View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

F fc D IS ft A I*

ft iS & E n V IS



For release at 9:30 p#m. Eastern Standard Time, May 25, 1935

The Banking Bill of 1935
Radio Speech
Marriner S. Eccles
Governor of the Federal Reserve Board
Saturday night, May 25, 1935,
In the National fiadio Forum
arranged by the Washington
Star — Broadcast «;ver the
network jf the National Broadcasting Company.

I am grateful to the Washington Star for the invitation to speak in this
I should like to talk to you as plainly as I can about the Banking Bill
which is pending before Congress•

In the brief time at my disposal I shall have

to confine myself to the most controversial features of the bill and omit discussion of many other provisions of the bill which would, in my judgment, contribute towards recovery, as well as towards the better coordinated and more
efficient administration of the Federal Reserve System.
I shall assume that you believe that in order to have our money system controlled for the benefit of the nation as a whole and not for the benefit of
special interests this control must be in the hands of a responsible body. If
after all that this nation bus gone through during the past five years you still
believe that we can leave oxw monetary system to chance or to fate, then it would
be futile for me to try to persuade you that our present system can and should be
With the banking cataclysm so fresh in our memories, we would be justified
in raying that the Government had failed in its duty if it neglected to correct
at least some of those apparent defects in our banking system which contributed
to bringing untold distress to millions of our people and threatened to plunge
our entire economy into the abyss, foe are told that there is no emergency at
this time which demands prompt action to correct these defects, but surely we
should not wait for another crisis before taking the steps necessary to remedy
obvious defects which painful experience has exposed. We should profit by the
lessons we have learned from the emergency.
The real problem is the control over the volume and cost of money. The defects which I have mentioned are not duo \,o the absence of powers of control,but to
the fact that the present responsibility for the exercise of these powers is so
diffused and divided as to hamper seriously, if not to frustrate, their effective

~ 2 -

We need also to state the objective towards which these powers
should be directed.

At present there is no objective for monetary

policy stated in the law. The Banking Bill as passed by the House of
Representatives proposes a definite objective which is, in a word, that
monetary policy shall be directed towards the maintenance of stable
conditions of production, employment, and prices so far as this can be
accomplished within the scope of monetary action.
I do not wish to be understood as believing that by monetary action
alone we can eliminate all booms and depressions and achieve a permanent
and unvarying stability.

I do believe firmly, however, that by monetary

means exercised promptly and courageously v;e can greatly mitigate the
worst evils of inflation and deflation.
Vi/hat are these powers of control to which I refer?

There are

three principal means of control which now exist. The first is the power
to raise and lower the discount rate, that is, to determine the cost
at which banks can borrow from the Federal Ke&erve banks and consequently
to influence the cost at which the public can borrowr from the banks.
The importance of this pcvver is apparent. By lowering or increasing
interest rates it is possible to lower or increase the cost of doing
business and, therefore, to have an influence over the contraction or
expansion of business. This power is now vested in the Federal Reserve
Board at Washington.
The second means of control to which I have referred is the power
to raise or lower reserve requirements of the banks which are members
of the Federal Reserve System.

This power more directly influences the

~ 3 -

volume of money because under our law the amount of deposits that banks
can create is limited in proportion to the amount of reserves they possess*
Therefore, an increase or a decrease in the volume of reserves tends to
increase or decrease the volume of deposits which are our principal means
of payment, or money.

Since 1933 this power has been vested in the Federal

Reserve Board, but it can only be exercised when the President declares
that an emergency exists and gives his approval. The responsibility for
declaring an emergency should not be placed upon the President*

Even if

an emergency did not exist, the declaring of it would almost certainly
create one. The bill proposes to give the Federal Reserve Board the use
of this most important instrument of control without requiring the President
to declare an emergency, which might involve insurmountable political

The Federal Reserve Board should be in a position to exercise

this power in the normal course of events for the very purpose of preventing
an emergency •
The third means of control is what is known, perhaps somewhat
mysteriously, as open-market operations*

Without going into the details

of this technical natter, open-market operations mean that the Federal
Reserve banks when they wish to increase the volume of money can do so
by buying Government securities in the open market. The noney they pay
for these purchases ID added to the reserves of the member banks.
Conversely when the Reserve banks wish to diminish the volume of member
bank reserves they can sell securities and in effect lack up the money
paid by the banks for the securities. In this way they can directly influence the available volume of money. At the present time the control over
this power is distributed between a committee of twelve governors of

~ 4 -

the twelve Federal Reserve banks, who now have the responsibility for
recommending purchases or sales, the Federal Reserve Board, which has
authority to approve or disapprove the recommendations of the governors,
and 108 directors of the twelve Reserve banks, who in turn have the
right to determine whether or not they wij.1 buy or sell in accordance
with the policy that has been recommended by the governors and approved
by the Board. A more effective means of diffusing responsibility and
encouraging delay could not very well be devised.
On this point I have recommended that the power over open market
operations be entrusted to the Federal Reserve Board, which consists
of eight members, six of whom are appointed by the President and confirmed
by the Senate, and two ex-officio members, the Secretary of the Treasury
and the Comptroller of the Currency. The Board would be required, however,
before taking action on open market operations as well as on discount
rates and reserve requirements, to consult with a committee of five governors
selected by the Federal Reserve banks. In this way the responsibility
for action will be unescapably fixed.
To my mind, the all-important thing is to place responsibility for
the exercise of these three means of control in a clearly defined body
and to state the objective towards the attainment of which that body
shall exercise these powers. I do not wish to be dogmatic about how
this body shall be constituted.

I have recommended placing responsibility

for the exercise of these powers in the Federal Reserve Board, which
was established by law to serve the best interests of the nation in
banking and monetary matters. However, there are powerful groups which
are irreconcilably opposed to this plan and

- 5 -

wish to perpetuate the present unsatisfactory situation in which these
powers cannot be effectively exercised.
This attitude is by no means characteristic of all of the bankers
of the country.

In all fairness, I wish to emphasise that in discussing

this issue most of the leaders of the American Bankers Association have
adopted a constructive and cooperative attitude. This is in sharp contrast with the attitude of a few bankers and business leaders, particularly
in New York. Many of the bankers have frankly recognised the need and
importance of the major changes proposed in the Banking Bill and have
accepted them in principle.
M t h these barkers the issue over tho bankirg bill narrows down
largely to a question of the composition of the controlling body. Thus,
the American Bankers Association proposes that the exercise of monetary
powers shall be entrusted to a committee consisting of the Federal
Reserve Board, which shall be reduced to five members, and a committee
of four governors selected by the governors of the twsive Federal Reserve
banks. This plan would give the governors of the Federal Reserve banks,
who are selected by directors two-thirds of whom are appointed by private
bankers, four votes as against five votes for members of the Federal
Reserve Board.
There ha& been considerable support for another proposal which
would entrust the powers of determining monetary policy to a committee
consisting of the Federal Reserve Board of eight members, as now constituted, together with fiv^ governors of the Federal Reserve banks.

- 6 -

These governors would be selected with reference to a fair representation
of the different regions of the country, one member to represent the
Eastern Federal Reserve districts; one, the Middlefoest;one, the South;
one, the far West; and one to be selected at large.
It is not for me to determine in whom these powers shall be vested.
My recommendation was that they be vested in the Federal xteserve Board,
with a committee of five governors acting in an advisory capacity.


have just mentioned two other px-oposals. It is for the representatives
of the people of the United States in Congress to determine whether they
want to give these powers to an independent public body, to private
interests, or to a combination of the two. The one principle on which
I feel there can be no reasonable ground for disagreement is that the
powers must be vested in a clearly defined body which will have adequate
authority and full and unescapable responsibility for the use of these
important powers.
As I have said, the purpose of the bill is not to create new powers
but to place existing powers in a responsible body where they may be effectively exercised. Against this proposal the cry of political control has been

This is not a new cry.

It was raised against the original

Federal Reserve Act more than tv/enty years ago. It was raised by about
the same interests which are now resisting the passage of this bill —
the same interests that have repeatedly been against all progressive social
and economic legislation, such as the income tax, even when it was
proposed to make it as low as 2 percent; against child labor legislation;
against the Federal Trade Commission and the Federal Power Commission;
the Securities Exchange Commission; against pensions of all kinds, both

State and national; in short, against all that enlightened legislation
which has long since been accepted and now forms the basis of such economic
and social advance as we have achieved.
If it is fair to charge that the Federal Reserve Board is political,
then the same accusation must be made,against the Interstate Commerce
Commission, against the Federal Trade Commission, and against other
governmental bodies the members of which are nominated by the President
and confirmed by the Senate. Experience has demonstrated that these
bodies have consistently acted not for political advantage but in the
public interest.
Some of the opponents of the bill are raising all the familiar
bugaboos that they have so often trotted out in the past whenever
any attempt has been made in the interests of the country as a whole
to limit their influence in national affairs. I think that Mr. Walter
Lippmann well stated the tone and temper of these irreconcilable opponents
when, in a recent article, he referred to their hysterical methods. He
pointed out that they tell us in one breath that we are threatened with
a grave emergency because of the dangers of uncontrollable inflation
while in the next breath they tell us th&t n:> emergency exists which
requires the enactment of this legislation, designed as it is to enable
us to deal effectively with just such an emergency. As Mr. Lippmann
says with reference to the inconsistency of these opponents, "It does
Hot make sense. If we are faced with these hideous dangers, are we
not criminally negligent if we fail to fix clearly the responsibility
for averting them?"

- 8 ~

As I say, this cry of "wolf" is not new.

I have had occasion to

delve into the history of banking legislation and I note with some
degree of consolation that the Fedei%al Reserve Act was denounced in
language so nearly identical with that being used today by much the same
organized opposition, that unless you knew the dates you could not
distinguish between what they said more than twenty years ago and what
they are saying today.
Then, as now, the same interests were crying inflation and political
control. Then, as now, they demanded full control. Indeed, they undertook
to persuade President Wilson that they should have banker representation
on the Federal Reserve Board•

Senator Glass of Virginia in his authorita-

tive and illuminating book on the Reserve System entitled nAn Adventure
in Constructive Finance11, tells of how these bankers made their arguments
to Wit. Wilson, and according to Senator Glass, when they had finished,
President Wilson said quietly, "Kill one of you gentlemen tell me in what civilized country of the
earth there are important government boards of control on which private
interests are represented?
"Ttere w&s,M wrote Senator Gl&sst "painful silence for the longest
single moment I ever spentj and before it was broken, Mi-. Wilson further

^vhich of you gentlemen thinks the railroads should select members

of the Interstate Commerce Commission?»»

And Senator Glass adds in his bjok,
"There could be no convincing reply to either question * * *.n

~ 9 ~

Let me quote another pertinent paragraph from this illuminating
"Vvhile the Federal Reserve bill was pending," wrote Senator Glass,
"it was mercilessly condemned in detail by certain interests. Where
there was any praise in these quarters, it was faint enough to damn. This
hostile criticism reflected not alone the attitude of bankers, as the
class which imagined that it was chiefly affected by the proposed readjustment; but it voiced the disapprobation of those business groups which
are most readily impressed by banking thought.

This was not surprising,

since the pehnomenun was and is of frequent recurrence/1
Unfortunately this is all too true. You are witnessing the same
phenomenon again today.

You are hearing the same cry that the banking

bill means reckless inflation —

that the purpose of the bill is to

obtain control of the banks so that the administration may be able to
finance an endless series of government deficits. The complete answer
to this bugaboo is that if the administration had such a purpose it
would not need this bill, for this JT any other administration will
always find means to raise the funds which the representatives >f the
people in Congress have appropriated.
As a matter of fact, the administration has at its Command, in
the Stabilization Fund and under the so-called Thomas Amendment, more
than 5 billions of unexpended dollars*

Demand for the purchase of

government bonus is so great that the average interest rate has dropped
by more than 25 percent since the administration took office.

In the

face of these facts, do you believe the opponents of this bill when they

- 10 -

tell you that the administration wants the hanking bill enacted in order
to enable it to finance governmental deficits?
The organized opposition to the banking bill wants to delay its
passage, to leave matters as they are. Our -opponents profess to believe
that the issue should be submitted to a commission for further study.
But manifestly this is not an issue which will be settled by further

It is not an issue as to facts whicij need to be gathered together

and pored over by another commission. Unless your memories are shorter
than I believe them to be, you know the essential facts. The issue is

It is an issue of fundamental belief. It is whether such powers

as we possess over monetary policy, which affects the welfare of all of
us, shall be definitely placed in a body which shall have not only the
necessary means of control but the fixed responsibility for its exercise,
or whether these powers should be left as at present where they can neither
be effectively used nor the responsibility for their exercise definitely

It calls for a decision by the people of the United States through

their representatives in Congress. It is icy sincere conviction that this bill
is in the interest of the banking system as a whole because it will enable
it better to serve the public interest.
I thank you.