluirt, Bennett, Javits, and Tower.
Senator SPARKl\L\N (presiding). Let the committee come to order,
please.
The purpose of the meeting this morning is to consider the nomination of Mr. George Wilder Mitchell, of Illinois, to be a member of
the Board of Governors of the Federal Reserve System for the remainder of the term of 14 years to February 1, 1962, in the place of
Mr. Szymczak, who has resigned.
Mr. Mitchell, we are glad to have you with us. We have a Senator from your State, Senator Douglas, as a member of this committee.
Do you have a prepared statement to give?
Mr. l\frroHELL. No, I do not.
Senator SPARKMAN. Would you like to tell us something about
yourself?
May I say that we have your biographical sketch, and it will be
printed as part of the record.
(The biographical sketch of Mr. Mitchell follows:)
l\Iitchell, George Wilder, economist; born Richland Center, "'is., February 23,
1904: son of George Ray and Minnie (German) ::\Iitehell. Married Grace i.\larion
Muir. August 30, 1927; children-Marilyn Anne (Hagberg), Bruce William,
Judith Nancy (Rediehs), Margery Grace.
A.B., University of Wisconsin, 1925; student (part time), University of Iowa,
1927-ao, University of Chicago, 1930-33.
He,-;earch assistant, University of Wisconsin. 102G-26: statisti<'al and research
assistant, United Typothetae of Ameriea, 11)26-27; instructor and research
as~istant, University of Iowa, rn21-:~o: research assistant, University of Chicago,
rn:::0-:1:1; director of research, Illinois Tax Commission, 1933-3!.l, Hl41-43 (nwmber
of commission, 1939----40) ; assistant to director, Department of Revenue, State
of Illiuois, l!J.!3; director, Department of Finance, State of Illinois, l\H!J--51;
tax economist, Federal Reserve Bank of Chicago, 1944-48, vice president, 19:il-.
Tax consultant for Civil Aeronautics Board and director of stucly of multiple
taxation of air commerce, 19-!4--45; member of advisory group ap!)ointerl by Joint
Committee on Internal Revenue Taxation to Investigate the Bureau of Internal
Ren-nue, 80th Congress; chairman of Federal Reserve Committee whieh prepa red "Automobile Installment Credit Terms and Praetices," sup!)lemen, 111,
Federal Reserve System, "Consumer Installment Creclit,"' part I, volmne 2,
Hl57; ehairman of Federal Reserve Committee on Surveys of Credit and Capital
8onrees, U.S. Congress. "]\'inancing Small Business,"' part 2, l!Ji"i8; member of
Illi1wis Goven1or's Ren,nne Commission, 1961; member of National Committee
on Gm·ernment Finance, Brookings Institution, lHUl-.
1
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NOMINATION OF GEORGE W. MITCHELL
Member of American Economic Association, American Fiuanl'e Asso<'iation,
National Tax Association (president, 1948), Institut Internutional de Finanl'es
PulJliqnes, International Association of Assessing Offieers, Tax Institute. Regional Sdence Association, Delta Sigma Rho, Phi Kappa Phi. Member of
Congregational Church.
Additional publications: editor of 8-volume "SurYey of Local Finance in
Illinois," 19:30--40; coauthor of "Business Activity in Iown." 1930; "Assessment
of Real Estate in Iowa and Other Midwestern States," 1H31.
Home nclclress: 1401 East 55th Street, Chicago. Oflke address : 230 South
LaSalle Street, Chicago.
STATEMENT OF GEORGE WILDER MITCHELL, CHICAGO, ILL.
Mr. MITCHELL. Let me say that when I graduated from the University of ,visconsin in 1925 I was uncertain whether I would go into
teaching or into administration or research; and during the course
of the next few years, having tried all of these, I decided upon research
and administration.
I spent approximately 11 years in tax administration in the State
of Illinois, working as director of research for the Illinois Tax Commission, and was finally named a member of the commission. I ,vent
to the Federal Reserve Bank of Chicago in 1944 and have been Yice
president in char(l'e of research at tlmt bank since l!),'H.
In the course of the years at the Federal Reserve Bank of Chicago,
I had a leave of absence to act as director of finance for the State
of Illinois. The director of finance functions are principally the
preparation of the State budget and the determination of fiscal policies
for the State government.
I also had a leave of absence to work for the Civil Aeronautics
Administration on a study of multiple taxation of air carriers, and
another leave to serve as a member of a committee appointed by the
Joint Committee on Internal Revenue Taxation to mvestigate the
administration of the Bureau of Internal Revenue.
This recital of highlights in my career indicates, I think, that I
have been in the public service almost throughout my entire career.
Senator SPARKMAN. Senator Proxmire 1
Senator PRoxMIRE. Yes.
Senator SPARKMAN. This gentleman is not a constitutent of yours
now, but he used to be when you were a resident of his St.ate.
Senator PROXMIRE. You can almost say he wa.s a constituent by
prSoxy.
. Ill"m01s
. w h en h e was m
. ·nr
.
enator S PARKMAN. Y ou were m
n 1sconsm.
Senator PRoxMIRE. Yes. Mr. Mitchell was born in Richland
County, Wis. We are very proud of Mr. Mitchell's fine record.
This is a very splendid appointment. Here is a man who has a
most pertinent kind of background in the Federal Reserve System,
and also has a quite broad experience outside the Federal Reserve
System. So it is not a matter of appointing a man who has spent
his whole life within one agency.
However, I would like to ask Mr. Mitchell some questions, because
I think that Senator Morse raised a point on the floor of the Senate
about 4 or 5 days ago as to the dangers of appointing people from
within a particular agency to that agency. Such persons may get a
very narrow viewpoint and tend to look at the agency from the standpoint of the regulative units within the industry, m this case the banks,
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NOMINATION OF GEORGE W. MITCHELL
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rather than having a broader perspective, which is useful in m~king
policy decisions.
With this in mind, I would like to ask to what extent, Mr. Mitchell,
would you say that the interest rate is determined in a free market
by the forces of demand and supply¥
Mr. MITOHIU.L. The interest rate, of necessity, is determined by the
demand for funds, both short and long term, generated by the Government, individuals, corporations, and others who use money, and by
the supply, which is generated by the savings of individuals and corporations and the remvestment by individuals and financial institutions. To these sources of supply we should add the capacity of the
banks to expand their use of credit through the operations of the
Federal Reserve System.
Senator PRoxMIRE. What I have in mind is: Isn't the level of interest rates something that can be determined by policies deliberately
.adopted by the Federal Reserve Board¥ Since 1914, isn't the history
of the Federal Reserve Board one of stepping in whenever they felt
it desirable to do so and increasing or decreasing interest rates to
moderate the economy one way or the other, either to stem a possible
inflation as they did in 1929, or to stimulate activities as they did in
the de-pression period during the early thirtiesi Hasn't there been a
long history of this¥
Mr. Mrrc:HELL. A ilong history of moderating or affecting changes
in interest rates. When you say "determine," this gives nse to the
possibility that one might say the Federal Reserve could fix the inter-est rate anywhere at any pomt. I think this is not the case, except
with disastrous consequences.
Senator PaoxMIRE. They may not be able to fix a. precise, rate at
a specified time. But isn't it true they can pretty much fix it because
they control the supply of money i The Constitution requires that
the Congress have control over the supply of money, 1tnd Congress
has delegated that control to the Federal Res&rve Board. The Federal Reserve Board can increase or decrease the supply of money as
they wish.
. Mr. MrrcnELL. From the supply side, as I indicated, this is only
one source of supply of credit to meet the va.rious demands for credit.
'The other sources are the savings of individuals and oorpornt.ions and
the stream of reinvestment funds which is coming on the market and
seeking reinvestment. To this you &dd the amount of credit that
the banks can extend, which, m turn, depends on the monetary
policy being followed at that time by the Federal Reserve System.
Senator PRox:mRl!l. This is one area that traditionally is not a matter
of much controversy. There is some. Traditionally, the Government
can have a direct impact on the economy by determining the suppl,Y
,of money. The Government can, and the Government does. It 1s
~ognized as good publi~ policy. And we don't have to argue about
1t ns we do a.bout fiscal pohcy~nding, and so forth.
Mr. MITCHELL. Yes1 that is right. But again, as I say, this is only
,one factor in determimng the level of interest rates.
Senator Paonmm. With that in mind, on page 38 of this very inter-esting report of the Commission on Money and Credit, it is argued
that at some level of unemployment, an increase in demand is not inflationary. I think the figure they use is 8 percent. They say if
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NOMINATION OF GEORGE W, MITCHELL
unemployment gets to a level of 8 percent, we can increase demand
sharply and substantially. There is little or no inflationary effect.
Mr. MrrcHELL. Yes.
Senator PROXMIRE. The inflationary effect is minimal. '\Vould you
agree with this 1
Mr. MITCHELL. With the level of unemployment at 8 percent, I
would say an increase in demand would not be inflationary; that is
right.
Senator PROXMIRE. We have a level of unemployment now which
is 7.3 ~rcent unadjusted and 6.9 percent seasonally adjusted. It is
very high. It is close to the 8-percent level.
Mr. MITCHELL. That is right.
Senator PRoxMIRE. Under these circumstances, would you say that
an increase in the supply of money which, of course, I take it, does have,
the effect of increasing demand, would be inflationary 1
Mr. MITCHELL. No.
Senator PRoxMIRE. It would not be W Would not that have thetendency to make funds more available and therefore tend to promote
employment i
Mr. MrrcHELL. Yes.
Senator PROXMIRE. All right. I don't want to take too long because I think other Senators should have an opportunity to question
you, and I know they are all busy. I should like to suspend my questioning now and come back a little later. I don't want to detain the
nominee at any length, but I think other Senators might be desirous
of going ahead.
Senator SPARKMAN. Very well. Senator Bennetti
·
Sena.tor BENNET!'. Only one comment: You have made it clear at
least to me that the power of the Federal Reserve and its actions represent only one factor in all of these powers and actions that finally
control the current rate of interest. Am I correct in assuming that t
Mr. MrrcHELL. Yes sir.
Senator BENNET!'. My friend from Wisconsin has rather pushed
you to the point where I think he would like the record to show that
the Federal Reserve can determine the supply of money. I think you
answered "yes" to that question.
Mr. MrrcHELL. The supply of money; ;es, that is true. ·The Federal Reserve can determine the supply o money, but this is not the
same thing as saying that it can determine the rate of interest.
Senator BENNET!'. Actually, what the Federal Reserve does is useits power to increase a part of the supply of money. It does not control all of the supply of money.
Mr. MrroHELL. Yes, sir; you are right. What the Federal Reserve does is provide the reserves for the banking system. The business and individual community decides how these reserves are going
to be used-and the banks, too. It may be that they will be used by
an increase in private demand deposits, which are a part of the money
supply. Some of the reserves may go into currency; in which case
they become a part of the money supply.
Some may go into Government aeposits temporarily. The Government's balance may rise. This absorbs reserves, but does not- affect
the money supply. Ordinarily, it is a short-run phenomenon. It may
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NOMINATION OF GEORGE W. MITCHELL
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ply by providing additional reserves to the banking system. The immediate reaction may be that Government deposit.s rise and this is all
that happens. Some may say the Federal Reserve isn't doing anything. The Federal Reserve has done its bit, but it takes the time for
the Government to spend this balance and draw it down before the
money gets into the private hands and then becomes a part of the
money supply.
The other thing that can happen to the reserves is they can go into
time deposits; and if they do go into time deposit.s, they don't get
into the money supply, as conventionally defined. Milton Friedman,
for example, defines the money supply to include time deposits. He is
almost alone with respect to this.
So actually reserves provided by the Federal Reserve get into the
money supply as a result of what banks and businesses and individuals
do. Of course, if the banks permit the reserves to lie idle, individuals
do not even get a chance to operate in this respect.
Senator BENNETT. It seems to me that private individuals and corporations, by their savings and reinvestment, provide most of the
money supply and the Federal Reserve can influence this volume as a
kind of residual or marginal effect.
If the Federal Reserve System supplied all the money, we would
have complete fiat money and our system would have lost its basic
pattern.
Mr. MITCHELL. Senator, I think our difficulty is just a semantic
one. When you say money supply, you are saying what I ordinarily
mean by the term "supply of credit." The phrase that I use is "supply
of credit." The supply of credit depends upon the amount becommg
available for reinvestment on people's predilections to go long after
being short, on the savings in the community and the amount of credit
created by the Fe<leral Reserve System.
Senator BENNETT. Changing the word, then. the amount of credit
that the Federal Reserve supplies is not the basic amount of credit
in our economy.
Mr. MITCHELL. That is right; yes, sir.
It adds to it or any detract from it.
Senator BENNETT. To that extent it affects the interest rate.
Mr. MITCHELL. That is true.
· Senator BENNET!'. But it is not the sole factor¥
Mr. MITCHELL. Yes, sir; it is not the only factor.
Senator BENNETT. I have no other questions, Mr. Chairman.
Senator SPARKMAN. I should have added earlier that we have the
approval of the two Senators from Illinois to this nomination, both
Senator Douglas and Senator Dirksen. Senator Douglas, have you
any questions to ask or comments to make 9
Se,nator DouoLAs. Mr. Mitchell is a man of very high g_ua.lifications
for this position. We all have before us the sheet givmg his past
achievements, which show that he is splendidly prepared for a position on the Federal Reserve Board for the remainder of Mr.
Szymczak's term.
He has been vice president of the Federal Reserve Bank in Chicago,
and a director of their research division. I think probably he is one
of the best qualified men that we have had before us for appointment
to the Federal Reserve Board. He is a man of high character and
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NOMINATION OF GEORGE W. MITCHELL
great integrity. And it is & source of personal satisfaction to me to
see that he has been appointed.
Purely for the record, I would like to make this comment to which
Mr. Mitchell :ma.y give such weight as he thinks it deserves. I have
felt that the Federal Reserve Board paid very close attention to what
they ca.II the fina.ncial condition of the country and followed the
credit, banking, and monetary situation very closely. I have not felt
that they followed the employment conditions of the country as
closely, and that. they perhaps did not recognize as fully as they
should their :responsibility in seeking to maintain a higher level of
production and employment consistent with a reasonably steady price
level.
I am not going to offer any advice to }fr. Mitchell in view of his
experience. But I do hope he will address the attention of the Board
at least to a. set of facts: First, the actual volume of unemployment in
the country; and second, the degree of unused cap11.eity in the country.
The index of unemployment m July stood at 6.9 percent, seasoIUY.ly
adjusted. This is based on taking as a denominator the total working force of the country and not merely those that seek wage and
salaried positions. If we eliminate the 11 million self-employed, the
percentage of unemployment is approximately 8 percent. Then if we
take into account tlie involuntary part-time wokers--those who work
less than 37½ hours a weeki although they would like to work a full
week-we get an additiona 2 percent unemployment. So we have
involuntary lost time of approxllllately 10 percent at the present time,
which is an extremely high ratio.
Similiarly we ha.ve a. large amount of idle capacity. A fair estimate would~ that 20 percent of our productive capacity is not used.
With 10 percent unemployment a.nd 20 percent idle capacity, it would
certainly seem that a monetary credit policy which would aid idle
men to be _put to work1 or idle plants to produce goods which otherwise would not be produced, would be in the national interest.
I ha.ve been struck by the fact in the past that when we tried to
point this out, perhaps imperf~tly, to the Federal Reserve Board,
this has seemed to fall on deaf ears. I felt frustrated about it. Such
a monetary credit policy has been represented as inflationary. Yet
we have gone for a considerable period of time without inflationary
effects, bees.use when we get an increase in the total supply of money,
we may also get a.n increase in the physical quantity of production.
The equation of the quantity theory of money has two sides to it.
And a mere increa.se m the amount of money does not send up the
price level, if it is met with a. compensatory increase in the quantity
of goods.
So I am not going to ask you questions at this point. But I will
merely say that thefie are matters which, in my judgment, have not
been sufficumtly oonsidered by the Federal Reserve Board, which have
not been given adequate weight by the Federal Reserve Board, and
which deserve to be considered by the Federal Reserve Board.
Senator 8PA1lKlliN. Senator J avits ¥
Senator J.a.vrn. Mr. Mitchell, what is your concept of the independence of the Federal Reserve Board from the Treasury¥
Mr. MITCHF..LL. From the Treasury¥
Senator J AVITS. Yes.
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NOMINATION OF GEORGE W. MITCHELL
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Mr. MITCHELL. I think the Federal Reserve System operates to accommodate the entire economy-agriculture, business, commerce, and
government. The Federal Reserve cannot ignore the OP.erations of
the Treasury, nor can the Treasury ignore the responsibilities of the
Federal Reserve System.
I think it is a case of independence to a degree, but neither should
be bound by the other's decisions if these decisions involve inconsistent behavior on the part of each of them.
Senator JAVITS. So you would not feel yourself bound out of loyalty or other considerations to follow the desires of the Treasury if
you believed that the total economic system cnlled for some other
decisioni
Mr. MITCHELL. That is correct; yes, sir.
Senator ,TA VITS. And I assume you would contend for that point of
view in the Board.
Mr. MITCHELL. Yes, sir.
Senator J A VITS. What do you think of the report of the Commission
on Money and Credit, headed by Mr. Frazar B. "Wilde? Have you
had an opportunity to study it?
Mr. :\hTcHELL. I am generally familiar with this report, and I
think, in general, the underlying philosophy of the report is appropriate nnd proper, and I would generally subscribe to it. As far as
specific recommendations are concerned, they are extremely numerous,
and some of them are helpful and others, I think, are not helpful, and
some I am just indifferent about.
Senator JAvrrs. Yes. I can understand that. And I wouldn't
take my colleagues' time by going into that. The Joint Economic
Committee is having a series of hearings on that right now.
Mr. 11ITCHELL. I !mow that.
Senator J A VITS. The last point I would like to get your philosophy
on, because that is all one can do in a hearing on confirmation, is the
question of the base of credit. I noticed your emphasis on savinis
in your answer to Senator Proxmire. I am sure you understand the
basic concept enunciated by Senator Douglas. That is, the credit
base because of unused capacity and a certain amount of built-in unemployment, must have some quot.ient for real assets in ea.ming power;
even if not realized. I would just like to know if you have any feeling on that. score.
In other words, is your view the doctrinaire view that we are limited
in our credit base by the amount we save every year i Or do you feel
that our yearly savings are too narrow a base for this exploding world
and for our own dynamic economic situa.tion i
Mr. MrrcHELL. That relates to the relative importance of savings
and reinvestment and monetary cree.tion. Senator Douglas understa.nds, I am sure, that at the margin a small amount may have quite
an impact. It may be that savin~s and the stream of reinve.gt,mentplus the amount people are willmg to commit on a lo~er termprovides 90 percent of the credit that is needed for expansion toward
full employment. The part that the monetary component, that is
monetary expansion, might provide, might be relatively small, but
it might have quite significant effects on the rate structure. The
danger for which we must be alert is that the monetary supply is not
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NOMINATION OF GEORGE W. MITCHELL
expa~ded t~o rapidly, and that we ~o!1't get inflation. It is really a
question of Judgmen~, as to whether It IS bemg done or not being done.
Senator JAvrI'S. Fmally, where do you see the greiitest opportunities
:18 you enter, as I am sure you will enter, into this great responsibilIty? "\Vhere do you see the greatest responsibilities for the dHelopment of our economy? Let me indicate to vou what I mean bv that.
Do ~on see it i~1 increasin~ pr~luctivity? Do you see it in exp:tnding
foreign O\lerat1ons, both m aid and trade~ Do yon see it, in raising
the Amer~can standard of living? Do you see it in greM sweeps of
technolog1ca,l advance?_ "\Vher~ do y~u see our great. ollpo1t11~1ity '?
l\Ir. MITCHELL. I thmk, basically, 1t depends on tee molocrwal adYa,nce. "\Ye need to do what. is required to ham a more p~ductfre
economy, imd I think this, o,·er t.he lollg swing, is a matter of technology. Technology has given us our current standard of living,
and can give us a higher stamlard of Ii Ying.
The contribution that the Federal Reserve can make toward this is
mainly in moderating cyclical swings.
Sena,tor ,TAvrrs. So you would put the highest premium on technology, automation, the development of the pi·od11ct ion process. You
feel that the main emphasis has to be on expanding productive bases
in a technological sense?
:Mr. MrrcHELL. I believe so.
Senator ,JAvITS. I think that is very enlightening and a very interesting kev to your philosophy. Tha1;k you.
Senator SPARKMAN. Senator Clark?
Senator CLARK. Mr. Mitchen, I imagine that yon iire as convinced,
as I am sure all the committee members are, that. ,YOU are going to be
confirmed without much trouble, to this very important position.
My friends on either side of me who luwe your interests at heart tell
me that you a.re thoroughly competent. My own wry superficial look
at the situation would indicate t.hat their judgment is correet.
I shall vote for your nomination. But this is rather a curious part
of the folklore of the Senate. "\Ve summon these nominees here and
ask them rude ~uestions or make dissertations on s11hjectR about \\"hieh
we know very little, at least as fa.r as I am concerned. My eolleag.rns
know far more than I. This is a kind of irresistible oppo1tunit,y
for a politician to sound off at least briefly on this subject.
Senator DouOLAS. Very important, too.
Senator Cr.ARK. I am without the self-discipline which would make
it possible for me to resist this opportunity to deliver a little lecture.
You are going into a highly technical job in which the exercise of
professional judgment is of the greatest impottance. "With one or
two ~ossible exceptions, I don't think there are very many members
of this commit.tee who have the technical ability to appraise very thoroughly just what your decisions should be. But I would like to suggest to you quit.e briefly, Mr. Mitchell, a philosophical approach to
this job.
I would start with the basic precept that one of the most dangerous
things in our democracy is political and economic la.g. All of our
people in positions of importance, those who are appointed as much as
those of us who are elected, are apt to be behind the times and unprepared to recommend and put th_rough the steps which a. constan_tly
changing world and an mcred1bly fast-movmg economy reqmre.
Therefore it is of the greatest importance in the world that we should
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NOMINATION OF GEORGE W. MITCHELL
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have an open and creative mind in these jobs of great technical
responsibility.
The danger is that we will have negative and conventional minds
which are not willing to look facts objecth·ely in the face, but merely
report and repeat the outmoded cliches of the day which is gone.
Such people may ham very little tolerance for new ideas, and be quite
sure that the economics they leamed in college-the law of profits-never changes. The conventional wisdom, as Professor Gailbreth put
it, has almost the same sanctity as the Bible.
I feel myself, having been somewhat of a student of Arnold Toynbee, that the most important thing in our civilization is to have a
creative minority, a dominant minority to guide our affairs. It is
nip and tuck in this critical point of our history whether that will be
the case or not.
You have an extraordinary opportunity to show your sound judgment. Your keen understanding of these _problems and your willingness to keep an open mind will be of most importance. I don't think
that some of your colleagues on the Federal Reserve Board ham kept
that open mind. As a result., the workings of the Federal Reserve
Board have been far Jess satisfactory than they would have been if
its present members had been a little less intransigent and a little more
willing to look at changing conditions objectively.
I share the Yiews of my colleagues that unemployment and employment are entitled to more consideration under the Employment Act
of Hl46 than they have had. Stability is terribly important, of course.
Maximum production also is import.ant. But employment deals with
human bein~s. Just because a man spends his life dealing in terms of
money and Ii ving with bankers and in the middle of fiscal affairs is no
reason for him to lose his sense of compassion. Nor is it necessary
for him to take a kind of intransigent position with respect to matters
respecting human beings.
No one can be certain that it won't also lead to a sounder economy.
I don't think the independence of the Federal Reserve Board is a
sacred cow either. It served us well in the past; it may not serve us
well in the future. Ours is the only central bank in the world not
controlled by its gO\·ernment. Maybe this is something we should
take a continuing look at.
My lecture is over, and I don't intend to solicit any reply unless you
feel so inclined. I do think you are going into a position of enormous
responsibility and I hope you keep an open mind.
Senator SPARKMAN. Senator Towed
Senator TOWER. Do you feel any major organic changes should be
made in the Federal Reserve System 'l Do you contem:{>late recomme11ding any such changes 'l Do you believe the functions of that
System should be expanded~
Mr. MITCHELL. I don't think that any major changes are needed.
There are many alternative organization structures and many ways
of running an organization. '\Ve may not have the best possible
system right now. It seems to me, for example, that some of the
CMC recommendations might result in improvement, although I
would be inclined to think that if changes were to be made, perhaps
more consideration should be given to those which were sug~J'e8ted by
Professor Reagan in an article reprinted recently by the Joint EeoDigitized by
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NOMINATION OF GEORGE W. MITCHELL
nomic Committee. He recommends the abolishing of the Federal
Reserve Board and the creation of the office of Govemor. That
would be a drastic change, but it might be worth considering.
Just tinkering with the Federal Reserve structure is not likely to
be significantly productive even though it might result in some improvement. I would like to see the base of support for the Federal
Reserve somewhat broadened. Precisely how one goes about doing it,
I am not entirely sure.
Other than that, I don't believe I have any comment, Senator,
which is really responsive to your question.
Senator SPARKMAN. Does that complete your questioning, Senator
Tower?
Senator TowER. Yes.
Senator SPARKMAN. Senator 'Williams?
Senator WILLIAMS. I have been reading the New York Times profile on Mr. Mitchell. I am very much impressed. And I think I will
experiment here and resist the temptation to make a dissertation.
Senator SPARKMAN. Senator Long?
Senator LoNG. I am very much impressed with the philosophy of
my colleagues on this committee as well as the qualifications of the
nominee, so I, too, will refrain. I have no particular philosophy to
express to the committee or questions I want to ask of the nommee.
Senator SPARKMAN. Senator Proxmire, do you have a few more
questionsi
Senator PRonnRE. Yes. I apologize to the committee and I do not
mean to detain you. This is an important occasion. This is an appointment for a few months. But it may be the prelude to a 14-year
term on the Board.
The money supply is roughly 27 percent of the gross national product. This is nearly the tightest, as far as I can remember, that 1t has
been since 1914. There may have been some other occasions when it
was tighter, but not many. It is certainly the tightest in the last :30
yeaCrs.
. any mstances
.
. wlnc
. 11 t h e ratio
. of money supp1y to
an you cite
m
gross national product was tighter than it is right now?
Mr. MITCHELL. No, sir; I don't believe I could. I would like to
comment. Would you like to have me comment?
Senator PROXMIRE. Yes, I would.
Mr. MrrmrnLL. In the last decade, roughly, money supply has risen
26 percent. And the turnover of deposits-which is another way of
measuring velocity and is not the same as income velocity-has risen
60 percent. This is the turnover in 337 centers, excluding New York,
for in New York the turnover has risen 140 percent.
The net of all this is that we have had a 6 percent annual compounded increase in effective money.
Along with the secular increase in turnover, we have been getting a
secular mcrease apparently in income velocity. I think this is the reason why it hasn't really been necessary to increase the money supply
as rapidly as it would otherwise have been.
Senator PROXMIRE. Is that not always true? It is always true
by definition that when we have a small money supply in relation to
the gross national product, the velocity necessarily has to increase.
Mr. MITCHELL. Velocity and turnover are both responsive to rising
economic activity.
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But turnover in the short run doesn't have very much leeway in
it. In the long run it hllB the leeway brought about by institutional
-changes. For example, the number of times people are pa.id has
something to do with the frequency of turnover. The more often they
a~paid the higher the velocity.
The growth of the so-called budget or special chooking account has
tTemendously increased the velocity of deposits. For example, the
average velocity of an individual account is something between three
to six times a year. Business accounts are around 25 to 30 times a
year. The bud.get accounts are 12 to 15 times a year.
As we add to the number of budget accounts and as corporations require their treasury departments to oonserve on cash, we step up
velocity. This cannot be done overnight. But in the course of a
decade, a great deal has been done to conserve on money needed to
do the same job. In a. period of boom, velocity rises slightly. It rises
a little more rapidly than it does at other times, but most of the
-change in velocity that occurs has been occurring in the postwar years
.secularly, and I don't lmow how much further it may go. It may
_go quite a. way. Some people say it has to stop. Obviously, it will
stop someplace. But it can continue for some time.
Senator PROXKIRE. There is no question but that the velocity would
:automatically increase as the money supply diminishes in relation to
the job it hlUI to do with respect to gross national product,
Mr. MITCHELL. That is right.
Sena.tor PROXMIRE. The argument that the velocity has increased
doesn't seem to me to be a satisfactory answer. I pointed out that
the situation is one that discourages the expansion of our economy
and that tends to militate against employment on a. historical basis.
The policy of the Federal Reserve B0&rd, just considering the factors
of money supply and gross national product, is as tight as it has ever
been in the 47 years since the Federal Reserve System was established.
Mr. MITCHELL. I think you a.re still talking about income velocity.
lfoney is used for a great many things other than final purchases or
product. This is what gross national product is. There a.re all the
mtermediate transactions leading u_p to these final trBJ1.sactions for
which money is necessary. In addit10n to that, there is a tremendous
volume of transfer of debt a.nd equity for which money is needed.
You are taking one small use of money, namely, gross national product, final purchase; but really one has to consider all the other uses
of money, some of which are proportional to changes to gross national
product and some of which are not. New York debits tend to be
inversely related.
Senator Paox:MIRE. Can you giYe me any statistics that indicate the
money supply is easing i ,vould you characterize the present monetary situation as one of credit ease 1
Mr. MITCHELL. Yes. The position of the commercial banks today
is indicative of monetary ease. Business loans are not rising and investments have been rising very sharply. This always happens in
a period of monetary ease.
Sena.tor Paox:mu. But we have a. small money supply, we have a
Foss national product that is rising, and we have a relatively high
rnterest rate.
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NOMINATION OF GEORGE W. MITCHELL
Mr. :MITCHELL. The rate pattern is partially a function of th~
foreign situation. Interest rates are not typical for this stage of a
recession. Short-term interest rates are relatively high, and so are
long-term interest rates relatively high compared to previous
recessions
Senator PROXMIRE. When the businessman goes to a bank, he wants
to borrow money so he can expand his plant, put people to work, and
so :forth.
Mr. MITCHELL. Yes.
Senator PROXMIRE. "\Yhen he goes and asks for the price of that
money,_ it is high. As far as he is concerned, the situation is tight.
Mr. .L\hTCHELL. The price o:f money may be high, but the situation
is not tight. The banks would be delighted to lend to many people.
They are looking :for customers who want to borrow right now.
Senator PROXMIRE. The only way we can measure that objectiYely
is what they are asking :for money. Isn't that right?
Mr. MITCHELL. Yes, they are asking a high price :for it.
Senator PROXMIRE. Let me just proceed to something else. I commend your attention to page 49 of the report o:f the Commission on
Money and Credit where there is a very interesting discussion which,
it seems to me, supports my position pretty well that velocity is simply
the other side of money tightness.
Mr. MITCHELL. I think that the CMC report doesn't really handle
velocity or turnover adequately.
Senator PROXMIRE. Then let me move on quickly.
Senator DouoLAs. Before you abandon that, would you be willing
to yield¥
Senator PRoxMIRE. Yes.
Senator DouoLAS. Before you abandon that and turn to another
subject, may I raise the point that there is a causal connection between
a limitation of the money supply and high velocity, and that it
operates through the interest rate.
If we restrict the supply of money so that there is a considerable
a.mount o:f idle resources and idle la,bor, with the result tlrn,t in the
bidding :for commercial loans there are high interest nites, do not
these high interest rates speed up turnover by operating in two ways 't
First, businesses want to keer> low inventories, so they cut their inventories as far as possible. Secondly, they reduce idle demand deposit balances in banks :for which they are not paid interest. Thus
the higher interest rates which come in consonance with the restriction
o:f the money supply, in turn, as Senator Proxmire has said, increase
velocity. Then this increase in velocity is used, as Senator Proxmire
has pointed out, as a justification :for the restriction in the money
supply.
Mr. MrrcHELL. Could I comment on this1
Senator DouoLAs. Yes.
l\fr. MITcHEIL. This is the cyclical response of turnover to higher
interest rates. As I was pointing out before, you have two factors
affecti?g turnover and one is _a secuh~r one which _depend_s o~ our
financial mores, and the other 1s a cyclical one associated with mterest rates. They both operate, but over the decade of the fifties, I think
the institutional changes have been much more important.
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NOMINATION OF GEORGE W. MITCHELL
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8enator DouGLAS. Suppose there is a secular increase in interest
rates. May not that have an influence on the secular speedup 1
Mr. MITCHELL. It would.
Senator DouoLAS. On velocity?
Mr. MiTcHELL. Once you have trained a corporation treasurer to
keep his balances down, he will keep them low, even though the
rates drop. He will have a little more edge on his appetite when the
rates are higher. That is true.
Senator PnoxMmE. You conceded that the interest rates are high.
You also agreed that the ratio between money supply and gross national product is as low as it has ever been. To me this may mean
at least an element of tightness, as has been stressed very eloquently by
Senator Douglas and Senator Clark. The fact is that we do have
very, very heavy unemployment, nearly 8 percent seasonally adjusted.
Our growth rate over the past few years has been very small. Isn't
it logical on the basis of everything we have been talking about a.nd
everything we can see and everythmg our commonsense tells us that
these high interest rates do have the effect of restraining business
from borrowing? Therefore, don't they act as a brake on the economy
at a time when we have many idle resources 1
Mr. MITCHELL. Certainly higher interest rates restrain activity.
That is true.
Senator PROXMIRE. ·why is the Federal Reserve Board unable to
adopt policies, in view of the fact that they have control of the supply
of money, that will reduce the interest rates?
Mr. MiTcHELL. As I was saying earlier, we have had a period of
monetary ease. The effect on interest rates has been limited because
of the international situation and the monetary ease is reflected not
so much in the rates as it is in the easy position of the banks.
Senator PROXMIRE. The big difficulty I stumble over is that I feel
very strongly that we should be very slow and very cautious and very
careful about treading new economic paths. "\Ve have had magnificent
success in this country. The one area where I feel the Government can
act to stimulate the economy is in this monetary area. All of us agree
that this is an area where we can properly act to stimulate. "\-Ve see
our economy idle. We see people out of work. We recognize the challenge of our Euro~n free oountries as well as Russia. We are not
moving ahead rapidly enough. I feel, therefore, that this is one area
where we should be able to move ahead pragn1atically and without
any departure from our faith in our own system.
Mr. MITCHELL. Senator, the rate of gross national product in the
first quarter of this year was about $500 billion. The second quarter
rate ·has been estimated at $515 billion. And many people are predicting it will be $540 billion by the end of the year. This is a pretty
rapid upward surge in the economy. Another fact showing recovery
is that the number of persons in wage and salary employment has
increased in the past 4 months by something like 1.2 or 1.3 million.
This is the largest increase in this particular series over a comparable
time period that we had in the last three recessions.
Senator PnonrmE. But the fact is that we still have nearly 8 percent unemployed and still have idle plant capacity. Because of the
~arvels of automation and technology we are getting higher productivity.
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NOMINATION OF GEORGE W. MITCHELL
l\Ir. :MITCHELL. W'e are getting a vigorous recovery at the moment
and there is every reason to believe it is going to continue. And the
monetary policy will play a role in this.
Senator PROXMIRE. Then I have just one other area which I will
-cover very quickly. Yesterday Frazar \Vilde in discussing the report
•Of the Commission on Money and Credit with the Joint Economic
Committee recommended that the number of members of the Federal
Reserve Board be reduced to five, that the Chairman be appointed so
that his term coincides with that of the President of the United States,
and that higher salaries be pa.id and more experienced people be nppointed to the Federal Reserve Board. I wouldn't expect you to
comment on all of these matt~rs, particularly the latter perhaps. But
I am wondering if you would agree that it is important to stress not
only experience that is pertinent for appointees to the Federal Reserve
Board, but also a broad appreciation of the overa.11 interests of the
-economy.
Mr. l\lITcHELL. Yes, sir.
Senator PRox:mn. Don't y-ou feel there is some danger in stressing
.specific and particular pertment experience of the appoint~¥ By
particular pertinent experience, I mean experience with banking and
the kind of technical job that the Federal Reserve Boa.rd has to do.
Mr. MITCHELL. I think many people in the country are qualified to
serve on the Federal Reserve Board. My experience in talking to
people is that bankers generally come closer to understanding the
problems of the Federal Reserve Board than most other people, but
there are others that are qua.lified.
Senator PRoxllCIBE. That is the difficulty. They get a, banker orientation. It is a, wonderful orientation. There is nothin~ wrong with
it. I was in banking in a, modest wa,y. It is one viewpomt that sometimes contradicts the interest of the public.
Mr. MITCHELL. I couldn't a~ee with you more. All I am saying
is that there are more well-qualified people among bankers than among
-others. I don't think we should ha.ve more bankers on the Federal
Reserve Board. ·
Senator PRou.uRE. Thank you. Thank you very much, Mr. Chairma,n.
The CHAIRMAN. Are there any further questions 1
Senator Lc>No. I said a while ago that I didn't have any questions to
:ask. I have listened to these various theories. They have been all
right on the high level. But I want to inquire as to the effect down
in the grassroots.
As I understand, you say that there is a surplus of money now and
that interest rates perha,ps should be lowered.
Mr. MITCHELL. I say the typical response of the banking system to
monetarv ease on the part of the Fedreal Reserve System, when the
demand ·for loans is low, is to expand their investments, and this has
taken place.
Senator LoNo. I have some knowledge of the small banks back in
Missouri, and those banks have loan demands. Their loans now outstanding are maybe 50 or 60 percent of their assets. They are having
trouble ine.eting their loan demands, especially in rural areas. So are
many of our large city banks in the Middle West. How do you
.account. for the statements that there is ea,sy money now and money
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NOMINATION OF GEORGE W. MITCHELL
15
rates are low when down at the grassroots we are having difficulty
meeting our loan demands'?
Mr. MITCHELL. Well, it is impossible to say what is true for every
bank in the country. I think there are banks in the cattle-feeding
areas, for example, that feel quite loaned up. But I don't think this
is generally true. If you have to say something about the country
as a whole, this would not be the correct statement.
Senator LoNo. For banks down at the grassroots, wouldn't the fact
that the costs of the supplies ther buy, the salaries they pay, and their
other expenses have materially mcreased the last year actually affect
low-interest rates? Werent' low-interest rates a few years ago much
cheaper with cheaper expenses? Banks are now required to charge
a higher rate of interest to pay for these things.
Mr. MITCHELL. Banks ultimately will have to do what everybody
else has had to do; they will have to find ways to cut their costs by
one technique or another. There is a tremendous development taking
place in banking now in the form of electronic accounting. This is
going to make it possible for banks to operate cheaper eventually, and
some of them already have made substantial savings.
Senator Lc>No. That doesn't take care of many of the smaller banks
that exist in our banking system.
Mr. MITcnELL. That is true. They have a hard problem. Interest
rates in the small communities are quite a bit higher usually than they
are in the larger centers.
Senator LoNo. You don't have figures to indicate whether money
is tighter in the rural areas than generally over the country?
Mr. MITCHELL. No, sir.
Senator LoNo. That is all.
The CHAIRMAN. Anything furthed
Senator PROXMIRE. I do apologize. I have one more question, which
is very important for me.
On page 64 of the report of the Commission on Money and Credit,
there is the following recommendation :
The Commission recommends the continued use of open-market operations as
the normal or usual instrument of general monetary policy. Instead of relying
on a "bills-only" policy, the Federal Reserve should be willing, when domestic
or international conditions warrant, to influence directly the structure as well
as the level of interest rates in pursuit of countercyclical monetary policies and
should deal in securities of varied maturities. This recommendation does not
mean a return to a pegged structure of prices and yields for government securities. And the normal use of open market operations in bills to carry out technical and seasonal changes In bank reserves is appropriate.
I ask this question because to me it is one of the really crucial issues
in this whole area. You say that you disagree with some of the recommendations, and that you agree with others. I wonder if you can
tell us how you feel about this.
Mr. MITCHELL. On the question of bills only that is an unduly doctrinaire position, and I would have no particular difficult:Y in endorsing the statement of CMC. I think it is easier to operate m bills only,
but I think you may be more effective in operating across the board.
The CHAIRMAN. Thank you.
The committee will now go into executive session.
(Whereupon, at 11 a.m., the committee went into executivA
session.)
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