The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
MEANS OF COMBATING INFLATION
Statement of
Marriner S. Eccles, Member
Board of Governors of the Federal Reserve System
AUGUST 3, 1948
(From the Hearing before the Committee on Banking
and Currency, House of Representatives, on S. J. RES. 157)
STATEMENT OF MARRINER S. ECCLES, GOVERNOR OF THE
FEDERAL RESERVE BOARD
Mr. ECCLES. Mr. Chairman and members of the Committee, as
Governor of the Federal Reserve Board, and as a past chairman, one
who has been with the Federal Reserve Board for nearly 14 years,
and as one who has watched very closely the inflationary developments, it is an opportunity and a privilege for me to meet with this
committee again.
Everyone, I think, recognized, when this country commenced a large
defense program, and later got into the war, that Federal deficits were
going to develop on an increasing scale, that the Government's
requirements for war purposes were going to utilize a large amount of
the materials and labor that normally would be available for the
civilian economy, and that the people would be receiving purchasing
power from the Government's large and increasing purchases that
would exceed the supply of civilian goods and materials available to
them, unless taxation was so high that it drew into the Government a
sufficient amount to pay for the Government's war program on the
basis of a balanced budget. That has never been done, and it was
not done in our case.
Taxes were increased to the fullest extent that the public was willing
to bear, and that Congress was willing to vote. This left a large
residual amount of purchasing power in the hands of the public.
That purchasing power came from bank-created money. I t came
from bank credit which was necessary to finance the Government's
deficit.
I n order to prevent inflation and maintain stability, this cqjuntry,
within a reasonably short time after the war started, put into effect a,
full harness of controls, the allocation of scarce materials by the War
Production Board, building permits, wage controls, price controls,
rationing, export licenses, and excess-profits taxes as well as increased
individual income taxes and excise taxes, with the result that we got
through the war with a comparatively small inflationary development.
I think from 1940 to 1945 the cost of living went up something like
25 percent—which was rather a satisfactory record in view of the fact
that the public debt was increased from forty-some-odd billion dollars
to over $270,000,000,000, and that the supply of money—bank deposits
and currency—increased more than two and a half times.
I t should have been apparent to all that with the public having
such a large amount of purchasing power in the guise of bank deposits,
currency and Government securities—which was potential purchasing
power—and with a backlog demand that had accumulated for an
kinds of goods, particularly consumer durable goods and housing, over
a period of 5 years, that to take off, as was done in 1945, practically all
of the controls, with the exception of price control—which was completely ineffective removed from the other harness of controls—made
ail inflationary spiral inevitable.
We should not be surprised that there was this inflationary development, but under the circumstances we should be surprised that the
inflationary development has not been greater than i t is.
The public have not only had what would be considered their current requirements, the requirements that they would have had for the
various goods and services had there been no war, but the public, you
1
2
must remember, have been trying to buy automobiles, houses, and
many other consumer durable goods, and industry has been trying to
buy the capital goods that it would normally buy, plus the backlog
demand that had accumulated. So that, in effect, you have had an
effective demand—and by effective, I mean a demand backed up by
purchasing power and easy credit that should take years to fill—the
current plus the backlog—which the public have been trying to fill in
a period of 2 or 3 years. How can you fill a demand for goods and
services that would normally take years to fill in a period of 2 or 3
years, without getting inflation?
You have the example of housing. The cost of housing, since the
war ended, has more than doubled. Easy credit for housing, as has
been made available by the Federal Government under title V I and
under the Veterans' Act, has not necessarily produced more housing.
I t certainly has produced an inflation in the housing field. 1 use that
merely as an example.
Easy credit certainly has not produced more automobiles or other
consumer durable goods. But the demand has been so great in the
field of automobiles that possibly i t could not have been met even if
they had all been sold on a cash basis.
Now, we have been talking about what we are going to do with
this inflationary situation every year since the war ended. And up
to the present time, ftf seems to me, there has been practically nothing
done to deal with the inflationary pressures which should have been
obvious, but there has been quite a good deal done to add^to the inflationary pressures that existed when the war ended.
I realize it is difficult to resist the numerous minority pressure
groups. Each one wants the benefits of inflation for himself, but he
wants the others to pay for them.
The farmer wants a floor under his prices, but he does not want a
ceiling.
The real-estate people, the building-materials people, want easy
credit so that they can readily dispose of, at inflated prices, the homes
and materials they have to sell. But they certainly resist having any
excess-profits taxes in order that the Government might recapture
some of the profits that are thus made.
Labor has always wanted price control, but they have vigorously
resisted wage control.
The bankers want higher interest rates, but they do not want the
Federal banking agencies to have increased power over the expansion
of credit.
You know the familiar pattern. And now, after 3 years, you have
been called together to consider this problem which has been with
the Congress constantly, and the American public constantly, and
there has been little or no willingness to face up to it, realistically,
either by the public or by the Congress, or by the administration.
This situation has gone so far that to stop the inflationary development could well bring about a deflationary development.
You have a great many inflationary forces still in the situation.
The supply of money is still expanding through bank credit. Although
the Federal Government's fiscal policy, due to a favorable budget situation, has been anti-inflationary, to the extent of about $14,000,000,000,
that has been almost completely nullified by the inflationary effects
of a bank-credit expansion of $12,000,000,000.
3
A favorable budget picture, which is the most effective antiinflationary force that could be available to the Government, because
it would deal with the basic causes, because it would be reversing the
trend that existed during the war, which created the inflation, is ho
longer available, and there are prospects, next year, of a budgetary
deficit which will be increasingly serious if we still have the inflationary situation. I see little hope of securing a budgetary surplus
so long as we have an increasing military expenditure with no terminal
point, or so long as we have a world-aid program witty no terminal
1joint, in such amounts as this Government is now spending, and so
ong as the cost of maintenance of the veterans' program, interest on
the public debt, and other expenditures of the Government that seem
impossible to reduce, continue—unless sufficient revenue is made
available through taxation to meet the appropriations made by the
Congress.
There is not much use talking about controlling inflation unless the
fiscal policy calls for a budgetary surplus. Although bank-credit controls are necessary, desirable, and would be useful and .effective, they
are supplementary to a sound fiscal policy.
I t would be impossible, if the country should run into budgetary
deficits, to put into effect a restrictive monetary and credit policy.
The purpose of this hearing this morning, as I understand it, is
primarily to consider what can be done, particularly in the monetary
and credit field, to curb inflationary development. That seems to
me to be the most important anti-inflationary proposal in the President's program.
The program taken as a whole seems to me to be more of a political
program than an economic one, because there is in the program action
called for which would be very inflationary.
The mistake, of course, as I have indicated, was made back in 1945
and early 1946, when the entire harness of controls was prematurely
removed, and that includes the removal of excess-profits taxes, which
was possibly one of the major mistakes that was made at that time,
because that opened the door for a justifiable demand for increased
wages.
The American public—and especially those minority groups,
minority pressure groups, who were trying to get some advantage for
themselves—are primarily, or at least partially, to blame.
What we are interested in at this time, of course, is not so much
recrimination. What we are interested in is what can now be done,
at this late date, to overcome as far as possible the mistakes of the
past.
I da not believe it practical to put back a complete harness of wartime inflationary controls, and I do not believe that to put back some
and leave off others would do the job. I do believe that it is too late
to avoid a serious deflationary adjustment at some point. The disequilibrium and the distortions have already been created. I do
believe that the inflation can go further if nothing is done and a
budgetary deficit develops. I t can be long postponed, and can be
catastrophic in its effects.
I do believe that the sooner inflationary development is stopped,
the less serious the adjustment, or the deflationary developments,
will be.
4
I do believe it essential that credit controls of sufficiently broad
power and authority, both in the consumer credit and in the bank
reserves field, be made available.
That can be, at the moment, the most useful, the most practical,
and the most effective.
I do believe that everything within the power of the administration
and the Congress should be done to maintain a budgetary surplus.
I do believe that the Federal Government should do everything
within its power to encourage the State to postpone every expenditure
that it is possible to postpone, and set an example to the States by
doing likewise.
I do believe that the Federal Government should not, for what
seem to me political reasons, encourage a housing program in excess of
the amount of labor and materials available, and encourage further
inflation thereby.
I do believe that the Federal Government should do everything
within its power to bring down food prices, by encouraging more and
not less production.
I do believe that we should—and I may sound naive in this regard—adjourn political considerations, and I say that for both
parties, and consider honestly and openly the economic facts of life.
Mr. Chairman and members of the committee, I have spoken, as
ron observe, off the cuff and from my heart, about this general probem of inflation which you are considering, and I am sure that there
are many questions that you may desire to ask, particularly with
reference to this matter of bank credit control, as covered in the
President's message, and which happens to be in my particular fielcl.
You make like also to consider the question of housing credit,
which is also covered in the President's message. The Board has
given considerable thought to its inflationary impact.
The C H A I R M A N . Mr. Eccles, you have implied that the President's
program might in some respects be inflationary. Do you care to
comment generally upon the President's program, generally or specifically, in that respect?
Mr. ECCLES. Well, i t is rather involved. I have indicated, Mr.
Chairman, that there are many aspects of the program which are
inflationary, and others which, of course, are deflationary, and that
it thus tends to balance off.
Now, as to getting into each of the specific subjects I must say that
I would like to avoid getting into the specific subjects, because i t
seems to me that the discussion could be endless.
The C H A I R M A N . We are here to discuss the President's program
with respect to inflation. You have indicated that the mistake was
made when we removed the excess-profits taxes in 1945. The President's first proposal is to recommend that the excess-profits tax be
reestablished, in order to provide a Treasury surplus and to provide a
brake on inflation. Perhaps you would like. to comment on the
statement made by Mr. Fred Vinson who at that time was Secretary
of the Treasury, in his appearance before the Ways and Means
Committee, wherein he said—
i
clearly the repeal of the excess-profits tax will stimulate production. Today we
are starved for new houses, new cars, new radios, and the like. The best oiFense
against the use of our wartime savings to bid up prices on these scarce items is to
remove the scarcity. Production and more production is the key. To this end
5
the elimination of the oppressive influence of the excess-profits tax would make
a real contribution.
Mr. E C C L E S . I , of course, did not agree with that statement, and
I so told Mr. Vinson. I happened to have a very close relationship
with him at that time, when he was Secretary of the Treasury and
still have a very friendly relationship. I still have a very high regard
for him.
The C H A I R M A N . I might say that the committee has a very high
regard for him.
M r . ECCLES. But I did express opposition to it, and I decided to
write a memorandum to him giving him my reasons why I thought
a mistake was being made, ana I wrote him a letter in which I said:
Referring to our brief conversation when you expressed surprise at my opposition to the repeal of the excess-profits tax.at that time, I a m venturing to enclose
a memorandum outlining my reasons for my position.
I have some excerpts from this memorandum here that you might
be interested in, for the purpose of getting the other side of this story.
The underlying reasons for maintaining high taxes apply with equal or even
greater force during the critical period of postwar because, first, we still face an
unbalanced budget. Every dollar of Government expenditures not raised by
taxes will have to be borrowed, and, to the extent that banks furnish these funds,
new supplies of money will be added to the already enormous accumulation of
liquid funds in the hands of the public.
Taxation is the last bulwark against inflationary forces because of the weakening or the removal of other controls such as the War Labor Board exercised over
wages, and hence prices, or such as the War Production Board exercised in the
construction field with building permits.
The most prudent course, at this juncture, would be to defer tax reductions
until such time as the supply is more nearly in balance with demand and we have
begun to approach at least a balanced budget.
At this stage we would be wise to err on the side of too much rather than too.
little revenue. Taxes can always be reduced. Since- the basic problem today
is one of shortages of goods in relation to demand and purchasing power, a prudent
fiscal policy requires that high taxes be maintained in order to reduce the public
debt so far as possible.
Not only is the backlog of demand unprecedented, but the supply of money
in the hands of prospective buyers is at an all-time high and will be further increased as employment in peacetime occupations occurs.
The situation would be entirely different if we were confronted with a progressive deflation, if inventories were in excess of effective demand. Then the problem
would be to create more goods and to give employment, and fiscal policy would
caU for, first, reducing the taxes in the lower income brackets in order to increase purchasing power.
Any further reduction would benefit primarily those best able to pay. This
is particulaily true with respect to the repeal of the excess-profits tax. B y and
large, business and industry, which is in the excess profits, has never been so well
off. Never have such vast accumulations of cash and equivalent in Governments
been bigger; never have there been bigger earnings after taxes and never have
there been such glowing prospects of profits that are to be made in fiUing the
unprecedented backlog of demand from domestic as well as foreign sources.
I t is highly significant that expectations of outright repeal of the excess-profits
tax are having four adverse effects: I t is doing much to lift the stock market;
it is. drawing into this field speculative funds. I t is whetting the appetite of
labor for bigger demands, reinforced by strikes. I t is inducing corporations in
the excess profits group to avoid further sales in the last quarter of this year,
because obviously profits after January would go untaxed, so far as excess profits
are concerned. I t is inviting inventory speculation in anticipation of profits
resulting from rising prices.
and so forth.
The argument that business needs a special tax incentive to produce and to
employ people at this time is inconsistent with the basic economic facts. The
6
war demonstrated that if business has orders it will go ahead, producing and
furnishing employment notwithstanding high taxes.
Business has never had such a peacetime prospect for orders as it has today
because demands, foreign and domestic, are so large and so far in excess of supply.
With such intense demand, and the sharp competition for markets, production
would go ahead if there was no reduction in the excess-profit taxes.
And I did advocate some reduction at that time.
I t cannot be logically held that the removal of this tax will give needed incentives to existing business. As for new business enterprise, its main problem is to
obtain the materials and the labor in order to get under way in competition with
established industry. Instead of benefiting from repeal of the excess-profits tax,
the smaller corporations would lose the advantage of the exemption; and to
repeal the excess-profits tax and leave the normal tax as it is would work still
further to the advantage of the larger, and to the disadvantage of the smaller,
corporations, generally speaking.
The argument is frequently made that the repeal of the excess-profits tax
will make no great difference in revenue collections because corporations will pay
in dividends to the stockholders what they would otherwise b^ taxed in excessprofits tax. This would only be true, however, if dividends received were taxable
at the same rate and if there was a sufficient effective tax on undistributed earnings
to induce corporations to pay them out to individuals instead of retaining them
and thus adding to the value of corporate securities,
and so forth.
I t seems to me that the record, since the repeal of this tax, has
proven that it did not stop inflationary developments by inducing
enough further production, as was indicated. Overlooked was "this
terrific backlog of demand, supported by the very large volume of
purchasing power, and the principal effect of this tax was, of course,
to take off any pressures that industry mig.it have for raising prices,
because, after they got into the excess-profits tax, the benefits of
price increases would go largely to the Government. Repeal of the
tax, of course, gave them a greater incentive to raise prices because
the benefit of the price increases went to them.
I t also took away from the corporations a great deal of any
resistance to raising wages, and we saw very promptly, with little or
no resistance, a first round of wage increases, which was certainly a
corollary to the repeal of the excess-profits tax.
We then saw a second round of wage increases, and now we have
had a third round.
Of course that is the inflationary cycle. I t has been supported by
an expanding credit and expanding money supply; so that we have,
first, an excessive supply of money and purchasing power in relation
to goods and services. That creates an excessive demand, and that
brings about a price increase. That brings about increased profits.
And, of course, you cannot blame labor, wherever they are able to
get increased wages to take care of their increased cost of living, for
doing so. And of course they not only, in many instances, got their
increased cost of living taken care of, but they got in excess of their
increased cost of living.
So that the cycle is: Increased credit, increased prices, increased
profits, and increased wages. You have an inflationary cycle. I t is
not just wages and prices.
I merely indicate here the fact that this tax was removed, I think,
prematurely, as were * other controls, and that we lacked, in the
country, the patience to make haste slowly; to realize that our need
for housing and our need for consumer durable goods, our need for
expansion of capital facilities, could not be met overnight; that it
7
could only be met gradually, where our capacity to produce would not
only taka care of the normal demand but also could gradually build up
the backlog demand.
We did not realize that, and we have the result that I have indicated.
The C H A I R M A N . Mr. Eccles, why did we reduce the gold reserves
from 35 percent and 40 percent to 25 percent, do you recall?
Mr. ECCLES. I would like before answering that to say just one
more word on the question of the excess-profits tax. I am not favoring its reenactment at this time because it would have to be part of a
whole program, and I think the question is a very involved one. I t
would have been an easy matter to continue the tax: in force and effect
and to have gradually reduced it until it would have been practical to
repeal it. But at this late date, to impose an excess-profits tax, the
question first arises: On what basis? You have to first determine
what is excess; and to determine what is excess you have to determine
the formula for deciding the basis upon which to apply it. I will not
go into that, but that is a very involved and a very difficult thing to
do, and certainly it cannot be done in any short time, in a special session of Congress. I think I, therefore, would not favor its reenactment. I think that our whole tax structure needs to be overhauled—
and that is a major job—and that it should not be done piecemeal by
an attempt to impose, at this time, an excess-profits tax.
The C H A I R M A N . D O you think the administration made a mistake
in taking it off in 1945?
Mr. ECCLES. Well, I just read my letter and excerpts from the memorandum. The date of that was October 20, 1945.
Mr. B U C H A N A N . D O you think the Congress made a mistake in reducing taxes this year?
Mr. ECCLES. I do. And I have so stated, publicly, and before
committees.
Mr. B U C H A N A N . Does the President have the power, at the present
time, to check the inflationary spiral? I t has often been repeated
here that he does have the powers; that the Federal Reserve Board
has the powers. Does the President have the powers at the present
time?
Mr. ECCLES. I do not think the President has the powers at all.
And certainly the Federal Reserve Board does not have the powers.
Mr. P A T M A N . I f you will pardon me for interrupting, Mr. Chairman,
specifically, does the President,have the power to increase the rediscount rates of the Federal Reserve banks?
Mr. ECCLES. N O ; he does not, and I would like
Mr. P A T M A N . He has no such power?
M r . ECCLES.
NO.
Mr. P A T M A N . And one other question. Does he have the power to
prevent the Federal Reserve System from guaranteeing the par value
of Government bonds?
Mr. ECCLES. That is a responsibility of the Federal Reserve open
market committee. The Federal Reserve System is, of course, a
public organization. The Federal Reserve Board is a public body,
appointed by the President, for long terms, and confirmed by the
Senate. They are not a part of any administration.
Mr. P A T M A N . And a member is not subject to removal by the
President?
Mr. ECCLES. NO, sir; any more than a justice of the court is subject
to removal by the President.
8
The C H A I R M A N . Just a moment
Mr. E C C L E S . I was just going to say that the Federal Reserve
Board is an independent body, an agent of the Congress, as shown
by the legislative histoiy of tne Banking Act of 1935, when Senator
Glass insisted that the Secretary of the Treasury, who was formerly
the ex officio Chairman of the Board, and the Comptroller of the Currency, who was the head of a bureau of the Treasury,, should both be
left off the Board that was provided for in that act, for the reason,
as I said, that there was too much political pressure exercised, and
that he could speak as one who knew, because he had, during his
period as Secretary of the Treasury, felt that the Board was unable
to exercise its independence in a way that it should be able to exercise it.
Now, it has been indicated, in the press, that the Board is a part of
the administration. As I have indicated, it is not a part of any administration. I t is expected, of course, to cooperate with, and work
with, in every way i t can, any administration, and it is supposed to
advise with the Congress, and it is required to make its reports to the
Congress.
Now, the President does have the responsibility of designating the
Chairman of the Board, and the Chairman is looked upon as being
the liaison between the President or the administration and the
Board or the banking system.
I always considered, while I was Chairman, that it was my responsibility to try to persuade the administration, as far as I could, to
go along with the views that the Board might have with reference to
the questions upon which the Board had responsibility and to try to
maintain a liaison that would maintain a harmonious relationship.
Now, I was not demoted. I just was not reappointed as Chairman.
That is, of course, as I have said, a privilege of the President. The
Chairman is the liaison, and, of necessity, the administration must
have a liaison with such an organization as the Federal Reserve
System. I just wanted to make clear that relationship and what
seems to me the responsibility of the Board, for the record.
Mr. S P E N C E . Mr. Chairman.
The C H A I R M A N . Mr. Spence.
Mr. SPENCE. Mr. Eccles, if the controls—price control, allocation,
priorities, and rationing—had remained unweakened, and had continued, what effect do you think that would have had upon the conditions which now Bxist?
Mr. E C C L E S . I f what?
Mr. S P E N C E . I f controls had been continued for a longer period,
what effect do you think that would have had upon present conditions? You said pressure groups have weakened them. I think that
is true. Suppose they had been continued, however, what effect do
you think that would have had upon the inflationary conditions that
now exist?
Mr. E C C L E S . I just do not think you would have the inflation that
you now have.
Mr. SPENCE. Y O U think that could have controlled it?
Mr. E C C L E S . I do not think there is any question about it. I n
spite of Canada being so close to us, and being under the pressure
and influence of the actions that we have taken, they have not had
anything like the inflation that we have had. And that certainly is
true of other countries—I am thinking of Australia, for example. Of
9
course, they are small countries. Great Britain possibly could not
have survived without the imposition of the very high tax structure
and the very tight controls of every kind. She would have had an
inflation such as some of the continental countries have and such as
some of the Asiatic countries have. But considering her short supply
of goods and the fact that she was in the war from the beginning to
the end, and that she had all the monetary inflationary pressures,
yet she, through maintaining and keeping controls, has been able to
survive and maintain an excellent degree of stability, considering the
problem she had. We had no such problem because we had no destruction of our productive capacity. Our productive capacity was
greatly increased during the war. Our population was increased.
Our manpower was increased. And we are a country of great natural
wealth, great facilities for production. So that we had less reason
than these other countries, which had much shorter supply, and which
did not have within their own borders the resources that we had.
I t h i n k we have done an exceedingly poor job i n dealing w i t h the
inflationary situation, and we could have done a very good job.
Mr. SPENCE. SO you think the weakening of the controls is the cause
of our present predicament?
M r . ECCLES. I t h i n k the taking off of the entire harness of controls
is the cause of our present predicament.
Mr. SPENCE. D O you not recognize that those controls were so weakened that they became ineffective and were allowed to die?
Mr. ECCLES. Y O U are speaking of price control?
Mr. SPENCE. Price control, rationing, and so on.
M r . ECCLES. Well, t h a t is a very different matter. On the question
of the removal of price control, I was in favor of the vetoing of the
price-control bill, because I felt t h a t b y the summer of 1946 price cont r o l was largely encouraging black-market operations and tax evasion,
t h a t price controls could not stand alone w i t h the remaining harness
of controls taken off, and t h a t the greatest friends of the continuation
of price control were the black market operators and the tax evaders,
just as the bootleggers were the greatest friends of prohibition. I t
was a perfectly natural development. So the taking off of price
control i n the fall of 1946 was certainly overdue.
I t h i n k i t is perfectly obvious t h a t if you have price control you have
to have rationing, and y o u need allocation of your scarce materials,
and y o u need building permits, y o u need wage controls, you need
export licenses, and tax control. A l l that was just part of a harness,
and to t h i n k t h a t this cart could be pulled by a horse without a harness,
of course, just does not make sense!
Mr. SPENCE. D O you not think that a large part of that was due to
the fact that those controls were so weakened that they did not operate?
They operated very well during the war, did they not? They saved
the Government billions and billions of dollars in its purchases, and
they became so weakened, as you said a while ago, by pressure groups,
that they wrere ineffective at the time thay were removed. I do not
think they could have been continued, under the circumstances.
Mr. ECCLES. NO. This is what happened—and I want to give you
the record on that, because they were not weakened by the pressure
groups. Naturally the pressure groups were all fighting to get rid of
them. The farmers were anxious to get rid of price controls, and
labor wage controls, and business excess-profits taxes, there is no ques
10
tion about that. But they were doing a good job until they were removed. And this is what happened:
The sudden end of the war in 1945 brought drastic reductions in
military procurement. The question of maintaining controls became
immediately a major public issue. The policy of the administration
on this matter was enumerated on August 18—4 days after the
war ended—by Executive Order 9599. The President instructed the
Federal agencies to move as rapidly as possible, without endangering the stability of the economy, toward the removal of price, wage,
production, and other controls, and toward the restoration of collective
bargaining in a free labor market. The day following the surrender
of Japan all controls over manpower were dropped, and OPA removed
rationing restrictions on gasoline, fuel oil, and all processed foods and
heating stoves. Several hundred items were removed from price
control within the first hundred days after VJ-day.
On August 21, 1945, the WPB discounted the controlled-material
plan—upon which allocations were based—which had become the
cornerstone of the War Production controls.
The controlled-material plan was a relatively simple device for
dominating the industrial economy by giving WPB complete controls
of a few strategic commodities such as steel, copper, lumber, and so
forth. A great many control and priority orders were revoked by the
end of August, including controls over most metals, except tin, lead,
and antimony. Industrial construction restrictions were first eased
and then, on August 15, 1945, construction L-14—which was the
building permit upon which you determined where your materials
were going to be used, whether they were going to go into housing
or something else—was revoked by WPB and with it went all limits
on new construction.
You had an inflation in that field which is quite fantastic, and
you have had scandalous profits made by builders and promoters,
who started with little or no capital, and the building industry, such
as lumber and other concerns, with excess-profits taxes off, have made
profits that certainly would not stand publication.
Before the end of August, we took off controls over transportation
and so forth, of all kinds. That may have been all right; I do not
know.
The Price Administrator was specifically instructed by the President, on August 18, 1945, to take all necessary steps to assure that
the cost of living and the general level of prices would not rise.
However, reconciling labor demands for higher wages and industrial
demands for higher prices, and profits, presented difficulties which
the stabilization program was in the end entirely unable to solve.
Mr. B R O W N . Mr. Eccles, are you making any suggestion as to
what we should do now to curb inflation?
Mr. ECCLES. Yes, sir; I did, I think before you came in.
Mr. B R O W N . All right. I will read your testimony.
Mr. P A T M A N . The only thing I heard you say
The C H A I R M A N . Very briefly, would you restate what you recommend at the present time?
Mr. ECCLES. What I said at this time is this: I t seems to me that
credit controls are the simplest, the easiest, and possibly the most
effective instruments that could be made available, and yet they are
only supplemental to a sound budgetary program which would pro
11
vide for a budgetary surplus, or certainly avoid deficits. I indicated
that in the field of housing, everything should be done to avoid continuing the inflationary effect of the housing program, because otherwise the credit instruments cannot be very effective, on the one hand,
if the Government is stimulating or encouraging an expansion of credit
on the other hand, beyond the available supply of building and
materials.
The C H A I R M A N . Specifically, would you recommend the passage
of S. 866, the Taft-Ellender-Wagner bill, at the present time?
Mr. E C C L E S . N O ; I told the Senate committee the other day that
I felt that that would be a very inflationary instrument. I would
favor the objectives of that bill as a deflationary program which should
be held in abeyance and used to cushion a deflationary development.
I f you use all the deflationary instruments in an inflationary period,
what are you going to have available to cushion a deflation?
I think the expansion of unemployment insurance, the increasing of
old-age pensions, are likewise anti-deflationary weapons. Anything
that the Government can do to postpone nonessential public works
or other expenditures, whatever they may be even though the appropriations may have been authorized should still be done at this time
so as to maintain, if possible, a budgetary surplus.
Mr. B U C H A N A N . H O W about the slum-clearance and urban-redevelopment program, under S. 866? Should those programs be begun
now?
Mr. E C C L E S . I do not think so; no.
Mr. B U C H A N A N . The planning of them?
Mr. E C C L E S . I think it is all right to do planning now, and I think
anything that could be done at this time to get these building codes
of the various cities on a rational basis should be done. Anything
that can be done in preparation to meet a deflationary situation,
should i t develop, of course, should be done.
Mr. P A T M A N . Mr. Chairman, I would like to ask Mr. Eccles some
questions.
Mr. S P E N C E . I would like to ask one more question, first.
Do you recommend that the reserve requirements of the State
nonmember banks be under control?
Mr. E C C L E S . I said the other day that i t would be my recommendation that no legislation be passed if the nonmember banks
are going to be excluded from this control. The discrimination, at
the present time, against the member banks, is already pretty severe.
Certainly, if the national banking system is to be maintained and made
strong, it should not be put at an additional very great disadvantage
as against State banks because the national banks must be members
of the system.
Mr. S P E N C E . I recognize the dual banking system, but the State
bank is a creature of the State, organized under the laws of the
State.
Mr. E C C L E S . There is nothing proposed in this bill-—I should not
say the bill—there is nothing in my proposal that nonmember banks
should be covered as well as the member banks that I believe to be
unconstitutional. I am not a lawyer, but I can give you these as my
reasons: The Wagner Labor Relations Act, it was determined by the
Supreme Court, covers all banks because they are engaged in interstate commerce.
12
I understand the Wage and Hour Act likewise covers banks, for the
same reason. And certainly there has been no question about the
Board's regulation W covering consumer credit. I t has always
applied to all banks. Regulation U, covering margins on collateral
loans, has always applied to all banks.
There has certainly been no discrimination in those fields, and there
is nothing unusual in this proposal that the nonmember banks be
covered.
The program that the Federal Reserve Board authorized me to
present before your committee and before the Taft committee at the
last special session of Congress, in November, to consider these problems, covered the nonmember banks.
The program that was submitted on April 13 in response to the
President's Economic Report before the Joint Committee on the
Economic Report—Mr. Taft's committee—includes the nonmember
banks.
There has been unanimity, always, on the part of the Board and of
the staff— and, I think, the System—that the nonmember banks
should be included in any credit control measure.
The C H A I R M A N . Mr. Eccles, do you think that should prevail in
the absence of an emergency?
Mr. ECCLES. Yes, I certainly think it should prevail in the absence
of an emergency.
The C H A I R M A N . Regulations T, U , V , and W were promulgated
in compliance with powers giren to the President Under the Trading
With the Enemy Act.
Mr. ECCLES. No, no; only W .
The C H A I R M A N . Where do you get T, U, and V?
Mr. ECCLES. T and U were established under the Securities Exchange Act of 1934.
The C H A I R M A N . Could he impose those credit controls now?
M r . ECCLES. Y e s .
The C H A I R M A N . Will you review what T, U, and V were?
Mr. ECCLES. Regulation U is the authority of the Board to
impose
margin requirements on collateral loans, secured by listed securities,
made by banks.
The C H A I R M A N . I S that something in addition to these marginal
requirements?
Mr. ECCLES. NO, that is part of it. That is the. one that covers
banks; there is another regulation that covers the brokers.
The C H A I R M A N . I S that T?
Mr. ECCLES. That is T.
The C H A I R M A N . What is V?
Mr. ECCLES. V was under a wartime Executive order that provided
for war production loans guaranteed by the Military Establishment,
and they were administered by the Federal Reserve System, which
acted as the agent for the Army, Navy, and the Maritime Commission in ! the V-loan program. That has all disappeared with the
liquidat on of the war.
The C H A I R M A N . In your opinion, if the Federal Reserve is given
the authority to increase reserve requirements, by what percentage
would they increase them for the different bank categories?
Mr. ECCLES. Well, the proposal is 10 percent.
13
The C H A I R M A N . I know that. That is the ceiling. What do you
think the Board might do with respect to increasing the reserve
requirements? Would they raise thjem 1 percent, 2 percent, 5 percent,
7 percent, or 10 percent?
Mr. ECCLES. That, of course, would be impossible for me to say
at this time. As a matter of fact, if the authority existed the effect
of the authority itself is perhaps sufficiently important so that use of
the power may not be needed, or, at least, it may be needed to a far
lesser extent.
The C H A I R M A N . What are the total reserves of all the banks now?
Mr. ECCLES. The reserve requirements, do you mean?
The C H A I R M A N . Total reserves.
Mr. ECCLES. Y O U mean in dollars and cents?
The C H A I R M A N . Yes. What I am trying to get at is how much a
10 percent increase in your authority, if it was used, would increase
the reserves.
Mr. ECCLES. Well, this authority would give the Board power to
increase the reserves, roughly, something Tike 11 billion dollars—
that is, reserve requirements.
The C H A I R M A N . Twelve billion dollars?
Mr. ECCLES. N O , I do not think it is 12 billion dollars. I said
around. 11 billion dollars.
The C H A I R M A N . In April or May of this year, in your testimony
before the Joint Committee on the Economic Report, you said this,
in advocating an- increase of 10 percent in the reserve requirements
for demand deposits and 4 percent for time deposits: That that would
give the Federal Reserve System power to increase reserve requirements about 12 billion dollars.
Mr. ECCLES. Yes. Well, I say 1 1 billion dollars because the statement you have quoted included a power, which the Board had not
used, of 4 percent in the case of the central Reserve cities—New York
and Chicago. That amounted to about a billion dollars. Five hundred million dollars of that authority has been used.
The reserve requirements of New York and Chicago are now 24
percent. The Board has the authority to increase them another
2 percent.
Mr. SPENCE. I S it not true that the reserve requirements in most
State banks are very small?
Mr. ECCLES. The difficulties with the proposal to eliminate the nonmember banks are these: I will try to give you some of the objections
that I have, and I think this represents the Board's view as well.
State banks, at present, are required to carry only—and it varies
by States—10 to 15 percent in reserves in the banks of Reserve cities.
T'hat can be carried in cash in their vaults or in balances with the city
correspondent, and some States permit them to carry Government or
municipal securities.
Mr. B R O W N . Right there, Mr. Eccles, suppose the State has a
requirement for a certain amount? And suppose the Federal Government comes along and establishes a requirement of another amount?
What do we do in those circumstances?
Mr. ECCLES. We do not interfere with that. The State can make
any requirement they want.
Mr. B R O W N . We never undertook to regulate the reserves of the
State banks up to now.
14
Mr. ECCLES. We do not undertake to regulate the reserves of the
State banks even now. All we do is say that in addition to the reserves
the State banks are required to carry they must carry an additional
amount of 10 percent—the same as member banks—with the Reserve
banks of the district.
Mr. B R O W N . I do not think your comparison is very good. I do
not see how, under the Constitution, you can go ahead and regulate
the reserves of State banks. I n other words, you would practically
control State banks.
Mr. ECCLES. N O , there is nothing against the dual banking system
in the proposal at all, for the very reason that at the present time
possibly 2,000 of the State banks of the country are members of
the Federal Reserve System. .All of the State banks could be members
of the Federal Reserve System and you still would have a dual banking
system. This in no way destroys the dual banking system, but it
prevents the State system from destroying the national system and
the Federal Reserve.
Mr. B R O W N . I understand that when you are a member of the
Federal Reserve you have to abide by their rules.
. Mr. ECCLES. They would not be members at all. They would
have locked up, in eneet, a reserve equal to 10 percent of their demand
deposits, and that could be supervised and policed by the State bank
supervisor. So that, so far as the Federal Reserve is concerned, it
would have nothing whatever to do with the regulation or the supervision of State nonmember banks, with the exception that whatever
requirement they made of the banks in any class of cities which are
members of the System would apply also to the nonmember banks
in the same cities.
There is no reason why a nonmember bank would join the System—
certainly if this additional reserve requirement is imposed on members
only. Even today it is practically impossible to get members into the
System. There has been practically no growth in membership in
the System, because the advantage—especially if you are a bank in
a non-Reserve city—of not being a member is great because of the
discrimination that is placed upon membership.
For instance, a member bank in a non-Reserve city today must
carry 14 percent of its demand deposits in collected funds with the
Reserve bank of that district. They must also carry such cash and
currency in their vaults—and that is not considered a part of the
reserves—as are required.
I n the State banks, cash and currency is considered part of the
reserve requirement.
A member bank must also, for its own convenience and as necessity
to its operation, carry, I would say they average, at least another 10
percent of their deposits in balances in what we call their city correspondent banks so as to enable them to get certain services that the
Federal Reserve cannot and does not give them.
I have an enumeration of some of the discrimination that now exists
which I would like to read.
A member bank today, for practical operating purposes, has to
carry at least, I would say, 25 to 30 percent of its deposits in cash
reserves and balances with its city correspondents, whereas the balance
that the country bank has with its correspondents for certain services
also takes care of its reserve requirement.
15
Now, if we impose an additional 10 percent on the members and
do not apply it to the nonmembers, I would expect a large exodus of
the smaller member banks, including the national banks; they would
withdraw from the Federal Reserve System because it would be so
advantageous to them from an earnings standpoint.
The C H A I R M A N . Mr.-Eccles, would it be convenient for you to be
back this afternoon?
M r . ECCLES. Y e s .
The C H A I R M A N . I think I should make the statement now that if
we can finish with Mr. Eccles this afternoon, Mr. Snyder, Secretary of
the Treasury, will be here tomorrow morning, and it is our hope that
we may conclude the hearings with Mr. Snyder's testimony and go
into executive session tomorrow afternoon.
The committee will recess until 2 o'clock.
(Whereupon, at 12:30 p. m., the committee recessed, to reconvene
at 2 p. m. the same day.)
AFTERNOON SESSION
Present: Messrs. Wolcott, Smith, Talle, Sundstrom, McMillen,
Kilburn, Buffett, Hull, Banta, Nicholson, Spence, Brown, Patman,
Monroney, Folger, Buchanan, and Multer.
Mr. S M I T H . The committee will come to order.
I believe Mr. Patman had the witness when we recessed for lunch.
Mr. P A T M A N . Mr. Eccles, what caused, more than any one thing,
the depression of 1920?
Mr. ECCLES. The inflation of 1919 and 1918.
Mr. P A T M A N . That was the greatest contributing factor, was it not?
Mr. ECCLES. Yes, sir. If you had not had the war inflation of
1917, 1918, 1919, and 1920, you would not have had the severe deflation, credit deflation of 1920 and 1921.
Mr. P A T M A N . The point I want to ask your opinion on is this:
What caused it to start?
Mr. ECCLES. Restrictive credit policy.
Mr. P A T M A N . That is right. I t caused the banks to call their loans
and as soon as the banks called their loans, everything collapsed, is
that not correct?
Mr. ECCLES. That is right. But that policy at that time was an
extremely drastic policy.
Mr. P A T M A N . What was the credit policy which was initiated by
the banks at that time which was so rigid, Mr. Eccles?
Mr. ECCLES. Y O U had no open market committee in existence.
Mr. P A T M A N . I understand.
Mr. ECCLES. The only instrument of control was the discount rate
of the member banks—that was the principal instrument of control.
I do not mean the member banks, I mean the Reserve banks.
Mr. P A T M A N . I t did not work, however, did it?
Mr. ECCLES. Each of the Reserve banks acted separately, upon their
own initiative, in that field of Reserve bank credit in their district.
There was no uniform, over-all, national credit policy, as there must
be today with an open market committee, composed of the Board
and five of the, presidents, which committee is able to buy and sell
in the open market and allocate its purchases and sales to each of the
Reserve banks without having to get the consent or approval of each
of the Reserve banks. This was put in the Banking Act of 1935.
16
The discount rates must be approved every 2 weeks and if the
Board does not approve, of the rates submitted it can determine the
rate or the rates on the various types or classes of paper.
I n 1920, the member banks were very heavy borrowers from the
Reserve banks. The war was largely financed by the customers of the
private banks buying Government securities and borrowing to do so
from the banks where they did business. They were encouraged to
buy and to borrow to buy, and a great deal of the financing was done
not by the banks buying the securities directly—I am speaking of the
commercial banks now—but by the banks loaning to their customers, and the customers borrowing and putting up the bonds they
had purchased as collateral.
Now the banks in turn borrowed from the Reserve bank of their
district, whereas in this last war the financing was done by the Open
Market Committee purchasing Government securities in the market
and thus supplying reserves to the member banks—not the member
banks borrowing at all. The effect of it was to supply reserves to the
member banks and thereby they were able to stabilize and hold the
Government security market on an even basis to finance the entire
operation, and it was only through the method which we developed,
I think, that it was possible to finance a 200-billion-dollar war debt
upon a basis of complete stabilization.
Mr. P A T M A N . D O not overlook the point I am trying to bring out,
Mr. Eccles. What restrictive policy did the Board put into effect
which caused the immediate calling of loans in 1920? In May, was
it not?
Mr. E C C L E S . Yes, sir. Well, what was done was this—and I think
i t was done by the Reserve banks. I do not know that the Board
disapproved of the policy, but at least the initiation of the restrictive
policy I believe was largely made by the Reserve banks of the district,
which raised the discount rates. But you can raise the discount rate
and still a lot ol borrowing may be done. But they put pressure on the
banks to pay off
Mr. P A T M A N . Pay the Federal Reserve?
Mr. E C C L E S . That is right; pay off the loans they had.
Mr. P A T M A N . And that compelled local banks to call upon their
customers?
Mr. E C C L E S . That is right. That caused the local banks to call
upon their customers and it caused a serious credit deflation, because
the source of credit was denied or nonexistent. That is not involved
at all in this proposal before us now.
Mr. P A T M A N . Did they raise the reserve requirements?
Mr. E C C L E S . They had no authority to raise the reserve requirements. They had no authority whatsoever. The reserve requirements were fixed in the statute, by the Federal Reserve Act.
Mr. P A T M A N . And it was changed in 1935?
Mr. E C C L E S . The authority to change came in 1935.
Mr. P A T M A N . N O W , in 1936, the soldiers of World War I were paid
about a billion and a half dollars, on June 15, 1936. The reserve
requirements of the banks had not been changed since 1917,1 believe,
but within about 2 months after the money was paid, the reserve
requirements of banks were raised; is that right?
Mr. E C C L E S . That is correct.
17
Mr. P A T M A N . Why did you raise the reserve requirements back
at that time?
Mr. E C C L E S . Because we had a growing speculative development,
particularly in inventories. Inventories nad grown about $5,000,000,000. There was a very rapid accumulation of inventories, as
prices were rising rather rapidly. That was one of the factors.
Mr. P A T M A N . Y O U think that was caused by the payment of that
money to the veterans of World War I?
Mr. E C C L E S . Well, I think it was a psychological situation. A
lot of people felt that the depression was over and now was the time
to buy, and there was a lot of forward buying. That tended to help
it. There was also, in that year, about a $4,000,000,000 public
works and public relief program, I think, whereas in 1937 you had
no veterans' bonus and the social security taxes went into effect and
amounted to about a $2,000,000,000 tax on the public, in excess of the
expenditures for relief. So that the entire budget picture was changed
very rapidly from a substantial deficit to practically no deficit. I
am speaking of a cash deficit.
Mr. P A T M A N . Well, we had what was called a recession in 1937,
did we not?
Mr. E C C L E S . Yes; but if the Board had taken no action at all on
the reserves, I am sure it would have made little or no difference,
for this reason: That increasing the reserve requirements did not
extinguish the excess reserves or raise the interest rates.
Mr. P A T M A N . I know, but you raised them three times, Mr. Eccles.
You raised them a hundred percent in 1 year.
Mr. E C C L E S . That is right; but there was more than enough excess
reserve—you see the gold imports had created such a large amount
of excess reserves that the interest rate went to zero. The Government was borrowing, in one period, actually, at a negative interest
rate on its Treasury oills. The reason for that was there were $7,000,000,000 of excess reserves in the banking system, with absolutely no
opportunity or place for loans or investment.
I t was not as though there were a lot of Government bonds available
to the banks. The increase in reserve requirements in 1937 did not
even sterilize the exdess reserves that had already been created by the
gold imports that had come in.
Mr. P A T M A N . What I cannot understand is why you would, for the
the first time in 20 years, not only raise the reserve requirements, but
double them in 1 year's time.
Mr. E C C L E S . We only had authority for 1 year.
Mr. P A T M A N . But you doubled them in 1 year?
Mr. E C C L E S . That is right.
Mr. P A T M A N . Why would you keep on doing it if it had no effect?
Mr. E C C L E S . For the very reason that it is not the most flexible
instrument. The open market operation is a much more flexible
instrument to deal with. Increased reserve requirements have to
apply across the board and not to the individual bank. They have
to apply generally to a class of banks. Therefore, it is not the most
desirable or flexible instrument to use if the open market power is
available.
Now, all we could do, toward increasing reserve requirements at that
time, was to wipe out to a considerable extent the excess of reserves,
so that the open market operation could function and be effective.
18
I would say as of now that we would not need, nor want, nor desire, the
authority to increase reserve requirements if the traditional power and
authority that was given to the Reserve System in 1913 could be made
effective. We are not asking for additional power. We are asking
for a partial substitution of the power that we are unable to use so
long as we staid ready to support the public credit, so long as we
stand ready to support the long-term- 2K-perce.it rate. That m itself
makes the use of the discount rate and the denying of the bank's
credit unusable, or ineffective. For this reason the banks do not
need, nor are they willing, to borrow today, because they have a
portfolio of Government bonds which is equal, for the banks as a
whole, to about 50 percent of their total deposits. Those deposits
were created when they purchased those Government bonds. That is
where they came from. That volume of bonds is about $65,000000,000. All the banks need to do is to sell some of those bonds or
bills or certificates, and they immediately get funds to take care of
their loan expansion.
The Federal Reserve stands there today to support that market, as
they are the only residual market. So that the control over credit is
in the hands, today, of 15,000 banks, and not in the Federal Reserve
authorities. If we could withdraw from the support of the Government market, if we could deny the banks the reserves that they are
able to get through the sale of the Government securities that they
have, instead of borrowing from the Reserve banks, we would have a
sufficient control to absolutely stop the expansion of bank credit,
because, as we withdrew from the market, we could then raise the
discount rates to such an amount that it would be very, very effective.
Todav to raise the discount rat,p. is Tvrfl.pt,if»fi.llv mp.fl.riincrlp.ss PYPP/nt,
Today tn rfl.isp. thp rHsprmnt, rate practically meaningless, except
as it may have a psychological effect—because the banks would
just sell us the bills and the certificates that they own, the bills yielding
about 1 percent, certificates, 1% percent, with the discount rate beinglji.
In other words, the discount rate is still a little higher. Even with
the discouat rate as low as
the total borrowing of the Reserve
System is something like $200,000,000, which is practically nothing.
Now, if we should raise the discount rate to 1%, 1%, or 2 percent,
it would be purely academic. So long as we support the Government
short-term rate, that is.
Now, in that connection—and this is all part of the same story—I
think that the present Government short-term rate has been in effect
too long. I think that the short-term rate should be permitted, by
the Treasury, to rise.
There is authority existing today, of course. That is not a matter
for Congress. The Federal Reserve has tried to support a short-term
rate agreeable to the Treasury, or to persuade them to permit the rate
to go up. We were able to persuade the Treasury to permit the shortterm rate to go up from % to 1 percent and from 1 percent to 1%. and
thus take the .pressure off the long-term 2K-percent rate on Governments which got down to the point of selling at 2.2 percent. But
within the last few months the Federal Reserve has been unable to
persuade the Treasury to favor the raising of the short-term rate.
Therefore, the open market committee has supported the bill and the
certificate market At the short-term rate established by the Treasury.
Now, I do not believe that there is any justification for pegging, or
supporting the long-term rate at 2% and also pegging and supporting
19
a short term rate at 1%, or on bills at 1 percent. I feel—and I know
the Federal Reserve people as a whole feel—that we must, so far
as we can see it at the present time, and I can give you reasons, if you
want them, continue to support the 2%-percent rate.
Mr. P A T M A N . The only reason is that it would break every bank in
the country if the bonds went much below par, is i t not?
Mr. ECCLES. Well, I do not think i t would do that.
Mr. P A T M A N . I t would be possible, however?
Mr. ECCLES. If they had to sell the bonds while they were down, it
would certainly impair some of them. But I will mention it in just
a minute, if I can, Mr. Congressman, but to try to peg the short-term
rate, and hold that down below the point at which it would normally
go in a free market in relationship to the 2^-percent rate does not to
my way of thinking make very much sense in the present situation.
I would certainly feel that if Congress should give to the Board the
authority to increase the reserve requirements, as has been proposed
by Chairman McCabe when he appeared before this committee yesterday, that they would also favor, as the Federal Reserve does, and
I would also hope that the Treasury woul4 favor, permitting the
adjustment in the short-term rate to a market rate. Then we would
let the discount rate go up.
Now, there may be some people who think that that would create
such uncertainty that that will tend to slow up borrowing. 1 do not
think any such thing. I think that the raising of the short-term rate
is minor insofar as its monetary effect is concerned, but it is an important part of the overall credit-control mechanism, and I feel that it
would not be logical or sensible to increase the reserve requirements of
all banks and keep the discount rate down one and a quarter, which
would have to be done, and force the short-term rate and continue to
hold the short-term rate down to 1%.
Now, aside from its monetary and credit effect, there is a serious
question of bank earnings. Especially is that true of the banks in
the central Reserve cities and in the Reserve cities. I do not say
that that is major, but it is certainly a factor, because all of the
commercial paper and business rates are related to that short-term
rate.
Their costs have gone up, just like other costs, due to the inflation,
very rapidly, and their earnings have dropped very, very fast during
the past year. To increase the reserve requirements by 10 percent,
which would force them to dispose of 10 percent of their earning assets—
their bonds, would affect their earnings quite seriously, and that
really is where some of your formidable objections to this bill come in.
I feel that as a part of this control, if it is going to be made effective,
the short-term rate should be permitted to rise. Failing to permit i t
to risej and increasing the reserve requirements and diminishing their
reserve assets would put the banks under pressure to go out and seek
loans at as high rates as they were able to find, maybe longer term
loans, even though it did impair some of their liquidity. We feel
that if you should increase this reserve requirement, take away from
them that much of their earning assets, that that should be partly
overcome by permitting the short-term rate to rise. We would not
force it up. I t will automatically rise. I t cannot go very high if you
support the 2%-percent rate. I t is not going to create very much
uncertainty, so long as you hold the 2K percent rate, because tne range
20
with which the short-term rate can rise would be within its present
1% and I would say possibly IK percent. That in itself is not a very
great rise.
So I do not agree with those who say that is all that is necessary,
because it creates so much uncertainty. I t cannot create uncertainty
so long as you hold the 2%-percent rate. But if that rate rises, our
discount rate rises, in the trend of a credit tightening, and that, in
turn, will reflect itself on all other loans and investments. I f your
dollar is diminishing in price, then, certainly the cost of interest should
go up some. The owner of money, the savers, the insurance people,
and the investors generally certainly should not be the only ones to
suffer to the extent that they have suffered, by holding down the interest
rate beyond what seems to be necessary.
Now, getting to the 2K-percent rate, people say, "Well, why do you
not let the 2K-percent rate go up, so that it will reflect the demand for
savings and for investment, so that more people will save and not
spend so much? I f you let the rate go up, it would be a very important anti-inflationary factor;"
Well, to let the 2 ^-percent rate go up raises some very, very serious
problems, and these are some of the problems that it raises:
I n the first place, it would unstabilize the entire Government bond
market, and when the public debt represents 60 percent of the entire
debt, you are not playing with any small and minor item. You are
playing with $250,000,000,000 of a total debt structure of around
$400,000,000,000. That is not the tail of the dog. That is the dog.
If you are going to have stabilization in the Government market, you
cannot have the public in a position of complete uncertainty as to
how far the price of securities—Government bonds, and, of course
other bonds and mortgages—would reflect the price—municipals;
they would all reflect the price of a drop—the uncertainty as to what
the market value of their assets as well as what the cost of interest was
going to be. That is expecially true for the reason that the Government has falling due in the next 12 months $49,000,000,000 of debt—
$49,000,000,000 in 12 months. Another $46,000,000,000 within the
next 5 years. There is close to a hundred billion dollars in 5 years,
with $49,000,000,000 in 1 year.
The job of refunding that much debt is no simple and easy task in a
market that is unsupported and unsecured and unstable. How do you
price the issues each week and each month that you have to offer to
the public? Who is going to buy the issues, and at what price, when
they do not know what the price may be after they have bought them?
How can you finance long-term or snort-term municipals, and corporate and other securities that are falling due every day and every week,
and when new money is being raised, when there is no basis upon which
to price them?
We have not had any situation such as this before. This is completely unprecedented. And this idea of trying to say what we ought
to do because of what has been done, is no more realistic than trying to
say, "We are going to fight the Third World War on the basis of the
way in which we fought the First World War." And I say that the
Federal Reserve Board does not have the authority, as has been
claimed by some which they have failed to use, and because of which,
if they did use it, this request for new authority would not be necessary. That just is not so, unless we are willing to use the traditional
21
authority, the power that we have, to withdraw from the important
and vital support of the public debt, and raise the discount rate, and
deny the banks reserves. Otherwise they would get such reserves as
they want. Without more power and authority over the banks, or
by withdrawing from support of the Government market—either without one or the other—then, I say that this Federal Reserve System
is the greatest engine of inflation that man could contrive, and the
limits to which additional money can be created by the will of the
banks is fantastic.
Now, we have pointed this problem out over and over since 1945.
The Federal Reserve Board has been conscious of this problem during
the war, and in our report to the Congress in 1945, the Congress was
told that the Board lacked the power to deal with the monetary
expansion of credit.
I n 1946 we told the Congress.
I n 1947, before the Taft committee, on the 25th day of November
last year, we told the Joint Committee on the Economic Report the
same thing.
On April 13 of this year, I appeared for the Board before the same
Taft committee and again told the Congress of the inadequacy of
powers to curb bank credit expansion, and you have now had
$12,000,000,000 of bank credit expansion during the past 2 years on
top of an inflationary situation, a monetary inflation situation, which
even without that $12,000,000,000 was explosive, and you have
nullified, by the bank credit expansion, the entire effect of a favorable
fiscal policy in which the Government has taken $14,000,000,000 more
away from the public than they put back.
And I say that that condition is likely to continue. True, during the .
first quarter of this year, it was deflationary, as I pointed out before
this committee and the Taft committee. I t was deflationary because
during that period there was such a large amount of taxes collected—
$7,000,000,000, practically, in the quarter. That money was used to
pay off bank-held debt, and the banks were under heavy pressure during that quarter. I t is a time of seasonal decline, too. But in spite
of all that pressure, there was still an expansion of total bank credit
on balance, and for the first 6 months of this year there has been an
expansion of bank credit of, I think, $1,300,000,000.
There is every indication that with the growth in prices, with the
general inflationary situation, there will be now an accelerated bank
credit expansion for the rest of this year,, adding to the money supply
Mr. PATMAN. I want to ask you one other question, Mr. Eccles,
and I will be through. The charge has been made that the President
has the power to check inflation by increasing the rediscount rate
of the Federal Reserve banks, and stop the Government's support,
of the bond market. You covered that in two parts this morning,
but I want to ask you whether that is true or false.
Mr. ECCLES. The President has no such authority. The Congress
gave that authority tp the Federal Reserve Board, on the question
of the discount rate. The initiation comes from the banks—from the
Reserve banks, but they are required to submit, under the law, discount rates every 2 weeks, and we, therefore, for practical purposes,
have the authority to control them because we coidd refuse to approve
them and instruct them to fix a rate.
22
Mr. P A T M A N . And in the support price, the Open Market Committee has the entire power?
Mr. E C C L E S . The Open Market Committee has the power and the
authority to operate in the open market.
Mr. P A T M A N . And the President has no power o r authority on
either one of these issues?
Mr. E C C L E S . N O ; but the Secretary of .the Treasury has the responsibility for raising such money as the Government needs to meet the
appropriations made by the Congress that are not covered by taxes.
The Treasury likewise has the responsibility of refunding the public
debt.
Now, it is true, I suppose, that legally the Open Market Committee
could say to the Treasuiy, "You must price your securities at such
and such a price. We will not support the market at the prices that
have been outstanding." But, as I brought forth before this committee, the Open Market Committee and the Federal Reserve Board
are in favor, with the Treasury—and I think with the great majority
of bankers and the public generally—of holding the long-term rate.
Now, where there is the difference of opinion is in the question of
the short-term rate, and it is hoped that we can negotiate short-term
rates that will reflect the market demand for short-term money in
relationship to our support of the 2% percent long-term rate. So the
President cannot be charged with responsibility for not using that
power, and I said before this committee in December, in answer to
questions of Chairman Wolcott, when we were being somewhat
criticized for not tightening up and letting the market adjust, as I
recall the matter, that I was sure that the Open Market Committee,
if the Congress felt that we should withdraw support from the market,
if they would want to indicate that and take the responsibility for it,
that certainly we would do it. But so far the Open Market Committee has felt that we were choosing what we considered to be the
horn of the dilemma which seemed to be more in the public interest
to choose.
This matter has all been gone over, and it has been discussed and
debated at great length. I t seems to me that it is pretty largely a
question of trying to have our cake and eat it. The banks, outside
of a few of the bigger banks which have nothing but short-term securities—and you must think of that, those who have bills and certificates—of course, when you drop the market, it is not too important
to them, because a short-term piece of paper cannot decline much'—
but outside of the larger banks with bills and certificates, there is not
very much support for breaking the two and a half percent rate.
The banks, as a whole, are opposed to breaking this rate, the nonmember banks possibly more, if anything, than the members. The banks,
as a whole, want to prevent inflation, and yet they do not stop making
loans, they are unwilling to have the Federal authorities exercise any
control over their reserve situation, they do not want the Board or
anyone else to have the powers that have been proposed by the
Board as the only means of dealing with this, and they do want the
Open Market Committee to stand there and provide them a market
for their Government securities when they choose to sell them and
without a discount.
Now, I say that :s an untenable position for the banking fraternity
to take. We cannot deal with this thing and do both. And, of
23
course, the Congress hesitates to give us these powers—and I am not
promising too much for them
Mr. P A T M A N . Y O U mean if the powers are granted to you, you are
not promising that you can do very much with them?
Mr. ECCLES. Weft, not. alone, as I indicated this morning.
Mr. P A T M A N . Y O U indicated this morning that we would have to
balance the budget and have a surplus?
Mr. ECCLES. i es. I am saying that it is certainly an important
factor in the picture.
Mr. P A T M A N . That is all I care to ask, Mr. Chairman.
Mr. SMITH. Mr. Eccles, you seem to give the impression that the
President does not exercise much power over the policies of the
Federal Reserve System. Do you wish to convey that idea?
Mr. ECCLES. Yes, sir. I do not think the President has undertaken at any time, in any way—either President Truman or President
Roosevelt—to indicate to the Federal Reserve System what they
ought to do, because they had recognized that the Federal Reserve
was an agent of Congress.
Mr. S M I T H . I mean through the Treasury, principally.
Mr. ECCLES. Well, of course, we .have to work very, very closely
with the Treasury, because the question of managing a $250,000,000,000 public debt is an important one, and the Treasury has responsibilities, as we have responsibilities, and there is a divided responsibility, yet there must be complete coordination of the .operation.
I n most countries the central banking system is owned by the
government, and is a mechanism of the treasury. I t has little independence. In this country there has been a strong feeling that there
should be a political independence on the part of the Federal Reserve
System. Yet there must be an effort at a liaison with any government
in power. I do not believe that a central banking system can be in a
position where, if the Congress appropriates the money, they4 can
then say to the Treasury—which is a part of the Government— 'You
cannot go out and raise the money except under our dictation, and at
such price as we may determine." That is something that just has
never been done and I have expressed it in this way: The Reserve,
the Open Market Committee, and the Board should have an independence to the extent that they would be expected, as the agent of Congress, to advise with, and to have always their day in court, with an
effort at trying to persuade any administration as to what would seem
to be, to them, a proper monetary policy, and, I have always gone so
far as to say, a proper fiscal policy*
Mr. SMITH. And you would also expect the Federal authority to
exercise the same influence over the Federal Reserve; would you not?
Mr. ECCLES. I do not say that they have. But what we try to do
is try to advise. Then the question is, if you cannot persuade, and
you cannot agree, how far should the central banking authority go
m enforcing their will? That is a matter that has not been determmed,
certainly.
Mr. SMITH. Mr. Eccles, you are supporting the bond market at
two and a half percent; is that not a fact?
Mr. ECCLES. We are supporting the long-term market, and all the
other bonds in between on a relative basis down to one and one-eighth.
Mr. S M I T H . I mean the long-term market. Now, what if the
Treasury sets a certain rate? You want that rate to go higher; do
you not?
24
Mr. ECCLES. We have recommended that the short-term rate ought
to be permitted gradually to go up.
Mr. S M I T H . Why? Just in a few words.
Mr. ECCLES. I will tell you why: For the very reason that we feel
that the banks would be more likely to buy short-term Government
securities in the market if the rate was a little better, and would be
less likely to be out reaching for loans. That is certainly a possibility.
We also feel that when the banks come in possession of excess reserves
from two sources, over which they are not responsible—one is gold
imports, which creates excess reserves, and the other is the purchase,
by the Federal Reserve System, of securities from nonbank investors—
largely insurance companies, savings banks, and institutions of that
sort—noneligible securities, largely, or even eligible securities—when
you do that, you create excess reserves in the banking system which
they have no control over.
When they get that money as excess reserves, and money idle to
them, we would then like them to buy short-term Governments. We
would supply the Governments. I n other words, we buy the long
ones in the market, we buy the gold, and sell the short-term securities,
and one sterilizes the other, so that through the sale of the short-term
Governments to the banks we sterilize the effect of the gold imports
and the purchase of the long-term markets. And if the short-term
rate should go up, we think that that might be a factor in getting the
banks to be more interested in purchasing the short-term securities.
Mr. S M I T H . How much of a factor?
Mr. ECCLES. I cannot say that. I do not think it is major.
Mr. S M I T H . I t is not major?
Mr. ECCLES. Some of them think it is major. Mr. Sproul, I think,
thinks it is major.
Mr. S M I T H . Y O U have, dwelt on it quite a bit and I just wondered
what importance you attach to it.
Mr. ECCLES. Well, it is certainly a corollary to increasing reserve
requirements—a very definite corollary to it.
Mr. S M I T H . I t is that important?
M r . ECCLES. I t is that important, that it certainly should be done
as a part of an over-all credit-control program.
Mr. S M I T H . N O ; I said, Do you consider that important?
Mr.
ECCLES. Y e s ;
I
do.
Mr. S M I T H . All right. Now, you said the Treasury did not exercise
any power or control over the Federal Reserve policies.
Mr. ECCLES. I did not say they did not exercise it. They exercise
a good deal of influence but not statutory authority or power. But
hey exercise a lot of influence.
Mr. S M I I H . N O ; that has nothing to do with statutory authority or
influence. I t is inherently a power. If you think that rate ought to
be increased because it is affecting your reserves and ability to handle
your bond market, that is not a matter of "influence at all. So it is
true, then, that the Treasury, or the administration through the
Treasury, does affect, importantly, the policy, in that particular
respect, of the Board of Governors of the Federal Reserve System.
Mr. ECCLES. I said that was minor, and that is the Open Market
Committee and not the Board itself.
Mr. S M I T H . Mr. Eccles
Mr. ECCLES. And I will*say this for the Treasury—that during
my term as Chairman there was not a period in all of last year, and
25
up until the first part of this year, when the recommendations of the
open market committee, with reference to monetary policy, were not
accepted. I t has only been very recently that the Treasury did not
accept the recommendation of the open market committee with
reference to the June and the July financing. That is the refunding.
So that any responsibility that you may lay upon them in failing to
respond applies to that time.
Now, I will say this: There was a period in there, when Mr. Vinson
first went in, right after the war and before Mr. Morgenthau went out,
that we just could not get them away from an extremely cheap
money policy of a buying rate on bills and a special discount rate, and
we were very patient, and we finally did get the situation changed,
after Mr. Vinson had had an opportunity to become a little more
familiar with his job.
He was taking advice from some of the economists in the Treasury
who we and the-Board think were giving him some very bad advice.
Mr. S M I T H . Mr. Eccles, going back to 1 9 3 6 , you sterilized your gold
purchases by paying for the gold with Government debentures; is
that not correct?
Mr. ECCLES. W e sterilized the gold how?
Mr. S M I T H . Y O U sterilized your gold imports? What was the year—
was it in 1 9 3 6 that that took place, involving about $ 3 , 0 0 0 , 0 0 0 , 0 0 0 of
gold?
Mr. ECCLES. A S I recall, the bill rate was very, very low, and the
Treasury increased the public debt by issuing bills and using the money
to sterilize the gold. I t was costing them very little. That is right.
That was the gold imports that they purchased.
Mr. S M I T H . Did that involve the Federal Reserve Bank System in
any way at all?
Mr. ECCLES. N O ; it did not involve them at all, because the gold
never got into it.
Mr. S M I T H . I n other words, you are saying to this committee that
that had nothing to do with the credit with which the Federal Reserve
System was concerned in its banking operations?
Mr. ECCLES. That was just the same as if it had continued to stay
abroad.
Mr. S M I T H . And the fact that it did not get into the credit structure
had something to do with the Federal Reserve System, did it not?
Mr. ECCLES. Well, if it had come into the System it would have
added to the excess reserves, and it would have possibly made for
even easier money than it was; and, as I said, the short-term rate
was practically zero.
Mr. S M I T H . Which, of course, affected the Federal Reserve Banking
System. Then why do you come in here and try to lead this committee to believe that the Federal Reserve Banking System is an
independent institution, which operates absolutely independently of
the Treasury or the executive branch of the Government, when, as a
matter of fact, the two are so completely coordinated that there is no
possibility of separating them?
Now, the law provides specifically for making
Mr. ECCLES. I t appears that you misunderstood me, Dr. Smith.
I answered the question, and then you castigate me for coming in here
and saying something that I did not say..
Mr. S M I T H . Well, let us get the record straight, because I do not
want to do anything of the kind. Did you not say, or did I not under
26
stand you to say, that the executive branch of the Government has no
power over the Federal Reserve System?
Mr. E C C L E S . N O statutory power. They have influence.
Mr. S M I T H . N O statutory power, but they have influence?
Mr. E C C L E S . That is right. That is true of every independent
agency.
Mr. S M I T H . To start with, the President appoints the Chairman,
and he appoints all of the governors?
Mr. E C C L E S . N O ; I was not appointed by Mr. Truman. I was
appointed by Mr. Roosevelt.
Mr. S M I T H . I know; but we are not speaking about one particular
President.
Mr. E C C L E S . The President does appoint them, that is right, for
long terms, and the Senate confirms them, and he designates one of
them as Chairman.
Mr. S M I T H . SO that the Board of Governors of the Federal Reserve
System are an integral part of the general political body; is that not
true? They are a part of the United States political authority; is that
not right?
Mr. E C C L E S . That is right; sure they are. As an agent of Congress,
they would be that.
Mr. S M I T H . Well, we can be a little more specific, because we have
the words right before us, "The Board of Governors of the Federal
Reserve System is a governmental institution." I t is a governmental
institution.
Mr. E C C L E S . That is right.
Mr. S M I T H . If it is a governmental institution, to be sure, the
executive department has certain powers and controls over it, whether
they are spelled out in a law or whether they are not. You helped to
finance the war at the instance and direction of the President of the
United States, and you are now handling the securities, bonds, debentures, notes, and so forth, that were issued by the Federal Government, and you have fixed a price at which you are, as you say, stabilizing the bond or security market. That, of course, is in the interest
of the Federal Government.
Mr. E C C L E S . I t is in the interest of the American public.,
Mr. S M I T H . Well, I am talking about the exeuctive branch of the
Government now, because we want to get this thine clear and get the
idea out of the minds of the people that the Federal Reserve Banking
System is a private institution, because the law says it is not.
Mr. E C C L E S . What about the open-market committee? The
President does not appoint them, and they are not confirmed by the
Senate. Five members of them are Reserve bank presidents selected
by a board of directors of 12 banks, the majority of which are elected
by the private bankers.
Mr. S M I T H . That is true, but there is still a certain amount of control which the Board of Governors of the Federal Reserve has over
those 12 banks.
You know what the law is, and we need not go into that at the
present time.
Now, Mr. Eccles, I want to ask you this question: How long do you
think you can continue to support the bond market, or to manipulate
the bond market, or peg the prices of bonds, or rig the Government
bond market, until you are forced to come in here and say to us, "We
27
have got to have a specific law to hold down prices—a rigid pricecontr<5 law?"
How long is that going to be?
Mr. E C C L E S . Let me answer that by asking you a question, because
it is not clear jut what you mean.
Are you advocating that we withdraw support from the Government bond market and let that seek its level? Is that what you are
advocating?
Mr. S M I T H . I am not advocating anything, Mr. Eccles. I am just
trying to explore the situation to see what is in store for us in the
future—where we are headed for.
You do not think you can continue to support this bond market
forever without more controls, do you?
Mr. E C C L E S . Yes; we can support the bond market for a very long
period of time. But I would say this to the Congress, with reference
to the bond market; that one of the things—and the most important
thing—in the picture that requires our support of the Government
bond market is the failure to have a budgetary surplus, because the
public expenditures have been increased by congressional appropriations and the taxes have been cut by Congress, and therefore we no
longer have a budgetary surplus which, in and of itself, would tend to
reduce the public debt and which would be anti-inflationary in the
picture, and which would very greatly reduce the necessity for the
support of the Government bond market.
I t seems to me that the Reserve System, the Board and the open
market committee, are put into an almost intolerable position; a
position which I must say, at least, is extremely difficult. We could
deny the banks reserves upon which credit is expanded by withdrawing or letting the Government bond market seek its own level.
That is one side of the dilemma. And I have indicated rather at
length the problem that that would seem to us to create—and I would
say that there is unanimity with reference to that subject in the Reserve System. And the other question is that the banks—and up to
date the Congress, and, prior to this time, the administration—because
last November and last April, when I came before the'committees and
presented this program and thought that we had the support of the
administration in that field, we woke up to find that the administration, and particularly the Treasury—did not support the credit-control program which we abandoned any more than the bankers and the
Congress did. So the System has been left with a dilemma here,
charged with responsibility and without authority except using an
authority that nobody wants us to use.
Mr. S M I T H . There again, Mr. Eccles, you admit that the executive
branch of the Government has control or affects- the Federal Reserve.
Mr. E C C L E S . N O ; upon the Congress. They did n<5t have any
effect upon us. We came here and presented the program, even
though they opposed it. We came here and presented it.
Now it appears that I was not a proper representative in presenting
the program, because I was not redesignated. I thought I was
presenting to the Congress—and in that connection I would just like to
read into the record, here, something on that subject—I thought we
were carrying out a part of the Government's anti-inflationary program.
28
Mr. S M I T H . But, Mr. Eccles, you spoke about the Treasury. The
Treasury Department cooperates
Mr. ECCLES. Well, the Treasury; yes. The Treasury happens to
be the agency of the administration that opposed the program for
controlling bank reserves.
Mr. SMITH. Of course.
Mr. ECCLES. And they did not offer an alternative. We thought,
certainly, that we had the cooperation of the administration, but we
were not deterred from pressing it even when we found we did not
have the cooperation. And when we came up here again, on the 13th
day of April, and presented before the Taft committee oar thought
with reference to the regulation of credit and the management of the
public debt—we thought we were completely in line with the President's statement. When he was asked by Congress what he thought
of the program that Eccles had presented before the committee
asking for these controls, 2 days after, in the Wall Street Journal
there appeared the statement, "Eccles bank credit proposals do not
have support of the President"—that was the ftrst I knew of it—
"Truman disavows the program, while Snyder declares he did not
know what is was about."
Another statement in the Washington Post, on the same date:
"Eccles spoke for himself alone, Truman explained."
Now, I spoke entirely for a unanimous Board in presenting that
program, and that program that was presented then was identical
with the program that is now presented, with the exception that it
included nonmember banks. That is the only difference.
Mr. S M I T H . Mr. Eccles, it would appear that you are in disagreement with the President on his recommendations, that they would
have the effect of still further inflating credit; is that correct?
Mr. ECCLES. Well, I mentioned this morning that it seemed to me
that the President's program was more political than it was economic.
As I see an economic program to deal with inflation, it should be the
type of a program that does not increase purchasing power or increase
the money supply but should be the type of a program that certainly
tries to hold it m balance or reduces, if anything, the money supply.
Now, certainly that program does not do that. And I would say
this for the Republicans' answer: that that, likewise, is a political
answer; and, as I said before the committee this morning you cannot
meet these economic programs without facing the economic facts of
life. And we are where we are because for 3 years since the war
ended we have, I think, given too much consideration to the various
ressure groups—and nobody, of course, likes to stop inflation for the
enefits that they may get, as I said this morning.
A boom is a pleasant sort of a thing for the majority of the people.
Unless we face up to the economic aspects of it, why, of course, it is
going to continue to run its course, and it can continue to go for an
indefinite period if bank credit continues to expand—that is, more
money—-and budgetary deficits continue to grow.
But to say that we are going to get a bust next week or next month
or next year or the following year—you cannot say. The thing can
go on for a considerable time. And the dollar can continue to be
devalued and devalued and devalued. So that, when a deflation
finally does set in, you have wiped out, as has been done in many
29
countries in the world with which you are familiar, the middle class
of people—their savings, their insurance, their pensions. You have
wiped out about only half of i t now. But you can continue the
process until you wipe out that much more. And when the adjustment comes, certainly the debtors then—that have gone into debt in
the inflationary period when the dollar was worth little—will be
put to a terrific test; and you will get widespread bankruptcy in a
deflationary period, and the state will have to intervene.
When that, time comes it will have to intervene at levels perhaps
even higher than these. That may well be if the deflation goes long
enough. You cannot go back to 1940, no matter what; and I do not
think that now the economy could stands the deflation that could
take you back to 1945. I do not think that is possible now. I f
this thing continues, and you get a further devaluation, the present
levels could look low to you, and they may well be levels below which
a deflation could not carry you because of the unemployment and the
bankruptcy that deflations create.
I just mention that to point out the seriousness of the inflation that
has already been created since the war, and the Federal Reserve Board
does not want the responsibility—and is not going to take it because
we have time and again sent our reports out.
I have made statement after statement; the Board has made statement after statement to the Congress, to the public and to the Administration—and the record is there.
I am particularly glad, at this time of my demise as chairman, of
the opportunity of upholding the record of this Board. I t is a
voluminous one, and a good one, and I will stand on the record before
these committees and before the public.
Mr. S M I T H . Mr. Eccles, you are taking this thing very seriously,
and I appreciate it. I think it is a very wholesome thing for tms
committee to realize that a man in your capacity, and with your
knowledge of the finances of the Nation, really regards our situation
as being critical and dangerous.
I do not suppose I am overemphasizing that, am I?
Mr. ECCLES. I have been pointing out that i t was a critical situation that we were developing for a long while.
Mr. S M I T H . Now Congress ought to do everything in its power to
hold down expenditures, should it not?
Mr. ECCLES. I t certainly should.
Mr. S M I T H . Even if it is only a dime?
Mr. ECCLES. Absolutely. They should set an example of saving
to the public.
Mr. S M I T H . All right.
Now the President recommends that we spend some money—
?uite a sum of money—to build a structure in New York City for the
Inited Nations to house Stalin's agents. I have figured out that the
project, under our present system of financing, status of the debt,
foreign policy, and so forth, the United States would pay most, if not
all, of the cost whict would not be $65,000,000, but could reach twice
that figure at the end of 34 yews, the period fixed for its repayment.
Do you think it wise for the Congress of the United States to provide
that money, particularly at this time?
Mr. ECCLES. Well, I do not want to say whether the providing of
that particular money is justified or not. I am not sufficiently familiar
with the arguments and with the debates upon the question.
30
Certainly, no matter what the situation is, the Government, in
every period, must spend some money. Now, whether that is some
of the money that could be cut out, or whether some other money
could be cut out, it seems to me the appropriations committees or the
Administration, who are making the suggestion, are better able to
judge what the expenditures in the budget should be made for.
I would not want to say that you should cut that money for that
building or that you should cut some other particular expenditure.
All I am saying is that, in the overall, certainly, if we do not find a
way of reducing the budget or increasing the income, we are not going
to do very much as an anti-inflationary measure in the fiscal field.
Mr. K I L B U R N . Will you yield, Dr. Smith?
You said in your statement that the budgetary deficits were increasing?
Mr. E C C L E S . No. I did not say that. What I meant to say was
that the budgetary surplus was disappearing, and there is every indication that we will run into budgetary deficits. And I went on to mention, this morning, that if we carry out the military expansion program
and other obligations that are being discussed
Mr. K I L B U R N . There was a budgetary deficit every year up until
last year, when the Republican Congress* came in.
Mr. E C C L E S . N O ; you had a surplus in 1946. I n the fiscal year
1947 you had the biggest surplus, the country has ever had—in the
fiscal year just ended—but you likewise had a surplus in the fiscal
year ending in June of 1946* You had a substantial surplus in the
fiscal year ending June 30, 1947, as well as this year.
Mr. S M I T H . Air. Eccles, those of us in Congress, after all, have to
use our efforts to cut the budget, and we have got to cut where we can.
If you do not care to express yourself on this United Nations tower
of Babel, that is all right.
Mr. E C C L E S . Well, I will express myself on that. Maybe I should
not, without knowing more about it, but at least my first hand feeling
is that that is something that could be deferred; that the United Nations seem to be housed in a manner in which they can operate.
Mr. S M I T H . Mr. Eccles, you are one of the most forthright and honest persons in the Government with which I have come in contact
since I have been in Washington. I have the utmost faith in your
integrity.
Mr. E C C L E S . Thank you, Dr. Smith.
Mr. N I C H O L S O N . Yes. But, Dr. Smith, where does it leave us?
We are just where we were when we started out.
You are asking us to do one thing, on the one hand, and do something, on the other, that is just exactly the opposite, and I cannot
understand it. I cannot understand how it can be done. We either
do one thing or nothing. But you ask us to do two things. One, to
build houses, for instance.
Mr. ECCLES. V Who asks you?
Mr. N I C H O L S O N . Well, the people who come before this committee.
Mr. ECCLES. I know; but you said "you ask us," as though it was
the Federal Reserve or as though it were me.
Mr. N I C H O L S O N . Well, as I understand it, the Federal Reserve,
under the proposition that is before us, wants to take control of the
whole banking situation.
Mr. E C C L E S . NO. We already have certain controls. All we want
to do is to have given to us additional authority so as to be able to
31
put some mild, I would say, restrictions upon the banks of the country insofar as their iurther credit expansion is concerned.
Mr. N I C H O L S O N . Are they all member banks?
Mr. ECCLES. N O ; they are not all member banks.
Mr. N I C H O L S O N . D O you want to force banks who are not members
to become member banks?
M r . ECCLES. N O ; w e d o n o t .
Mr. N I C H O L S O N . Or to stop competition?
Mr. ECCLES. N O ; we do not want to force
them in at all.
"What we are doing, by this proposal, is to not further expand the
discrimination that now exists between the national banks and member banks and nonmember banks—and that discrimination is very
substantial.
We started on that this morning when adjournment took place,
and I would like to cover that further. I would like to put into the
record a list of items of discrimination that already exist and that
already weaken the system, and if this further restriction is put on
member banks—and the nonmember banks are left free—it will be
only adding another discrimination, which is certainly a major one.
I t is possibly more important than nearly all the others put together,
because when you tie up 10 percent of the deposits of one group of
banks that already have a much larger percentage of their deposits
tied up, because they are members of the System, than nonmembers,
then you can readily see that a lot of banks are going to get out of
the System. And, to the extent that ypu leave loopholes in our
banking structure, you are unable to make an effective thing out of
control and regulation.
I t seems to me that at the present time—and the record shows it—
the nonmember banks have an earning power of 2.58 and the members
2.01 percent. That already is true because the reserve requirements
of members, the amount of cash they have to carry, and tne balance
which they carry with correspondents are possibly twice those which
are carried by tne nonmember.
Mr. N I C H O L S O N . SO that the nonmembers can buy this short-term
stuff a great deal easier than a member bank can.
Mr. ECCLES. I t can. They can make loans.
Mr. N I C H O L S O N . Yes. And it creates a competition, there; where
the nonmember can take up, according to your figures, almost 1 percent of short-term loans.
Mr. ECCLES. But what happens* here is that we do not want the
banks to expand either their loans or their investments. I mean,
we want to curb their loans and investments to the extent that you
could increase their reserve requirements, say, 10 percent, and that
would take 10 percent of their total deposits. Ten percent of their
total deposits would require them to dispose of, to the Federal Reserve, about 20 percent of their Governments.
Now, they are not going to like that ; and unless they can get higher
rates on what they have left, or on their loans, it will affect their
earnings; and that is 'one of the reasons why we want the short-term
rate to go up. But the very fact that the holdings of their Governments have been very substantially reduced, reduces their liquidity
and reduces very greatly their desire to expand credit.
Now, I do not believe it would be necessary to put all this power
into effect at once. I think the very fact that the Reserve System
32
could make that apply to all banks means that the banks are going to
keep as liquid as they can in order to meet that requirement and they
would -hesitate to be selling their Governments for the purpose of
making loans. So that its effect would be one of restriction—just the
very fact that the authority did exist.
If you exclude the nonmember bank you are going to induce
national banks—because of the desirability, because of the advantage they get—to get out of the national banking system, and, therefore, you weaken the whole Federal System; and you, in turn, would
increase the number of state nonmember banks.
Many of the state banks that are now members of the System will
be tempted to withdraw from the System because of the disadvantage,
because of the penalty and because of the discrimination imposed on
them because they are members of the System. And I have here a
whole list of matters—items of discrimination that already exist;
and this Congress, or the American public, cannot afford to weaken
the Federal Reserve System in any manner.
I t does not seem to me to be good judgment to say, on the one hand,
that you are going to increase our power and then, on the other,
exclude the nonmember banks, so that you weaken it because of the
discrimination.
There is nothing unusual in applying it to all banks. And I want
to call the committee's* attention to a special report that was sent
to the Congress on January 1, 1941. That is very important now
because of the opposition of the Federal Advisory Council and the
opposition of some of the bankers.
This report was sent to the Congress with the unanimous approval
of the Board of Governors, the presidents of the 12 reserve banks.
This report was sent to the Congress, and in this report it was proposed,
among other things—
that Congress provide means for absorbing a large part of the existing excess
reserves, which amount to $7,000,000,000, as well as such additions to these
reserves as may occur in the future.
As I indicated a while ago gold imports had been coming in at that
time because of the devaluation policy. The Federal Reserve had
Governments that they could sell in tne open market to absorb the
excess reserves, and the net result is the banks had added to their
deposits $7,000,000,000, by the gold imports, and on the opposite
side of their ledger, they had $7,000,000,000 of idle excess reserves, so
that the supply of money was so great—excess money—and the
demand was so small for credit that the Government was able to
borrow on bills at the zero interest rate, and the rates on private
credit were exceedingly low. The banks were so much concerned
about their solvency and their earnings that they favored, in the
council, all of whom are bankers, authority to increase the reserve
requirements of all banks to the extent'of doubling the then existing
authority, which instead of being 10 percent as now proposed by us,
would have been approximately 20 percent.
That is what they proposed in order to absorb these excess reserves
and get control of the money market and raise the rates.
What happened? The banks still have the effects of that gold
inflow invested in Government securities. The banks, when the Government began to finance deficits, immediately had available to them
a market for their excesses, and they bought Governments. They
33
were able to take care of the expansion of the currency. So that as
long as the public debt is the size that it is, with the large amount of
Governments available, and the demand for credit available, the banks
have no excess reserves, they have not had excess reserves for years,
and they are never likely to have any excess reserves when there is an
opportunity to buy Governments. Those Governments are just the
same as excess reserves so far as their liquidity is concerned, or there
ability to extend private credit and create additional money supply
because they can sell those Government bonds, and they get the
reserves with which to extend the credit.
So I say, that they are not consistent
Mr. NICHOLSON. Well, they could not do it if everybody did it at
once, could they?
Mr. ECCLES. They are only going to sell the bonds to the extent that
they get demands for loans because they want to get interest on Governments until they can get a better rate on something else. So there is
no problem of everybody doing it at once, because it would mean that
people were just marketing an interest-bearing Government bond
to take a non-interest-bearing, idle deposit, unless they had some
other place to put it.
Where you may well get a flood of selling would be if there was an
indication of dropping of the market price. Those holding securities,
trying to get the best price, thinking in terms of what happened after
the last war, when 4% percent totally tax-free bonds went to 82, you
can well imagine what an avalanche of sales might then develop because they would want to try to get the best market, and that is one
of the reasons and one of the best reasons why we have to stabilize
the market, and why we have to maintain the long-term rate.
Mr. SPENCE. What was the bonded indebtedness of the United
States at the time the bonds went to 82?
Mr. ECCLES. Something around 2 4 to 2 5 billion dollars. I might
ask this question: If Government bonds, totally tax exempt, yielding
a rate of 4% percent, without any support by the Federal Reserve
System, could go to 82 or 83, then when our national debt was $25,000,000,000 only, the query is, where would a 2% percent fully taxed
bond, taxable bond go, if the Federal Reserve withdrew from its support, when there was a debt of $ 2 5 0 , 0 0 0 , 0 0 0 , 0 0 0 ?
Mr. SPENCE. I just do not know. But I am ju&t giving you a
picture of the relative size of the debt and of the difference in the
interest rate.
Mr. T A L L E . Mr. Chairman.
The C H A I R M A N . Mr. Talle.
Mr. T A L L E . At the outset, Mr. Eccles, I want to thank you for a
clear, detailed and wTell organized presentation.
Mr. ECCLES. Thank you.
Mr. T A L L E . There are two points I would like to raise. The first
has to do with the nonmember banks. In the event we overlook the
question of constitutionality, as to whether there is authority or not—
let us wraive that for the moment—and assuming that we did enact
a law to require the nonmember banks to increase their reserves by
the percentage stated, and in the event that those banks chose not to
comply, what would be the penalty or the sanction that would be
imposed on them for noncompliance?
34
Mr. ECCLES. I think possibly the same sanction that is imposed
upon the member banks for noncompliance. I n the case of the member
banks, where they are deficient in the reserve, there is a penalty in
the form of an interest rate on their deficiency. There is no limit in
the statute as to what that penalty can be, as I understand it. They
are permitted to average their deposits over a period of a month, in
the case of the country bank, and 2 weeks in the case of the Reserve
city banks, and 1 week for the central Reserve city banks. This is
permitted in order to have the needed reserve requirement every day,
these banks would have to carry an excess. Therefore, we permit
them to average it over a peak. This would likewise, I assume, and
certainly should, apply to the nonmember banks in the same manner.
The nonmembers in the Reserve cities and the country banks should
be able to average in the same manner as their competitor member
banks would average them and the same penalty for deficiencies
should apply.
The difference would be that the nonmember banks, we would
expect, would be supervised and policed by the State banking commissioners. The Federal Reserve has a very close relationship with
the State banking commissioners because we have around 2,000 State
banks which are members, and because of that fact we work with
them in connection with examinations and regulations, decentralized
down to each Federal Reserve district and branch.
We do not duplicate the work of examination. We arrange with
them, as a general rule, that they will make one examination and we
make the next examination. So that this relationship with the State
nonmember banks, through the State banking commissioners, is not
a difficult thing to accomplish. As I indicated this morning, we have
had a relationship with these nonmember banks in connection with
the other regulations that have been given to the board over them,
Mr. T A L L E . In the case of a State member bank, would the Federal
Reserve System have the right to expel i t fi;om membership in the
system in the event it did not comply.
Mr. E C C L E S . We would not do it for that reason because we would
put the reserve penalty on them and that is all that is necessary.
They are not going to pay a rate of 4, 5, 6, 7 or 8 percent, for money,
if they are getting 3 or 4 percent. They are just not going to pay
any such penalty. So there is no question of expelling.
The Reserve System does have a considerable power to expel banks
from the system. As to just what those powers are, I am a little
hazy.
Mr. T A L L E . Could the Federal Reserve Board reach a nonmember
bank, influence a nonmember bank indirectly by working through
the nonmember banks' correspondent bank which was a member of
the Federal Reserve?
Mr. ECCLES. N O , you cannot reach them that way. You mean
by permitting a nonmember to carry the balances with the correspondent bank?
Mr. T A L L E . I was thinking of whether the Federal Reserve Board
could work through a national bank, which was large enough to be a
profitable correspondent bank for, let us say, a country nonmember
bank?
Mr. E C C L E S . I do not know hpw we could in this regard.
35
Mr. T A L L E . I t would be a rather devious method, at any rate?
Mr. E C C L E S . Yes, sir; the difficulty is that if the country bank
carried its balance, its increased requirement, in a correspondent bank,
then that correspondent bank in turn would have to carry a reserve
against that balance. That is what we call inter-bank balances, and
tnat is one of the processes of pyramiding. One of the best arguments
for a unified banking system—and that is what was conceived of in
the early days of the Federal Reserve Act—of course, was to get all
banks into the Reserve System and to increase the importance of the
Reserve System on the basis of par clearance and the facilities of collections. But naturally the reserve city banks and the correspondent
banks, those who fought against the Reserve System in the beginning,
have continued naturally to resist any action on the part of tne Federal Reserve that might tend to reduce the balances that they get
from their correspondent banks, upon which they only have to carry
20 or 25 percent reserves.
Therefore, the reserves of a nonmember bank that met the reserve
requirements of the State bank commissioner, when they get over
to a correspondent bank, those reserves become deposits and that
correspondent bank has money to loan, can loan those reserves, except
that they must carry against those deposits a certain amount of
reserves.
But we are not trying at this time to interfere, any more than is
necessary, with the correspondent bank relationship. We are not
doing anything to compel membership in the Reserve System. We
are merely faced with a problem here of what to do to put some
pressures upon the banking system, as a whole, and for it to be
effective and not weaken the System, the nonmember banks must be
covered.
I mean pressure so as to restrict their credit expansion, to hold it
down. There is nothing in this proposal that would bring about or
force a credit contraction. I t may be too mild. I t may be altogether
too mild to have very much effect, because if the banks own
$65,000,000,000 of governments, and they could sell $10,000,000,000,
to meet the requirement, they still have a huge potential for credit
expansion.
I just wanted to show that this proposal is not very onerous and is
not very restrictive, because they would still have, even if they met
the increased requirement, the possibility of selling $10,000,000,000
worth of governments, and would still have $55,000,000,000 of
governments left.
There has been some talk about a compromise then on this bill,
and only making it 5 percent. Well, I would say that the 10 percent is
still not a very restrictive requirement in itself. Yet I do think that
for the present it may be sufficient.
The C H A I R M A N . $12,000,000,000?
Mr. ECCLES. $11,000,000,000.
As I say, they have got
$65,000,000,000 worth of governments. They could sell the
$11,000,000,000, taking the system as a whole, and have $55,000,000,000
left. They could sell $5,000,000,000 of the $55,000,000,000 and
then expand on that; with this increased requirement, it reduces the
multiple credit expansion, which is desirable. I t would reduce the
multiple credit expansion from about 6 to 1 now to about 4% to 1.
Now, every dollar of reserve is the basis for $6 of credit expansion.
36
With this requirement every dollar would be a basis of 4% dollars of
credit expansion. That is with the amount that is proposed.!
But, as I said, the banking system as a whole will still have an
awful lot of governments left, and they could sell $5,000,000,000 and
still get a considerable expansion of credit.
I am not saying that they would do that. I think if you raised the
short-term rate, and you had the power to put this 10 percent additional on, that the desire of the banks, under these conditions, would
be to try to keep liquid, based on the experience of the thirties, and
that might well restrain credit expansion. I t certainly would make
them extremely selective and very cautious and would put much
more restraint on than any voluntary program can or would put
upon the banks. I just hope that if anything is going to be given
to the board it would not be an amount that would be completely
inadequate, because the whole question of the use of this is, as I said,
supplementary to other things, but at this time, I believe it is desirable and possibly the most helpful thing that could be done in a
hurry to help hold the line.
The C H A I R M A N . Will you yield, Mr. Talle?
Mr. T A L L E . I yield to the chairman.
The C H A I R M A N . Th,at brings us right back to this question, as to
how you are going to use, immediately—how much of this power you
are going to use immediately.
Mr. ECCLES. We may not have to use any, Mr. Chairman. I t
depends upon whether the banks make that necessary. I t depends
upon two things: I t would depend upon the extent to which we had
to buy bank securities from nonbank investors, the extent to which
gold flowed in. Those two factors alone will add to excess reserves
in the banking system. These excess reserves, if the banks continue
to expand credit, should be sterilized by some increase in the reserve
requirements to meet that excess that was created, and if the banks
then continue to expand credit and sell us governments, we should
again raise the reserve requirements to sterilize the effect of such
bonds as they sold.
Now I can only say that you would have to use this authority
based upon the conditions that would develop, and conditions that
would develop after we had such authority may be different from
the conditions which exist if we do not have the authority.
The C H A I R M A N . If we gave you 10 percent additional authority,
and you put it on tomorrow or the next day, what would be the effect?
Mr. ECCLES. Nobody would think of putting it on in any such a
manner, when the banks do not have idle balances. When we increased reserves in 1937 the idle money was already there. They
did not have to sell anything to get it or collect a loan to get it. The
reserves were there and with all the increase we put on they still had
an excess and the short term rate never went above half of 1 percent.
The C H A I R M A N . I have a letter here to the effect that it is going to
interfere with respefct to reserves. This comes in from the economic
adviser of some of this country's leading corporations which have assets
of over 75 billions of dollars and he goes on to say this:
Suppose the Congress should give the board power to raise reserve requirements
and the board should raise them. Then the commercial banks would either sell
Government bonds or call commercial loans. I n the first instance the board
would either buy the bonds and in so doing raise the reserves of the banks and,
37
believe it or not, actually negate its previous action, or banks would become
insolvent and our new President, M r . Dewey, as M r . Hoover, would be a victim
of the Reserve Board's stupidity.
I f the banks call commercial loans, consumer goods would be sacrificed in the
markets, and then production of these goods would decline.
Immediately the demand for industrial equipment and other capital goods
would decline, and the country would enter the vale of depression.
I t makes me sick to think that we might have to return to such conditions that
ultimately would lead us to state capitalism or communism. The imposition of
increased reserve requirements would force me to advise these clients to liquidate
their holdings of Government bonds and prepare for depression.
Mr. ECCLES. "Well, of course, there is nothing new about that letter.
We would get plenty of opposition. I n the first place, what that
fellow says just is not true.
The Reserve System is not going to be so stupid as to overnight
increase the reserve requirements of all banks in the country 10 percent, so that they are forced immediately to sell $11,000,000,000 worth
of bonds.
The C H A I R M A N . Let me put this question to you: How much do
you think the reserve is apt to be raised in the next 6 to 8 months?
Mr. E C C L E S . I could not even guess-that for the very reasons that
I stated. From the very fact that it was there, the banks would
undertake to pursue a credit policy—I know I would if I were a
banker—so as to meet that requirement, exactly the same as I would
meet it if it were in effect. I would set aside enough of my Governments to say, "Well, now, if they increase reserve requirements, those
Governments will be sold, so I cannot count them. That is not part
of my liquidity. That is not available for me to dispose for lending,"
and I would consider my lending policy, and I would consider the
credit policy I would pursue on an assumption that I might be required
at any time to meet that requirement.
If banks actually do that—certainly nobody wants to take away
from the banks earning assets—if they will pursue a policy of a nongeneral expansion of credit, if they will pursue a policy with the
money they have, and the reserves they , have received from gold
imports, and the money that went into them, from our purchase of
nonbank securities, of buying from the Federal Reserve the shortterm securities that they held, certainly there would be no necessity
or desire to impose a requirement on them that would require them
to dispose of earning assets.
But if, on the other hand, they do as they are now doing, and as
they have been doing over the past 2 years —taking the year as a
whole—expanding their credit and thus increasing the supply of
money when we already have an inflationary condition, and a voluntary scheme does not stop them from doing so, i t would be up to the
Federal Reserve, after getting a raise in the short-term rate, to
increase the reserve requirements, slowly, as the conditions warranted.
Now, I am only one member of the Board. I cannot speak for the
others. But I am just telling you that is the way I would look at it
and, based upon my experience in dealing with these problems—and
I have had considerable both as a private banker, over a period of 20
years, and as a Reserve official tot 14 years—that is the way I would
do it.
The C H A I R M A N . Thank you.
Mr. Talle.
38
Mr. T A L L E . Another question I have in mind, Governor Eccles,
has to do with the gold reserve requirements back of Federal Reserve
notes and Federal Reserve bank deposits. Historically, they were
40 and 35 percent, respectively, until June of 1945. Of course, I
realize certificates have been used in lieu of gold since 1935.
Mr. ECCLES. That is correct.
Mr. T A L L E . But the change was made from 4 0 percent and 3 5
percent to an even 25 percent for both, in June of 1945. Would it
not be desirable to move back to the larger percentages, under present
conditions?
Mr. ECCLES. I do not think that would be desirable. I think i t
would do no immediate good and may well give the public a feeling
that it was an anti-inflation action whereas it would not be effective,
and it would not do any good for the present.
A t the present time the reserve requirements, if they were increased—the gold reserve requirements—if they were increased to
35 and 40, respectively, on currency and bank deposits with the Federal
Reserve banks, i t would require $16,069,000,000. The excess of
gold now held by all of the Reserve banks is $5,717,000,000. But, as
a practical matter, the excess amount is $4,642,000,000, because in
practice we have found that you cannot get closer than 3 percent to
the limit. There is an operating ratio. So that I would say that if
we increase the reserve requirements to 35 and 40 percent, you would
have $4,600,000,000 of excess reserves. Therefore, there would be
no pressure whatsoever upon the ability of the Reserve banks to
expand currency to meet the public demand for currency, or to purchase Government securities in the market, or to make loans to
member banks in order to provide reserves.
I f the excess amount that I have mentioned disappeared, as it was
used up, through an expansion of current, or if inflation continued,
or through an expansion of the purchase of Governments by the Federal
Reserve System in the support of the market, then you would be up
against this problem: The Federal Reserve System would be entirely
unable to help the Government in its refunding operations, would be
entirely unable to support the Government market, and we would
likewise be unable to meet the increased demand for currency from
the member banks whose customers required currency, and we would
have to come back to the Congress, as we did before, and say to the
Congress: "You must reduce the reserve requirement because if you
do not reduce the reserve requirement, the possibility of a collapse
in the Government bond market that should eventuate, or our inability to supply the banks with currency, and, in turn, their inability
to furnish it to their customers would seriously impair the whole
banking system," and I am sure that the Congress would merely
reduce the requirement again. But it does not make very much
sense, it seems to me, to try to control the expansion and the contraction through the medium of an indirect gold standard. That is really
what we are trying to do, and when we say we want to impose that
reserve requirement, there is a much more honest and a much more
direct way of dealing with the problem. I t would amount to this:
As the excess reserve got close to the limits, the smart people, the
people that understood the restrictions, would immediately say:
"Well, the Federal Reserve System Open Market Committee now is
limited, in its purchase of Governments. They will not be able to
39
buy more than another billion dollars or another $500,000,000. Their
limit is there. Or perhaps $2,000,000,000."
So the big boys, the insurance companies and others, might say,
" I think we had better sell our securities to the Federal Reserve System while we know that they are able to support the market," and
you may well have enough sale of Governments that they would use
the excess reserve they held rapidly, whereas others would not use it
at all, but the very fact that it had a limitation, the very limitation
itself, could induce a lot of selling of Government bonds, which certainly would be undesirable and unnecessary, and I see no value whatever in changing to that, except if the Congress indirectly wanted to
say to the Reserve System, "You shall not support the bond market."
Or if they wanted to say, "We are going to put you in a position
where you cannot support the public credit."
I say the much more honest way to do that is to say, "Do not
support the 2% percent rate," and the other way is not to vote for
appropriations or for tax reductions that create budgetary deficits,
but support budgetary surpluses, so that the question of the Government being able to take care of its refunding, can be accomplished
without any help from the Reserve System. That is really the direct
way of getting at it.
This is a Mr. Spahr idea. I think Mr. Burgess also makes a point
of it. I disagree fully and completely with both of them, and although
Allan Sproul and I disagree on some things, we agree completely and
fully on this issue, and so do all of the economists of the Reserve
Board and the economists of the banks and all the presidents. And
the people who talk about this one are what I call a few gold standard
money cranks.
Mr. T A L L E . I recall, when the change was made in 1 9 4 5 , that it was
argued by some people in the administration that deflation was just
around the corner and that lower reserves would permit a greater
expansion of money and credit. This feared deflation did not occur
however. Quite the opposite development did occur, and now we are
faced with rapidly increasing inflation. Should not then, in line with
the administration's theory of 1945, the larger percentages be restored?
Mr. ECCLES. That is fine, but let us bring the public debt down.
The idea is you want to go back with these figures but you do not
want to go back with the public debt. The action of Congress just
recently would indicate that there is no intention of reducing the
public debt, and, therefore, it is no time now to change the item.
When you reduce the public debt substantially, then you can talk
about changing the ratio that was reduced in order to help meet the
expansion of the public debt.
There is just one other point I would like to make—and this is a
practical operating point—unfortunately, each of the Reserve banks
is required to carry gold and Governments against its particular
deposits and against its particular issue of currency. That, in one
sense, we have 12 central banks. Some day I hope that can be
changed. I argued before the appropriate committee of Congress
in 1945 that the currency of the various Reserve banks should be
interchangeable. We showed that i t would save hundreds of thousands of dollars a year in the shipments of currency. We got nowhere. But now the very fact that we have, in 12 separate compartments, currency issues, gold reserve requirements, and Government
40
bond portfolios, means that some banks may have a deficiency in
gold, where others have a large excess.
Now, as a matter of fact, if you should increase reserve requirements—gold reserve requirement, that is—to the 35 percent and the
40 percent, respectively, and we maintained a 3 percent operating
margin, as of July 31, there would be 4 banks that would be deficient
in gold reserves, even though the 12 banks had an excess of $4,600,000,000. That would make it an extremely inconvenient operating job
for no useful purpose.
Mr. T A L L E . Are the deficits large?
Mr. E C C L E S . N O ; they are not large.
Mr. T A L L E . I think for June they amounted to a little over
$105,000,000.
Mr. ECCLES. Well, they are not large. I n fact, they are comparatively small. New York, as an example, 1 bank, has almost half of
the entire excess. I have here a statement with the arguments on this
issue that I would like to put in the record.
The C H A I R M A N . Y O U may put it in the record.
(The document referred to is as follows:)
Restoration of the previous ratio of required gold certificate reserves held by
Federal Reserve banks of 40 percent against Federal Reserve notes and 35 percent against Federal Reserve bank deposits has been proposed to your committee
as an anti-inflationary measure. This proposal would make no contribution whatever to the fight against inflation. I t would not sterilize new acquisitions of gold
nor would it give the Federal Reserve {System any additional powers to curb
inflationary expansion of bank credit.
The present reserve requirements* of the Federal Reserve banks stand at a
uniform level of 25 percent. Congress established them at this level in consequence of the wartime expansion of currency and Reserve bank credit. The
previous requirements of 40 percent against notes and 35 percent against deposits,
incorporated in the Federal Reserve Act of 1913, were largely arbitrary.
T o restore the prewar levels now would only entail needless operating difficulties
for some of the Federal Reserve banks. The combined banks at present hold gold
certificates amounting to 50.6 percent of their total note and deposit liabilities,
or approximately $6,000,000,000 in excess of the proposed higher requirements.
Thus, they would not prohibit Reserve banks from providing member banks with
additional funds on which to base a considerable further expansion of bank credit.
I f Reserve banks were to be prevented by this device from issuing currency
and member banks were thus unable to supply currency to their customers, i t
would precipitate the kind of money panic which the Federal Reserve System
was created to prevent. Likewise, if the Federal Reserve System, because of an
artificial limitation, were unable to supply credit to member banks, the results
could well be demoralizing in the Government bond market.
Although the Reserve System as a whole has gold certificate reserves in excess
of the proposed higher requirement, there is considerable variation among individual Federal Reserve banks. As a practical operating matter, these banks
cannot permit the ratios to go down to the vanishing point and hence require
a working margin of at least three percentage points.
I f the higher requirement were restored, some Federal Reserve banks would
have a substantial deficiency, others would be below or close to the necessary
operating margin, while still others would have a large excess.
Reserve banks with a deficiency would be obliged to sell some of their Government securities to or to borrow from Reserve banks which had an excess. The
reserve position of the individual Federal Reserve banks is constantly changing
with seasonal and other movements of funds in the economy. Therefore, the
proposal would entail operating difficulties and constant inconvenience without
accomplishing any useful purpose.
Expansion or contraction of Reserve bank credit should be determined by the
needs of the economy and not by the amount of gold certificates which Reserve
banks happen to have, which in turn is contingent upon international movements
of gold.
41
Likewise, inability to supply credit to member banks would compel the System
to withdraw support from the Government securities market and perhaps even to
sell securities which it now holds at whatever prices or yields they would bring in
the market.
The Reserve banks do not control the amount of currency which the public
wishes to hold. I t is the depositors of the banks and the recipients of checks who
determine the volume of outstanding currency. They create the demand and
member banks come to their respective Federal Reserve banks to obtain such
amounts of currency as their depositors or others presenting checks may desire
to have.
I f the Reserve System were unable to meet demands for currency it would
jeopardize public confidence and might lead to runs on banks and to hoarding
of currency, such as occurred in 1931.
I t is already within the System's power to invoke such drastic measures. The
System has rejected such a course because of the possible disastrous effects on the
entire financial situation of the country.
The proposal would appear to be designed to force the Federal Reserve System
to abandon support of the Government securities market and thus bring about
sharp increases in interest rates. I t is inconceivable that Congress or the public
desire either to create a run on the currency or collapse of the bond market. I f
that were the will of the majority, it should be done openly and frankly and not by
indirection.
Excess Gold Certificate Reserves over requirements of 85 percent Gohi Certificates
Gold
y
against deposits and 40 percent against Federal Resert >e Notes, July 81,1948
Reserve Notes, Jul
[ I n thousands of dollarsl
Total required Excess of gold
reserves (35
certificate reand 40 percent)
serves
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta..
Chicago
St. Lonis
Minneapolis
Kansas C i t y
Dallas
8an Francisco
-1
-
Total
894,530
4,550,294
997,087
1,362,301
960,567
830,445
2,889,077
699,705
439,810
708,449
579,575
1,777,952
-16,063
2,534,050
75,232
152,012
112,849
243.526
1,521,868
-60,623
51,992
154,123
-1,472
949,514
16,689,793
5,717,008
Mr. ECCLES. I would also like to put in the record the statement of
the more important points of discrimination between member and
nonmember banks. I will supply that for the record later.
Mr. T A L L E . I would like to have that statement inserted in the
record, Mr. Chairman.
The C H A I R M A N . Without objection, that will be done.
(The document referred to is as follows:)
S O M E OF T H E M O R E I M P O R T A N T H A N D I C A P S U P O N M E M B E R S OP T H E F E D E R A L
R E S E R V E S Y S T E M AS C O M P A R E D W I T H N O N M E M B E R S
1. Reserve requirements are more onerous for member banks than for nonmember banks. Member banks are required to carry certain percentages of their
demand and time deposits respectively in noninterest bearing balances with the
Federal Reserve banks. Apart from these required reserve balances, member
banks have to carry vault cash to meet deposit withdrawals and some balances
w i t h correspondent banks, none of which can be counted in fulfillment of statutory
Teserve requirements. Nonmember bank reserve requirements not only may be
lower in amount but may usually consist of vault cash and balances carried with
city correspondents, who may render services that are not available at the Federal
Reserve banks. I n some instances and to some extent reserves of nonmember
42
banks may be invested in United States Government and other specified securities.
To a considerable extent, therefore, nonmember banks receive direct or indirect
compensation for a substantial part of the reserves which they are required to
carry under State law.
2. Nonmember banks may receive immediate credit for checks cleared through
their correspondent banks, whereas credit to member banks for checks cleared
through Federal Reserve banks may be deferred from 1 to 3 days for out-of-town
items.
3. Member banks are prohibited from charging exchange on checks received
from Federal Reserve banks for collection and therefore are deprived of revenue
which might otherwise be obtained from this source. Many States permit such
charges to be made and there are at least 2,000 State banks that make such
charges regularly. Member banks are at a competitive disadvantage particularly
as compared with some nonmember banks in their dealings with country bank
correspondents because nonmember banks may follow a practice of absorbing
exchange charges for their customers, whereas member banks are not permitted
to do so.
4. I n most States, those having a population of a million or more, a national
or State member bank must have a minimum capital of $500,000 in order to
maintain a branch outside the city in which it is located. This is not required
of nonmember banks. Even where branches are not involved minimum requirements for capital are frequently less for nonmember banks than for member
banks.
5. There are much greater Federal restrictions on-investments and loans of
national and State member banks than in the case of nonmember banks.
6. There are certain Federal restrictions on holding companies and interlocking
directorates which are not applicable where only nonmember banks are involved.
7. Any State nonmember banks is free to choose whether its deposits shall be
insured by the Federal Deposit Insurance Corporation and therefore can save
the substantial cost of the assessments for such insurance but member banks
have no such choice.
M r , T A L L E . I n that connection, I would like to ask one question:
I f you look at total deposits, they are small, are they not, for the
nonmember banks?
M r . E C C L E S . That is right, they are a billion and a half, as against
about 9 billion dollars.
M r . T A L L E . About 1 5 percent?
Mr. E C C L E S . N O , that is the reserves. I have got that right here.
All member bank deposits; if you exclude the interbank deposits—
that is, the demand and time deposits, not taking into account the
interbank deposits—is 110 billion for all member banks. For the nonmember insured banks—and I have not thought of making this cover
the uninsured banks, although it could do it, if Congress saw fit—I
could not make a good argument for not including them, but they do
not amount to much, the only argument being that they are such a
small amount—but at the same time there is no economic argument
for not including them—would be 19 billion dollars.
The important part about this is'that the 19 billion dollars would
get larger and the other would get smaller, because you offer every
mducement for banks to get out of the System—the State banksf
that is—and every inducement for the national banks to convert to
State banks, and you offer no inducement for them to come in. I ,
you are going to strengthen the Federal Reserve System and the
national banking system, there should be more inducements to
come in, and not less inducements, as this would bring about, if you
excluded the nonmember banks, that is, this proposed legislation.
Mr.
The
Mr.
T A L L E . That is all, M r . Chairman.
C H A I R M A N . M r . Monroney, do you
M O N R O N E Y . N O questions.
have any questions?
43
The C H A I R M A N . Mr. Folger?
Mr. FOLGER. Mr. Eccles, have you read the committee's bill
with reference to title I I , dealing with bank reserves? I t is a confidential print. I do not know that this is a bill.
The C H A I R M A N . There are merely some technical changes.
Mr. ECCLES. N O , I have not read the bill to which you refer.
Mr. FOLGER. I t refers entirely to member banks, defining the
four categories: Member banks in central Reserve cities, member
banks in Reserve cities, member banks not in Reserve or central
Reserve cities, and, fourth, all member banks, but no such change—
shall have the effect of requiring any such member bank to maintain a reserve
balance against its time deposits in an amount equal to more than 10 percent,
or a reserve balance against its demand deposits in an amount equal to more
than 36 percent thereof, if such bank is in a central Reserve city, 30 percent if it
is in a Reserve city, or 24 percent thereof if not in a Reserve or central Reserve
city.
What are the figures as they now obtain with respect to these several
categories?
Mr. ECCLES. Six percent, time deposits; demand deposits, 14 percent on the banks in non-Reserve cities; 20 percent, banks in Reserve
cities; 24 percent, banks in central Reserve cities, which are just two
cities, New York and Chicago. There is authority to increase those
reserves by another 2 percent.
Mr. FOLGER. That would make it 2 6 percent?
Mr. ECCLES. That means adding 10 percent to each of those
categories. That would make them, instead of 14 for example, 24;
instead of 20, 30; instead of 26, 36; and 10 percent on all savings,
no matter -what the category is in all three categories of bajiks.
Mr. FOLGER. I noticed, in the chairman's statement, that he refers
to his testimony before the Senate committee, and he says:
Since I presented that statement to the Senate committee, the Board has this
morning had an opportunity to meet and to discuss the proposed legislation at
length. The Board are agreed that the inclusion of the nonmember banks is essential to make the proposed legislation fully effective.
Do you know of that determination by the Board?
Mr. ECCLES. I certainly do. I was responsible for getting that
meeting. I will be glad to tell the committee just exactly what the
situation was.
Mr. FOLGER. That inquiry is a preface to this question:
That says in order to "make the proposed legislation fully effective."
That does not deal particularly with the discrimination that is urged
against now—and, I think, properly so—but it would be difficult to
make this legislation effective if you did not include the nonmember
banks, would it not?
Mr. ECCLES. That is right.
Mr. FOLGER. That woxnd have that effect?
Mr. ECCLES. I t would,
Mr. FOLGER. What is done with respect to nonmember banks now
with respect to their reserves? Does the Federal Reserve System
undertake to influence that?
Mr. ECCLES. Nothing whatever. And, as a whole, they are the
ones who have been, in proportion to their size, the greatest extenders
of credit. The central Reserve cities—New York and Chicago—in
relation to their size have been the smallest extenders of credit and
have been more responsive to the need for credit restriction.
44
Mr. FOLGER.. State member banks can withdraw from the System
at any time, can they not, by just a mechanical operation?
Mr. ECCLES. Yes, that is their privilege. I t is very simple.
Mr. FOLGER. National banks cannot-get out?
Mr. ECCLES. Well, national banks cannot get out of the System,
but they can get out of the national banking system and into a State
system, which would relieve them of this requirement. That is the
loophole.
Mr. FOLGER. They would have to convert themselves to State
banks?
Mr. ECCLES. That is right.
Mr. FOLGER. And then get out?
Mr. ECCLES. That is right. I would just like to say that I have
been in the banking business since 1913. I was president of two
banks in 1920. I was the president of a banking organization all
during the collapse of the year 1929 and thirties. That organization
owned 28 banks, both Reserve city banks and country banks. And I
would say this to the committee: If I were in the banking business today
and this restriction was imposed upon my bank as a member bank,
unless I had a very substantial amount of interbank deposits and I
had to have Federal Reserve connection for clearing, and so forth, I
would withdraw from the System because I would be able to maintain
smaller reserves by a considerable amount than are now required,
without the imposition of the increase, and I could put the saving in
those reserve requirements, as well as the reserves that I would be
carrying with my city bank correspondent, into short-term Governments.
Then this 10 percent that would be imposed upon me as a member—
I can likewise put that in Governments. So why would I need membership in the Federal Reserve for borrowing purposes if I had any
source of liquidity that I could thus create by getting out of the
Reserve System?
Mr. FOLGER. Mr. Eccles, I believe you—and, I think, other witnesses—have indicated that this proposed legislation is just conceived
as a supplementary aid to the reduction or minimizing of the inflationary trends or developments that have come about—wholly supplementary to the other things.
Mr. ECCLES. I tried, in my general statement this morning, to
make that point. I do not want to underemphasize its importance,
and neither do I want i t to be overemphasized and have the public
or the Congress expect too much and to think that this is by any means
a cure-all. I think it is secondary to a sound and proper fiscal policy.
Mr. FOLGER. To many other things that might be done?
Mr. ECCLES. I covered that this morning, Congressman Folger,
rather fully, and, if you would excuse me, I would like to avoid the
repetition.
Mr. FOLGER. I do not ask you for that. You mentioned the very
important fact that the fiscal policy and the budgetary system that
we have assure a surplus in the Treasury rather than a deficit.
Mr. ECCLES. During an inflationary period.
M r . FOLGER.
Yes.
Mr. ECCLES. IFT deflationary periods I am for deficits because you
need to put a cushion under the deflation, and the most effective
means of putting a cushion under the deflation is public spending
and Government deficits.
45
But unless you have surpluses now, how can you, how are you, in
a deflationary period, be in a position to have deficits?
Mr. FOLGER. That thought, I suppose, led you to observe that
public spending, in the way of building and other things, is something
to be resorted to in a deflationary period and not in a period of inflation.
Mr..ECCLES. Very, very definitely. Unless you use your fiscal,
monetary and credit policies as a compensatory mechanism to moderate the inflationary development, and also moderate the deflationary
development, I do not see very much hope to avoid the excesses of
booms and busts.
Mr. F O L G E R . That is all.
Mr. T A L L E (acting chairman). Mr. Buffett, do you have a question?
Mr. B U F F E T T . Yes. Mr. Eccles, our managed currency venture is
nmninginto stormy weather; is that the situation?
Mr. ECCLES. Well, our gold standard ran into stormy weather, as
I recall, from 1929 to 1933. But I do not think either the managed
currency or the gold standard had anything to do with the creation
of the stormy weather.
Mr. B U F F E T T . Y O U do not think that the final brake on Government spending in the hands of the producers of the country has any
influence on Government spending?
Mr. ECCLES. II do not understand the question.
Mr. B U F F E T T . I say, you do not think the decisive brake on public
spending in the hands of the producers can exercise a determining
influence on Government spending?
Mr. ECCLES. I still do not get your point. Could you put your
question again, or put i t differently?
Mr, B U F F E T T . I will try to rephrase it.
When the producers of a country have some method of protecting
themselves against reckless Government spending, then they have an
instrument in their hands to restrain inflation, do they not?
Mr. ECCLES. Well, inflation can come from an overexpansion of
private credit as well as an overexpansion of public credit. But I
will say this: To the extent that you get private credit you usually get
a certain amount of production to support the credit—unless you have
an inflationary condition—and all; tfeat credit does is add to the inflationary pressures. Whereas, in the case of Government spending,
Government credit—that is, where they borrow in excess of their tax
revenue—you do not get either goods or services available for the
consumer to buy.
For instance, European loans or grants do not produce any goods
whatever. But they do put pressure upon the goods that we produce.
I am not arguing against the European aid program, but I am merely
pointing out an economic fact.
Certainly the worst possible conceivable waste that one can think
of are the military expenditures because they certainly are a burden
upon our manpower and upon our productive facilities, and they produce nothing available for the consumer to buy. Or any expenditure
by Government, for that matter, that is wasteful, that is not absolutely
essential in a time of inflation. Now, in a time of deflation, where
you have idle men, idle material, Government, spending based not
upon balanced budgets, but Government spending based ppon deficits
pumps new purchasing power into the stream and gives employment
and production that otherwise may not exist. I t is a very dinerent
Digitized for matter under those conditions.
FRASER
46
Mr. B U F F E T T . Have you ever explored the difficulties of restraining military expenditures in a country where the producer has no way
to protect himself against expanding military expenditures? In the
gold-standard country he has a method of protecting himself. He can
f o to the bank and say: " I do not like the way they are running things;
want gold in exchange for paper money."
Mr. E C C L E S . That has never been possible, though.
Mr. B U F F E T T . I t was possible in this country until 1933.
M r . ECCLES. O h , n o .
Mr. B U F F E T T . Y O U mean I could not go to the bank and get gold
coins?
Mr. E C C L E S . Well, a few people got gold. That was all right.
The amount of gold today, in dollars, is based upon the price at
which we fix it. We could double the amount of gold in the world
i n terms of dollars if we said we would pay $70 an ounce instead of $35
an ounce. But when the price of gold was $20.67 an ounce the total
amount of gold in the world was about 11 billion dollars. There was
over a hundred billion dollars of obligations in this country alone,
payable in gold.
Mr. B U F F E T T . Why did the people not want the gold at-that time?
Because the price level was reasonable?
Mr. E C C L E S . Surely, that was the reason. But the fact that they
could get gold did not keep it stable, because they could get gold, from
1929 to 1933, up to the time of the bank holiday, and the price of gold
was $20.67 an ounce.
The fact that they could get it, and the fact that the price of gold
did not change, certainly did not keep the economy stable, and you
had a decline, from 1929 to 1933, of a terrific amount, even though
you could get gold.
Therefore, I say that the idea that the gold standard keeps your
money safe and keeps the economy stable is a myth and a fiction,
based upon the historical facts.
Mr. B U F F E T T . Well, it has done a better job than any managed
currency, as far as I can learn.
Mr. E C C L E S . Well, you had a very different world picture before
the two world wars. The gold standard worked fairly well, but i t
was never really a gold standard in the sense that we think of it. I t
was a sterling standard. Up until the First World War it was the
Bank of England that managed the gold standard. We called it an
international gold standard. What it really was was an international
sterling standard; and sterling, at that time, was the currency of the
world in the same way that the dollar is the currency of the world
today.
When the war came along and Britain lost its creditor position in
the world, they were no longer able to manage the gold standard.
They tried to get back on it and were unable to, and what was thought
of as a gold standard, but which was a sterling standard, disappeared.
Now you have no chance of getting back to the gold standard in
the sense that it would be an international gold standard where gold
is freely exchangeable within the various countries and within the
country. I t will be used, to a certain extent, as an international
yardstick; but even at that, it has not proved to be very effective.
Mr. B U F F E T T . Then what hope can you offer the bond holder or
prospective bond buyer in this country that his bond is not going to
47
deteriorate as much in the next 30 years as the French bonds and
money have deteriorated in the last 30 years?
Mr. ECCLES. I certainly am going to offer him no such prospect,
unless the Congress of the United States, in carrying out the monetary and fiscal policy of tins country—and that, after all, is where the
source is—can create a greater degree of economic stability in the
future than we have had in the past.
The stability of the^purchasing power of the dollar depends upon
the amount of goods and services made available at any given time
in relationship to the purchasing power.
Mr. B U F F E T T . Have you made any detailed study of the spending
pressures that Members of Congress are subject to in good times?
Mr. ECCLES. I have great sympathy for them. I have great sympathy for anyone who has to rim for election .every 2 years and go
out and face his constituents. I realize the problems and the -difficulties, and I realize that the pressures are simply tremendous. And
it has been due to those pressures, as I pointed out this morning, that
the condition of inflation that we now have has been brought about.
So I sometimes despair of democracy ever being able to have enough
enlightened self-interest—that is, of the people ever having enough
enlightened self-interest—to prevent these excesses.
I hope that we might be able to, but certainly our whole history of
the past has demonstrated that we are just unable to do it.
Mr. BTJFFETT. Well, we have deprived the worker and the producer
in this country of a repository of value in which he could have reasonable confidence, have we not?
Mr. ECCLES. Well, we have not deprived him of it. We have never
had it. We have never had it in this country or any other country
at any time..
Mr. B U F F E T T . Thev have it in Switzerland right now.
Mr. ECCLES. Yes; but I have seen Switzerland when they did not
have it, too, when they were on the gold standard.
Mr. B U F F E T T . D O you mean that the Swiss peasant who had a small
hoard of gold saw that value largely disappear, or be cut in two, and
then cut m two again and again?
Mr. E C C L E S . Oh, yes; if he wants to sit and hold onto his gold as a
means of security, the way matters have turned out, gold has gradually,
by devaluation
Mr. B U F F E T T . Wait a minute. He has had the physical gold. You
cannot devaluate his physical gold holdings.
Mr. ECCLES. That is what I am saying. By the devaluation of gold
he has received, in terms of currency, an increase in his money i i he
wanted to sell that gold. I n other words, if the people holding physical gold here could have continued to hold i t when this country devalued, instead: of having $20.67 an ounce worth of gold they would
have $35 worth of gold.
Mr. B U F F E T T , And their relative position under today's price level
would be unchanged.
Mr, ECCLES. Well, they would be better off. The unfortunate thing
is that there is not enough gold in the world—I would not say i t is
unfortunate, but I would say that it is a fact—that there is not enough
gold in the world where everybody can hoard gold as a means of protecting the value of their savings. I f everybody did it, i t possibly
48
would not be a protective means at all, because there would be such
a surfeit of gold that it would possibly lose its value.
Its value has been due, apparently, to its great scarcity, and it was
considered to be the most desirable means as a money base.
I recognize that it was expected to control and stop the inflation of
the money supply. The Warren theory, of course, was that in the
depression the money supply seemed to be inadequate. We had
deflation, and Warren had an idea that if you devalued gold and made
it $35 an ounce, that immediately you would inflate the price. Well,
the difficulty is that the public did not own the gold, so that when you
devalued they would have something to spend. Therefore the experiment of devaluing the price of gold, so far as inflating or increasing the
price level was concerned, proved to be entirely worthless, showing
that the price level had little or no relationship to gold.
Mr. B U F F E T T . D O you mean that the price level in Switzerland has
not been more stable than it has been in France?
Mr. E C C L E S . I do not think that is because of gold. I do not think
that is because of gold at all.
Mr. B U F F E T T . What does cause it?
Mr. E C C L E S . Well, I am not sufficiently familiar with the Swiss
economy, but I know you have had a very stable price level in other
countries, such as New Zealand and Australia—just as stable as in Switzerland—and they have had a managed currency. Not only that, but
their central bank has been a Government-held bank practically run
by the treasury.
Mr. B U F F E T T . D O you think this credit curb will prove effective in
stopping inflationary trends at this time?
Mr. E C C L E S . I doubt it. I doubt it very much.
Mr. B U F F E T T . What would be the next move, then?
Mr. E C C L E S . Well, as I said this morning, unless you get a balanced
budget, or not only a balanced budget but a budgetary surplus to apply against the reduction of the public debt, while through the credit
mechanism you are restraining the expansion of the private debt, you
are not likely to stop the inflationary tendencies; it can go on just as
long as the Government is willing to pump money into the spending
stream through deficits, or as long as banks are willing to expand credit
to people and corporations who are willing to borrow.
Mr. B U F F E T T . What will happen if the public, one of these days,
decides that they have been taken for a ride in buying bonds and then
seeing the value if those bonds deteriorate, and they begin to cash their
bonds on a large scale?
Mr. E C C L E S . That would certainly add to-the inflation.
I have pointed out the element of danger where the public loses confidence in the purchasing power of their money. I did that as early as
1944 or 1945.
When the public reaches the point where the Government is not
going to protect the purchasing power of its savings, then it might decide to quit saving and start to buying things. I think the public, under
all circumstances, has behaved very well, and when you consider the
potential inflation and the size of the deposit structure, together with
the amount of governments that are almost the equivalent of currency,
you realize how much more inflation is possible if the public decided
to use the money they have and the government they have in order
to buy things.
49
Mr. B U F F E T T . That is one of the reasons I was against the Marshall
plan, the British loan, UNRRA, and a number of other experiments.
However, I am only in a very small minority. Was the Federal Reserve ever instructed by Congress to support the Government bond
market at 101?
Mr.
ECCLES.
I t never was.
Mr. B U F F E T T . Does that decision on the part of the Federal Reserve Board itself have a very inflationary influence?
Mr. ECCLES. N O ; it may well have had the opposite. I t may well
have stabilized the Government bond market and given the people
confidence and stopped all this cashing of Government bonds. There
may have been a lot of people and a lot of institutions who would have
cashed the bonds and gotten the money; and if they had gotten the
money they would have been more likely to spend it than if they had
held it in the form of Government bonds.
Mr. B U F F E T T . D O you think that that action, plus what you are
recommending here now, will lick this inflation?
Mr. ECCLES. N O ; I have said before that I think a budgetary surplus is far more important, and that by no credit mechanism except
of the most severe type, namely, that of possibly withdrawing support
from the market and denying the banks reserves, could you get at the
root of inflation.
Now, let me add this i n connection w i t h the root of the inflation,
and I am sorry I did not say something about i t this morning:
I t is better, of course, always, to deal w i t h causes than effects.
Everybody recognizes that direct controls deal only w i t h the effects
as a stopgap until you can deal with the causes. We have dealt
w i t h the effects of an excess supply of money and credit i n relation
to goods, by the harness of controls but we ceased to deal with the
effects of the inflation before we were prepared to deal w i t h the
causes. Even at the present time we certainly have not dealt entirely, by any means, w i t h the causes.
More production—and that, of course, is somewhat of a slow
process—is absolutely essential. Ultimately, you must have a
supply of goods and services equal to the potential demand. There is
always a demand, but I am speaking of potential demand backed up
by purchasing power. I do not believe everything has been done that
possibly could have been done in the field of production. Certainly
strikes by labor curbed a certain amount of production; and it was a
mistake, when the war ended, to immediately reduce the workweek
from 48 hours to 40, when what we needed was not less work and more
money, but what we needed was more work. With more work there
is more likelihood of getting more goods and services, more work and
more savings. That is what was needed.
Those are the basic things you need to get at.
Now, along with that, we should not have provided the easy housing
credit, which was particularly bad to the extent that i t effectuated
a demand for housing in excess of the supply of labor and materials.
So, to get at the causes, we must reduce in any way we can the supply of purchasing power—taxes is the most important element in
that particular picture—we must do everything we can to increase
the supply of goods and services available; we must keep credit from
expanding.
50
Mr. B U F F E T T . H O W are we going to keep well-informed people
from moving steadily into things and real property when the country
is exporting a large amount of its production and, by that exportation,
constantly raising the replacement cost of merchandise in this country,
so that a man who today buys an automobile or a gas stove or almost
any kind of durable goods knows that within 2 years or 4 years or 6
years the price of those goods is going to soar simply because of the
great funneling-out process of our raw materials in the way of free
exports of our goods.
M r . ECCLES. Of course, he does not know what is going to happen.
I f he did, of course, what you say would be true.
M r . B U F F E T T . D O you not think there is a movement like that on
now?
M r . ECCLES. N O ; i t has certainly been a slow movement. Today you even have an excess of certain goods. You have an oversupply, as we know, of certain durable goods* and some soft goods.
Certainly there is an oversupply of luxury goods, because people have
been, as we term i t , priced out of the market.
The hopes and expectations of the people are, of course, that prices
will not go higher—at least, the prices on things they buy. They
would like them to go higher on the things they have to sell. Especially if they have money, or if they have credit and they want to
buy, they are hoping that they can get things cheaper later on.
That is one reason that the inflation has not been as great as it could
be, because there have been a great many people who have deferred
the purchase of a car, they have deferred -their purchase of a house,
and many other things. There have not been enough to do that,
however, to reduce inflationary pressures. We may reach a point
where enough people will be priced out of the market and will determine that they are just not going to pay inflated prices. If enough
of them reach that point so that the supply exceeds the demand,
then you will be in for a deflation.
Mr. B U F F E T T . What do you think Congress is going to do if that
happens?
Mr. ECCLES. Well, of course, if we get into a deflatioanary period,
I think that it is going to run a certain course so as to reduce some
of the inflation, but there is a limit to which it can go without wrecking the economy. We found, from 1929 to 1933, that you reach a
point where the Government has to intervene on a great scale to save
the system. So I would only hope that we would not wait that long.
I would hope that if a deflation comes, that we will have a backlog
of public housing instead of trying to do it now, and a backlog of
private housing, and a backlog demand for public works. We then
will have to have some deficit financing, and, whether you like it or
not, you will have to reduce taxes, even though it adds to your budgetary deficit, on the great mass of people whose purchasing power would
be necessary to sustain your production. We would have to resort
to all kinds of crutches. I cannot foresee all of them now, but the
further our inflationary situation goes, and the more people get into
debt, the more the wealth becomes concentrated again in fewer
hands, the greater will be the difficulty of meeting the problem that
will develop.
Mr. B U F F E T T . I S there any situation more conducive to the real
wealth getting into a few hands than a steady deterioration of our
51
currency that is understood by a small group of people and not
understood by the masses?
Mr. E C C L E S . Well, I think an inflation certainly helps. There are
the speculators who are willing to borrow any amount they can
borrow, and take any kind of chances that make the fortunes, and,
of course, there have been plenty of fortunes made, which makes anything that ever happened in the past look very insignificant. We
were talking about taking all the profits out of war. Of course, we
did not do any such thing. There is this difference this time, however: I believe the profit opportunity was much more widely spread
than has ever been the case before. The fixed-income groups, whitecollar classes, the unorganized workers, have, of course, taken it on
the chin,-so to speak. The farmers have gotten very much more
than their share of the national product, national income, ever since
the war started, much more than they were entitled to. That is
likewise true of certaih business groups. I n fact, I would say most
business groups have made excessive earnings since the war and
particularly since the excess-profits tax was taken off. Certainly
some labor groups have profited by the inflation. Their income has
gone up substantially more than their increased cost of living.
On the other hand, we also have great groups who have suffered
from the inflationary developments.
Mr. B U F F E T T . Under our present foreign policy, it seems to me that
we have pretty well underwritten the economic wants of the nonRussian world. If that is a correct appraisal, do you think that the
present political leaders, and the present Presidential candidates who
are pledged with this foreign policy, will come to grips with the roots
of inflation?
Mr. E C C L E S . Well, there is no question but what the base of our
current and expanding inflationary situation is our military and our
world-aid program. Without those two programs, we would very
soon have a sufficient budgetary surplus, and a sufficient production
to meet all of our requirements, all of our demands, and our problem
then would more likely be how to prevent a deflation, how to keep
purchasing power up.
Mr. B U F F E T T . I n father words, if it were not for $ 5 7 5 , 0 0 0 , 0 0 0 or
$600,000,000 worth of goods which we send abroad each month for
free, we would be having a surplus and lower price level?
Mr. E C C L E S . Well, $ 2 0 , 0 0 0 , 0 0 0 , 0 0 0 of our $ 4 0 , 0 0 0 , 0 0 0 , 0 0 0 budget
is in two places, and the reasons for both of those, after all, is the
question of the Russians. Until we are realistically willing to face up
to that problem, i t is pretty difficult to deal with the inflationary picture. Certainly, we cannot continue a preparedness program on a
basis of defense that has no terminal point, and continue a foreign-aid
program—a global program—that has no terminal point, without
ultimately wrecking our economy on the shoals of inflation. We
must have a terminal point to both of them, and that terminal point
must be brought about through our forcing the conditions of peace
before we wreck our economy on the shoals of inflation or on the
shoals of a regimentation of controls in an effort to prevent such an
inflation. So that means we must find a basis for peace even at the
risk of war before it is too late.
Mr. B U F F E T T . D O you think we have made any substantial progress
in that direction since the end of the war?
52
Mr. E C C L E S . I think the whole world has deteriorated. I think our
hopes have come to naught, and I think it is pretty generally recognized that instead of having made the progress that we expected to
make when the war ended, there has been a gradual deterioration, and,
of course, the whole source of our trouble is Russia. Unless we deal
directly and firmly and specifically and soon, with that problem, rather
than have an armament race, and then deal with it later on, in a Third
World War, it seems to me that this inflationary thing we are talking
about is hopeless.
Mr. B U F F E T T . I t is true, is it not, that in 1945 we were the decisive
military, industrial, and political power in the world?
Mr. ECCLES. That, is right.
Mr. B U F F E T T . Our power in that respect has deteriorated as we
have exhausted our strength sinee that time, and also to the extent
that we have diluted the savings of our people by inflation and thus
robbed them of the fruits of their labor; that is right?
Mr. ECCLES. That is what happened.
Mr. B U F F E T T . I am very much disturbed in this situation in this
respect, Mr. Eccles, and I do not see that we are reaching a solution.
The longer we temporize with this problem, the longer period of time
is provided for those who understand inflation to profit at the expense
of the trusting and patriotic citizen who counts on his Government to
preserve the value of his savings; is that not correct?
Mr. ECCLES. That is absolutely correct.
Mr. B U F F E T T . And if we temporize with this problem, instead of
helping him by postponing the climax, we simply add to his ultimate
loss?
Mr. ECCLES. That is right.
Mr. B U F F E T T , Thank you.
Mr. T A L L E . Mr. Buchanan, have you some questions?'
Mr. B U C H A N A N . N O questions.
Mr. T A L L E . Mr. Multer.
Mr. M U L T E R . I agree with you, Mr. Eccles, that our military budget
is nonproductive so far as our economy is concerned. You would not,
however, reduce that military budget at this time, would you?
Mr. E C C L E S . I do not want to get into- a discussion of the justification for either the military budget or the world-aid program. I am
talking of the economics of the situation, and not the justification. I t
is a matter that I have some views about, but I do not believe that this
is the time or the place to get into the question of our military program
or our foreign policy.
Mr. M U L T E R . I think you might have made some comment about
what would happen to the E, F, and G bonds if Government support
of the bond market were withdrawn.
Mr. E C C L E S . Well, I am glad you mentioned that, because we do
have a demand liability in the form of E, F, and G bonds of something
like $53,000,000,000. Certainly any sale of E, F, and G bonds would
stop while the long-term interest rate was unsettled and uncertain,
and there might be a large cashing in of those securities, because if the
interest rate on market securities should go up, which i t would if the
prices go down, there would be no reason why holders of E, F, and G
bonds would not want to either shift to the market bonds—which, of
course, in itself, might stabilize the price, except that the Government
would have to borrow money to pay off the E, F, and G bonds, in some
53
form—but the holders of E, F, and G bonds might very well cash in
their securities and hold idle cash waiting to see what to do with that
money, or they might cash in the bonds and try to spend the money
for an automobile or for stocks or any number of things. I t would be
most unfortunate if the holders of those large savings bonds should
start cashing them in on a large scale, which could very well eventuate
if you withdrew support from the long-term market bonds.
I am glad you reminded me of that, because that is just another
argument supporting the arguments that I have already made for
maintaining the present rate of 2% percent on long-term Government
bonds.
M r . M U L T E R . Most of those E, F, and G bonds are individually
held, are they not?
M r . ECCLES. Well, there are a lot of the F and G's that are held by
corporations and banks and insurance companies.
M r . M U L T E R . The surplus you mentioned, the current surplus,
for the current year, being the largest the country has ever had, is
true from a bookkeeping angle, but if you take into consideration the
fact that by legislation this Congress has postponed into 1949 the
expenditure of certain moneys already appropriated, the actual surplus
would be smaller, would it not? I t would be smaller than the 1947
surplus?
M r . ECCLES. The $3,000,000,000 that was set aside?
M r . MULTER. Yes.
ECCLES. I think
$3,000,000,000.
So that
Mr.
the $ 7 , 0 0 0 , 0 0 0 , 0 0 0 surplus excludes the
if i t was not for that, the surplus would
have been $10,000,000,000.
M r . M U L T E R . No; I think i t would be $4,000,000,000. I f that
money which has been appropriated this year
M r . ECCLES. I n other words, the surplus, from a bookkeeping
standpoint, $ 4 , 0 0 0 , 0 0 0 , 0 0 0 ; whereas from a money standpoint it is
$7,000,000,000.
So that from an anti-inflation standpoint, i t is
$ 7 , 0 0 0 , 0 0 0 , 0 0 0 , although from a bookkeeping standpoint i t is $ 4 , 0 0 0 , 000,000.
Mr. M U L T E R . There was considerable discussion between you and
Dr. Smith as to the Federal Reserve System being a governmental
agency or an independent agency and whether i t is controlled by other
agencies. I think the fact is that the Federal Reserve System is the
most independent of the governmental agencies in the country, is i t
not?
M r . ECCLES. Well, yes; that is certainly true. That is true of the
System as a whole, but I would not say that is true of the Board.
M r . M U L T E R . Y O U mean the Board submits to outside influence?
M r . ECCLES. N O ; I mean that the Board are all appointed by a
President.
M r . M U L T E R . But their terms of office usually are much longer than
the term of office of the appointing official.
Mr. ECCLES, But there are two members whose terms fall due
within 4 years, one every 2 years, so you see that is an important
political element in the picture. The Chairman and the Vice Chairman are designated by the President, and they, of course, have to
meet with and work with all of the other governmental agencies,
particularly the Treasury and often, in certain situations, the State
Department. The Chairman of the Board is on the National Advis
54
ory Council which has to do with the coordination of the foreign
economic and credit policies, and so forth. I would not say that
they are any more independent than some of the other agencies—
that is, the Board. Now, so far as the Federal Reserve banks are
concerned, they are. They have maybe too much authority and too
much independence. They are elected or appointed by the boards
of the banks, the majority of which are elected by the private bankers.
And the Board, in Washington, of course, is a supervisory agency,
with considerable power to supervise and regulate the operations of
those banks. For instance, if Mr. Sproul of the New York bank,
comes down—if the Board takes a position in favor of one thing, he
can come down and testify, and does right along, against the Board.
So you have .a degree of independence in the banks that is much
greater than in the Board.
Mr. M U L T E R . The only positive control over the Federal Reserve
System is that exercised by congressional legislation?
Mr. ECCLES. That is right. The control, and the responsibility
and authority is, in my opinion, too greatly divided and diffused
and I am in favor of the study that the Hoover Committee is making
on the whole question of reorganization and also the suggested study
of the monetary and credit and fiscal problems and organizations of
Government as suggested by Mr. Aldrich. I think that we certainly
are in great need of reviewing and revamping our present set-up.
Mr. M U L T E R . One final question: Every time a matter of controls
or regulation comes before this committee, we are given the suggestion
of socialism and communism. Do you think the Federal Reserve
System, in its control of our banking system, smacks of socialism or
communism?
Mr. ECCLES. Of course, I can think of a lot of controls which would
smack very much more of socialism. I think that any controls that
the Federal Reserve System exercises over the system are needed in
order to help preserve our private banking and enterprise system.
They are necessary to prevent the creation of conditions which might
bring on socialism.
Mr. M U L T E R . Thank you, sir.
Mr. T A L L E . Governor Eccles, you have been at work here since
10 o'clock this morning. I t is almost 6 o'clock now. We thank
you very much. We are very grateful for your testimony.
Mr. ECCLES. Thank you, Mr. Chairman.
Mr. T A L L E . The committee will stand adjourned until 10 o'clock
tomorrow morning when I understand Secretary of the Treasury
Snyder will appear.
(Whereupon, at 5:45 p. m., the committee adjourned, to reconvene
at 10 a. m.t August 4, 1948.)
@FedFRASER