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NOMINATIONS OF OWENS AND ROBERTSON
HEARING
BEFORE THE
OOMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
EIGHTY-EIGHTH CONGRESS
SECOND SESSION
ON
THE NOMINATIONS OF HUGH F. OWENS TO BE A MEMBER
OF THE SECURITIES AND EXCHANGE COMMISSION, AND
JAMES L. ROBERTSON TO BE A MEMBER OF THE FEDIDRAL
RESERVE BOARD
MARCH 11, 1964
Printed for the use of the
Committee on Banking and Currency
U.S. GOVERNMENT PRINTING OFFICE
30-300
WASHINGTON : 1964
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COMMITTEE ON BANKING AND CURRENCY
A. WILLIS ROBERTSON, Virginia, Ohawman.
JOHN SPARKMAN, Alabama
WALLACE F. BENNETT, Utah
PAUL H. DOUGLAS, Illinois
JOHN G. TOWER, Texas
JOSEPHS. CLARK, Pennsylvania
JACOB K. JAVITS, New York
WILLIAM PROXMIRE, Wisconsin
"MILWARD L. SIMPSON, Wyoming
HARRISON A. WILLIAMS, JR., New Jersey PETER H. DOMINICK, Colorado
EDMUND S. MUSKIE, Maine
EDWARD V. LONG, Missouri
MAURINE B. NEUBERGER, Oregon
THOM.AS J. McINTYRE, New Hampshire
JIIATTHIIW HALII, OMe! of Staf!
CHARLIIS H. BRADFORD, Mmoritg OJer'k,
II
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WITNESSES
Pace
A. S. Mike Monroney, U.S. Senator from the State of Oklahoma________
Hugh F. _O~ens, nominee, to be a member of the Securities and Exchange
Comml881on_____________________________________________________
Biographical data______________________________________________
James L. Robertson, nominee, to be a member of the Federal Reserve
Board__________________________________________________________
Biographical data___________________________________ ___________
TELEGRAMS, STATEMENTS, AND DATA SUBMITTED FOR
THE RECORD
American Banker: Editorial entitled "A Man Who Cares" _____________ _
Dillon, Douglas, Secretary of the Treasury: Statement before the Subcommittee
on______________________________________________________
Domestic Finance of the House Committee on Banking and_
Currency
Hruska, Roman L., and Carl T. Curtis, U.S. Senators from the State of
Nebraska: Joint statement and resolution of the Nebraska Bankers
Association
___________________________________________________ __
Nebraska Bankers Association : Resolution of the executive council, Harris
V. Osterberg, executive vice president_ ____________________________ _
North American Securities Administrators, Olympia, Wash.: Telegram
from Bernard G. Lonctot, president _______________________________ _
Proxmire, William, U.S. Senator from the State of Wisconsin: Article from
the Wall Street Journal entitled "Surprise for Consumers"-----------Robertson, James L., nominee, Federal Reserve Board:
Bank shortages:
Excerpt from report by House Committee on Government Operations entitled "Crimes Against Banking Institutions" ______ _
Summary of bank shortages in State member banks reported to
the U.S. attorney, table _________________________________ _
Summary of possible defalcations of $10,000 or more in State
member banks reported to the U.S. attorney during the years
1958 and 1959, table ____________________________________ _
t°%a~~!it>:}o~!i:he-Nat1;~;.- a~d-stat; Bimk -i>1~~1;M ~r -the-A~~ri:
can Bankers Association, Washington, D.C., entitled "U.S. Policies
and Latin American Progress" _______________________________ _
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4
5
5
7
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38
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7
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31
24
19
18
7
33
4
INDEX OF ORGANIZATIONS
American Banker__________________________________________________
6
Federal Reserve Board____ ____________ ____ _________________ 7, 18, 19, 24, 33
House Committee on Government Operations_________________________
24
Nebraska Bankers Association______________________________________
7
North American Securities Administrators____________________________
3
Treasury Department______________________________________________
38
Virginia Securities Division, Corporation Commission, Richmond________
4
Wall Street Journal_______________________________________ ________
31
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NOMINATIONS OF HUGH F. OWENS TO BE A MEMBER
OF THE SECURITIES AND EXCHANGE COMMISSION,
AND JAMES L. ROBERTSON TO BE A MEMBER OF THE
FEDERAL RESERVE BOARD
WEDNESDAY, MARCH 11, 1964
U.S. SEN.\TE,
CmunTTEE ON BANKIXG AND CcnRENCY,
Wa.~hington, D.C.
The committee met, pursuant to notice, at 10 :O:i a.m., in room 5302,
New Senate Office Building, Senator A. Willis Robertson ( chairman
of the committee) presiding.
.
Present: Senators Robertson, Sparkman, Douglas, Cl.ark, Proxmire,
Bennett, J a vits, and Dominick.
The CHAIRMAN. The committee will please come to order.
vVe are pleased to have before us today two very fine gentlemen,
one of whom has been nominated to be a member of one o:f our leading financial institutions, the Securities and Exchange Commission,
the other for the important Federal Reserve Board.
- The one nominee has the same name as I do; unfortunately, I
c,a,n't claim kinship but I am proud of the prominence he has gi \·en that
name in all sectors.
Mr. Owens is nominated to fill the remainder of the term of our
friend and colleague, Senator J. Allen Frear, ending June 5, 1965.
Mr. Robertson is nominated for a term of 14 years beginning FebruM'Y 1, 1964. He has been serving since his previous term expired on
January 31, pursuant to section 10 of the Federal Reserve Act, which
provides that members shall continue to serve until their successors are
appointed and have qualified.
The chairman is pleased to note in the audience our distinguished
colleague from from Oklahoma, Senator Mike ~fonroney. If he will
come up, we would be pleased to have him present his constituent.
Senator MoNRONEY. :May I bring him with me?
The CHAIRJ\fAN. -Yes, indeed.
_
Gentlemen of the committee, I don't introduce to you, but I present
our distinguished colleague from Oklahoma, Senator Monroney.
STATEMENT OF A. S. MIKE MONRONEY, U.S. SENATOR FROM THE
STATE OF OKLAHOMA
Senator MoNRONEY. Thank you very mtich, lfr. Chairman, and
. Senator Clark. It is a privilege to be back in the Banking and Currency Committee, where I had the privilege of serving for several
years.
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NOMINATIONS OF OWENS AND ROBERTSON
Senator CLARK. You are missed.
Senator MoNRONEY. I have missed the committee, too.
To introduce the oonstituent, Mr. Hugh Owens is 54 years old,
having been born in Muskogee on October 15, 1909. He is the son of
the late Mr. J. F. Owens, former president and chairman of the board
of Oklahoma Gas & Electric, and the late Mrs. Owens. His father
was one of the great pioneers of Oklahoma and virtually was the
founder of this very large and successful public utility.
He attended high school at Georgetown Preparatory School here
in Washin~n, received his A.B. degree from the University of Illinois, and liis law degree from the University of Oklahoma. Upon
graduation from law school1 he was for about 2 years associated with
a Chicago law firm specializing in securities registration under the
then new Securities Act of 1933 and Securities Exchange Act of
1934. He came to Oklahoma City in 1936, where he was for some 8
years associated with the firm of Rainey, Flynn, Green & Anderson,
one of the foremost law firms in Oklahoma. He later was a partner
in the firm of Hervey, May & Owens, and later in private practice
alone.
Following an investments scandal which rocked the State because
of its large proportions, the State of Oklahoma passed a new and
vitalized Securities Act of 1959, under which we operate at present.
The new law is administered by a oommission composed of one lawyer,
one certified public accountant, and one banker, all appointed by the
Governor. The administrator serves at the pleasure of the oommission. Mr. Owens has been administrator of the Oklahoma Securities
Commission since October 1, 1959.
Mr. Owens has done an exceptional job as the State securities administrator. He is a member of the executive committee of the North
American Securities Administrators Association, the actual leader of
the Midwest Securities Administrators group, representing 22 States
in the heartland of the country. I believe, from the mail I have received and the people who have written regarding •his nomination,
that he is possilbly one of the most respected and well-liked State
securities administrators in the Nation.
Several factors make this gentleman an ideal choice for the vacancy
on the Securities and Excha~ge Commission. Oklahoma was re.cently cited in a speech by the Securities and Exchange Chairman as
being one of the two States doing the best job of State regulation of
the securities industry.
Mr. Owens is a devoted family man, an active Catholic, a former
vice president of the U.S. Junior Chamber of Commerce, and a combat veteran of naval service in the Pacific during World War II.
Both professionally and personally I can recommend him most
highly.
·
. May I say that Senator Edmondson joined in the recommendation
to the President for Mr. Owens to the position he has been nominated for.
The CHAIRMAN. So the nomination bears the endorsement of your
junior colleague, as well as your own i
.
.
Senator MoNRONEY. Yes. Senator Edmondson 1s out of the city or
he would be here. He endorsed and recommended Mr. Owens most
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highly. As a maitter of fact, while I believe the administrator is
chosen by members of the Board, these were appointees of Governor
Edmondson-then Governor Edmondson. I am sure he had a hand
in the original appointment in the State office in Oklahoma.
The CHAIRMAN. One of our letters compared the State's principles
to one of the Thirteen Original States. The State of Oklahoma has
made a major contribution to the economic structure of our Nation.
This is the 50th anniversary of this committee. The first chairman
of the committee came from -the State of Oklahoma. His name was
Robert Owen; very close to the name of the present nominee. In all
deference to my colleague, Senator Glass, whom I succeeded, history
seems to have given him about 90 percent of the credit for the bill
creating the Federal Reserve System. As a matter of fact, a similar
bill had failed because it went before the Finance Committee and
the Republicans had control of it and wouldn't let it through. When
the Democrats got control in 1913 they created a committee-I
wouldn't say they packed it-but they at least put on men not hostile
to President Wilson's proposal and they they named this very able
man, Robert Owen.
I am convinced but for the splendid work he did on this side we
wouldn't have gotten the Federal Reserve Act through when we did
and I welcome this opportunity to pay tribute to him.
Then, of course, I think it is generally conceded that one of the most
able and effective Members of the Senate on taxes in recent :years has
been the late Robert Kerr of Oklahoma. As I said when I heard of
his death, a mighty oak has fallen. And we still miss him.
So that is just a little background by which I welcome into our
Federal financial fold a representative of the State that has done so
much to promote sound fiscal laws and policies.
Without objection I would like to file in the record telegrams I have
just received endorsing this &J.>pointment, one from Bernard G.
Lonctot, president, North American Security Administration, from
Washington State, a.nd one from William C. Young, director of the
Securities Division, Richmond.
(The telegrams follow:)
OLYMPIA, WASH., March 10, 1964.
Hon. A. WILLIS RoBERTSON,
Chairman of the Senate Banking and Currency Committee,
Senate otfl,ce Building, Washington, D.O.:
As president of the North American Securities Administrators and administrator for the State of Washington, I wholeheartedly endorse and support the
President's nomination of Hon. Hugh F. Owens to the Securities and Exchange
Commission. He is a man of integrity and ability and will bring to the Securities and Exchange Commission a vast experience in the enforcement of securities, regulations, and laws from the State level. This is an asset and knowledge
that would be of extreme benefit to the Securities and Exchange Commission and
to the ditrerent States who are working in cooperation with the Securities and
Exchange Commission. He is versed in the Federal law and is also an attorney
of outstanding ability. He is at the present time a vice president of the North
American Securities Administrators which is an association made up of the 50
States and the 10 Canadian Provinces. He has. been a leader in advocating and
promoting uniformity among States and will be a definite aBSet to the country
and to the administration.
Respectfully submitted.
BERNARD G. LoNCTOT,
President, North American Securities AdminiBt:rators.
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NOMINATIONS OF OWENS AND ROBERTSON
RICHMOND, VA.,
Hon. A.
March 10, 1964,
WILLIS ROBERTSON,
Senate Building, Washington, D.O.:
Hugh F. Owens who has been nominated as Commissioner with Securities and
Exchange Commission is a man of good reputation, devoted to duty, and wellqualified person for the position. It is a pleasure to recommend him.
WILLIAM C. YOUNG,
Director, Securities Division.
The CHAIRMAN. It is also a well-known fact in political circles that
when a man is a candidate for high office and has an attractive wife,
she is "Exhibit 1" in all the pictures and so forth.
The Chairman ,vould be glad to have Mrs. Owens stand up'and let
us see her. We are glad to have her with us.
(Mrs. Owens stood and greeted the committee.)
The CHAIRMAN. Mr. Owens, do you wish to make a statement on
views, policies, anything?
STATEMENT OF HUGH F. OWENS, NOMINEE TO BE A MEMBER OF
THE SECURITms AND EXCHANGE COMMISSION
1fr. OwExs. I believe not, Mr. Chairman, I am delighted and honored to be a nominee for this high office, and I wish to assure you I will
fill it with all the powers the good Lord has given me, with honor
and integrity.
The CHAIRMAN. Coming from Oklahoma, where you have a lot of
oil stocks and all, I reckon you have had a lot of experience with some
people that issue good stock and with some that issue what we used
to call fly-by-night stocks, and you will watch out for that?
:\fr. OwENS. Yes, sir.
The CHAIRl\L\N. Senator Clark?
Senator CLARK. On the basis of Senator Monroney's recommendation and Senator Edmondson's, I should certainly support this
nomination.
I wonder, Mr. Owens, if you have given any thought that any of
your stock holdings might involve a conflict of holdings to the Securities and Exchange Commission.
·
Mr. OWENS. I have given it thought but so far I don't think they
would.
The CHAIRMAN.
e would ask you to follow the general rule to
give us a statement on that which we will treat in confidence. You
don't have to go into deta,il but just to let us know where your financial
heart is. We will put it in our confidential file. As the Senator from
Pennsylvania indicated, that is the usual procedure.
~Ir. OwENs.· Would you like me to ma,ke it now 1
The CHAIRMAN. No, you give it to us and we will put it in our file.
Seha:tor CLARK. If any question arises, we might want to call you
back and check on it. It 1s largely routine.
The CHAIRMAN. There will be no more questions and we thank you,
Senator Monroney and Mr. Owens, for coming here.
We hope we will have time before the Senate meets to go into executive session. In the meantime, you get the statement to us so we can
get a look at it before we vote on the confirmation.
:Mr. OWENS. Thank you.
,v
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NOMINATIONS OF OWENS AND ROBERTSON
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Senator MoNRONEY. I want to thank the committee for the expedi~
tion in calling Mr. Owens here for examination and testimony on this
very important appointment.
The CHAIRMAN. Thank you, Senator.
Mr. OwENs. Thank you.
(A biographical sketch of Mr. Owens follows:)
BIOGRAPHICAL DATA, HUGH
F.
OWENS
Born in Muskogee, Okla., October 15, 1909.
Came to Oklahoma City, March of 1918.
Wife : Louise Simon Owens.
Daughter: Julie-Mrs. William Charles Pickens. Children, Usa 4 ; William,
Jr., 2; Dallas, Tex.
Parents: Mr. and Mrs. J. F. Owens (deceased). Father, former president and
chairman of the Board of Oklahoma Gas & Electric Co., and vice president of
the Chamber of Commerce of the United States.
Education: Georgetown Preparatory School, Washington, D.C., 1923-27; semifinals, National Oratorical Contest. University of Illinois, 1927-31, A.B. degree;
president, Sigma Chi fraternity; president, Skull and Crescent, honorary leadership society. University of Oklahoma, 1931-34, L.L.B. degree; president, Blue
Key, honorary leadership society; president, Chi Chi Chi, honorary interfraternity society; members, Phi Delta Phi, honorary legal fraternity.
Upon graduation: First associated with a chicago law firm (general counsel
for H. M. Byllesby & Co.), specializing in securities registration under Federal
Securities Act of 1933, and of Federal Securities Exchange Act of 1934. Later
associated with firm of Oklahoma City: Rainey, Flynn, Green & Anderson,
1936-48; 1948-50, partner, law firm: Hervey, May & Owens, Oklaho.ma City,
Okla.; 1950-52, counsel, Superior Oil Co., Division Office, Midland, Tex.; 1953·
59, independent general law practice, Oklahoma City, Okla.
Civic activities during this period: vice president of U.S. Junior Chamber of
Commerce (candidate for national president, 1940). Board of directors, Oklahoma City Chamber of Commerce. Executive committees: Community Fund
and Salvation Army.
January 1942 to October 1945: Lieutenant commander, U.S. Navy: 1. Executive officer, U.S.S. Callaghan, Pacific Fleet destroyer (battle citation, action at
Okinawa, Admiral Nimitz).
.
2. Operations officer, establishment of U.S. naval base, Yokusuka, Tokyo Bay,
at end of war (citation, Admiral Halsey).
Present: Administrator, Oklahoma Securities CoIJ1mission. Vice president
and executive committee of North American Securities administrators.. Parttime faculty, College of Law, Oklahoma City University.
.
Member: Christ, the King, Catholic Church, Oklahoma Bar Association, Men's
Dinner Club, and Lawyer's Club.
STATEMENT OF J'AMF.S LOUIS ROBERTSON, NOMINEE TO BE A
MEMBER OF THE FEDERAL RESERVE BOARD
The CHAIRMAN. Next is Gov. James Louis Robertson, who I think
has done outstanding work as a member of the Federal Reserve Board.
I haven't agreed 100 percent with everything he has done but I have
always said he is one of the best qualified men on this Board in recent
years. He is technically trained, he is industrious, and intellectually
honest.
While I am more inclined to so-called tight money policies at the
present than he is, I recognize there are a good many people in this
country that don't agree with me-maybe a few members of this committee-and they are not too displeased to see Governor Robertson
stay in this position where, if there is to be any discussion of policy, he
30-300-,64--2
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NOMINATIONS OF OWENS AND ROBERTSON
is certainly better qualified and prepared to advance his theory of
economic policy than any new man would be.
We have the endorsement of both his Senators. They both endorse
him for this appointment.
The chairman without objection will put into the record at this
time an editorial from the American Banker of March 10, entitled
"Man Who Cares." And of course all financial institutions know the
high regard in which all bankers hold this daily newspaper. It is to
them what the Wall Street Journal is to other types of corporations
and Mr. Robertson can be well pleased with the high testimonial that
this paper pays him.
We also have a joint statement by Senators Hruska and Curtis and
a brief biographical sketch of Mr. Robertson which we will insert at
this point.
(The material mentioned follows:)
[From the American Banker, Mar. 10, 1964]
A MAN WHO CARES
Months of speculation and rumor have come to an end with President Johnson's
reappointment of James L. Robertson to a full 14-year term as a member of the
Board of Governors of the Federal Reserve System. In the context of all the
pressures, implied opportunities for the altering of the Board's broad policy
directions, and hints of the values he would place on having his "own man" on
the Board, President Johnson has made a wise decision.
The Board of Governors of the Federal Reserve is no place for a doctrinaire.
It is a place for wise and thoughtful men, of firm convictions, of course, but of
such a high degree of responsibility also that flexibility in adjusting policy to
events is a major personal quality in each of them. Mr. Robertson measures
up in full to this high standard.
More than most members of the Board, he is likely to be found in dissent.
During the recent period of the Board's concern about whether to tighten the
discipline on monetary policy, from balance of payments considerations, he voiced
concern about the domestic results of a tightening policy, lest it inhibit economic
growth.
Yet Mr. Robertson's record also makes it clear that he does not wear the uncomplicated label of a pure "easy money" man. For, in the past, when the first
pressures of inflation have started to make themselves felt, he has been among
the leaders on the Board in developing policies to tighten money, and to bring
those pressures under control.
So, Mr. Robertson can be expected to differ in the future, as he has in
the past, with both Federal Chairman William McChesney Martin, who gives
high priority to international monetary policy, and with President Johnson,
who has voiced the hope that domestic interest rates will not rise this
year. Yet it is precisely because he is a deep and independent thinker,
wearing no man's policy collar, that Mr. Robertson contributes so much to
the soundness of the Board's decisions, and thereby to the economic stability
of the country. He personifies-possibly even more than his colleagues because of the fact that he often differs with them-the sense that the Board
delves deeply into every problem before it makes a decision; that it does not
simply thump a rubber stamp on policies determined by others.
Banking gains particularly by the reappointment of Mr. Robertson. Because
of personal experience and a profound concern for the problems of the industry, he has established himself as the member of the Board most actively
interested in the Board's bank regulatory responsibilities. His previous long
service as Deputy Comptroller of the Currency gives him unique insight into
the problems of bank regulation, and equips him specially to understand the
roots of some of the present disputes between the Comptroller and the
Federal.
Conservatives among bankers should be especially pleased that Mr. Robertson
bas been reappointed, for, even though he is frequently in the minority, he
has stood firm against the flood of mergers which has materialized in banking
in recent years. He remains a determined advocate of the specialized, personal
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NOMINATIONS OF OWENS AND ROBERTSON
7
service which the smaller banks can provide; and he has resisted the encroachment of big, impersonal efficiency, through merger, into this domain.
He has become, even as a minority, a force to be reckoned with. His private
comments in Board deliberations on proposed mergers cannot fail to force a
refinement of thinking by the majority members, so that they face squarely
the full meaning of their actions.
Nor does Mr. Robertson confine himself solely to discussions within the
marble walls of the Federal. He demands of banking the best the industry
has to offer. Quiet tolerance of institutional foibles is not his characteristic.
He has proposed reforms, and has commented tartly on practices of which
he disapproves. Most of all, he cares. He cares very much about banking
in this country, and that is why, beyond all his other valuable personal and
professional qualities, banking is fortunate that Mr. Robertson has been reappointed.
JOINT STATEHENT OF SENATOR ROHAN L. HRUSKA (REPUBLICIAN, NEBRASKA)
AND SENATOR OABL T. CuBTIS (REPUBLICAN, NEBRASKA)
Mr. Chairman, as Nebraska Senators we wish to go on record favoring the
reappointment of Gov. James L. Robertson to the Federal Reserve Board.
Mr. Robertson is an outstanding Nebraskan. He has had an excellent record
in public service and has served with distinction as a member of the Federal
Reserve Board.
As part of our recommendation, we wish to include the attached resolution
of the Executive Council of the Nebraska Bankers Association.
We recommend favorable consideration by this committee and by the Senate.
ROHAN L. HRUSKA.
CA.BLT. CuBTIS.
Whereas the Nebraska Bankers Association is deeply appreciative of the outstanding service rendered by Gov. J. L. Robertson of the Federal Reserve Board
to the banking industry ; and
Whereas it is generally acknowledged that Governor Robertson possesses a
knowledge of banking and its problems which has ca'llSed him to become recognized as the leading authority in his field ; and
Whereas the current term of office of Governor Robertson will expire in the
near future: Now, therefore, be it
Reaowed, That the Executive Council of the Nebraska Bankers Association
does hereby endorse Governor Robertson, a native Nebraskan, for reappointment
to a full term as a member of the Board of Governors of the Federal Reserve
System and does hereby urge the careful consideration of this recommendation
by au concerned.
·
Certified to be a complete copy of a resolution by the Executive Council of
the Nebraska Bankers Association on the 12th day of December 1963.
HA1l&I8 V. OB'l'll:RBIDBG,
Ba,ecutwe Vice Preaident.
JAHE8
Lome
RoBEBTBON
James Louis Robertson was born and reared in Broken Bow, Nebr., the
youngest son of pioneer settlers. His birth date is October 81, 1907. After
attending Grinnell College in Iowa, he studied at George Washington University,
from which he received the degrees of bachelor of arts and bachelor of laws.
He then did graduate work at the Harvard Law School, where he received a
master of laws degree in 1982.
He entered Government service in 1927 in the U.S. Senate post office, and later
became a special agent of the Federal Bureau of Investigation.
He was admitted to the bar of the Court of Appeals for the District of Columbia
in 1931, and to the bar of the Supreme Court of the United States in 1935.
In 1933 he joined the legal staff of the Office of the Oomptroller of the Currency. He served in the U.S. Naval Reserve in 1943--44. Thereafter, he served
as Deputy Comptroller of the Currency until he took office as a member ot the
Board of Governors of the Federal Reserve System in February 1952.
Mr. Robertson is married to the former Julia Jensen of Iowa. They have
three sons.
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NOMINATIONS OF OWENS A.c'l'D ROBERTSON
The C11AIR:\IAN. Kow the chairman recognizes the distinguished
Senator from Pennsylvania, who wishes to inquire.
Senator CLARK. Thank you, Mr. Chairman.
I have no questions on Mr. Robertson's qualifications. I think he
has shown by his performance in office that he is fully qualified for
this job.
l\fr. Robertson, I would like to ask you a few questions bearing on
policy of the Board insofar as you helped to make it. This is a question not for Board policy but for your individual views on matters
which I think are of great importance in connection with your official
duties.
I would like to make this brief preliminary statement: The administration is now engaged in a rather unusual effort to stimulate the
economy and to increase employment, to minimize unemployment.
This is a matter of keen interest to me both as a member of this committee and its Stabilization and Production Subcommittee, and as
chairman of this committee's Subcommittee on International Finance.
It is also of keen interest to me as chairman of the Subcommittee on
Employment and Manpower of the Labor and Public Welfare Committee which is just about to file a rather extensive report resulting
from hearings during the last year which resulted in taking the testimony of ornr 150 experts in the general field of employment and
manpower utilization.
In that irn·estigation we were forced to the conclusion that fiscal
and monetary policy had an important effect on employment opportunity. The fiscal policies of this administration, just approved by
Congress, have resulted in the passing of a substantial tax reduction
bill at a time of rather substantial prosperity, but quite high relative
unemployment.
At the same time, we are concerned with the balance-of-payments
problem, its effect on our gold supply, and on the soundness of the
dollar.
'. The Federal Reserve Board, I take it, is vitally interested in this
whole problem, is it not?
· Mr. ROBERTSON. Very much so.
Senator CLARK. It has been the view of some of us-I am sure the
chairman would not agree and many others would not agree-that
it would be desirable for the Federal Reserve Board to reinforce the
administration's fiscal policy, as evidenced by the Tax Act; its emplyoment policies; the President's Manpower Report, which came
down day before yesterday; by keeping money relatively easy, interest rates relatively low to the greatest extent possible without further
prejudicing our balance-of-payments situation.
I would like to have your comments on my statements.
l\fr. Rom-:RTSON. In response, Senator Clark, I would say that 1
probably have been farther on one side, the side that :you have mentioned, than anyone else in the Federal Reserve, in urgmg that monetary policy be used more vigorously in an endeavor to stimulate economic activity, in order to correct the two real deficiencies, one the
underutilization of productive capacity, and the other unemployment.
I think this should be done as vigorously as can be. We never can
forget other problems in the :picture, snch as the balanre-of-payments
problem, which I don't think 1s as serious as many people do. ·
Senator CLARK. And also the possibility, the threat of inflation?
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NOMINATIONS OF OWENS AND RO}jER:TSON
9
Mr. RoBERTSON. There is a threat. "\Ve have now sta1ied on the
policy of using fiscal policy in order to stimu 1ate the economy.. Sound
fiscal and monetary policies are absolutely essentin.l to economic
growth in this country and to the solution of the problems you have
mentioned. But there is also the possibility we wiff overstimulate and
brin(J' about inflation.
~ are very much opposed to inflation, as I think everyone must be;
consequently, monetary policy must be in a position where it can move
decisively. We have not had inflation in this country for the past 3
years; consequently, monetary policy should have been, in my own
personal view, a little more on the stimulative side, I suspect I differ
from my colleagues in that I'd use monetary policy more vigorously
both in combating inflation, and in promotmg greater utilization of
resources.
.
Senator CLARK. In your own thinking with respect to the monetary
policy which the Boa.rd will adopt and follow, what is your thinking
as to th~ prese1_1t relationsl~ip with the Treasu~ with the Council of
Economrn Adv1se_rs1 and wi~h tl~e Secretary _of Labor, '."'l~o. under Jhe
Manpower Retrammg Act 1s given the pohcy respons1b1hty for determining manpower policy?
·
.· · · ' ··
.· ·
.
In your opinion is.there presently adequate consnlfation, adequate
coordination; the machinery for assuring that a' lplified policy can be
established in the national interests~
· ·
Mr. ROBERTSON. I have been in Government 37 years and I have
never seen a period in which there was greater harmony between the
Treasury, for example, and the Federal Reserve than has existed in
the past 3 or 4 years.
Senator CLARK. Let's make it 2 or 3 years.
Senator J AVITS. We'll leave it at 4.
Mr. ROBERTSON. All problems are put on the table. The Treasury's
pro~lems are put out so we know them. W~ don't attempt to give
advice to the Treasury, unless they ask for: 1t; they must make the
decisions in their field, and they have. There is absolute cooperation
between the two. There is no attempt, so far as I can see~ by either
agency to go off on its own. Each makes decisions in the light of its
own competence and responsibility, but also in the light of the overall
objectives at which all of Government is aiming.
·
Senator CLARK. What are the mechanics by which this cooperation
is derived? Regular meetings?
.
.
Mr. ROBERTSON. Regular meetings, and they have been going on
for years. On Mondays the Chairman of the Board of Governors h.as
lunch with the Secretary of the Treasury and every Wednesday the
Secretary or Under Secretary and members of his staff, for example,
Mr. Roosa, the Under Secretary for Monetary Affairs,.l\fr. Carlock,
the Fiscal Assistant Secretary, and top members of their economic
staffs, come over and have lunch with the Federal Reserve.
Senator CLARK. With different members?
Mr. RoBERTSON. The Chairman is usually there along ~ith one or
more other members.
·
Senator CLARK. Do you yourself participate frequently in those
meetings?
Mr. ROBERTSON. I have in the past. I have not done so in the past
2 years simply because it got into the stage where the Chairman and
Vice Chairman would participate regularly, which seemed to be ap-
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NOMINATIONS OF OWENS AND ROBERTSON
propriate. But most of the top staff assistants are there, so all the
problems of concern to either agency are known to the other. This I
think brin~ about close understanding of the problems of each agency.
Senator CLARK. Does the Board in any regular way consult, before
making monetary policy, with either the Secretary of Labor, who is
charged with manpower policy, or the Council of Economic Advisers,
:who make the Economic Report and are generally the President's
princii>al advisers in terms of the state of the economy i
Mr. RoBERTSON. No; monetary policies are formulated without consultation or asking advice of others unless we feel we need it. There
.is an avenue open always between the Federal Reserve and the Treasury. But never do we undertake to ask somebody to take the responsi·bility to make our decisions.
Senator CLARx. I am not thinking in terms of making the decisions,
but let me put my question this way : Do you not agree monetary
.policy could and often does have a very real impact on em_ployment W
Mr. ROBERTSON. A very real effect on employment and therefore
we must take into consideration the Government's employment
policies.
Senator CLARK. Should you not therefore be more or less regularly
in touch with the Secretary of Labor, who is charged with the duty
of making policy, so you will fully understand his views i
Mr. ROBERTSON. It is possible we should be in closer touch; however,
we do have people on the staff who keep in contact.
·
Senator Cr..ARK. I am going to make a suggestion for you to take
back to your fellow members of the Board, and Chairman Martin,
that you give serious consideration to this, not for the purpose of
having them make the decision, but for the point of getting the views
of persons making policy in allied fields, not only with the Secretary
of Labor but the Council of Economic Advisers, so the monetary policy
.can be integrated with others who have responsibility for the economy,
hopefully so in the end the administration speaks with a unified voice.
Mr. RoBERTSON. I would be very glad to do so.
Senator CLARK. Does this suggestion make any sense to you i
Mr. RoBERTSON. I'd be very glad to do it.
Senator CLARK. You have pointed out accurately the present legal
situation, which I think I am correct in stating is unique m the world,
at least in the world of free enterprise, in that our central banking system is independent of the administration and of the pressure; that,
of course, is ingrained on both sides, I think. In your opinionhis this
a sound way to operate or would we not be better advised if t e central banking system were an arm of the Government to the same extent as is true in other countries of the free world i
Mr. RoBERTSON. I think we have a very great advantage in this
country in the kind of setup we have. Monetary policy should be
made without regard to the political pressures of the moment.
It seems to me that the Federal Reserve, the money creating agency,
the credit regulating agency of the country, should be free from domination of the executive branch of the Government, especially the
agency which has to finance the Government and usually wants to
finance it on the cheapest possible basis. Monetary policy must be
formulated in the light of the overall economic situation in the country.
Senator CLARK. Do you agree fiscal policy should be formulated by
the administration i
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11
Mr. RoBERTSoN. Very definitely. I think it should be formulated
by the Government but not by the agency which has responsibility for
credit conditions. Government borrowing should be done on the cheapest possible basis ordinarily, but you should not create easy credit for
this purpose if it were not in the interest of the overall economic-Senator CLARK. This is an old argument which I don't want to pursue any further.
I have one more question, one more area. You are familiar with
the report of the Committee on Money and Credit which was issued
in 1961 ~
Mr. ROBERTSON. Yes, sir.
Senator CLARK. That report was made by a very distinguished
group of private citizens, mcluding gentlemen of very , widely dµfering economic and social views, making this recommendation-I
would like to ask for your personal opinion-that the Federal Reserve
Board Chairman and Vice Chairman should be designated by the
President from among the Board's membership ,t o serve for 4-year
terms coterminous with the President's. The Commission's report
comments that this strikes a balance in formal status between tenure
at the President's pleasure, which some of the Commissioners would
prefer, and no. change in th.e present law which the members of the
Commission on Money and Credit would prefer.
.
Mr. ROBERTSON. I would support this position. I think it is very
reasonable.
.
Senator CLARK. Another recommendation of the Commission on
Money and Credit was that, the Federal Reserve Boord should consist of five members, with overlapping 10-year terms, one expiring
each odd year, and members should be eligible for reappointment.
The Commission commented that this would assure the President
of one vacancy to be filled shortly after his inauguration while retaining the general stability of Board membership. The reduction in
numbers should enhance the status of members, and the 10-year term
combines a sufficient protection for independence, with some safeguard
against superannuation.
How do you feel about that i
Mr. RoBERTSON. I think the term is a perfectly reasonable suggestion. I don't think there is anything magic in the present setup. I
have some question a.bout the reduction of the number to five unless
they go one step further and take the bank supervisory functions out
of the Federal Reserve and put them in one spot1 so to have unified
Federal policy. If they did that I would agree with the five member
sue:~on.
The CHAIRMAN. Governor, in October 1962 you recall that I had a
brief chat withlou in ,the caJ.>ital of one of our Latin American countries. You tol me at that time you were making a quick trip to the
principal countries of Laitin America to study their fiscal policies and
perhaps get some information about our various types of aid. Did
you observe some fiscal practices that you wouldn't have approved of
our engaging in i
Mr. ROBERTSON. A great many, and if you like I will submit for
the record a speech which I made on that.
The CHAIRMAN. I think that would be good. Without objection
that speech will be inserted in the record at the close of your testimony.
1
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NOMINATIONS OF OWENS AND ROBERTSON
The members of the committee recall that we have had much testimony about the possibility of inflation, at least inflated prices. After
all we can't control what labor unions are going to do; if they say
they'll strike, we generally pay. Attention was called to the tax cut
of $11.5 billion, increasing purchasing power by $800 million a month.
While some economies are being proposed in the budget, we feel we
will still have a very substantial deficit. And we don't know but what
in the end the budget approved by Congress may be much larger
than what we had anticipated. Certainly we are adding, if we do all
the President requested, we are adding $4 billion a month to the
budget deficit of the late President and, while that won't appear-in the
next fiscal year, it will appear on the books of the Treasury when they
go to finance it.
Now among the fiscal policies, the biggest country, Brazil, which is
bigger than the continental United States, and possibly has more
resources than any country in the world-great reserves of timber,
great farming land, minerals, precious stones, the biggest producer
of coffee, all the things that add up to wealth-isn't it true that for a
number of years Brazil has owned the central bank, the Government
owns the bank¥
Mr. ROBERTSON. That is my understanding.
.
The. CHAIRMAN. And when the Government wanted to spend money
in excess of revenue, haven't they directed that bank to set up a credit
for the Government on the bankbooks and then to print the money
that is to be disbursed?
Mr. ROBERTSON. In general I think this is true but I would rather
not make a definite statement with respect to this without very careful
study.
The CHAIRMAN. I can understand your reluctance to make a definite
statement without checking your records.
In the first place, we liave been paying most of their deficits for
a number of years. In the second place, they have been financing
one-half of the expense of the Government simply by printing money.
Now there are certain people-I'm glad they are not in the majority-who think it unfair that the taxpayers get new money by letting
the Federal Reserve Board take UJ? a Government bond and issue
dollars against it and then we pay mterest on the bond. They evidently thmk it would be much simpler if we would just print the
money ourselves because they don't call this printing press money.
When we were down there the official rate. of the dollar was about
400, the black-market rate was 600-something; it is now between 1,100
and 1,200. Haven't they had inflation running close to 5 percent a
month¥
Mr. ROBERTSON. They have had very bad inflation.
The CHAIRMAN. You found things down there you don't think we
should imitate¥
Mr. ROBERTSON. Yes, sir.
The CHAIRMAN. The Senator from Utah?
Mr. BENNETT. No questions.
The CHAIRMAN. The Senator from New York?
. Senator: JAVITS. ~ ~ave one question that relates to you:r- basic function. It IS a fact, 1s It not, that the tool of your policy IS essentially
the rediscount rate and that the rest of the Federal Reserve System
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NOMINATIONS OF OWENS AND ROBERTSON
13
operates pretty much according to the basic concept, which is built
into the law, of the relationship of production and economic activity
to credit and demand?
Mr. RoBERTSON. I would say the rediscount rate is really not the
principal tool. It's the overall control over bank reserves through
open market operations and reserve requirements which are determinative of the money supply.
Senator JAVITS. Yes; I should have mentioned that earlier. So the
Federal Reserve Board does have a direct effect.
Mr. RoBERT!ON. Without question it's one of the strongest factors.
Senator JAVITS. Now the Board's judgments are taken by majority
vote?
Mr. ROBERTSON. Always.
Senator JAVITS. Where there is a division, is the action of the Board
considered to be the action of all~
Mr. ROBERTSON. That is correct.
Senator JAVITs. I heard Senator Clark's questions with great interest. In addition to all these things Senator Clark said about keeping
in touch with employment problems, I am all for you getting all the
advice and consultation you can on the Board and I also agree you
should be autonomous. These all square with my own judgment.
Let me ask you first: To what extent does the Board take into consideration the work of the Council of Economic Advisers as to the
direction the country is moving?
Mr. RoBERTSON. We review all the information we get from them
and there is close contact between the members of the Council and
the members of the Board, so we are very well a.ware of their economic
thinkin .
Senafor JAVITS. Did you also review the annual analysis of the
President's Economic Report by the Joint Economic Committee?
Mr. RoBERTSON. Oh, yes; very definitely so.
Senator J AVITS. Do you feel any need in our country's organizations, in view of the tremendous responsibility the Board carries,
for any charting of national goals? You will remember that during
the Eisenhower administration an effort was made to establish a means
for defining and publishing national goals, especially economic, and
in my judgment very unhappily we have 'more or less let that fall. I
just wondered whether in your work, critical as it is in the work of
the Board, do you make your own projections in terms of the American destiny, say for a decade ahead, or for any period?
For example, we know the American Telephone & Telegraph Co.
is planning several decades ahead'. What about you fellows? Do you
plan ahead? Do you think you could very profitably use some authoritative national view as to the goals of our society?
Mr. ROBERTSON. I am sure it would be very desirable to have goals
formulated by any knowledgeable group-even though they won't
all agree. If there were such goals they would he helpful. We do
not attempt to deal that far ahead. w·e have to deal with the situation as it is.
Senator J A VITS. How far ahead?
Mr. ROBERTSON. We look 3 weeks at the most, from one meeting to
the next, with_ respect to open market operations. We certainly make
30-300-64-3
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NOM:lNATIQNS OF OWENS Am> ROBERTSON
attempts through the staff to project ahead as far as we can see, but
you don't formulat,e policy on the basis of any such progµostications.
Senator J AVITS. Nonetheless, those prognostications are made
within the Board ?
·
.
.
Mr. RoBERTSON. Y es,they are.
·.,
. Senator J AVITS. In other words, you do have some chart of history.
: .•
. ,
for say 2 years?
Mr. RoBERTSON. Usually they are set up 'to show the possibilities
that could happen in the light of what is known ..
. .Senator JAVITS. You do feel it would be-useful to have an authoritative national projection generally characterized in terms of national
goals?
•
Mr. ROBERTSON. I would think so.
Senator JAVITS. At the same time I gather1 Mr. Robertson, that, as
part of your philosophy, you do not subscribe to the view that the
Board should do anything other than administer its affairs with the
basic objectives in mind from meeting to meeting. You may have
these projections in mind but essentially you believe the Board must
.
,
operate on a completely current basis?
. Mr. ROBERTSON. I think so.
Senator J AVITS. How can you tell us how you would phrase the
objectives of the Federal Reserve Board?
Mr. RoBERTSON. Economic stability, high level of employment,
maximum purchasing power, and full utilization of economic resources
and productive capacity.
.
Senator J AVITS. Including human resources?
•
Mr. ROBERTSON. Very definitely.
Senator JAVITS. That is called the concept of maximum employment?
Mr. ROBERTSON. That is right.
·
Senator J AVITS. To use that compromise word.
Mr. RoBERTSON. Yes.
Senator J AVITS. Our economy is variously estimated as progressing
at the rate of 2.5 to 4 percent a year. Many consider 4 percent good;
many consider 2.5 percent unsuccessful in terms of our economy.
Do you feel that in your deliberations you have any criteria in mind,
in regard to this definition of your objective i
Mr. ROBERTSON. I would not personally have any particular figure
in mind. I would look rather at factors I can judge better myselfwhether we do have full employment, whether we are fully utilizing
our productive capacity.
Senator J Avrrs. In other words, do you assume as a member of the
Board, ipso facto, that if you have full employment and full utilization of resources, you have a satisfactory rate of economic growth i
Mr. ROBERTSON. I think I would have to say yes.
Senator JAVITS. Even though there is the danger that the full employment and the full utilization of our resources-without any disagreeable note to my friends in the cosmetic business-may be taken
up making lipstick and silk stockings and so forth?
Mr. ROBERTSON. This is free enterprise.
Senator JAVITS. You would feel that whatever might be the substance of the production, if there is full utilization of resources and
full utilization of manpower you will trust the American economy
to balance that out, so that we have muscle as well as the other i
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NOMIN~TIONS OF OWENS .AND ROBERTSON
15
Mr..RoBERTSON. I would.
Senator JAVITS. You have found that to be the fact, as a matter of
history?
Mr. RoBERTSON.· Yes, sir. ·
·
· .
··
;
Senator J.A,.VITS. Now is the Board suscepti!ble -to any adjustment
from the National Security Council or any authoritative agency that
we need to drive our economy ahead faster in order to meet the challenges of the Soviets or the challenge of the newly developing ai'eas,
which requires proba.bly a great deal more than even we are putting
into it now i
·
· . ·
·
·
Mr. ROBERTSON, As you know, the Federal Reserve does_participate
through its Chairman on the National Advisory Council. We are
·
a ware of all these areas that deserve attehtion. ·
Senator J AVITS. Whether or not you are susceptible, they are there
to be brought to bear upon this?
Mr. ROBERTSON. Always.
Senator J AVITS. As for yourself and your own outlook on your work,
do you think the United States ought to continue exercising its world
~esponsibility and ~eadership -and not to withdraw into fortress America?
,
·
Mr. ROBERTSON. Whether we like it or not that is what we are going
to have to do. I think it's appropriate. ·
Senator JAVITS. In your work, if we confirm you, would you endeaver to perform your task in such a way as to enable us to carry
out that role ?
Mr. ROBERTSON. I certainly will.
·
·
Senator SPARKMAN (presiding). Mr. Robertson, I was interested in
the series of questions that Senator Clark put to you before he left,
and those also put to you by Senator Jav1ts, with reference to the
cooperation and the manner of working together with the Federal
Reserve Board and not only the Treasury Department, but other departments and agencies of the Government regarding all o:f these fiscal,
monetary, and economic problems.
My attention was called to the testimony of Secretary Dillon before the Subcommittee on Domestic Finance of the House Committee
on Banking and Currency on last Thursday, March 5. Have you
read that testimony W:
Mr. RoBERTSON. I have seen references to it. I have not read
it.
Senator SPARKMAN. In it he discusses quite fully Federal Reserve
cooperation, independence, and the matter of the agencies and departments of the Government working together on these matters.
I was going to ask you some questions on it. It seems he makes a very
clear statement and without objection I should like to have that
testimony of Secretary Dillon prmted in the record after your testimon_y and I would be very glad if you were to read that testimony.
~Seep. 38.)
Senator SPARKMAN. I shall not ask for any statement from you
because I rather expect we may take action on this before you can
submit a statement.
Mr. ROBERTSON. I am sure from what I have seen in the papers and
knowing the facts, that his statement and my statement must be in
accord.
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NOMINATIONS OF OWENS AND ROBERTSON
Senator SPARKMAN. He conforms to the statement that you have
made so far as the relationship between the Federal Reserve rund the
Treasury Department is concerned.
One question I was going to ask you: For instance, I was going to
ask you if the Treasury alwa,ys knew about some new Irey departure
or some change that the Board was going to make, and vice versa ? I
gather from his statement you are kept informed on matters generally~
,
Mr. RoBERTSON. No question about that; none at all.
Senator SPARKMAN. I have to go to the floor; I am going to have
to leave in a very few minutes. I will ask Senator Douglas to take
over, if he will.
May I say it is the wish of the chairman that there be an executive
session following this. I have some votes here autho'rized. Mr. Hale
will say somethmg to you about what the chairma,n's wishes are as to
that.
I will turn you over to Senator Douglas, to preside and ask
questions.
Senator DouGLAS (presiding). Mr. Robertson, I want to ask some
questions about the examination of the banks. You rendered very
distinguished service as Deputy Comptroller and I believe your chief
responsibility was the exammation of the banks?
Mr. RoBERTSON. That is right.
Senator DouoLAS. The Comptroller of the Currency conducts the
examination of the national banks and they amount to how many ?
Mr. ROBERTSON. In the neighborhood of 4,500.
Senator DouGLAS. And the Federal Reserve oonducts examination
of the State banks which are members of the Federal Reserve System'?
Mr. ROBERTSON. That is right· another 1,500.
Senator DouoLAs. The FDIC conducts the examination of State
banks not members of the Federal Reserve~
Mr. RoBERTSON. Another 7,000.
Senator DOUGLAS. Now in terms of assets rather than in terms of
number of banks, what is the relative importance of each of the three
groups?
,
Mr. RoBERTSON. The member banks would hold about 85 percent of
total bank assets, State and National, and they are divided about 55
percent in National banks and 30 percent in member State banks.
Senator DouGLAS. I see. The Federal Reserve does not conduct
examinations of the national banks?
Mr. ROBERTSON. It does not. It has the power to do so but does not
as a matter of fact.
Senator DouGLAS. The various State authorities, banking authori ties, do, however, conduct parallel examinations, with the Federal
Reserve and the FIDC examiners?
Mr. ROBERTSON. They do and in most instances they are done simultaneously.
Senator DOUGLAS. Since you came to the Reserve Board, where I
thi~k 3:ou have served very well, you have always specialized in exammat1on procedures?
Mr. ROBERTSON. I probably have had more to do with it than any
other member of the Board.
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NOMINATIONS OF OWl!JNS AND ROBERTSON
17
Senator DouGLAS. Have you noticed any different standards between examination of national banks and examination of other banks
under the jurisdiction of the Federal Reserve?
Mr. ROBERTSON. There are differences in standards and there· are
differences in the examinations from man to man and from year to
year. It is very difficult to formulate a precise statement about these
because, as you know, my only contact with national bank examinations today 1s reading reports of examination of national banks. This
isn't quite the same; but there are differences.
Senator DouGLAS. When you came over from Comptroller of the
Currency to the Federal Reserve, did you notice differences which
existed tben?
Mr. ROBERTSON. Yes, there were differences.
Senator DouGLAS. What were they?
Mr. ROBERTSON. The primary differences are that the Federal Reserve examiners devote more time to the examinations and the formulation of the examination reports than is true in the Comptroller's
office. But the general quality of all Federal examiners is high and I
would say there is not a noticeable difference. There is a difference,
for example, on dealing with what we'd call problem cases. I think
we are perhaps more severe in dealing with problem cases than some
other agencies, perhaps. But here again this may be based on the
fact I don't know in detail what they are doing with respect to problem cases.
Senator DouGLAS. Have you been disconcerted by the relative munher of cases of embezzlement in banks?
Mr. ROBERTSON. Over the years I have been concerned about this
and of course a good deal has been done to try to curtail this.
Senator DouGLAS. Did you have figures on the number of cases of
embezzlement which come to light each year?
Mr. ROBERTSON. I do not have that m my mind, but we have compiled figures recently complying with requests from the Department
of Justice and others.
Senator DouGLAS. Would you make those available to the record~
Mr. ROBERTSON. I would be glad to.
( The compila.tion follows ('See also p. 24, below) :)
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00
Summary of possible defalcations of $10,000 or more in State member banks reported to the U.S. attorney during the years 1958 and 1959
1
Types of shortages
Number of defalcations I Total amount involved
Federal Reserve district
1959
19~
0
co·
;:;"'
(D
Q.
O"
'<
CJ
0
~........
Boston .·----------------- ---------. __. __ _____ __ _____ _
New Yori
Pbiladelp
Clevclan(
Richmon
Atlanta. _
Chicago ..
St. Louis _
Minneapo
Kansas Cit
fa~ 1Wrancisco _____ __ ______ __ _________ _________ . ____ . _
1
4
1958
1959
$45,160
183,500
325,367
193, 300
$49,268
424,936
15,000
Nwnber of banks
· 1nvolved
Abstraction of cash: Miscellaneous: Forgery,
Withl1olding deposits, check kiting, conversion
loan payments or
of assets, withholding
employee's own checks
income, and false
entries
ij
1959
1958
2
6
3
1958
1059
1958
1959
1
4
3
2
17
0
l;j
17
838,336
900, 157
15
17
8
(v
1
I
~
=
25,649
204,069
1---------- 2
Total ··- ______ . __________ . ___ ___ . _____ ________ ·-
I
Does not include "mysterious disappearances" or "kiting operations" in which there was no evidence of possible criminal involvement of bank personnel.
12
9
i
Summary of bank 8hortages in State member bank8 reported to the U.S. attorney
DURING THE YEAR 1000
Shortages
Federal Reserve
bank
Total
number
or
shortages
Under $1,000
Total
amount
0
N.
"'
CD
Q.
O"
'<
CJ
0
~........
(v
$1,001 to $5,000
$5,001 to $10,000
Number Amount
Number Amount
Over $10,000
Number
of baftb
Involved
Number Amount
co·
Types of shortages
Number
Amount
---
Boston_______________
New York ...........
Pblladelphla•.... _. __
Cleveland.········-Richmond •.•........
Atlanta•.•...........
Chicago., ••.•.....••.
St. Louis .......•....
Minneapolis .........
Kansas City....•..••
Dallas.--·-·-········
San Francisco .•••.•• _
26
$105,181
509,201
2(!,4119
192,226
28,370
31,723
232,516
28,161
6,251
20,199
151,837
124,910
Total ..........
228
1,457,033
4
99
17
12
11
7
25
13
2
3
9
4
3
34
7
11
9
6
25
2
3
7
12
57
11
4
4
2
8
5
1
1
1
16
128
113
8
$2,181
27,439
29
6,649
5
815
2,781
961
4,234
3,995
651
00
150
5,894
54,840
4
5
4
11
7
$69,716
15,532
13,579
12,111
10,656
23,112
15,611
------------------1
3,750
2
8
6,556
19,016
76
188,538
----
6
1
1
2
1
1
1
---------3
-----------16
1
$42,922
7
6,278 .. ·-· 3
9,783
13,478
1
9,033
5
8,555
5,600 ·--------1
---------20,144
3
2
----------
$103,000
369,125
168,048
20,206
196,137
Mlscellan·
eous:
forgery,
AbstracMysterltlon of
check
ous discash; withholding
appearco!1J!'~on
ance: cash, deposits,
of assets,
Joan paywithchecks or
holding
securities ments, or
employee's Income and
own checks
false
entries
2
45
9
-----------4
1
6
8
---------- ----------------------- ------------
-114,793
--
23
16,359 -----------125,987
1
100,000
6
1,098,862
82
2 ----········
22
32
4
4
5
7
5
2
2
4
12
7
4
1
1
1
1
2
2
6
13
7
85
61
z
0
~
I
ij
;
l7l
~
g
lt'!I
I
~
~-
~
Summary of bank shortages in State member banks reported to the U.S. attorney-Continued
DURING THE YEAR 1961
Types of shortages
Shortages
Under $1,000
Federal Reserve
bank
Total
number
or
shortages
Total
amount
$1,001 to $5,000
$5,001 to $10,000
Over $10,000
Number
of bimks
in\'0l\'ed
Number
Amount
Number
Amount
Number
Amount
Number
Amount
--0
co·
a.
N.
CD
Q.
CT
'<
CJ
0
~
(i,)
Boston- - -············
New York •••••••••.•
Philadelphia •••••••.•
Cleveland_ .•.•••••.•
Richmond •••••••••••
Atlanta .••••••••••..•
Chicago•••• -•••••••••
St. Louis. - __ ••••••••
Minneapolis_····-···
Kansas City···-·····
-···-·
Dallas._··-···
Francisco.·_______
San
16
80
27
9
3
4
26
18
4
3
5
33
tM,6711
483,486
407,453
57,9118
5,598
32,025
147,597
17,879
53,631
33,100
387,382
637,536
9
8
62
19
8
4
7
2
3
4 ··-·······
24
16
13
11
1
4
1
3
1
5
22
11
28
~
TotaL._._. ____
228
2,202,364
1111
- -137
$7,230
351
8,302
5
19
5
3
1
1
4
7
2
1
1
8
4, 950
16, 114
52,495
57
111,142
$3,134
21,158
7,414
419
1,748
---------4,790
4,279
500
~
27,251
9,767
3,205
3, 850
1,219
7,325
13,600
5,131
l,&oo
3
5
2
1
$18,315
34,012
14,558
8,031
4
1
1
$391,065
375,714
46,343
Mlscellan•
eous:
Abstrac•
forgery,
tlon of
oheck
Mysterl• cash; wlth·
kiting,
holding
ous di&appear.
deposits, conversion
or assets,
ance: cash, loan paywith•
ments, or
checks or
holding
securities employee's
own checks Income and
false
entries
~
I
0
~
0
~
6
7
8{
26
11
12
6
2
1
14
4
1
2
1
16
3
20
4
2
1
3
10
3
3
1
4
15
!z
92
69
t.".l
1
----------1 -----·--------------------------2 ---------11,563
19,243 -----------3
20,936
2
114,546
3
11
-----------1
48,000 --------------------- ---------1
31,200 -------·--------·----1 ---------2
375,081 -----------7,000
2
2
607,120
6,000
1
-- - 18- -120,415
2,008, 312
16
67
r/l
~
ti,
~
i
DURING THE YEAR 1962
Boston _______________
New York ___________
Philadelphia _________
Cleveland ___________
Richmond ___________
Atlanta ______________
Chicago _____________
St, Louis _____________
Minneapolis _________
Kansas City _________
Dallas _______________
San Francisco ________
24
72
31
10
10
7
19
18
5
4
3
39
$66,482
765,311
90,074
121,548
34,916
97,624
549, 726
63,936
39,561
2,412
10,985
174,754
10
34
13
TotaL _________
242
2,007,279
130
8
8
6
16
11
4
3
3
14
17
24
17
5
6
2
8
12
3
3
2
19
$9,541
8,184
5,830
2,041
2,216
501
3,021
3,812
491
1,412
935
4,648
4
33
10
3
3
3
7
3
l
l
118
42,632
81
$10,059
63,928
18, 795
6,113
4,500
8,250
15,624
5,145
1,570
1,000
1
3
1
$6,400
27,219
8,500
---------------------------- ----------
------------------14,281
2
2
14,347
$40,482
665,980
56,949
113,394
28,200
88,873
516,800
30,632
37,500
2
12
3
2
l
2
2
l
1
12
28
17
1
5
-----------2
11
---------------------·--·-------------- ---------- ---------- ------------ ------------
1
------------------13
30,769
4
--------------165, 763
14
10,000
27,345
108,092
--------------------111,992
3
1,690,802
29
2
7
85
8
4
22
22
10
7
3
4
7
4
2
2
3
3
10
4
3
2
4 -----------1 -----------16
16
88
69
4
2
DURING THE YEAR 1963
I
.....
~
w.
0
t:g
0
co·
N.
"'
CD
Q.
O"
'<
CJ
0
~........
(v
Boston_______________
12
$55,27'1
7
7
$3,155
3
$4,748 __________ __________
2
$47,376
6
New York___________
63
204,523
29
27
9,043
17
35,728
3
24,1112
6
135,560
11
Pbiladelpbia_________
22
189, 00.
1~
13
6,374
6
10,018
1
5,377
2
168,135
14
Cleveland___________
11
24,163
8
7
2,652
.2
2,275
l
5,898
l
13,338
3
Richmond___________
10
544,129
9
42,885
4
5,122 __________ __________
2
536,172
4
Atlanta______________
5
11,928
5
2
1,337
3
10,591 __________________.__ __________ ____________
1
Chicago ______________
19
957,412
19
7
3,208
6
16,167
4
24,382
2
913,655
2
St. Louis____________
19
57,428
17
14
·6,8,\9
3
5,974 __________ __________
2
44,60/i
11
Minneapolis _________________________________________ ---------- ------·--- ________________________________________________________________ _
Kansas City_________
3
14,639
ll
2
729 ---------- __________ __________ __________
1
13,910 __ _
3
31,687
3
1
41
1
1,601 __________ __________
1
30,045 ___________ _
Dallas_______________
San Francisco________
38
52,397
15
23
8,400
12
l7,619
3
26,288 __________ ____________
10
1----1
Tota!._ _______ _ - - -195
I 2,143,489
.127
1---1---1---1---1---1
107
44,713
57 I l()g,843
12
86,137
19
I
22
20
4
3
3
10
4
2
3
1
7
6
2
6
~
;w.
~
t:I
2
: 1----------20
~
0
1,002, 796
62
71
62
t:g
l.:i;l
~
w.
0
z
t,j
.....
2-2
NOMINATIONS OF OWENS AND ROBERTSON
Senator DouGLAS. Are you acquainted with the report of the Association of Bank Shareholders which has its offices in Chicago, which
is headed by a bank president from Wausau, Wis.¥
Mr. ROBERTSON. The name registers but I am not familiar with the
report.
Senator DouGLAS. Would you give a rough estimate of the number
of cases of embezzlement which come to light each year, subject to
correction, for the record¥
Mr. ROBERTSON. This is very difficult. No; I prefer not. My guess
would just not be good enough, Senator. You see they would vary
in amounts from $100 on up.
Senator DouGLAs. I read these reports quite frequently and it is
my impression there are 600 to 1,000 cases.
Mr. ROBERTSON. That doesn't seem an unreasonable guess.
Senator DouGLAS. In other years it is more than this. Are these
embezzlements sometimes or very frequently acts committed by leading
officials of the banks¥
Mr. RoBERTSON. They are at times.
Senator DouGLAS. Or are they usually committed by minor clerks¥
Mr. RoBERTSON. The vast majority are by minor officials or employees, not top management, but some are on the part of top management.
Senator DouGLAS. Do you think this is a serious situation¥
Mr. RoBERTSON. It always is serious but it isn't a matter that gives
me great concern from the standpoint of the safety of the depositors
or confidence in banks.
·
Senator DouGLAs. There was one Federal Reserve district some
years ago which had 50 bank embezzlements.
Mr. RoBERTSON. Which were discovered in a short period of time.
Senator DouGLAS. A very short period of time. Did you go into
that¥
Mr. RoBERTSON. At the time I did; this is many years ago.
Senator DouGLAS. What was the situation down there¥
Mr. RoBERTSON. The situation-if we both have the same one in
mind¥
Senator DouGLAS. I am referring to the Pittsburgh situation.
Mr. RoBERTSON. So am I. This was a situation brought on in part
when an embezzlement which had been going on for a period of time
came to light, causing more concern in other institutions and, as a
result, more embezzlements were turned up at that particular time.
Senator DouGLAS. The total figures were startling; it ran close
to 50 different cases.
Mr. RoBERTSON. That is approximately right, and there is no substantial reason I know of why 50 in a given period of time would
attempt to embezzle funds.
Senator DouGLAs. H/ou were a public health official and if you
had 50 cases of typhoi fever breaking out in a limited time, you
would try to find out the cause 1
Mr. ROBERTSON. Yes, and tighten down on controls; that has been
done.
Senator DouGLAS. What was done¥
Mr. ROBERTSON. That I can't tell you. These are ~ple who make
·up their minds they are going to embezzle and think they can get
away with it.
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NOMINAT!ONS OF OWENS AND ROBERTSON
23
Senator DouGLAs. Many of these cases were very large sums.
Mr. ROBERTSON. Some were. I don't remember the aggregate volume; this was about 15 years ago.
Senator DouGLAS. Is it not true that on the average these bank
embezzlements have been occurring over a J?eriod of 6 to 8 years?
Mr. ROBERTSON. Many have been occurrmg over such a period as
that, especially those you were referring to in that area, but I don't
think it would be typical of the total number in any given year. They
have continued over such periods of time, but many are caught early
by internal controls.
.
·
Senator DouGLAS. Have you made an averag~ duration of embezzlement detection?
·
Mr. RoBERTSON. This would be the worst possible estimate, but if I
had to guess, I'd say 3 or 4 months.
Senator DouGLAs. Is that all?
Mr. RoBERTSON. Yes; this is because the vast number are smaller
amounts.
Senator DouGLAS. The figures I saw in one of the reports of the
Associated Bank Shareholders, if I remember, was in terms of years.
Mr. RoBERTSON. It may have been limited to a given size of embezzlements. That would throw the figures out of line.
Senator DouGLAS. If so, it is only tlie top of the iceberg that is visible in any one yead
·
Mr. RoBERTSoN. Yes.
Senator DOUGLAS. In addition to the cases coming to light, are not
many cases hushoo. up by private settlement of the officers?
Mr. RoBERTsoN. I would doubt there are many of these because as
soon as the information gets into the hands of people within the institution, it would cause the embezzler-if he tried to hush it up by
pa.ying it off-this would come to be known by examiners, and as soon
as this was ascertained we would be immediately informed, and notify
the Department of Justice. I w:01Ild say. these cases are not freque~t.
Senator DouGLAS. Do JOU think any improvements are needed m
the system of bank exammations to diminish the volume of embezzlement?
Mr. RoBERTSON. Not to diminish the embezzlements. I think they
need to continue to improve internal audit procedures.
Senator DouGLAS. When an embezzlement is continued 6 to 8 years,
is this a reflection on the examining procedqres?
Mr. RoBERTSON. Not necessarily, because the examiners do not go
into a bank for the purpose of determining the existence of embezzlements. They go in to ascertain the quality of assets. They do go into
the adequacy of the internal audit but they don't verify all assets and
liabilities. To do this would require a staff many times the size of our
own and all others combined.
Senator DouGLAS. How would the banks do this?
Mr. RoBERTSON. Through establishment of adequate internal audit
controls.
Senator DouGLAS. What would you regard as adequate internal audit
control? Should it consist of outside auditors i
Mr. RoBERTSON. Not necessarily. The best, in my own opinion, is
adequate internal audit _policed by an outside private firm. Now they
can set up schedules and procedures, and they can have policing methods whereby once or twice a year a check is made to see whether these
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24
NOMINATIONS OF OWENS AND ROBERTSON
controls actually are being operated satisfactorily. This, in my opinion, is the best. Some banks ha.ve outside auditors come in. But there
are very few that have enough people to do a complete job.
Senator DouGLAS. I take it you don't think this is a real problem?
Mr. ROBERTSON. It is a problem, not one that gives me great concern.
Senator DouGI.AS. What is the total volume of embezzlement known
each year in terms of dollars?
Mr. ROBERTSON. I can't give you that. I would be glad to get what
I can on it for you.
Senator DouGLAS. ·would you supply it for the record?
Mr. ROBERTSON. I would be glad to.
(The information follows :)
The figures supplied. on an earlier page (pp.18--31) are for Stat.e member btmks.
The Board is not the primary source for figures on national banks or insured. nonmember banks, but figures on the latter were included by the House Committee on
Government Operwtions in its report on "Crimes Against Banking Institutions"
dated February 20, 1964. On page 10, that report stated:
"Between 1958 and 1962, inclusive, the Office of the Comptroller of the Curreney reported 3,016 cases of irregularities by officers and employees of national
banks. involving estimated amounts totaling over $28 million.
"In ,that same period, the Board of Governors of the Federal Reserve System
reported 733 cases in State member banks, involving more than $7 million. And
the FDIC reported 1,695 cases, with shortages estimated at more than $36 million.
"Thus, between 1958 and 1962, inclusive, the 3 Federal bank supervisory agen•
cies reported a total of 5,444 cases of internal crimes, involving over $70 million."
Senator DouGLAS. I take it you are proposing consolidation of the
examination functions of all three of these agencies~
Mr. ROBERTSON. Yes, I am.
Senator DouGLAs. What type of agency would you create I
Mr. ROBERTSON. I would create what I choose to call a Federal
Banking Commission that is composed of five individuals selected
by the President on a rotating- basis, of men competent in the field, a.nd
I would hope that the Commission would take over all functions of the
Comptroller of the Currency and of FDIC, and the supervisory functions of the Federal Reserve System. That Commission would have
two arms, each operated by a single administrator; one would have
charge of all examinations and one would have charge of all insurance of deposits.
Senator DouGLAS. You mean take over the work of the FDIC?
• Mr. ROBERTSON. Completely, sir. The insurance features of the
Federal Deposit Insurance Corporation would be carried on by the
Federal Banking Commission. This function would be merged into
a single function. This would mean that instead of having, as we do
today, conflicting policies, inconsistent decisions, agencies going at
cross-purposes, you would have a single policy, as far as the Federal
Government is concerned, which would be applicable to all commercial banks in this country, equally and equitably. This I think is essential. We are rapidly getting to the point where banks being subjected to the same Federal laws but are treated differently, depending
on which supervisory agency they happen to come under. As a. result,
there is confusion as to what the law is or is not. One bank is permitted to merge, another not. This cannot go on for long.
Senator DouGLAS. Would you have this board make decisions on
mergers~
Mr. RonERTS0N. Yes. All merger problems and all general supervisory policy problems would go to the full Commission. Individual
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NOMINATIONS O~ OWENS AND ROBERTSON
25
supervisory problems would be handled by individual administrators
but banks would be permitted to appeal their decision to the full
board. Charters would be granted in the first instance by the Examinations Administrator but lie couldn't do it without consulting with
the Administrator for Insurance.
·
Senator DouoLAs. This would take over all the work of the FDIC i
Mr. ROBERTSON. Yes.
Senator DouGLAS. What would it leave for the Federal Reserve?
Mr. RoBERTBON. Monetary policy.
Senator DouoLAs. As to the open market operation and the reserve
ratios and rediscount policy?
Mr. RoBERTSoN. That is right. The principal function of the Federal Reserve would stay where it is but, the supervisory functions
would be moved to the Commission.
Senator DouGLAS. This would leave you free to handle the question
of monetary policy?
Mr. ROBERTSON. That is right.
Senator DouGLAS. Did you find that you get so absorbed in examination~ mergers, and other problems that you don't have enough time
to decicte the right plans for the money supply i
Mr. ROBERTSON. The amount of time that has to be devoted by
members to merger decisions alone takes up so much of their time that,
in my view, they do not have adequate time to devote to monetary
policy. I think that is a full-time job, the principal function. The
members shouldn't be devoting their time to going over files, that are
voluminous, as to merg~!S and the like.
Senator DouGLAS. What would you do with the agency which insures the building and loan associa.tions----the Federal Savings and
Loon Insurance Corporation?
Mr. ROBERTSON. This is is a different problem a.nd I have not devoted myself to it. I think sometime we ought to think in terms of
aiming at consolidation with respect to Federal supervision of nonbank institutions. But this is not something I have worked out.
Senator DouoLAs. Thank you.
Senator Dominick ?
Senator DOMINICK. I would like to follow up on the questions you
are asking, just to clear up the record in my own mind.
It is my understanding that the Comptroller of the Currency a~
this point does the examination on the national banks and the Stata
banks which are members of the Federal Reserve System?
Mr. ROBERTSON. The Comptroller of the Currency does not examine any State banks, only national banks. He has no power to examine State banks.
Senator DOMINICK. The Federal Reserve Board conducts examination of all State banks whether or not they are members of the Federal
Reserve Bank System?
Mr. ROBERTSON. No, only State member banks, those that voluntarily decide to be members of the Federal Reserve System.
Senator DoMINICK. On the figures that you presented to the committee, the Comptroller of the Currency would be examinil!g on 4,500
national banks and the Federal Reserve on about 1,500 State bank
members, and there are about 7,000 State banks which are not members of the Federal Reserve System, and they are examined only by
State officials?
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NOMINATIONS OF OWENS AND ROBEJ;tTSON
Mr. RoBERTSON. No; insured nonmember banks are examined by the
State officials and also by the Federal Deposit Insurance ,Corporation.
Only about 300 very small banks are not insured; they are not super-:
vised by the Federal Deposit Insurance Corporation. . ·
.
Senator DOMINICK. So we have three separate Federal·agencies
doing the examination at the present minute?.
.. ,
·
·
·
·
Mr. RoBERTSON. That is right.
Senator DOMINICK. Are there set criteria for these .~xaminations
which are agreed upon by these agencies ahead of time?
Mr. RoBERTSON. There are none; no such cooperation among these
three Federal agencies.
.
Senator DOMINICK. Has the Reserve Board .attempted to create any
such cooperative effort? .
. ··
Mr. RoBERTSON. 1Ve have so endeavored and for many years we did
have cooperation. We had_ an interagency committee. When I first
went to the Federal Reserve we set up an mteragency committee composed of top-level representatives of the Comptroller, the Federal
Reserve and the Federal. Deposit Insurance Corporation. This
worked beautifully ; it no longer exists.
Senator DOMINICK. Is my .understanding correct that one of the reasons it no longer exists is that the current Comptroller of the Currency
wouldn't have anything to do with it?
Mr. ROBERTSON. I would say that is correct.
Senator DOMINICK. Mr. Robertson, I think this banking Commission bears considerable examination.. Would this agency, as you see
it, take over the chartering aspects?
Mr. ROBERTSON. It would as far as national banks are concerned.
Senator DoMINICK. Would it take all of the functions of the Comptroller of the Currency?
Mr. ROBERTSON. It would.
Senator DOMINICK. And the present office of the Comptroller of the
Currency would be absorbed or abolished?
Mr. ROBERTSON. Correct.
Senator DouGLAS. Did you advocate that when you were Deputy
Comptroller of the Currency i
Mr. RoBERTSON. No.
Senator DouGLAs. That it should have control over examinations?
Mr. RoBERTSoN. You mean all examinations? No, but I did take
the position I thought the Comptroller of the Currency ought to continue to examine the national banks. I am now in the opposite posis
tion.
Senator DouoLAs. Have you changed your view because you have
changed office 1
Mr. ROBERTSON. I have changed my view because the weakness that
always existed in the structure of the system has come to light.
Senator DouGLAS. I remember testimony you gave some years ago
and it was exactly opposite to that. Excuse me, Senator Dominick.
Senator DOMINICK. That's all right. This provides helpful information along the same line I am inquiring about.
We are having problems and have been for some time on the q_uestion
of whether the Comptroller of the Currency or the Securities and
Exchange Commission has jurisdiction over common trust funds and
so-called Smathers-Keogh mvestments. Under your concept of this
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NOMINATIONS O;F OWENS AND_ ROBERTSQN
27
~ew agency, would they have regulatory authority or banking functions of this type?
·
.. . .
- ·
Mr. ROBERTSON. Under my proposal the Commission would have all
the regulatory powers and functions tha~ are now vested in any one
of th~ three Federal banking agencies. The question of where the
power lies as between the Securiti~ ~d Exchange Commission and
the Comptroller of the Currency would not be affected. My own feeling is the Securities and Exchange Commission ha,s greater competency
in the field than does any bank supervisory agency and therefore, I'd
leave it in that Commission. ,
.
.
·
.
Senator DOMINICK. So at the present minute you believe the commercial banks, so far as common trusts and Smathers~K~h funds
are concerned, should be under the jurisdiction,of the Securities and
Exchange Commission 1
_
· ·
.
..
Mr. ROBERTSON. I do,
.·
.
. .
Senator DOMINICK, All right that is good to knc;>w because .that's
exactly opposite of the bill that I have in; it's good to have this point
made clear.
.
- _
.
.
.. Now on the insurance of accounts, would this also be handled by this
particular Commission?
.
Mr. ROBERTSON. Yes· it would.
·
. .
Senator DOMINICK. k other words, practically evecy single func-.
tion that is now carried on by the FDIC or the Comptroller of the
Currency and all functions of the Reserve Board except the monetary
supply would be handled by the new Commission?
Mr. RoBERTSON. Yes; I would turn it around with respect to the
Federal Reserve, and say the proposal would merely take out of it
all bank supervisory functions. There is one. little vestjgial remaining function in the Comptroller's Office with respect to currency which
wouldn't be affected, it would be transferred to the Secretary of the
Treasury. It's not si@i,ficant.
.
. ..
Senator DoMINICK. What, if you know, is the attitude of the commercial banking industry in this i
·
Mr. ROBERTSON. It is very difficult to know what the pr~nt attitude
of the commercial ~ industry is on this matter. Of course
when I first proposed this I expected to have almost 100 percent of
the industry agamst it. In a survey taken by the Bankers As.sociation
itself, my recollection is something like 40 percent was in favor of my
plan, which made me grateful.
Senator DOMINICK. Only 40 percent?
Mr. ROBERTSON. I think this would not be true today, Senator, because the situa.tion is deteriorating markedly month by month. And
it will not be long before the bariks in this country will rise up and
demand that there be some reform of the Federal su~rvisory functions and policies. I might be unduly optimistic; I think this is going
to happen.
Senator DOMINICK. Why would they be opposed to your proposal i
Mr. RoBERTSON. The argument, a.nd I think the only one raised by
many voices, is that it represents too great a centralization of power.
Of course my view is that this simply isn't correct. What tlie proposal would do would be to maintain the dual banking system of this
country, because the Sta.tes would be put in a position whereby they
could build up and develop a better State supervisory force and if at
the end of 3 years they could establish their ability to supervise their
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28
NOMINAT10NS OF OWENS AND ROBERTSON
own State banks in .an adequate manner, and provide reports adequate
for Federal purposes, then the Federal agency would withdraw from
supervision of State banks except insofar as it re]at.es to mergers and
holding company applications and so :forth. This would very definitely stren~hen the dual banking system of the country.
Senator DoMINICK. A couple more points on the same types of
questions: At the present time the decisions of the Comptroller of the
Currency, on granting or denying a new national charter, are not subject to any review by any court i
Mr. RoBERTSON. That is right, in the absence of a showing of
capricious action.
Senator DoMINICK. Even in that, no review?
Mr. ROBERTSON. I'd question that; it has never 'been tried. If it
could be shown that it is an arbitrary, capricious action, it is my view
there could be a successful attempt to get judicial review.
Senator DOMINICK. How could you do this when you don't have
any kind of hearing~
Mr. ROBERTSON. It would be difficult, but it could be done.
Senator DoMINICK. I prepared a bill which would require a hearing on these type.s of applications and the right of review of the
court on adverse decisions. I spoke to the Comptroller and some of
the banks aJbout it and it was Just like an explosion in their midst
they didn't like that at all. Could you see any need for this type of
legislation?
Mr. ROBERTSON. I think there would be less need if you had a Federal banking commission of five men instead of a single individual
who is makmg the decision; but even then we ought to be working
toward the estrublishment of hearings so opponents and proponents
can get all the facts out on the table.
Senator DOMINICK. In your merger and holding company cases are
these public or private hearings~
Mr. ROBERTSON. There are usually public hearings where there is
any dis;rute rubout it at all. If you give an opportunity to be heard
to one side, you give it also to the other side.
Senator DoMINICK. This is not true so far as the granting or denying of a charter is concerned. Is there any substantive significant
reason for difference in attitude?
Mr. RoBERTSON. The practical question is that you have such a
large number of charter applications in which a hearing would serve
very little purpose. In many cases you don't have people interested
pro or con except the applicants.
Senator DOMINICK. At the present time the Comptroller of the
Currency is passing out charters like popcorn all over the country.
There is a good deal of interest in this.
Mr. RoBERTSON. Yes, there is.
Senator DOMINICK. Thank you.
Mr. Chairman, thank you, that is all I have for the moment.
Senator DouGLAS. Senator Proxmire?
Senator PROXMIRE. Mr. Robertson, I will be as brief as I can. You
have a well-earned reputation as a very effective, helpful, and useful
dissent.er. I would like to ask you about this monetary situation
beginning with the balance-of-payments problem. In your view, does
the interest equalization tax, which I understand is likely to pass Congress and which seems to have had already quite an effect on balance
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of payments, does this somewhat reduce the pressure on the Federal
R~rve to have a policy of restricting the money supplies so our
domestic economy will not suffer?
Mr. ROBERTSON. I would say the pendency of this measure has
probably been more effective than it will be after enactment. It has
been very effective in restricting the flow of funds out of this country,
so the balance-of-payments problem today is not nearly as large or
serious as it was before this step and others were taken.
Senator PROXMIRE. As indicated in the fourth quarter of last year,
the balance-of-payments situation has been vastly improved .. Would
it be possible to amend the equalization tax to make it do almost anything you wanted to do?
·
Mr. ROBERTSON. I think you could but there are sometimes ways
to circumvent economic controls of this kind.
·
Senator PROXMIRE. There is no necessity to have a particular differential established here; it could be higher?
Mr. ROBERTSON. That is right.
Senator PRoxMIRE. So there is no reason why the increase from 4
to 5 percent by Great Britain in their prime rate should necessarily
result in putting serious pressure on our monetary authorities to follow
suit? An adjustment in the equalization tax should accomplish all
we could, or by reducing money supply?
Mr. RoBERTSON. These are two different problems.
Senator PRoxMIRE. Yes. ·
Mr. ROBERTSON. They affect different flows-the tax has effectively
stopped a good portion of the flow of long-term funds in that direction, but it has had no effect on interest-rate differentials that influence
flows of short-term funds.
Senator PROXMIRE. ·why doesn't the equalization tax affect the flow
of money?
Mr. ROBERTSON. Because it isn't designed to affect this.
Senator PRoXl\URE. Why?
Mr. ROBERTSON. You could legislate to do that.
Senator PROXMIRE. Is it the short-term flow that's been most damaging to our international position?
Mr. RoBERTSON. This is the contention of many people. It is not
my contention and I do not believe it; the vast flow is in the long-term
area which isn't affected at all by short-term interest rates.
Senator PROXMIRE. In the long-term area. Isn't it true some studies
have indicated the interest differential doesn't have much effect?
Mr. ROBERTSON. The interest equalization tax does not apply to
bank loans.
Senator PnoxMIRE. Disregarding the equalization tax, it would seem
in your judgment that it is unnecessary for us to follow a more restricth;e monetary policy because of higher interest abroad'? · ·
Mr. ROBERTSON. You are referring to the increase in Britain to 5
percent. I would say no; there is no need for a more resti-ietive
policy because of that factor. · It has not shift.eel interest-rate incentives sufficiently to induce capital outflows.
·
·
Senator Pnox:J\nRE. Isn't 1t true that there are other factors, trade,
for example, the speculation that follows other matters such as political stability?
Mr. ROBERTSON. There are many factors which affect the flow of
funds; interest rates are one. I do not deny that interest rates have
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a bearing. The problem in this country with respect to balance of
payments--in other words, the funds flowing out-is not the result
of our trade position; it is in surplus. We are in a different position
from any country in the world in this respect-our payments deficit
is caused by_ economic aid, military aid, and investments abroad.
Senator PRoxMIRE. Isn't it true our investments tend to follow the
trade surplus to some extent 1
·
Mr. ROBERTSON. I think that's true. I think the real answer to the
balance-of-payment problem in this country is to develop our own
economy to the point where you increase interest in the economic
activities in this country and attract funds to flow here, and induce
our own people to keep funds here and invest them profitably instead
of moving abroad. I think we must always appraise the problem
when an excessive amount of dollars are sent abroad for international
pU!1)0608,
Senator PROXMIRE. As a Governor of the Federal Reserve Board
your primary job is a monetary job and the monetary policy must
take our balance of payments into consideration but should be based
fundamentally on domestic economic considerations, unemployment,
inflation, economic growth; is that correct 1
Mr. RoBERTSON. This in my opinion is primarily the responsibility of the Federal Reserve. We can't ignore the existence of the
balance-of-payments problem; but it should be secondary, not primary.
Senator PRoxMIRE. In making up your mind as to the validity, the
accuracy of unemployment statistics would be of great importance
to youi
Mr. RoBERTSON. Very much so.
.
Senator PROXMIRE. There has been considerable· question about the
validity, whether or not these do reflect in fact unemployment accurately.
What kind of analysis can the Federal Re..~rve Board make on unemployment statistics, do you have the feeling they are accurate,
any area they should be re.fined or improved i
Mr. ROBERTSON. I am not an expert in this field. I must say our
staff, plus Secretary Wirtz, have convinced me the figures are about
as accurate as we can get at the present time. They shouldn't be downgraded. As far as I know, they are accurate. No one contends they
are 100 percent accurate, but I am convinced they accurately reflect
the seriousness of the unemployment situation.
Senator PRoxMIRE. The unemployment is 5.4 percent seasonally adjusted this last month, which was December. Nevertheless, would you
agree that an unemployment figure of 5 to 5.5 l?ercent is such that
increased effective demands would help to diminish it without inflationary-Mr. ROBERTSON. I would hope so very much, but one never knows
what public psychology would do, how wages and prices will perform.
I would hope we can get a stimulative effect out of the ltax cut and
a monetary policy which will help to bring down the percentage of
unemployed and increase production.
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Senator PRoxMIRE. The Wall Street Journal had a very alarming
article the other day. I quote:
SURPRISE FOR 0oNSUMERS
The same tax cut that began putting extra dollars in workers' paychecks yesterday may make it difficult for some of those workers to get ,a loan to buy a
house, car, or refrigerator-and may make many more pay higher. interest on
such loans.
So, at least, say some prominent bankers. Their reasoning: Many consumers
likely will use their tax-cut dollars to make a downpayment on some major
purchase, figuring to borrow the rest. And many ·businesses likely will use taxcut cash to start expansion projects, then borrow to complete them. So demand
for bank loans can be expected to jump at a time when the Federal Reserve
Board bas been restricting the supply of money banks have available to make
new loans and, for various reasons may restrict it further.
It sooms to me very simply, and quite accurately this article puts the
finger on the economic dilemma that faces Congress and the Federal
Reserve; we want to stimulate the economy but not increase prices. I
voted against the tax cut. If it is going to do a job it should do it.
How can you justify not providing at least a substantial increase in
the money supply 1
Mr. RoBERTSON. I think we have to gage the monetary needs as we
go along, not try to fight inflation when 1t doesn't exist; try to deal
with the problem that does exist, which is underutilization of resources, and unemployment. In these circumstances, you ought to
make money available at as low interest rates as you can. If inflation
starts, I will be one who will be fighting it, but I don't intend to fight
inflation until it begins.
Senator PROXMIRE. Last year there was an increase in the GNP of
more than 4 percent in constant dollars, an increase in the GNP of
about 6.43 in active dollars. The money supply increased about 3.7
percent, far less than the job it had to do, therefore monetary policy
tended to have a somewhat moderate restraining influence; is that
correct?
Mr. RoBERTSON. I really think it did but I am not one who thinks
monetary policy has been really restrictive.
.
Senator PROXMIRE. That may be.
Mr. RoBERTSoN. The degree of the expansion of the money supply
is not the whole answer. I think it depends also on velocity1 the use
of that money. This is a matter you have to watch very carefully.
Senator PRoxMIRE. That is the reasoning we run into with some
Federal Reserve witnesses, velocity is just a function of the money
supply in relation to the gross national product. The tighter the
money supply, the hifher the velocity.
•
Mr. ROBERTSON. Its extremely important.
Senator PROXMIRE. If you restrict the money supply given certain
amounts of economic activity, the velocity is bound to go up.
Mr. ROBERTSON. That is right, but you have to watch the whole
picture.
Senator PROXMIRE. So you would keep in mind the unemployment
statistics ?
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Mr. ROBERTSON. I don't see any sign of an inflationary movement
in this country today. It oould arise at any time depending on psychological attitudes, savings habits and so forth. I don't see it today.
I would keep an eye on the unemployment situation, the utilization of
productive capacities, and watch the situation to see if inflationary
tendencies develop.
Senator PRoxMIRE. Secretary Hodges spoke yesterday of 10 percent
or more increase in the coming year in business investment. Now if
you get a substantial stimulation, which we hope to get in our consumer spending from the tax cuts, recognizing that the 5.4 percent miemployed includes the fact that 20 percent who are unskilled are
unemployed-a high percentage of semiskilled are unemployed and
almost none of the skilled are unemployed-we might very well be on
the verge of inflation. Especially since the utilization of additional
capacity brings high cost marginal facilities into production. This,
too, may mean higher prices.
Mr. ROBERTSON. I think you have all the elements but it is a matter
of anyone's judgment. I would not predict we will get inflation. I
will predict we are going to have problems we must watch.
Senator PRoxMIRE. Thank you very much.
Senator DouGLAS. Thank you very much.
Senator DOMINICK. I just want to thank Mr. Robertson. I think
he has been an extremely able and interesting witness.
Senator PROXMIRE. He has indeed.
Senator DouGLAS. I would like to offer one bit of advice. This
question of comparative interest rates has been used by many people
as an argument for increasing domestic interest rates. The last few
days I have been trying to study the figures which you produced on
international comparisons of interest rates. I think they can be described as very defective. To show the bank rate for the various
countries is very important because in this country we discount below
the loan rates and in England it's above the bank rate.
As I remember the figures, when we had 3.5 and Britain had 4.0
bank rates, our short term 90-day rate was 3.5 compared to England's 3.7. So that England, in its rate on 90-day paper, was actually
above the American rate, not below it. Even this rate, however, is
not given for some countries and the actual private lending rate is not
given. And yet this is supposedly one of the important factors which
enters into determination of monetary policy.
I think in this respect the statistics of the Federal Reserve Board
need to be greatly improved and I plan to take this up with the joint
committee. · But I wISh you would give a little attention inside the
Board and see if some improvement is not available. I am sure that
the data in the Economist in England, the journals in France and
Italy, at lenst would have this. 1'Ve are operating in the dark. Take,
for instanee, Switzerland. It's sometimes said we have to protect
short-term funds from being transferred to Switzerland, but the Swiss
official rate is 2 percent. It is not monetary consideration which
lends to any transfer to Switzerland. This whole question needs more
nccurn.te information.
Thank you.
(Thereupon, at 11 :38, the committee went into executive session.)
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(The speech by Mr. Robertson and the statement by Secretary Dillon, previously referred to, follow:)
U.S.
POLICIES AND LATIN AMERICAN PROGRESS
Remarks of J. L. Robertson, member of the Board of Governors of the Federal
Reserve System, before the National and State Bank Divisions of the American Bankers Association, Mayflower Hotel, \Vashington, D.C., December 10,
1962
Several months ago I suggested the need for a fundamental reformation of our
crazy quilt pattern of Federal bank supervision, a pattern which is obsolete and
defies logical justification. I suggested that instead of clinging to a system in
which three_ different Federal agencies examine and regulate the commercial
banks of this country, we should consolidate them into a single independent
agency-a Federal Banking Commission. It would ·be headed by a board of
five men, appointed by the President, with the advice and consent of the Senate,
on a staggered-term basis. They should be specialists who know the business
of banking well, men of integrity, impartiality and competence, constituting an
agency that would be completely nonpartisan, even as the Federal Reserve Board
and the Federal courts are today. To this Commission would be transferred all
the powers and functions now vested in the Comptroller of the Currency and
the Federal Deposit Insurance Corporation, as well as the bank supervisory
powers exercised 'by the Federal Reserve.
This would have a number of important advantages. It would raise standards.
It would end a race of laxity among existing agencies, which too often reduces
supervisory standards to the towest common denominator. It would satisfy tht•
imperative need for coordination, efficiency and uniformity of Federal bank
supervisory policies. It would eliminate the confusion caused by conflicting
and inconsistent decisions (for example, on mergers). It would reduce costs
and increase efficiency. Last, but not least, it would provide the banking industry with a single set of "rules of the game", ground rules that would apply
to all banks alike-fairly, equitably, and impartially-and without which many
institutions are finding it increasingly difficult to plan ther ·own future activites.
Shortly after my last speech on this subject, before the convention of the
National Association of Supervisors of State Banks at Bretton Woods, N.H.,
I removed myself physically as well as mentally from the field of battle. I spent
most of· the month of October in Latin America, where I engaged in some onthe-spot research into the banking and economic problems that confront our
neighbors to the south. On my return, I fully expected to again take up the
gauntlet, but to my surprise and pleasure, I found that in my abSence, and
perhaps because of it, there had developed an increasingly widespread understanding of the proposal for a Federal Banking Commission, a growing realization that it would not in any way weaken the dual banking system, and a ground
swell in favor of it.
I have no illusion that the issue has been decided and that the battle has been
won. However, the case for reform has been stated, not only in my earlier
speeches on the subject, but in articles and editorials in widely read magazines
and newspapers. There is little that I can ·add of an expository nature. ·Even
if I had the power, I would not want to try to win support for the reforn1 by
emotional oratory. I can only say that the more the question has been debated.
the more convinced I have become that the proposal is sound and· feasible. I
hope and trust that after eareful, openminded study of the pros and cons,
bankers, supervisors, Government officials and legislators will reach a similar
conclusion. If this should be the case, the plan could be effectuated either by
the President under the Reorganization Act or by the Congress through the
legislative process.
Believing that I have done about as much as a man in my position can be
expected to do in bringing about the needed reform, I feel free tonight to tum
to a discussion of the need for reform in our thinking about the problems of
Latin America. I do not pretend to know as much about this as I do about
bank supervision, since-when it comes to Latin America-I am, ·at best, what
might be called a 1-month expert. I make no pretense of being anything else,
and perhaps I should hold my tongue. However, the gravity of the situation
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has so impressed me that I feel impelled to share my thoughts with you, in spite
of the fact that they are the product of a too brief, even though intensive,
survey.
I was in Mexico City when the Cuban crisis occurred. It seemed that the
hand of fate itself was adding emphasis to the feeling that Latin America will
influence our destiny much more in the future than it ever has in the past; a
feeling that had led me to seek firsthand knowledge of the area. In those final
days of October we gained a keener appreciation of the fact that small, barely
noticeable clouds on the southern horizon could be the origin of storms that
might threaten our very existence. Now the crisis has subsided, and we are
practically back to normal. However, I think that we are all a little changed.
We are more conscious of the fact that we are living in the shadow of a volcano
that might erupt at any time. We are also aware of the need to find some
means of immunizing this hemisphere against the kind of evil that Fidel Castro
represents.
That we are still a very long way from accomplishing this was impressed
upon me strongly in the first country I visited-Venezuela. Here is a country
that is obviously experiencing real difficulties. The first day I was in Caracas
the newspaper headlines blazoned the news of the temporary seizure of a village
just a few miles from Caracas, and the slaughter of its police force, by a band
of Communists. The week after I left, the Tamanaco Hotel where I had stayed
was ·bombed and badly damaged. More recently, bombings have wreaked heavy
destruction on Venezuela's oil and pipeline facilities. The Government has been
forced to declare martial law and suspend civil liberties.
I commend careful study of the Venezuelan situation to all those who hold
that the antidote for Communist penetration in Latin America is simply economic growth or the achievement of higher levels of per capita income. Latin
American growth statistics are highly suspect, but Venezuela's growth is easily
visible to the naked eye. One does not need statistics to see that in the last
decade there has been an economic explosion in Caracas. It has been based
on a great oil boom, which has seen production nearly double in the last 10
years. Per capita gross national product is now well over $600, which is not
only far above the level in any other Latin American country, but is higher
than in parts of Europe.
This is not just statistical deception. Venezuela has attracted many immigrants from Europe, and even those working in humble positions testify that
economically they are better off in Venezuela than they were in countries such
as Italy or Spain. Workers on the assembly line in the Ford Motor Co.'s newly
established plant earn $10 a day. The beginning pay for bank employees is
$100 a month. Still, it is said to be hard to get competent skilled workers
whether they be accountants, cooks, or mechanics, even though the number of
unemployed people there is very high, indeed.
We often hear that land reform is vital in Latin America, but in Venezuela
it would be more accurate to say that the problem is to find people willing to
develop and cultivate the vast amount of unused land that is available. The
country is larger than Texas and Oklahoma combined, and it has a population
of only 7½ million people. Much of the arable land is publicly owned and is
not used for any productive purpose. The problem in Venezuela is not that of
appeasing the deep hunger of the people for land, but rather to find men and
women willing to pioneer and open up new areas.
The Venezuelan experience rudely shatters the fond American notion that
you can make people more stable politically by taking them out of the slums
and giving them good housing. To the dismay of the Government, it has discovered that the hotbeds of communism in Caracas are not the miserable squatters' hovels that blight the city's hillsides, but the striking high-rise apartments
that the Government built to provide decent, low-cost housing for the squatters.
Venezuela's President is Romulo Betancourt, a man who is regarded in some
quarters as the apotheosis of the non-Communist left. He was democratically
elected, and he has tried to undercut the appeal of the Communists by introducing various social reforms. However, he has been a special target of the Communists, and terrorism and lawlessness have been growing problems for him.
The terrlorism, along with some of the reforms, have worried investors in Venezuela, and in recent years there has been a slowdown in the rate of economic
growth. I suspect that President Betancourt would be one of the first to agree
that the complex problem of subversion confronting Venezuela is not one that
can be solved merely by political reform. Observing his problem, I can better
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understand what Edmund Burke was driving at when he said, "Kings will be
tyrants from policy when subjects are rebels from principle."
Venezuela does not typify all of Latin America. Each country has its unique
characteristics and problems. However, it does provide an interesting and challenging introduction to the area. I say this because Venezuelan experience
points to both the urgency of Latin American problems and to the need for a
fresh, questioning look at some of the most frequently mentioned remedies for
them.
A very important step in the treatment of any ailment is proper diagnosis,
and the gnawing worry that has been troubling me since my return from Latin
America is that perhaps we have failed to properly diagnose that area's ills.
It appears that we have tended to see the illness largely as one of capital malnutrition and income maldistribution. The accepted remedies have been the
infusion of large amounts of capital and some rush operations to reform the
distribution of income through taxation and through a draconian change in the
ownership of agricultural land. It appears to me that we may be mistaking
the symptoms for the disease, which is really more deep seated. If this is true,
our prescribed remedies will be ineffective, and they may in some cases be
harmful.
The shortage of capital in Latin America is very real and very obvious. One
sign of this is the high rates of interest that prevail throughout the area. As
a general rule, banks are pressing against the legal ceilings on interest rates,
and they are usually finding ways of circumventing them. Bank lending rates
are generally limited to a maximum of around 12 percent a year, but commissions and other hidden charges often push the actual cost up to as much as
18 percent. In Brazil, businessmen complain that bank officials frequently ask
for a participation in the enterprise as a condition for granting credit. Even
so, the banks are unable to meet the heavy demand for loans because of the
inadequacy of their resources.
What's more, the banks in most Latin American countries have found that
they can get around the interest rate limitations on both deposits and loans by
setting up "flnancieras." These are finance companies which may sell shares
or accept savings deposits, issue bonds or borrow funds, and relend at rates of
interest much higher than the banks are permitted to charge. For example, in
Brazil where the legal ceiling for bank loans is 12 percent, the flnancieras lend
against good commercial paper at rates up to 40 percent a year. In Argentina,
the banks are limited to 15 percent, but their flnancieras also charge up to 40
percent. They pay 18 percent on their shares or borrowings. In Mexico, where
inflation and devaluation have been less of a problem, the 11.nancieras charge 15
to 22 percent a year. Their bonds, which they redeem at par on sight, yield 8
percent a year.
The high cost of money in these countries seems to have little to do with the
policies currently pursued by the central banking authorities. Some of the central banks are ostensibly employing very restrictive policies; others are exercising virtually no control over credit. However, the only country I visited
where money was not extremely expensive and where banks could fully meet
the loan demand was Panama, where there is no central bank. I do not want
to imply that central banks are useless institutions which might be better abolished. However, it is significant that Panama, which uses the U.S. dollar for
its currency and therefore has the hardest money in the area, is the one country
that has what we would consider to be a relatively reasonable structure of
interest rates.
This provides a most revealing clue to the cause of the capital shortage elsewhere in Latin America. Inflation, past and present, is certainly a major factor.
Some of the Latin American countries are taking painful measures to curb inflation, but once confidence in a currency has been severely shaken, it is not easy
to restore it. It takes confidence to encourage savings and to get capital to :fl.ow
into a country and to stay there. Those interest rates of up to 40 percent in
Argentina may appear very attractive to lenders at first glance, but when one
finds that the value of the Argentine peso has been nearly halved since last
March, interest soon wanes. This is one reason why banks and savings and
loan associations in the United States are able to attract money, with their 4and 4½-percent rates, from countries where the local institutions may be offering
rates three or more times as high.
There are other explanations for this phenomenon in addition to inflation.
Fears of the confiscation of property and of legislation which makes the profitable
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employment of capital difficult or impossible are also important in driving capital
out of Latin America. Mexico has recently enacted compulsory profit-sharing
legislation, which has raised a lot of eyebrows abroad. Brazil has recently enacted a law which limits the remittance of profits on foreign investments to 10
percent a year, calculated on the basis of the registered investment. It will not
permit retained earnings in excess of this IO-percent limitation to be added to
the capital base which will be used to compute future remittances. Add this to
the recent nationalization there of some American-owned utilities. and you can
understand why foreign investors are not exactly rushing to Brazil today.
Much concern has been vocalized over the fact that Latin Americans have been
sending their money abroad and because foreign, esvec~ially U.S., investment
in Latin America has markedly dwindled. ( In the first half of 1962, there was
actually a net reflow of U.S. direct investment capital from Latin America.) I
suggest that the remedy for this does not lie in the substitution of governmentprovided capital for private capital. It does not lie in attempts to locate and
forcibly repatriate Latin American capital deposited in American or Swiss banks.
It does not lie in exhortation or special tax measures designed to persuade
Americans to step up their investments in less developed countries.
The primary remedy, and perhaps the only workable one, lies in an attack
on those factors that drive capital out of Latin America and discourage domestic
sa,·ings. This means attacking some fairly prevalent ideas, one of the more
important being the idea that inflation is unavoidable. or even desirable, in· a
developing country. This is not a new thought, but I wish to emphasize it
because somehow our Latin American friends have gotten the impression that
the Alliance for Progress program is keyed much more to such things as land
reform and the writing of long-range development plans than t.o the adoption
of ,iound fiscal and monetary policies and the creation of a favorable climate for
both domestic and foreign investment. This has gone so far that some Latin
Americans accuse us of contributing to the worsening of the investment climate
by pushing for reforms that tend to drive money abroad. To show you how
hvisted thinking can become. some even say that we are doing this deliberately
in order to ease our own balance-of-payments problem.
This leads to our second questionable diagnosis of Latin America's ills; namely,
maldistribution of income. Much has been said about the problem created by
the great contrast between wealth and poverty in Latin America. I do not know
why Datin America is singled out in this respect. The contrast there is perhaps
less than in many parts of Asia. In fact, I understand that a Latin American
soccer team that recently visited Russia was shocked to find that the gap between
the living conditioos of the rich and the poor was far greater there than at
home.
I might note that 30 or 40 years ago. not to mention the present, the contrasts
between the wealthy and the poor in this country were not exactly unnoticeable.
I had personal knowledge of conditions on the lower end of the scale during my
boyhood in Broken Bow, Nebr. We did not have any firsthand knowledge of
how the Astors and the Vanderbilts lived, but we read about it. We also read
the literature of social protest-the works of writers such as Upton Sinclair,
Frank Norris, and Theodore Dreiser.
Those works had a beneficial influence insofar as they stimulated corrective
action against some of the ugly sores in our society. However, few would argue
today that we have reached our present degree of affluence because we eliminated
or greatly reduced the unequal distdbution of incomes. We are better off today
chiefly because we concentrated our efforts on raising productivity. One way we
did this was by developing mass production, supported by mass consumption.
Men like Henry Ford were lavishly rewarded for their contribution to this development. However, their great personal fortunes were picayune in comparison
with the tremendous increase in the productive power of American labor, ancl the
rE>Hulting improvement in the standard of living that they made possible.
Nothing in Latin America impressed me more than the need and the scope for
improvements in the productivity of labor, both urban and rural. This. I feel,
can make a much more important contribution to raising living standards there
than can measures t.o redistribute existing income. The cake needs to be made
bigger-just recutting it will not do any good. Indeed, there are cases in which
the effects on productivity. of income redistribution. are likely t.o be harmful.
Again, this is not an original idea, but it is also one that seems to have gotten
lost in Latin America. Like correcting attitudes about the desirability of inflation, this is not something you can accomplish simply by making Government
loans or grants. It requires work in the area of ideas. For example, you have to
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convince a very large number of people that they will get real improvements in
their li:ving.standards faster if they try to maximize their productive effort than
if tlhey try to maximize their money income while minimizing their output. Wellorganized groups can use their bargaining power to improve their own position
at the expense of the u,norganized up to a point, but in Le.tin America the tendency
has been to grant the wage· increases, the fringe benefits, the early· retirement
privileges, et cetera,. to everyone through legislation. This often means that no
group gains at the expense of any other, but rather that the whole society loses
· because productivity suffers.
I came away from Latin· America with stories ringing in my ears of the great
problems created by inefficient operations that could not be put in order because
of laws and-regulations restricting the dismissal of worker!t---"even the-inefficient
ones. In one country, a bank was prevented from dismissing two employees who
had been caught embezzling funds. In Peru, a country plagued with undereniployment, I found costly machinery being used instead of unskilled labor only
because complex legislation makes it easier for employers to work with machines
than with men.
Elsewhere, I saw large amounts of capital being used to build plants which
can operate profitably onl:r as long as the government continues to ·provide
them with guaranteed markets in which they can sell at high prices. The
idea of stimulating mass consumption by bending every effort to bring the
cost of manufactured goods within the grasp of the masses is not only ignored,
it is flouted. The governments themselves must share the blame for this
because of tax and tariff policies that make goods much more expensive than
they ought to be.
This applies not only to luxuries, but _even to some obvious necessitiesmatches, for example'. ··I was particularly aware of this beca"se I am a
pipe smoker. Xever before have I been in an area where ·lllafohes were so
scarce and of such poor quality. People joke about this.· In one country
they told of the fellow who took a match from a full box, lit it, and immediately threw the box away. Asked why he was so wasteful, he replied,
"Oh. everyone knows there. is only one in a box that works."
This exaggeration illustrates a point of some significance. .Thtorre is something cockeyed about policies that make the sale of poor matches at exorbitant
priceR a means of helping to finance the losses incurred by a government-owned
plant to produce. for instance, poor quality steel which is also sold at exorbitant
prices.
I began this discussion by pointing out that the Venezuelan case suggested
that economic growth per se was not the solution to the problem of political
instability in Latin America, and I then went on to criticize some of the
aC'cepted solutions on the ground that they do not seem to be the measures
hest 1mited to the promotion of eC'onomic growth. I must clarify this seeming
ineonsistency.
I am in favor of economic growth; very mud1 so. I want ·to see misery
alleviated; not because it will serve our political interests, but because it is
in the interest of the people of Latin America. I am also in favor of social
justi/.e.- and for the same reason. However. one of the basic difficulties there
is that popular conrepts of social justice are often in serious conflict with
some of the basi<" principles of economics. A country may have ·very impressive growth,, as Venezuela hits had, and still suffer from political instability
becan><e a substantial portion of the population believes that the political and
economic organization of ·society is unjust. on· the other· hand, if-the government succumbs to popular conceptions of social justice that are economically
'ruinous;' as in Argentina under Peron, political stability is not likely to be
attained either. I am afraid that we have not yet mastered the art of
· bending basic economic law to meet our own wishes.
This suggest.'! that the Latin American problem has to be approached in
the direction of modifying popular c0ticeptions of what is economically and
politically just. Governments, ·whether democratic or dictatorial, will have
difficulties if they try to pursue economic policies that are sound but highly
unpopular. But they· will ha"\'e no easier road if they adopt policies that
are. popular but economically unsound.
I believe that what this adds up to is that the proper diagnosis for
Latin America is not <'Rpital malnutrition and income maldistribution. Rather,
it is a combination of endemic economic miscomprehension, a widespread acceptance of certain notions of social justice that do not square with the economic
realities, and a high degree of inertia.
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If one accepts this diagnosis, it is obvious that high on the list of remedies
must be one that will stimulate a reformation of ideas and of spirit. There
is a need to somehow infuse a spirit of drive into a large part of the population of the Southern Hemisphere. There is a great need for something akin
to the spirit that impelled our forebears in this country to pioneer the
wilderness and open up the West, IJUffering not only personal dliscomfort but
risking death to cane out a better life for themselves and their families by
their own sweat and sacri1lce.
What worries me is that we do not really know how to go about this. So far
as I know, we have not carried out experiments or research to try to find out
whether it can be done. I suspect that the closest we have come to it is in the
Peace Corps program. I did not have an opportunity to observe the Peace
Corps at work, but I did hear favorable reports on its activities in Latin America.
This approach may be one way in which some of the necessary changes might
be stimulated.
Actually, the remedial task in Latin America, under my diagnosis, is so staggering that there is a strong temptation to throw up ones' hands and look (as
I fear we have done too frequently in the past) for diagnoses that call for
simpler remedies-remedies, for example, that can be provided from an open
pocketbook. However, in my view, the danger is so great that there are two
things we cannot really afford : First, failure -to comprehend the nature and the
scope of the problem, and second, failure to exercise all our ingenuity and
imagination-as well as our compassion-in the endeavor to aid our Latin
American neighbors.
STATEMENT O'J' HON. DOUGLAS DILLON, SEOBETARY 01' TRI: TBlcA.sUBY, BEl'OBIC THE
SUBOO!oULITTEII: ON DOMESTIC FINA.NOii: 01' TRI: HOUBII: CoMMITTEII: ON BANKING
AND Oumu!:NOY, MilOH 5, 1964
Mr. Chairman, my testimony today will be limited to what I have experienced
during my 3 years as Secretary of the Treasury. That is the only period in
which I have had any close contact with the Federal Resene System or with
the operations of our commercial banking system.
FEDERAL BEBICBVE-TBEASURY COOPEBATION
It is difficult for me to conceive of any closer working relationships between two
coordinate agencies of Government than those that have characterized the Treasury and the Federal Reserve during the past 3 years. That does not mean that
our policy judgments always coincid~any more than do, for instance, the
policy judgments of the individual Governors who sit on the Federal Resene
Board. But I believe that each agency has been fully informed at all times on
the problems and policies of the other, and worked closely together in coordinating
their separate actions.
I have always found the officials of the Federal Resene eager to learn of our
special problems and qulck to cooperate within the bounds set by their own
primary responsibility for regulating ·the supply of money and bank credit according to their own best appraisal of prevailing economic circumstances. This
common understanding and cooperation has been of great help to me as the chief
fiscal and financial officer of the Government and in my direction of our international financial relationships.
Cooperation has been refiected in a number of informal relationships that,
by their presence through several administrations, are now a matter of course.
Every Monday, for instance, the Chairman of the Board of Governors vial.ts the
Treasury to di8CU88 current issues and problems with me and my associates.
Every Wednesday, the Chairman, together with other Governors and members of
his staff, meet at lunch with the Under Secretary for Monetary Affairs and his
associates to .discuss matters of mutual interest. More formally, certain aspects of international policy are cleared through the National Advisory Council
under by chairmanship. These relationships have been further bolstered by
free and continuous exchange of information between the staffs of the Treasury
and the Federal Reserve.
In addition, Presidents Kennedy and Johnson have continued the practice
of meeting from time to time with the top financial officials of the admi'nistration. Chairman Martin has participated fully in these discussions. He cannot,
of course, bind the Federal Reserve to a decision that is within the province of
his Board or of the Open Market Committee. But he is always willing to convey
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his own appraisals and judgments t.o us. These conferences also enable him t.o
interpret accurately and sympathetically the administration's objectives and
policies to his own Board and t.o the Open Market Oommittee, so that those
groups may have the benefit of this information in arriving at their own
decisions.
This process of close consultation and cooperation cannot be attributed entirely to a happy accident of congenial personalities or t.o a fortuitous coincidence of objectives. Its foundation rests solidly upon the fact that the Federal
Reserve is bound by the same broad objectives, cited in the Employment Act of
1946, that govern the operations of other Government agencies.
FEDE&AL BESlllBVE INDEPENDENCE
From time t.o time, suggestions have been made that coordination of financial
policy should be enforced by various devices. Such a· proposal is contained in
one of the bills before you-H.R. 9681-which would make the Secretary of the
Treasury ex officio Chairman of the Federal Reserve Board.
This proposal seems t.o me to raise most important questions of public poli'cy,
for inevitably the implication is that the stature of the Federal Reserve--independent not of the Government, but of the Treasury-would be, t.o some degree,
diminished.
Demands on the time of any Secretary of the Treasury are already heavy.
Added responsibilities for the formulation and execution of monetary policy
would compete with his responsibilities in other areas. Delegation of a large
portion of these new responsibilities to bis subordinates-and that could hardly
be avoided-would in turn raise further questions about whether the critical and
complex issues of monetary policy were receiving the attention they deserve.
It is one thing for the Secretary of the Treasury to be continually aware of the
general nature and direction of monetary policy, and t.o keep in close t.ouch
with the Chairman of the Board of Governors on the issues that seem most
significant-as I now do. It is quite another t.o be responsible for the vast and
complex activities of a very intricate operating organization.
Proposals of this kind also raise the possibilitty that decisions on monetary
policy, directed toward the overall health of the economy, will at times, consciously or unconsciously, be biased by the constant pressures on the Secretary
of the Treasury t.o assure the economical financing of the dominant borrower in
our economy-the Federal GovernmeJllt itself. This does not mean that the Federal Reserve should not or does not properly take into account the financing needs
of the Federal Government in determining its own policy. These Treasury
financing operations have important implications for financial markets generally,
and in their common pursuit of a vigorous and healthy economy the Federal
Reserve and itbe Treasury share a common interest in the orderly financing of
Government. But occasions could, of course, arise in which almost any Secretary
of the Treasury would feel a conflict between his immediate interest in insuring
a successful financing and the broader objective of maintaining a supply of money
and credit in tune with the needs of the economy as a whole.
Finally, and perhaps most fundamental to a resolution of this issue, experience
over many years and in many countries has taught the wisdom of shielding those
who make decisions on monetary policy from day-to-day pressures. The day of
private central banks operating without regard to Government policy is long
since gone, and quite properly so. But around the world, almost all coUDltries
still find it useful to maintain independence for their central banks within the
government.
Independence naturally implies the right to disagree; and not only to disagree,
but to act on the basis of difterent judgments. Some difterences between the
Treasury and the Federal Reserve may from time to time be a fact of life. But
this need not be distressing. The necessity to test policy proposals against the
views of an independent Federal Reserve is, I believe, the best insurance we can
have that the claims of fina,ncial stabiilty will never be neglected.
In considering this problem of achieving a proper balance, I share the view
of the present Chairman of the Board of Governors that the Chairman's term of
office should be made coterminous, or more nearly coterminous, with that of the
President. With a President free to choose a new Chairman upon taking office,
or shortly thereafter, there will be firm institutional basis for expecting that the
kind of cooperative relationship that bas characterized the past 3 years will
continue in the future, and that the viewpoints and· aims of an incoming administration will be sympathetically reflected in the councils of the Federal Reserve.
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Two years ago, President Kennedy made precisely such a proposal to the Congress. It was valid then and it remains valid today. I commend it to your
attention.
THE INTERNAL STRUCTURE 01" THE FEDERAL RESERVE
The bills before you raise a number of other specific issues concerning the
internal structure of the Federal Reserve, including the composition of the
Board, the usefulness of the Federal Open Market Committee, arrangements
for appropriate audits, and the methods of covering its necessary expenditures.
I will not dwell upon these issues at length for they raise a number of detailed
questions of organization upon which I have no special competence.
In approaching questions of this kind, however, I do feel strongly that we
should remain mindful of the relevance of one of President Wilson's remarks
at the time the Federal Reserve System was established 50 years ago. He noted
then that the sponsors of that legislation were dealing "with our economic
system as it is and as it might be modified, not as it might be it we had a clean
sheet of paper to write upon."
This committee is dealing with a living institution-an institution that has
demonstrated its capacity to innovate, to experiment, and to adapt itself to a
very wide range of circumstances. But in this process of change, it has never
lost certain characteristics--an established tradition of independent judgment ;
a mixture of regional participation in policymaking with ultimate central control that is unique in our Government; an ability to attract highly qualified
officials and staff; and a reputation for operating efficiently and impartially.
The structure that has resulted does not fit easily into the framework of
o;tandard tables of organizations. Policy responsibility is widely dispersed. and
coordination depends in part on informal working relationships built up over
the years. Vestigal elements of an earlier conception of private participation
in central ·banking policies-elements that are more symbolic than real todayare still visible.
But change without clear purpose can be dangerous too. If there are persuasive reasons for particular proposals-if it can be shown that ownership of
Federal Reserve Bank stock by member banks has biased Federal Reserve
policy decisions, or if budgetary or auditing practices have been loose, to take
two examples-by all means, this committee should act. But I doubt the advisability of taking action simply for the sake of achieving symmetry with other
Government agencies, particularly if there was danger that such action might
impair a long tradition of regional participaton and efficient service of which I
believe the country can be proud.
Personally, I would be inclined to the view that if any change is made in
the composition of the Board itself, it might better be made smaller rather
than larger. I would also think that consideration might usefully be given
to some shortening in the present 14-year term for Board members, as well as
to the elimination both of the current special geographical restrictions on Board
membership and of indications that members should be representative of
particular interests.
In the same vein, I should also express my firm support for the efforts now
underway to lift the salaries of Board members along with those of other Govern. ment officials. This is the appropriate path toward reducing the present
anomalies~so evident within the Federal Reserve System itself-that have left
Board members with salaries far below the more competitive rates paid not only
in industry but within the Federal Reserve System itself.
OTHER ISSUES
Three of the bills before your committee--H.R. 9686, H.R. 9687, and H.R.
9749---raise issues of general financial policy rather than of the administrative
structure and independence of the Federal Reserve itself.
The first of these, which would require the payment of interest on Treasury
tax and loan accounts, is the most limited in scope. This matter, as you know,
has been carefully reviewed at intervals by the Treasury Department. ·we now
have underway a new and comprehensive study of the facts both on bank earnings that can be attributable to these accounts and on bank expenses in handling
transactions ·of the Government. This study, which I hope will be completed by
July, will shed further light on this matter.
However, in appraising the tax ancl loan account system, I think it is vital
to keep in mind that these arrangements were basically designed not as a method
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to reimburse banks for services performed but to fill a special need in our decentralized financial system, characterized by a large number of independent
banks. These arrangements perform a twofold function. First, the use of tax
and loan accounts avoids abrupt flows of deposits from one section of the country to another, as well as disturbing contracti-ons or expansions in the total of
bank reserves, that would otherwise be an unfortunate byproduct of the large,
day-to-day cash and borrowing operations of the Treasury. Second, the tax
and loan account system makes it possi'ble for commercial banks to underwrite
and distribute new Treasury securities-an indispensable element in the smooth
market absorption of many new cash offerings.
I know of no arrangements in foreign countries that have been more successful in minimizing and cushioning the effects of Treasury operations on the money
markets, even though in many of those countries a highly centralized banking
system makes simpler the task of forestalling disturbing flows.
Any e:lfurt to seek a precise balancing of cosui and earnings that emerge from
the mutual relationships ·of the Treasury and the banks that W()lllld directly or
indirectly impede these 'basis functions of the tax and loan account system would
be self-defeating.
I would be happy to have Mr. John Carlock, who as Fiscal Assistant Secretary
is directly in charge of the Treasury depository arrangements, provide you with
a more detailed review of these matters at your convenienee.
Much broader issues of monetary theory and practice are raised by the proposal of H.R. 9687 that we reverse the Banking Acts of 1933 and 1935 and permit
banks to resume payment of interest on demand deposits. This approach was
fully explored by the President's Committee on Financial Institutions. However, the majority of the Committee concluded in its report filed last year that
the dangers and difficulties posed by such a change, particularly for smaller
banks outside of the financial centers, outweighed any potential advantages. I
joined in that majority finding.
The final bill, H.R. 9749, would commit the Federal Reserve to support the
yields of all Government securities at rates no higher than 4¼ percent. This
would, in my judgment, represent a departure from the principles of flexible and
vigorous monetary and credit policies.
In my judgment, efforts to peg interest rates by governmental decree, or to
hold them below a prederermined level, represent an unrealistic simplification
of what can, in fact, be done, or properly attempted by any governmental authority. \Ve want interest rates to be as low as possible. We want to remove any
props that artificially hold rates above the levels that supply and demand in
competitive markets would produce. We want the influence of Government constructively used, wherever there is room for choice, on the side of lower rates.
But I think that to make a fixed level of interest rates the sole objective in any
circumstances would prevent the Federal Reserve from doing most of the other
things that we expect it to do-in avoiding inflation, or averting boom-bust
cycles, or assisting sustained growth. The contribution that flexible interest
rates and monetary policies can make to growth without inflation are so great
that we must place no artificial restrictions of this kind on Federal Reserve
operations.
Before closing, I would like to suggest to the committee two areas in which
outmoded restrictions in the Federal Reserve Act have clearly outlived any usefulness they might once have had, and today unnecessarily constrict the flexibility with which the Federal Reserve can discharge its domestic and international responsibilities.
The first of these areas concerns the archaic requirements defining the paper
eligible for securing advances to member banks.
At the present time, as you know, the Federal Reserve can freely lend to member banks at the prevailing discount rate only on the basis of Government securities or commercial paper meeting certain rigid legal requirements in its maturity,
purpose, and self-liquidating character. In recent years, a much larger proposition of the Government security holdings of many banks has been needed to
secure public deposits or for other purposes that effectively forestall their use
in borrowing from the Federal Reserve. The supply of other paper meeting the
technical eligibility requirements of the Federal Reserve Act has also declined
as the character of bank lending has changed over the decades, and in any event
the use of this paper for borrowing would require awkward and cumbersome
procedures by both commercial banks and the Federal Reserve.
The necessity for banks to maintain assets that meet these restrictive eligibility requirements in a volume adequare to provide a reasonable margin over
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foreseeable needs could become an impediment in the flexible distribution of
bank credit among competing uses. Moreover, shortages of eligible paper could
potentially affect the ability of the Federal Reserve to make credit promptly
available at reasonable terms to its members when required. Unless these eligibility requirements are relaxed, the time could come that the flow of credit from
banks to consumers, home buyers, and businesses requiring medium-term credit
would be unnaturally constrained. Doubts might unnecessarily arise over the
ability of the Federal Reserve to relieve any sudden pressures effectively and
expeditiously. I urge that you give your early attention to removing this anachronism from law.
A somewhat parallel rigidity in the law is beginning to afl'ect the ability
of the Federal Reserve to meet its growing responsibilities in the international
financial area. . The Federal Reserve banks, as they acquire foreign currencies,
can place these funds abroad oJllly in bank deposits or in commercial paper of
limited classes and restricted availability. For years, these restrictions were
of no practical import, in view of the limited amount of foreign currencies held
by the System. Bnt, the Federal Reserve is now resuming operations in a
variety of foreign currencies on a large scale and participating widely in the
network of reciprocal currency agreements and other arrangements that have
emerged from the increasing cooperation among monetary authorities in recent
years. Consequently, the need for greater flexibility ls apparent.
By permitting the foreign currencies acquired to be held in a wider variety
of safe and liquid money market instruments, including, in particular, foreign
Treasury bills, the Congress would be taking an important new step to furthe..strengthen the international monetary system and the position of the dollar.
Clearly, perfection cannot be claimed for either the Federal Reserve Act,
which became law more than 50 years ago, or the Federal Reserve System as
it has evolved within the framework of that law. As in the past, the effective
adaptation of the Federal Reserve to the needs of today and tomorrow will require
that the Congress be willing to search out and eliminate faults and anachronisms
that hamper effective performance. But, I would also urge this committee, in
undertaking that necessary task, to protect and preserve, those elements in the
structure of the Federal Reserve that underlie its special strength and stature
at the center of our banking system.
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