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NOMINATION OF J. DEWEY DAANE
HEARING
BEFORE THE
COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
EIGHTY-EIGHTH CONGRESS
FIRST SESSION
ON
THE NOMINATIO!\ 01<' J. DJ<)WEY DAANE TO BE A MEMBER
OF THE BOARD OF GOYERNORS OF THE FEDERAL RESERVE SYSTEM FOR THE RK\IAINDER OF THE TERM OF
14 YEARS FROM l<'EBRUARY 1, 1960
NOYEMBER 7, 1963
Printed for the use of the
Committee on Banking and Currency
ca
Q
U.S. GOVERNMENT PRINTING OFFICE
25--509
WASHINGTON : 1963
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COl\L\IITTEE ON BANKING .AND CURRENCY
A. WILLIS ROBF,RTSO:-., Virginia, Chairman
JOHN SPARKMAN, Alahama
PAUL IL DOUGL.-\S, Ulinois
JOSEPHS. CLARK, Pennsylvania
WILLIAM PROX:v!IRE, Wisconsin
HARRISO:-. A. WILLIAMS, JR., New Jersey
EDMUND El. MHSKIF,, Mnlne
EDWARD V. LO:\G, Missouri
MAURINE B. NEUBF.RGER, Oregon
THO:\IAS J. McINTYRE, New Hampshire
WALLACE F. BENNETT, Utah
JOHN G. TOWF,R, Te1aa
JACOB K. JAVITS, New York
MILWARD L. SIMPSON, Wyoming
PETER 11. DOMINICK, Colorado
MATTREW HAL&, Cltff/ e{ Staff
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NOMINATION OF J. DEWEY DAANE
THURSDAY, NOVEMBER 7, 1963
U.S. SENATE,
COMMITTEE ON BANKING AND CURRENCY,
Wa8hington, D.0.
The committee met, pursuant to call, at 10:11 a.m., in room 5302,
~ew Senate Office Building, Senator A. Willis Robertson (the chairman) presiding.
Present: Senators Robertson, Sparkman, Douglas, Proxmire, Williams, :\1uskie, 1Ic{ntyre, Tower, Simpson, and Dominick.
The CHAIRMA:'11. The commit.tee will come to order. The committee is culled to act on the Presidential nomination of Dr. J. Dewey
Duane, now Deputy -Under Secretary of the Treasury, to be a member
of the Fe<leral Reserve Board.
Dr. Duane was born and bred in Michigan, went to school first in
)forth Carolirrn and then in ~fossuchusetts. Then he established a
legal residence in Virginia, and so the Virgini11 Senators are pleased to
say that they think highly of him and approve of his confirmittion.
The Chair will pluce in the record the biography of Dr. Daane,
showing t,hat he lrns an A.B. degree at Duke, magna cum laude, which
is next to the highest laude--the next to the highC'st honors degree,
Then he got an M.P.A. at Harvard as a master of political administration.
Senutor PuoxMmE. Public. I say that because I also have an·
~1.P.A. from Harvard at about the same time.
The CHAIRM\J';, He also has a doctor's degree at Harvard in
public administration. He has had fine training, first with the Federal
Reserve Bank of Richmond, and then as an associate economist to the
Federal Open Market Committee, which is a very important activity,
as all of us know, in the Federal Reserve Board.
The chairman is pleased to present to the committee Dr. J. Dewey
DMne, who will be glad to answer any questions that the committee
members rnav see fit to ask.
(The biographical sketch referred to follows.)
EIOGR.\PHIC.-\L SKETCH OF J. DEWEY DAANl!l, DEPUTY UNDER 8ECRETAltT OP
THE TREASURY FOR MONETARY AFFAIRS
PlacP and date of hirth: Grand Rapids, Mich., July 6, 1918.
FathPr: Gilhert L. Daanp (rlecPa.'lPd) .
.:\IothPr: Mamie B. Daane (Mrs. Clyde F. Simpson).
Education: Duke Unh·ersity, A.ll., l!J39, magna cum laude (Phi Beta. Kappa);
Hana.rd l'ni•-ersity, M.P.A., HJ46; D.P.A., 1!)49 (Littauer fello\\·).
:\larri ..d: Barbara W. Mcl\lann.
Children: Elizabeth Marie (:\lrR. Ronald Mallek).
RPsirlence: Carlyn Apartments, 2500 Q Street NW., Washington, D.C.
Brief career summarv:
.July Hl39 to :\I:iy 1, HIGO: Federal Resen·e Bank of Richmond. Became
monetary economist in 1!)47, assistant vice pn'sident in 1!153, and vice
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NOMINATION OF J. DEWEY DAANE
president in 1957, and directed the bank's resellrch di,partment. Prillcipal
duties have included economic research and analvsis in the molletarv field.
Served llS an associate economist of the Federal' Opell l\farket Conimittec
and 118 collsultant to the bank's prPsidPnt. Also served as a mPmber of,
and adviser to, a number of Federal Reserve SystPm committceH. (On
leave of absence Novembn l!l50 to .June l!J,51 while serving a." chief of all
International Monetary Fund fiscal mission to the Republic of Paraguay.)
May l to July 15, 1960: Federal Reserve Bnnk of l\1inrwapoli:;, vice
president and economic adviser to the ballk and its president .
.July 18, 1960, to November 16, 1!161: Assistant to tlw Secretary of tlw
Treasury. Principal adviser to the Furler fiecreta.ry for :Vlonl'ta.ry Affairs
on debt management and monetary policy.
November 17, 1961: Deputy rnrlPr SecrPtary of the Trea.'<nry for :\IonPtary Affairs. Acts a.~ a gt•nera.l deputy to the Under Secretary for :.\Ionetary
Affain;, including his responsibilities for both natiollal and intematioual
financial problems, and hm, particular rPspow,ibility for the Office of l>rbt
Anal vsis, the Offiec of Fillancial Analysis, and the Office of Donw,-tic Gold
and Hih-er Operations.
:\lemberships and other acti,·ities: American Economic Association, American
Finance Association, Southern Economic Association, and the Regional :-\riPncc
Association. Pa.~t president of the Richmond Export-Import Club; former
member of the board of directors of the Richmond chapter of tlw ~ ational Conference of Christians and Jews; Richmond Citizens Ad\"i,;ory Committee 011 Rural
and Urban Planning.
The CHAIRMAN. I recognize the Senator from Alabama.
Senator SPARKMAN. Mr. Chairman, before we start asking questions, may I call attention to the fact, as the chairman pointed out,
that he graduated from Duke magna cum laude. But I noticed
another very important thing. At Duke he was Phi Beta Kappa. I
believe the chairman is a member of that.
Tho CHAIRMAN. And the distinguished Senator from Alabama.
Of course, you know I sometimes say that in Washington we have
too many Ph. D.'s who have a Phi Beta Kappa key at one end of
their watch chain and no watch at the other end.
That means that for 4 years he made an average of 93 or better,
and Duke is a fine college.
Senator SPARKMAN. Mr. Chairman, may I say I have read carefully the biographical sketch of Dr. Daane, and I have heard a good
bit about him. Of course, he has been prominently connected with
the Treasury Department in recent years, and prior to that with
various parts of the Federal Reserve System.
I have no questions to ask. I think he will make an excellent
member of the Federal Reserve Board.
The CHAIRMAN. The Senator from Texas, Mr. Tower.
Senator TowER. No questions right now, Mr. Chairman.
The CHAIRMAN. The Senator from Illinois.
Senator DouGLAS. Mr. Chairman, let me say I think Mr.tDaune
has had a vast amount of valuable experience and has the highest
technical qualifications for the position to which he is nominatE><l.
I would like to have the privilege of asking a few que-Stions.
I should like to start off by reading section 8 of t,he Constitution.
As you know, this is a preliminary section: "The Congress shall have
the power"-and then a series of paragraphs which follow, the specific
powers granted to Congress.
"Congre-Ss shall have the power"-and then paragraph 5-"to coin
Money, regulate the Value thereof * * *."
I wonder what interpretation you give to this constitutional power
given Congress to coin money and regulate the value thereof.
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NOMINATION OF J, DEWEY DAANE
~fr. D.uNE. Well, I think the interpretation, Senator, is that this
power very clearly does rest with t,he Congress, and the implication of
your question-and I certainly fully subscribe to it-is that the
Federal Reserve System is a creat,ure of Congress and engages in this
power only by virtue of its establishment by the Congress.
Senator DouGLAS. Of course, you know this was ratified in a period
when we had a metallic currency.
Mr. DAA~E. Yes.
Senator DouGLAS. Do you interpret this, as some people have
argued, to mean that this power is restricted to the coinage of metals
into a medium of exchange, or does it extend to the issuance of paper
monev and to the control over bank credit'?
Mr~ DAA~E. Certainly it extends through the creation of bank
credit, and, of course, as you well know, that is the important part
of our money supply, rather than the actual physical coin and paper
money.
Senator DouGLAS. That is fine.
The CHAIRMAN. If I may offer a little bit of background, Gouverneur :MoITis of New York, who was a member of the Philadelphia
Constitutional Convention, was largely responsible for that provision in the Constitution. One of the grounds that the colonists
had complained of, in giving reasons for going to war against Great
Britain, was that Great Britain would not let them have their own
money. They had to use British money, English money, when they
could get it, or the Spanish dollars. Right after the end of the Revolutionary War, Gouverneur Morris ordered 40 tons of copper made in
Birmingham, England, and they were called the 8's and the 5's.
In New York, Pennsylvania, and one other State it took three of them
to make a penny. We did not think so much of them in Virginia.
It took four of them to make a penny for us. Jefferson said that the
coins were just too small and we ought not to have anything less than
a penny. So in the First Congress of the United States he got through
the decimal system.
These coins had on them the design of an eagle, but the eagle was
looking to 13 arrows in his right hand. We turned him around, and
now he is looking to the olive branch. It took 16 different kinds of
eagles until we got to the one that we put on there now, and when you
look at those early eagles you would not know whether they were
blackbirds, eagles, or what.
In 1782 the Congress passed a law that the eagle should be our
national bird. Benjamin Franklin thought it ought to be the wild
turkey, and I think he was right.
That is the background of the money he is talking about.
Senator DouGLAS. If I also may try to display some degree of
erudition, may I say that the symbol of the city of Athens used to be
the owl and the olive tree. There was no objection to having Athena.
squint toward the olive tree, although the owl is the symbol of wisdom.
Now, if I may continue-The CHAIRMAN. Please do.
Senator DouGLAS. Then, Mr. Daane, you have not merely been
talking about coined money, not merely referring to the coinage of
metallic coins, but paper money and also bank credit?
Mr. DAANE. Yes. I think, Senator, there is a very fine line between
the demand deposit component of the money supply, narrowly defined,
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NOMINATION OF J. l>EWEY, DAANE
and the time deposit component and other near moneys. Jt shades
over, as you so well know. I would say we would consider the monev
power to go through bank deposits in toto.
•
Senator DouGLAS. Does Congress have the power to regulate
reserves on time deposits, or what you properly call "near money"?
Mr. DAANE. On time deposits, yes. This, too, has been delegated
by the Congress to the Federal Reserve.
Senator DouGLAS. Now, you speak of the Federal Reserve ns being
the "creature of Congress." Would you explain that?
Mr. DAANE. Well, it was established by the Congress. It was
amended a number of times subsequently, most significantly in the
mid-1930's. Its power derives from Congress, and its power in this
connection derives directly from the constitutional provision that you
read.
Senator DouGLAS. And to whom do the profits of the Federnl Reserve System belong?
Mr. DAANE. The profits belong and are paid in to the Treasury
of the United States.
Senator DouGLAB. In other words, they are not the property of
private stockholders but the property of the Government'?
Mr. DAANE. Quite right.
Senator DouGLAS. Now, has this ever been formally recognized by
statute or by resolution of the Federal Reserve Board?
Mr. DAANE. I am not certain of the answer to that, Senator.
The Board, in its answer perhaps to an inquiry of yours back in 1949,
I think, acknowledged this. But whether it has ever been formall)~
recognized, I am not certain.
Senator DouoLAS. I do not think it has. Do you not think it
might be a good thing if this were formally recognized?
Mr. DAANE. I think it would be quite appropriate for it to be formally recogniz.ed. It is recognized everywhere in the System. The
clearest case is in case of liquidation. It would all go to the U.S.
Treasury.
Senator DouGLAS. And this yields an annual revenue to the
Treasury of somewhere around $800 million?
Mr. DAANE. Somewhere in the neighborhood of three-quarters of
a billion to a billion.
Senator DouGLAS. Now, what is the mechanism by which the
Federal Reserve System regulates or controls the total amount of
demand deposits which the banks create?
Mr. DAANE. The mechanism reallv revolves around the volume of
bank reserves. The Federal Rese~ve, through its open market
operations, which are its principal instrument for day-to-d11y and
month-to-month operations, by buying securities puts reserws into
the hands of the banking system, and absorbs reserves by selling
securities. It also has the power-Senator DouGLAS. How does it put reserves into the System?
What is the process?
l\Ir. DAANE. The process is that the authorization h('re stems from
the Federal Open :Market Committee, composnd of tlw seven members
of the Board and five of the RPserve bank presidents. The authorization goes to the agent, of that. Commit.tee, the :\fonager of the
System's Federal Open Market Account who handles these transactions, physically housed in the Federal Reserve Bank of New York, in
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NOMINATION OF' J. DEWEY DAANE
cont.act with our market for U.S. Government securities. When the
System buys securities, on a hypothetical case-say they were buying
securities today-the process, which I am sure you and I have both
witnessed at firsthand, is for the trading desk in New York, still
operating in its capacity for the Federal Open Market Committee, to
contact the Government security dealers, to take offers of securities,
and to contract to buy securities at given prices.
Senator DouGLAS. How does the Federal Reserve System pn.y for
these securities?
Mr. DAANE. It pays in Federal funds, the same as most of the
security transactions in the Government securities market, on an
immediate credit bnsis, in the sense that the sellers are given a credit.
If it is a bank, they are simply given a credit on the books of the
Rest>rve bank.
:-,pnntor DouGLAS. Given a check or credit?
~Ir. DAANE. I think more normally, Senator-though I am a little
rusty at firsthand here-I think probably just the credit rather than
a check.
Senator DouGLAS. You say these securities are purchased from the
securities dealers, of whom there are 18 now?
Mr. DAANE. The number varies. I think it is around 18 now,
including dealers and dealer-banks. The securities dealers, of course,
deal thrnugh their own banks as far as receiving the funds is concerned.
The tnmsitctions in this market take place on two bases. One is
if the Federal Reserve were to buy securities today for cash, then the
the credit accrues to the bank for the dealer's account today.
Se1rntor DouGLAS. Suppose it goes to the denler.
Mr. DAANE. If it is for regular delivery, which would be for·
delivery tomorrow, then the credit accrues to the dealer tomorrow.
Senator DouGLAS. If it goes to the dealer, then what happens?
Mr. D,L\NE. ·well, then the dealer, of courrn, has got an additional
deposit credit. He has sold his security and tnken in lieu of the
security nsset a bnnk deposit.
Senator DouGLAS. The .Federal Reserve bank deposit?
Mr. D.LI.NE. No; he has his own bank deposit. The bank lrns the
Federal Reserve bn.nk deposit.
Senator DouGLAS. It then becomes a claim of the bank against
the Federal Reserve, not it claim against the bunk, but a credit of the
bank?
Mr. DAANE. In its reserve account.
Senator DouGLAS. Can the bank call for funds and ask the Federal
Reserve to-Mr. DAANE. Surely. The reserve accounts of the bank nre just
like your hank account.
Senator DouGLAS. Do the b1tnks do this?
Mr. DAANE. They certainly do. The banks call for funds frequently. L'se of our physical media of exchange is based on this
reserve account that the banks hnve, so it is a verv active account.
Senator DouGLAS. Suppose you buy a billion~ dollars' worth of
Government securities. These become credit,s of the member banks
in the System. To what degree cu.n they then create credit and make
loans to individual customers?
Mr. DAANE. The exact multiple-again I will plead other duties in
the past few years-the multiple probably averages out somewhere,
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::--.OMIKATION OF J. DEWEY DAANE
Senator, in the neighborhood of 5}~ or 6 times the dollars of securities
acquired.
·
Senator DouGLAS. So the average reserve is somewhere between
15 and 16 percent?
Mr. DAANE. That is right. You have got a reserve requirement on
your central Reserve and Reserve city banks of 16½ percent, on your
country banks of 12 percent, on your time deposits of 4 percent, so
this probably brings you to an average figure, I would guess, very
nearly the one you have named. The process of doing this is, I am
sure, well known to you.
Sena.tor DOUGLAS. A good many practical bankers deny that b11nks
can create credit. I remember a book in the Home Universit,y Series
man_y years ago by a president of one of the big banks, who wrote a
whole book trying to prove th~t banks could not creiite credit. And
the professor of banking at the University of London, Edwin Ciinnon,
also denied that thesis, as did his successor, Professor Gregory, and we
have had testimony before this conunittee by New York bankers saying
they do not create credit, that they merely reloan credit which has
been deposited with them by others. What would you say to that?
Does the banking system as a whole create credit?
Mr. DAANE. The banking system as a whole very clearly crentes
credit, Senator, and even the individual bank may. Per1iaps the
clearest case of the latter would be where we give the Treasury tax
and loan account privilege, where the banks very obviously are ttdding
a deposit without reserve. When you get into the reserve requirement, then my own preference in explaining this, in terms of having
had considerable experience, which does not show on the dossier
which wus given to you, in teaching at the University of Richmond,
where I taught for 15 years or more at their evening school of business
administration-my favorite way of expressing this, and I suppose that
of every money and banking professor, is the bank A and bank B, et
cetera, analogy, where the first bank receives, for exn,mple, a hundred
dollars in deposits from outside and lends perhaps $85 and sets aside
$15 to meet the reserve requirement. The $85 goes to bank B, which
sets aside x amount against its reserve requirement and in turn goes
to bank C, and you take the process through and you come up with
the same multiple we discussed a moment ago. So quite dearly the
banking system does create credit, and the average depends upon the
average reserve requirement.
Senator DouGLAS. So that if the Federal Reserve System buys a
billion dollars' worth of bonds from security dealers the banking
system can create up to $6½ billion of demand deposits?
Mr. D.uNE. That is quite right.
Senator Douaus. And the procedure in demand deposits is that
the loan comes first and the deposit follows, whereas in savings banks
the deposit comes first and the loan comes subsequently?
::Mr. DAANE. That is exactly right.
Senator DotTGLAs. Very good. Now, as a historical f1:ict, do the
increased purchij,Ses by the Federal Reserve System result rather
quickly in a corresponding multiplied increase in the amount of
demand deposits?
Mr. DAANE. I think, Senator, that here there is a timelag, dependent in large measure upon the strength of credit demands. Quite
obviously, if the banks are completely loaned up, and money is tight,
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NOMINATION OF J. DEWEY DAANE
a supplying of reserves is quite quickly translated. Now, how
quickly into the full potential of the multiple is another question,
but it iR certainly quickly translated into an expansion of bank
credit.
If the banks are in a sh1<'k position, adding the reserves may not
immediately have this result, and in fact it 11ui,y never reach the full
potential.
Senator DouGLAS. Do you pay interest to the private banks on
credits which you give to them? Does the Federal Reserve System
pay interest to private banks?
Mr. DAANE. No; the Federal Reserve does not pay interest to
private banks. They earn interest on the Government securities
which the Treasury sells and which thev buv in the market.
Senator DouGL.\S. These are interest:free 'credits?
Mr. D.uNE. Quite right.
Senator DOUGLAS. Now, then, the private banks, however, will
get interest on $6% billion which they lend?
Mr. DAANE. They will, indeed.
Senator DouGLAS. Giving up the billion dollars of interest of
Government securities?
Mr. DAANE. They gain a return on $6 billion; that is right.
Senator DouGLAS. Then the Federal Reserve System, on the other
hand, g_ets the interest on the billion dollars of bonds?
Mr. DAANE. That is right.
Senator DouGLAs. And that really constitutes your chief earnings,
does it not?
Mr. DAANE. Yes; it does.
Senator DouGLAs. That is it almost exclusively?
Mr. DAANE. Historically~£ course, we are covering ground
which I know is familiar to you, Senator-historically we were in a
position in the System back prior to 1920 when our principal earnings
came from discounts, and in fact the reason that the Federal Reserve
really undertook its first open market operations was to remedy the
fact that the Reserve banks were losing earnings as discounts went
down. In the early 1920's they turned to the open market operations
on an individual bank basis, rather than a centralized purchase basis,
to supply earnings to the individual banks.
Senator DouGLAS. So that on the interest on the $6}' 'billion of
credit which is created, the banks get interest on $5½ billion and the
Government gets interest on the billion dollars of bonds?
Mr. DAANE. That is right.
Senator DOUGLAS. Could one say, therefore, that the Government
gets a commission of around 15 percent on each dollar of money which
they permit the private banking system to create?
Mr. DAANI<~. In a sense I suppose you eould say that.
Senator DouGLAS. It would not be erroneous, would it?
Mr. DAANE. No; I cannot say that offhand. I would want to
think a little bit about this "commission" business, but offhand I
think this would be a correct way of looking at it.
Senator DouGLAS. I notice in this phrase "Congress shall have the
power to coin money," which we have been discussing, the words
"regulate the value thereof." What is the value of money? It is the
reciprocal of the price level, is it not?
Mr. DAANE. That is right.
III08 II
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NOMINATION OF J. DEWEY DAANE
Senator DouGLAS. Therefore, Congress has the power to regulate
the price level?
Senator TowER. Will the Senator yield?
Senator DouGLAS. Surely.
Senator TowER. I might point out that none of these specific
authorizations of congressional authority by the Constitution should
be considered without considering also the last paragmph in section
8 of article I:
To make all laws which shall be necessary and proprr for carrying into
Execution the foregoing powers, and all other powers vested by this Constitution
in the Government of the l;'nited States, or in any Department or Officer thereof.
Then you apply the doctrine established by the Court in the classic
case of McCulloch v. Ma,ryland and come up with the doctrine of
applied powers; am I correct?
Senator DouGLAS. I am not a constitutional lawyer, but I think
this is correct. And I would say John Marshall, a great legal representative of the Republican Party on the Supreme Court, gave a very
broad interpretation of the powers of the National Government.
The CHAIRMAN. Chief Justice Marshall w11s a member of the Federalist Party.
Senator DouGLAS. A prototype of the Republican Party.
The CHAIRMAN. They had Whigs, you know.
Senator DOUGLAS. They changed the name but it remained the
same.
Well, I think Congress, in trying to exert its power to regulate the
value of money, does so principally through the Federal Reserve, one
of whose goals is the maintenance of the value of our money.
Mr. DAANE. Yes.
Senator DouGLAS. We have delegated that power to the Federal
Reserve?
Mr. DAANE. We have.
Senator DouGLAS. Through the ability of the Federal Reserve
System to control the volume of demand deposits?
Mr. DAANE. Quite right.
Senator DouGLAS. Is this not a solemn responsibility?
Mr. DAANE. It is, indeed. I think this is an extremely important
responsibility. And I would stress, Senator, that this is not a task
that is easy to accomplish. It is a complex one. I do not think
anybody really has all the answers as to how to do it. I know that
I do not.
Senator DouGLAs. Now, in the p11st discussion of the powers of
the Federal Reserve System the emphasis has been upon stabilization
and the elimination of recessions or depressions. I cross-examined
one of vour members of the Board on the means of doin~ this. I
shall not repeat that todav, because I know that you are thoroughly
competent in this field. However, for the sake of the record, would
you state how vou think inflation should be checked and how vou
think depressions can be lessened by action of the Federal Reserve
Board?
1\fr. DAAKE. Senator, I think the best check the Federal Reserve
can exert against inflation-and it cannot do it alone, but it has to
be done in harmony with om fiscal policy-the best check it can exert
against inflation as we really begin to press upon our resources, both
manpower and productive capacity, with an upward tilt in prices, is
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NOMINATION OF J. DEWEY DA.Um
to allow, in the first instance, the market itself to tighten in terms of
the availability of credit, and then to move positively by the mechanism that the Senator and I just discussed of open market operations,
principally to augment that dampening of credit availability.
Senator DOUGLAS. How would you do that?
Mr. DAANE. Well, in simple terms what you do is you would begin
to sell securities into the market, along the lines that we have traced.
But you might do this in a sort of sequence that would begin with
the pressures of demand themselves, bringing you to a status of less
credit availability, and you couple this with positive moves which
would involve sales of System securities. At the same time you might
raise the discount rate. On this score, there has been in the postwar
period somewhat of an evolution in the use of the discount rate as a
tool of the System credit policy. For quite a few of the post-World
War II years we used the discount rate only in a follow-the-market
wav.
The normal way the System would try to check inflation would be
to sell securities, and it would result in a tighter credit availability.
This would lead to an increase in interest rates and then a discount
rate rise subsequently. But most recently the System has been using
the discount rate coordinately with open market operations, and perhaps even leading the market with a discount rate rise, which is what
we did in July as far as short rates are concerned.
Senator DouGLAS. Now, if you want to offset a recession or depression, what would you do?
l\.fr. DAANE. Again, in offsetting the recession or depression you
would probably turn to the instruments of open market operations in
the first instance, to buy securities and supply reserves to the market.
You would lower the discount rate, either coordinately or even perhaps
first. We have done that, too, in the past 10 years. We have used
the discount rate to signal a change in the direction of Federal Reserve
policy.
Senator DouGLAS. Do you think that the Federal Reserve can be
as effective in offsetting a depression as it could be in checking inflation, that is, you make loanable funds available to the banks, but the
presence of those loanable funds does not necessarily mean that business will borrow unless it feels that there is a sale and profit at the end
of the road?
Mr. DAANE. I think the process is asymmetrical, Senator, and
therefore I think the System has to push a lit.tie harder on the reserve
supplying side in the recessionary per:od.
Senator DOUGLAS. ·what was that?
l\1r. DAANE. I say I think the process is not symmetrical. You
cannot guarantee the use of reserves supplied in a recessionary period,
so it may take more effort to do this than simply to create reserves.
Senator DouGLAS. May it not also mean that the monetary policy
needs to be assisted by fiscal policy in the periods of recession'?
Mr. DAAKE. Verv definitelv. I think this is a clear lesson to be
drnwn. Again, wliile I cert11.inly agree with you that the Federal
Reserve hns an extremely important role, it cannot carry all of the
stabiliznt,ion and growth nnd balance-of-payments-and everything
else-burdens in and of itself. There has to be a consistent fiscal
policy.
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Senator DouGLAS. But the Government needs to create additional
monetary purchasing power in time of a recession, and if the purchase
of Government securities merely makes this available but it is not used,
does this not mean that there is thrown upon the Government the tnsk
of making additional monetm-,v purchasing power avail11ble either
through a tax cut or through a public works expenditure program?
Mr. DAANE. It does. I would subscribe entirely to what you say.
Senator Douglas. Very good. I will throw out one question and
will not ask the witness to answer it, because I think my colleague,
Senator Proxmire, will probnbly develop it.
What we face now is not so much the question of a recession,
though it is hinted at, but rather the fact that for 6 years we have
been going along with a high volume of unemployment and high
volume of unused capital capacity, a volume of unemployment
which on conventional terms averaged around 6 percent, and which
is 5.6 percent at present, but if you will include the part-time lost
time and the lost effort of youths who have not counted as part of
the working force, it has averaged well over 7 percent. And this is
accompanied by 15 percent or so idle capacity and an economy
which is running at approximately $40 billion less in gross national
product than it could run with, say, a 3-percent unemployment rate
and a IO-percent idle capacity rate.
Is there a need for affirmative action by the Federal Reserve System and by the Government? I will not ask you to answer that
because I have taken up too much time now.
The CHAIRMAN. The Chair does not think you have taken up
too much time. The questions were interesting and pertinent.
The witness has developed the fact that banks create credit and they
really add to our money supply, because bank checks do more business
than currency these days.
He has also stressed the fact that the Constitution puts on us the
duty of regulating the value of money, and we have delegated it to
this Board. He said that constitutes for him and the other members
of the Board a solemn responsibility, and I agree with that. N aturally, I am gratified that we can have a man that has had practical
experience in this matter but still is only 45 years old.
Senator DouGLAS. I may say this is a very competent witness.
The CHAIRMAN. No question about it.
Senator DouGLAS. An extremely competent witness.
The CHAIRMAN. It makes it pertinent for me to call attention to
the fact that Dr. Daane not only will be the youngest man on the
Board when he goes there, but the Chairman of the Board, who will
be 57 next December, is now the youngest man on the Board.
Senator DouGLAS. Do you nseribe a large share of that to the fact
that for 21 years he was in Richmond, Va.?
The CHAIRMAN. I do not think that hurt him any.
Mr. DAANE. I do not either.
The CHAIRMAN. Governor Robertson had splendid training in practical banking before he went on the Board. He was deputy for years
to the Comptroller of the Currency, and for a number of years I
called on him all the time when I wanted information about banking
laws and whatnot. His term will expire January 31 next year, and
he is eligible for reappointment. He has done a good job, but I
understand he will not be reappointed because at the end of his tenn
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NOMINATION OF J .. DEWEY DAANE
he will be 71 years old. Yesterday I read in the paper that a Harv11rd
professor who is about to retire may be nominated for appointment,
nnd he will be 81 before his term expires. That is the Board that
fixes the value of our money in a very critical period.
Senator DouoLAs. Please <lo not fight that battle before you are
through this one.
The CHAIRMAN. It is a very solemn responsibility. In any event,
I am glad you an<l I can ngree we have here 11 good man for the Board.
I recognize the Senator from Wyoming.
Senator SIMPSON ..Mr. Chairman, I am impressed with the conduct
and knowledgeability of the witness, and I want to concur in what
the Se11tttor from Illinois just suid. He has proved an excellent
witness. He has been very interesting and entert11i11ing to me. I
want to say, 1Ir. Duane, I am loaded with proxies. vVe are all in
favor of confirmation, and I um representing Senator Tower of Texas,
Senator Bennett of Ftuh, Se11utor Javits of New York, and Senator
Dominick of Colorado.
The CHAIRMAN. Now we will hear from the distinguished o-raduate
of not the Harvard School of Public Administatation but the Harvard
School of Business Administration, is it not?
Senator PROXMIRE. Both.
The CHAIRMAN. The Senator from Wisconsin.
Senator PPOXMIRE. I am sure that this nomination is going to be
unanimously approved by the committee and by the Senate. It is a
pleasure, I might say, to have a young and eminently qualified man
nominated. There have been some o-ood nominations in the past, but
there have also been some people, I think, not qualified who have been
nominated and approved. 1 think you are extraordinarily well
qualified for this particular job.
I want to ask you some questions that in no way are calculated to
to embarrass you, because I am sure that any questio11s on this matter
would not embarrass you because you are so clearly able to handle the
whole field. I want to come right to the point and be blunt and direct.
The U.S. News & World Report had a speculation on this appointment, coupled with the prospective appointment of Professor Harris
of Harvard. I want to quote a few sentences from what they said
about your appointment and have your comment:
In fillin11; this particular varancy, l\Ir. Kennedy had an opportunity to reverse
this liru--up-
tha t is, the lineup of the Martin majority, the so-called sound money
or tight, money, depending on your viewpoint, majority.
He could have given the upper hand to those who have tended to favor an
easier policy on money and credit. He chose, however, to leave the balance
unrhanged. This was the real significance of the Daune appointment. As a
result, money policy will continue on the "conservative" side.
Do you have a comment on that?
Mr. DAANE. Yes; I do, Senator. I would like to refer to a little
more of that article. Except for the fact that it had a little better
picture than the Newsweek one, I found myself completely in disagreement with their description of me and the implications of it.
I would much prefer and believe it is much more accurate to say that
I am a "professional economist," not a "conservative economist."
The CHAIRMAN. Will you repeat that? J cannot follow you.
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Mr. DAANE. I am saying, Senator, that attempts which have been
made subsequent to the announcement by the President to label me
as a "conservative economist" are really not very productive. My
own feeling is that it would be more accurate to say that I am a
"professional economist" who has had long experience in these matters.
On the specific implicatiorn; of the label which U.S. News & World
Report tried to pin on me, they said this means clearly that the Ko. 1
money problem will be balance of payments and th11t unemployment
and economic growth will be subordinated to international considerations. I would like to assure Senator Proxmire that nothing is further
from the truth.
In my own judgment, the No. 1 paramount problem we have on the
domestic scene is that of unemployment and more rapid economic
growth, and here I would think that whatever monetary polic:v cnn
appropriately contribute, it ought to contribute at all times. However, as the Senator knows, I feel very strongly that we do lrn.ve 11
serious balance-of-payments problem. We cannot ignore this prnblem. But to give the twist that the article did that the Senator is
referring to, I do not think is an accurate one. I would, if asked to
categorize myself in an overall label sense-v,·hich I would not like to
do particularly beyond the "professional economist" one-accept the
other description which a number of the news accounts have given of
me as a "moderate." I think I am a moderate, just as the President is,
and in the sense certainly that I would eschew extremes. But beyond
that I do not think it is correct to say that I would be completely in
line with one person or another person on the Board. I can assure
this group that I would vote my conscience and convictions in what I
would conceive to be the best interests of the now nearlv 200 million
people in this country, if that is responsive to the question.
Senator PROXMIRE. I think that is a very good answer.
The CHAIRMAN. May I interrupt? I just want to remind him of
what a former Senator from Virginia, named Claude Augustus Swanson, used to say. He said, "When in doubt, do right." Dr. Daane
has said, "I &m not an out-and-out liberal. I am not a conservative.
I am a professional economist, and when confronted with these problems I am going to try to do what a moderate would do, which would
be right."
Senator PROXMIRE. I agree with Dr. Daane completely that, of
course, labels nre not very helpful whether a person is a conservative,
liberal, or moderate, or middle-of-the-rondor. It depends entirely· on
the viewpoint of the appraiser. :\'lost of us like to feel we nre moderates. I am sure almost 100 Mem hers of the Senate would argue they
are moderates and not extremist~. But let me ask some specific
questions to see if from my standpoint I can see what your views are
and what your policies might be.
If a tax cut is voted and if a tax cut has the stimulative effect, which
its proponents hope it will have in the economy, would you antieipnte
it would be followed by some tightening of credit and slightl.v higher
interest rates?
Mr. DA ..\NE. I think it is always, Senator, a very ri~ky bm,iue;,s to
try to anticipate the kind of monetary policies that you would have in
the future, bec11.use my own personal observation, after living with the
monetary policy process for 20 years, is that you are always confronted
by changing conditions in our dynamic economy, so that you cannot.
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NOMINATION OF J, DEWEY DAANE
be sure in advance of what the exact surroandin~ will be. But, to
try to trace through the more obvious imflications of your question,
I think that the clear indication is that i the tax cut results in the
hoped-for acceleration of the economy that WP expect it to bring
about, it is possible the market itself, as a result of increased credit
demands, would tend to produce some sort of upward rate pressure.
This would be a normal process. It would not be a process which
monetary policy was taking the lead in.
As to a possible direct monetary policy move itself, I would have noadvance judgment. I certainly do not believe there has been any
intention to think in terms of any sort of simultaneous coupling of a
tax cut and tighter mon etary policy.
Senn.tor PROXMIRE. As the Senator from Illinois emphasized, we
have had unemployment at a 5½-percent rate or higher. It has been
over 5 percent now for yen.rs, and it \\'ould seem to some economists
who appeared before the Joint Economic Committee 11.nd this committ.ee that until we get down to 4 or 4% percent we should concentrate
all of our Federal Government policy instruments on trying to expand
the economy rather than trving to protect against inflation. What I
am getting at is this: Would you feel that we might have reason to
have a relatively easy money policy until we get into the 4-percentunemployment category and greater than, say, 90 percent utilization
of our capacity? And what other criteria would you use to determine·
whether or not you think that we ought to have another turn of the
screw-higher interest and rediscount rates?
Mr. DAA:\TE. I would certainlv see no need to trv to check an inflntion that is nonexistent, Senator, and I would not ·expect the resumption of inflation with the existence of the high percentage of unemployment thut we now huve and the high percentnge of unused resources.
I guess all that I am really trying to say is that., hopefully, monetary
policy would do the right thing under the particular circumstn,nces.
If you began to really press upon your resources in terms of nrn.npower
and materials and production, this is another question altogether, hut
in the very short-range context, with the degree of unemployment we
have and the degree of unused resources, I would not qm\rrel with your
appraisal.
Senator PROXMIRE. They raised the rediscount rate recently at a
time when we had heavy unemployment.
Mr. DAA N E. We did.
Senator PRoxMmE. And it did have the effect. of somewhat discouraging expansion, although we continue to have fairly good·
business conditions.
Mr. D.uNE. I do not really feel that this is quite an accurate portrayal. We raised the rcdiscount rate for balance-of-payments
purposes.
Senator PROXMIRE. Yes; but, after all, you cannot. separate it.
Mr. DAANE. And I do not believe there were any repercussions onthe adequacy and availability of credit. If you look at the availability of credit in the mortgnge area, which is the big user of our
long-term funds, you will see that interest rates on mortgages, though
they stabilized in recent months. are actually below the rates prevailing at the trough of the recession in February of 1961. Rates on our·
Government securities, principally because of developments in the·
past few weeks, a.re slightly above. The corporate AA rate is exactly
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NOMINATION OF J. DEWEY DAANE
where it was at the trough of the recession. So far as these interest
rates are indicators of credit availability, I do not believe the discount
rate, which was aimed at the short-term capital flows and as far as we
•can tell has had considerable impact there, has had any really mensurable impact.
Senat,or PnoxMIRE. Of course, it nil depends on the place from
which you start. I would argue that interest rntes were much too
high at the trough of the recession. I would also argue interest rntes
are only one measure of credit avnilability. Excess reserves, for
example, are another mensure.
Let me ask this: Should the emphasis of money policy be on the
side of protecting the dollar position in the world? Does this mean
that keeping short-term rates high, thus encournging investors to
keep their dollars at home instend of sending them abroad to seek
higher returns-how impori!rnt relntivel.v is the balnnce-of-payments
problem? You justified a minute ugo the increase in the rediscount
rnte from the balnnce-of-payments viewpoint, even though we hud
5}~ percent of our work force unemployed, even though the President
of the United Stutes wns contemplating what I think is an unorthodox
proposal relative to solving our economic problems by asking for nn
$11 billion tax cut at a time when we have a big deficit and spending
is increasing. Under these circumstances, an increase in the rediscount rate would seem to put very heavy emphasis on the balance of
payments and virtually ignore the domestic situation.
Mr. DAANE. I know it was not designed to do this, Senator. As I
tried to say, I feel that we do have a rnther unique combination of
problems in our country in terms of having a real unemployment nnd
growth problem, which we both recognize, coupled with a balance-ofpayments deficit of serious proportions existing over a considerable
period of time.
Traditionally, in the textbooks you would find the balance-of-payments deficit consistent with inflationary pressures on the use of
resources. We have had a different sort of situation to contend with,
and the new methods that we have turned to-and they are new in
this sense, and have of necessity been new-have invoh:ed trying to
do the two things together and treating the two problems in a wny, in
relation to monetary policies, that hns meant that we lmve tried to
push up the short-term interest rates so as to deter the interestinduced, short-t~rm capital outflows and, as I believe, with considerable success, while not interfering with the flows of funds or the
stimulus to the domestic economy that credit availability can provide.
At the same time we have proposed a tax cut so that fiscal policy can,
as Senator Douglas pointed out a moment ago, come in and give the
additional stimulus which the economy needs to remedy this intolerably high unemployment level.
Senator PROXMIRE. You talk about the advantages of doing both
things at once, but it seems to me you have to make a tough, hnrd
choice. The fact is that if you have a big tax cat and have a big
deficit and stimulate the economy, every indication, on the basis of
all our history, on the basis of economic theory, is that this is going
to have an adverse effect on our balance of pavments.
At the same time, if you follow the policy of increasing interest
rates or of tightening credit, every indication is that this is going to
have a somewhat restraining effect on our economy. I submit that
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NOMINATION OF J.. DEWEY DAANE
there is no evidence, including the third qua1 ter of 1963, to justify this
policy of tighter credit or of high rediscount rates or to justify the
theory that it is going to have a restraining effect on the outflow of
capital or is ~?ing to have a favorable effect on our adverse balance of
payments. I ou are familiar, I am sure, with the Gemmill and Bell
study and familiar with the studies which the Secretary of the Treasury
brought us on this same issue, trying to convince us thRt the interest
rate differential would stem the flow of capital abroad, which I thought
the staff of the Joint Economic Committee did a superb job of
showing it would not stand up. They showed the Treasury Department's own studies indicated only 1.5 percent of our cnpital outflow
is interest-rate sensitive; 85 percent is not. What determines capital
outflow is trade and speculation, not interest rate differentials. So
what we are doing in effect is using this interest power we have to
try and protect ourselves in the balance of payments, which it cannot
do effectively, but it can restrain our economic expansion.
Mr. D.uNE. Senator, if I may respectfully differ a bit-the difference is, I am sure, probably more likely in degree-I feel that eliminating the interest-induced, or interest differential and the interestinduced flows, is a successful effort. I think we have some fairly
impressive evidence of it in the third quarter. From my own experience-and I have lived all my working life very close to the financial markets-I would not know whether 15 or 20 or 25 or whatever
percentage, and I am not sure anyone does, of these short-term
capital flows are interest sensitive. I do know a good healthy part of
it is interest sensitive, and we have seen in the quarter that we have
just finished some fairly impressive evidence with respect to those
short-term capital flows, reflecting the fact, as far as we can deduce
from information from the financial people responsible for the flows,
the fact that you had a bringing into alincment of short-term interest
rates, where as a symbol of the whole structure we now have a Treasury 90-day bill rate slightly above, on a covered basis, the British
bill rate.
Senator PROXMIRE. You know perfectly well, as you told me last
night, that it was the announcement of the interest equalization tax
which would be retroactive that really had the decisive effect on the
capital flows. The fact is in the second quarter, when we also had
high interest rates, we had the worst experience we have had in a. long
time- on the balance-of-payments capital outflow.
Mr. DAANE. 1 am sorry, Senator, I did not make myself clear last
evening. We have had a substantial improvement in our balance of
payments in the third quarter. We were running at an annual rate
m the first half of this year, excludin"' any SIJecial Government
transactions, of $4.5 billion in the first ha1f, actually above $5 billion
in the second quarter. While the final figures are not quite available
us yet, it seems very clear that this rate of deficit has been cut at
least in half, and probably below half, in the third quarter. The
principal improvement in the third quarter is on two counts. It is
on short-term capital flows and long-term capital flows. In the
long-term-The CHAIRMAN. Excuse the interruption. This is off the record.
(Remarks off the record.)
Mr. DAANE. Mr. Chainn1111, I think I can wind this up in a moment.
All I was saying was that in the third quarter we had a substantial
improvement. It is primarily attributable to capital flows, and it is
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NOMINATION OF J, DEWEY DAANE
attributable to an improvement in both the long and the short
outflows. ·we have had some can-yover of new issue borrowing in
our market under previous commitments entered into prior to the
effective date of the proposed tax, but extractin~ from that we have
had a sharp reduction in long-term capital outflows, reflecting the
decisive effect of the proposed interest equalization tax.
In the short-term area we have also had a substantial improvement,
reflecting the realinement of interest rates which, as Secretary Dillon
said last week, in the short area are now in a very satisfactory relationship, clearly indicating no need to think about further inching up
under present circun1stances in the short area.
Senator PROXMIRE. After the strong implication of the chairman,
I am going to make this much shorter. I just want to call certain
things to your attention and ask for a brief reply if you want to.
You are aware of the fact that in the past we have had 9 tax
cuts in the last 40 years. When tax cuts were coupled with more
restrictive economic policies, we did not get economic expansion.
Business did not improve. But when tax cuts were accompanied by
monetary ease we did, as in 1949 and 1954. We did get economic
expansion. The fact is, however, that shortly after the 1949 and
19.54 expansion, when the Fed stepped in and tightened credit, we
had the business expansion shortened, and we moved into a recession
trough.
Do you think that these lessons that we have had suggest that the
Fed, as long as we have 5\,-percent unemployment, should be very
careful about tightening credit?
Mr. DAANE. I think certainly as long as there are unused resources
and the kind of unemployment conditions we have, the monetary
authorities very clearly should be careful.
Senator PROXMIRE. I want to call your attention to some spectacular
statistics in my mind. I think we should have some kind of ratio
between the money supply and the gross national product, which is
the job that money has to do, and I think you probably feel the same
way, too. It does not have to be precise, l-for-1, and I know you are
opposed to having a regular increase each year, but some relationship.
I call your attention to the fact that between 1956 and 1962 the
gross national product grew 32 percent, the money supply increased '
only 7 percent, and in 1956 we did not have a very big ratio, at least
not an exceptionally big ratio, money supply to gross national
product. So, regardless of the arguments that some of the economists
and others have made, we have had a fairly tight money policy for
the last 6 years. This certainly is overall evidence that we have had ,
a tight money policy.
One other final point I would like to make is this. If you compare
what has been the experience of the industrialized countries in the
world with statistics that at all compare with ours, since 1956 you ·
find an almost 1-to-1 correlation between increase in money supply
and economic growth, and you do not find a correlation between
increase in money supply and inflation. It is very striking. Let me
very quickly run down this list. It will take less than 30 seconds.
Between 1956 and 1961, Japan had an increase in money supply of
14.1 percent; industrial production, 24.4 percent. In Italy the increase in money supply was 12 percent.; increase in industrial produc-
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NOMINATION OF J. DEWEY DAANE
t'ion, 10.1 percent. Germany was 11.6 and 7.6 percent. France:
10.9, money supply; 7.6, industrial production. Canada: 6 percent,
money supply; 3.1 percent, industrial production. United Kingdom:
2.2 and 2.5 percent. The United States had the smallest increase in
the money supply and the smallest increase in industrial production.
I do not say this is conclusin or final or that we can run our economy
by this expansion of the money supply, but I do say that the Federal
Reserve has in effect a larg<' shure of the responsibility for the stagnation of our economy.
One of the reasons that I am going to vote against the tax cutand I am opposed to it-is that I think as long as we have this majority
on the Federal Reserve Board that has this attitude it is not going
to do any good. We are going to get a deeper deficit and not get the
kind of expansion we want to get.
That is all I ha,·e to say, and I apologize to the chairman and
•other members of the committee.
The CHAIRMAN. You are mo\'ing into the area of the tax cut, which
is not his responsibility.
l\1r. DAA~E. I would like to mnke one comment.
The CHAIRMAN. If you want to step into it, go ahead.
Mr. DAA'.'\E. With respect to these figures, I do not think we should
at this time discuss this. I do not think the oversimplified correlation
that Senator Proxmire presents here is without question, or beyond
question in terms of the implications, and so on. I think perhaps we
could discuss this subject sometime, Senator, and I would like to,
when we have a longer opportunity.
On the other aspect, however, I would like to make clear that I
do not anticipate thnt. monetary policy would negate the effectiveness
of a tax cut, nor would I share that negation.
Senator PROXMIRE. Thank you rnry much.
May J just sny once 11gain tlmt this man is obviously very well
qualified. "\Vhile he may follow policies with which I disagree, I
will vote for him with enthusittsm.
The CHAIRMAN. I think the members of the committee are aware
of the fact that this is strictly a merit appointment.
Senator PROXMIRE. Indeed.
The CHAIRMAN. I never met Mr. Duane before last week when the
Secretary brought hi:-n up and told me he hated to lose him. The
Virginia Senators knew of his work but they never recommended him
for anything, but we are glad to endorse hi:n for this. He is, as he calls
himself, a moderate and a professional economist.
Senator DouGLAS. I hope he does not lose proxies bv that declaration.
·
The CHAIRMAN. He is not going on the Board to promote tight
monev as a conservative or loose money, :-naybe by inflation, as a
liberal. He is going on the Board to do what he thinks is best for our
Nation, and that is the way I appraise him.
Senator McINTYRE. Mr. Chairman, I would like to sny that I am
quite impressed by the excellent background which you bring to this
job. I wish in my work on this committee I could only have part of it
in my background. I hope you will always maintain this professionalism that you speak of and your objectivity.
Mr. DAANE. Thank you very much.
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NOMINATION OF J. DEWEY DAANE
The CHAIRMAN. The Senator from New Jersey.
Senator ·WILLIAMS. I want to express my appr eeiut,ion for this ver_y
interesting and very helpful refresher course on the subject of money
and banking. It was very useful, and maybe we ought to do it more
often.
The CH.URMAN. I hope these hearings will be widely distributed.
There are no further questions. We thank you, Mr. Daanc, and we
will now excuse vou.
(Whereupon, 1it 11: 17 a.m., the committ.ee met in ext>cutive session.)
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