View original document

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




H. R .5357


MARCH 4, 5, 6, 11, 12, 13, 14, IS, 18, 19, 20, 1935





M ONDAY, M ARCH 4 , 1935

The committee met at 10:30 a. m-, Hon. Henry B. Steagall (c!mirman) presiding.
The CmuzMAN. Gentlenwn, we have with us this morning Gov­
ernor Eccles of the Federal Reserve Board, who will discuss title I t
o f H. R. 3357., and I think Governor Ecclcs would like to proceed
without interruption until he shall have concluded a prehminary
discussion o f the bill, after which, of course, he will be glad to
answer any questions and furnish any information that may be
desired by members of the committee.
Governor Eccles, we shall be glad to have you proceed in your
own way for such time as you desire, without being interrupted.

Mr. EccnEs. I am sorry that I do not feel entirely up to par today.
I have been laboring under a rather heavy cold. I had thought, at
first, to make a rather extended verbal statement with reference to
the legislation. I decided, however, on account of the way I feel,
to make a brief written statement of the general outline of the legis­
lation. I believe this will in a general way cover the philosophy
underlying section 2 o f the bill.
The CHAIRMAN. Title II ?
Mr. EccLES. Title II of the bill. So that I will just proceed to
read this statement, if I may.
In recommending banking legislation at this time, it is recog­
nized that the Congress has before it an unusual number of urgent
matters that are engaging its attention, and that legislation in order
to deserve your consideration at this session must not only be im­
portant in general but must also be urgent at this particular time.
We are not unmindful of the fact that within the past 2 year^
you have passed the Emergency Banking Act, the Banking Act of
1933, the Securities Exchange Act, and other important p iw s of
legislation dealing with banks. One purpose oi this legislation
has been to meet emergency conditions, ana it is now proposed to
incorporate into permanent legislation tne features of the emergency
laws that have proved to be valuable.
Another purpose of recent banking legislation, and particularly
o f the banking bill of 1933 and o f the portions of the Securities




Exchange Act that deal with powers of the Federal Reserve Board,
has been to prevent the recurrence of speculative excesses which pre­
ceded the recent break down of our Banking machinery and were
partly responsible for this collapse. These bills were largely in­
spired by the difficulties that came to a head in 1928 and 1929, and
it is gratifying to know that we now have on our statute books meas­
ures that will go far toward preventing the recurrence of conditions
such as prevailed during the speculative orgy of these years.
At the present time, however, there appears to lie no immediate
danger of excessive speculation. The present need is to so modify
oar banking law as to encourage the banking system to give a fuU
measure of cooperation to efforts at economic recovery. It is even
more important from the longer time point of view to so modify
our banking structure and administration as to have it become an inHuence toward the moderation of fluctuations in employment, trade,
and business. This would tend not only to avoid the particular evils
that came to a head in 1928 and 1^29, but to so regulate underlying
conditions as to diminish the possibility of a speculative boom "get­
ting under way. For when speculation is once under way it is
extremely diflicult to control, and the only means of preventing
excesses is to combat conditions that are favorable to their inception
and early development.
In order to accomplish this it is necessary to improve our machinery
of monetary control, which is the principal objective of title II of
the proposed bill.
More specifically these objectives are to increase the ability of the
banking system to promote stability of employment and business
insofar as this is possible within the scope of monetary action; as
a necessary step in that direction, to concentrate the authority and
responsibility for the formulation of national monetary policies in a
body representing the Nation; to modify the structure of the Federal
Reserve System to the extent necessary for the accomplishment of
these purposes, but without interfering with regional autonomy in
matters of local concern: and finally to relieve the banks of the
country of unnecessary restrictions that handicap them in the proper
performance of their functions and thus to enable them to contribute
more effectively to the acceleration of recovery.
In my opening remarks I wish to direct your attention particu­
larly to four proposals incorporated in title II of the bill. Other
provisions of the bill I wish to leave for your consideration, with
the understanding that I shall be glad to answer any questions that
you may wish to ask about them.
The four questions which I wish to discuss this morning are:
(1) The proposal to combine the ofEces of chairman of the board of
directors and governor of the Federal Reserve banks, and to have the
appointments to this combined ofEce subject to approval by the Fed­
eral Reserve Board (sec. 201 (1), pp. 38-41); (2) iQodiRcation of
the machinery for determining open-market policies of the Federal
Reserve System (sec. 205. pp. 43-44) ; (3) transfer of the determina­
tion of eligibility requirements from the statute to the Federal Re­
serve Board (sec. 206, pp. 45-46); and (4) liberalization of provi­
sions relating to real-estate loans (sec. 210, pp. 49-51).




As you know, the present law provides that the Federal Reserve
Board appoint 3 directors of each Federal Reserve bank and that 1
of the directors appointed by the Board be the chairman of the board
of directors. Jt appears to have been the intention of the framers
of the Federal Reserve Act that the chairman of the board of direc­
tors be the principal executive oNcer of each bank and the law makes
him also the oSicial representative of the Federal Reserve Board at
the bank. In practice, however, it has developed that the directors
appoint an executive ofHcer for whom they have adopted the title
of governor of the Federal Reserve bank, a title that is not mentioned
in the law, and that these governors have become the active heads
of the Federa! Reserve banks.
The proposal in the bill is to recognize the existing situation by
giving the governor of a Reserve bank a status in the law and to com­
bine his omce with that of the chairman of the board of directors.
It is, of course, essential that the holders of these combined ofHces
bo approved by the Federal Reserve Board. The Board, you will
note, will no longer appoint a chairman of the board, but will merely
have the power to approve or disapprove the appointment of the
governor, who will also be chairman of the board. In tins proposal
there is no encroachment on the autonomy of the individual Reserve
banks. It merely reestablishes the original principle of the Federal
Reserve Act that the Federal Reserve Board, which has responsibility
for national policies and for general supervision over the Reserve
banks, shall be a party to the selection of the active heads of the 12
Reserve banks. This change will work towards smoother coopera­
tion between the Board and the banks and will establish within
the banks a greater unity of administrative control than now exists.
It will also result in considerable saving through the elimination of
one of the two highest oiEcers in each Federal Reserve bank.

From the long-time point of view the recommendations dealing
with changes in the machinery for determining and carrying out
the open-market policies of the Federal Reserve System are essen­
tial. Open-market operations are the most important single instrur
ment of control over the volume and the cost of credit in this
country. When I say credit in this connection I mean money,
because by far the largest part of money in use by the people of
this country is in the form of bank credit, or bank deposits. When
the Federal Reserve banks buy bills or securities iii the open market,
they increase the volume of the people's money and lower its cost;
and when they sell in the open market, they decrease the volume
of money and increase its cost. Authority over these operations,
which anect the welfare of the people as a whole, must be vested
in a body representing the national interest.
Under existing law open-market operations must be initiated by
& committee consisting of representatives of the 12 Federal Reserve
banks, that is, by persons representing primarily local interests.



They must be submitted for approval or disapproval to the Federal
Reserve Board, and after they have been approved by the Federal
Reserve Board, the boards of directors of the Federal Reserve banks
have the power to decide whether or not they wish to participate
in the operations. We have, therefore, on this vital matter a set-up
by which the body which initiates the policies is not in a position
to ratify them; and the body which ratines them is not in a position
to initiate them or to insist on their being carried out after they are
ratified; and still a third group has the power to nullify policies
that have been initiated and ratified by the other two bodies. In
this matter, therefore, which requires prompt and immediate action
and the responsibility for whicn should be centralized so as to be
inescapable, the existing law requires the participation of 12 gov­
ernors, 8 members of the Federal Reserve Board, and 108 directors
scattered all over the country before a policy can be put into
It requires no further explanation to show that the existing
machinery is better adapted to delay and obstruction than it is to
effective operation, and that it results in a diffusion of responsibility
which prevents the necessary feeling of complete authority and
responsibility by a small group of men who can be held accountable
by the Congress and the Nation for the conduct of this matter that
is of nationa! importance.
The proposal in the bill is to set up a committee of 5, 3 of whom
shal! be members of the Federal Reserve Board and 2 governors
of Federal Reserve banks. This proposal would have the advantage
of creating a small committee with undivided responsibility. It is
not clear, however, that this arrangement is the best that can be
devised for the desired purpose. The Federal Reserve Board, which
is appointed by the President and approved by the Senate for the
purpose of having general responsibility for the formulation of
monetary policies, would under this proposal have to delegate its
principal function to a committee, on which members of the Board
would have a bare majority, while governors of the banks would
have 2 out of 5 members.
From the point of view of the Board the disadvantages of this
arrangement are that a minority of the Board could adopt a policy
that would be opposed to one favored by the majority. It would
even be possible for one member of the Board by joining with the
two governors lo adopt a policy that would tie objectionable to
the seven other members of the Board.
The placing of this authority in such a committee would also
have the disadvantage of giving one important power, the power
of open-market operations, to the open-market committee, while
other fundamental powers are vested in the Board. These powers
could be utilized to nullify the actions of the open-market com­
mittee. For example, the committee might adopt a policy of easing
credit, while the Federal Reserve Board would be in a position to
tighten credit, either by raising discount and bill rates or by in­
creasing member-bank" reserve requirements. Also the Board,
through its power of prescribing regulations for open-market opera­
tions. could conceivably interfere with the carrying out of the poli­
cies of the committee. While it is not coniemplated that such



extreme situations would occur, it does not seem desirable to
amend the law in a manner that might result in such unreasonable
Upon further study it would appear that the best way in which to
handle this proposal would be to place the responsibility for openmarket operations in the Federal Reserve Board as a whole and to
provide tor a committee of five governors of Federal Reserve banks
to atblise with the Board in this matter. The Board should be re­
quired to obtain the views of this committee of governors before
adopting a policy for open-market operations, discount rates, or
changes in reserve requirements.
Such an arrangement would result in the power to initiate openmarket operations by either a committee of the governors or by the
Board, but would place the ultimate responsibility upon the Fed­
eral Reserve Board, which is created for that purpose. In this con­
nection I should like to quote President Woodrow Wilson, who in his
address to the joint session of Congress on June 23, 1913, said:
The control of the system of banking and of issue * * * must be vested
in the Government itself, so that the banks mny be the instruments, not the
masters, of business and of individual enterprise and initiative.

a. ELi(amLITY or PArKR
It is proposed to give the Federal Reserve Board authority by
regulation to determine the character of paper that may be eligible
as a basis of borrowing at the Federal Reserve banks. This is par­
ticularly important at this time because it would encourage member
banks to pay less attention to the form and maturity of paper that is
offered by wou!d-be borrowers and to concentrate their attention on
the soundness of such paper. At present many banks are unwilling
to extend loans to borrowers who have assets tliat are unquestionably
sound because they lack the assurance that in case of a withdrawal
of deposits they would be able to liquefy these assets at the Federal
Reserve banks.
In times of emergency it has been necessary to remove existing
restrictions and to give discretion in the matter to the Federal Re­
serve authorities, as was done under the Glass-Steagall Act of 1932.
This act, however, was passed after a great many banks had gone to
the wall at least partly because of lack of cligibie paper and its pro­
visions insofar as they relate to borrowing from the Reserve banks,
have now expired. I think they expired yesterday.
What is proposed is not, as has been sometimes alleged, a policy
of opening the doors of the Federal Reserve banks to all kinds of
paper, regardless of its soundness. On the contrary, it is proposed
to place emphasis on soundness rather than on the technical form of
the paper that is presented.
Experience under emergency laws shows that the Federal Reserve
banks and the Federal Reserve Board have exercised caution and,
though they have extended credit on ineligible assets to the extent of
$300,000,000, alt but $1,300,000 of this has been paid back and the
banks have suffered no considerable losses. It would appear safe,
therefore, to intrust discretion in the matter to the Federal Reserve
Board, which is always in session and, therefore, in a position to con­
sider emergencies promptly without being under the necessity of



proclaiming them by an appeal to Congress and thereby aggravating
the situation, and being obliged to wait for Congress to be in session
and to act on the matter.
Another phase of this problem is that the total volume of paper
eligible for discount held by member banks at the present time is
only about $2,000,000,000, or loss than 8 percent of the resources of
the banks, and even in 1929 it was only about $4,000,000,000, or a
little more than 12 percent. While this amount is sufEcient in the
aggregate to provide access to the Federal Reserve banks, there were
many individual banks that did not possess sufficient eligible paper.
Even more important than that, is the fact that in a period of timid-*
ity the banks tend to refrain from making loans, except on paper
eligible for discount at Federal Reserve banks. This is even now a
factor causing liquidation in many communities and preventing
adequate expansion of credit in others.

A bank that would conduct its business on the theory of having
only such assets as can be disposed of at will in times of crisis, when
the national income has been cut in two, cannot serve its community
adequately. Such a bank would conRne its operations to the pur­
chase of the most liquid open-market paper, with the consequence
that it would neglect its local responsibilities and would neverthe­
less find it difficult to earn enough from the low returns on such
paper to cover expenses and dividends. The banks should be in a
position to meet the needs of their communities for all kinds of
accommodation, both short and long term, so long as the credits are
sound, and they ought to have the assurance that all sound assets
can be liquefied at the Federal Reserve bank in case of an emergency.

Closely allied to this matter of eligibility is the proposal that the
limitations on real-estate loans be modified so as to permit member
banks better to supply the needs of their communities for mortgage
loans. This proposal does not introduce a new character of loan, it
merely relaxes existing limitations on real-estate loans which
national banks have made for 20 years. What the bill proposes is
to modify the requirements so as to make them more realistic and
to enable the member banks better to serve their communities.
Coupled with the provisions in regard to eligibility, these proposals
ought to result in greater willingness of member banks to lend on
real estate and, therefore, to an improvement in the mortgage market
and a stimulation of construction which is essential to business
Member banks hold about $10,000,000,000 of the people's savings,
and it is therefore proper and necessary that they invest a part oi
their funds in long-time undertakings. The separation of com­
mercial banking from savings banking may be theoretically desir­
able, but it cannot be accomplished in this country without
disrupting existing machinery, while the need for increased activity
in building is urgent. Member banks are suffering from the com­
petition o f many Government and other agencies that are entering
the Held of real-estate loans, and it is a matter of self-preservation
for the banks to be able to hold and expand their activities in this



The details of the bill as proposed may have to be modified. The
problem is a difficult one because the laying down of specific per­
centages of value presents many perplexities. In some regions, and
at some times, a 75-percent loan on real estate is conservative, while
at other times a 50-percent loan may be too liberal. It may be best
in this matter, as in others, to vest discretion in the Federal Reserve
Board to prescribe such rules and regulations about real-estate loans
as in its judgment would operate most effectively in the public

Other sections of title II of the bill which I have not discussed
may be briefly enumerated: Provision that directors of the Federal
Reserve banks shall not serve for more than 6 consecutive years.
This would prevent crystallization of any one interest in the man­
agement of a Reserve bank. A change in the qualifications of
members of the Federa! Reserve Board to make these qualifications
more descriptive of the functions of the Board. An increase in
salary of future appointive members of the Board and provision
for pensions. Grant of power to the Board to assign specific duties
so as to be reiieved of detail. Macing of obligations guaranteed by
the United States Government on the same basis as direct obliga­
tions of the Government. Repeal of collateral requirements against
Federal Reserve notes. These requirements serve no useful purpose
and have been sources of serious trouble at critical times. Clarifica­
tion of the authority of the Board to raise or lower reserve require­
ments—the bill as introduced authorizes changes in reserve require­
ments for different districts or classes of cities. It might be mod­
ified by eliminating changes by districts and classifying cities into
two groups— (1) Reserve and Central Reserve cities and (2) other
cities. Authority for the Federal Reserve Board to waive capital
requirements for admission of insured banks into the system prior
to July 1, 1937, when all banks, in order to be insured, must be
members of the Federal Reserve System. This might be broadened
so as to authorize the Board to waive not only capital but all
requirements and to permit existing banks to continue permanently
with their present capital, provided it is adequate in relation to
their liabilities.

Title III of the bill contains a number of sections proposed by
the Comptroller of the Currency and by the Federal Deposit Insur­
ance Corporation. Sections in which the Federal Reserve Board
is interested are in the nature of technical improvements of a noncontroversial nature of the same genera! character as those con­
tained in the so-called " omnibus banking bill" which was reported
favorably by the Banking and Currency Committees of both Houses
of Congress in June 1934, but failed of enactment in the closing
da vs of the Seventy-third Congress.
Lor example, a provision that a holding-company affiliate, which
is a holding company by accident and is not engaged in the busi­
ness of holding bank stock, shall be exempted irom the require­
ment of obtaining a voting permit. Another example is the pro­
vision that member banks for the purpose of calculating reserve



requirements shall be allowed to deduct from gross deposits the
amounts that are due them from other banks rather than be allowed
to deduct these amounts only from the deposits they hold for other
banks. The existing provision has resulted in injustice to country
banks, which hold no deposits for other banks, and are, therefore,
unable to get the benefit of the deduction which city banks can
make^ There is also a proposal intended to simplify the provisions
o f tSe Clayton Antitrust Act in regard to interlocking bank direc­
torates and to facilitate the administration of these provisions by
the Federal Reserve Board.
Provisions in title III, as well as in title II, are still being studied
and improvements and modifications in technique and in phrase­
ology are being developed. I shall, therefore, appreciate an oppor­
tunity to submit to the committee for its consideration a number of
amendments to the bill before final action is taken. It would also
be helpful if the committee would permit the Board's counsel to
cooperate with the committee's counsel in the final perfecting of
the phraseology of the bill.
Thank you.
The CHAIRMAN. Gentlemen, in view of the physical diHiculties
under which Governor Eccles is laboring this morning, I have
assured him that we would excuse him, wnen he had finished his
general statement. Governor Eccles, if you desire that we do so,
we shall be glad to let you go on tomorrow morning, and the com­
mittee will meet at 10:30 o'clock.
(Whereupon the committee adjourned until 10:30 a. m., Tuesday,
Mar. 5,1935.)

FRID AY, MARCH 5, 1935

W7z.<?AM?<7^?H, 7^. C.

The committee met at 10:30 a. 111., Hon. Henry B. Steagall
(chairman) presiding.
The CHAIRMAN. Gentlemen, we wilt come to order. Governor
Eccles, the committee wil! be glad to have you resume your discussion
of title II of the bill. You may proceed as far as von desire without
Mr. EccLES. I made a general statement yesterday, and it oc­
curred to me that it might be helpful to the members of the com­
mittee if I discussed, more or less informally and possibly in more
detail, some of the features of the bill.
It is proposed to combine the office of the chairman of the board
of directors and the Governor of the Federal Reserve bank. At the
present time each of the 12 Reserve banks has 9 directors. Six of
those directors are elected by the stockholders of the banks, that is,
the member banks; three of them are appointed by the Federal
Reserve Board.
These directors are appointed for 8-year terms. Of the 6 direc­
tors appointed or elected by the member banks, 3 are bankers, known
as "class A" directors; 3 must be selected from eommercc, agricul­
ture, or industry, and are known as " class B " directors. One of
the three directors appointed by the Federal Reserve Board, known
as "class C " directors, is selected or appointed as chairman of ihe
board of directors of each Federal Reserve bank. He is also the
Federal Reserve agent. He is a full-time, highly paid ofBcial; and
originally it was conceived that he would be the executive head of
each Federal Reserve bank.
The governors of the Federal Reserve banks are not mentioned
in the Federal Reserve Act. The act provides that the directors
of the bank shall select such ofEcers and employees as are necessary
to conduct the affairs of the bank.
The title of "governor" was given by the nine directors to the
person selected by them as the operating head of the bank. In
practice, the position of the governor has become an outstanding
and important position, and in nearly every instance he has become
the head of the bank. He is not a director of the bank; he is




electcd by the board of directors; the nine members of the board
of directors.
The Federal Reserve Board has no legal relationship with the
governor of the bank, has no responsibility in his selection except
that it passes on his salary. Its oiBcial relationship with the bank
is through the chairman and Federal Reserve agent, whom the
law designates as the Board's olHcial representative at the Federal
Reserve bank.
It is proposed, in this legislation, as a matter of efEciency, coordi­
nation, and good organization, to do away with this dual relation­
ship and to combine the oNice of governor with that of chairman,
making the governor and the chairman a class C director. The
board of directors of each Federal Reserve bank will select the
governor and the chairman; but this selection must be subject to
the approval of the Federal Reserve Board.
You will observe that the Federal Reserve Board will not have
the power of appointment of the chairman, which will be given to
the local board and combined with the ofEce of governor; the ap­
pointment will be subject to the approval of the Federal Reserve
This will make for better coordination and economy, will do away
with the possibility of cleavage, by reason of the dual organization
of the chairman, appointed by the Board in Washington, and the
governor, selected by the local board.
Although the directors of the banks are appointed for a period
of 3 years only, in practice many of the directors have served since
the beginning" of the Federal Reserve System. It is thought ad­
visable to limit the term of ofEce of all oi the directors to two con­
secutive terms, totaling a period of 6 years. This is proposed to
avoid the crystallization oi control or authority in any one group
or combination.
It is felt that, in each Federal Reserve district, there are many
able men to represent the bank members and also commerce ana
industry, as well as the Board at Washington, which appoints the
three class C directors; and that the pubhc nature of the Reserve
System is such that it would be to the interest of the System to have
a limit upon the terms of the directors.
It is recognized that there may be a loss of some very able men
as the result of this restriction, but it is believed that there will be
more gained as a result of this policy than will be lost.
It is interesting to note that two, and I believe three, of the
Federal Reserve banks have adopted the policy, without it being
prescribed by law. of limiting the terms of their class A and class
B directors, that is. the directors electcd by the member banks, to
3 years. The Xew York bank and the Dallas bank, and I think
the Atlanta bank, rotate the oHices of their class A and B directors.
Thev find this in the interest of harmony among their member
ban!?s: and it is felt that, if it is in the public interest to do that
in the case of those banks, it would be well to do it in the case of
all banks and to place the limitation to 6 years in the law.
Since this proposal was made, there has been considerable discus­
sion, and I Hnd that, almost universally, it is looked upon with a
great deal of favor by the banks throughout the country. I find



that there is considerable feeling among many of them that there has
been a certain amount of crystallization of control in small groups.
I met with a group of bankers on Friday, and without exception,
they were all very favorable to that restriction.
Admission of insured nonmember banks: I am discussing this
briefly, in the order in which the proposals appear in the bill—the
admission o f insured nonmember banks is in section 202. It is recog­
nized that many of the nonmember banks could not readily qualify
as members of the Reserve System, and that a very great hardship
and injustice wouM be imposed upon them, if they were required to
become members of the Federal Reserve System under the present
legislation, and under the rules and regulations for membership. It
is, therefore, proposed that the Federal Reserve Board should have
authority to waive the capital requirements.
I suggested yesterday, in connection with this particular feature
of the bill, that the authority for the Federal Reserve Board to waive
the capital requirements for admission of insured banks into the
System, prior to July 1^ 1937, when State banks are required to be
members of the Reserve System in order to be insured, might be
broadened, so as to authorize the Board to waive not only the capital
requirements, but a!l requirements, and to permit existing banks to
continue permanently with their present capital, provided it is ade­
quate in relation to their liabilities.
I think it is desirable to have unification of the banking system,
and I recognize that possibly the most likely way of getting it is
through all banks becoming members of the Federal Reserve System.
In many instances, the capital of nonmember banks, is less than
the minimum amount required—$50,000, and their volume of busi­
ness is such that th^y do not require and cannot possibly use and
support a capital of $50,000 with an adequate surplus, which is also
It is also recognized that certain of the rules and regulations for
membership would make it very difBcult for many banks to qualify
under those rules and regulations; and it is, therefore, the desire of
the Federal Reserve Board to so modify the law and its rules and
regulations as to make it possible, under reasonable conditions, for
nonmember banks to get the benefits of membership. I believe those
benefits are very real. Particularly would that be true if the present
law is amended in some of the particulars as provided for in the pro­
posed bill. I refer to the change in the present eligibility features;
also the recognition of the desirability of using the savings and time
funds in longer term lending, or in the real estate loan Held. These
provisions would give to many of the nonmember State banks the
support that otherwise would not be available to them, if it were
possible for them to continue to operate as nonmember banks.
In section 203, it is recognized that it would be desirable to change
the present language with reference to the qualifications for mem­
bership on the Board, as a recognition of the fact that the functions
and duties of the Federal Reserve Board are such as to make it a
body representing the Nation, rather than any group or combination
of groups. In recognition of that, it is provided in the bill that fu­
ture appointive members of the Board shall be men who are qualified



by education or experience or both to participate in the formulation
of economic and monetary policies, which seems to me to be the
central and most important function of the Federal Reserve Board.
It is recognized that membership on the Federal Reserve Board is
one of the most important, responsible, and powerful positions of
the Nation. It is, therefore, believed that the position should attract,
by reason of its importance and responsibility, the best qualified men
in the Nation to deal with these monetary and economic problems.
It is felt that the men on the Board should be independent and,
therefore, it is recognized that their compensation should be such as
to enable them, without having to have an independent, private in­
come, to live in Washington in the manner that their position would
require. It is proposed that the compensation for future appointive
members be increased to $15,000 per year, the salary now received
by members of the Cabinet. Their salary was originally equal to
that of Cabinet members, but later the Cabinet salaries were in­
creased. The proposal is to reestablish this equality. It is also pro­
posed that there be a pension or retirement provision, so that mem­
bers of the Board who have severed their outside connections and
serve in this position, will not feel a dependency that otherwise
they may feel.
I do not believe the pension provision in the bill fully and ade­
quately meets the situation. It provides that aiy of the present
members may retire at the age of 70, and that future appointive
members must retire at the age of 70. It also provides that, upon
retirement, they will receive a pension of $12,000 per year, when
they have served the full period of 12 years, or more, and a propor­
tionate amount when they have served not less than 5 years. It
would seem to me that, in order to attract the ablest men obtainable
for this position, to make them willing to accept positions on this
Board as careers, and to sever all other connections, a pension should
be provided for future appointive members, irrespective of the age
at which their terms may expire.
It seems to me that this would have the effect of inducing these
men to accept positions of this sort during the most active and
remunerative period of their lives; otherwise, they might not be
willing to accept.
It does not seem fair to ask a person, of the caliber that Board
members should be, to accept a position and serve for a 12-year
term—we will say from the ages of 48 to 60—and at the end of the
period of 12 years, if not reappointed, to be obliged to go out and
undertake to reestablish connections, which were severed and neg­
lected for a period of 12 years.
It would seem to me that, in the public interest, it would be well
to provide that, if a member is not reappointed, he would receive
the full pension, if he has served a full term or longer; but if he is
offered a reappointment and prefers not to serve, of course he should
not be given a pension. I believe that would make for greater
independence on the part of the members of the Board.
As to the term of the oiRce of Governor of the Board: There has
been a good deal said about the provision in the proposed legislation
that the term of the Governor as a member of the Board shall expire
hen he is no longer designated as the Governor by the President.



The present law provides that the Governor shall be de^^nated by
the President to serve at his pleasure, the designation being from
among the Federal Reserve Board members. As a practical matter,
when the Governor is no longer designated as Governor by the
President, it is because the President is desirous of having someone
else serve as Governor.
Mr. GoLDSBonouGH. As I understand it, you approve of that
provision ?

Mr. EccMss. What is that!
Mr. GOLDSBOROUGH. You approve the provision allowing the Presi­
dent to remove the Governor, whenever he sees At!
Mr. EccLEs. Well, I have no objection to it. I think that, as a
practical matter, it is reasonable. In some of the other central banks
there are similar provisions with reference to the executive heads
of the banks.
It seems to me that an administration is charged, when it goes into
power, with the economic and social problems of the Nation. Pol­
itics are nothing more or less than dealing with economic and social
problems. It seems to me that it would be extremely diHicult for any
administration to be able to succeed and intelligentiy deal with them
entirely apart from the money system. There must be a liaison
between the administration and the money system—a responsive rela­
tionship. That does not necessarily mean political control in the
sense that it is often thought of.
Does that answer your question, Mr. Goldsborough!
Mr. GOLDSBOROUGH. Yes: from your standpoint, I think it dops.
Mr. EccLEs. Referring again to the term of oiHce----The CHAIRMAN. Suppose you let me ask a question right there:
Is not the practical situation such that the administration has that
power and may exercise it. but under this bill there will be a tech­
nical recognition of that power and a definite Rxing of responsibility,
at least within limitations!
Mr. EccLES. Well, the only change—I do not think it will be ma­
terial, but the only change in this mil over the present legislation is
ihat when the Governor is no longer designated as Governor by the
President, his term as a member of the Board will expire, whereas,
at the present, when he is no longer designated as Governor, his term
as a member does not expire. This means that if he is no longer
designated as Governor and he does not resign as a member, there
will be no vacancy on the Board to which the President could appoint
the person he desires to designate as Governor, unless he designates
an existing member of the Board. There is this disadvantage under
the existing law: When a member is no longer designated as Gov­
ernor and resigns as a member—which is the only thing that a Gov­
ernor could do, and a person who would not do that would certainly
not be a proper person to act as Governor—he is precluded for a
period of 2 years from entering the banking Held. That is a deter­
rent in the present law to a man accepting that ofRee. If he is taken
from the banking Held, he is required to sever all connections with
the banking business for an inde6nite time, that is. for as long as
he is designated as Governor, and that may be for 2 or 3 or 4 years.
When he is no longer designated as Governor, he resigns as a mem­
ber: and. if he has not served out his term as a member, he is pre­
cluded for 2 years afterward from entering the banking Held again.



If he has served out his term as member, he may immediately enter
the private Reid.
Now, what I should like to propose here is that the Governor's
term as a member do not expire when he is no longer designated as
Governor; that is, leave the law as it is with reference to his term
as a member, but provide that, if he chooses to resign as a member
when he is no longer designated as Governor, his term as a member
be considered to have been fulfilled.
Mr. HoLLiSTKR. That is not what this new statute says, it* it!
Mr. EccLES. No; I am offering this as a suggested change: Whereas
thu bill provides that he shall automatically cease to be a member
of the Board when he is no longer designated as Governor, I am
suggesting that it be changed so as to provide that, if he does not
choose to continue to serve as a member when he is no longer desig­
nated as Governor, he would be free to enter the banking field, with­
out taking a 2-year vacation.
Mr. GOLDSBOROUGH. Your view is that they should resign volun­
tarily, and the 2-year application should apply; but if they are
removed as Governor and they see 6t----Mr. EccLEs. It should not apply.

Mr. GOLDSBOROUGH. It should not apply!
Mr. EccLES. That is right.
Mr. GOLDSBOROUGH. That seems to me to be sound.
Mr. EccLES. It seems to be fair and will remove a deterrent; and
it seems to me that it will accomplish the object of making it a more
attractive position in the future lltan it has been in the past.
Mr. HoLMSTEK. Would it not also attract something else, or accom­
plish something else! This is drafted to give the President the
opportunity, if he cares to do so, to make a clean sweep, to com­
pletely clean up the whole Federal Reserve Board in a few days, does
it not ?
Mr. EccLEs. Well, of course, I think that if we are going to con­
ceive of a President that would resort to what would be considered
sharp practice, he would possibly have more direct ways of cleaning
it up than that. I think a President that would resort to that sort of
thing would possibly have other ways of meeting the situation.
Mr. HoiJJSTER. Presidents have in the past, unfortunately, done
things that some of us would not back up; but, as a matter of fact,
as the bill is drafted, it permits the President, if he cares to, to re­
move successively every member of the Federal Reserve Board,
appoint him as Governor, and undesignate him; whereupon, he imme­
diately retires from the Board!
Mr. EtCLES. Yes; that is correct.
Mr. H 0MJ8TER. So the suggestion you make would at least elimi­
nate the possibility of that happening, when we had a man in the
White House that might adopt such sharp practices!
Mr. Ecci.Es. Yes.

Mr. CROss. Mr. Chairman, may I make a suggestion as a member
of the committee?
The CHAIRMAN. Certainly.
Mr. Cnoss. I would like to make this suggestion: That Mr. Eccles
be permitted to go ahead and finish his statement; and then that he
submit the amendments that he would suggest; and then when he



gets through with his statement, just as Mr. Goldsborough suggested
the other day, each member of the committee be given a chance to
ask questions, bccause every member has many questions, or a num­
ber of questions, on this section that they would like to ask. I am
afraid that, if we start like this, we will never finish or get anywhere.
That is my suggestion.
The CHAIRMAN. Well, I certainly expect that every member of the
committee will have the opportunity you refer to, and I will recog­
nize members in an orderly way, so that every member will be
allowed to ask questions.
Mr. CROSS. The point is, we will not have a coordinated idea of
this by going in and out? and I think it is much better to let him
finish, and then later on let him bring his proposed amendments to
the bill, and then we can take up those amendments and let him
discuss those amendments in a much more uniform way, and every
member will get a grasp of the bill. That seems to me to be the
best way to proceed.
The CHAIRMAN. All right, Mr. Eccles, you may proceed.
Mr. EccLES. Assignment of duties: There is no controversy over
that question. It is iust a practical way of enabling the Board to
meet the problems 01 increased responsibility that are placed upon
them by delegating to others many of the routine duties, so long as
they do not involve questions of policy.
Open-market operations: Inasmuch as this was covered quite fully
in my statement yesterday, I do not believe that I can add very much
to it. There will likely be a good many questions that will aevelop
in connection with that, because, under that heading, the whole
question of monetary control heads up.
I explained yesterday the way the open-market operation is now
organized, the manner in which the bill provides for it to be oper­
ated, and the amendments suggested to the proposals in the bill.
Eligibility for discount: The eligibility requirements of the pres­
ent law do not seem to me to meet the changed conditions that we
now have in the Nation, compared with the conditions that existed
at the time the Federal Reserve was established. The amount of
eligible paper available now held by banks is a very small part of
the total resources of the banks. Even in 1929 it was only slightly
over 12 percent of their loans and investments, and today I under­
stand it is less than 8 percent. Approximately $2,000,000,000 is the
total amount of the paper which would be considered eligible by
the banks themselves. It was found, when the depression com­
menced and as it continued, that the banks did not have eligible
paper to meet their shrinking deposits, brought about by the general
liquidation of bank loans and by hoarding; and that^ in order to
avoid closing they were forced to sell such bonds as they had upon
the market. These bonds were considered, at one time, to be sec­
ondary reserves, because they were listed. Banks also brought pres­
sure upon all loans which came due during the period, and were
forced to refuse new credit, feeling, of course, that they had to have
as large cash reserves as possible and be as liquid as possible. They
were bringing pressure to collect loans that came due, and to sell the
securities that they had, wherever they could do so without taking
too large a loss. That attitude on the part of the banks throughout
the Nation was largely due, it seems to me, to the fact that they did
130417—35------ 2



not have eligible paper in suHicient quantities to meet the demand
and could not get help at the Federal Reserve banks unless the
paper was eligible.
Therefore, m an eEort and under pressure to get liquidity, they
froze themselves so completely that they Rnally closed the entire
banking structure. So it was found out that, in the Rnal analysis,
in a depression, there is no liquidity, except that liquidity which can
be created by the Federal Reserve or the central bank through its
power of issue.
This was Rnally recognized when great damage had been done,
when thousands of banks had been closed unnecessarily, when
millions of individuals and institutions had been forced to the wall
through the lack of available credit, or through pressure to pay
existing debts. Millions of depositors lost hundreds of millions of
dollars as the result of those closings.
We Rnally recognized that we did not have to have eligible paper
and we did not have to back our currcncy with gold or eligible paper
or even with Government bonds. We Rnally recognized that, in
order to get the banks open, we could take any sound asset into the
Reserve bank and issue Federal Reserve bank notes. When that
happened nobody wanted their money, the runs stopped, and liqui­
dation stopped to a very great extent. Certainly, the pressure was
very greatly relieved.
!fow it seems to me that it is only being a realist to recognize that
the Reserve banks, subject to rules and regulations made by the
Reserve Board, should have the power to meet emergencies, should
have the power to loan to member banks upon sound assets, rather
than see the banks close, or rather than see unnecessarily drastic
liquidation forced upon the community.
This provision does not mean inflation. Before the banks today,
as a whole, would have any occasion to use the Reserve System, they
would have to extend billions and billions and billions oi dollars o!f
credit, because of the excess reserve position that they now occupy.
But, if the provision is there, it will make the banks ieel altogether
different about extending credit today. It will make them recognize
that they do not have to have 90-day or 6-month paper in order to
make loans, when that type of demand for credit does not exist to
more than a very limited extent.
This, to my mind, is one of the most important features of the leg­
islation at the present time. It will tend to do more toward inducing
recovery through credit expansion than any other feature of the bill.
The banking system must be made, to provide the money and credit
required, if it is going to justify its existence. At the present time,
that is largely provided by the Government. The banking system,
the commercial hanking system----Mr. GoLDSBonouoH. You say it is being provided by the Govern­
Mr. EccMS. To a veiy large extent.
Mr. GOLDSBOROUCH. We were under the impression that the Gov­
ernment borrowed the money that it is now providing, from the
banks; is that not correct!
Mr. Ecci.ES. That is very true. The banks are willing to extend
credit on Government bonds.



Mr. GoLusnoRouoH. We have provided the hanks with $13,000,000,000, about, have we not!
Mr. ECCLES. Well, I do j!ot know the exact amount, but----Mr. GOIDSBOROUGH. That is an approximation.
Mr. Ecci.ES. But whatever amount of Government bonds the
banks have purchased—it is not $13,000,000,000, but, including what
the Federal Reserve System has, I think it is nearly $13,000,000,000—
the Government is doing the lending through the various Govern­
ment lending agencies, such as the Home Owners' Loan Corporation,
the Farm Credit Administration, and the Reconstruction Finance
Corporation. Those are the three most important agencies and, of
course, we know they have put out billions and billions of dollars,
and the banks have largely taken Government bonds and bonds guar­
anteed by the Government, and the Government, in substitution, has
taken the loans of the individual and the corporations. So that it
has been a process of the banks liquidating their private loans, and
the Government taking them over, and the banks providing the
funds to take Government bonds or bonds guaranteed by the Govern­
ment. And, of course, if continued, it seems to me that the banks
are going to have very great diRicultv in justifying their existence.
Mr. GOIDSBOROUGH. When they can only live by the Government
furnishing nearly one billion dollars a year in interest, which they
do not earn, it seems to me your statement is worthy of very serious
Mr. EcciiEs. I recognize that, and I have also told many of the
banks that the provisions of this legislation with reference to this
eligibility feature, and with reference to this real-estate loan feature,
are to give them an opportunity to utilize their funds in the direct
Held o f lending and get the Government out. Otherwise thev will
find that the Government will have taken over the banking business,
not because the Government wanted to. but because the banks forced
it to.
Purchase of United States guaranteed obligations: It is provided
that obligations guaranteed by the United States Government should
be put on the same basis as direct obligations. There seems to me to
be no justification for discrimination; that they should be eligible
for purchase by the Reserve banks without regard to their maturity,
in the same manner that direct obligations of the Government arc
eligible for purchase by the Federal Reserve banks.
Collateral for Federal Reserve notes: It is provided that the position
of Federal Reserve agent as such shall be eliminated and that the
position of chairman of the Federal Reserve bank shall be combined
with that of the governor. The Federal Reserve agent acts as a
trustee, holding the collateral against which Federal Reserve notes
are issued, at least 40 percent in gold certificates and the balance in
eligible paper or Government bonds, or both. It was thought, origi­
nally. that the amount of currency outstanding at any time was influ­
enced or regulated by the amount of commercial paper, which repre­
sents the activity or the volume of trade or business. It has been found
t^at there is very little relationship between the volume of Federal
Reserve notes ant! the volume of commercial borrowing. Of course,
that is due to the fact that currency, as such, plays so small a part in
our money system and that bank credit or deposit currency plays a



inAj or role. The amount of currency or Federal Reserve notes out­
standing will depend upon the demand for currency by member
banks. The member banks discount or borrow from the Reserve
banks in order to maintain their required reserve balances with the
Reserve banks. Member banks draw currency to meet the demands
of their customers. It is not felt that the collateral put up back of
the Reserve notes in any way restricts the use of currency. It is
not felt that collateral adds anything to their security. They are
now guaranteed by the United States Government; they arc a first
lien on a!! the assets of the Reserve banks. Whenever notes are
issued or deposits created by the Reserve banks, there are assets to
offset the liabilities of the Reserve banks, whether the liabilities
consist of notes or of deposits of their member banks.
There would seem to be no more reason to secure notes which they
issue than to secure deposit liabilities to their member banks. The
Reserve banks are required to hold gold certificates equal to not less
than 40 percent of their notes outstanding, and gold certiScates or
lawful money of not less than 35 percent of their deposit liability
and----Mr. WOLCOTT. Gold certificates ?
Mr. EcciJss. Well, of course, they have no gold. There is no pro­
posal to change that. The assets of the banks, on the other side,
consist of gold certificates and other money tliat they may hold,
and Government bonds and bills or rediscounts.
Mr. HANCOCK. Could you properly call those notes "asset cur­
rency " !
Mr. Eccms. What is that?
Mr. HAXcocK. Could you properly call those notes "asset cur­
rency " !
Mr. EcctBS. I do not just understand what you mean.
Mr. HANCOCK. I do not want to begin questioning you, but right
on that point you made the statement that it was not necessary that
notes have any particular banking value.
Mr. EccLES. Yes.
Mr. HANCOCK. In that they constitute a lien against all of the
assets of the banks.
Mr. EccEES. That is right.
Mr. HANCOCK. Now, would you consider such notes as asset cur­
Mr. EccLES. Well, they are the obligations of the banks that issue
them and are guaranteed by the United States Government. They
are not asset currency, in that they are not backed specifically by
this or that particular asset or assets, except to the extent that there
is at least 40 percent of gold certificates held, and there would be
other certificates back of them. The liabilities of the bank would
be offset by its assets. So, to that extent, there are assets in the form
of gold certificates, Government bonds, or loans and discounts, back
of all the notes issued, just as there are back of all of the deposits
of the bank. The value back of the Federal Reserve notes is deter­
mined by the assets of the Reserve banks. In 1932 it was found im­
practical to restrict the issue of these notes as they were restricted,
when gold was leaving the country very rapidly and when the banks
held very limited amounts of commercial paper. The requirements



*of the law had to be suspended in 1932, and Government bonds had
to be accepted as substitutes for commercial paper as the basis for
issuing notes, in order to release the excess amount of gold that had
to be held in the absence of commercial paper. So it was found
that the restriction imposed at the time, and the only time when the
provisions of the law were tested at all, they had to be suspended.
The CHAIRMAN. It might be well to remember definitely the date
of that action.
Mr. EccLEs. Well, you probably remember it. It was in 1932,
February 27, 1932.
Reserve requirements: The Federal Reserve Act, as amended by
the act of May 12,1933, provides that, with the consent of the Presi­
dent, when an emergency is declared to exist, the Federal Reserve
Board has power to change the reserve requirements of member
banks. It is proposed to recognixe this emergency provision as a
permanent provision and to give to the Board the power to change
reserve requirements, without declaring that an emergency exists and
without the approval of the President. This is a function of mon­
etary control almost equal in importance to open-markct operations,,
and it is felt to be necessary that the Board have this power, par­
ticularly in order to control an inflationary condition, should one
It is conceivable that the reserves of the member banks may be
greatly in excess of the amount of Government bonds and paper
held by the Reserve banks. The sale of those securities in the
market would not be sufBcient to absorb the excess reserves: and
therefore, the increase of reserve requirements would come into use
as a means of controlling an inflation of credit. It would be ex­
pected to be used only as a method secondary to open-market oper­
ations. Changes in reserve requirements would be used at a time
when open-market operations failed to meet the situation.
Mr. Cnoss. I might suggest that I remember the conditions that
existed in the world, the speculation on the stock exchange: do you
think it would be wise to nave a provision so that you could desig­
nate certain particular banks, where they had increased their reserve,
rather than apply to ail banks, everywhere, at any time?
Mr. EccLEs. I do not believe so. I think money is too much like
water: it seeks a place where it can----Mr. FoRD. Seeks it own level?
Mr. EccLEs. Yes: it seeks a levei, and of course that level is based
upon the return it can get.
We have proposed here that changes in reserve requirements might
be a pplied to two classes of cities: Central reserve and reserve cities
in one class and country banking areas in the other. It is conceiv­
able that different reserve requirements could be applied to the
reserve cities, if that is where speculation was going on and where
the excess of reserve was, which is usually the case. There is an
element of time in money seeking its level. Just what it is, I do
not know that anybody can say. But increases in reserves might
be applied first to the reserve cities and then later to the other areas,
if it seems to be necessary, rather than to apply them at the same
time universally. I do not believe that you could consider it beyond
that. I do not believe it would be practicable to apply it to mdi-



vidual banks. The Federal Reserve Board has the power now to
regulate margin requirements on collateral and brokers' loans, which
is one of the most effective instruments of speculation control, I
think, now available. I believe that, had it been available in 1928
and 1929, it would have possibly been helpful in controlling or
restricting the speculative orgy that we went through.
The CHAIRMAN. Governor Ecclcs, the House has been in session
for a little while, and there are matters that require the attendance
of Members, and I am sure you will be glad to desist until tomorrow,
anyway. We will adjourn until 10.30 o'clock tomorrow morning,
and we expect to have the pleasure of having you back again with us.
(Whereupon the committee recessed until 10.30 a. m., tomorrow,.
Wednesday, March 6, 1935.)


D. C.,
The committee met at 10:30 a. m.. Hon. Henry B. Steagall (chair­
man) presiding.
The CiiAiRMAx. Gentlemen, we will come to order. Some of us
have to appear before the Committee on Rules this morning, and 1
have to leave in a few minutes. I am going to suggest that, unless
Governor Eccles decides to proceed further without interruption,
that the committee will now proceed to discuss with him title II of
the bill. If you desire further time without interruption, we shall
be glad for you to have it. We do not want to hurry you in the
least. It is our desire to permit you to have ample time to express
your views, in your own way, fully, after which the committee, of
course, will desire to interrogate you.
Mr. KccLEP. I have finished my principal statement.
Mr. KorPLEMAxx. May I ask a question ?
The CnAiRMAX. Certamly.
Mr. KorPLEMAxx. There may be some questions that I want to
ask on title II. but I am not prepared to do that today. I suppose
that Governor Eccles will be here tomorrow?
The CHAIRMAN. Yes; you will have ample opportunity to do that.
I am taking it for granted, of course, that that will be flone, if it is
necessary to meet vour convenience.
Mr. Ecci.Es. I finished the discussion yesterday of the p roposals,
w ith the exception of the one relative to the rcal-estate loans.
The CHAIRMAN. The committee will be glad to hear you further
on that provision, or any other, without interruption, if you so
Mr. EccLEs. I 8nished them all with the exception of that yes­
terday, and it seems to me to be one of the important issues, and it
might save time to say something about that.
The proposal is to amend the act to permit the national banks,
as well as other member banks, to make nrst-mortgage loans on im­
proved real estate for a period up to 20 vears; that is, if the loans
are amortized so that they would be paid o# over that period of
time; to reduce the period from 5 years to 3 years in cases where
the loans are not amortized, and to increase tne amount that they
can loan from 50 to 60 percent of the value of the real estate.
It is also proposed to increase the amount, the total amount of
bank funds that can be loaned, from 50 percent of time funds of a
bank up to 60 percent, including in the amount loaned, however,
other real estate excepting the banking houses.




You recall that I suggested yesterday that the proposed bill be
amended, if we think it advisable to amend it, so as to give the
Federal Reserve Board the power to determine the conditions of
real-estate loans by regulation, the reason for this being that to
tiy to put into the statute a limitation of 60 percent of the amount
of savings wiil work a very great hardship on many State banks.
We find that some of the State member banks and many of the
State nonmember banks already have in excess of 60 percent of
their time funds in rea!-estate loans. It would seem, therefore, that
they would be required to cease making real-estate loans and to
liquidate the loans they had as they fell due.
Also, it seems that to try to fix in a bill or in a statute a provision
permitting 75 percent of the appraised value of property might not
be desirable. It is felt that the situation would be better met if the
Board had the power to fix the rules and regulations to meet this
matter; that it would make it much more flexible than if it is put in
the statute.
The member banks of the country huve about $10,000,000,000 of
savings or time funds. The New England area and the New York
area are largely served by mutual savings banks. More than 50 per­
cent of the deposits of the banks, outside of that area, consist of sav­
ings deposits. These funds are equivalent to the funds that the
mutual savings banks are receiving from the people in the area that
they serve. The banks are required to pay interest on these time
funds. The maximum rate of interest at the present time is fixed at
2% percent. It is impossible for these banks to pay that interest and
to loan these funds on short-time paper.
In the first place, there is not available a sufHcient amount of shorttime commercial loans to utilize more than a fraction of the demand
deposits, much less the savings deposits; and as a result the banks
hold a very large volume of idle funds.
There has been no restriction imposed upon banks with reference
to their investments in long-term bonds. They have been permitted
not only to invest all of their savings funds but as much of their
commercial funds as they desire, in long-term bonds, railroad bonds,
utility bonds, foreign bonds, and industrial bonds. I cannot see that
it is so much more desirable to permit banks to invest in long-term
listed bonds than it is to loan their funds on improved real estate on
an amortized basis in their local communities.
The fact that bonds were listed and. therefore, supposed to be
marketable, was considered a justification for the investment of
funds in bonds as compared with the investment in real estate. The
depression proved that the ready market for bonds was only there
at prices that bankrupted the banks, if they were forced to"sell in
the market that existed. More banks became iusolvent as a result of
the depreciation of their bond accounts than as the result of their
real-estate loans. The fact that bonds were listed and were greatly
depreciated put the banks, when the examiners came into a condi­
tion of insolvency, because of the difference between the quoted
market price and the cost of the bonds; whereas in the case of realestate loans it was not expected that there should be a ready market
for them, and so long as they were not in default, they were consid­
ered .jto have the value of the amount of the loan. It was the



depreciation shown on the bonds and stocks, because of the quoted
market, that impaired and in many cases wiped out the capital of
the banks.
It seems to me that, if we want to be so restrictive in the matter
of rea!-estate loans, because they are long-term investments of funds
which are likely to be drawn out on. demand, we should also be
restrictive with reference to the investment of funds in long-term
bonds. I believe that the banks should be permitted to invest their
funds in long-term bonds and in long-term amortized mortgages.
Particularly is that true with reference to their savings or time
funds. The reason is that otherwise they have no way to use their
funds, except to buy Government bonds, or bonds guaranteed by
the Government.
Mr. GOLDSBOROUGH. You mean you think it is the duty of society
to support the banks!
Mr. EccLEs. No; I am not saying that. I am talking about the
condition that exists.
Mr. GOLDSBOROUGH. As far as society is concerned, it is interested
in banks only insofar as the banks are useful to society!
Mr. EccLES. That is correct. Either the banks holding these
§10,000.000,000 of time funds must be prepared to lose those funds
to the savings and loan associations, to mutual savings banks, or
to others, or they must be put in a position to use the time funds
in the long-term investment Reid.
I am convinced that it is not possible for the majority of banks
in this country to operate with demand deposits alone. The volume
of these funds is not adequate for profitable operation except in
the larger institutions, and to take time deposits away from the
banking system would reduce the size of many banks to the point
where they would be unable to exist.
If our private banking system is expected to provide credit in
other ways besides buying Government obligations or obligations
guaranteed by the Government, then it seems to me that some of
the provisions of this proposed legislation are essential, the one
with reference to eligibility and the one with reference to realestate loans.
There is nothing new about national banks loaning on real estate,
since they have made such loans for 20 years. Thev have loaned,
however, for a limited period of 5 years on a straight mortgage,
which makes for a much more unsound loan than a longer-term
amortized loan.
I believe that covers what I have to say, Mr. Goldsborough, and
I will be glad to answer any questions.
Mr. GOLDSBOROUGH. Suppose we begin the regular examination.
Mr. Cavicchia has a question.
Mr. CAviccniA. Mr. Chairman, I think this would be the proper
place in the record for the Governor to tell us, if he knows, to what
amount the mortgages of national banks are held or were held in
1933 or today, if he knows.
Mr. EccLES. I do not know oE-hand, but I have it here. On

October 17, 1934, under the law in effect, the national banks had
authority to lend up to $3,400,000,000. Under the new proposal the
limit would be about $4,400,000,000 for national banks and about



$6,800,000,000 for all banks. The total amount of actual loans on
real estate by all member banks at the end of 1934 was
Mr. COLDSBOBOUGH. Governor Eccles, you wanted to say some­
thing else!
Mr. EccLEs. I was going to say that in connection with my dis­
cussion of the provisions of the bill I have suggested certain pro­
posed amendments or revisions for your consideration. I would
like, in closing, to call those to your attention in the order in which
they were suggested.
Mr. (jrOLDSBOBouGH. As this hearing naturally will be protracted,
we are not going to hurry you, and you may do so.
Mr. EccLEs. In section 2&1, the first section discussed, it was sug­
gested that the governors and chairmen of the Federal Reserve
banks be approved by the Federal Reserve Board every 3 years
rather than annually so that their terms as governors and chairmen
would coincide witlf their terms as class C directors.
Mr. GoEDSBOKOtrGH. What page is that on, please!
Mr. EccLEs. That is section 201. That is the one with reference
to combining the o(Hces of chairman and governor.
Mr. WiLUAMs. On page 39 of the bill.
Mr. Eccijss. This, as you will notice, is a slight modification, and
it is just offered as a suggestion.
There has been some criticism about the necessity of approving
the appointment of the governors each year, whereas they will be
appointed as class C directors for 3 years. I personally can see no
necessity of approving their appointments every year and feel that
it is wetl to consider the suggestion that they be approved every 3
years instead.
Section 202: On the question of admitting insured nonmember
banks to the Federal Reserve System, the suggestion is that the
Board have authority to waive not only the capital requirements but
all other requirements for admission, and that the Board be per­
mitted to admit existing banks to permanent membership, without
requiring an increase in capital, provided that their capital funds
are adequate in relation to their liabilities.
Mr. GOLDSBOROUCH. When you refer to the capital, you mean the
capital and surplus combined^
Mr. Eccins. What is that!
Mr. (r()i,!)SBOR(X GH. You mean the capital and surplus combined!
Mr. Ecci.Es. The law requires $50,000 capital at the present time,
and many banks----Mr. GoLHSBOHui cu. I know, but I think you say, " Providing its
capital is adequate " !
Mr. EccLEs. No: I would think you should take the capital and
surplus in determining the adequacy.
Section 303: The suggested modification of the pension provision
is for the purpose of giving Board members a greater degree of
independence. It has been suggested that each member of the Board,
regardless of age. who has served as long as 5 years, whose term
expires and who is not reappointed, shall be entitled to a pension
on the same basis as though he were retiring at the age of 70. I
discussed that to some extent yesterday.



Section 203: It has been suggested also that a Governor of the
Federal Reserve Board, who is not redesignated bv the President
may, if he chooses, continue his membership on the Federal Reserve
Board. That is the way the law is now, and the new bill that is
being considered, as you will recall, provides that his term as mem­
ber of the Board shall cease when he is no longer designated as
Governor. It has been suggested that, as a result of that, the Presi­
dent could designate each member of the Board and then no longer
designate him, and finally create a new Board completely. So, in
order to eliminate that criticism, this is the suggested amendment:
That the Governor could continue as a member of the Board even
if he is not designated as Governor; but that if he resigns from the
&oard upon not being redesignated, it would be considered that he
hud served out his term and he would not be precluded, by reason of
having resigned under those circumstances, from entering business
for a period of 2 years.
In section 205, it is suggested (hat authority over open-market
operations be vested in (he Federal Reserve Board, but that there
be created a committee of 5 governors of the Federal Reserve banks
selected by the 12 governors of the Federal Reserve banks, and that
the Board be required to consult this committee before adopting an
open-market pohcv. a change in the discount rates, or a change in
member bank reserve requirements.
Mr. GoLDSBORornH. Is there any interpretation in your suggested
amendment as to what the consultation would consist of? Express­
ing it another way, would the Board be bound to accept (he sugges­
tion of these five men, or any one of them ?
Mr. EccLES. No. It is a question of giving the governors a hear­
ing and making a record before the Board can act; but the Board
would have the final responsibility for the action.
Mr. G0M)SB0R0r(m. That is the intent, but I am not sure it is
entirely clear. Of course, that can be clarified.
Mr. Seems. Yes; that is the intent. The Board would be charged
with the responsibility and they would have the power to initiate,
but before taking action they would be required to advise with and
get an expression of the views of the committee of the governors,
or the governors could initiate and come to the Board and make
their recommendations for the consideration of the Board.
Mr. FoRD. Should there be a time limitation on how long you have
to wait for that consultation?
Mr. EccLES. Well, I would provide that, of course, the Board
should be able to make rules with reference to that.
Section 209: It is suggested that the Board should not have the
power to change the reserve requirements by Federal Reserve dis­
tricts. I discussed that, I think, to some extent yesterday. It has
been suggested, further, that the member banks ^e classified in the
two groups, one comprising member banks in the central reserve
and reserve cities, and the other all other member banks. Changes
in the reserve requirements, therefore, would have to be either for
the country as a whole, or for the financial centers, as against the
country districts.
Section 210: Real-estate loans: It has been suggested that the
conditions on which real-estate loans may be granted by member
banks be left to the discretion of the Federal Reserve Board, to be



determined by regulations. I see no objection to accepting also some
geographical limitation as to where loans could be made, that is,,
some specified distance from the banking houses. Of course, there
is no limitation as to the field where banks can toan funds on bonds^
but there seems to be a good deal of opposition to the elimination
of the geographical limitation on real-estate loans. I do not believe
it is of suiBcient importance to have any disagreement over.
Well, now. those are the suggested modifications.
Mr. FoRD. Just one word on that geographical limitation: In cities
where the Federal Reserve banks to whom the various banks have to
go for these loans, if the geographical limitation is put in there,
very often there is very keen competition between cities and the city
in which the Board is located, and if it were limited, it might
mitigate against another city that did not have a bank, as to the
character of loans that they wou!d be willing to discount. With
the geographical limitation, I think, in many instances, it might
have a very bad effect.
Mr. EccLKs. You mean in the case of real-estate loans?
Mr. Mmi). Yes, sir.
Mr. E(rcu:s. Well, I do not just get the point of your question.
Mr. FoHD. Let me illustrate it in another way: Let us say that the
main branch of the Federal Reserve is at San Francisco. Well, now,
the geographical limitation, for instance, leaves the city of San
Diego out of that limitation: and if there were some loans coming in
from there, and there happened to be competition, for instance, in
water transportation between those two points, and somebody on
that Board was anxious to work a little against San Diego, it might
be possible and something like that might come up, because it has
come up in other things.
Mr. EccLEs. Well, in the case of San Diego, in that case San Diego
wm:!d discount with the Los Angeles branch.
Mr. FoRo. That limitation would not touch the branches?
Mr. EccLEs. The limitation is a mileage limitation from the bank
that makes the loan, the idea being that the bank in an area should
loan funds in the area in which it is acquainted, where the oCicers
can personally be informed as to the property upon which they are
lending: whereas, if there is no geographical limitation, the funds
may be loaned in far-removed areas, a thousand or two thousand
miles away, as the case may be.
Mr. FoiM). If it applies to branches, that is all right.
Mr. EccLEs. The advantage of taking the limitation off is this:
That in an area that has a surplus of funds beyond the demand for
real-estate loans, it could invest those funds through some corre­
spondent institution where there is a shortage of real-estate money,
just as our insurance companies in New York and other points loan
money over the United States and building and loan companies have
loaned in a more or less wide area, and as the mutual banks loan in
far-removed areas.
Mr. GoLDSBOKOt Gii. Mr. Hancock, you may proceed, if you desire.
Mr. HANCOCK. Mr. Chairman, I have listened with intense interest
to the very able and enlightening statement made by the Governor of
the Federal Reserve Board with respect to the purpose and phil­
osophy of this important measure, and to his detailed explanation of
its mechanics. It occurs to me, however, that since it is such an!



Important and far-reaching measure and is somewhat intricate, that
the committee should arrange immediately to have the Governor's
testimony reduced to writing go that we may have a chance to fully
analyze and digest it before we go into the questioning of the Gov­
ernor. I hope the clerk will arrange to have this done at once.
I am not so much concerned with the mechanics as I am the pur­
pose and philosophy of the bill. How it will be administered is, of
course, vitally important.
I want to ask the Governor what is the difference between this
measure and an outright central bank?
Mr. ECCLES. Well, 1 do not know just what you mean by " central
bank." You mean by that a bank that is owned by the Government,
and a bank with branches!
Mr. HANCOCK. I would like to have an explanation of that, and
then I will ask vou another question.
Mr. EccLES. There arc a good many different kinds of central
banks and----Mr. HANCOCK. Well, let me ask you this, Governor: What would
be the practical difference between the system proposed herein and
the Federal monetary authority that the committee last year studied,
conducted hearings on, and considered!
Mr. EccLES. I am not familiar with what the committee worked
on last year. I could not give you a comparison between Federal
Reserve operations and what was proposed under that bill, because
I am not familiar with it.
Mr. HANCOCK. Well, briefly, here is what the Federal monetary
authority undertook to do: It undertook to set up what you migHt
term a supreme court of finance insulated against political and com­
mercial banking domination, and vested in that supreme court of
finance or authority the sole note-issuing power of the Nation. It
would have owned and controlled all of the gold, all of the metallic
base; and it would have had the right to control the open-market
- operations through the sale and purchase of Governments, the con­
trol of the rediscount rate, and other essential powers to control or
regulate the volume and cost of money for the national welfare.
Mr. EccLES. Speaking of the central bank, the Federal Reserve
System has always been expected to perform certain functions of a
central bank. It was set up on the basis of a certain regional auton­
omy, due, I suppose, in part, to the opposition to centralization in
this country at the time the Federal Reserve System was set up, and
due, also, in part, to the size of the country and the different economic
conditions that existed in the different regions. The Reserve Board
was set up as a coordinating agency for these 12 banks, which have
25 branches.
The proposed bill in no'way changes the physical structure. The
. ownership of the Federal ^Reserve bank is left with the member
banks. In most of the countries of the world, the central bank is a
privately owned institution. Instead of being owned by the member
banks, it is owned by the public.
There is no change being made in the number of directors, 9 direc­
tors. and the majority of them are selected by the stockholders of
the member banks—6 of the 9. A limitation is being put, however,



upon the terms of these directors. The general structure of the bank
is not being changed.
It is proposed, however, that the appointments of governors should
be approved by the Board. That is so that they would be in a more
direct relationship, a more responsive relationship to the Federal
Reserve Board, so that the Board's coordination of the system would
be through the governor, rather than through the chairman and
agent. This is the reason for the proposed combination of the olEces
of Governor and Chairman. Such coordination would be further
cifecced through the Board's control over open-market operations and
discount rates. The Board today approves the discount rates.
There is no change in the matter of the discount rates proposed in
the bilL but there is a change regarding the open-market operations.
Mr. HANCOCK. And that is the heart of the bill, is it not!
Mr. Eccuas. Well, it is the most important feature and-----Mr. HANCOCK. That is the main method or means by which you
control the supply of money!
Mr. EccLKS. Well, the question of reserve requirements is also a
feature secondary------

Mr. HANCOCK. Secondary!
Mr. Eccms. I think secondary to the other features.
Mr. HANCOCK. But the open-market operation is the primary and
most effective feature!
Mr. EccLES. That is right. The other is secondary. The open
market is the primary feature.
Mr. HANCOCK. And under the terms of this bill, the open-market
operations are vested entirely in a Government board!
Mr. EccLES. No; vested in the Federal Reserve Board under this
bil! if changed in the manner which has been suggested.
Mr. HANCOCK. Yes, but under this bill, that Board is appointed
by the President and confirmed by the Senate!
Mr. EccLES. That is right, for terms of 12 years, and the openmarket power is vested in the Board. Today the Board has a veto
power over open-market policy. The governors have an openmarket committee. The 12 governors elect a committee of 5, and
that committee is a committee charged with the responsibility for
the initiation of open-market operations. The Federal Reserve
Board either approves or disapproves or induces them to modify
their program; but the Board cannot initiate. And then, if the
policy is initiated by the open-market committee and is approved
by the Board, the I3oard is not in position to require that the
banks cariy out the policy. .So it is proposed in this bill to place
the authority and responsibility in a small body, and the B oari----Mr. HANCOCK. Under the biil proposed you can initiate the policy
and then enforce its execution, can yon not!
Mr. Eccus. That is right
Mr. HANCOCK. So it really gives you complete control over the
money supply!
Mr. EccLES. That is right. Now, to that extent, it is centralizing
that function to a greater extent than it has ever been centralized!
Responsibiliy is always felt more keenly when it becomes a personal
responsibility, and it seems to me it is desirable to place that re­
sponsibility in a small body, either in the Board or somewhere else.



The responsibility for the exercise of these important functions of
monetary control should be in one body, either the Board or some
other body. It should not, to my mind, be divided to such an ex­
tent that it can result in obstruction, lack of action, lack of coordi­
nation, and lack of a feeling of responsibility.
There are many important functions the Reserve banks have out­
side of the open-market operations, and there is no idea of taking
away from tne regional banks all of the functions which they now
have. As a matter of fact, if the Board is given the authority it is
requesting here in the bill, to delegate some of its authority, I believe
that there are some of the duties that the Board could delegate to
the regional banks beyond the responsibilities the banks now have.
The regional banks carry the reserves of the member banks. The
regional banks pass upon the credits to the member banks. It is
through the regional banks that the Board operates in the approv­
ing of banks ior membership, in the issuing of voting permits, in
the examinations of banks, m the matter of reduction of capital
structure, or in the matter of consolidations. All of the important
relationships with all of the banks and the public in the area where
the Reserve banks are, are handled by the management and directors
of those banks; and there is no idea of taking away any part of
this, or attempting to centralize those functions here m the Federal
Reserve Board.
Mr. HANCOCK. In effect, Governor, does not this bill undertake
to bring back home the sovereign power vested in the Congress to
coin money and regulate the value of it!
Mr. EccLES. Well, it brings to the Federal Reserve Board the
power, and, of course-----Mr. HANCOCK. And through that Board back to Congress!
Mr. EccLES. That is right, because----Mr. HANCOCK. Is it not an unpleasant fact, Governor, that this
power has been farmed out to private interests for years and years!
Mr. EccLEs. Well, the power really has not been exercised to any
great extent. Up until 1922 there was not any recognition of the fact
that, by the open-market operations, you affected the supply of money.
There was no special machinery for open-market operations in tne
original Federal Reserve Act. In 1922, during a period when some
of the banks were buying securities as investments, it was observed
that it influenced the situation in New York, and they began to realize
that these 12 Reserve banks, acting independently, in buying and sell­
ing for their own investment account, from a purely earning stand­
point—in other words, operating as commercial banks would—had a
real influence and effect on the money market. The result of that was
a self-appointed committee of governors to work together, so as to
have a coordinated program of buying and selling; and I believe it
was not until 1933 that the open-market committee was recognized in
the law.
Mr. HANCOCK. Governor, based on your statement yesterday, would
it be unfair to interpret this bill as the last clear chance to save the
autonomy of private banks of America!
Mr. EccLBs. Will you state that question again!
Mr. HANCOCK. I said, would it be fair to interpret this bill as the
last clear chance to save the private commercial banks in America
from their own destruction!



Mr. EccLES. Well, that would be a question rather difHcult for me
to answer.
Mr. HANCOCK. I am asking you the question, Governor, in the light
of what you said yesterday.
Mr. EccLES. I think this bill will certainly tend to make it possible
fbr the private banking system to function in a much more satisfactory
and adequate manner than it has in the past.
Mr. HANCOCK. Nothing could be more desirable.
To use the expression that you used before the Senate committee
in 1932, this measure, idealistically speaking, is designed to bring the
money world back into relations with the real world, is it not!
Mr. EccLES. Well, it is designed to create a condition of stability,
stable business, we will say, so far as it can be done through monetary
policy. The important thing today is not so much, as so many people
believe, to increase the quantity or volume of money, as it is to increase
the velocity of money that is already in existence.
Mr. HANCOCK. I believe you take th^ position as I do that the veloc­
ity of monev has a greater effect upon business activity than the quan­
tity or volume!
Mr. EccLES. The volume of money is a very important element, and
I think that, in a period of great business activity and full employ­
ment, or reasonably full employment, to reduce the quantity of money
is very effective in controlling inflation. A small reduction in the
quantity of money, through open-market operations, in certain pe­
riods, would be very elective.
Mr. HANCOCK. It alwavs, however, tends to decrease business
Mr. EccLES. That is right, and it is—well, it would tend to decrease
business activity, and possible excess reserves would be wiped out.
That would force the banks into borrowing, and that would materially
restrict credits and raise rates, and tend to slow up the volume of busi­
ness. However, when you permit a condition to develop, such as has
developed during the past 4 or 5 years, when you first had a great
period of deflation, of loans held by the banks, and bills held hy the
Reserve banks were allowed to run off, the volume of money was being
extinguished at a terrifically rapid rate. From 1929 to the period (3
the bank holiday, about one-third of our total bank deposit money was
extinguished, largely, through the liquidation of bank credit. This
liquidation was forced upon the banks in part by their inability to go
to the Federal Reserve banks with assets and meet the withdrawals of
depositors, who were hoarding their funds, because of banks failing.
Mr. HANCOCK. It was an emergency situation and the very time the
banks should have stepped in boldly as a rescuer or savior! Of
course they were no able to go as far as they could go if this bill is
Mr. EccLES. Well, two things seem to me to have been necessary.
Mr. HANCOCK. In other words, the Reserve banks were affected
by the same emotional disease that the member banks were; is that
not correct !
Mr. EccLES. They were increasingly restrictive in the kind of
paper on which they would extend credit, and, of course, the law put
limitations on the type they could take. Now, as to whether or not,
by acting sooner or acting more vigorously in the open market, they
could have stopped the period of deflation, that is, of course, a debat­



able question. Some will argue that had they acted more vigorously
and sooner than they did, when there was a tremendous shortage of
funds due to hoarding and due to the gold that was pulled out of the
country and went abroad, that it would have turned the tide of
Mr. HANCOCK. There was never, during that period, coordinated
action on the part of the Federal Reserve System as a whole, was
there! Were not some banks operating at cross purposes with
Mr. EccLEs. I do not know. I do not know exactly what you mean
by " coordinated/'
Mr. HANCOCK. I mean this: That some of their actions were not
in unison or accord with a national policy, looking to unified opera­
tions for the good of the entire country!
Mr. EccLEs. Well, I think the governors met and discussed the
problem, and I think they also met here in Washington with the
board and----Mr. HANCOCK. I do not think there is any question about their
having met, but what uniRed effective policy did they agree on!
Mr. Ecci.ES. Well, they reduced the discount rate, and they bought
securities in the market, beginning with the autumn of 1929, but
more vigorously after the passage of the Glass-Stcagall Act in
February 1932.
Mr. GOLDSBOROUQII. I will sav that they continued that until the
danger of the passage of the Coldsborough bill was over, and then
it immediately stopped.
Mr. HANCOCK. Governor, what constructive thing did the Federal
Reserve Sytem do. after deflation was halted, to aid in bringing
about recovery! Would you mind telling this committee that!
Mr. EccLEs. Well, of course, in view of the fact that the entire
banking structure collapsed and had to completely close, it is difficult
to imagine how anything very much worse could have happened.
Mr. HANCOCK. Well, I believe in your statement made before the
Senate committee in 1932----Mr. EccLEs. 1933; in February of 1933.
Mr. HANCOCK. You referred to the fact that you considered the
Federal Reserve System an emergency system; is that correct!
Mr. EccLEs. Well, I do not think so. I would not consider the
Federal Reserve System an emergency system; it is a system that cer­
tainly should be able to regulate the volume of money. I f the banks
and the money system under capitalism cannot meet the emergency,
the Federal Reserve System is the only agency we now have to do it.
In other words, through the Federal Reserve System, we say that
we succeeded in financing a war; and we know now this contributed
very greatly toward the financing of the extraordinary expenditures
o f the war, in the absence of putting on taxes high enough to do that.
The Reserve System has, of course, been very helpful in the clear­
ing of checks, and it has been a very great improvement over the
system that was employed prior to the Federal Reserve System. It
has speeded up immensely, immeasurably, the clearing of financial
transactions throughout the country.
Mr. HANCOCK. Governor, if we had put on sufficient taxes during
the war period, a large part of our present financial difficulties would
have been avoided, would they not!
130417— 35------ 3



Mr. Eccijss. Well, I do not know that I could agree to that. I do
not think that the financial troubles of the present are due to the
war. We do not lack and did not lack in 1929 any material and
physical thing that we had before the war and after the war. We
had an increase in our total man power and in our capital production
The CHAIRMAN. Let me interrupt. Did not we experience our
greatest period of prospeidty in all of our history subsequent to the
war and prior to this panic?
Mr. EccLES. We had replaced every physical loss, and even the loss
of man power as the result of the war by a very great amount from
the end of the war up to 1929.
Mr. HANCOCK. Well, Governor, is it not a fact that our present
war debts largely represent profits made during and out of the war!
Mr. EccLES. Well, certainly, during the period of the war, we did
not consume and use, as a nation, more than we produced. As a
matter of fact, during that----Mr. HANCOCK. And in that way, we did not impoverish ourselves?
Mr. EccLES. We did not impoverish ourselves at alt, because we
used much less than we produced, because we furnished the Allies a
tremendous amount of goods, which created the interallied war
debts; so there was no occasion for a huge war debt, if the popula­
tion had all been put upon a basis whereby there would have been
no advantages to any group or class, and there would have been no
profits as a result o f that operation.

In other words, if the resources of the Nation had been mobilized
in the interests of the Nation, for war purposes, we would not have
needed any inflation, we would not have needed the credit that was
extended. Our present situation indicates we are just as able now,
in this country, to meet the problems of the depression as we would
be to meet the problems of war. No one would question the fact that
our ability to nght a war would depend upon the men and materials
and our capital facilities in the form of our factories, systems of
transportation, and so on. The question of money would not be the
measure of our ability to fight a war in this economy of abundance.
Neither is our ability to njght the depression in this economy of
abundance a problem of money.
Mr. HANCOCK. It is a question of distribution!
Mr. EccLES. Yes; it is a question of distribution. The depression,
to my mind, was not brougnt about through a shortage in the vol­
ume ; and by an increase in the volume of money after 1929 it would
not have been possible to have avoided the depression. It might have
deferred it or delayed it ; but so long as we had such an inequitable
distribution of wealth production as currently produced, so that our
capital production facilities were all out of balance with the buying
power o f the people, the velocity was sure to slow up and a depres­
sion was inevitable.

Mr. HANCOCK. Governor, with respect to the question of debt—
and then I will get to this bill again—I want to ask you this ques­
tion, do you think a nation can impoverish itself by employing its
men and materials in improving its equipment and resources!
Mr. EccLES. No; I cannot see how a nation can impoverish itself
by adding to or producing wealth. In my opinion, we might im­
poverish certain individuals if we do not distribute the wealth that

n'minced through giving employment.



Mr, HANCOCK. Then all we need today in this country of rich
resources is, for our money to go to work; is that correct!
Mr. EccLES. That is correct.
Mr. HANCOCK. Will this new bill help to restore confidence and
put it to work!
Mr, EccLES. Well, I cannot answer that; I can only express an
opinion. It is my belief that it will; it is one of the factors that
will help; it will make it possible for the banks to lend funds in
Selds in which they have been unwilling and unable to lend before.
Whether or not they will find borrowers is another question. There
is a great absence of people who are willing to borrow, even on long
terms, or on any terms.

In connection with what I said, in order that I may not be mis­
understood, I happened to read the other day an account of the
last report of the Brookings Institute, which finds that the excessive
savings went into speculation: Too much thrift held slump cause. It
seems to me that has a very important bearing upon this question
of the volume and quantity of money and the velocity of money.
Mr. HANCOCK. Said in a different way, you mean that too much
labor went into capital goods!
Mr. EccLES. That is right. [Reading:]
The Institution, in the third of a series o f investigations to ascertain whether
maldistribution of income is a primary cause of the depression, found that
the ihrst need is for greater spending for goods rather than more savings.
Money going into savings, the report made public last night points out, is
not immediately spent for consumption, and the rapid growth of savings in the
twenties resulted in too much money going into speculation and not into
ACtaa! buying of goods.
The report disputed several traditional economic concepts. Theoretical!)*,
according to one school of thought, savings go into the expansion of plant and
ether physical facilities, but the institution found that so much money was
saved that there was a plethora.
Instead of going into either consumption goods or capital goods, it went into
speculation which served to innate the prices of securities and to produce
financial Instability.
In announcing the report, the institution cautioned that it did not suggest
the individual of moderate means should, as a matter of policy, save less,
but that " the problem is one of aggregate savings in proportions to aggregate
The phenomenon of an excessive supply of savings is, the report said, some­
thing new. In the past there has usually been a dearth of savings, with
resulting diHcnlties in expanding the Nation's productive facilities.
The report further disputed the theory that business expansion begins with
expansion of capital goods, holding rather that such expansion begins afte**
people begin to buy.
The report noted that " a large part of the savings of individuals and
business corporations has gone to finance Government deficits" since the

The s&ne institution, as I recall, gave the figures ofthe distribu­
tion o? the national income—I think it was in 1939—showing that
one-tenth of 1 percent of the families at the top of the list received
the same income as 42 percent of the families at the bottom of the
list; or in other words, the average income, per family, at the top.
was equivalent to the average income of 430 families at the bottom.
Mr. HANCOCK. In the peak year, Governor, in 1929——
Mr. HoMJsnm. Pardon me* but I want to ask what report titat is
that he is quoting from!
Mr. EccLES. That is the report of the Brookings Institute. The
Capacity to Consume.



Mr. GOLDSBOROUHH. And that is the 42 percent the Brookings
Institute wants to spend !
Mr. EccLES. Well, the thing that they find is that that 42 percent
was not responsible for very much saving. The one-tenth o f 1 per­
cent, of course, were unable to use their income in consumers' perish­
able and durable goods; and they, therefore, had to find an outlet
in the investment field, or in the neld of capital or producers' goods,
until we reached a point where our capacity to produce was iSl out
of relationship to our ability to consume but not our capacity to con­
sume and----Mr. HANCOCK. Which is a whale of a difference!
Mr. EccLES. Yes; our problem is no longer one of production,
which it has been for generations, while we were building the coun­
try, while we were a debtor Nation, and when we had a rapidly in­
creasing population.

Our problem is one of distribution. By distribution we mean not
the distribution of the existing wealth but the distribution of the
wealth production as it is currently produced; and the most effec­
tive day to do that, in times of prosperity, is through the incometax system. One of the greatest mistakes, I think, that was ever
made during a period o f prosperity was to reduce income taxes
rather than to maintain them at th!e high war point and use the
funds collected to reduce the Federal debt; and then when unem­
ployment developed to use the Federal credit to take care of un­
Mr. HANCOCK. Governor, I think that same report to which you
referred just now also showed this startling information: That in
the peak year, 1929, 68.9 percent of the American families had gross
incomes of less than $1,500.
Mr. FoRD. May I make an observation there, Mr. Chairman!
The CHAIRMAN. Yes, Mr. Ford.
Mr. FoRD. In 1929 there were 22,000,000 people in the United
States, at the peak of our prosperity, who were living at or below
the subsistence line; there were 45,000,000 people that were just get­
ting by; there were 25,000,000 that were fairly well off; there were
15,000,000 that were rich; and there were 10,000,000 wallowing in
wealth; and those are figures which were gotten out by a responsible
Mr. FiSH. And what is the subsistence line!
Mr. FoRD. It is just being able to live by a little help from the
country or relatives or somebody else; just getting by.
Mr. FiSH. On the basis of income, it depends on the cost of living,
but what is a subsistence income!
Mr. Foim. Well, 1 do not know what it is, because it depends on
the section. It might be $15 in one part of the country and might be
$25 in another and $40 in another, depending on what part of the
country you live in.
Mr. HANCOCK. Governor, do you subscribe to the thought or belief
that the control of a nation depends upon the control of its credit!
Mr. EcctES. I do not know that I understand your question.
Mr. HANCOCK. By that question I mean that unless the Nation,
through its central Government, controls the credit or note-issuing
power of the Nation the Nation cannot be used for the protection
and welfare of all of the people!



Mr. EccLES. Well, I think there must be a control over the money
Mr. HAxcocK. That means credit, does it not!
Mr. EccLKS. It is not necessary to control the credit relationships
of individuals among themselves, nor the credit corporations extend
on accounts, and so forth.
Mr. HANCOCK. O f course not; but our money system is 90 percent
credit or check currency. You made that statement before the com­
A ir. EccLES. W ell, 90 p ercen t o f ou r p a y m en ts are m ad e b y ch eck s
on d ep osits, w h ich is cre d it m o n e y ; an d it is n ecessary f o r a n a tion
to exercise co n tr o l in the p u b lic in terest o v e r th e m on ey system .

Mr. HANCOCK. Well, now, this bill is designed to insure control of
the credit of the Nation in the interest of tiie Nation as a whole, is
it not, and without interference with the normal functioning of the
Mr. EccLES. That is correct.
Mr. FoRD. Otherwise, socialize it!
Mr. EccLEs. Well, it depends on what you mean by "socialize."
Of course, I read yesterday a statement of Woodrow Wilson's con­
ception of the Federal System, and I do not need to go beyond the
statement of the President in whose administration the organization
of this System was set up.
Mr. HoLLiSTER. What is the purpose of that statement, Governor!
Mr. EccLEs. It is the purpose of setting up the System. He said:
The control of the system o f banking and Issue must be vested in the Govern­
ment itself, so that the banks may be the instruments, and not the masters, o f
business and o f individual enterprise and initiative.
Mr. HoLLiSTER. Did anybody ever suggest that the Government

should have the control of issue!
Mr. EccLEs. He has suggested the control of issue-----Mr. HoLLiSTER. Did anybody else ever sot up the contention that
the Government was only f o r issue!
Mr. EccLEs. The theory was that these banks would control the
Air. HoLLiSTER. It was not the Government. The banks were not
identical with the Government, and nobody ever suggested that, did
Mr. EccLEs. That is true, but the thought was, that the Federal
Reserve Board and the chairmen of these banks, who were appointed,
were the representatives of the Government, or the people through
the Government.
Mr. HoLLiSTER. The Federal Reserve Board was, but not the Fed­
eral Reserve System!
Mr. EccLEs. The chairman of the Federal Reserve banks was
appointed by the Federal Reserve Board, and was at that time
looked upon as the executive head of the banks.
Mr. HoLLiSTER. And the chairman appointed by the Board was
to completely control the individual Federal Reserve banks!
Mr. EccLEs. No; the Federal Reserve banks, of course, were to be
controlled by their board of directors.
Mr. HoLLiSTER. Who were not Government appointees!
Mr. E ccL E s. That is right.
Mr. HoLLiSTER. Except certain of them!
Mr. EccEES. That is correct.



Mr. HANCOCK. Governor, I wanted to ask you one more question.
Do you think that the legitimate consumer demand or requirements
for credit in this country can and will be met, as long as banking
is a career!
Mr. EccLEs. Why, yes; I think so.
Mr. HANCOCK. I asked you that question because I understood you
to refer to the fact that by providing independence or competence
for Federal Reserve Board directors they could take hold of such
positions and make careers of them and not have to look to outside
Mr. EcctEs. That is right.
Mr. HANCOCK. It is my thought that banking should never have
been a career but always a profession. I hope you understand what
I mean.
Mr. EccLEs. Are you speaking of the private commercial bank, or
are you speaking of the Federal Reserve bank!
Afr. HANCOCK. I am speaking of all kinds where the public is in­
volved and their welfare at stake.
Mr. Chairman, they are all the questions I care to ask at this time,
but I reserve, of course, the right to discuss with the Governor the
various sections of the bill. In your absence I made a request that
the hearings up to now be printed, because it is humanly impossible
for any man to digest all of the statements and suggestions made
by the "Governor, without having a written statement before him.
Mr. EccLEs. Let me answer Mr. Hollister's question about the
control of issue because my associate has brought to my attention
this statement in the law:
The Board shall have the right, acting through the Federal Reserve aaenr, to
grant in ivho!e or in part, or to rejci't entirely, the application of any Federal
Reserve hank for Federal Reserve notes.

Mr. HoLLiSTEK. In other words, the Federal Reserve Board may
limit the issue of notes, but may not increase the issue of notes at
Mr. EccLEs. That is right.
The CHAIRMAN. Gentlemen, it is probable that the H. O. L. C. bill
wiH be taken up in the House tomorrow. I ain not in a position to
say definitely about that, but I wiH know in a little w hile. I thought
we would not have any meeting of the committee tomorrow, and we
appeared before the Rules Committee and asked for a rule, and we
asked that we be given 1 day for debate of something like 4 hours
on the bill. We are hoping that request will be granted. As soon
as I can see the Speaker I can ascertain whether the bill will come
up tomorrow or not. If it does, I wish you gentlemen would help
me give information about it. Ii the bill comes up tomorrow. I sug­
gest that the committee hold a meeting tomorrow afternoon at
8 o'clock, and just as soon as I can get that information I will have
it telephoned to your ofHce.
Suppose we say that we will meet at 3:30 this afternoon if the
bill comes up.
Mr. HANCOCK. If the bill does not come up tomorrow, Governor
Scales will come back. Is that correct!
The CHAIRMAN. I f the bill does not come up, Governor Eccles will
come back; yes.
(Thereupon, the hearing in the above-entitled matter was ad­
journed temporarily.)

MONDAY, M ARCH 11, 1035

TFtMAinyfow, D. ^7.

The committee met at 10:30 a. m., Hon. Henry B. Steagall
The CHAIRMAN. Gentlemen, we have Governor Eccles with us this
morning to resume the discussion of this bill, H. R. 5357. and it is
Mr. Williams' time to ask questions, if you desire, Mr. Williams.
Mr. WiLLiAMS. All right. Governor Eccles, I understand the
main purpose of title II of this act is to enlarge and further central­
ize the powers of the Federal Reserve Board, in order that it may
have increased influence and power over the expansion and contrac­
tion of credit of this country. That is to be done mainly through the
open-market committee, fixing discount rates and controlling the
reserves of the member banks. Those are the agencies through
which it is to operate. Am I correct in that assumption!
Mr. EccLES. That is correct.
Mr. WiLLiAMS. Xow, to what extent by the operation or by the
use of these agencies by the Federal Reserve Board, can the general
commodity price levels in this country be controlled, in your judg­

Mr. EccLES. It is impossible to say. The proposal to give to the
Federal Reserve Board, with the advice of the Governors commit­
tee, the responsibility for the use of these monetary controls, the
discount rate, the reserve requirements, and the open-market opera­
tion is for the purpose of maintaining stable business conditions,
insofar as this is possible by monetary means. A stable price level
does not necessarily mean stable business conditions.
It seems to me that we are far more interested in full employ­
ment than we are in stable prices. I f stable prices at some given
index figure would leave an army of unemployed, it does not seem
to me that this is the objective tliat would satisfy this country.
Mr. WiLLiAMS. Well, vou wiM agree, will you not, that it is very
desirable, as far as possible, to have stable prices!
Mr. ECCLES. Yes; I agree to that.
Mr. W iLL iAM S. And that the purchasing power be the same yes­
terday, today, and forever, you might say, so far as we can make
them so !
Mr. EccLEs. I agree that wide and rapid fluctuations in prices are
inflationary and deflationary and tend to create conditions that are
unfavorable to business stability.




Air. WiM-iAMS. I judge you are not in favor of fixing certain com­
modity price levels as the goal toward which the Board should strive
in its expansion and contraction policy!
Mr. EccLEs. I would prefer that it be not made the central objec­
tive of the banking bill.
Mr. WitLiAMs. Do you think it is practicable to do that?
Mr. EccLEs. I do not think it is.
Mr. WiLUAMS. On the other hand, there is considerable criticism
in the country of the policy which places, entirely without any limi­
tation, the matter in the hands of a few men, or the Board, this
great authority; do you think there is any danger along that line?
Mr. EccLEd. The control over the volume of money and credit
that the Federal Reserve Board can exercise through its use of three
instruments of monetary control, would not necessarily tend to
expand the amount of money in use in a depression such as we
have at the present time.
Mr. WILLIAMS. Right in that connection, in the use of this word
" money ", what do you mean!
Mr. EccLEs. I mean demand deposits and currency.
Air. WiLHAMS. Bank credit?
Mr. EccLEs. Yes; bank credit, deposits in commercial banks and
currency. Afore precisely it is deposits subject to check, exclusive
of banls Hoat and interbank deposits, plus United States Government
Mr. WiLLiAMS. Bank demand deposits?
Mr. EccLEs. That is right.
Mr. WiLLiAMS. And currency?
Mr. EccLEs. Yes; that is right.
Mr. WiLLiAMS. Is that what we mean when we talk about m oney
n ow ?

Mr. EccLEs. That is right.
Mr. WiLLiAMS. I want to have
Air. EccLEs. That is correct.

that understanding as we g o along.

Air. WiLLiAMS. N ow , you say it w ou ld not necessarily result in
expansion, that the p o licy should n ot or m ight not result in expan­
sion d u rin g a p erioa o f depression !

Air. EccLES. You may create excess reserves through your openmarket policy, but unless the borrowers are willing to borrow from
the banks, and the banks are willing to lend to borrowers, you would
not create a further increase in your money supply. You would
increase the reserves of member banks, which would make for an
inducement for the banks to lend and tend to result in a reduction
in rates of interest, making for cheap money; but you must have
borrowers who are willing and able to borrow before you can create
additional money.
Mr. WiLLiAMS. Is there no relation between the quantity of money
and the volume of business that the country docs!
Mr. EccLEs. Xo exact relation. The volume of money is an impor­
tant factor, but the use of that money is an equally important factor
in determining the amount of business.
Mr. WiLMAMs. Well, now, going back, for instance, to 1928, with
a certain volume of money at that time and amount oi business, how
does that compare, we wifi say, with 1933!



Mr. EccLES. In 1928 it was estimated that the national income
was about $83,000,000,000. According to the Department of Com­
merce's figures, in 1933 the national income was about $47,000,000,000.
The money supply in June 1928 was $26,400,000^000 and in 1933 it
was $19,900,000,000. The ratio of the national income to the volume
of money was 3.12 in 1928 and 2.35 in 1933. That brings out the
point that 1 think you have in mind. I would estimate that in 1934,
with a national income somewhere between $50,000,000,000 and $55,000.000,000, with an average volume of money of around $23,000,000,000, the number of times that your volume of money turned over
was very little over two times. At the same rate of velocity that
existed in 1928 and 1929, with the present volume of money, the
national income should now exceed $75,000,000,000, which indicates
that simply increasing the volume of money does not increase the
national income ^proportionally. It seems to me that the reason for
that is quite obvious.
The distribution of the ownership of money determines whether or
not it is going to be put into use. Money is put into use by corpora­
tions and individual investors, who are led to believe that there is a
profit in the investment or use of funds.
Mr. WiLUAMS. Well, then, did the increase in the volume of money
build up reserves in the banks of the country! Would that not stim­
ulate business itself, to the extent that it would make more money
available, and would lead the banks, by reason of the unusual ana
unnecessary amount of money on hand, to try to get it out into the
Reid of action! In other words, it would not be earning them any­
thing, and it would furnish them an incentive to lend on more rea­
sonable and better terms, would it not!
Mr. EccLES. It has caused a very great reduction in interest rates,
which is an inducement to the borrower, to the extent that the bor­
rower can use the money profitably. Money is created by debt. Our
banking system creates money-----The CHAIRMAN. Right there. Governor Eccles, you say money is
created by debt; you mean by that, bank credit!
Mr. EccLEs. Yes^ that is right. I mean that the banking system,
the process of loaning money, extending credit, increases bank de­
posits. In the absence of individuals ana corporations who are will­
ing and able to borrow, the banks have created additional funds by
purchasing Government bonds. The purchase of Government bonds
has increased bank deposits.
Mr. WiLMAMS. Well, the volume of money times the velocity rep­
resents the national income, does it not, but they have both got to
be there-----Mr. EccLEs. They have both got to be there; yea.
Mr. WiLLiAMs. You have got to have volume and velocity like you
have in physics to have momentum!
Mr. EccLES. That is right. You cannot have velocity of the means
of payment unless you first create a means of payment. You may
create a means of payment and if it is in the hands of those who are
unwilling to spend it, you do not create business activity.
Mr. WiLMAMS. Now, Governor, let us go to the question in this
second title here of issue by the Federal Reserve banks. This act, as



I understand it, removes the necessity for any specific collateral back
of any particular issue!
Mr. Keens. That is right.
Mr. WiLLiAM S. And simply permits the banks to issue upon their
assets? Of course, all of that is to be done under the rules and regu­
lations of the board, I assume, the Federal Reserve Board! Now, in
other words, who is going to control how much they issue!
Mr. EccLEs. The volume of notes issued depends in the first in­
stance on the demand for cash by the public and more remotely on the
amount of deposits the Federal Reserve banks have created &r their
member banks, either by extending loans to them or by open-market
Mr. WiLHAMS. Who is going to determine whether an issue has
back of it sound assets, or not!
Mr. EccLES. The Federal Reserve banks' credit departments will
determine that by the type of loans or type of credit which they ex­
tend to the member banks.
Mr. WiLLiAMS. Now, let me see that I understand. The policy that
has been heretofore followed has been that the Federal Reserve agent
has had charge of that, has he not, or a representative of the Board!
Mr. EccLES. The Federal Reserve agent holds the collateral, con­
sisting of gold certificates, eligible paper, and Government bonds.
Originally it had to consist of gold and eligible paper. The GtassSteagall Act of 1932 permitted Federal Reserve notes to be backed
by Government bonds in the absence of a sufficient amount of com­
mercial paper.
Mr. WiLMAMs. The application for issue is made to the Federal
Reserve agent?
Mr. EccLES. That is right.
Mr. WiLLiAMS. And he was required to have sufEcient assets, in
his judgment, back of that issue; that is, they were required to put
up with him particular assets on a particular issue that they called
for: is that correct!
Mr. EccLES. It was figured as a whole, the total amount of notes
that each Federal Reserve bank had outstanding, backed by gold
certificates and bonds and other collateral that was deposited with
the Federal Reserve agent. But it seems to me that, in order to
understand what is back of the Federal Reserve notes, we must
consider the balance sheet of the Federal Reserve bank. The lia­
bilities of the Federal Reserve bank to the public consist chiefly of
deposits of the member banks and of Federal Reserve notes.
Against these liabilities the Reserve banks hold assets, consisting
of investments in bills, Government securities, discounts to its mem­
ber banks, and gold certificates.
It is impossible to issue Federal Reserve notes as liabilities with­
out either an offsetting decrease in deposits or an offsetting increase
in assets, in the form of gold certiBcates, Government bonds, eligible
bills, or loans to member banks; and the only question that could
arise regarding the security back of Federal Reserve notes would
be in connection with loans which the Federal Reserve bank made
to the member banks. I f they made loans which were bad, whether
eligible paper or whether loans secured by what would be considered
as sound assets, and the losses on those loans were in excess of the



capital and surplus of the reserve bank, then in theory the United
States Government would have to be called upon to make good the
guaranty of the Federal Reserve notes outstanding. But that is
the only way in which there could be any question as to the backing
of the Federal Reserve notes. At al! of the central banks, except
the Federal Reserve System and the Bank of England, notes are
issued without any specific backing.
Air. IV iL M A M s. Now. Governor, I want this clear in my mind-----Mr. HoLMSTER. May I ask one question right there. Mr. Williams!
Mr. WiLLiAMS. Yes"
Mr. HOLLISTER. Is it not true, however, that there is a statutory
limit in most of the countries as to the amount of that issue?
Mr. EccLEs. Well, I could not say.

Dr. Goldenweiser advised me there is no such statutory limit.
Mr. WiLLiAMS. Let me ask you this question: In the application
of a reserve bank under our present system, to the Federal Reserve
agent for an issue, has that application ever been denied!
Mr. EccLEs. I do not think so.
M r. WiLLiAMS. W h e n an a p p lica tio n is m a d e, w h o passes o n it?

Mr. EccLES. That is a formal matter; it is almost an automatic
operation. The amount of notes that any Reserve bank requires to
meet the demands of its deposits would be turned over to it by the
Federal Reserve agent in exchange for the necessary collateral lodged
with the Federal Reserve agent.
Mr. Wn<LiAM8. Now, are you saying that would be left entirely
to the Federal Reserve banks!
Mr. Eccuss. The amount of issue will be determined bv the call
which the member banks make for currency, and when tlhey make
c deposits with the Reserve bank,
currency must have funds in a
commercial bank to be able to draw down that currency.
Mr. WiLLiAMS. The part I am trying to get at is whether or not
the central Board, the one that has control or the one you want to
place more power in—whether or not they have control over the
amount of issue of each one of these Federal Reserve banks !
Mr. EccLES. The Federal Reserve Board has technical control over
the amount of issue under the present law, but it has found that it
is useless to control note issue after the member banks have acquired
deposits, and under the proposed law the Federal Reserve Board
would not have this purely technical or theoretical control. The
reason that the control is only theoretical is that, when member
banks wish to withdraw their deposits in cash, no Reserve bank can
refuse to pay out the cash, and the Federal Reserve Board cannot
take the responsibility for preventing it.
Mr. WiLLiAMS. Then, the Federal Reserve agent simply is an ad­
ministrative ofHcer; he has no discretion about it, but ne is simply
a trustee with these funds in his hands!
Mr. EccLES. The Federal Reserve bank would have to close if the
member banks asked for currency in lieu of their accounts and were
There is no more justification for requiring specific collateral back
of Federal Reserve notes, which are the liabilities of the Reserve
banks, than there is for requiring specific security to be pledged



against the deposits of the Federal Reserve bank. Why should
Federal Reserve notes outstanding be given a preferred status over
the deposit liability of the Reserve banks?
Mr. W 11JJAMS. Then, do you think it is a sound policy for the
Government to guarantee these notes and at the same time have no
control over their issue at all!
Mr. ErtLES. I do not think that a controlled issue would be a
particle different than an issue that is not controlled, because the
Reserve banks are required to issue currency whenever member banks
have deposits and desire to draw down those deposits in currency.
It is in the determination of the volume of credit extended to member
banks for the purpose of creating the deposits that the real control
of the note issue lies. They cannot draw down currency unless they
have established balances with the Reserve bank, and have put up
acceptable assets, in which case they can drawn down their deposits
in currency in the same manner that any individual depositor of a
commercial bank is able to draw his deposits in currency. Whenever
a bank is unable to pay out the deposits in currency, that bank
must close.
Mr. WILLIAMS. They are turning out currency on what they call
" acceptable assets " as security!
Mr. EccLEs. Who is?
Mr. WiLLiAMS. The Federal Reserve bank? If a member bank
wants to borrow money, how do they get it!
Mr. EccLES. They put up collateral.
M r. WiLLiAMS. W h o passes on that c o lla te ra l!

Mr. EccLES. The Federal Reserve banks.
M r. WiLLiAMS. And they get money for it! That is, the member
banks get monty for it!
Mr. EccLES. les; they get credit.
Mr. WiLLiAMS. And that is guaranteed by the United States
Mr. Ecci.Es. They get deposit credit for it.
Mr. WiLLiAMS. Of course, that is money!
Mr. EccLES. Yes; that is right.
Mr. WiLLiAMS. And the Government itself is back of it, and still
it is simply the deposit of eligible security in the judgment of the
Federal Reserve bank!
Mr. EccLES. That is right.
Mr. WiLLiAMS. And they have entire control and jurisdiction
over it!
Mr. Ecci.Es. Over the assets which they will take, yes.
Mr. WiLLiAMS. And pass on the question as to whether they are
good or bad!
Mr. EccLES. That is right.
Mr. WiLLiAMS. All right.
The CHAIRMAN. Governor Eccles, do you mean that they have
entire control over the kind of assets they accept! They pass upon
the acceptability of assets entered as collateral as to solvency and
technical eligibility, but when it comes to fixing the rules of eligibil­
ity under the present law, they are governed by the rules laid down
in the act, are they not!
Mr. EccLEs. That is correct. They have discretion as to the ac­
ceptability of assets or as to the type of paper which they will take



from member banks, subject at the present time to the eligibility
requirements of the Federal Reserve Act.
In the future, if the present eligibility features of the act are
removed and discretion given to the Federal Reserve Board to deter­
mine the eligibility requirements, the Reserve banks would h ave
discretion within the rules and regulations laid down by the Federal
Reserve Board. However, it would not be mandatory and it is not
mandatory in the present law, that the Federal Reserve banks loan
to member banks. They simply have authority to loan to member
banks upon what is considered eligible paper.
The proposed amendment would give the Federal Reserve banks
the power to loan to member banks on paper submitted to them,
provided it met the requirements laid down by the Federal Reserve
Mr. WmjAMS. Yes; I understand the only difference in the exist­
ing law and the proposed law in that respect is, as it is now it is a
part of the statutory limitation, and the other is to leave it to the
rules and regulations of the Board as to what is eligible?
The CHAIRMAN. Let me ask you a question right there now ? Thi s
might happen, technically speaking, that under the new law the
Board could make regulations denning the eligible paper which
would be more restrictive than the rules 6xed in the present law, or
if the Board saw fit, it could liberalize those rules, but it could worn
either way!
Mr. EccLES. I think so.
The CHAIRMAN. So it does not work arbitrarily in either direction V
Mr. EccLES. That is right.
The CHAIRMAN. Under the new bill, that is correct?
Mr. EcctEs. That is correct, yes.
Mr. WmuAMS. What, in your opinion, should be the policy in
lihat respect, liberalized or made more restrictive ?
Mr. EccEES. I think it would depend a great deal upon the condi­
tions that confronted the countiy. In 1930 and 1931 it would have
been in the interests of the banking system and in the interest of the
entire country if the Federal Reserve banks had been permitted to
loan to member banks on any sound assets, when many of them had
very little or no commercial paper. The failure of the member
banks to be able to borrow from the Federal Reserve banks forced a
condition of great deflation. It forced the banks to refuse to extend
loans as they iell due, and forced them to sell their bonds, their secur­
ities on the market. It resulted in liquidating or extinguishing,
through credit contraction, about $20,000,000,000 of our total bank
deposits, including time deposits. A good deal of that, of course,
was the result of tying up deposits in closed institutions; but the
total volume of deposits was greatly reduced, partly because of the
inability o f the member banks to get relief by going to the Federal
Reserve bank, until We finally liquidated our banking structure to
such a point that it became entirely frozen and closed.
And in getting it open, we finally had to recognize, as an emer­
gency matter, that the Federal Reserve banks could loan to their
member banks on all sound assets and that the Federal Reserve banks
could issue notes secured by any sound assets, without resort to gold,
Government bonds, or eligible paper.



The CHAimrAx. Now, let me interrupt you with something that
should be said right here. It not only went to the extent that you
have pointed out, but as an emergency measure we provided that
such loans might be made to nonmember banks and currency issued
to nonmember banks on the same rules and regulations; is that not
what happened!
Mr. EccLEs. That is correct.
The CuAiKMAX. So we were forced to do that in the hour of dis­
tress, instead of having anticipated and provided for it in advance!
Mr. EccrjR. Yes; Mr. Chairman, that is correct.
Mr. WiLLiAMs. Right in that connection, to \vhat extent has it
worked ?
Mr. EtxrLKs. When people can get their money, they do not want
it. I think the law was very effective, because it stopped banks from
closing. Instead of the federal Reserve being required to make
loans to meet the demand, money which had gone into hoarding to
the extent of anywhere from $1,500,000,000 to $2,000,000,000 in cur­
rency that was drawn from the banks beyond wnat was the normal
use or need of currency, tended to come back into the banks. That
enabled the banks to pay off the Federal Reserve banks, so that the
amount of borrowing by the member banks from the Reserve banks
today is practically negligible: whereas, in 1933. it was very large.
Mr. WiMJAMS. then instead of increasing the necessity for bor­
rowing has actually decreased it!
Mr. EccLEs. The requirements; yes.
Mr. WiLLiAMS. That has actually decreased!
Mr. EccLEs. That is right.

Mr. WiLLiAMS. There has been no demand upon the Federal Re­
serve Board since the passage of this act, I take it, from what you
say, to borrow upon these general assets, I will say, which were not
heretofore eligible, such as real-estate securities, long-term bonds,
and things of that kind; there have not been any of them otfered as
security to the Federal Reserve banks for the purpose of obtaining
loans ?
Mr. EccLEs. I think it is section 10 (b) of the Federal Reserve Act,
as amended by the Emergency Banking Act, which says that, under
exigent circumstances^ member banks are permitted to borrow from
Reserve banks on their time or demand note secured to the satisfac­
tion of the boards of directors of the Reserve banks. There was
some use made of that provision, but not very much, because it put
a bank in a position, where it applied for credit under the terms of
that provision, of admitting that it was in great distress and exigent
circumstances that it required special treatment by the board of the
Federal Reserve bank, which meant that a bank would only resort
to that, would only use the borrowing right, as the very last resort.
Mr. WiLLiAMS. To what extent are real-estate loans used for the
purpose of acquiring loans from the Federal Reserve!
Mr. EccLEs. I could not say to what extent, but there has been
some borrowing from Reserve banks on bills payable backed by realestate mortgages, and other collateral put up & secure the notes of
the banks.
Mr. WiLLiAMS. It is the intention of this bill, as I understand it,
to so amortize real-estate loans as to make them eligible for discount!
Mr. EccLEs. Not for discount.



Mr. WiLLiAMS. Well, for loans!
Mr. Eccms. Yes.
Mr. WiLLiAMS. As security for loans!
Mr. EccLES. Yes; the bill provides that the act be amended to au
thorize Federal Reserve banks, subject to the regulations of the
board, to discount for a member bank all commercial, industrial, or
agricultural paper, and to make advances to a member bank on its
promissory notes secured by any sound assets.
Mr. WiLLiAMS. And that includes real-estate loans, of course!
Mr. EccLEs. Collateral loans, bonds, or any other sound assets.
Mr. WiLLiAMS. And the purpose of this—-not of this section, but
of the real-estate section—is to so liberalize real-estate loans, by
amortizing them over a long period of time, as to make them eligible
as a permanent policy, to encourage additional loans by national
banks and member banks on real estate, in order that they can, if
necessary, dispose of those in time of distress and get money from
the Federal Reserve banks!
Mr. EccLEs. So long as the commercial banking system is per­
mitted to take savings deposits, I see no reason why those savings
funds cannot be loaned on amortized real-estate loans in the com­
munity of the bank.
Mr. WiLUAMs. I agree with that, myself. I absolutely agree with
that, but the purpose is, as far as it can be done, to liquefy realestate loans!
Mr. EccLEs. Yes.
Mr. WiLLiAMS. I th in k w e a ll agree th a t th a t ca n n ot be don e as
a p o lic y , b u t as fa r as it can be d on e-------

Air. EccLEs. Jn a depression, only the Federal Reserve can liquefy
assets. Real-estate loans are no different than any other type of
paper in a great deflation.
Mr. WiLUAMs. Of course, they have been, for the reason that
there has been no place to discount them.
Mr. EccLEs. In a great depression there is no other place to go.
And they do not have to be real-estate loans. They may be loans
on collateral, or they may be investments in bonds. W h en the market
is depressed, as it was for a period of several years, that meant bank­
ruptcy for any bank that liquidated its assets on the existing market,
and that condition tended to close many banks.
Mr. WiLLiAMS. Is it the thought of the Federal Reserve Board
that there should be no limitation at all, upon these amortized realestate mortgages!
Mr. EccLES. You mean no limitation as to the percentage-----Mr. WiLUAMs. No; I do not mean on the percentage of valuation,
but on the amount of the loan on each individual property.
Mr. Eccuss. There is no limitation now, under the real-estate pro­
vision of the National Banking Act under which they have operated
for 20 years, with the exception of the limitation of 10 percent of
the capital and surplus on any one loan.
Mr. WiLLiAMS. Real-estate loans have not heretofore been eligible
for discount with the Federal Reserve bank, except as an emergency
Mr. EccLEs. There is over $2,000,000,000 of real-estate loans in
member banks.



Mr. WiLLiAMS. Have they been able to put those loans up with
the Federal Reserve bank!
Mr. EccLES. Only when an emergency was created and then they
were permitted as an emergency matter to do that.
Mr. WiLMAMS. That is exactly what I say, except as an emergency
measure, they never have been eligible for loans!
Mr. EccLES. That is right.
Mr. WiLLiAMS. This act proposes to make them eligible?
Mr. EccLES. That is right.
Mr. WiLMAMS. And it is not thought to place any limitation, at
all, upon them!
Mr. EccLEs. You mean limitation as to----Mr. WiLLiAMS. As to the amount! Here is an apartment house
or hotel, or some other business institution, on which they want to
make a loan of $100,000,000, for example— Air. EccLES. One bank is limited in the amount of a loan they can
make to any one borrower to 10 percent of its capital and surplus.
So it has that limitation on it.
Mr. WiLLiAMS. There is to be an increase under this act!
Mr. EccLES. No; there is no change in it, at all.
Mr. DROWN of Michigan. As a matter of fact, it is a decrease, that
is, 10 percent of the time deposits!
Mr. EccLES. No; any bank can loan any borrower up to a total
of 10 percent of its capital and surplus.
The CHAIRMAN. You mean that a loan can be made on any col­
lateral or without collateral!
Mr. EccLES. That is right. That has always been a provision of
the Banking Act.
Mr. WiLLiAMS. There is a provision in here, is there not, limiting
it as applied to real estate!
Mr. JKccLES. No; the limitation is 50 percent of the time deposits
and 50 percent of the appraised value of the property, which is
the only limitation in the present act with reference to real estate.
Mr. WiLLiAMS. It is exp a n ded to w h at it was, in e ffe ct!
Mr. EccLES. It is proposed to increase it from 50 to 60 percent,
but the 60 percent also includes other real estate which is not in­
cluded in the 50 percent in the present law.
Air. WiLLiAMS. Then loans to each institution heretofore have
been limited to 25 percent of the capital and surplus on real estate?
Air. EccLES. Or 50 percent o f its tim e deposits, w h ichever w as
Air. WiLLiAMS. What I am trying to get at is, it is expanded and
enlarged, or is it not!
Air. EccLEs. Yes: from 50 to 60 percent and up to 100 percent of
its capital and surplus, whichever is greater.
Air. WiLLiAMS. Instead of 25 percent, it is now extended to the
full amount of its capital and surplus!
Afr. EccLES. Yes.
Air. WiLLiAMS. Or 60 percent-;—
Air. EccLES. Of its time deposits.
Air. WiLLiAMS. Of its time deposits!
Air. EccLEs. Right. I suggested that those limitations be taken
out of the act and the Federal Reserve be charged with the responsi­



bility of determining regulations with reference to the real-estate
Mr. WiLLiAMS. Do you think there ought to be no limitation in
that respect in it. except the regulations and rules of the Board!
Mr. EccLES. That is right.
Mr. WiLLiAMS. Or whatever limitation they saw Rt to place!
Mr. EccLEs. That is right.
Mr. WiLLiAMS. It ought not to be made a statutory provision!
Mr. EccLES. That is right.
Mr. WiLLiAMS. For the reason that it would give them more flexi­
bility in the local communities, in the different localities, and at
diff^-ent times, under differing conditions!
Mr. EccLES. Many of the nonmember State banks have, at the
present time, more than 60 percent of their time deposits in realestate loans, and some of the member State banks have more than
60 percent. That would mean that those banks would be required
to liquidate their real-estate loans, in order to comply with the 60percent requirement. Many State banks are not limited in the
amount of their deposits that they can loan upon real estate.
Mr. WiLLiAMS. I am very much concerned about this provision
regarding real-estate loans,"because I have been under the impres­
sion, bv reason of the fact that these loans were short-term loans,
not amortized loans, the banks were not able to handle them at
all in a period of depression.
Mr. EccLEs. You mean under the present bill!
Mr. WiLLiAMS. Yes; under the present act, the law as it is now!
Mr. EccLES. That is correct.
Mr. WiLLiAMS. And this act proposes to amortize them over a
period of years and make them eligible for discount and furnish a
market, somewhat, for them when the time comes when the banks
have to have their money. I think, myself, it is a very wise pro­
vision in the law.
I believe that is all I care to ask at this time.
Mr. FoRD. Might I ask a question, Mr. Chairman, just a question!
The CHAIRMAN. Yes; indeed.
Mr. FoRD. Suppose the Federal Reserve has taken considerable
volume of real-estate loans, what provision is there for the Federal
Reserve bank, itself, to dispose of them, should they want to!
Mr. EccLES. There would be no occasion for the Federal Reserve
bank to dispose of them, so long as the member bank that borrowed
the money was solvent. The member bank would owe the Federal
Reserve on its bills payable, secured by mortgages which it had taken.
Mr. FoRD. Suppose a member bank failed!
Mr. EccLES. The Federal Reserve bank would be required to
liquidate that mortgage or collect it or sell it, just as any otner asset.
Mr. FoRD. It could sell it, though!
Mr. EccLES. Yes; it could sell it.
Mr. FoRD. It is not just put in there and held static!
Mr. EccLEs. N o; it would liquidate any asset or loan of the mem­
ber bank which it held just the same as the member bank would
undertake to liquidate tiie loan of an individual or corporation
130417— 36------ 4



Mr. WiLLiAMS. Governor, there is this question that I want to ask
you before I finally quit: Under our present system, or under the
system proposed in this bill, what do the Federal Reserve banks pay
for theprivilege of issuing money!
Mr. EccLEs. They do not pay anything.
Mr. WiLLiAMs. Do not pay anything!
Mr. EccLEs. No.
Mr. WiLUAMS. Now, as you know, there is considerable agitation,
a good deal of comment in the country, about the Government own­
ing these institutions. What would be the difference in effect if
the Government did own them!
Mr. EccLEs. The individual member banks are the owners today.
However, they are limited to 6 percent dividends on their stock.
The earnings of the Reserve System in excess of 6 percent are held
by the Reserve banks, and at one time----Mr. WiLLiAMS. Right in that connection, do they not belong to
the stockholders!
Mr. EccLES. Not under the law, not beyond the 6-percent divi­
M r. WiLLiAMS. Of course, I understand we had. by legislation, to
take it away from them. They were claiming to own it, were they
Mr. EccLEs. Yes; I think that there possibly was some claim to
that effect. Personally, I would see no objection to requiring that
the earnings of the Federal Reserve banks, beyond the limitation
of 6-percent dividends to member banks, should be turned over to
the Government when the surplus of the Reserve banks has reached
an amount equal to its capital.
Mr. WiLLiAMS. ff the Government, however, can own and operate
them as successfully as private institutions have done, why not give
the 6 percent to the Government rather than to the private banks, as
well as the reserves and the surplus?
Mr. EccLEs. It is now provided in the law that, in case of liquida­
tion, any surplus remaining, after the payment of all debts, divi­
dend requirements, and the par value of the stock, shall be paid to
and become the property of the United States. I see no advantage
in the Government taking over the stock of the Reserve banks.
Mr. WiLLiAMS. It would not cost the Government anything to do
that, would it!
Mr. EccLES. I think it would; yes. The Government could not
take over the stock without paying the member banks, any more than
the Government could purchase any other asset without it costing it
Mr. WiLLiAMS. The purchase of the stock is already in the Federal
Reserve banks, the purchase price of it!
Mr. EccLES. That is right.
Mr. WiLLiAMS. And if you took it over, it would simply own it
instead of the Federal Reserve System owning it; the funds then
with which the stock was paid for would be in the hands of the Gov­
ernment, would they not ?
Mr. EccLEs. No; the United States Treasury would have to make
payment to each member bank for its stock in the Reserve System,
and the stock would be transferred from the ownership of the indi­



vidual member banks, which own stock in the respective Federal
Reserve banks-----Mr. WiLMAMS. Then, in taking over the System, we would get the
assets that belong to the bank, that were paid in there by the member
bank, would we not, for their stock!
Mr. EccLES. When you bought the stock held by a member bank
in the Federal Reserve System, vou would naturally have—that is,
the Government would naturally have the assets represented by stock
which it purchased. That is correct.
Mr. WiLLiAMS. And that is sound. real!y. after all; it would not
cost the Government anything?
Mr. EccLts. It might be—it would not cost it in the sense
that it would be paying out funds without getting an equivalent
asset; it would be an investment, rather than an expense, but it would
cost the same-----Mr. WiLLiAMS. They would get the stock#
Mr. EccLES. That is right.
Mr. W i L L i A M S . The stock the member banks now own! Now, I
believe I asked a question awhi!e ago, that if the Government can
own and operate the banks and issue money, instead of private insti­
tutions, why not do that and save the 6 percent that we are now
Mr. EccLES. You would not save 6 percent. For the Government
to buy the stock, it would be required to raise the money that is used
to purchase the stock, and in raising that money it would borrow it
I f it borrowed it or raised it as they raised funds for other purposes,
it would be required to pay whatever interest the Government debt
was required to bear, in order to float the funds to get the money to
buy the stock.
At the present time, the last offerings of Government securities
bore a rate of 2% percent; so in that case, you would save 3% per­
cent. the difference between 6 percent and 2% percent.
Mr. WiLMAMS. Even so. why not save it!
Mr. EccLES. The answer is, perhaps, that there is no more reason
for the Government to invest in this business so long as it controls
the money supply, than in any other business.
Mr. HoLLisTER. Might I ask one question there?
Mr. WiLLiAMS. Yes; go ahead.
Mr. Hoi,LisjKH. That would be on the theory that you could neces­
sarily buy the stock at par. There is nothing, is there, in the law
which would permit the Government, unless it is some new theory
of confiscation hitherto unannounced—there is nothing by which the
Government could expressly pay the member bank which owns a
particular amount of stock in a particular Federal Reserve bank—
there is nothing by which the Government could compel that bank
to sell its stock at par if it chose to put a price on it of $200 or $300
or $400, is there!
Mr. EccLES. That is a legal question that I do not feel I am pre­
pared to answer.
The CHAIRMAN. Let me suggest that if you answer that question
you also tell us what you would do about tHe stock of the State bank
that is a member of the Federal Reserve System.
Mr. HoMJSTER. I am assuming that the Government is trying to
buy stock in a Federal Reserve bank owned by individual member



banks. That would be a matter oi contract between the Government
and each individual stockholder bank as to what the Government
would be willing to pay and what the member bank would be willing
to surrender its stock for.
Mr. Ecci.Es. That would seem to be the situation, and that is a
legal question.
Mr. Hoi-LiSTim. If you are not prepared to answer the question, I
would rather not interfere with Mr. Williams. I do not want that
to remain open without some comment, but I will refer to it later.
Ayr. WonxnT. May I ask a question. Mr. Williams?
Mr. WiLLiAMS. Well, yes.
Mr. WoLcoTT. Do I understand there is about $450,000,000 in that
fund which has been turned over to the Federal Treasury over and
above this 6 percent that was used—or we used one-third of it, did
we not, in subscribing for stock?
Mr. KcciJ:s. The Federal Deposit Insurance Corporation? That
was $140,000,000----Mr. WOLCOTT. Was it not one-third of that fund?
Mr. EccLES. No; it was more than one-third. The Treasury put
$130,000,000 and the Reserve System-----Mr. W oLcoTT. $149,000,000?
Mr. EccLES. I think it was $140,000,000.
Mr. WoLcoTT. $139,000,000, I think it was.
Mr. EccLEs. It made a total of $290,000,000 that was supplied by
the Reserve banks and the Treasury.
Mr. WoLcoTT. Out of this Reserve System?
Mr. EccLKS. Out o f the surplus o f the Federal Reserve bank.
Mr. WoLcorr. That could be used in payment of interest on these
bonds, and after that the full 6 percent and all over and above that
would go to the Government?
Mr. EccLES. You mean, then-----Air. WoLcorr. This reserve that is already in it-----Mr. EccLES. Yes: but that money was paid out by the Reserve
banks to the Federal Deposit Insurance Corporation, and therefore
the Reserve banks no longer have those funds. Those funds are
owned by the Federal Deposit Insurance Corporation and-----The CHAIRMAN. Let me correct you just a moment.
Mr. WoLcoTT. We reimbursed the Federal Reserve bank for that,
did we not ?
The CiiAiRMAN. We did not give any money to the Federal De­
posit Insurance Corporation, but we merely subscribed to its capita,}
Mr. EccuEs. Yes.
Mr. W oLcoTT. Indirect loans-----Mr. EccLES. You do not think that the capital stock has very
much value, then, do you? The law provides that the stock of the
Federal Reserve banks can receive no dividends.
The CHAIRMAN. Tim will tell that.
Mr. EccLES. The first b a n k in g bill-----The CHAIRMAN. It has made pretty good profit up to now.
Mr. EocKEs. Title I of the banking bill provides that the Federal
Deposit Insurance Corporation's capital o f $290,000,000 can be re­
duced to a nominal amount, and the balance put to surplus, so there



would not be an impairment of capital, if it became necessary to
put up these funds.
Mr. WiLLiAMS. I would like to remark, in that connection, that
so far as I am concerned, that will not be done, because I believe
the banks themselves ought to bear that burden.
Now, coming back to the original proposition, Governor, whether
or not the Government, as a practical proposition, can own and
operate the Federal Reserve banks on as sound a financial basis, and
render the same service and save these expenses, in the long run, if
you have dividends that are being paid to the banks on the stock—
if that can be done, why should it not be done ?
Mr. EccLEs. I believe that the ownership of the stock by the
Government would not necessarily be of any particular benefit or
value in the operation of the Federal Reserve System. I believe
that through the adoption of the provisions of this bill, the control
would be effective and the responsibility fixed, and it should be just
as effective in operating the system in the public interest as it could
be operated if the Government owned the stock. It gets down to a
matter of human intelligence. The management of the banks or
the management of the System would have to be directed in some
manner by some means. I see no reason why a management selected
with the Government owning the stock would insure the System
Leing operated in the public interest anymore than would be the case
with the members of the Federal Reserve Board being appointed by
the President of the United States, as is now provided, and the
governors and chairmen of the individual banks selected by the local
directors of the bank, subject to the approval of the Federal Reserve
Board. There is a great advantage in keeping regional ownership
and interest in the Reserve banks.
Most of the central banks of the world arc privately owned. The
bank which is just being set up in Canada, after a good deal of
investigation and study and consideration, is owned by the public. I
understand the stockholders elect the directors, but the Governor of
the bank must be approved by the finance minister, and he has very
great power and responsibility.
It is not so much who owns the bank as it is the way the bank
is set up and the responsibility with which it is charged.
Mr. W iL LiA M S. Is it your thought that Government-owned central
banks can operate as economically and as cfliciently and as much in
the interest of the people of the country as our present system ?
Mr. EccLES. I do not think that the fact that it may t)e Govern­
ment-owned, in and of itself, should make any difference. It may
be operated as efficiently and it may not be operated eHicicntly.
That, as I say, gets to the human problem, after all.
Mr. W iL L iA M S. The ownership of it, in that respect would make
no difference?
Mr. EccLEs. I do not think so, not necessarily. I f the manage­
ment of the banks, the personnel of the board consisted of elHcient
men who would feel independent to use their best judgment and
thought in carrying out the affairs of the institution, the ownership
would make no difference. If, on the other hand, people were ap­
pointed to operate the system for purely political reasons, rather
thaja with reference to their qualifications, and they were mnde to
ifeel subservient to the point where their best judgment was not



exercised, then of course the system, under those conditions, would
be badly and inefficiently and ineffectively operated.
Mr. WiLUAMs. Of course, the central idea in this legislation here,
as is stated at the very beginning, is to try to increase and centralize
the power in the Federal Reserve Board over the System, and I
think properly so because I think that the Government and Con­
gress and the"administration should have control of the monetary
system. It is a national system, of course, and there should be some
central authority and central power responsible for it. The pur­
pose of the bill is to create centralized authority, with complete
management of the corporation or system.
Mr. EccLEs. With the board, which would be charged with re­
sponsibility for the monetary policy, working with and under the
advice of the Governors* committee. There are many functions that
would be carricd out by the individual regional reserve banks, under
the direction of their boards of nine directors.
Mr. WiLLiAMS. But nothing that would influence the national,
monetary policy, without the consent of the central board ?
Mr. EccLEs. That is right, except that the Governors would in­
fluence the policies of the board, as a result of their counsel and
Mr. WiLLiAMS. And that would be true whether they were repre­
senting the system governmentally owned or individually owned?
would it not?" Right in that connection the counsel that you propose
of five-----Mr. EccLEs. Representing the 12 Governors.
Mr. WiLLiAMS. What function does the advisory counsel now per­
form ? Why could it not do the work proposed by the five ?
Mr. EccLEs. I think it is more proper to have the executive heads
of each of the 12 banks select their committee for the purpose of
ad vising with reference to the policies, than to have the council
advise. The Governors are in much closer touch with monetary
problems. The members of the council are appointed, one from each
Federal Reserve bank district by the Federal Reserve banks, and
I think they consist entirely of commercial bankers from the Fed­
eral Reserve districts. They are in touch with the individual prob­
lems of their particular banks and their particular communities but
I do not believe would be as able or as qualified-----Mr. WiLLiAMS. They perform a very valuable function; that is?
do thev or do they not?
Mr. EccLEs. I have not been on the Federal Reserve Board except
for a few months, and I have only had occasion to meet with the
advisory council on two occasions. It would, therefore, be difHcult
for me to judge as to just how important the functions of that body
have been over the life of the System.
Mr. FORD. Might I make a comment, Mr. Williams, please?
Mr. WiLLiAMS. Yes.
Mr. FoRD. Mr. Eccles, does not the demand for more complete
control on the part of the Government indicate that the heretofore
private control has not proved satisfactory to the Congress or the
country !
Mr. EccLEs. I would not say that we had had private control.
I think one of the principal difSculties of the money system has been
that we had not placed the responsibility definitely upon any one



body and given it the power and authority to carry out the responsi­
bility that was imposed upon it.
Mr. FoRD. It is too wide spread, and they have been forced to
operate and do what the Board wanted to do-----Mr. EccLES. We did not have a statutory open-market committee
until the Banking Act of 1933 created one of 12 Governors, and
charged that body with responsibility for the initiation of the openmarket operations and gave to the TSoard the power of approving
or disapproving the recommendations of the Governors. But even
then if the Board approved of recommendations of the Governors,
one or all of the 12 banks could refuse to participate in the operation.
Mr. WiLLiAMS. Has not the Board had that open-market policy
through the years?
Mr. EccLES. The Board was not charged by law with the duty of
formulating an open-market policy.
Mr. W iLLiAM S. None at all? Have they not intended to control,
in any way, the expansion and contraction of money through openmarket operation, through their advice and instruction to the member
banks, and through their own operations?
Mr. EccLKS. The Board has acted in all these matters, but without
a clear mandate of law.
Mr. W iLLiAM S. They made no effort—do I understand that the
Board itself has never made any effort at all along that line until
the open-market committee of 1933?
Mr. EccLES. The Board has attempted to influence the money mar­
ket through changes in discount rates—that is, its right to approve
of the discount rates—and it has even changed discount rates on its
own motion. The need of the open-market operation was recognized
in 1922, and a voluntary committee of governors was organized to
carry out the open-market policy or program.
M r . W iLLiAM S. T h e y had t h a t p o lic y th e n ?

Mr. EccLES. The open-market committee of the governors had the
responsibility for that program. The Board itself has not been
charged specifically with the responsibility for the open-market
Mr. W iLLiAM S. I understand, as a matter of law, but they have
actually adopted the policy, have they not?
Mr. EccLES. To what extent I cannot say. I am not as familiar
possibly as I should be with the detailed history of the operation of
the Board.
Mr. CROSS. May I ask a question ju st on that?
M r . W iLLiAM S. Yes.
Mr. CROSS. Now, is it not a fact that the Board, in April 1923 or
May 1924. brought its pressure on the open-market committee and
had them to buy $510,000,000 o f Government securities and reduced
the rediscount rate from 4 ^ percent to 3 percent, and, as a result, put
the wholesale commodity price level up to 11 percent, and the agri­
cultural products up to 20 percent, and this action was repeated a
number of times, and brought about the beneficial effect when they
did it?
Mr. EccLEs. I do not know to what extent the open-market pur­
chases and reductions in the rediscount rates had an effect upon
the price level. It is true, I think, that, under certain conditions, to
reduce the interest rates and increase the supply of money would be




effective in increasing business activity, just as to increase the in­
terest rates and reduce the quantity of money would tend to restrict
business activities, and slow up borrowing, and possibly start a
process of liquidation.
I do not believe that anyone can say to what extent open-market
policy can be responsible for recovery or for depression.
The Swedish money management is one of the most interesting,
I think, that we have in the world today and possibly has been as
successful, or looked upon as being as successful as that of any
other country, and the governors of the Swedish bank, in February
1932, made this statement:
It follows that when forming its policy in view of fluctuations in the price
level the Riksbnnk cannot but take into account tin* causes of such changes In
prices. For it is essential to determine whether price movements are caused,
e. g., by increased tariffs, altered exchange rates, or a tendency to inflation
on the domestic market which may be looked upon as primary in relation to
exchange rates. In any such analysis of price conditions, naturally other
price indexes itesides the Riksbank's own index of consumers' prices will also
be taken into consideration. Obviously, in their endeavor to create as stable
economic conditions as possible, the governors are also taking into account
other factors than mere changes in the price level, particularly conditions
affecting productivity and stocks in various industries.

The CHAIRMAN. Gentlemen, it is evident that we cannot continue
much longer, in view of the business in the House. I am going to
suggest that we adjourn until tomorrow morning at 10:30, and
resume with Governor Eccles.
(Thereupon a recess was taken in the hearing until 10:30 a. m.,
Tuesday, March 12, 1935.)


The committee met at 10:45 a. m., {nusuant to adjournment, Hon.
Henry B. Steagall (ctiainnan) presiding.
The CHAIRMAN. The committee will please come to order.
Mr. Eccles. you may proceed now. Mr. Williams, do you have
further questions?
Mr. WiLLiAMS. I think not. Mr. Chairman.
The CHAIRMAN. All right. Mr. Cross.

Mr. CROSS. Governor, you agree with the proposition that it is the
duty of Congress to regulate the value of money, don't you; that is.
Congress, acting through its agency which it sets up, shall do it?
Of course, Congress itself does not do it.
Governor Ecci*E8. I think that is a sovereign power given to Con­
Mr. CRoss. In the Constitution.
Governor EcoLns. In the Constitution.
Mr. Cnoss. Now if that is the duty of Congress through its agency
which it sets up. which of course, is the Federal Reserve System,
don't you think that that agency ought to be independent of any
outside influence or interests?
Governor EcrLES. The agency should represent the Nation as a
whole and should not be under the domination or control of any
group or groups.
Mr. CROSS. Should not the agency they set up, they being respon­
sible and having the duty to perform, which they have delegatee! to
that agency, should not that agency be independent of any outside
agencies that come in with a dinerent purpose in view?
Governor Ecx i,Es. It is my view that the Federal Reserve Board
should be as independent as it is possible to create a body of that
sort, charged with the responsibility of monetary policy in the public
Mr. CRoss. Now, Governor, isn't it a fact that the member banks
of the Federal Reserve System are constantly wanting to go out in
an opposite direction to what a wise policy would dictate, and that
they are constantly wanting to inflate when they should not, and
constantly wanting to deflate when they should not!




Governor EccLKS. Well, of course, there are a good many thou­
sands of member banks, and I don't believe there is any uniformity
of opinion. Inflation is brought about by creating a condition of
easy money, expressed in low rates and excessive reserves, in a pe­
riod when there is great business activity and hence a willingness to
Mr. Cnoss. Yes. But now the point I am driving at is this, isn't
it a fact that the member banks, and I am asking this just to get your
reaction on this, are inflating when they should not be. and are de­
flating when they should be inflating? Here is what Governor Har­
rison of the New York Federal Reserve Bank said in the hearing in
1932, page 53:
It is almost inevitable that the Federal Reserve Systtun, or any central hank,
will always have to go contrary to what the hanks an* doing. When they ore
deflating, we have to put pressure on them, and when they are della ting we
have to boost things up. 1 think that is what we should do.

Isn't it a fact that the member banks, when they are trying to make
money for their stockholders, in times when prices are high, they
want, of course, to keep extending credit, credit, credit, and inflating,
and naturally their class A directors—and class D directors, who are
largely under the control of class A directors—wish to keep going
forward and expanding, and don't you think that, is a conflicting
interest contrary to what the Federal Reserve System is intended
to do!
Governor EccLES. Of course, a!! I have is the record. From 1926
up to 1930, there was a verv small variation in the supply of money.
There was no inflation in tfie volume or the quantity of money from
1926 to-----Mr. CROSS. You refer there to all money—credit money?
Governor Eccles. That is right: I refer to all money. I include
in that demand deposits of member banks and of nonmember banks,
and the currency outside the banks, in a word the entire circulating
Air. CROSS. That is over what period?
Governor EccLES. That covers the period from 1926 to 1930.
Mr. Cnoss. Will you please answer for me this question: There
was a vast difference in velocity in those years?
Governor EccLES. Yes; that is correct.
Mr. CROSS. And the Federal Reserve System can step in and con­
trol velocity, can it not?
Governor EccLES. I don't think that the system has as much influ­
ence or velocity as it has on volume of money. I think the velocity
of money is influenced more by the tax system than by monetary
policy. Velocity slows up as business activity declines, or as defla­
tion develops.
With the national income in 1929 estimated at beyond 82 billions,
with the money volume at that time 264 billions, there was a velocity
o f 3.12; that is, each dollar on the average turned over 3.12 times
in the course of the year in the process of making up the income of
the community*
Whereas, in 1933, with the national income diminished from 82
billions to 46 billions, and the volume of money reduced from 26.4



billions to 19.9 billions, income velocity had declined in that period
to two and a third.
Mr. Caoss. Yes; I understand, that Governor.
Now Governor, isn't it a fact that in order to control the situation
you must still have a fixed policy and step in in time? "A stitch in
time is worth nine ", as one of the governors explained here in his
In 1929, Governor Harrison was insisting that something be done
to stop the inflation, but it delayed too long, until the crash came,
and of course then when that happened it was almost impossible to
do anything. But it is shown by the record before that they would
go out, putting out more securities, putting out more credit, more
money, when the commodity prices rose, and then when they would
stop that and sell, the reverse was true, because when you sell you
take from the member banks their reserves, and that of necessity
causes them to rediscount which they don't like to do, and that has
the effect, of course, of steadying things, and slowing matters up—
keeping them from rediscounting so much.
In order that I may get your reaction on some of these things, I
will quote from the testimony of Dr. Sprague who appeared before
the committee, I believe, in 1923:
There would be. I think, an advantage from the passage of The hill. I
probably agree with you that the defects in the operation of the Federal Re­
serve Syntem are not so much errors of judgment they have made, hut rather
in the hesitating manner in which at times policies have been decided upon
:;nd then executed.

Without a goal to go to. and the boards come and go, the present
Board mnv be gone in a short while, and with no goal to go to, the
individuals differ and hesitate, and don't you think that is one of the
great troubles, not having any gonl to go to?
Governor EccLEs. You mean without a specific provision or objec­
tive required?
Mr. CRoss. Yes.
Governor EccLES. You menu required as a part of the law?
Mr. CRoss. Yes; for Congress to set down the purpose, arid have
it the purpose of Congress, rather than to just turn the Hoard loose
and let them go ahead as they did in 1928, as my recollection of the
testimony shows, or 1924. when the Presidential election was coming
-on and they determined they should have prosperity. So, therefore,
they got out and they bought Government securities, $510,000,000,
shooting the price level up 11 percent, the farm products 20 percent,
and built up commodity prices. Then, after that, they reversed the
process, but no election was then coming on.
Now if you have a goal to go to, so they can't just shoot things up
and down for some ulterior motive, they are fastened to an anchor,
and don't you think it would be wise to have such a provision in the
Mr. WiLLiAMS. You mean a price level, do you, Mr. Cross?
Mr. CRoss. Yes.
Governor EccLES. I don't think there should be a mandatory pro­
vision to reach a certain price level. It may be of interest in that
connection to consider the preamble of the recent law creating the
Bank of Canada. It is short and might be considered as a basis for



our own. ft doesn't definitely Rx a price level, but it does Rx an
Whereas it is desirable to establish a centra! bank in Canada to reguiate
credit and currency in the best interests of the economic life of the nation,
to control and protect the external value of the national monetary unit, and to
mitigate by its influence fluctuations in the general level of production, trade,
prices, and employment, so far as may be possible within the scope of monetary
action, and gcncraliy to promote the economic and tinancial welfare of the

Mr. CROSS. They will all say that, of course. Everybody agrees
to that, but isn't it a fact that our system is such, as I suggested, we
go out and do a thing when a Presidential election is coming on,
without any guide as to what the purchasing power of a dollar
should be, no relation to the commodity-price level, and then turn
them loose? They not only hesitate, but when they do jump, they
will jump because of some purpose that is actuating them like a
Presidential election.
For instance, let us take Dr. Sprague, who said in his testimony,
*I have reached the conclusion that a stabilization amendment might
prove serviceable."
Now. that was his testimony during that same time, in 1928.
Don't you think experience has shown those people that they
couldn't have a stable policy under those conditions %
Now. I want to get your reaction on some more of his testimony.
Now, Dr. Miller, in the hearings in the Senate, in 1931, said:
It was my opinion expressed several times, in discussions at Federal Reserve
meetings in the opening months of the year 1929, that the Federal Reserve
System was drifting, that it was in the midst of a perilous situation without a
policy- -

and won't that, in your opinion, continue to be the case unless you
have got a goal to go to?
Governor EccLEs. I think there should be a goal, but the goal
shouldn't be a fixed-price level. I think the goal should be stable
business conditions because if you have a goal of----Mr. CKoss. Who is to determine what stable business conditions
are? The Board? They differ here.
Governor EccLEs. Yes; it has got to be left up to the Board, which
should not be considered a political body. The law makes the
Board a nonpartisan body, on which political parties as such are
not represented and appointments to which are for periods of 12
Mr. Csoss. That is true, but you know human nature doesn't
change, and it is just like the
in the Supreme Court.
People don't change. And what we want to do, it is my idea that we
get something here where they are anchored to something.
For instance, now, here is the testimony of Governor Harding:
The American monetary system is a good deal like a ship at sea without
adequate equipment of rudders and compass to guide it.

Don't you think they need something to guide them, something to
go to ?
Governor EccLEs. I don't believe that a iixed-price level is a guide
that we should have. We might have a stable price level on thebasis of some index, and yet have a great deal of unemployment-



Nobody would be satisfied if you reached a 1926 price level and
continued to have a national income of 50 billion dollars instead of
80, and 10 million people unemployed.
Mr. CROSS. Yes, but Governor, the question of unemployment de­
pends upon profits, doesn't it!
Governor EccLEs. Not altogether-----Mr. Cnoss. I won't run my factory unless I make a profit, will I?
Governor EccLEs. That is true.
Mr. CROSS. I f I make profits, I employ people.
Governor EccLEs. That is right.
Mr. CROSS. And when I employ people that increases purchasing
Governor Ecci^s. That is right.
Mr. CROSS. And when they have that increased purchasing power
they are going to buy, and I will continue to produce, but if you let
matters run wide open and I keep expanding, then there is bound
to be a reaction, and I throw a lot of people out of employment and
I destroy purchasing power.
Don't you think it is better to have a stable purchasing power in
relation to a wholesale price level!
Governor Eccuss. This is an interesting chart here that Dr. Gold*
enweiser gives me. It shows that the price level in England was
very stable from 1931 to 1934, but the amount of their unemployment
fluctuated considerably.
Mr. CROSS. Yes: I have seen some of the charts.
Governor EccLEs. But I mean-----Mr. Cnoss. But, now, Governor, in reference to England, did you
read the book by Sir Charles Morgan Webb, in which he in substance
says that they regulated gold from 1823 on down to 1914 because they
were the only creditor nation of the world and they were carrying
the commerce of the world, and that it benefited them as a creditor
nation! Did you read that work!
Governor EccLEs. No; I didn't. It seems to me that the Federal
Reserve System can control to quite a large extent, not entirely, how­
ever, the volume of money, by its power over discount rates and its
open-market policy.
Changes in the volume of money in the hands of the people, how­
ever, depend also upon the willingness of people to borrow and
the willingness of banks to lend.
Mr. CROSS. Yes, Governor; but what I am trying to get at now
is to try to show you how confused the Federal Reserve Board has
been in the past. Now, for instance, here Dr. Miller testified in
1928, and he says:
It is my opinion that the Federal Reserve mind at the present time is more
perplexed than it has been sinctt the troublesome period of 1920 to 1924; that
it is in a state o f mental confusion.

Why was that and what is there to keep it from remaining in a
state of mcjital confusion unless you have some goal to go to?
Governor EccLEs. I think there should be a goal, but I don't think
the question of prices-----Mr. CROSS. Well, name the goal you think is the proper one.



Governor ErcLES. The goal is stable business conditions and fuH
Mr. CROSS. AH right, they had that all the time, didn't they? It
is just the same as the goal m the law now, isn't it!
Governor ErCLEs. Jn the existing law the Federal Reserve Board!
is not charged with the responsibility of creating a condition either
of stable prices or of full employment.
As 1 understand it. the responsibility of the Federal Reserve Sys­
tem is to supply the credit needs of commerce, agriculture, and
Air. CRoss. All right, now let us go back to Congress. It is the
duty of Congress under the Constitution to furnish money, adequate
money, a medium of exchange, and regulate its value.
Governor EccLES. That is right.
Air. CRoss. How can Congress regulate that value unless it Rxes
the price level %
Governor Ecci,ES. I don't say that prices are not part of the con­
sideration. I think that every eifort should be made to maintain
stable prices, but stable prices should not be the sole and paramount
objective, so that the Board would be directed to maintain stable
prices and not to consider total production and employment at all.
Mr. CROSS. Yes; but you take the wholesale index of prices in
the market, which are arrived at by taking the mean price, where
some may go way up and some way below, but you hold a mean level
of prices. Xow, if you don't use that, you have got no measure of
value, have you? Unless you use that, what other measure of value
could you Rgure for money 2
Governor EccLEs. I am not sure that I can say. Gold, of course,
hasn't proven to be a very satisfactory measure of value and the buy­
ing power of money, measured in goods and services, of course, is
the value that the people are interested in.
Mr. CROSS. Governor, I want to ask you this question, You don't
think we are helpless in the midst of plenty to feed and clothe, with
man power to produce—that we are helpless and these things come
on and then there is no help for it? Do you think that?
Governor EccLEs. I stated the other day that I don't believe that
any monetary policy alone will result in stable business. Simply
dealing with the volume of money, so far as it is possible to innuence or aifect the volume of money through the controls that the
Reserve System has, cannot give you full prosperity. This is be­
cause distribution of wealth production-----Mr. CROSS. Yes.
Governor EccLES. Is a very important element, and that gets back
to the problem of the tax system. The banking system can inHuenca
the volume of money----Air. Citoss. Now, Governor, I understand that.
Governor EccLES. And the tax system, it seems to me, must in­
fluence the velocity of money.
Air. CRoss. Well, now, Governor, let me get this. Of course, I
don't think the tax system is so important that we are ever going
to get anywhere with it except to stop enormous fortunes by higher



taxes in the upper brakets. But now suppose you have got a small
community such as they had in the early days, when people would
come in to the fairs and exchange their products, their things; and
they followed the law of supply and demand perfectly, did they not!
Governor EccLES. Yes.
Mr. CROSS. Now, the dollar or the monetary unit of a country
is supposed to reflect as a mirror the workings in that country of
the law of supply and demand for things; so if the country has
plenty of everything, if that law of supply and demand were fol­
lowed just like they would come together and exchange what they
have, everybody would have plenty and would not be hungry and
distressed and ruined and broke. Now, don't you think the mon­
etary unit ought to perform that function!
Governor EccLKS. The monetary unit ought t o ; but the monetary
unit can't be made to perform that function simply through mon­
etary policy. Placing the means of payment in the hands of people
who will spend is the thing that determines employment, business
activity, and price levels.
The ownership of the money is an important element in the use
of the means of payment. I f there are corporations, owning large
unused balances of funds, which cannot find a profitable place to
use or invest those funds, those funds don't go into circulation.
Mr. CROSS. That is true, but if you had prices at the point where
they could invest and make some profits-----Governor EccLES. But the-----Mr. CROSS (continuing). They would invest.
Governor EccLES. The prices would not induce them to invest.
It is the profit opportunity that induces them to invest, and where
you already have a great unutilized capacity because the people as
a whole lack the buying power to purchase tlie goods produced, there
is no incentive to invest in further capital goods.
Mr. Cnoss. Governor, don't you think the whole theory is that
we are helpless—and so far as the Federal Board is concerned we
needn't look to that for relief, not for much relief—that there are
all kinds of things out yonder that you can't reach and touch, and
therefore we just have to follow along!
Governor KccLEs. No; I think that the monetary factor is 1 of
the 3—1 of the 3 important control measures of our capitalistic sys­
tem. The volume of money can largely be controlled through a
hanking system.
The distribution of funds which is a factor in their velocity must
he controlled through the income-tax system, and employment must
he regulated through a public-works system.
When the volume of money is adequate to support a certain price
level for a given volume of production, and unemployment begins
to develop, and as a result prices begin to decline, it is likely to be
because productive facilities are out of balance with the consumers'
buying power, and velocity of money is declining.
Mr. CRoss. Yes; but you don't want to let it get to where that
happens. I f you are going to let contractions tal^e place, and as a
result all over the country where bonds have been issued for school



districts, road districts, municipalities—and you say that the dollar
today or next month will double in purchasing power, so that that
individual must pay twice in real value because there is no value in
money so far as keeping and clothing is concerned—he must pay
twice as much in real value to pay the taxes and to pay the interest
on his mortgage if he has one—it becomes an impossibility. It
means a general liquidation and discontent and trouble and threat­
ened bankruptcy.
Governor EccLES. It does, if you let the national income decline.
The purpose of our tax system and the public-works system is to
keep up production when private business fails to keep up full em­
ployment. The loss to the Nation, when the national income declines
through unemployment, is a loss we cannot afford.
Mr. CRoss. And your idea is to do it through public works, public
enterprises ?
Governor EccLES. That is right.
Mr. Cnoss. Each time you do th^t you borrow a good many bil­
lions of dollars, don't you?
Governor EccLES. You wouldn't have very much to do if you did
it at the right time, before you allowed deflation to proceed very
far. The amount that it would require at the beginning-----Mr. CRoss. That is, more or less, just a guess, isn't it? I f you
keep on running these billions up, who is paying that tax but the
public! And if you get 50 billions and a hundred billions, the
fellow who pays it has got to collect it back off the people, there
are bonds which they have got to collect off the people in taxes.
Governor EccLES. Who p a ys the difference between the 85 billion
of national income and the less than 50 billions of national income—
who p a ys that 35 billions?
Mr. CRoss. The fellow who has got the loans on his land. The
people who have the loans foreclose the mortgages and get the land,
And they keep it until they can resell it to these fellows again, those
who can buy. They have to take that loss. But my idea is to get
a stable purchasing power in your monetary unit, so that it can't
happen that if a man goes out and puts up a factory and has to
borrow money, and he borrows this money and builds the factory
and expands it, and the first thing he knows the purchasing power
of that dollar doubles and trebles, and he is sunk.
Governor EccLES. You may fix a stable purchasing power as a
requirement of the monetary policy of the Federal Reserve Board,
or any other Board, but I don't know what methods they could use
to maintain or to reach that objective.
Mr. CRoss. Don't you think it could be kept by using the redis­
count rates? In other words, using the reserves—the reserves in
the banks—couldn't you use the open-market operations?
Governor EccLEs. No monetary policy alone by simply attempting
to regulate the volume of money will maintain a stable national in­
come or-----Mr. CRoss. I don't say "volum e" alone. I mean volume and
velocity. Can't you control it through the rates, loaning of the
reserves, and rediscount rates and open-market operations—wouldn't
that have an effect on the velocity as well as the volume?



Governor EccLES. To the extent that a reduction of rates and an
increase in the supply of money would tend to stimulate velocity;
yes. But so long as there is an inequitable distribution of wealth
production which results in excessive savins we will have depres­
Only by pulling back that part of our savings that we cannot
profitably use in new capital goods and using those funds to give
employment to those who become unemployed can we maintain a
The Government must be the compensatory agent in our economy
through the money system, through the tax system, and through a
public works system.
Mr. REILLY. I think the committee will have to go now. The com­
mittee will adjourn now.
(Whereupon, at 11:25 a. m., an adjournment was taken until
Wednesday, Mar. 13, 1935, at 10: 30 a. m.)








The committee met at iO: 3t) a. m., Hon. Henry B. Steagall (chair­
man) presiding.
The CHAIRMAN. The committee will come to order. Mr. Cross,
you may continue with your examination of Governor Eccles.

Mr. CRoas. Governor, you may have thought, from my questions,
that I am in a critical mood. I want to say I think this bill pro­
vides for a tremendous improvement over what we have, and I think
you are a big improvement over governors we have had heretofore;
so do not think I am criticizing you.
Check money, for all practical purposes, performs the functions
o f legal tender money, does it not?
Governor EccLES. Yes; it does.
Mr. CROSS. The easier credit is, the greater the volume of credit,
and the greater the number of check dollars, the less the dollar will
buy; is not that so? When credit is easy there are plenty of check;
dollars, check money, and that means prices are up, does it not, and
therefore the purchasing power of the dollar is down, is it not?
Governor EccLES. That would be expected to follow. The easy
money-----Mr. CROSS (interposing). That is almost axiomatic, is it not?
Governor EccLES. Easy money, through the banking system, by
creating low interest rates-----Mr. CROSS (interposing). That is a fact, is it not, that it is axio­
matic; that when credit is easy there is a large volume of credit, and
that inevitably means that times are good and prices are up, and
profits are up, and people are borrowing, and there is a, supply of
check money like there was in 1928 and 1929 ?
Governor EccLES. Of course, your general prices go up when means
o f payment in the hands of people who will spend increase faster
than production.
Mr. CROSS. Is the proposition I put to you true or not?
Governor EccLEs. I think that is generally the case, but it cer­
tainly is not always so. Witness the present situation.
Mr. CROsa. Then the tighter credit is, the less credit there is, the
fewer number o i cheek dollars there are; that is true, is it not?




Governor EccLEs. Yes; I think that is true.
Mr. CRoss. That being the ease, then the more the dollar will buy,
will it not %
In other words, as credit dries up, check money, the purchasing
power of the dollar increases, does it not?
Governor EccLEs. Not a lw a ys.
Mr. CROSS. Now, Governor, do you not think the velocity theory
of money is more or less a meaningless fiction?
Governor EccLEs. No.
Mr. Cnoss. Now, along in 1928 and 1929 we had a situation where
our credit money, our check money did about 90 percent of the
trafEc duty of the country, did it not?
Governor EccLEs. I think those were the estimated figures. I do
not know how accurate they are, but that would be approximately
Mr. CRoss. That is what they put it at, about 90 percent!
Governor Ecci*ES. Yes.
Mr. CRpss. Now, if all of that check monev had vanished or dried
up, 90 percent of the money had dried up, t^e trafHc of the country
had vanished, had it not!
Governor Ecci.ES. Unless the deposits were drawn out in currency.
Mr. CRoss. I f you have 5% billion in currency, we will say, and
we are talking about the check part of it, and practically 90 percent
of it was gone, then you had left your legal-tender money, which was
about 5 billion, we will say?
Governor EccLEs. Yes.
Mr. CRoss. Now, if nine-tenths of that money was check money;
that is, 90 percent, and you had 45 billions in check and 5 billions in
legal-tender money, and the 45 billion had vanished, it is not to be
assumed that it did not ail go out?
Governor Ecci.ES. I do not know that I understand your point.
Mr. CRoss. I f your check money had vanished like the mist—it is
a kind of phatom money, but it does the work of the country in all
its functions. Say that 90 percent of the trafSc was done through
check money, and we will say that is nine-tenths of the total, and
one-tenth of the business was done, we will say, with legal-tender
money, there being nine times as much check money as lega!-tender
money, and the check money disappears, and you have only left your
legal-tender money, of course, then 45 billion in check money would
have vanished, would it not?
Governor Ecci.ES. I f it disappeared, that would be the case.
Mr. CRoss. I f your credit dried up like the mist, then it would
disappear, would it not?
Governor Ecci.ES. Yes.
Mr. CROSS. And if you then had 5 billion in legal-tender money,
and then that 5 billion had kept on performing the duty of trans­
ferring the property and the goods of the country at the same speed
at which it was traveling when you had your 45 billion of credit
money, it would have been doing only one-tenth of the amount of
traffic duty that was being done by the whole amount of credit money
plus the currency or legal-tender money, would it not ?
Governor EccLEs. I f the total amount of money is reduced by ninetenths, then that one-tenth or the remaining money would be



Mr. CROSS (interposing). Traveling as fast as it always had been,
it would have been one-tenth, would it not!
G o v e r n o r EccLES. I
t r a v e lin g th a t fu st.

do not kn ow

w h e th e r it w o u ld

h a v e been

Mr. CROSS. Assuming that it would be traveling as fast as it was
in 1928 and 1929, with the 45 billion gone, it was doing only onetenth of the work; if it was doing the same amount of work after
the crash as before the crash, is not that true!
G o v e r n o r E cci.ES. I f th e v e lo c ity o f th e fu n d s d o es n o t c h a n g e , i f
th e v o lu m e is redu ced n in e tim e s, o f cou rse, y o u r v o lu m e tim e s
y o u r v e lo c ity w o u ld be o n e -te n th o f w h a t it w a s.

Mr. CRoss. Surely: that is simple mathematics.
Governor EccLEs. Yes.
Mr. CRoss. Now, is it not a fact that in figuring velocity you
give credit to the work being done by the credit money when times
are good, and the legal-tender money, in fact, is not going any
faster than afterward, except that the credit money vanishes and
you no longer can figure what the credit money is doing to the legaltender money ? In other words, you give credit to the legal-tender
money, and when times are good you say the currency amounted
to 5 billions, and it was going at such and such a speed; but you
are giving credit to the legal-tender money for all that is being done
by 45 billions of credit money, are you not? Is not that the way you
count velocity?
Governor Et'CLES. N o; it is not.
Mr. CRoss. How do you count it! You cannot tell how often it
swaps hands.
Governor EccLES. The national income is the number o f times
that your volume o f money-----Mr. CROSS. O f w h a t m o n e y !
Governor EccLEs. All money.
Mr. C Ross. All right.
Governor EccLES. There is no distinction so far as the working
o f the money is concerned between currency and checking accounts;
they both perform the same function in the money system. I men­
tioned yesterday the difference in the velocity figures.
Mr. &ROSS. Let me get this concretely, if I can, so I can under­
stand it.
Take, for instance, the situation in 1929. At what velocity do
you say money was traveling at that time!
Governor EccLEs. What would be termed as the income velocity;
that is, the relationship of money to the national income-----Mr. CRoss (interposing). What was the velocity of money at that
time? Say we had 50 billion, counting the credit money and the
legal-tender money, what was the velocity at which aM of the 50
billion was traveling?
Governor Eccijss. We had, in 1929, 26.4 billions-----Mr. CRoss (interposing). O f all money!
Governor Eccuas. O f all money.
Mr. CRoss. Checking-----Governor EccLES (interposing). And currency; that is right. That
eliminates, of course, your interbank deposits. These are the figures
I got from the Federal Reserve statistical division.
Mr. GOID8BOROUOH. That does hot include savings money!



Governor EocLEg. No; you cannot include savings money any more
than building and loan money.
Mr. Cnoss. The checking accounts, plus the legal tender, amounted
to 26 billions?
Governor EccLEs. That is right. The national income was 82 bil­
lions. according to the Department of Commerce figures, or, to be
exact. 82 billion 300 million.
Mr. CRoss. What do you u nderstand as the nation al incom e?
Governor Ecci.ES. It represents, as I understand it, the income
received in the production of all goods and services.
Mr. CROSS. Whut do you count as goods %
Governor Ecci,ES. It would be capital goods as well as perishable
goods, buildings, factories----Mr. CROSS (interposing). And lands?
Governor EccJLHS. Equipment; no land.
Mr. CROSS. Just buildings?
Governor EccLEs. Buildings—factories and equipment; all kinds
of goods. The tota! volume of bank debits was estimated to be
between 1,000 and 1,200 billion. In other words, the actual turn­
over of money was about 40 times a year, I think.
Air. CROSS. Governor, now you say capital goods, and then you
say the income was 80 billion. Wltere do you get the income at
80 billion2 What do you mean by that?
Governor- EccLrs. The money value.
Air. Cnoss. Of all capital goods, buildings, and so forth?
Governor EccLKS. The money value of what was produced in any
particular year. If in the year 1929 the value of all foods, clothing,
and capita! equipment of ail kinds produced in that year was a cer­
tain amount, that would be income, after the elimination of dupli­
cation^—for instance, if you start to figure the value of wheat that
is so!d to the miller, then the miller sells to the wholesaler and the
whnlc-aicr sells to the retailer. When you take the total check trans­
actions, they run between a thousand billion and twelve hundred
billion, and it takes into account all of those relationships. But
the national income only takes into account what is produced, and
by considering it once, and not in the various transactions through
the methods of production and distribution. That is the national
Air. CROSS. I am getting at the question of velocity. You say you
had 26 billion of all kinds of money. Upon what basis do you
figure the velocity of the 26 billion?
Governor EccLEs. With that amount of money, with 26 billion,
we had a national income of 82 billion, 800 million; or we had there
what is termed an income velocity of 3.12. In other words, the total
volume of our currency and checking account went into the total
national income that year 3.12 times.
Now, we come down to 1933, when the national income was 46
biHion, 800 million, and our money had diminished from 26 billion,
400 million to 19 billion, 900 million.
Air. GotDSBORcuGH. When was that, 1933?
Governor EccLEs. Yes.
Air. GOLDSBOROUGH. The other year was 1928 ?
Governor EccLEs. The other year w as 1929. There was very little
difference between the 1928 and 1929 figures. Ayid.with the income



of 46 billiohs, 800 millions and the deposits and currency in exist­
ence during that year of 19 billion 900 million, the income velocity
was 2.35* We have not the figures for 1934, but that is expected to
show a decrease. We know that the volume of deposit currency has
been very substantially increased as the result of three factors—the
budgetary deficit, gold imports, and the reduction of currency in
circulation as the result of the dehoarding.
Mr. CROSS. Your gold is all stabilized, is it not?
Governor Ecci.ns. That is right. But the gold comes in from
abroad to take care of the unfavorable trade balances of Europe and
the rest of the world. The only way they have been able to take
care of their unfavorable trade balances is to pay us in gold. There
has been about 1 billion 300 million of gold coming into the country
in 1934. Those three factors increase your deposits. There would
have been a greater increase than that had there not been a shrinkage
of loans and investments of banks, outside of Government bonds.
As 1 recall the figure, it was around 6 or 7 hundred million dollars.
The result was an increase in deposits and currency by about $4,000,000,000, as I recall the figures.
Mr. CROSS. You sa y an increase in currency?
Governor EccLES. In deposits. I do not think there w a s any in­
crease in currency.
Mr. CROSS. As to this billion dollars of gold that comes in here, do
you mean to say that would make an increase of a billion dollars of
back-bone or pocket money?
Governor EccLES. An increase in bank deposits in that amount;
yes, sir.
Mr. GOLDSBOROUGH. You said the amount in 1933 was forty-six bil­
lion, eight hundred miHion. Have you the amount in 1934?
Governor EccLES. No; I have not. It is estimated as over Rfty
billion, but the ratio of the national income to deposit money will
show up considerably less than it was in 1933, showing that with the
increase in the volume of money there has been a decrease in the
velocity of money; that the increased volume has not increased the
national income in proportion.
Mr. CROSS. What is the increase for 1934 over 1933?
Governor EccLES. I have not the exact figures.
Mr. CROSS. In the volume of money?
Governor EccLES. It would just be an estimate. But I think it is
around four billions. That is the increase of 1934 over 1933.
Mr. CROSS. What is the difference between the check money of
1929 and the check money of 1933 ?
Governor EccuR. I do not know just what you mean. You mean
in amount, the actual amount of check money in 1989 as compared
with the check money in 1933?
Mr. CROSS. Y e s .
Governor EccLES. There w a s a difference o f T % billion between
1929 and 1933.
The CHAIRMAN. Let me ask you a question right there, to make
sure I understand it. Do you mean to give the total 6gures for the
entire country? Are your figures predicated on calculations that
embrace all o f our banks?
Governor EccLES. Oh, yes.



The CHAmMAN. That is what I understood, but I wanted to make
it clear.
Governor EccLES. Yes; the member and nonmember banks.
Mr. CROSS. You do admit that the dollar as it is today, untied to
any price level, is no measure of value, do you not! In other words,
its purchasing power is constantly expanding and contracting!
Governor EccLES. That has always been true.
Mr. CROSS. You have an exact measure of length, for instance, in
the linear foot; and you have an exact measure of weight in the
pound. You also have an exact measure of volume in a cubic foot.
But you cannot measure volume by weight. You might have two
cubes of exactly the same dimensions, one made of cork and one of
lead, but if you attempt to measure them by weight you would not
get any idea about it at all, would you ? That is a simple question,
it seems to me. I am talking about the simple question of measure.
You could not get any idea as to the size of those two cubes by using
the measure o f weight, per pound, could you!
Governor EccLEs. No.
Mr. Cposs. One would probably weigh a hundred or a thousand
pounds more than the other.
Now, you attempt to measure the value by the pure unit of weight,
do you not, with so many grains of gold, for instance!
Governor EccLES. I do not think that a 6xed gold content results
in stable prices.
Mr. CROSS. I do not think it does either.
Governor EccLEs. It never has in the past.
Mr. CROSS. I do not think so, but we put the price at $35 an ounce,
whereas it used to be $20.67.
Governor EccLES. That is right.
Mr. CROSS. So it is no measure of value, is it?
Governor EccuR. I do not think so.
Mr. CROss. Now, the only way to get a measure of value is by a
price level; do you not think so? Do you have any other suggestion
as to a measure of value outside of a price level!
Governor EccLES. Do you mean by some index Rgure!
Mr. CROSS. Yes; or some wholesale commodity price level.
Governor EccLES. That gives you a measure of value, but it is not
what you want.
Mr. CROSS. It does give a measure of value, does it not?
Governor EccLES. Yes; it does give a measure of value.
Mr. CROSS. Now, if you would tie your monetaiy unit of the dollar,
as we call it in this country, to the price level, you would get a
measure of value, would you not!
Governor EccLES. I do^iot know just how you would tie a mone­
tary unit to the price level.
Mr. CROSS. I say. if you do do it.
Governor EccLES. Yes; if you can.
Mr. CROSS. I am saying, if you can you would get a measure of
value. As it is, you have not any measure of value. Do you know
of any other method by which you could approach a measure of
Governor Ecci^s. I think that a stable price level is a desirable



Mr. CROSS. I know: we are talking about the price level. What
other way is there?
Governor EccLES. I should not say that I know of n way to get a
stable price level, and at the same time get a stable business condi­
tion, which is a condition of full employment and prosperity.
Mr. CRoss. O f course, that is what we all want to do, if
Let me ask you this question: As the result of this instability,
fluctuation, expanding, and contracting in the purchasing power of
the dollar, and consequently affecting the earning power of a dol­
lar, credit, or credit money, or check money is very sensitive, timid,
and easily affected by any economic disturbance, is it not?
Governor Eccles. I do not think that check money is more sensi­
tive than any other money.
Mr. CRoss. All right. Any kind of money is sensitive, is it not;
any other money, like legal tender 2
Governor EccLKS. Yes; that is right.
Mr. CRoss. I f you can stabilize it on a price level, it will become
a dependable measure of value and relieve credit from the insta­
bility and constant fear to which it is now subject, will it not?
That is, if a man knows that lie will know that he will have a
dollar to spend in the aggregate, and would take into consideration
the figures you use in determining the wholesale commodity price
level, and he knows it will hold up the purchasing power and the
value, would not that tend to stabilize and give confidence?
Governor EccLES. I think it would.
Mr. CRoss. The only method by which we lenow how to do that
are the levers you have in this bill, rediscount and open-market
Governor EccLES. Open-market operations, yes; that is right.
Mr. Cnoss. Now, with those three levers, do you not think you
could approximate holding the purchasing power of the dollar stable
with the price level!
Governor EccLES. Insofar as that can be done through monetary
action, I think you could accomplish that.
Mr. Cnoss. We know of no other action-----Governor EccLES. In that connection let me read a short state­
ment I have here which seems to me to cover this question.
Professor Olin, a Swedish authority—and they have possibly had
more experience in this question of managed currency-----Mr. CRoss. He has not had a long experience t!ecause this just
started recently.
Governor EccLES. That is true of the entire world. As a mat­
ter of fact, as to the problem of central banking and money manage­
ment, there is plenty to learn about it. There is no country which
has had any experience for any great length of time.
Mr. GOLDSBOROUGH. There is plenty to unlearn about it, is there
Governor EccLES. About the question of managed money!
Mr. GOLDSBOROUGH. About the way to handle central banks. Can
you answer that?
Governor EccLES. I do not know enough about the history of
central bank operations. O f course an automatic gold standard has
bean a guide in th^ operation of the world's banking system in the
past, up to the time of the war.



Mr. Cnoss. Controlled banking, was it not?
Governor EccLES. Very largely.
Mr. CROSS. I wish you would read that book written by an
Governor EccLES. This man says, after surveying the Swedish
experiment in an article in index, volume 8, that—
A business cycle policy that aims at as full and regular a utilization of the
productive forces as possible, that is a maximization of the real national income
per head of tlic population over a long period, is bound to take many other
factors into account besides the development o f prices: that is to say, it can
not be based on the idea o f stabilizing any particular price level, especially if
the latter has been brought by an immediately preceding depression, but of
equilibrium with the other parts of the price system.

Mr. GOLDSBOROUGH. Which means that there are two factors: One
is the factor of a scientific monetary system and the other is the
factor of distribution of production" that is what he is talking
about, is it not?
Governor Eccms. That is right; I agree with that.
M r . CROSS. M y idea is th at th is b ill is a ll r ig h t, excep t th a t there
are tw o a m en d m en ts we o u g h t to h ave.

I think it is up to Congress to provide for the regulation of the
value of money, through our agent, which is the Federal Reserve
And since, as I think 1 showed here yesterday, the member banks
are in the business of making money, and the 12 Federal Reserve
banks have that idea, too, and as Governor Harrison, of the New
York Federal Reserve Bank, said, the very time the Federal Reserve
Board wants to hold down inflation or credit, the banks insist on
expanding it, and the very time the Federal Reserve Board wants to
boost credit, the banks tend to shrink and contract it. As long as
they own the stock of the Federal Reserve banks, with their class A
and c!ass B directors, with all those influences working, I am afraid
there will be cross-purposes, and I think they should be in a posi­
tion, without any outside influence, to act for the whole people all the
time. That is why I believe that the stock should be taken over and
owned by the Government in those Federal Reserve banks.
Another amendment which I think should be adopted is this: I
think we ought to give them a goal to work to. It is the best we
have got; it might not be a perfect compass, and no doubt is not by
any means; yet I think we ought to have some kind of a price level,
whether you take 50 or 100 commodities, or 784, or use the economists'
index, we ought to have some goal set for them to anchor on. We
can try it, and if it does not work we can change it.
I notice that England has let the pound slide down, no doubt with
the idea of getting constantly under our dollar, giving her the advan­
tage. I think we ought to take 20 percent above the wholesale com­
modity price level of 1926. I f we take that and go very little below
that, I think we should do it, because if England or any other country
is constantly trying to slide under us and cheapen their money to
give them an advantage in the export trade, I think we should be in
a position where we can follow along with them.
But I am sold on the question of tying the dollar to the price
level within a certain latitude.

Then I will tell you another thing I think about this bill, at least in
connection with the psychological effect. You have 40 cents on the



dollar back of the Federal Reserve note, and I think if you would
make it, say, 35, and provide, say, for 10 cents in silver certincates, you
would be taking a wise step.
I realize if you can have stabilized and controlled currency you do
not need any metal at all, except as a matter of foreign trafRc. But as
long as the balance of trade is in our favor we do not even need that
because they have to be constantly buying money to pay for our goods.
O f course, if we become an importing nation and the balance of
trade is against us, we would have to use a different currency.
Governor EccLES. As to this question of Bxing the price level in the
bill. I personally would not like to see that. I would suggest that, in
lieu of a fixed price level, something of this sort might be put in the
bill, as indicating the direction or objective to which the Federal
Reserve Board would be required to reach:
It shall be the duty o f the Federal Reserve Hoard to exercise such powers as
it possesses to promote conditions making fo r business stability and to mitigate
by its infiuence unstahilizing fluctuations in the general level o f production,
trade, prices, and employment, so tar as may be possible within the scope of
monetary action.

Mr. CRoss. That is a lot better than what we have in there now.
Mr. GOLDSBOROUGH. Would you feel like including in that a state­
ment indicating that the Board should also direct its attention toward
using its power in such a manner as to absorb the unemployment?
You have done that in a way, but it is not quite clear.
You know there arc experts who I think are worthy of attention
who claim that you can use monetary powers in such a way as to
absorb unemployment to a certain point, and that when you do that
you then have notice that you have raised your price level to the
proper position.
I am wondering if you could put some sort of legislative direction
as that in what you have said. I think myself you have done very,
very well in what you j ust pointed out as a possible amendment.
Governor EccLES. I am trying to avoid a rigid requirement in the
law that may be impossible of accomplishment, and hence may cause
embarassment. I would like to see enough flexibility in the law ; be­
cause I do not believe that we can deal with our money, economic and
social problems, and they are all interrelated, as an exact science.
You have too many emotional factors to contend with, and when you
talk about the problems of business stability, stable prices, full em­
ployment, and so forth, you have to take into account factors other
than purely the mathematical or mechanical factors o f money.
Mr. GOLD8BOROUQH. read that proposed provision again?
Governor EccLES. It says:
It shall be the duty o f the Federal Reserve Board to exercise such powers
as it possesses to promote conditions making for business stabiiity and to miti­
gate by its influence unstabilizing fluctuations in the general level o f produc­
tion, trade, prices, and employment, so fa r as may be possible within the
scope o f monetary action.

Mr. GOLDSBOROUGH. You are stating the objectives.
Governor E c c tE S . That is right.
The CnAiRMAiv. The present law was designed, of course, to pro­
mote sound business conditions and laid down a guiding rule of pol­
icy somewhat along the line o f your suggestion, although not so



Under the present law the language is:
The board o f directors shall administer the afFnits Impartially—

And so forth—
and extend accommodations such as may be aafeiy and reasonably made, with
due regard to the claims and demands of other banks, and to the requirements
c f industry, commerce, and agriculture.

It is not so comprehensive, but it is in the law, and to a certain
extent it is a recognition of the ends to be desired.
Personally, my view is that you have expressed the true policy,
and that is to take the general results that would be desired as the
guide and standard of activities.
In connection with Air. Cross* inquiries, what is the relation be­
tween actua! currency, or Government currency, or Government
money, and check money and its velocity?
Governor EccLEs. So far as their functioning and purchasing
power are concerned, there is no difference. They serve the same
purposes as a means of payment. Currency is used largely as a
matter of convenience in meeting pay rolls, in retait buying by the
man with a small income, where the checking account is too ex­
pensive, or is not wanted. Even in cases where checking accounts
are used, particularly is it true now with service charges and the
check tax, people will cash checks for a larger amount and pay bills
with currency rather than pay all bills with small checks. The use
of the check has been greatly diminished.
The CHAIRMAN. What I am undertaking to develop is the neces­
sary part that must be played by actual money in the present scheme.
(Governor EccLxs. I do not know that I quite understand you, Mr.
The CiiAiRMAN. We cannot get away entirely from the use of
actual money, even though we do 90 percent of our business by the
use of bank checks.
Governor EccnES. That is right. We possibly use the bank check
more than any other country.
The CHAIRMAN. As we cannot rest our banking structure entirely
on air, we have to have a basis for that. What I am directing your
attention to and asking you to discuss is the proper basis, and the
necessity for it : how far the development of a sound bank-check
currency mUst rest upon the use of actual currency ami the oppor­
tunity to redeem the bank check in actual currency.
Governor EccLEs. Of course, a bank has to be in a position to
pay its deposits in currency. At one time it was required to pay it
in gold, and of course we know what trouble that got us into. The
bank is required to pay the deposit in currency. We found that,
while banks were closing and the great deflation was going on, th&t a
great many people and corporations wanted their deposits in cur­
rency, to such an extent that the amount of currency outstanding
passed the all-time record of the use of currency, even when busi­
ness was very active. It exceeded over seven billions of dollars, at
a time when our business activity was about 50 percent of what
it normally is, showing that a very substantial amount of that cur­
rency was not drawn out for current or immediate uge but was
drawn out for fear of loss through bank failures, to be held in safe­
keeping. We must prevent bank failures so far as is humanly



possible. When people found they could get their money if they
wanted it, confidence was reestablished in the banking system, and
the amount of currency outstanding greatly diminished.
The CHAIRMAN. You say we got into trouble under the system
under which we had to redeem everything in gold. Just what do
you mean by that?
Governor EccLEs. I mean that when people demanded payment in
gold, since gold was used as a reserve for our money system, it did
not take the withdrawal of very much gold to force a suspension of
gold payments and to put an embargo on gold.
The CiiAiRMAN. Let me ask you this question, " Were we forced
to suspend gold payments? "
Governor EccLEs. Yes; I think we were, not only because of with­
drawals but also because of our price and debt structure and the
measures that were absolutely necessary to correct it.
Mr. CROSS. G o ld w a s le a v in g the country very rapidly, was it not!
Governor EocLps. Yes; it was leaving the country very rapidly;
not only that, but it was being drawn out by corporations and indi­
viduals at a rapid rate.
The CHAIRMAN. When we suspended payment we had an un­
precedented amount of gold on hand, did we not ?
Governor EccLEs. A t the time we suspended we had lost a great
deal of gold.
The CitAiRM AN. W c h a d lo s t a g r e a t d e a l o f g o ld , b u t w e s t ill h a d
more th a n h a l f o f th e w o r ld 's g o ld , d id w e n o t ?
Governor EccLEs. No; we h a d about 40 percent of it.
The CnAiRMAN. But we had certainly something like a third—an
undue proportion of the world supply.
Governor Eccucs. But at the rate at which it was being drawn out
it was evident that we might soon reach a position where it would
be necessary to dispense with gold payments and put an embargo
on, and therefore, why permit a preference to those people and cor­
porations who demanded payment in gold ?
The CHAIRMAN. Had we hot always been able, by the use of Gov­
ernment credit, to get our hands on all the gold we needed to redeem
the outstanding gold obligations? I do not mean it was a desirable
thing to do; far from it; that is not my view of it. I am simply
stating the facts.
Governor EccLEs. We had panics in the past where we could not
even pay in currency, up until the time we got the Federal Reserve
System set-up. I remember the panic of 1907, when they suspended
payment in currency and used clearing-house certificates.
The CHAIRMAN. There was not any difficulty in redeeming the
currency in gold, was there? O f course, we have always had occa­
sion wlien quite a number of banks could not pay out any kind of
money because they could not get it. But there never was any time
in those situations when there was any diiEculty about exchanging
currency for gold, if you wanted it?
Mr. (yOLDSBOROUGH. In the panic of 1873 the gold reserve was
Mr. CROSS. And there is always a vast difference between dollars
and commodities. The whole world was trying to get back, and the
whole world was scrambling for it.



The CHAIRMAN. I am speaking about what did happen when Mr.
Cleveland was unable to get gold.
Governor EccLES. I think he negotiated a loan with Mr. Morgan.
The CHAIRMAN. As a matter of fact, we maintained our gold
standard with $150,000,000, did we not ? That leads to this question:
I am not one of those who think that our gold-standard system was
ideal; that is one of the things I think it might be said we had to
unlearn. Whether we have learned anything or not, I will not at­
tempt to say.
But I think it will be agreed that is one of the things we have
But I was going to ask you this question : Why was it we could not
redeem in gold ? Why could we not go along with that system %
Why was it not safe to continue it? That is what I am talking
Governor EccLES. For the reason that-----The CHAIRMAN. Is not this the fact. Governor, that the trouble
was there was not enough gold?
Governor Eccms. Of course, there was not a fraction of enough
gold in this country or in the world to meet the gold obligations.
The CnAiRMAN. We did not have enough gold.
Governor EccLEs. Not a fraction of enough to meet the obliga­
tions, but that is always the condition. It works all right so long
as no questions are raised about redemption but in case of panic there
is not enough gold and payments have to be suspended.
The CnAiRMAN. Let me ask you another question. Was not that
the chief difRculty with the banks when they found themselves in
the situation where they could not meet their obligations in currency,
that the currency was too scarce %
Governor EccLFs. No; the currency was not scarce, because the
banks had assets with which they could go to the Federal Reserve
System and get credit, and they could have drawn down currency.
There was no shortage in the amount of currency available to a
bank, if the bank had assets acceptable to the Federal Reserve bank.
The CnAiRMAN. That is the point. The fact was they had de­
posits, as you have said. I think, amounting to 26 billion, or say
25 billion m round figures, that were in the nature of demand obli­
gations. But they had only a trivial amount in comparison to their
deposit obligations of assets upon which they could apply for and
obtain actual currency; is not that right?
Governor EccLES. That is right.
The CnAiRMAN. And the fact was, as against 25 billion dollars
of demand-deposit obligations for which the banks were responsible,
they had only in the country something like 5 billion dollars in
which to meet that responsibility. And for all their cash obliga­
tions in the Nation they had only such a, portion of actual cash that
they could have paid, plus their discountable or rediscountable
paper, and the amount of rediscountable paper had gotten to the
point where it was trivial as compared with the amount of obliga­
tions they had.
Governor EccLEs. Oh, yes; and the amount of rediscountable
paper, even in 1928 or 1929, was only a fraction of the total deposit



The CHAIRMAN. As a matter of fact, the banks now owe deposit
obligations that I believe you say amount to about 25 billion.
Governor E c c L E s . That is, demand obligations.
The CHAIRMAN. The amount has increased front 19 billion to 25
billion of demand obligations outstanding against the banks!
Governor EccLES. That is right.
The CHAIRMAN. And they nave available today to meet those
demands something like three-quarters of a billion dollars of actual
money; is not that about right!
Dr. GoLDENWEiSER. You mean cash in vaults!
The C H A IR M A N . Yes.
Dr. GoLDENwEisER. That is about right.
The CHAIRMAN. That is what I am talking about. That is a
' ' " '
ition, is it not!
The CHAIRMAN. O f course, they have in addition to the cash
available to them their privilege of obtaining currency on their
assets, which is still limited to a certain quality of assets.
Governor EccLEs. Besides the cash value which they have in their
vaults, they have their balances in the Reserve banks, which are the
equivalent o f cash, the reason being that they can draw down cur­
rency against those balances with the reserve banks, and those bal­
ances today are over 4 billion dollars.
The CHAIRMAN. Then they would be entitled to have Federal Re­
serve notes issued.
Governor EccLES. That is right: against those balances.
The CHAIRMAN. That is, their excess balances!
Governor Ecci.Es. They are required, of course, to carry a min­
imum balance.
The CHAIRMAN. But they could not utilize that.
Governor EccLES. They could draw down their currency against
their excess balances, but they would be penalized if their balances
were below the legal requirements.
The CHAIRMAN. Which, of course, means that the legal require­
ments could not be utilized, as a practical proposition.
Governor EccLES. Yes. It could be utilized subject to the pay­
ment of a penalty for any deficiency in reserves.
The CHAIRMAN. So they would be limited to their excess balances
and their cash on hand, and such paper as they would have upon
which they might obtain currency.
Governor EccLES. That is right.
The CHAIRMAN. Does it not follow that the banks found them­
selves in difficulties in undertaking to meet their demand obligations
growing out of the scant supply o f actual currency, as compared with
the demand upon that supply, not alone by the banks but demands
from various sources in the Nation ?
Governor Ecci.ES. The banks found that they were unable to meet
their deposit liabilities in currency because of the lack of assets
which the Reserve banks would accept. That reduced the amount
o f currency that they were able to pay out, and the very fact that
many o f them were unable to meet that demand causedf the whole
Nation to want to convert their deposits into currency.
As soon as the people found that they could get their deposits in
currency, as the result of the emergency banking act o f 1933 per­



mitting the banks, not only the member but also the nonmember
banks, to get credit, and hence currency from the Reserve banks
upon all of their sound assets, the people of the country did not want
their deposits in currency. The reverse action developed and the
currency which they had wanted when they thought they could not
get it began to come back into the banks and increased the deposits
of the banks by an amount of from a billion and a half to two
billion dollars.
So that it seems to me that the lesson that that experience should
have taught is that the Federal Reserve Board should have some
discretionary power in the making of rules and regulations that
will permit the Federal Reserve banks to accept the sound assets
of banks and thus stop what otherwise would be a repetition of
what we have had in the way of a credit contraction and the re­
duction of our deposit money.
The CHAIRMAN. Governor, it is unquestionably true that we have,
to & large extent, restored confidence in the banks, and money in
hoarding, and no doubt considerable sums that have been with­
drawn for legitimate uses, because of the distrust of the banks, has
been returned to the banks.
But does not that result mainly from the insurance of bank
deposits ?
Governor Eccr/ns. I think that is a very important fact.
The CHAIRMAN. Let me ask you another question.
Governor Ecci,ns. 1 think that is particularly——
The CHAIRMAN. We will not have accomplished much, no matter
how fully we accomplish that, if we only succeed in restoring con­
fidence in banks so that the public will leave its funds in banks
for safekeeping.
That would be a thing to be desired, and it seems to me a thing
which the public has a right to expect, but that would be a long
way from accomplishing what we need in this country, to bring
about a revival and recovery of normal business conditions; is not
that right?
Governor EccLES. Yes; that is right.
The CHAIRMAN. It is a fact, is it not, that we did find the banks
in a condition where their demand obligations were so great that
they had no way on earth, with the limited amount of cash or cur­
rency available to them, to meet their demand obligations. Even
though a bank might be solvent, the practical situation was that
there was no way for the bank to get enough currency to meet its
demand obligations. That was the situation that existed in many
cases, was it not ?
Governor EccLES. That is right.
The CHAIRMAN. That is the situation that confronts us and for
which we must 6nd a remedy if we are going to make it possible to
bring about business recovery and the normal use of banking credit
to support business in the United States; is not that right?
Governor EccLES. That is right.
The CHAIRMAN. And this is also true, is it not, that the emergency
plans embodied in the emergency legislation which we passed in



1932 have certainly failed to accomplish those desirable results, have
they not?
Governor EccLES. I think that is the only conclusion one could
reach, from the present evidence.
The CHAIRMAN. Those provisions are so hedged about, even though
under the law, under the act of 1933, as it was finally written by
an amendment that extended to nonmember banks the privilege of
having their sound assets treated as eligible for advances by the
Federal Reserve banks, and as a basis for the issuance of currency,
the rules and regulations were so hedged about, the law being a
temporary measure, and being tried out as an emergency measure,
was not enough to reassure the banks that they were free to go ahead
and use their credit facilities freely for the support of business
and to promote recovery.
Governor EccLES. An abundance of excess credit is available in
the banking system. Excess reserves are sufHcient at the present
time for the banking system, as a whole, to extend credit to an
amount in excess of 20 billion dollars, without the banking system
as a whole having to use its rediscount facilities with the Reserve
System. Interest rates are at possibly an all-time low level. The
discount rates of the Reserve banks have been steadily reduced until
at the present time none of the banks have a rate in excess of 2 or 2%
The amount of the excess reserves held by the banks, the low dis­
count rate, and hence the low rates that are prevailing for commer­
cial paper, for hi^h-grade bonds, industrial and municipal, and for
Government securities, are indicative of the excess supply of money
and credit in relation to the demand for it, on a basis largely of
short-term credit.
In order to expand the use of money which is necessary for
recovery, either those holding deposits in banks must be willing to
spend their funds, which would increase the velocity of the total
existing deposits, or borrowers who can command bank credit must
be willing to go to the banks and borrow funds which they will
spend, or a combination of both is necessary.
I f, in the first instance, owners of funds spend their funds, you
would get an improvement in business through an increase in the
velocity o f the existing deposits. I f new loans are made you would
then get an increase in the volume of money as well as an increase
in the velocity o f money. In the absence of an increase in the
velocity of the funds held by the banks, or an increase in the volume
of private credit extended by the banks, the Government has been
required to inject into our system through using its credit an in­
creased Sow o f funds. Government spending has the same effect
as private spending. It is somebody's income. Every one's spend­
ing is somebody elsc's income.
The CnAiRMAN. Let me ask you a question right there. Do you
think Government spending has the same effect as private spending!
Do you think you want to adhere to that statement upon reflection?
Governor EccLES. From the purely monetary standpoint-----The CHAIRMAN. As far as the actual transaction is concerned;
but as far as the psychological effect is concerned, and the effect
130417—35------ e



upon & lot of men who want the money spread into their business,
it would be a different matter would it not ?
Governor EccLES. It may be. It is, of course, desirable to have
private spending instead of having Government deficits.
The CHAIRMAN. In that connection, let me ask you this question:
In reference to the matter of farm-land values, we have put a certain
amount of support under farm-land values by the assistance that
has been extended by the Government. But the average citizen who
might have some idle cash and might want to invest it for his
chiidren does not know how long that policy will continue, or when
that support will be withdrawn, and in such an event, what effect
it would have on bank values. But if this support was given in a
normal way so a citizen would expect it to be maintained and to
endure, he would have a different mental attitude toward the situa­
tion, it seems to me.
Mr. CRoss. The difference, as I see it, is that money put up by the
Government in enterprises that would not come in conflict with the
activities of private business would cause those who receive wages
from that activity with the Government to spend money with the
merchants and others, but it does not affect the feeling or help the
condition. Everybody feels like the Government has to quit some­
time somewhere, and therefore they remain nervous.
I f private enterprise should take up this unemployment people
will feel as if that is natural and normal. If you could get prices to
where private enterprise could make a profit, I do not see how the
credit you are talking about will be used, because neither the fellow
will borrow, nor would the bank be foolish enough to loan; but you
have to get prices to where a man can get a loan and can sell his
products and make a profit and pay it back. Of course, that means
the employment of labor, and that means spending power.
I know we are in a jam, and it is hard to get out. Of course, we
can dig and dig, and get right back to where we find ourselves in the
mud. But I do believe if we could get prices back we will be going
Governor Ecci^s. The only way you could get prices back is
through increasing the means of payment in the hands of the people
who will spend faster than you increase production. To get them
back any other way means to get them back through an artificial re­
striction of production or the fixation of prices, which are not de­
sirable ways to get prices up. In other words, to raise prices and
reduce production does not add anything to the national wealth.
Mr. CRoss. We are in this situation. You have a fixed indebted­
ness on the people. You say that Tom. Dick, and Harry own these
buildings in this city. They do not. In the courthouse you will see
a paper title in their names. But there is a mortgage against it, and
under present prices, with the taxes they have to pay, they do not
own anything. They are mere interest-paying tenants. Tfiat is all
they are, struggling like the dickens to pay their rent to the fellow
who owns the mortgage.
The dollar has so increased in its purchasing power that it takes
twice as much for him to get the necessities and comforts that he has
than he had to pay before, and with the taxes he has to pay now



he is up against. Unless we can get it to where he can pay back
with the same kind of dollar that he borrowed, I do not see anything
ahead but a general liquidation, and possibly a revolution.
Governor EccLEs. Of course, there are two ways out of depressions,
it seems to me. One is through the process of liquidation and
Mr. Cnoss. Then there may be a revolution.
Governor EccLES. The other is through an inflationary process.
We went through a period of liquidation and bankruptcy as a result
o f allowing nature to take its course until we had extinguished a
third of our deposit-money supply and until we had 15 or 16 million
people out of employment, and until the quoted values of the
resources of America were less than the debt. In other words, we
liquidated down to a point where we had created a condition of
general insolvency as measured by the ability of the people through
the national income to support the debt structure.
The deflation was finally stopped because of the unrest and because
o f the suffering caused thereby and because it not only was affecting
the debtor but the creditor was equally affected. The corner of
completing the job of deflation was so hot that it could not be
turned, and there was only one other course open. In ord&r to save
the system of capitalism and to maintain order, the Government was
forced to step in, even under Air. Hoover.
The first effort was made through the organization of the Recon­
struction Finance Corporation, not for the purpose of directly reliev­
ing unemployment but for the purpose of using Government credit
to support, through further debt, the railroad system, the banking
system and the insurance structure, all of which was very necessary
to support.
That action did not meet the problem of unemployment. It was
an effort to support the private credit structure through the use of
Government credit.
That action, plus similar actions by the Government through other
credit agencies which have been set up and have not been inflation­
ary—I mean the Home Owners' Loan Corporation, the Farm Credit
organization, and the Reconstruction Finance Corporation—stopped
deflation. The greatest portion of Government credit which has
been used during the depression is not of an inflationary nature, be­
cause it is simply a question of transferring the debt from where it
is to a Government agency.
The CHAIRMAN. And by that process it did stop deflation?
Governor EccLEs. Yes; that process stopped, or at least checked
deSation. The condition of inflation has to come about through the
increase in the volume and velocity of money either by Government
-spending or by private spending, or by a combination of both.
Mr. I<ORD. Would not " reflation " be a better term?
Governor EccLEs. Yes. The difHcultv is that so many people,
when you say " inflation ", think it is something unsound; they think
o f worthless money. What I mean is that a rise in the general price
level, in employment, and improvement in the business situation,
from wherever it is, would be inflation, no matter how small the



The CHAIRMAN. Let me suggest that you just use the word politely
and call it " expansion."
Mr. Cnoss. They debated until they got into this condition. Now.
if you go back to where we were, would we not simply be reflating,
or expanding?
Governor Ec(ms. " Expanding " or ' reflating "—I do not care
what the term is. I think it is a question of what is meant.
Mr. Cnoss. It ought to be controlled ?
Governor EccLEs. Absolutely; it is very important, of course, that
it be controlled, and with the private banking system, with the excess
reserves now available, if the credit expansion should commence and
continue with the use of the present existing reserves, you could
get a business activity and a price level substantially higher, I think,
than we had in 1926, 1927, 1928 or 1929. You would have an in­
crease in your total deposit money; or, in other words, your total
deposit money would be increased beyond any amount that we ever
had before.
Mr. CROSS. We know that, Governor; but do you not think that
by these lovers that have been put in this bill, as you have it, by
your control over the reserves, the rediscount rate, and so forth, you
could take the situation in hand any time so that you could control it %
Then. too. is it not much easier to control inflation, to stop things
from going up, than to stop deflation after it has once started! As
one of the Governors who testiiied here before told us, whenever you
attempt to stop deflation, it is the hardest problem with which you
have to deal.
Governor EccLEs. t think that rhc control of inflation is a far less
difficult problem than the control of deflation. We have had a good
deal of talk for a y(-ar or two about the fear of inflation. If there
was any real fear of inflation, it would be evidenced by an increase
in equities. Stocks would be going up instead of down, high-grade
bonds would be going down instead of up, and the interest that
would be paid on long-term municipal, Government, and other se­
curities would be increasing rather than decreasing. Likewise, realestate values would be rapidly increasing, and rents would be
going up.
In other words, if there were a fear of inflation that we hear so
much talk about, money would be shifting from deposits into things,
and there would soon come a demand for increased credit, because
it would be profitable, with things going up, to use credit to buy
Mr. Cftoss. Every time a statement is given out, purporting to
come from the White House, that there is or will be no inflation,
down drops the stock market and everything else.
If you nave any influence over there, I wish you would stop them
from doing that, f Laughter.]
Mr. FoRD. Is not the situation that you are describing there one
of fear on the one hand and cupidity on the other! In a deflation­
ary period, everybody is shivering; and in a boom period, every­
body is overconfident and wants to get more. As I said, you have
cupidity on the one side and fear on the other. You step from one
stage to the other, do you not!

S86t AO j,ov o x m x v a


I am not criticizing that cupidity; that is human nature; but
that is what it amounts to.
Governor EccLES. You have, of course, a lack of confidence on
the purt of a good many people, and a timidity; but on the other
hand, if they feel sure of inflation, that these things are going up,
the natural result is that they would buy things in order to make a
The CnAiRMAN. It is 12:30, and I think that this would be a good
time to recess.
Governor EccLES. I would be glad to have the Federal Reserve
furnish to the members of the committee mimeographed copies of
the first 3 days' hearings.
The CnAiRMAN. That will be very helpful. We will appreciate it.
Governor EccLEs. And also, when I have finished here, or the
hearings have been finished, I will be glad to furnish the members
of the committee with a complete brief, just as I have it here, of
every phase of this legislation.
The CHAIRMAN. All right.
We will meet at 10:30 tomorrow morning.
(Thereupon, at 12:30 p. m., a recess was taken until Thursday
morning, Mar, 14,1935, at 10:30 a. m.)



Z?. C.
The committee met at 10:30 a. m., Hon. Henry B. Steagall
(chairman) presiding.
The CHAIRMAN. The committee will come to order. Mr. Eccles,
you may continue your statement. Mr. Cavicchia desires to ask you
some questions.

Mr. CAviccH iA. Governor, I think the other day I asked you to tell
me the amount of mortgages held by member banks. I understand
that amount has already been inserted in the record, namely,
Governor Ecci^s. Y es; that is right.
M r . C A v ic c H iA . T h e b ill b e fo r e u s, as I u n d e rsta n d it , a u th o r ize s
th e n a tio n a l b a n k s to le n d on a m o r tiz e d m o r t g a g e s u p to 7 5 p e rce n t
o f th e a p p r a is e d v a l u e ; a m I correct ?

Governor EccLEs. That is the limitation put in the bill; but I
made the recommendation that the Federal Reserve Board be given
the power to make rules and regulations governing mortgages to be
taken by member banks, in lieu o f the 75 percent and 60 percent
limitations in the bill.
Mr. C A viccH iA . What do you mean by 75 percent and 60 percent?
Governor EccLES. Seventy-6ve percent of the appraised value o f
the property and 60 percent o f the amount of the time deposits.
Mr. CAViccHiA. One of the reasons given for the banks' inability
to meet the demands of the depositors, Governor, in this crisis we
have been going through in the last 5 or 6 years, was the fact that
they had so much of frozen assets on hand. Do you not think that
if you give authority to the banks to lend on mortgages on a higher
percentage than they have been loaning on heretofore that you will
make it still harder for them to meet the demands for payments in
case we should have another crisis?
Governor EccLES. I feel that the liberalization of the mortgage

provision should be considered in connection with the modification
of the eligibility changes in the legislation. It seems to me that
unless the eligibility provision be liberalized, permitting the Federal
Reserve banks to loan on sound assets in order to meet conditions
of deflation, then the banks should be prohibited from loaning on




5-year 50-percent mortgages. They should be prohibited from loan­
ing on or purchasing any bonds the maturity of which runs beyond
6 months or a year.
Mr. C A viccn iA . You think that it is the short-term mortgages that
add to a feeling of fear?
Governor EccLES. No; ^vhat I t^ink is this, that the banks, having
only 12 percent of their loans and investments eligible in 1929, and
those eligible assets not equally distributed throughout the banking
system were not able to meet a substantial contraction of credit with­
out many of them being forced to the wall and without forcing the
payment of loans as they fell due.
There should be no more objection to the long-term amortized
mortgage as proposed in the bill than to the 5-year straight 50percent mortgage, which has been permitted for a period of 20
years, or to the investment in securities of all kinds without regard
to maturity.
It is interesting to note as to the banks which closed throughout
the country, and I understand that it has been shown by investiga­
tion, that the greater number of bank failures was in the area—
and this is according to Federal Reserve districts—where the small­
est amount of real-estate mortgages were held by the banks. The
area where the larger percentage of real-estate mortgages wag held
by the banks was where the percentage of bank failures was the
It is found that the investment in securities—in bonds—has a
very close relationship to bank failures.
Mr. CAviccH iA . That leads me to ask you this question: I think
you will agree with me that the decline in the value of real estate
has amounted to perhaps 25 percent or more during this crisis as
compared with what it was in 1923, 1924, and 1926. Do you agree
with me on that ?
Governor EccLES. Yes; I think there is an average deflation of
Teal estate of at least 25 percent.
Mr. CAviccHiA. So that if a bank loans up to 75 percent o f the
appraised value on a mortgage, and then there should be a depression,
that 25 percent equity would be wiped out overnight, would it not?
Governor EccLES. It would be wiped out over the period that it
took to bring about a deflation of that amount.
Mr. CAVAcoHiA. It will not be as good a security as a mortgage
based on 50 percent, because if there is that difference there will
still be a leeway there.
Governor EccLES. I think that is correct, with this exception:
That in the case o f the 50-percent straight mortgage, which is now
permitted, the owner— —
Mr. CAviccHiA. What do you mean when you say " which is now
permitted " ?
Governor EccLES. The law now permits a mortgage of 50 percent
-of "
* ** '
' ^ - —— A (yf ^ thM funds.

Governor EccLES. That is in the law now, and it has been there
:for 20 years.
Mr. C A v ic c H iA . You say " time funds " 2
Governor EccLES. That is right.



Mr. GOLDSBOROUGH. I think you are mistaken about the 20 years.
I know that Mr. Steagall and I fought the inclusion of a more
liberal provision in the banking act for years and years, and I have
only been on the Banking and Currency Committee for 15 years.
The CHAIRMAN. We liberalized the provision in the McFadden Act
o f 1927.
Governor EccLES. You might have liberalized it, but they have
been making real-estate mortgages for 20 years. I was incorrect in
stating that the present provision has been there for 20 years.
Mr. GOLDSBOROUGH. They were not allowed to carry real-estate
mortgages before 1926.
Governor EccLEs. There is a provision in the original Federal
Reserve Act.
Here is the provision of the original Federal Reserve A ct:
SEC. 24. Any national banking association not situated in a central reserve
city may make loans secured by improved and unencumbered farm land, situ­
ated within its Federal Reserve district, but no such loan shall be made for a
longer time than Rve years, nor fo r an amount exceeding Rfty per centum o f the
actual value o f the property offered as security. Any such bank may make
such loans in an aggregate sum equal to twenty-Rve per centum of its capital
and surplus or to one-third of its time deposits and such banks may continue
hereafter as heretofore to receive time deposits and to pay interest on the same.
The Federal Reserve Board shall have power from time to time to add to
the list o f cities in which national banks shall not be permitted to make loans
secured upon real estate in the manner described in this section.

Mr. CAviccHiA. That was confined to farm lands, as you read it.
Governor EccLEs. Yes.
The CHAIRMAN. Just a moment. This seems to be chasing' niceties
rather than principles. Dr. Goldenweiser, can you give us off-hand
the history of this legislation?
Dr. GoLDENWEisER. I think Mr. Wyatt can answer that question.
Mr. WYATT. I cannot give you the details off-hand, but that sec­
tion has been amended a number of times and all the amendments
were in the direction of greater liberality. The last extension of it
was in the McFadden Act of February 25, 1927.
Mr. GOLDSBOROUGH. My memory is that Mr. Steagall and I fought
that for years and years and years, and finally we were steam­
rollered in 1927. I also know that this Congress has spent a large
part of its time in the last 2 years bailing out the banks that accu­
mulated these real-estate mortgages over our protest.
Mr. WYATT. That section was amended twice: Once by the act o f
September 7, 1916, which was in the direction of greater liberality,
and authorized loans on city real estate as well as farm land. It was
amended again by the McFadden Act of February 25, 1927 which
authorized loans on city real estate for 5 years, instead of 1 year,
removed the prohibition against banks in certain reserve cities mak­
ing any real-estate loans, and increased the aggregate amount of realestate loans which might be made by any national bank from onehalf o f its time deposits to one-third of the savings deposits.
Mr. CAviccHiA. When we talk of 1-year mortgages, it does not
mean that they will be called in at the end of 1 year. I f the people
will pay their interest and the property is kept up, the mortgage ia
permitted to run along; am I correct or hot !
Governor EccLES. I think that is true.
Mr. CAviccH iA . That is the general practice, is it not ?



Governor EccLES. That is the general practice, in connection with
most loans, whether real estate or otherwise.
Mr. CAViocmA. I am only cognizant of what takes place in my
own State. I know o f savings institutions------

Governor EccLES. The borrower usually pays a commission, how­
ever, each time the loan is renewed, and he is always in the position
of never knowing-----Mr. CAviccHiA. That is not true in New Jersey. The savings in­
stitutions make their mortgages for 1 year. They never pay a
bonus for getting the money. The mortgage is never renewed.
Under our law it may continue, even though it is for a 1-year period.
You will Rnd mortgages that have been on some pieces of property
for 15,20, or 25 years. As long as the people pay their interest, they
run on. They do not have to & renewed.
It does not cost them a nickle, except in the case of some mort­
gage companies, where some 5 or 6 years ago they got into the habit
of writing short-term mortgages for 3, 4, or 5 years. When those
mortgages expired, they did have to be renewed, which caused extra
cost to the borrower, and sometimes a great deal of trouble in having
them refinanced.
Let me ask you one more question in connection with the mortgages.
I take it that the reason you are liberalizing the mortgage clause
in this banking bill is that you are hoping to be able to provide
mortgage money, which has been very scarce during the last 6 years.
Am I correct about that?
Governor EcCLES. That is partly true. We had this in mind.
The commercial banking system has over 10 billion of time funds.
Those time funds, or savings funds, in the commercial banking
system are the equivalent, so tar as the people are concerned, of funds
held by the mutual savings banks in the New England and New
York areas.
Either the banks are going to use those time funds in the long­
term lending Reid, either long-term bonds of various kinds, or long­
term mortgages, or long-term Government financing, or they are
going to have to stop paying interest And give up those time funds.
I f a bank is confined to its loans to eligible paper^ in order to be
liquid, then the only other avenue for investment of its funds would
be Government bonds. That would mean at the present time that
3 percent of the total loans and investments of the banks would be
commercial paper, and the 92 percent would be Government secu­
rities. This would mean that the Government, through its agencies,
would be doing the lending business, furnishing long-term credit,
which it is largely doing today, and the banks which hold the
funds of the people would be furnishing the Government the funds
by purchasing Government bonds or bonds guaranteed by the Gov­
ernment. That is the trend today.
As a matter of fact, 44 percent of the assets of the banks are now
Government bonds, or bonds guaranteed by the Government, and I
see no------

Mr. CROSS. Long-term deposits!
Governor Eccus. Forty-four percent of the loans and discounts;
that is, the investments or the banks represent Government bonds. ;



What I am trying to do is to put the banking sytem in a position
where it can furnish long-term credit to the communities, just as
the mutual savings banks and savings and loan associations do with
the time-funds which they have.
I f banks are not to be in a position to compete in that Reid for
loans and investments of that sort, then it seems to me that they
are put up against the problem of the use of these funds, which
they hold and which are greatly needed to bring about an improve­
ment in business conditions.
As I indicated yesterday, the income velocity of our existing funds
was about two, whereas in 1926, 1927, 1928, and 1929 it was over
three. O f if we had the same velocity of our deposit money that we
had during that period, our national income would be at least from
20 to 25 billions more than it is.
But it is the stagnation of credit, the stagnation of funds, that
continues, it seems to me, to retard business recovery. As to the
extent to which an easing of credit by the use of long-term mort­
gages or on the amortized basis, and the liberalizing of eligibility
requirements would bring about the use of that credit, nobody, I
think, is in a position to say.
Mr. CAViccHiA. I think you will agree with me when I say that
whether they be national banks or State banks, or mutual savings
banks, they have a lot of money on hand at the present time and are
not loaning it; am I correct?
Governor EccLES. That is right; they have excess reserves.

Mr. CAViccniA. The savings banks or the mutual banks which are
mow permitted under State laws to loan money on mortgages up to
50 percent of the appraised value are not loaning any,-or very little,
money at the present time.
Do you think, if this act were passed, that the national banks
would do what the mutual banks are not doing now—lend money
on mortgages!
Governor EccuBs. The mutual banks are lending money on mort­
gages in certain sections. The insurance companies are lending on
mortgages, and one o f the Rrst things this act would do would be to
'enable the banks which now hold over 2 billion of mortgages, many
o f which are in excess of 50 percent of the appraised value-----Mr. CAViccHiA. That is because of the drop in the market!

Governor EccLES. That is right. Therefore, they are forced to
collect on the mortgages, and Congress is appropriating money for
the Home Owners'lL<oan Corporation, the Federal Farm Mortgage
Corporation, and the R. F. C., to take up these mortgages.
The banks are not in a position to hold many of the mortgages
that they may have for the reason that their mortgages are in excess
o f 50 percent, and they are due.
I would like to see the banks required to hold the mortgages they
have and refund them on a long-term basis, requiring amortized pay­
ments with reduced interest. Instead of going through the process
o f changing the form of the obligations they hold, they have to sub­
stitute for their own loans obligations guaranteed by the Government
Not only that, there are many State nonmember banks which, if
they should obme into th&Federal Reserve System, would have more
than 50 or 60 percent of their time funds in mortgages. In many
sections the banks are permitted to loan in excess o f 50 percent; and,
5 f there is a liberalization o f the mortgage feature, the bill will make



it less difHcult for the nonmember banks to come into the Reserve

I f we are going to proceed on the assumption that we are going
to have great cydical booms and depressions, depressions that can
extinguish 30 percent of our deposit currency and can reduce the
national income by one-half, then I say that there is no way you
can set up a banking system that will serve the money needs of the
country and at the same time be prepared to meet that kind of a
catastrophe. Liquidity in deflation can only be provided by the
Federal Reserve System.
Mr. GOLDSBOROUGH. You mean as long as we are on this fractional
reserve basis of 10 percent? Is that what you mean!
Governor Bcca^ES. Yes.
Mr. GOLDSBOROUGH. Of course, when you have an accordion and
just blow the air in and out. you are right, but you do not have to
have that system.
Governor Eccuss. O f course, it seems to me we do not have any
alternative at this particular time without a very revolutionary
change in the whole banking set-up. The 100-percent reserve idea
would, of course, eliminate the 10 to 1 ratio. Hut that is another
Mr. CAvicciiiA. Governor, am I right in saying that one of the main
reasons why this provision is in (he law is to encourage the banks to
hold onto die mortgages that they have now, because otherwise they
would have to resort to foreclosure, because their mortgages are no
longer on a 50-percent basis on account of the big drop in values!
Governor EccLES. I would say that is true in some cases, and I
would say that is one of the constructive effects. The other construc­
tive effect would be that the banks are put in a position to do what
the R. F. C. and other Government agencies are now doing.
There apparently is no demand for short-term commercial credit.
The business of this country is largely done by concerns with an ade­
quate working capital. But there does seem to be some demand for
longer-term credit, and there is no prospect of getting any building
activity without providing long-term credit at low interest.
The English have provided 30-year credit for home construction
on 80 percent of the value of the property at 4%-percent interest, and
that is done by the private savings institutions.
The most unsound type of mortgage credit is the straight loan that
we have had in this country. It means that the borrower, the builder,
will get a straight 50-percent loan from the banks and insurance
companies, and then a second-mortgage loan will be financed else­
where at ruinous rates, until the cost of the mortgage money, consider­
ing the first-mortgage cost and the second-mortgage cost, has made
the financing cost o f the property ruinous to the home builder and
the home owner. The amortizing payments were to be made over a
period of time on the second mortgage. The first mortgage became
due and it was expected, of course, that the full amount would be
Mr. C A V iccH iA . Governor Eccles, I appreciate the fact that there
are many definitions as to what constitutes centralized banking. One
o f the charges made about the bill that is before us now is that it tends
to centralize banking.



Is this so, or is it merely regulatory in the sense that this bill tends
to do away with the great disparity heretofore prevailing between the
national and State banks?
Governor EccLES. Which part of the bill are you referring to?
Title II does not deal; it seems to me, with the problems of national
and State banks, except by giving the Board the right to waive the
present legal requirements for membership of nonmember State
Mr. CAviccHiA. I mean in the strict sense that centralized bank­
ing is used. This is not a bill aimed to centralize authority in the
Federal Reserve Board, is it?
Governor EccLES. It centralizes some authority in the Federal Re­
serve Board. The authority that is being centralized through this
in the Federal Reserve Board is the authority over open-market
^the Board at the present time has authority over the discount
rate, and subject to the approval of the President, under the emer­
gency act, has the authority to change reserve requirements by
declaring an emergency.
This bill is proposed to place in the Board, with the advice of the
governors, the third function of monetary control, that of openmarket operations, which, at the present time, is in the committee
of governors, subject to the approval of the Board, and then sub­
ject, Bnally, to the decision of the twelve Federal Reserve banks as
to whether or not they will participate in the program recom­
mended by the governors and approved by the Board.
Mr. CAViccHiA. Does that leave the different Federal Reserve
banks in different districts to operate independently, if they wish?
Governor EccMM. It leaves them to operate independently; and
that is not changed. The question of extending credit to member
banks is left with the credit division o f each Federal Reserve bank.
It has been stated that the changing of eligibility requirements
would cause the Federal Reserve banks to be loaded up with long­
term mortgages. It seems to be assumed that the Reserve banks
would discount these mortgages or any slow assets that they may
choose to take, during the life of such assets.
In the Erst place, whether or not credit will be extended to a
member bank, &nd upon what basis, will be determined by the
regional Federal Reserve banks, which are responsible for the credits
extended to member banks. The Board will only make the rules
and regulations governing the basis upon which credit can be ex­
tended, and it is proposed here to give the Board power to liberalize
the basis Upon which the Reserve banks can extend credit to the
member banks. The occasion for the extension of credit arises
when the reserves of the banks get below the legal requirement, and
they Rnd it necessary to borrow to build up the reserves.
Mr. CAviccHiA. Tne other day you showed the members of this
committee a chart, showing the conditions in England. This chart
seems to show that there is no relation between the price level and
the increase or decrease in employment; am I correct about that?
Governor EccLES. That is correct.
Mr. CAviccHiA. Although we have been proceeding on the theory
in this country that if the price level goes up wages will increase
and unemployment will decrease; am I correct in that?



theory! I do not know what you mean by " we."
Mr. CAviccHiA. There are certain economists; everything that
this Administration has done in the past 2 years—and I am not
criticizing the Administration; I do not intend to be partisan; but
it has proceeded on the theory that if the price levels went up wages
would go up and unemployment would decrease. But the chart
showing conditions in England seems to negative that assumption.
Governor EccLEs. That is correct.
Mr. CAviccHiA. Governor Eccles, the Canadian banks, I am told,
are not permitted to make mortgage loans, and in depression times
they are not met with the problem o f frozen assets. Is this one o f
they have had no bank failures in Canada during
Governor EccLES. I do not accept the assumption that a mortgage
is any more of a frozen asset during delation than nearly any other
asset of the bank. The assets become frozen when every banking
institution wants to dispose of its assets to meet the demands of its
customers for money. The only liquidity that, can be provided for
a banking system is through the central bank.
The Canadian banking system is a very different structure than
the American banking system. In the first place, they have very
few very large banks, and the creditor area—the eastern section o f
Canada supplies the credit to the debtors o f the interior provinces o f
Canada, t have been told that the interior sections of Canada, had
they not been tied into the creditor or eastern section of Canada,
would have had the same kind of bank trouble that; we have had in
this country; that it was the eastern section which was really furnish­
ing the funds to develop the interior areas that enabled the system tx*
cariy through.
The Canadian system had only a fraction of the credit contrac­
tion that we had in this country. Had our credit contraction been
13 percent, as it was in Canada, we would not have had the banking
collapse that we had.
The credit contraction in the British banks during the depression
was practically negligible. The total amount of deposit money and
currency outstanding all during the period of the depression in
Great Britain remained almost uniform. Things might have been
different here also, had our Federal Reserve System been in a posi­
tion to loan against sound assets. The demand for money wouM
have ceased—mat is, the demand for currency—because we know
that when people were able to get their currency after the bank
holiday they did not want it, and currency came back into the banks
instead of continuing to go out of the banks.
Mr. HoLMSTER. You said Canada had very, very few very largp
banks. You mean she only has a few very large ones.
Governor E ccL E S . That is right.
Mr. HoLMSTER. It sounded as if you meant there were a lot o f
little ones.
Governor EccLES. I mean that they have few very large banks,
but they have a large number o f branch banks*
Mr. HoLMSTER. i thought you might want to clear that up.
Governor EccMB. Yes; I thank you.



Mr. CRoss. You say that in England they did not have trouble
with currency to take care of their deposits. Are the assets upon
which those banks loaned money broader than ours! Can they loan
upon any sound paper, where we are limited in that respect!
Governor EccLEs. Are you referring to central banks—that is, the
new Canadian Bank and the Bank of England—or are you referring
to the commercial banks!
Mr. CRoss. I am just referring to your statement that they could
loan on sound security, and that if we had been in their position
we would not have had the crash that we had. The question I am
trying to get at is, Could they loan upon different assets than we
loaned upon, because it is sound paper and ours is sound; but we are
not under our law permitted to loan on that paper or discount that
Governor ECCLES. In the first placc, the Canadian banks, as I
understand it—and I am not an authority by any means on that
subject; it is just what I have been told and hear—mat the Canadian
banks and the British banks do not loan on real estate/ The banking
structure, as I said, is entirely different; it is differently constituted.
The savings funds in Britain are largely built up, as I understand
it, in the savings and loan associations, the mutual savings and
loan associations, which carry the real-estate credit.
I f our banking system was a large branch banking system such
as the Canadian system or the British system, it would be a much
easier problem to segregate investments or savings funds from the
commercial banking system. But so long as we have unit banks
operated under the laws of 48 different States and the National
Bank Act, these unit banks have two functions: The function of pro­
viding the check money through their deposits, and the function o f
investing the community's savings or investment funds.
Demand deposits representing bur deposit currency should be in­
vested in short-term paper, so far as possible, and m Government
securities. But when it comes to investment funds, interest-bearing
funds, it seems to me that we have another problem, and it is entirely
different from the problem in Canada or the problem in Britain, or
in any other country.
I f we are going to avoid a banking collapse and the extinguishing
of a large part (3 our money supply in the future, it is going to be
necessary to make it possible, when contraction starts, for our Fed­
eral Reserve System, which is our central bank and bears the same
relation to our banking structure as the Bank of England does to the
English banks, to loan on sound assets to prevent a continuation of
credit contraction and bank failures.
Mr. CAviccHiA. You need not answer this next Question if you
feel that you ought not to, Governor. This is the question: In your
opinion, should we have a metallic base for our money, such as gold,
or is that an exploded theory !
Governor EccEES. A " yes-or-no " answer could be misunderstood.

That is a question which, in order to answer it, would need consid­
erable explaining.
Mr. CAviccHiA. The reason I asked it is this: Some people still
hold to the theory that we should have a metallic base, and that that
should be gold. Others say it has been tried and it as failed. That
is why I asked the question.



It is a problem upon which many opinions are expressed; but I
do not think it has been answered. The fact that the important
countries of the world have been wedded to gold by experience and
habit for so long a time makes it a very dimcult matter to divorce
money from gold.
Mr. CAViccH iA. Governor, it is a moot question whether or not
the United States is still on a gold basis just now. What do you
say about this!
Governor E ccu s. Our currency and our deposits in the Federal
Reserve still require the same gold reserve that they always have,
o f 40 and 85 percent. To the extent that gold is not being paid out,
we might say that we are not on gold. To the extent that we are
requiring the same gold reserves, we can Bay we are on gold. We
permit me export of gold under license, so that internationally we
Are on gold.
Mr. CAViccHiA. So far as our imports are concerned, we are on
gold, are we not!
Governor EocLM. The dollar has been fixed at a certain price at
the present time in relation to gold.
Mr. HANCOCK. It has been stated that we are today on a discre­
tionary international limping gold-reserve standard. What do you
think about that!
Governor EccLES. I would prefer not to discuss that question. I
do not believe that has very much relation to title II of the banking
Mr. HANCOCK. Well, it is not irrelevant.
Mr. CAViccHiA. Under our present system, fear and confidence
have a lot to do with the banking question, have they not; and is
that not also true in relation to business in general!
Governor E ccu s. Not as much as I think is sometimes claimed.
What is confidence with one group would be lack o f confidence with
An effort to balance the Budget would give confidence to a group
o i people who feel that, if it is not balanced, their taxes are going
to 6e higher ; but it would put fear and consternation in the minds
o f the group of people who are dependent upon what the Govern­
ment appropriates for relief.
Therefore, when we speak o f confidence, it does not have an equal
application to all our citizens^
Mr. GaTORD. Governor, I question the necessity o f title H . Mr.
Hancock questioned you and you answered that that is really the
primary feature of the bill, while the secondary feature is in refer­
ence to the reserve of banks. I want to ask you a few questions
leading up to the necessity of it.
What is the total debt o f the Nation, having in minr] the present
expenditures and authorized expenditures! In the President^ mes­
sage, was it 31 billion of authorized expenditure that faced us up to
that moment! ,
Governor Eccua. I would not be certain. As I recall, I know it
is over 80 billion, but I do not remember the exact figures.
Mr. GiFFORD. It is 81 billion and some fraction, I
Governor E ccu s. I think that is approximately correct.
Mr. Gararn). Having in mind what has been done, we passed the
H. O. L. C. bill, carrying one and seven-tenths billion!



Governor Eccues. That is right.
Mr. GnroRD. And if we pass the bonus bill that will be two and
three-tenths billions additional, will it not!
Governor E ccus. It depends on which bill passes.
Mr. GiFFORD. It is two billion three hundred million, is it not!
Governor EccEES. It will depend on which bill passes.
Mr. GiFFORD. You are following these probable expenditures with
the idea in mind of the necessity for this law !
Governor Eocms. No; that is not correct. This law has no rela­
tionship to that. I f the Government were to balance its Budget,
we would propose the same law.
Mr. GnroRD. I think my vote, so far as the necessity of this is
concerned, would be guided by the actual necessity presented.
Governor EccLEs. I think there has been-----Mr. GnroRD. I f the Public Works bill now pending in the Senate,
carrying $4,800,000,000 passes, and we provide for 1 billion to take
care of social problems, as suggested, and if another billion should
be required for farm-credit loans, we would get into the realm of a
national indebtedness of 42 billion dollars, should these things
transpire. You may subtract from your total, 3 billion, if you want
to, and take into consideration the $1,800,000,000 profit from gold,
but you would still have a debt o f some 36 billion dollars. How
much did you say there were in deposits in the banks!
Governor EccLBS. About 25 billion, eliminating interbank deposits.
That represents the demand deposits.
Mr. GiFFORD. There are 88 billion in currency and deposits in the
banks of the country. Do you recall the President's warning about
the danger of the banks having to absorb the deficiencies in 1982,
causing a very dangerous situation—that is, the deficiency caused by
the operations of the B. F. C .!
Governor EocLEs. I do not recall that statement, but, of course, I
would not feel there was any danger in that.
Mr. GiFFORD. The President spoke very strongly, and I wish you
would read what he said, o f the great danger o f the banks having
to absorb that deficiency caused before March 4, 1988, and since
then we have added this large amount.
The purpose o f this legislation is to control the privately owned
banks, which would still be privately owned, by a Government board
in Washington, so far as open-market operations are concerned!
Governor EccLES. You mean control the investments that are
made by the Reserve banks!
Mr. GnroRD. To control open-market operations.
Governor E ccna. Yes; to control open-market operations by the
Reserve Board in Washington rather than by the banks themselves.
Mr. GiFFORD. They will still be privately owned, but they will be
Government controlled.

Governor E ccLE s. That is right.

Mr. GiFFORD. You mean the Government as constituted at the
Governor EccLzs. I would say they are publicly controlled, rather
than govemmentally controlled. The control o f open-market opera. tions is proposed to be placed in the Federal Reserve Board.
Mr. GiFFORD. Exactly; acad that policy will be dictated by this new
130417—30— 7



Governor EccLEs. It will be carried out by the Federal Reserve
Mr. GiFFORD. So far as the Government as at present constituted is
concerned, that means just that, does it not, inasmuch as a provision
for refusal to reappoint was included in your bill!
Governor EccLEs. I do not think that has anything to do with the
political relationship.
Mr. GiFFORD. Oh, no; there is nothing political in this bill.
Governor EccLEs. The fact is that the Governor has always been
appointed by the President, at his pleasure.
Mr. GiFFORD. This bill specifically indicates the method by which
the Governor might not be reappointed.
Governor EccLEs. That is entirely incorrect. The bill provides that
the Governor shall be—that his term as a member shall expire when
he no longer-----Mr. GiFFORD. I am talking about the members of this new Board.
Governor EccLES. It is not a new Board; there is no difference-----Mr. GiFFORD. The present Federal Reserve Board-----Governor EccLES. There is no change whatever proposed in that
Mr. GiFFORD. But they retire at TO, under a pension, after a term
of years, and there are many changes.
Governor EccLEs. Rertirement at 70 will be compulsory only foi
future appointive members.

Mr. GiFFORD. My point is, should another government come in>
otherwise constituted, could they get control of this Board!
Governor EccMss. In what way could they get control!
Mr. GiFFORD. I am asking you.
Governor EccLES. No; they cannot, not unless their terms expire,
and the President chooses to appoint some one other than a member
whose term expires.
Mr. GiFFORD. By that method could not the new President get
Governor EccLES. By what method!
Mr. GiFFORD. By the refusal to reappoint.
Governor EccLES. He could, if the terms expired. But a member
is appointed for a 12-year term.
Mr, GiFFORD. There is no way of getting rid of them!
Governor EccLES. There is no way of getting rid of them except
for cause. That has always been in the bilL There is no proposal
to put in the bill any change in the method of appointing members
o f the Board, or as to their terms.
Mr* GiFFORD. That reminds me of the lady who insured her home.
There was a Rre, and when the agent came to the house he said he
would look into the cause of the Rre. Then she said, " I thought
there would be a catch in it."
Governor EccLES. That has always been in the law; we are not
presenting any change.
Mr. GiFFORD. Then the banker who wrote this letter to me was
misinformed when he said that nothing short of a revolution could
ever change the condition that will be Drought about by the enact­
ment of tSs bill; is that correct!
Governor EccMss. When the Federal Reserve Act was passed in
the beginning, what did the bankers say!



Mr. GiFFORD. Getting back to the necessity of it, it is not quite as
tight as the United States Supreme Court, is it! It is not quite as
tight, is it, so far as the appointments are concerned! Would you
be willing to provide for the appointments in that way, to have these
men appointed in the same way that members of the Supreme Court
are appointed!
Governor EccLES. They are appointed in the same way, by the
President of the United States, with the advice and consent of the
Mr. GiFFORD. I think that has been challenged. But you claim it
is exactly the same!
Governor Eccuas. It is the same, so far as the appointment and
confirmation is concerned. The term of the members is 12 years,
in the case of the Federal Reserve Board, whereas the term o f a
Justice of the Supreme Court is for life. I believe he may be
removed for cause.
Mr. GiFFORD. For what cause may a Justice be removed! What
would be the cause in this case!

Governor EcCLEs. I suppose for dishonesty or improper conduct.
Mr. GiFFORD. Or unwillingness to cooperate with the Government;
would that be a cause!
Governor ECCLES. I am not in a position to say what the cause
would be. A ll I know is that during the life of the Federal Reserve
Board of over 20 years no member of the Board has ever been,
removed for cause. Their terms have expired or they have resigned
Mr. GiFFORD. I think if they made it hot enough for them they
would get out, if they did not cooperate.
Now, coming back to the necessity for this bill: Faced with a
debt of 38 billion or 42 billion, do you want to make the assets o f
the member banks sound assets, available for the issuing of cur­
rency; is that it!
Governor EccLBs. No; that is not the purpose of it. The law is
not being drawn with that idea, o f assisting in the financing of the
The Government is having no difBculty with its financing. Its
interest rate has been going down steadily. The desire o f the banks
to purchase Government bonds is so great that whereas at the end
of Mr. Hoover's term the interest rate was nearly 4 percent, it is
now less than 2% percent.
Mr. GiFFORD. O f the present indebtedness o f the Nation, how much
of it is in short-term loans!
Governor EcctES. Do you femember, Dr Goldenwesier, what the
exact amount is!
Dr. GoLDENWEsiER. I can look that up and let you know presently.
Mr. GiFFORD. You have not been offering many loans to the public
on long-timepaper, have you !
Governor Eccles. They have been doing a good deal of refunding.
They have just called one billion eight hundred million of the fourth
4%-perceht Liberty loan, and they offered in exchange a 25-year
bond at 2% percent.
Mr. GiFFORD. They did that in other countries, based paftly on the
ground o f patriotism.



Governor EccLEs. As &matter of fact, the bonds held by the banks
of this country are less in proportion than the Government bonds held
by the English banks. Thirty-nine percent of the assets of the mem­
ber banks are invested in Government obligations, whereas 41 per­
cent of the assets of English banks are so held.
Mr. GiFFORD. You said this morning it was 44 percent.
Governor EccLEs. Forty-four percent of the total outstanding
bonds; 44 percent of the amount of Government bonds outstanding
are in the member and Reserve banks and 39 percent of the assets (3
the member banks are invested in Government bonds; whereas 15
percent of the total bonds outstanding in Britain are held by the
London clearing banks and the Bank o f England, but that represents
41 percent of the resources of the British commercial banks.
It takes 5% percent of the national income o f Great Britain to pay
the interest on the British national debt.
Mr. GiFFORD. Suppose we had to have an indebtedness o f $40,000,000,000, and $9,000,000,000 was to be absorbed in the next year and a
half, what proportion would the banks probably hold!
Governor Eccms. What proportion of their resources in bonds!
Air. GiFFORD. Yes.
Governor EccLBs. O f course, if the banks took 9 billion of bonds,
the banks would increase their deposits by 9 billion.
Mr. GiFFORD. The term " deposits " is a rather tricky term. I sup­
pose if I owed you $100,000, and you should be able to discount that,
you would get some more currency and loan me another $100,000, and
then take my second note and discount that, and still loan me still
another 100 thousand, and that process could go on indefinitely, could
it not!
Governor Eccuss. As a matter of fact, the banks could extend $20,000,000,000 of credit without rediscounting anything. The trouble
today is not the need of the banks to rediscount; the trouble is the
banks are unable to loan the funds that they now hold.
Mr, GaTORD. We know that is a temporary situation. Idle money
is glad to get something to invest in. There have not been many
long-term offerings made in these times. They are all anxious to
get something. You do not consider that that condition will be
regular, do you!
Governor EccLES. I think—and this, of course, is my opinion
only—that for a long time to come there are not going to be m this
country short-term loans o f sufBcient quantity to create the money
that is required to carry our business structure.
Mr. GiFFORD. Why has not the Government—knowing that this
indebtedness cannot be paid off for many years—why has not the
Treasury offered long-term paper or bonds!
Governor EocLES. Why have they not!
Mr GtFFORD. Yes.
Governor EccLES. That is a question I would prefer you ask the
Treasury. I would not want to apswar that question for them.
Mrl GiFFORD. You have said money was plentiful.
Governor Eccuss. Money is extremely plentiful. But if the
Treasury had offered long-term bonds a year ago or 2 years ago, they
would haw paid a rate o f maybe a half or three-quarters of a percent
more than they are paying now. So long as the Treasury can bor­
row at a fraction o f 1 percent, and the interest rate on long-term



financing is going down, would it not appear advisable to finance
on the cheapest basis of short-term credit, so long as the long-term
market is going down! It has been profitable up to date to defer
long-term nnancing.
Mr. GiFFORD. I f they could sell these long-term securities at 2%
percent they would sell them, would they not!
Governor EccLES. I f they could, you say!
Mr. GiFFOBD. Yes; they would oner them if they could be sold,
would they not!
Governor EccLES. I do not know whether they would or not.
Personally, I think you will see less than a 2% percent rate on long­
term financing.
Mr. GiFFORD. Then you think there will continue to be plenty o f
idle money and that business will not get busy and need this money t
Governor Eccuss. I cannot conceive of business using 20 billion
dollars of commercial credit, when in 1929 they only usM 4 billion.
Mr. GiFFORD. You do not care to answer as to wny the Treasury
does not how, when money is plentiful and rates are low, dfBer
long-term paper, that must, necessarily, be refinanced, a lot of it,
with short-term paper!
Governor Eccms. I f they can borrow later at 2 or 2% percent,
would it seem advisable now to borrow at 2% percent !
Mr. GiFFORD. Let us put it the other way. I f business recovers
and needs money, and money is at a higher rate, has not that been
the fear, that when these short-term securities are forced to be
refinanced by long-term securities that the rate will be very high!
Governor EccLEs. That has been the fear, but it has been unjusti­
fiable, and the reverse has been true.
Mr. GiFFORD. I hope you will prove to be a prophet, and a correct
prophet, so far as the next 5 years are concerned.
You have no fear, so far as the Government using the method of
issuing currency to banks with sound assets is concerned, that they
will not always have plenty of money to buy the issues put out by
the Government, and that this Government, under this plan of
banking, could go into that practically to any amount!
Governor EccLES. The amount of the Government debt that can
be supported depends upon the national income, and a 40-billiondollar debt here with an 80-billion income, is 6 months of the national
Mr. GiFFORD. We had a 90-billion-dollar income once, but what
is it now!
Governor EccLES. I think when Mr. Roosevelt came into ofRce it
was around about 38 or 40 billion. It is now some 80 billion.
Mr. GiFFORD. Our capital structure was 38 billion, tha,t being the
amount on deposit, available money and credits in the banks!
Governor EccLEs. No; it was 26 billion 400 million in 1929. That
was the amount of demand deposits plus currency.
Mr. GiFFORD. There are two other questions I want to ask you,
which you may be willing to answer.
You have no particular fear of a 40-billion-dollar national debt in
this conntry!
Governor EccLES. I have no fear of a 40-billion-dollar national
Mr. GiFFORD. Your answer staggers me. I have.



Governor EccLEs. I can give you my reasons for not having it.
Mr. GiFFORD. Personally, I wish you would. With the present
national income you have no dread or fear of the consequences of a
40-billion dollar debt?
Governor EccLEs. I am concerned about the present national in­
come, but .you do not increase the present national income by di­
minishing Government expenditures. It is the total expenditures
of the Nation that create the national income, and when the com­
munity, as individuals and corporations, do not spend, then the
Government must.
Mr. GiFFORD. I am looking at it from the standpoint of my cor­
porate interest. I f I owed a hundred thousand dollars to you and
you discounted my note and loaned me another hundred thousand,
you could then go to the bank and discount my second note and loan
me still another hundred thousand, and keep that up indefinitely.
But then what happens to me, finally? How long do you think that
a person, an individual, or corporation, can keep that up, and how
long can the Government keep that kind of thing up! The appli­
cation is the same.
Governor EccLES. That is just where the mistake is usually made.
Government credit is considered in the same way as we consider
individual or corporate credit, whereas when the Nation borrows
it is a question of the Nation borrowing from itself, so long as it is
a creditor Nation. Therefore, when it borrows from itself, that is
the-----Mr. GiFFORD. I f the citizen owed enough taxes, that is sound. But
the whole revenue is based on taxation, is it not!
Governor EccLES. Taxes are the basis of the Government's income.
I f by Government spending you increase the national income, you
increase the ability to pay taxes.
Mr. GiFFORD. Exactly. Then you have answered the question, that
a 40-billion-dollar debt can only be paid by taxes.
Governor EccLEs. But the taxes will not be paid out of the present
national income. I believe in the Government spending to a point
that could prime the pump. I f you increase that spending, in that
way you increase the demands for goods.
Mr. GiFFORD. Did you ever try to prime a pump and you did not
get quite enough water?
Governor EccLES. That has just been the case.
Mr. GiFFORD. That being the case-----Governor EccLES. It is the case today.
Mr. GiFFORD. Does anybody know the exact measure of water to
be poured in before you catch!
Governor EccLES. The measure would be when you get your un­
employment problem rapidly diminishing and with private business
being required to employ those who are unemployed to meet the de­
mand for goods, by reason of increasing purchasing power and
Mr. GiFFORD. Your statement about the 40-billion-dollar debt will
probably be of great comfort to those who vote for the soldiers'
bonus; it will probably be of great comfort to those who want social
legislation, that is, your statement that y^ou have no fear o f a 40billion-dollar debt. Do you realize the importance of that state­



Governor EccLES. Forty billion dollars in relation to the debt of
Australia and in relation to the debt of Great Britain and other
countries that we look upon as having met all the problems of the
depression possibly as successfully as anybody else-----Mr. GiFFOHD. So far as a comparison of our banking system is
concerned it is no comparison to compare that with the system of
other countries, if you can prove that our indebtedness is nothing
to be worried about, in comparison with other countries.
Governor EccLES. When we speak of a future debt of 40 billion,
it seems to me it is only fair to deduct from the 40 billion the assets
which the Government has taken in lieu of the debt. We cannot say
that the loans which the R. F. C. has made are entirely uncollectible,
and we should also take into account the balance in the Treasury in
considering the net debt.
Mr. GiFFORD. And the gold pro6t!
Governor EccLES. I think any other country would take the gold
profit into account. It is there.
So that the debt is less than 23 billion today when you consider
the Treasury balance, and without considering the gold profit, but
when you consider the assets that you can use to offset the debt.
That is less than 4 months of the normal national income of this
The indebtedness of Great Britain is 35 billion, and it takes 5%
percent of the national income to support the British debt. That is,
what is considered the present national income, which is between 19
and 20 billion.
Mr. GiFFOHD. You do not want us to fall into their company, do
you! .
Governor EccLEs. Our situation would require less than 1 per­
cent of the normal national income to support the Federal debt.
Mr. CAviccHiA. What percent!
Governor EccLEs. Less than 1 percent of the normal national in­
come to support the present Federal debt.
Mr. GiFFORD. The national income!
Governor EccLES. I said the normal national income.
Mr. GiFFORD. What is that!
Governor EccLES. Eighty-two billion was the national income in
I am as anxious as anyone to see the Budget balanced. The
Budget can only be balanced, however, out of the national income.
The national income can only be increased by employment.
Mr. GiFFORD. May I say, before I go any further, Governor Eccles,
I may appear to be almost brutally frank in my questions, but that
is mv mannerism. I am the most harmless man on the committee.
I liave letters from 25 commercial bankers in my district, all
Sne bankers and upright men, who are opposed to this legislation,
and I want to 6nd out about their opposition.
Governor EccLES. I appreciate the opportunity for giving my
answers. I have met with the bankers, with the representatives of
the American Bankers* Association, and with many other bankers,
and I Rnd that their opposition to the bill has oeen largely the
result of a misunderstanding. They do not understand what is
in the present law, and the opposition they raise to this bill is the



same opposition which might be raised to the present law, in a
great many instances.
Mr. GiyroRD. I am a new member of the committee, and know
little about the problems.
Governor EccLEs. I have now the figures of the Government
debt as of January 31, 1935, the total interest-bearing debt being
$27,952,000,000; due within a year. $5,606,000,000; from 1 to 5 years,
$8,792,000,000; and over 5 years, $13,554,000,000.
The CHAIRMAN. Let me suggest that in your statement you incor­
porate the figures showing the holdings of the Government against
those obligations, in order to make the story complete.
Governor EccLES. Yes; I will do that.
Mr. HANCOCK. You mean the credit balances in the general fund
of the Treasury!
Governor EccLES. The general fund balance is somewhere be­
tween a billion and a half and two billion. We will have to insert
in the record the exact figures.
The CHAIRMAN. That is what I said, that you should do that to
complete the statement, showing the holdings in the R. F. C. and
other organizations inuring to the benefit of the Government.
net assets of f&e United Rtates, Jaw.


[In millions of doliars]

Gross public debt_______________________________________ _____________ 28,476
Net balance in general fund (excluding balance o f increment resulting
from reduction in weight of the gold dollar)----------------------------------- 1,519
Net debt----------------------------------------------------------------------------------- 26,955
Proprietary interest of the United States in governmental corporations
and credit agencies:
I. Financed wholly from Government funds:
Reconstruction Finance Corporation-------------------------------------Commercial Credit Corporation---------------------------------------------Export-Import Bank_________________________________________
Public Works Administration________________________________
Regional Agricultural Credit Corporation____________________
Products-Credit Corporation__________________________________
All other-------------------------------------------------------------------------------



Total----------------------------------------------------------------------------------II. Financed partly from Government funds_____________________


Total----------------------------------------------------------------------------------------Increment from reduction in weight of the gold dollar________________


Mr. GiFFORD. We have your Treasury statement every day on our
desks. I am speaking this morning of the probable billions to be
added. We have that fact staring us in the face every day.
I want to bring out the fact that with this continual financing by
the Government o f Federal indebtedness we need this sort of protec­
Governor EccEES. The budget of any government must be bal­
anced over a period of time; there is not any question about that.
Mr. GiFFORD. Would you suggest a time—possibly 5 years!
Governor EccLES. I would say it might be desirable over a 5 year
period, but I do not think it necessaruy need be fatal if it is only
balanced over a 10-year period. A war condition could create an



unbalanced budget for a considerable period of time, if sufficient
taxes were not imposed to pay as it was carried on.
Mr. GiFFORD. Would you advise my creditors to carry me along
for 5 years ? If so, I wish you would send me a letter.
Governor EccLES. It has been my philosophy that the amount and
the rapidity with which the Government spends will reduce—that
is, if the amount and the rapidity are sufEciently great—they will
reduce the total amount that the Government may be required to
spend. To do that we have had a 40-billion-dollar deficiency in
national income and a 3-billion priming process last year; that is
about what it was.
I do not consider the transfer of the existing debt from where it is
to the Government as a priming process. It stops deflation, but the
actual amount of the budgetary deficit as a result of the Government
spending and the Government lending for new structures that in­
creases the buying power of our people has not been sufRcient to stop
the process ot deflation and to give the momentum necessary when
you consider the size of the pump.
By that I mean that with 10 or 12 million unemployed the buying
power cannot be sufficiently increased by a 3-billion-dollar spending
to utilize our existing productive capacity.
Mr. GiFFORD. That is a fine statement you are making, but I am
sure that the priming process must reach down far enough to give
constructive money that not only feeds and clothes people, but begins
to construct something out of which people can get an income.
I f the Government had spent this money and it was being used by
people who were constructing something which was employing labor,
that would be different than simply feeding and clothing people and
building beautiful roads or race tracks, and ornamental things in the
country which, in the end, does not keep very many people at work
bringing in an income. That does not keep many people at work for
any length of time bringing in an income, does it!
Governor EccLES. I think so. I think to spend money, or increase
productive capacity when you already have an excess of productive
capacity, is just the place where you do not want to spend it.
Mr. GiFFORD. In my section, they want to spend money on public
works, or on race tracks and beautiful roads through the woods, and
after they spend that money how much of an income will that
Governor EccLES. After all, income has to come from spending.
Mr. GiFFORD. But if that spending is simply for feeding and clo­
thing people and putting up ornamental unnecessary things, that will
not help them any in the iuture, so far as any income in the future
is concerned.
Governor EccLES. O f course, I do not believe that Government
spending should be in a Reid of competition with private enterprise,
where Government spending will be expected to return an income.
Mr. GiFFORD. You do not believe in the Government loaning to help
private business, do you!
Governor Eccues. I would prefer that the lending should be done
by the private-credit system, but when you reach an emergency such
as we had in 1932, and set up the R. F. C., it became necessary to save
the credit structure and lend money.



Mr. GiFFORD. Would you prefer that the $4,800,000,000 in the bill
pending in the Senate be loaned to private industry, the whole of
it, rather than have it expended in the method suggested!
Governor ECCLES. I would prefer that no part of it be loaned;
that every part of it be used as a grant, as leverage, so as to induce
private borrowing and spending.
Mr. GiFFORD. Would it be possible to make such a grant to private
industry by any such process without favoritism?
Governor EccLES. It is possible to make grants to cities, counties,
and States for noncompetitive public works, and induce leverage
through that process.
It is possible, through a subsidy to home owners, to induce the
construction of new homes, and the subsidy will be the difference
between the cost and rents.
Mr. GiFFORD. Do you prefer non-Federal projects?
Governor EccLEs. When it is a pure Federal project there is no
multiplying. I f the funds are used as a leverage, as a subsidy, we
will say, to cities, counties, and States, you get an increased spend­
ing or a leverage added to the spending by the home owner. We
have a differential between costs and rents today which is retarding
private construction.
Mr. GiFFORD. You mean, do you not, if you grant 30 percent to
municipalities and the municipalities are putting up 70 percent,
therefore you get three times as much work done!
Governor EccLEs. Yes.
Mr. GiFFORD. Exactly.
Governor EccLES. But instead of the Government loaning 70 per­
cent, let the municipalities arrange their own credit. I think 30 is
possibly not su&cient.
Mr. HANCOCK. I am very much interested in the statement you
made with respect to subsidizing the private home owner to incfuce
him to build a new home. I f such a program as that were carried
out by the Federal Government, would it not have a tendency to
stagnate every private lending institution in this country!
Governor EccLES. It would stimulate them greatly if the subsidy
represented the difference between costs and ren^s.
Mr. HANCOCK. Are you explaining the proposal that the news­
papers carried not long ago, to the enect that you advocated or sug­
gested a plan whereby the Government would make a grant or a gift
to a prospective home owner up to, say, 20 percent of the cost of
construction ?
Governor EccLES. I am not sponsoring any plan. The question
was with reference to the spending of the $4,800,000,000, whether I
would prefer that to be spent by the Government or used as a loan.
In answer to that I am simply making some observations here, or
some suggestions as to what would be my own personal view, in order
to get the most out of the proposed appropriation.
Mr. GiFFORD. I think you have answered my question sufficiently.
Mr. CRoss. It seems to me we are going far aBeld from this bill,
and that we have taken in all of the theories of loaning, most oi
which have nothing whatever to do with this bill, and if we con­
tinue along that line we will never get through with this hearing.
Mr. GiFFORD. Mr. Cross went very far aRela.



Mr. HANCOCK. I think the gentleman's questions have been inter­
esting and pertinent.
Mr. GiFFORD. I will be through in 2 minutes, if you will give me 2
minutes longer. I want to make two remarks.
I believe thoroughly in non-Federal grants, where the Government
itself pays only 30 percent and the municipality puts up TO.
I want to say simply in connection with this matter of priming
the pump, the answer seems to be suggested to me that we have poured
in the water, but the well is frozen. Lack of conSdence has frozen
the well, and it does not amount to very much.
(Thereupon, the committee took a recess until 3 p. m. this day.)

The CHAIRMAN. All right, gentlemen. I believe we finished with
Mr. Cavicchia. Now, does anybody on this side want to interrogate
Governor Eccles?
Mr. SPENCE. I want to ask him some questions.
Mr. DiRKSEN. I would like to ask some questions.
The CHAIRMAN. All right, proceed. Let us get along.
Mr. DiRKSEN. Governor, I shall try to be brief. Perhaps I ought
to restate the question Mr. Gifford had in mind this morning, I
think, namely, that the President has authority to designate one
man to the Board as Governor of the Federal Reserve Board; is
that a Presidential designation?
Governor EccLEs. That is right.
Mr. DiRKSEN. And when a man ceases to be designated by the
President, he is no longer a member of the Board?
Governor EccEEs. N o; he is no longer Governor, but he is a mem­
ber of the Board.
Mr. DiRKSEN. He remains a member of the Board?
Governor EccLES. Yes; unless he resigns, which is usually the
case if he is no longer designated as Governor.
Mr. DiRKSEN. I got the impression from reading your observations
on the bill that, when the President ceased to designate him as
Governor, he automatically divorces his membership as a member of
the Federal Reserve Board.
Governor EccLES. The present Federal Reserve Act requires that
the President designate a member of the Board to serve as Governor
at his pleasure.
Mr. DiRKSEN. I think I see, and it will not take very long to state
the question. Now, with respect to the government of the Federal
Reserve bank, I think the residence requirement has been taken out
of the old act, has it not? In the new provision there is a state­
ment to the effect that the Governor no longer has to be a resident
of the Federal Reserve district or Board on which he should serve.
Governor EcctES. That is right.
Mr. DiRKSEN. I am wondering whether it would be possible, under
this provision, to take a man from New York, for instance, and by
virtue of the fact that the power of approval is vested in the Federal
Reserve Board, insofar as the class C directors are concerned—if it
would be possible to transplant such a man to the seventh Federal
Reserve in Chicago, and by either the giving or withholding of the



power of approval, you could make him a member of the Board ?
I)o you think that is possible, if not probable ?
Governor EccLEs. Yes; it is possible to transfer a man from any
other reserve districts, and the proposal simply applies the same
and class C director. At present the Governor may be chosen from
other reserve districts, and the proposal simply applies the same
principle to the chairman and class C director, which is necessary in
combining the oHices of governor, chairman, and class C director.
Mr. DmKSEN. It would be possible then, to take somebody from
another section of the country and transport him to some other
Governor EccLES. Yes. The idea of that was to promote able
men in the Reserve System by moving them from one bank to an­
other bank, creating a career system. The selection of the Governor,
however, must be made by the local board of the reserve bank.
Mr. DiRKSEN. However, you have the power to approve!
Governor EccLES. That is right.
Mr. DiRKSEN. And you could approve, or you could disapprove
anybody that you desired to disapprove? tn other words, you
could prevent a man from becoming a combination governor, chair­
man^ and Federal Reserve agent by simply giving your disapproval
to his selection ?
Governor EccLEs. They would have to submit some other name.
Mr. DiRKSEN. So really you would have the power to control!
Governor EccLES. Well, whether the power of approval is the
power to control may be open to debate. It would become necessary
for the board of the Reserve bank and the Board here—at least a
majority of the board of the Reserve bank and the majority of the
Board here to agree upon a man that would be the executive head
of the bank.
Mr. DiRKSEN. I think the matter is important, for this reason, and
this is not very familiar to me and may not be familiar to you, but
in 1927,1 think, the rediscount rate was reduced for die purpose of
stimulating the investment interests and also stop the Row of gold
toward Europe, and the directorate of the Chicago Federal Reserve
Bank was rather opposed to it, because they saw apossibility of the
How of capital from every agricultural bank. They resisted the
idea, but it was done anyway; and I am not so sure but what, in
the light of hindsight, that was right, after all. So if it depends on
somebody out there who is absolutely sympathetic with all of the
things that are done, that might prejudice the interests of the par­
ticular area. That brings up, of course, this question: I was inter­
ested in your observations that it was seeking to make them respon­
sive to the national interest. That was the idea I think that you
enlarged upon in the course of your remarks some days ago.
Governor EccLES. Make who responsive!
Mr. DiRKSEN. Well, your Federal Reserve Board, and I suppose
your open-market committee; they would be responsive to the large
public interest, rather than to the sectional or local interest.
Governor EccLES. Yes; that is right.
Mr. DiRKSEN. That would, of course, eliminate the checks and
balances that did exist between the open-market committee and the
Federal Reserve Board and the directors of the respective Federal
Reserve banks. In the light of that experience back in 1927 I am



lust wondering whether it would be wise to eliminate that check,
because, in that instance it would have had a most salutary effect
upon the country, if the directors of a particular Federal Reserve
bank had prevailed, and that probably had been able to carry out
their own policies with respect to that Reserve bank district.
Governor EccLES. Well, of course, if each of the 12 Reserve banks
is going to be permitted to operate independently of the interests of
the country as a whole, with reference to their monetary policies, it
seems to me you would be sure to have great confusion.
Mr. DntKSEN. I f carried to the extreme!
Governor EccLES. So long as you have 12 banks without a Federal
Reserve board, without coordination and the power to deal with the
problems of national interest, I cannot imagine how you could have
a monetary policy that would be effective in meeting a situation that
the Nation might be confronted with. No other country, so far as
I know, has a divided responsibility with reference to the monetary
policy that would be comparable to a policy made by the 12 different
Federal Reserve banks.
Mr. DntKSEN. You know, section 205 of this bill, in speaking, for
instance, of the open-market committee, contains this language: It
says that you are to deal, instead of through the Federal Reserve
Board, with the Federal Reserve banks, and then the language is,
" and the Federal Reserve banks shall conform their open-market
operations to the provisions hereof." So, you are going to estab­
lish, after all, complete control at a time that might be disadvan­
tageous to the interests of a particular geographical section. For
instance, I suppose in Atlanta and Dallas you have certain cotton
interests, in Minneapolis you have the gram interests, in Chicago
you have not only grain but industrial interests; and that very
question came up in 1927, and I am not so sure that, if it had pre­
vailed, we might not have been infinitely better off. Of course, that
is a speculative thing, I admit, but that was one instance where it
proved out.
Governor Eccues. I feel that monetary policies must be dealt with
on a national basis, and that for each Reserve bank to act inde­
pendently with reference to open-market policy or discount rates
would cause great confusion. Money is like water—it seeks a level;
and to raise rates in one section would cause the funds to How to
the section where the rates were raised from the section where the
rates were low, which would act to increase the excess reserves in
one area substantially and, therefore, make for expansion o f credit
and cheap money, and have the opposite effect in another area.
Mr. DiHKSEN. But I think you will admit that was practiced in
one Federal Reserve district, and we might have had a 2 percent
rediscount, and in another place 2% percent, and another place
possibly 3 percent, because that seemed to Bt the conditions o f that
Federal Reserve district at that particular time.
Governor EccLZs. I do not believe it is necessary to have a uniform
discount rate at all the Reserve banks and, as a matter of fact, there
has rarely been uniformity in the discount rates. The discount rate
is proposed by the Reserve banks and approved by the Federal
Reserve Board, as a general rule.



Mr. DiRKSEN. But, examining the maximum possibilities of the
bill with respect to the open-market committee, it is quite possible
that the Federal Reserve directorate in any particular district would
not have anything to say about it, the System insisting that they
conform to whatever regulation is laid down about it!
Governor EccLES. That is correct. I f the committee felt it was in
the national interest to raise rates to prevent undue expansion and
speculation, they would do so; and, if they felt on the other hand
that there was an unnecessary contraction, they would want to re­
duce the rates and the reserve requirements in an effort to stop the
deflationary process, so far as they could. It seems to me that must
be done in the interests of the Nation, because we have found that
every part of the country is very interdependent with every other
part of the country, and that money has a very rapid Row and is
movable and transferable almost instantaneously.
Mr. DiRKSEN. When Mr. Crowley was before the committee, I
asked him about the section entitled I, which provides that mutual
savings banks and other banks may become member banks, or in­
sured banks, after July 1, 1937. In other word, you would have to
become a member of the Federal Reserve or otherwise have no Fed­
eral Deposit Insurance. I presume you are familiar with that!
Governor EccLES. Yes; I am*
Mr. DiRKSEN. That, in the light of section 202 entitled " I I " of
the bill, which provides that the Federal Reserve, in order to facili­
tate their entry into the System, can waive the capital requirements.
You enlarged on that somewhat in your observations and said, " and
any other requirements that may be necessary." Now, you are fa­
miliar with the facts, also, that in organizing many of these State
banks, you had to give deferred certificates in lieu of deposits, and
I think you have answered that that is a contingent liability charged
against the capital and, therefore, you cannot take those banks into
the System.
What would you do about those banks, particularly in cases where
most of the deposit liability was made up by deferred certificates,
and there may be in small banks, as much as $30,000 or $40,000 out­
standing of those certiScates, and it may take 10 years to earn
enough money to pay them off!
Governor EccLEs. I am familiar with that rule and I do not know
that I, personally, agree with it.
Mr. DiRKSEN. The rule does exist, however!
Governor EccLES. Yes; it was the opinion of counsel at the time
the question came up, that in the light of the present banking legis­
lation, by reason of those deferred certificates which the banks had
issued, although they were secondary to the depositors' claims, still
the bank was unable to qualify for membership. Now, one of the
reasons for this provision which you just read is, to permit the mem­
bership of the banks of the class that you referred to.
Mr. DipnaEN. Well, now, the corollary of that is this: What will
the present members of the Federal Reserve System say if by whole­
sale, you should take in these banks! They might object to the
fact that you are cutting corners in order to get them into the
System, might they not!
Governor EccLES. I cannot see that the other members of the Re­
serve System could be, in any way, aifected by that, except favor­



ably. It would be to the interest of all of the member banks of the
System to have all of the nonmember banks members of the System,
for the purpose of uniformity in carrying out the banking practices
and procedure, and so forth. Admitting those banks into the System
does not, in any way, place any liability upon the present member
Mr. DiRKSEN. Well, if this is a fair question, would you care to
say, categorically, whether you favor all banks coming into the Fed*
eral Reserve System at this time ?
Governor EccLEs. I think that it is in the interest of the banking
situation as a whole, nonmember banks as well as member banks, to
have all banking institutions, which have the power to create money,
members of the Federal Reserve System.
I think that the period of 1937 is helpful, in that it gives to the
banks an element ot time in adjusting their affairs to any extent that
they may desire to, before applying for membership; and I think
that, if this proposed legislation is passed, permitting the Board to
waive the requirements that the nonmember banks are unable to
meet, and providing the eligibility features that this bill carries, it
will be a great source of strength to the Federal Deposit Insurance
Corporation and to the banking system as a whole, through all
banks being members of the Federal Reserve System.
Mr. DiRKSEN. Well, now, Governor, if I remember the figures, I
think 41 percent of all of the banks in the United States are in
towns of 1,000 in population. I am just wondering what distinct
advantage will accrue to a bank in a small town which is simply
subserving the money and borrowing interests of that community
to buy 6 percent of the stock of the Federal Reserve, on which they
will get no interest and discount benefits and privileges, which they
probably would not use.
Governor EccLES. They get 6 percent on the stock which they buy,
which is a very profitable investment right now. Six percent is
what they get on the Federal Reserve bank stock which they buy
at the present time. Furthermore, the opportunity of rediscounting
or borrowing from the Reserve bank for seasonal requirements or
for emergency requirements should be a great source of help to the
local community and would tend to prevent bank failures which
otherwise might develop.
Mr. DiRKSEN. Well, now, if all of these banks come into the Fed­
eral Reserve System, manifestly, you are Rrst destroying the banking
authority of your State, and that would be possibly, or would pos­
sibly have the effect of superseding the laws of the State with refer­
ence to branch banking, and you might have an extension and de­
velopment of branch banking; is that possible!
Governor EccLES. I have not said very much about branch bank­
e r . DiRKSEN. Will you allow me to interposeand tell you that my
interest is aroused in the matter because
Senate bill 1926^ which
was introduced recently by Senator Fletcney, a. vejcy short bill, and
the last phrase provides that—
, .
Any national banking association may, with the approval o f the Federal
Reserve Board, consolidate with or purchase t&3 assets pf, and thereafter
operate as a branch or branches thereof, and national or gtate.banks, or banks,
located in the same State, with which such nationa! bank Association was on



January 1, 1935, and stiil is affiliated, or shares or majority of shares of
which were, on January 1, 1935, and still are owned by an afHliate o f such
national banking institution.

Mr. GOLDSBOROUGH. I am putting the committee on notice of the
fact that the bill is before us now, and there seems to be a trend
toward unification of the banking system. The extent of the branch
banking would be easier than it is at the present time, when you still
have checks and safeguards of some State law.
Governor EccLES. O f course, there has been a rapid development
of branch banking in the last few years.
The CHAIRMAN. Since the passage of the act that was to restrict
branch banking.
Governor Ecc^ns. The National Banking Act or the Federal Re­
serve Act permits State-wide branch banking in those States where
branch banking is permitted by State law.
Mr. GOLDSBOROUGH. Just to give the historical fact, we let the
branch-banking features slip by with the express assurance on the
part of those who wanted it that they would stand by the permanent
insurance plan, and as soon as the law passed they began to fight the
permanent insurance plan; we have had that fight on our hands ever
since. Our theory was that it would be impossible to make any
branch-banking law effective, because the independent banks would
be so strong under the permanent insurance plan that they could
preserve themselves. That is the history of mat legislation. The
branch-banking features would not have passed had we not had the
assurance that the permanent insurance plan would be allowed to
The CHAIRMAN. Governor, in connection with what Mr. Goldsborough said, the remark I made a moment ago had reference to
the McFadden bill, which dealt with the matter of branch banking.
Governor EccLES. The development of branch banking has been
brought about by the action of the various State legislatures, and
I understand that at the present time about one-half of the States
permit branch banking, either on a State-wide basis or in some form;
and, of course, the national banks are permitted to carry on the
branch-backing business to the extent that is permitted in the States
in which they operate.
Now, there is nothing in this proposed legislation that in any way
changes the present laws with reference to branch banking, and
there is nothing that interferes^ or encroaches upon, the State bank­
ing organizations. The provision that requires insured nonmember
banks to become members in 1937 is not in this legislation, but in the
legislation that was passed last year. So there is nothing in this
legislation that is being considered now that in any way changes
the relationship of the State banking authority with reference to the
banking structure.
Mr. J&iBKSEN. I quite agree. What I was getting at, of course,
is that, i f & little later, it was all set up it would be made infinitely
easier to extend the branch banks.
Now, getting over to section 206, there is a section there that
provides that any sound assets may be discounted, that any Federal
Reserve bank may discount any commercial, agricultural, or indus­
trial paper and may make advances to any certain member bank on
its promissory notes secured by any sound assets of such member



bank. I presume an asset may be sound and still be " ill-liquid "
rather than liquid, can it not! In other words, it might be good
security behind it, but still not liquid!
Governor EccLES. Yes. Many of the assets which are considered
to be eligible and held to be liquid were less sound than many of the
assets held by banks which could not qualify for rediscount or
security for borrowing from the Reserve banks.
The CHAIRMAN. Mr. Dirksen, let me ask him a question right
there, please.
I f you have not already stated it, what percentage of the invest­
ments of the banks, exclusive of Government securities, is eligible
for rediscount with the Federal Reserve bank!
Governor EocLES. Well, at the present time, I do not know the
exact percentage, but I understand it is less than 8 percent of the
total loans and investments of the banks that are eligible; and that
is according to the classifications made by the banks themselves and
not according to the classification made by the Reserve banks. I
think, upon experience, the banks would find, if it were necessary to
use all the. paper which they considered eligible, that some of it
would not be so considered by the Reserve banks. So that the figure
given, which is as I say, less than 8 percent, is the maximum.
Mr. DiRKSEN. I see section 207 provides that guaranteed obliga­
tions of the United States may be bought and sold without regard
to maturity. Those are such bonds as Home Owners' Loan Cor­
poration-----Governor EccLES. And Federal farm mortgages, and so on.
Mr. DiRKSEN. Well, now, I suppose that has to be considered in
the light of the provision in the bill which calls for the repeal of
the collateral requirements. Is there any notion of policy that some­
thing else should be substituted for 50 percent of the eligible paper
and collateral in addition to the 40-percent gold reserve!
Governor EccLES. No. You see, this is providing for the elimina­
tion of the collateral requirements against the Federal Reserve notes.
The reason for the provision that you have just read is that it is
felt that there should not be discrimination between Government
bonds and bonds guaranteed by the Government. The fact that the
Reserve banks may buy direct obligations of the Government, and
the fact that they may not buy long-term guaranteed obligations of
the Government is an unjustifiable discrimination between the guar­
anteed bonds and direct obligations.
Of course, at the time the law providing for the purchase of direct
obligations was originally passed, there were no guaranteed obliga­
tions; and I feel that, had there been guaranteed obligations at
that time the law would very likely have included both direct and
guaranteed obligations.
Mr. DiRKSEN. Well, now, heretofore, of course, the note-issuing
power was used largely commensurate with the rise and fall of
business in that area; and if there had to be a 40 percent gold re­
serve and 60 percent of eligible paper, there had to be commercial
transactions behind all of that paper. And so as there was a fixed
volume of business, the chances of any demand on the Federal Re­
serve agent for more Federal Reserve notes, or less, depended on
whether the tide of business was high or low.
130*17-^36— -8



NoW; that collateral requirement is to be repealed and you are
authorized to buy and sell m the market, and these guaranteed obli­
gations of the Government—that is what is called elasticity, which
does not mean a great deal to me—however, it is taken away, and
from then on the amount of notes that will be issued will bear no
definite relationship to the amount of business in the 12 Reserve
districts, or it may be a very arbitrary amount.
Governor EccLES. That was the theory upon which the collateral
requirements for note issue were based, but that is proving to be
inapplicable to the facts in the case. The greatest requirements for
notes in any year in this country happened when the business volume
was at its lowest, showing that the demand for currency does not
necessarily follow the fluctuations of business. The fluctuation of
bank lending on short-term eligible paper reflects to some extent
the activity of business. The call for Federal Reserve notes in the
United States, a country where 90 percent of the business of the
country is done by check, has very little relationship to the volume
of business.
As I stated a few days!ago in discussing this question, the Re­
serve banks have two classes of liabilities: One is the deposits to
the member banks and the other is the notes outstanding.
The CHAIRMAN. Will you not add to that, the capital held by the
other banks?
Governor EccLES. That is a liability to the stockholders, of
course; and the surplus is a liability to the Government. In
liquidation, the assets of the Reserve bank consist of the gold cer­
tificates, and the investments that the Reserve banks make in gov­
ernments, and loans and discounts which they make to member
I see no reason for putting up 40 percent gold certificates back
of notes and then putting up eligible paper to the extent of 60 per­
cent. As a matter of fact, it would be perfectly impossible to cover
the note requirements of the banks by 60 percent of commercial
paper ; because the banks do not have the paper to cover that pro­
portion of the note requirements. Therefore there would not be
sufEcient Federal Reserve notes to meet the requirements^ if the
Reserve banks were required to secure notes, as originally contem­
plated in the act, by 60 percent of the commercial paper.
There is no difference between note liability and deposit liability.
They are both liabilities of the bank and there would seem no more
occasion for the securing of notes than it would for the securing
of deposits. All of the assets of the Reserve banks are back of
all of the liabilities of the Reserve banks. The type of assets that
the Reserve banks hold—outside of the Government bonds which
they buy and the go!d certificates which they hold—is determined
by each Reserve bank, when that Reserve bank extends credit to
member banks.
Mr. DiRKSBN. Well, Governor, if you have more than 40 percent
gold reserves, that means that the Federal Reserve bank has got
to issue $8.50 for every gold certificate dollar that it has; is that
Governor EccLEs; What is that!
Mr. DiRKSEN. I f you have that 40-percent gold reserve behind
every dollar of Federal Reserve notes issued, you will have issued



;2% times for every gold certificate that the Federal Reserve banks
may have!
(Governor EccLES. That would be right.
Mr. DiRKSEN. Then in the light of the fact that you could buy
and sell without limit, virtually, all of the outstanding contingent
obligations of the Government, or those that are guaranteed, you
could retire most of them today if you so chose, and if that was
going to be the policy, by rather copious note issue; that would be
entirely possible under the bill, would it not ?
Governor EccLES. As I understand it, the bill would not change
that situation, at all.
Mr. DiRKSEN. But I would think that would be possible, would
it not!
Governor Ecci.ES. The present law permits notes to be secured
by Government bonds and gold certincates. That is not in the
present law, it was in the Emergency Banking Act of 1932.
Mr. DiRKSEN. You could, instead of just securing them, retire
them altogether!
Governor EccLES. What is that!
Mr. DiRKSEN. I say, instead of securing them, you could retire
them altogether!
Governor EccLES. Retire what!
Mr. DiRKSEN. Retire these bonds that had been guaranteed as to
principal and interest, being nothing more than a note issue-----Governor EocLES. You mean that the Reserve Bank, through openmarket operations, could purchase all of the outstanding, or as many
of the outstanding Government bonds and guaranteed bonds as they
chose to do!
Mr. DiRKSEN. Yes; as far as there were gold certificates available
that would be possible, would it not!
Governor Eccus. Yes; but, of course, that would increase the
reserves of the members by the amount of bonds which were pur­
chased^ and the excess reserves of the members today are something
over $2,000,000,000. To extend that reserve, banks purchase addi­
tional Government bonds or bonds guaranteed by the Government^they would increase the reserves of the member banks.
Mr. DiRKSEN. I think this morning, or yesterday, you made the
observation that the relationship of income to the deposit currency
was as 3 to 1, or substantially so!
Governor EccLES. In 1928, and 1929 it was 3.12. That was about
the average, as I recall, of the deposits and currency to the national
income. In 1933 the relationship, or what is spoken of as the income
velocity, was about 2%. At the present time, it would be substan­
tially less than that. That increase of money, deposits plus cur­
rency, has been much more rapid than the increase in income, and
hence, the velocity has been reduced.
Mr. DiRKSEN. Has th a t r e la t io n s h ip o f 3 - t o - l b e tw e e n t h e in c o m e
a n d d e p o s it c u r r e n c y e x is te d f o r a lo n g e r p e r io d t h a n sin c e 1 9 2 9 !

Governor EcctES. No; it has been steadily going down.
Mr. DiRKSEN. It has been going down since that time, but I mean
anterior to that period. I do not know where I got that figure,
but-----Mr. GoEnsBOROroH. Does income mean the same as production!



Governor EccLEs. Yes; it is spoken of as the national income. Dr.
Currie says the figure was very stable from 1923 to 1929.
Mr. DiRKSEN. At 3-to-l!
Governor EccLES. Yes.
Mr. DiRKSEN. And before that time, what was it!
Governor EccLEs. I do not have the figure on it. Of course, during
the war period and during the period of depression in 1920 and 1921,
I imagine there would be some changes in ratio.
Mr. HANCOCK. May I ask a question!
Mr. DiRKSEN. Yes.
Mr. HANCOCK. Governor, what do you mean by " national income!"
Governor EccLES. What I understand to be the basis for figuring
the national income is the price of all goods, whether consumer^
goods or capital goods, that are produced in any one year.
Mr. HoLLisTER. For ultimate sale!
Governor EccLES. Would that be sale!
Dr. CuRRiE. It is the wages, profits, dividends, of all the money
actually received by the income receivers.
Governor EccLES. It is supposed to represent all the goods bought
and sold.
Mr. HoujSTER. That is, the ultimate sales!
Governor EccLES. The ultimate sales, yes; otherwise you get dupli­
cation. That is right, the ultimate sales.
Mr. HoujSTER. Dr. Townsend refers to $1,200,000,000,000, and I
wanted to be sure about it*
Governor EccLES. No, you have $900,000,000,000 to $1,000,000,000,000 of bank debits, which, based upon the amount of demand
deposits would possibly give a velocity of deposit currency turn-over
of over 50 times in the period of 1928 and 1929.
Mr. HANCOCK. At what rate is the national income running today!
Governor EccLES. Well, I do not know. I do not know that there
are any figures at all on it
Mr. HANCOCK. What was the national income in 1934, as defined
by you!
Governor Eccuss. Do you have the figures of the Department o f
Dr. CuRRiE. N o; not for 1934.
Governor Eccuss. I have heard it variously estimated from $50,000,000,000 to $50,000,000,000, but you would really have to have the
complete figures for 1934.
Mr. DiRKSEN. At any event, that ratio is invariable and goes back
to 1923!
Governor EccLEs. It was relatively constant.
Mr. DiRKSEN. And for any increase of $1,000,000,000 in deposit cur­
rency, you would get an increase of $3,000,000,000 in national income!
Governor EccLEa. Well, theoretically, but that has not been the
case from 1929 to 1934.
Mr. DiRKSEN. But if it were invariable, there would be a great
incentive then to increase the amount o f deposit currency, in the hope
of increasing the national income by just exactly three times that
amount and all the good that we could do with that amount of money !
Governor EccLES. It would be fine—there is no question about
that—if we could do that by an increase of our volume of money,
without regard to who owns the money, and thus regulate our



national income. I do not believe that is possible. I do feel, as I
have said before, that of course the volume of money is an important
factor; and, certainly, with high interest rates and shortage of
reserves today, you could expect no credit expansion, and such a
situation would be very deflationary. Excess reserves, such as we
have today, which bring down the rate of interest, should ultimately
lead toward creating credit expansion—whether we can do that
and recover time alone can tell. That is one of the factors and one
of the elements that will help make for recovery, if private credit
expansion can induce recovery.
Mr. DmscoLL. Governor, I am not entirely clear in my mind as to
the expression "national income"; does that mean the price of
every taxable article that is produced in the United States per year!
Governor EccLES. It is the income received from the production
o f all goods.
Mr. DRiscoLL. We will say all of the hay, tobacco, textiles, wool
that is sold!
Governor EccLES. No; you would get duplication then.
Mr. DRiscoLL. Not if you sell it only once!
Governor EocLEs. That is right. For instance, you would sell
wheat to the miller, and the miller would sell the Hour to the whole­
saler and so on, and you would get, of course, a duplication, because
that would be the Hour sold to the consumer-----Mr. DRiscoLL. And not the wheat sold by the farmer!
Governor EccLEs. No.
Mr. SissoN. In other words, there is a great distinction between
the national income and the total turnover of business.
Governor EccLES. A very great distinction.
Mr. SissoN. Many times?
Governor EccLEs. A very great distinction, but the national in*
come determines the actual wealth produced, which determines the
well-being of the people if it is properly distributed.
Mr. FoRD. Might I suggest that mv interpretation of "national
income", is all wages, interest, dividends, ultimate sale prices of
goods. Does not that fairly well cover it!
Governor EccLES. I think that is the rule.
Mr. SissoN. That would not include the lawyers' income, who are
not productive members of society, as a part o f the national income!
Governor EccLES. Yes; it includes a lawyers' income.
Mr. WiLLiAMS. How about wages!
Governor EccLES. The same thing applies.
Mr. HoLLiSTER. Would not the real test be not the national income
in dollars, but the units of articles sold in respect to these other
particular years! I f your prices are quite different, your national
income may look different, but it is the units of things that happen
to be sold in a particular year, with reference to the other year!
Governor EccLEs. Yes, the production; that is right.
Mr. DRiscoLL. Governor, I see that section 209 of this bill con­
fers upon the Reserve Board the authority by regulation to change
the requirement as to the reserves to be maintained against demand
or time deposits. As I understand the percentage on demand is now
13 for Chicago and New York, and 10 for other eastern cities, and
7 for the country banks, and 3 percent on time deposits!
Governor EccLES. That is right.



Mr. DiRKSEN. Now, at one time, I think when the Federal Reserve
was raising prices, it was up to 25, 18, and 15, was it not! Was it
not much higher, and mounting higher when the Federal Reserve
was first enacted!
Governor EccLEs. It was higher than it was in 1925; it was 18 and!
down below 18.

Mr. DiRKSEN. It h a s been reduced!
Governor EccLES. Yes. Dr. Goldenweiser, I wonder if yon know
the reason for the drop in the Reserve requirements, from those
higher percentages to the percentage that applies at the present
Dr. GoLDENWEiSER. The reason requirements were reduced at the
time was that it was the theory that the cash held in the bank
vaults amounted to about that much. When this cash in the vaults
held by the banks was excluded from the legal reserve, there was an
allowance made for it.
Mr. DiRKSEN. You do not require any cash in vault now, do you!
Dr. GoLDENWEisER. No. When they would not let it count as
reserves any longer they reduced the requirement.
Mr. DiRKSBN. No; actually- there is no cash in the vault at the
present time, only of course tnese reserves against the deposits that
are deposited with the Federal Reserve bank!
Governor EccEES. There is cash in the vault, and these reserve
requirements of 7,10, and 13, as I understand Dr. Goldenweiser, were
reduced because previously the cash held was considered as a part
of the reserve requirements, and the cash now held by the banks is
not considered a part of the reserve. There is no legal cash require­
ment, but banks have to hold sufRcient cash to be able to meet the
cash requirements of their customers, and those requirements fluc­
tuate from day to day.
They have to ship money, from the Reserve bank to their bank and
the amount of cash required by a bank that is not in a Reserve
center, that is, in centers where there is no Reserve bank or branchr
of a Reserve bank, is relatively higher than the percentage of cash
that is carried in a bank where there is a Federal Reserve branch
bank or Reserve bank.
Mr. DiRKSEN. What reserves do the Bank of England and the
Bank of France require, as compared to these requirements here?
Governor EccLEs. I am unable to say.

Mr. DiRKSEN. D r . Goldenweiser, what can you say about that?
Dr. GoLDENWEiSER. There are no legal requirements about the
reserves of commercial banks.
Mr. DiRKSEN. In practice, what do they maintain?
Governor EccLES. Well, in England, somewhere around 10 per­
cent, as a rule.
Mr. DiRKSEN. Yes; both the demand and time deposits $
Dr. GoLDENWEisER. Yes; against their deposits.
Mr. DiRKSEN. Against all deposits?
Dr. GoLDENWEisia:. Yes; and in France I do not know, because in
France they hold so much of it in actual notes and the ratio varies^
but it is not very greatly different from the English system.
Mr. DiRKSEN. Well, now Governor, section 2M ), of course, would
confer upon the Federal Reserve Board the power to raise or lower



those reserve requirements; in other words, instead of 13, 10, and 7,
you could reduce them to 10, 7, and 3, and you might reduce the
reserve against the time deposits to 2 percent or even 1 percent. In
practice, how much of that reserve deposit do the Reserve banks, as
a general thing, carry?
Governor EccLES. You mean the member banks?
Mr. DmKSEN. No; of the deposits that are carried b y member
banks in the Federal Reserve bank, do they keep all of the 13 percent
or 10 percent or 7 percent on hand, or do they use it?
Governor. EccLES. The Reserve banks.
Mr. DiRKSEN. Yes.
Governor EccLES. The Reserve banks do not invest their money—
that is, their deposit money—from the standpoint of keeping their
money operating at a profit. It is their business to invest their money
in open-market purchases as a regulatory measure of the monetary
Mr. DiRKSEN. Well, the purpose, apparently, of that section is t o
give greater flexibility and give the Federal Reserve Board th e
authority to raise or lower their reserve requirements, and-----Governor Ecci.Es. That provision with reference to the reserve re­
quirement is now in the law. The Thomas amendment to the act of
May 12,1933, added to the Federal Reserve Act a provision giving the
Federal Reserve Board the power, by declaring an emergency, to raise
the reserve requirements, with the consent of the President. That
was put in there as a supplemental monetary control to open-market
operations. It is a control against inflation.
Mr. DiRKSEN. Against inflation?
Governor EccLES. Yes; that would be the purpose of that—a con­
trol against inflation. For instance, assuming that the excess reserves
of member banks greatly exceeded the amount of Government bonds
which the Reserve banks held and the bills which they held, there
would be no way of controlling through open-market operations am
inflationary credit expansion on the part of member banks. There
would be no way of reducing or wiping out their excess reserves upon
which credit inflation is built. Ter instance, if the authority now
granted to issue $3,000,000,000 of greenback currency was exercised,
and if the $2,000,000,000 of gold profit now in the stabilization fund
were used, $5,000,000,000 additional bank deposits would be created.
Mr. GOLDSBOROUQH. Right there, if that money were used to retire
Government bonds, the deposits would not bie increased but the
reserves would be increased?
Governor EccLES. That is right. In that case it would increase the
reserves by that amount, but it would increase deposits to the extent
that it retired Government bonds not held by the banks. I f the
money was used to retire Government bonds held by individuals, it
would increase deposits and increase reserves; to the extent that it
was used to buy Government bonds held only by the bankers, to that
extent it would increase the reserves alone without increasing
It is possible with the use, we will say, of the $5,000,000,000 referred
to, to increase the reserves by that amount. Additional gold may con­
tinue to come into the country, which would also tend to increase the
reserves. So that the banking system could build up excess reserves



from the $2,300,000,000, approximately, that they hold now to $7,300,000,000 plus any increased gold that comes in. You would have a
potential agency for bank-credit inflation that would simply be ter­
rific and no open-market operation could control it. An increase of
reserve requirements would have the same effect in extinguishing the
excess reserves as a sale of securities, and that is why this proposal is
Mr. DmKSEN. That is the sense of the 20 percent in this bill ?
Governor EccLES. Yes.
Mr. DiRKSEN. Ultimately to extinguish the reserve requirements, if
, Governor EccEEs. Yes.
Mr. DiRKSEN. I think I have only one more question, and that is
with reference to section 210, dealing with real-estate loans. I was
much interested in the discussion this morning, and I wondered
whether, after all, we could not keep the banks on a commercial
basis and keep them liquid by letting the building and loan associa­
tions handle the amortized real-estate mortgages up to 20 years, and
pursue the policy of greater leniency with respect to bank loans, to
such thrift agencies that now operate. I say that for this reason—
the building and loan associations are equipped to handle the amor­
tized loans, and if the banks were going to handle them in any
quantity, they would have to set up separate establishments and take
on additional personnel to do that.
Mr. CAViccHiA. May I say this, Mr. Dirksen ?
Mr. DiRKSEN. Yes.
Mr. CAViccHiA. The great trouble was that many building and
loan associations were running businesses in opposition to the banks.
They got in the habit of going to the banks to borrow money on
notes and pay, say, 5 percent on the money that they borrowed irom
the national bank or trust company; and they would proceed to lend
it to me, or the man who wanted to buy himself a home; and they
would get 3 percent or 4 percent or 5 percent bonus; and if they
started to sell preferred shares to depositors and some of these com­
panies borrowed—they did not borrow, but they took on deposit
money on which they guaranteed as much as 7 percent per annum,
which no bank could! afford to pay. I f the building and loans haa
not gone to that Reid, they would not have suffered as much as they
did when the crash came m 1929.
Mr. DiRKSEN. Well, let me say there are probably 700 or 800 Fed­
eral savings and loan associations that have been established now;
and, of course, their sole mission is to deal in amortized loans.
Governor E ccL E S. Well, I may answer that by stating that the
Federal savings and loan associations are members of the!home-loan
Mr. DiRKSEN. And those are rediscount institutions!
Governor Eccms. Yes; and those institutions can borrow money
from the home-loan banks at 3 percent. Therefore I do not know
how commercial banks owning substantial savings funds upon which
they pay 2% percent could compete with the home-loan banks in
providing funds to savings and loan associations.



Mr. DiRKSEN. It could, but for one thing, and do vou know what
it is! It is the bank examiners. There are lots o f buildings and
loans that would go to the banks and make their notes signed by
all of the directors, get the money, and pour it into the development
of building and construction in their communities; but I doubt very
much whether the examiners would permit that at the present time.
Governor EccLES. The only thing is that a bank, in order to pay
2%-percent interest on time funds, which it will likely have to pay
to hold the funds against the competition of the 3- and 3%-percent
rates paid by savings and loan associations, must lend those time
funds on a basis to yield them not less than 5 percent.
A building and loan association, as a member of the home-Ioan
bank, would not be willing and could not aiFord to pay the banka
5 percent for funds which they in turn would have to loan out at
8 percent; and in borrowing from the banks, they would borrow dn
a short term basis and would be loaning in the community bn homes
on a long-term basis. Therefore I do not think it is practicable to
expect the building and loan companies to borrow from the savings
or time funds of commercial banks.
Mr. DiRKSEN. There is one statement in here, one proviso in the
section dealing with real-estate loans, section 210, that says:
Nothing contained in this section shall prevent any national banking association from acquiring, as additional security for loans, previously made in good
faith, second or subsequent liens on real estate or shares or participations in
such liens.

Those are junior liens, or they would not be second mortgages!
Governor E ccL E s. That is right.
Mr. DiRKSEN. There would not be anything to prevent a bank from
taking a $2,000 Rrst mortgage on a $10,000 property, and then step­
ping m a little bit later and taking another junior mortgage for
$1,000, and making a junior lien against the Rrst mortgage against
the property, if they so desired. I believe you stated mis morning
you thought that was rather poor Rnancing to even indulge in junior
liens, if it could be avoided.
Mr. EccEES. A bank should be prohibited, in the Rrst instance,
from taking a junior lien—from making a loan secured by a junior
lien; but i f a bank has a loan, and even though it may be an unse­
cured commercial loan or a collateral secured loan, the bank is justiRed in taking a second lien, for additional security, if conditions de­
velop where the loan, which was adequately and properly secured,
or a loan which was made to a concern which had ample resources,
gets into a position where it becomes a doubtful loan. In such cases
the bank may take a second mortgage or take any other security
that it can get; and banks have Jways done that, in fact. They
have always been doing that.
Mr. D m KSEN. The only requirement, however, in that language, is
the faith of the bank, " previously made in good faith."
Governor EccEES. I think possibly the only reason for that lan­
guage there is this: The banks, we know, have always taken, and
there has been no prohibition upon banks taking, for debts previ­
ously contracted, second mortgages or any other collateral.



Mr. DmKSEN. Have they that authority now!
Governor E ccLE s. Yes.
Mr. DiRKSEN. To take second mortgages!
Governor Eccuss. Yes; they have always done that.
Mr. CAviccHiA. Is there not some contusion here, Mr. Dirksen!
I think you mentioned about a bank lending their $10,000, and sub­
sequently he wants to borrow another $1,000 on the same piece of
real estate. That is perfectly legitimate, because it is considered
practioally on&mortgage loan—is it not—whether it is made in one
loan or two loans; am I correct, Governor!
Governor EccLES. It would seem to me that it would be consid­
ered a 6rst and second mortgage, because the Erst mortgage might
be sold without recourse, and certainly the $1,000 mortgage would
then be a second mortgage. So long as both pieces of paper are held
by the same institution, they would De, for all practical purposes, the
equivalent of a Rrst mortgage.
Mr. CAviccHiA. I had in mind the building and loan practice,
where a) man has $5,000 mortgage, and a year or two later wants
Another $1,000; in all respects, that is considered as one mortgage.
Now, a second mortgage is never taken by a building and loan—by a
member bank unless it wants to secure some loan that it had already
made; is that correct!
Governor EccLES. That is right.
Mr. HANCOCK. Mr. Dirksen, may I ask one question!
Mr. DiRKSEN. Yes.
Mr. HANCOCK. In addition to the fact that there is such a small
amount of eligible commercial paper available for rediscount, did I
understand you to say the other day that one of the reasons why you
were suggesting that 20-year amortized real-estate mortgages should
be made eligible for borrowing was the fact that unless the banks
did handle mis type of paper, these loans would continue to gravitate
to the home-building and thrift institutions!
Governor EccEEs. We are not proposing that 20-year mortgages,
as such, be eligible for rediscount. The proposal is that the banks
be permitted to make amortized real-estate loans on improved prop­
erty up to the maximum period of 20 years, up to a certain percentage
of their time funds.
Mr. HANCOCK. Sixty percent, is it not!
Governor Eccms. Yes. Now, with reference to the question of
eligibility, there is nothing said at all about the right to rediscount
those mortgages. The wording of the eligibility provision is to the
effect that the Federal Reserve Act would be amended to authorize
the Federal Reserve banks, subject to regulations of the Board, to
discount for member banks any commercial, agricultural, or indus­
trial paper, and to make advances to member banks on promissory
notes, secured by any sound asset.
Mr. HANCOCK. I understand. This is something that was recog­
nized in the Emergency Banking Act, that the member banks be per­
mitted, on their bills payable or promissory notes, secured by sound
assets, to borrow from a Reserve bank, and the credit department of
each Reserve bank would determine the terms upon which the mem­
ber bank could borrow.



Let us see if we understand each other right there for a minute.
Under that provision, would the member bank be able to endorse,
without recourse, a first-mortgage note to a Federal Reserve bank!
Governor EccLES. A member bank now cannot endorse without
recourse any paper to a Reserve bank. AH borrowing from the Fed­
eral Reserve bank is done on eligible papery on the discount basis,
with recourse, and all the bill does is to broaden the borrowing privi­
lege so as to give to the Reserve banks the power to lend to member
banks oh the member bank's note fop a period-of 3, 6, or 9 months;
according to the regulations that the Board may make, those notes to
be secured by bonds, mortgages, or loans secured by collateral, with
such margin as the Reserve banks may consider adequate to make the
loans safe and sound to the Reserve bank.
Mr. HANCOCK. I think I understand that now; you see if I do.
In other words, the member banks, under this provision, would not
be able to rediscount a 20-year amortized mortgage with the Federal
Reserve System, but use the mortgage as collateral for a loan.
Governor EccLEs. That's correct.
Mr. HANCOCK. But it could give its own note, secured by the 20year amortized mortgage, and secure a loan from the Federal Reserve
bank, if that was a sound asset!
Governor ECCLES. The Reserve bank would determine what mar­
gin might be required, and would also determine whether the loan
would be made for 3 months or 6 months, or a longer period.
Mr. HANCOCK. But that would enable the member bank to be in a
position, in time of emergency, to take that paper and use it for the
purpose of liquidity!
Governor EccLES. The same as it could with eligible paper; that
is right.
Mr. HANCOCK. In other words, you mean put real-estate mort­
gages on parity, as they should always have been, so far as eligibil­
ity is concerned, with bonds!
Governor EccLES. Government bonds, you mean!
Mr. HANCOCK. Yes; Government bonds!
Governor EccLES. Yes; so far as being able to borrow money from
the Reserve bank is concerned.
Mr. C AviccH iA . Is this inflation, Governor!
Governor EccLES. This is not inflation, because no member bank
is going to borrow from the Reserve bank as long as it has excess
reserves. Now, when the borrowings of member banks reach the
point where you can get credit inflation, just as we have had in this
Country in the past, it was said to be the duty of the Reserve Board
and the Reserve banks to raise the discount rates and to discourage
future credit expansion.
Inflation can only be brought about by the willingness of the
people and corporations to borrow money, and that is one thing we
are trying to get; we are trying to induce the borrowing and lend­
ing of money upon which recovery is based. We are talking about
the fear of inflation or reflation, when, as a matter of fact, that is
what we want.
Mr. DiRKSEN. Governor, I have one more question, and that is
predicated on the question asked by the chairman of the committee



last week, when, oR the record, he observed something about the
condition of one of the Federal Reserve banks. Was that early
in 1988!
The CnAiRMAN. I am not sure that I remember the remark you
refer to.
Mr. DnmszN. Well, I got the impression at that time that it was
the Federal Reserve banks that had lost their liquidity; is that
Governor Eccms. The Reserve bank lose its liquidity!
Mr. DiRKSEN. Yes.
Governor EcCLES. I never heard o f that.
Mr. DnotSEN. I got that impression at the time, but that is neither
here nor there. I am just wondering if, carried to its logical con­
clusion, there is plenty of demand for this money; and, as you gay,
the assets can still be sound and stiil not be liquid, but if those were
infiltrated to the Federal Reserve banks, you may have another
Hurry similar to the one we went through.
Governor EccLES. An asset that may be considered sound and
liquid with business activity and a high rate of employment and
national income becomes frozen and unsound when the national
income diminishes. Soundness is not determined only by the sub­
stance of a loan or asset at the time the asset is purchased or the loan
is made ; it depends upon the state of trade and business which fol­
lows, and it is up to the banking system to maintain a state of trade
and business that will preserve soundness, if soundness existed when
the credit was created, in so far as it is possible.
When certain foreign bonds were purchased, German bonds, prior
to the war, we considered those the best in the world, and they were
sound assets. When wheat was selling at $2 a bushel, it would have
been considered perfectly sound, and the paper would have been
eligible to have been loaned upon, and it would have been proper to
have loaned upon that wheat with a 25-percent margin, on the warehouse-receipt basis. The same thing is true in any other commodity.
I remember when sugar was selling at around $21 a bag, and
within a 6-month period it fell below $5 a bag. I am not arguing
that a loan of 80 percent of the value of $21 sugar would have been
I remember when sheep were selling at $16 a head, when within
a 6-month period you could not sell them at $4 a head, yet a loan
made on sheep at $16 for 9 months—that is, on the basis of 50 per­
cent of $16—say, $8 a head for 6 months was eligible; whereas be­
fore that loan came due that security was not selling for one-half
of the amount of the loan.
The point I am trying to make is that the question o f liquidity and
the question of soundness depends upon the state o f trade and (he
state of business; and to the extent that forced deflation through
forced credit contraction iB obviated through making available the
rediscount facilities of the Reserve banks—to that extent you pro­
vide liquidity. The only liquidity that really exists in a serious de­
pression is the liquidity that is provided through the money-issuing
agency, the Reserve System. Even Government bonds cease to have



liquidity at the price at which corporations can sell them without
going bankrupt.
The price of Government bonds in 1932 was down, the 3's, I think,
to $83. A bank holding any substantial amount of those bonds—
to have sold them at that market—and if any substantial amount
had been sold, the market possibly would have gone to $50, and the
bank would have been ruined, th e banks, however, could go to the
Federal Reserve banks and borrow on those Government bonds, and
that was a protection to the market, and also a protection to the
banks, which would not have existed if the banks had been forced
to sell those bonds to get money to meet the demands, instead of
going to the Reserve bank and getting the money.
Mr. HANCOCK. Mr. Dirksen, may i ask one other question!
Mr. DiRKSEN. Yes.
Mr. HANCOCK. Now, deposits you have already written off.
Mr. DiRKSEN. I think if the Governor wanted to, in the light of
the fact that it was related to the bonus, he might make a further
Governor EccLES. I do not care to express an opinion on matters
of that kind, because I feel it is entirely outside of my ofBcial posi­
tion. I have my personal opinion, but I think it is outside of my
ofBcial position.
Mr. DiRKSEN. I have just one observation to make with refer­
ence to this last section of title II, and it is this: Whether or not
the time deposits will be drained off in the form of real estate
amortized loans to any appreciable extent, will depend entirely upon
the public demand!
Governor EccLES. Entirely.
Mr. DiRKSEN. The public demand must necessarily be occasioned
upon the purchasing power!
Governor EccLES. There is no question about that.
Mr. DiRKSEN. I f you have not got the purchasing power, they
might demand until they are blue m the face, and it would not do
any good: and that, in turn, is conditioned upon the state of employ­
ment in the country!
Governor EccLES. That is correct.
Mr. DiRKSEN. The question that comes up to us is: Which is the
first, the hen or the egg! And I question whether it is going to do
any good.
Governor EccLEs. I f you get demand for long-term credit for home
construction or for other construction, and the facilities for providing
it do not exist, that would be most unfortunate.
Now, I feel that, with low interest; and abundance of excess funds,
that the need and desire of institutions with those funds should be
to put them to work, and that may tend to create some construc­
tion. I do not believe that the demand, today, throughout the
country as a whole, for long-term, amortized loans is entirely being
met. What you say about the hen and the egg is true, and I am not
claiming for the eligibility feature o f this legislation and the realestate feature, one of which is the corollary to the other, that it will
bring about recovery ; but it would create tne machinery upon which
recovery can be brought about.



I might say this: That the increase in private expenditures for
equipment and construction await upon the increased demands for
products of industry. The increased demand depends upon the in­
creased incomes, as a whole. Increased incomes await upon in­
creased expenditures in construction. There is your circle.
Now, the impasse can be broken in the first instance, I believe, only
by the various Government activities, and if the impasse is broken,
then you have created here the machinery with which to help carry
forward, just as you are creating in the case of the Home Owners*
Loan Act and providing funds for your home-loan banks to loan to
the members of the home-loan banks. That is the agency that will
help in the mortgage Reid as well.
Mr. HANCOCK. That is what you said in 1933, is it not?
Governor EcciJas. Something like that.
Mr. DiRKSEN. That is all I have to ask, Mr. Chairman.
The CHAIRMAN. All right. Mr. Wolcott, have you any questions?
Mr. HANCOCK. Let us adjourn now until in the morning, Mr. Chair­
Mr. FoRD. May I make one observation before we adjourn!
The CHAIRMAN. Pardon me just a minute. Let this be off the
(Here follows discussion off the record.)
Mr. SissoN. As I understand it, this bill makes no change in the
law with respect to the liability of the banks that are members of the
permanent insurance fund for assessment; that is, in other words,
the assessment is still based upon the total amount of the deposits;
that is correct, is it not, whether insured or not!
The CHAIRMAN. That will be the situation under the new law, but
it is not the basis on which the assessments are made under the law as
is stands now.
Mr. SissoN. I know, but it was contemplated as a permanent fund!
The CHAIRMAN. Well, under the permanent plan, there would be
an assessment of one-fourth of 1 percent, to be repeated in case of
necessity. The necessity depends upon whether or not the total fund
on hand equals one-fourth of 1 percent of the amount of the total
deposits of insured banks.
Mr. SissoN. Well, what I am getting at, Mr. Chairman, is this:;
You all know that was one o f the points at issue last year, and that
is going to be one of the points in controversy this year. We are
getting some letters from certain banks to the effect that that is
inequitable; that is, when the total amount of the deposits that are
insured are a relatively small percentage of their total deposits, as
compared with their uninsured deposits, they are making the claim
that there should be a change made.
I am not taking any position. In fact, if I were to take any posi­
tion now, I would be opposed to that contention.
The CHAIRMAN. I think you will Bnd, Mr. Sisson, in Mr. Crowley's
testimony, and in Mr. O'Connors' testimony that that phase of the
legislation is fully covered, not bnlv ps to tne changesr made and the
systems being employed, M t
RdRlis that enter into the calculation
are covered.
Mr. HANCOCK. Mr. Chairman, may I respond to my good friend!
from New York!



I had occasion, today, Mr. Sisson, to go into a case affecting an
institution in my own State. I received a letter recently criticizing
the method proposed under title I of the new bill, whereby the pro­
posed assessment of not more than one-twelfth of 1 percent would
be levied against the total deposits in any one institution, annually.
This institution that I have in mind, under the present law, insured
$20,700,000 of its total deposit liability of $58,000,000, and the present
cost to that institution is approximately $51,000 a year. Under the
provisions of the new act, whereby the assessments apply to the total
deposits of $58,000,000—on the basis of not in excess of one-twelfth
of 1 percent, the cost of insurance to this institution is actually re­
duced $3,000, to $48,000 a year; and 13,000 institutions that are in­
sured today would carry this insurance at a lesser amount under the
new act than they do under the temporary plan at the present time*
Mr. W iLLiAM S. The fact is, there is no insuring under the perma­
nent system and-----Mr. HANCOCK. No; I say, under the temporary plan.
The CHAIRMAN. Well, gentlemen, have we decided to adjourn for
the afternoon! We will meet at 10:30 in the morning, and I hope
we shall finish with Governor Eccles tomorrow.
(Thereupon, a recess was taken in the hearing until 10:30 a. m.,
Friday, Mar. 15, 1935.)


F R ID A Y , M ARCH 15, 1935


*Wa#AMi,<7%07t, Z7. C.

The committe met at 10:30 a. m., Hon. Henry C. Steagall (chair­
man) presiding.
The CHAIRMAN. All right, gentlemen, there is nothing in the
House to interfere with our meeting today.
We will resume with Governor Eccles. Mr. Ford, have you some­
Mr. FoRD. Mr. Spence is next.
The CHAIRMAN. That is all right. Mr. Spence, if you have any
questions, you may proceed.
Mr. SPENCE. Governor Eccles, what will be the practical effect of
waiving the collateral requirements for the issuing of Federal Re­
serve notes? In other words, is there any limitation, or will there
be any limitation on the issuance of notes ?
Governor EccLES. There is no limitation now, for all practical
purposes. What determines the use of currency is not the Federal
Reserve banks, nor the member banks, but the people of the country
who have claims on the deposits in the banks. They have the right
to request a bank to pay them in currency. The bank, in order to
be able to pay them such currency as they request, goes to the Fed­
eral Reserve bank to get the currency. The bank, in order to get
the currency from the Federal Reserve, must have a balance with
the Federal Reserve, just as an individual depositor with a bank
must have a balance with the bank. Therefore, the only limitation
upon the issuance of currency is the demand for currency by the
people of the country that have bank deposits, and the collateral
requirements in no way affect or change the amount of the currency.
Mr. SPENCE. What was the philosophy of the original act which
so meticulously made the requirements for collateral!
Governor EccLES. I do not know that I can say. I could only
surmise what was in the minds of the framers of the act at that
time. The theory apparently was that the demand for currency
would fluctuate directly with the volume of activity of business, and
as business increased m activity, it would increase its borrowings
on eligible paper, which, together with the gold, would supply the
necessary collateral for the Federal Reserve notes; and, as business
activity slackened or decreased, the volume of eligible paper held by
the banks would be reduced, and hence the volume of currency would
be reduced.
130417— 35----- $




It has been found, however, that there is nothing in the history
of the Federal Reserve System to warrant such a conclusion. This is.
the only country where there is a central banking system, outside o f
Great Britain, which requires collateral to be held back of the note
issue of the central bank. All of the new central banks which have
been established in recent years recognize that, in essentially a checkusing country, there is no necessary relationship between the use o f
currency and the volume of business.
We heard a great deal of talk about issuing currency with the
idea that, if that currency is issued in greater quantity than is now
outstanding, it would improve or help business. The direct spend­
ing by the Government of currency, from the standpoint of the actual
money in circulation, and the business activity created thereby, would
be no different than the same amount of money spent by the Govern­
ment as the result of its present method of financing; because you
cannot keep out in circulation more currency than is required by the
country to meet its convenience in doing business. The currency
comes right back to the banks and from the banks goes to the Fed­
eral Reserve banks and is destroyed. We have noticed that, from
the time of the bank holiday up until the present time, the amount
of currency in circulation has been reduced by about $2,000.000,000^
Mr. SPENCE. What is the total amount of gold held b y the Federal
Reserve, Governor?
Governor EccLES. I do not recail the figures. Do you have that,.
Dr. Goldenweiser?
Dr. GoLoENWEisER. Gold certificates held by the Reserve banks
amount to $5,400,000,000.
Mr. FoRD. $7,866,000,000 in 1934.

Governor ECCLES. That would probably include the gold held by
the Treasury as well. The Federal Reserve would not nave that.
Mr. SPENCE. The amount of gold reserves upon which the circu­
lation is based; what would that be?
Governor EccLES. The law requires a 40-percent reserve against
Federal Reserve notes in circulation. Those gold certificates, plus,
the Government bonds or commercial paper, or both, are held by the
Federal Reserve agent as collateral. In the absence of commercial
paper, it was necessary to accept Government bonds to make up the
60-percent difference between the 40-percent gold and the total o f
notes outstanding.
Mr. SrENCE. And this act is that 40 percent of the gold reserve
is the sole basis of the circulation?
Governor EccLES. Yes; 40-percent gold reserve is the only limita­
tion. There is also a reserve required against the deposits of the
Reserve banks, which is 35 percent in gold or lawful money.
Mr. SPENCE. And the circulation, based upon the gold now held,
would be two and one-half times that!
Governor EccuEs. So far as gold is concerned-----Mr. SPENCE). So far as gold is concerned?
Governor EociJas. Yes; there is almost suiBcient gold now to back
up the outstanding currency 100 percent.
Mr. SPENCE. As I understand, the Federal agent was the a^ent o f
the Federal Reserve Board in its dealings with the Federal Reserve



Governor EccLES. The Federal Reserve agent is the chairman of
the board of directors, and is appointed by the Federal Reserve
Board and not by the banks, and he is the person at the bank through
whom the Federal Reserve Board deals.
Mr. SPENCE. He, in a sense, represents the Federal Reserve Board
in dealings with the Federal Reserve bank; is not that the philosophy
of it!
Governor EccLES. That is right.
Mr. SPENCE. And he saw that the Federal Reserve banks complied
with the requirements of the Federal Reserve Board. How will
those functions be performed now!
Governor EccLES. Through the Governor and the chairman, who
will be one and the same. Instead of having a dual organization,
which creates cleavage and which is bad administration, it is pro­
posed to combine the two oSices. That is one proposal in the bill
to which there has been practically no opposition from any source.
The bill will save, in the operation of the Federal Reserve System,
about $400,000 a year.
Mr. SPENCE. But the functions that were performed by the Fed­
eral Reserve agent are still being performed, but the Board will
select the person to perform them %
Governor EccLES. One of tiie principal functions of the agent was
to hold the collateral as a sort of trustee against the notes which were
issued. He was responsible at all times to see to it that these gold
certificates and these Government bonds or commercial paper were
deposited with him in sufEcient amount to meet the legal require­
ments for the issue of notes.
Mr. SPENCE. Under the law, one Federal Reserve bank may redis­
count—it says under the orders of the Board and regulations pre­
scribed by the Board, may rediscount its paper in other Federal
Reserve banks. To what extent has that been taken advantage o f!
Mr. EccLEB. I could not tell you just to what extent I under­
stand, however, that in 1920 and 1921 there was some of that done,
when the reserves of the Reserve banks got down to practically the
legal limit and they were unable to extend further accommodations
and, at the same time, have sufEcient gold to meet the legal require­
ments for deposit and note-coverage. Do you remember to what
extent that was, Dr. Goldenweiser!
Dr. GoLDENWEiSER. In 1920, f r o m m e m o r y , a b o u t $250,000,000.
Mr. EccEES. How many banks were involved in the rediscount!
Dr. GOLDENWEISER. There were 11.
Mr. SPENCE. That provision, really, in effect, makes the Federal
Reserve bank a central bank, does it not!
Governor EccLES. It does so only to the extent of making the re­
sources of the system available for the benefit of all the member
banks, and that is all.
Mr. SPENCE. There is one other thing: I believe you said that you
thought that some policy ought to be prescribed with reference to
the administration of the bill, and you made a suggestion, or you
suggested an amendment. Will you tell us what that amendment
was, again!
Governor EccLES. I suggested that I thought that fixing the price
level as an objective would not be desirable, and as an alternative



I suggested that something like this might be better as a definition
of objective:
It shall be the duty of the Federal Reserve Board to exercise such powers
as it possesses to promote conditions making for business stability and to miti­
gate, by its inRuence, unstabilizing fluctuations in the general level of produc­
tion, trade, prices, and employment, so far as may be possible within the scope
of monetary action.

That is better, I feel.
Mr. WiLMAMS. That would be their duty even if you did not put
it in there, would it not!
Governor EccLES. The present law does not give them such a duty,
at all. The present law only provides for-----Mr. WiLMAMS. Ought it not to be their duty!
Governor EccLES. I do not know. The law has looked upon the
Federal Reserve banks as agencies to provide credit for agriculture,
commerce, and industry. The original act never contemplated the
Federal Reserve bank as a monetary factor, as I understand it.
Mr. CRoss. May I interject right there, that the testimony of the
members of the Reserve Board and some of the governors—they
testified that it was not their duty and they did not consider they
had anything to do with it.
Governor E ccLES. I think it was thought that, if credit was pro­
vided for commerce, agriculture, and industry, that is all that could
be done toward creating business stability.
Mr. WiLLiAMS. You think they made no effort along that line, at
Governor EccLEs. What is that!
Mr. WiLMAMS. You think they have paid no attention to the objec­
tive that you set out there, heretofore!
Governor EccLEs. I would not say that. Of course, the powers
of the Board have been limited, their authority and their duties----Mr. WiLMAMS. And they made no effort, at all, to stabilize business
conditions and mitigate the evil effect of fluctuating prices and
unemployment, and things of that kind!
Governor EccLES. I have only been on the Board, as you know,
for a very short time, and what the Board may have done is a matter
of record, and it would appear in the record, from the condition of
unemployment, the fluctuations of business activity, that whatever
may have been done was a long way from creating stable conditions.
Whether a condition of business stability can be brought about by
monetary policy, only time can determine; and, as I stated the other
day, monetary action has its limitations and has to be considered in
connection with the tax program and Government expenditures.
Mr. W iLM A M S. I d o n o t m e a n t o be u n d e r s t o o d to b e o p p o s e d t o
the s u g g e s t io n y o u m a d e h e r e . I h a d h a d th e im p r e s s io n t h a t w a s
t h e ir d u t y a ll r ig h t , a n d I s t ill t h in k , i f i t h a s n o t b een t h e ir d u t y ,
w e o u g h t t o m a k e i t t h e ir d u t y .

Governor EccLEs. I do not believe that under the existing law they
are required to carry out or to perform that function.
The CHAIRMAN. Well, the fact is, is it not, Governor Eccles, that
there was an attempt to incorporate specific directions of that type
in the original Federal Reserve Act, and finally, it was left out of
the bill.
Mr. FARLEY. Mr. Chairman, may I have an opportunity-----



The CHAIRMAN. Mr. Spence, will you yield to Mr. F arley ?
Mr. SPENCE. I just want to ask a question. Governor Eccies, do
you consider that this bill, if passed, will be an attempt by the Con­
gress to exercise its constitutional legislative function to regulate
the value of money 2
Mr. ECCLES. I should say that it would be a case of Congress dele­
gating to a body that power and that responsibility, as defined in this
statement that I just read. We often think of regulating the value
of money as having reference to gold.
Mr. SPENCE. Well, as a corollary to that, that would be regulating
the price levels, too, would it not!
Governor Eccies. It would be an attempt to regulate the price
level. I f these instructions or requirements are prescribed for the Fed­
eral Reserve Board the price level will be one of the objectives, but
not the only objective. Others will be stable production and employ­
Mr. SPENCE. Well, how far do you think you could go in obtaining
some definite objective as to the regulation of price levels!
Governor EccLES. The controlling of production and the fixation
of prices can tend to create whatever price level is desired.
By the operation of the National Recovery Act and the Agricul­
tural Adjustment Administration you can restrict production and
bring about a rise in prices; but it seems to me that the thing
that we are most interested in is to get a maximum of production in
the country as a whole and a maximum of consumption. That is far
more important than the price level.
In order to be able to get a maximum of production, it is necessary
to get a proper distribution, and the question of price naturaHy has
to enter into the problem. I do not know that I could add anything
to what I said when Mr. Cross was examining me with reference to
the problem of prices.
Mr. CROSS. May I a s k a q u e s t io n !
Mr. SPENCE. Go right ahead.
Mr. CROSS. Governor, you said that three factors come in there:
The question of price and production and employment. I f you
check the price level when the country was prosperous and when its
indebtedness was created, much of it fixed bv bonds and taxes, and
the cheap dollar compared to the present dollar that existed—if you
get a price level that is comparable to the price level then in that
period, is not that the very thing upon which depends both produc­
tion and employment! In other words, to get employment you
have got to get the price to where the producer makes a profit—a
probable pront, because not everybody makes a profit, of course, but
under good management, he can make a profit, and when he can do
that, he employs labor and in turn labor is given a purchasing
power and the country can function as a result of that, and you get
rid of your unemployment and you keep a stable product and you
keep a stable price level on the standard you take of some prosperous
Governor EccLEs. You know, from 1923 up to about 1929, we had
a fairly stable price level. Now, why was it that that stable price
level became an unstable price level and we got into the depression
we did!



Mr. CROSS. If you will let me answer that, if you put that as a
question-----Governor EccLES. I think maybe asking a question is the best way
for me to answer it.
Mr. CROSS. I would say the Federal Reserve Board fell down in
its duty, or fell down under the law as it existed—I could not say
it was a duty. But in addition to that, we did not have then the
securities act to control the wild speculative gambling that Jpok
place throughout the country on the stock exchanges.; Now, we have
controlled it largely through the laws enacted in the Seventy-second
Governor EccLES. You assume that, if the volume of money in
relation to total production is kept at a certain ratio, you would
thereby maintain a uniform or fixed price.
Mr. CRoss. Not a fixed price of anything!
Governor EccLES. No, I know; I mean a fixed index, uniform
prices according to some index. And you overlook, it seems to me,
the income velocity, which is an element as important in our economy
as is the quantity oi money. As I indicated the other day in reading
the quotations from the Brookings Institution report on our ca­
pacity to consume, there must be a more equitable distribution of
income than existed in 1928 and 1929, in order to keep up income
velocity and to prevent production capacity getting all out of bal­
ance or relationship with consumer buying power.
Mr. FoRD. In other words, Governor, if you have a national in­
come of $100,000,000,000, but if it was confined to a small percentage
of the people in the country, it would not accomplish the result of
wide spread purchasing power, would it!
Governor EocLES. It would only so long as those receiving this
income continued to spend or invest those funds, but you reach a
point where-----Mr. FoRD. A saturation point, in other words!
Governor EccLES. They no longer invest.
Mr. FARLEY. Mr. Chairman, may I ask the Governor a few ques­
tions about the bill itself!
Mr. SPENCE. When I get through; yes.
The CHAIRMAN. When Mr. Spence gets through, I will recognize
you immediately, Mr. Farley.
Mr. SpENCE. Governor, the maintenance of a stable dollar is some­
thing that is very greatly to be desired, is it not, because if the
dollar would raise 10 percent in value and buying power, the wealth
of the Nation would be raised that much. For instance, if there
was $400,000,000,000 of wealth in the Nation and the dollar raised
its buying power, or was increased 10 percent, that would reduce the
money value of the wealth of the Nation $40,000,000,000, would it
Governor EccLES. A stable price level is very desirable. I f I
knew of some way to maintain stable prices, and at the same time
maximum production, naturally I would be very much in favor
of pursuing that method. But prices are influenced by so many
factors, crop failures, for instance, prices of imported goods as they
are influenced by the variation in the exchanges—those are two
factors that we may have very little or no control over, and they all
enter into the price structure.



Mr. SPENCE. Now, in this bill we state a new policy, or new
standards, or new criterions, or new objectives to be attained. The
provision here in regard to the open-market committee says it shall
^et forth policies that, in the judgment of the committee, should
be followed with respect to the open-market operation of the Federal
Reserve bank. Now, if this is a delegation of constituted legislative
power to regulate money, would it not be necessary for the Congress,
in making that delegation to state some objective to be attained!
I have not gone into that, but I want to read a paragraph from a
decision of the Supreme Court in
—one of the " hot-oil " cases:
The Constitution provides that "a ll legislative powers herein granted shall
be vested in a Congress of the United States, which shall consist of a Senate
and House o f Representatives" (art. I. sec. 1). And the Congress is em­
powered " to make al! laws which shall be necessary and proper to carry into
execution" it general powers art. I, sec. 8, par. 18). The Congress mani­
festly is not permited to abdicate, or to transfer to others, the essential legis­
lative functions with which it is thus vested. Undoubtedly legislation must
^)ften be adapted to complex conditions involving a host of details with which
the national legis!ative cannot deal directly. The Constitution has never been
regarded as denying to the Congress the necessary resources of flexibility and
practicality, which wi!l enable it to perform its function in laying down
^policies and establishing standards, while leaving to selected instrumentalities
-the making of subordinate rules within prescribed limits and the determination
of facts to which the policy as declared by the legislature is to apply. Without
capacity to give authorizations of that sort we should have the anomaly of a
legislative power when in many circumstances calling for its exertion would be
but a futility. But the constant recognition of the necessity and validity of
such provisions, ana the wide range o f administrative authority which has been
developed by means of them, cannot be allowed to obscure the limitations o f the
authority to delegate, if our constitutional system is to be maintained.

I have not gone into that question, but do you not think there
ought to be some objective, definite objective placed in the law!
Governor EccLES. You mean as to price?
Mr. SPENCE. As to price level, the purchasing power of the
Governor EccLEs. By purchasing power of the dollar you mean
the price level!
Mr. SPENCE. The price level; yes.
Governor EccLES. I f the price level is placed in the law as an
objective for the Board to reach as a result of monetary action, and
the other factors are left out, we may get the result of having a
stable price level and not getting any of the other factors which we
want. I believe that the price level is less important than employ­
ment. I think the most important element, after all, is total pro­
duction, because that is the real measure of wealth. I do not
know what monetary policy could possibly be pursued to bring
about a fixed price level and maintain it ; I do not know how that
would be possible.
Mr. SrENCE. Well, the price level does have a very great relation
to the production, does it not ?
Governor EccLES. It may or may not. The thing that, after all,
has relation to production is the buying power of the people of the
country as a whole. When the national income is increasing faster
than production, prices rise and production is stimulated thereby;
and when the national income is diminishing, prices decline, and
production is diminished thereby.



Therefore, it seems to me that the problem of the national income
is a determining factor with reference to prices and production. So,
rather than an arbitrary fixation of prices, if we could get an in­
crease in the national income^ we would get an increase in pro­
duction and an increase in prices; and that is why in 1929, after
we had had a period from 1928 to 1929 of stable prices—because
we had had reasonably full employment during that period—and
then our national income started to diminish and we got into a
cyclical depression, prices went down and production went down.

Mr. SPENCE. Do you think the changing price level comes from
conditions over which we have no control 2

Governor E ccL E S. Over which we do not have anything like
complete control. We possibly can exercise some control through
monetary action; but I do not think that we can exercise absolute
control, unless we undertake to fix prices, by legislation, and attempt
to regulate production accordingly. Even then, I doubt that we
could maintain stability of the price structure as a whole.

Mr. SPENCE. The power given to the Congress, in the Constitu­
tion, to regulate the value of money is a power you do not think
can be exercised!
Governor EcoLEs. I do not think it can be exercised to the extent
o f maintaining a uniform price level, and at the same time keeping
up maximum production.

Mr. SPENCE. Well, a good many of our ills have resulted from
changing the value of the dollar and the fluctuating price level.

Governor Eccuss. Oh, yes; but the changing value, as I say^ has
been brought about primarily through the decrease in the national
income, which was brought about through the inequitable distribu­
tion of income. That is where the trouble commenced very largely.

Mr. SPENCE. How far do you think legislation can go to stabilize
the value of the dollar? Suppose we set the objective that we might
not hit, but could we come anywhere near it!
Governor E ccL E S. I do not know how. Certainly, interest rates
could not be very much lower than they are now. The volume of
money that is not in use is very great, and to increase it, it seems to
me, would accomplish nothing toward either price raising or increas­
ing business activity.
We have a potential increase of $20,000,000,000 in the supply of
money. The excess reserves provide that. True, if Government
spending were greatly increased, you would get an increase in the
price level, because you would get an increase m the national income,
and you would get an inflationary or reflationary effect as the result
of that increased spending.
Mr. SpENCE. That would be an artificial condition!

Governor E ccL E s. It would bring about the same result as an
equal volume of spending by our people of their own funds, or their
being willing to borrow and spend a like amount. That would in­
ject into the circulation an increased amount of money and increase
the velocity of money and raise the price level, and the buying power
of the people would increase through that spending, and production
would then have to increase to meet the increased buying power, and
with the general increases, prices should tend upward.
Mr. CROSS. May I ask a question!
The CHAIRMAN. Mr. Farley is next.



Mr. SPENCE. There is one question more. I have gotten so many
letters from State banks—there is a provision in the law that you
can waive the capital requirements of the State banks and then give
them such additional time to conform to the requirements as the
Board may, by regulations, prescribe. A good many of them feel
that they ought to know just how long they have to comply with
these requirements, when they become members of the Federal Re­
serve System, with the ultimate purpose of remaining in.
Governor EccLES. I suggested an amendment to that the other
day that would give the Board the power not only to waive the capi­
tal requirements, but all other requirements, and also to permit banks
to continue with less than $50,000 capital, if it is adequate in rela­
tion to their liabilities. So there would be no time limit if a bank
with $25,000 capital did not need a greater capital in relation to its
deposit liability.
Mr. SPENCE. Well, I suppose it works both ways.
Governor EccLEs. That was the suggested amendment to liberal­
ize that section.
The CHAIRMAN. All right, Mr. Farley.
Mr. FARLEY. That is right in line, gentlemen, with what I had in
mind. In section 202 you provide-----Governor Eccuss. Where!
Mr. FARLEY. Section 202, that the time in which this shall become
effective is July 1,1937. But why is there any objection to writing
into the law 1940, for instance!
Governor EccLES. That is not in the banking bill of 1935. As I
understand it, that is in the banking act which was passed in 1933.
Personally, I see no reason for an extension of time in lieu of the
provisions that are being made, in order to make it possible to admit
all the State nonmember banks which are insured. I believe that it
would be in the interest of those banks and the System as a whole to
be members of the Federal Reserve System, if this legislation broad­
ening the eligibility features is passed.
Mr. FARLEY. I wanted to ask this, because in the State of Indiana we
have, in round numbers, 420 banks, and only six now are in the Federal
Reserve, and I have the fear that, if they are compelled to qualify by
July 1,1937, there will be many of them left out. Do you not thinK
that, if the insurance feature is withdrawn from these banks, because
they have not qualified, it is just the same as closing the bants!
Governor EccLES. Why do you think they cannot qualify!
Mr. FARLEY. Well, they might be able to qualify m a little addi­
tional time, but if the rules governing the examination of these banks
continue as rigid as they have been ior some months past, they prob­
ably would not be able to qualify, because they have a lot of frozen
assets yet.
Governor EccLES. I am sure that, so far as the present Federal Re­

serve Board is concerned; they realize fully that situation, and it is
their expectation to take into the System ail, or practically all, banks
which are insured. It is for that reason that we are proposing this
amendment to the Federal Reserve Act.
It is true that, as a condition of admission to membership, the Fed­
eral Reserve Board has rather rigid regulations, which are not require­
ments of law. They require banks to charge off all paper that is
classified as a loss, by the reserve examiners, and all depreciation on



bonds except those in the four highest classifications. However, the*
Federal Reserve Board, under this provision, would be expected to
give the same consideration to the bond accounts of these banks that
is now given to the bond accounts of existing member banks both by
the Reserve Board and by the Comptroller's ofRce.
Mr. FARLEY. Well, the inference, then, is that you mean to under­
take to liberalize them; and I do not mind saying that, from the
impression I have of you and your public work, I should not be much
afraid that would not be done.
Why object to writing it into the law and making it 1940! I have
in mind a case where I tried, a year and a half ago, to get a bank into
the Federal Reserve System, and they were declined, because they had
something like $360,000 of what they counted doubtful paper. Now,
even in these hard times, that bank has been able to reduce that now
over $200,000, and collect-----Governor EccLES. When was that, you say!
Mr. FARLEY. About a year and a half ago.
Governor EccLES. With the guaranteeing of bank deposits by the
Federal Deposit Insurance Corporation and with help from the Re­
construction Finance Corporation, with reference to capital struc­
tures, providing funds at 3% percent for preferred stock, the banking
problem is very different than it was. As a practical matter, it seem&
to me that the banks which are insured by the Deposit Insurance Cor­
poration should be admitted to membership in the Reserve System.
There would be no point in making requirements upon those banks
which would exclude them from the Reserve System, and thus exclude
them from the benefits of the Deposit Insurance Corporation, and
possibly close them. That would be a foolhardy thing to do.
So long as the depositor is protected by the Federal Deposit Insur­
ance, there should be an effort made to get all of the banks into the
System, so as to have unification of the banking system and thus be
able more effectively to carry out a monetary policy; and by that
means, also, greatly to assist in dealing with deflation as well a&
It is true that by far the greatest decline, both as to the percentages
of deposits and as to total deposits, was in nonmember State banks,
practically twice as great as it was in the member banks.
Mr. GOLDSBOROUGH. I did not catch that.
Governor EccLES. I said the shrinkage in deposits of nonmember
banks, the deflation in nonmembers banks from the peak of their
highest deposits down to their lowest deposits—in other words, the
deflation of nonmember State banks—was almost twice as great as
the deflation in the deposits of member banks.
That was a very great hardship on the communities which thos&
banks served, and the bank failures were far greater in the case of
nonmember State banks than in the case of member banks, both State
and national, and that of course-----Mr. GOLDSBOROUGH. I would like to inject that thau was not the
condition in the State of Maryland; it was the failure of the large
member banks in the important cities which carried the reserves o f
the country banks which burst the nonmember country banks.
Governor EccLES. I think there are exceptions all over the United
States; but what I am speaking of is the United States as a whole^
I am taking the entire country.



The CHAIRMAN. Somebody in the Senate. Governor Eccles, and I
believe it was Senator Norbeck—I never ran it down like I should
possibly have done—gave the figures, as I remember, for the year
1931, which show that the deposits, the casting up of accounts, showed
that there were as many deposits tied up in the failed national banks
as there were in the State banks; that I think the figures would show
that, in 1931, there were more deposits tied up in failed national
banks in the State of New York and in the State of Pennsylvania
than there were in the State banks. I would not say that I could not
be mistaken in those figures, because I am not an authority, but that
is my recollection.
But let me ask you this question: What happened was that the
failures first took place among the smaller banks; and of course that
involved, at least m number, the State banks more than the national
banks, and the nonmember banks probably more than the member
banks; but when the fire spread from the back alleys and side streets
to the mansion on the front and to the important centers, and began
to involve the large banks, they were not helpless; they did not stand
by and let the fire ruin them, but they came to Congress and had us
open the Treasury of the United States to them.
So that it seems to me that an appraisal of that situation should
be taken in the light of the fact that the processes were started by
resort to the Federal Treasury, and never allowed to reach that end.
So we do not know what the complete picture might have shown.
Mr. GOLDSBOROUQH. I think it ought to be stated here, as well as
any other time, that another direct cause of the failure of the small
banks was the fact that the large national member banks in the great
centers, through the years immediately preceding 1929, unloaded se­
curities on those banks, practically all of which securities afterward
were shown to be sour.
Governor EccLES. I have pointed out the effect of the bond acount
when I was upholding the real-estate loan provision.
With reference to the chairman's remarks, I am not here making
any odious comparisons between member and nonmember banks, for
the purpose of putting the nonmember banks to any disadvantage. I
am only trying to argue for the need of all banks to be members of
the Reserve System and have available to them borrowing and redis­
count facilities of that System, as well as of deposit insurance, so
that we may avoid fires starting in the back alleys, et cetera; because,
after all, the net result of the conflagration of the bank failures is
finally to burn down the System, if it is not stopped; and in the
process it is not only the bankers and the stockholders of the banks
that we are directly or particularly interested in, but it seems to me
we are interested in this problem as the duty of Congress and as the
duty of ofRcials who are responsible for our money situation.

Mr. GOLDSBOROUGH. Mr. Eccles, right there. Yesterday, I think,
you stated that the stockholders in the Federal Reserve System
receive 6 percent on their investments!
Governor EccLES. That is right.
Mr. GOLDSBOROUGH. But the Federal Reserve System, in turn does
not redeposit those funds in th
banks; so that, in

case of an investment which
Federal Reserve
System, they only get interest once; whereas on the ordinary in­



vestment, where they get a redeposit, they may lend the same
money 10 times. Is not that the reason why they object to coming
into the Federal Reserve System, because they do not get the ben­
efit of the deposits which they can reloan!
Governor E c c L E S . As I understand it, most State laws provide
that State banks—whether members or nonmembers they are sub­
ject to State laws—are required to maintain reserves, either in
money or in balances with other banks, or both, of a certain per­
centage of their deposits. Now, I know the requirement for State
banks in two of the Western States that I am familiar with is 15
percent of demand deposits and 10 percent of time deposits, which
must be carried in cash or with other banks.
Mr. GOLDSBOROUGH. Yes; but that does not answer my question.
I do not know whether you want to direct your attention to my ques­
tion, but what I asked was, whether or not. as a matter of tact,
when one of these small country banks enters the Federal Reserve
System and gets its 6 percent, that is all the interest it gets on
that particular investment. The investment is not redeposited with
them so they can loan it over again, as the ordinary investment is
which they make.
For instance, if they loan me $5,000, they expect me to simply
take a bank book from them, so they can reloan that same money.
Governor EccLES. When you buy a Government bond, the pro­
ceeds are not reinvested, or when they buy other bonds that are
marketable, we will say, or listed on Mie New York Exchange, or
when they buy Canadian bonds or other bonds, those funds are not
redeposited with them.
Mr. GOLDSBOROUGH. They are not redeposited with the country
bank, but they are redeposited with some bank!
Governor E ccL E S. That is correct.
Mr. GOLDSBOROUGH. But the small banks are not loaded up with
Government bonds.
Governor EccLES. Their percentage of Government bonds is pretty
high; it is much higher tnan it was, because there was no other
place-----Mr. GOLDSBOROUGH. When one of these national banks buys
$100,000 worth of bonds, all the Government gets is an entry by
some $25-a-week clerk to the effect that the Government has depos­
ited or has a deposit in that bank of $100,000. That is what
The CHAIRMAN. Just one moment, in connection with what has
been said, I think it might be well to call attention to the situation:
It means more to the small bank, the bank of small capital, to tie
up 6 percent of its stock in the Federal Reserve bank man it does
for the large institution to carry that burden, it would seem to me.
The little banks, under the old order, were permitted to carry their
reserves in a correspondent bank, upon which they were accustomed
to draw interest, which was no little thing to small banks. That
operated in this way: In the South, for instance, or in the West,
the demand for credit is seasonal. When marketing time came and
collections came in, the bank had a plan by which, it could use its
surplus funds, to put them to earning, by carrying them to the
eity bank; and that, in turn, gave them a large borrowing privi­



lege during seasons when the demand for loans was accentuated*
So that was an advantage that they enjoyed.
In addition to that, the small banks, members of the system, had
to surrender their right to charge for the services rendered in re­
mitting checks, and mat is, of course, a big item to any small bank
where the problem of overhead is great, and where the volume of
business is small, and, of course, that requirement kept many banks
from joining the Federal Reserve System. And those banks that
were automatically taken into the Federal Reserve System—the na­
tional banks—conducted a war against the efforts of the Federal
Reserve Board to take away such earnings, as long as they were able
to carry on the Rght. They Rnally lost through legislative action and
processes that I will not take the time now to review, but which were
not altogether justiRable, in my view of the matter.
You may resume, Mr. Spence.
Mr. SPENCE. I want to address-----Mr. FARLEY. There is one other question I want to ask, in connec­
tion with your statement of the wide difference between the assets
of the nonmember banks and the member banks. Was that arrived
at by the same committee's examination!
Governor EccLES. I do not just understand your question.
Mr. FARLEY. You said, a few moments ago, that the nonmember
banks had a much larger amount of worthless assets than the member
banks. Did the same group examine the nonmember banks, or arrive
at the same conclusion !
Governor EccLES. You must have misunderstood me. I did not
make a comparison between the assets of the member and nonmember
Mr. FARLEY. Then I misunderstood you.
Mr. EccLEs. I made no comparison between the assets, because I
am not familiar with the condition of the assets of the nonmember
Mr. FARLEY. I thought you said that the losses were greater in the
nonmember banks than in the member banks, or their portfolios were
not so good.
Governor EocLES. N o; what I said was, that the shrinkage in de­
posits and the liquidation at nonmember banks was far greater than
that at member banks; that! the deposit deflation, as tne result of
bank closings and credit contraction in the nonmember banks-—
Mr. FARLEY. I get the idea.
'Governor EccLEs. Was about twice as great as that in the member
banks, in proportion to the total deposits of each group of banks.
Mr. FARLEY. I have a letter in which the Indiana Bankers' Asso­
ciation makes this very emphatic statement:
The Indiana Bankers' Association is unalterably opposed to central banking
in any form, and especially to a central banking system in which credit grant­
ing and management will be vested in any political body.

That gets back to the question of control. You thought^ the other
day, there was no danger of anything of that kind happening.
Governor EccLES. T see no reason to expect the Federal Reserve
System, under this bill, to be any more subiect to political control
than has been the case in the past under existing legislation.
Mr. FARLEY. I remember your answer. There is another item I
would like to get a little information on. I have read your speech



at Columbus over several times, and it is a very excellent presentation
of the subject.
I personally think you never can have a price level until you con­
trol all products of every kind and description, from the farmer to
the market, or to the consumer. I do not ask you to say whether you
do or not concur in that suggestion. But now, about this provision by
which you are going out and loan on all types of real estate, making
provision for the rediscount of those securities at the Federal Reserve
bank, and then permit the Federal Reserve itself to issue currency
against all securities. It seems to me that the wildest inflationist in
the world could not have had a better term than that. When you
take on anything and issue securities—and issue currency against
those securities, it seems to me it is just like Germany did at the end
of the war. Is there anything in that!
Governor E ccLES. I though I had answered that point. That
question has been asked a number of times. I will try to answer it
very brieHy and cover the subject. Three phases of this legislation
have a bearing on this matter: Changing eligibility requirements,
permitting long-term real-estate loans, and eliminating collateral
requirements for Federal Reserve notes.
In the first place, I think that you will probably agree that the
amount of Federal Reserve notes that go into circulation has no
relationship to the collateral requirements. I attempted this morn­
ing, and yesterday, and I think the day before yesterday, to explain
why that is the case.
Mr. FARLEY. I f that is already in the record, Governor, it is not
necessary to repeat it.
Governor EccLES. With reference to the question of eligibility,
what we are proposing is to permit the banks, subject to rules and
regulations by the Board, not only to discount eligible paper, but
also to make advances to member banks on notes of the member
banks, secured by any of their sound assets. That does not mean
that the Reserve bank would have the power to discount a 20-year
mortgage. What it does mean is this: That the Board could, by
regulation, permit the Reserve banks to loan to member banks on
bills payable o f the member banks, for such---- Mr. GoLDSBpRouGH. A promissory note; that is what you mean!
Governor Ecc^Es. That is right, A promissory note, secured by
bonds, mortgages, collateral loans, on a basis to be determined by
each Reserve bank to be a sound basis for the loan.
Those loans would be made for periods of 90 days or 6 months,
according to the regulations that the Reserve Board may make with
reference to maturities. The member banks in the aggregate do not
borrow for the purpose of reloaning* What is usually done is that
the banks borrow to meet a shrinkage of deposits, the shifting of
funds back and forth, which always happens seasonally under normal
conditions, and it is usually seasonal borrowing.

If an emergency situation developed, th^ only way that the fire
of deflation and bank closing can be stopped is by the banks being
able to meet the demands of their depositors, and when they are able
to do that, the depositors do not want their money. But when the
depositors find banks are unable to meet the demands and banks
start to close, it is a progressive condition of deflation that develops;
*,nd, therefore, this eligibility feature becomes effective.



By the way, I believe that the governors of the Federal Reserve
ibanks and most of the member banks favor that requirement and
recognize the advantage of it in protecting the banking system. The
banking system, as a whole, would have to expand its credit by
$20,000,000,000 before there would be any occasion to do any borrow­
ing from the Reserve System, on the basis of present excess reserves.
The amount of real-estate loans to be made is not determined by
the member bank's ability to borrow from the Federal Reserve bank,
but by the percentage of time deposits, which, in itself, puts a limi­
tation upon the expansion of real-estate loans.
I do not know that I answered your question-----Mr. FARLEY. Well. I have 2 or 3 other little questions I want
to get a little light on. Does the practice still prevail of buying
foreign bonds?
Governor EccLES. I do not know to what extent. I would think,
ihowever, that if experience is any teacher, there would not be any
great tragic today in foreign bonds. There are, however, certain
foreign bonds, such as the Canadian issues, if that could be consid­
ered foreign, and Australian issues, and British bonds, and I think
the bonds of Finland, and Poland, and Scandinavian bonds, which
maintain their strength, their marketability, and have a very much
better record than many domestic bonds oi our cities, and counties,
and States.
Generally speaking, foreign bond accounts of banks have been
disastrous to them, particularly some of the South American issues
and some of the European issues.
Mr. FARLEY. Would you care to state whether they need the Postal
Savings System now, (governor?
Governor EccLES. You mean is it a necessity!
Mr. FARLEY. Well, is it a good business proposition!
Governor EccLES. For the Government!
Mr. FARLEY. Yes; for the Government!
Governor EccLES. It is a good business proposition to the extent
that they have been able toget money for 2 percent. I do not think
that it is necessary for the Government for its own interests. I think
the Postal Savings System has operated for the convenience and
benefit and security 0 1 citizens who prefer to deposit up to $2,500
with the Government through the Postal System.
Mr. FARLEY. Well, would the guaranteed bank-deposit proposi­
tion-----Mr. EccLES. It is less needed*
Mr. FARLEY. I think it is obsolete and ought to be put in the place
where the interest that would be collected would be so low that
nobody would even tiy it.
Governor EccLES. I know that bankers, generally speaking, feel
that there is a competitive relationship, and I think many of them
would like to see the Postal Savings System eliminated^ and feel
that it is unnecessary in view of the Federal Deposit Insurance Cor­
poration insuring $5,000 accounts. I do not believe it is very im­
portant, however, because the total funds in the Postal Savings Sys­
tem I think are somewhere around $1,000,000,000^ and that is a com­
paratively small percentage of the total deposits of the banking



Mr. FARLEY. On page 69 of this act, in paragraph (g ), we wrote
into the law in 1933 that bank directors could not borrow from their
own banks. Has any good purpose been served by that act? In
other words, do you not think that it is time that we liberalized
Governor E ccL E S. It is not bank directors, it is bank oiBcers.
Mr. FARLET. Well, bank oiBcers.
Mr. Ecauss. Yes. I think it is a very constructive piece of legis­
lation. There is not any question that, in principle, oiBcers of a
bank should not be in position to loan to themselves funds of the
bank. It may be very dilBcult for an oiBcer to be impartial in deal­
ing with himself.
However, to the extent that oiBcers of banks have loans in banks,
which were made prior to the passage of the legislation, those loans
should be treated, it seems to me, with due regard to the ability of
the borrower to meet the obligations. There is a time limitation
provided in the law, which I think is July 1935.
Mr. FARLEY. June 16, 1935.
Governor E coL E s. June 16, 1935, and, of course, there are many
oiBcers' loans in banks that it has been impossible, during this period
of depression, shrinkage of values, and lack of market for securities
to meet by June 16, and it is proposed in section 3 of this bill that
that time he extended for 3 years.
Mr. FARLEY. Three years from June 16, 1935 ?
Governor EccLES. Yes.
Mr. FARLEY. Now, would it not be inRnitesimally better to pro­
hibit bank oiBcers from borrowing outside of their own bank, and
thus compel an oiBcer to do his borrowing from the bank with which
he is connected, and if desirable and with the approval of the
majority of the board, to the end that his board may be able at all
times to know what he is doing, and also place some responsibility
on the board. Is not there this danger, that to permit the executive
oiBcers to borrow outside of their own banks could prove very dan­
gerous! There is nothing to prevent an oiBcer from an inland bank
to borrow excessively from a large and distant city bank, for which
he may furnish proper security, but which might involve him beyond
the point where his directors would consider it safe for him to g o !
Governor ECCLES. There is in the law a provision that requires
oiBcers who borrow outside of their own banks to report those loans
to the chairman of the board, or the president of the bank; and if it
happens to be the president or chairman himself, he is required to
report to the board of directors.
I feel that oiBcers should be prohibited from borrowing from their
own banks, and I feel that they should also be required, if they
borrow outside, to report their borrowings, as now provided in
the law.
Bank oiBcers in the past have always been required to report their
loans within their own bank to the board of directors, because it is
the duty of the board of directors o f a bank to approve all loans,
and, therefore, oiBcers' loans in their own banks have been reported
to the boards of directors; but we have found that not only oiBcers'
loans but many loans to directors have, in instances, created real
banking diiBcufties, and I cannot help but feel that, in view of the rec­
ord of the past, the prohibition now imposed should be continued,



with the extension of 8 years for those oRicers' loans which cannot be
paid at the expiration of the period on Jnne 16 of this year.
Mr. FARMY. Have you already put in the record whether you
think we have money enough in circulation or not!
Governor EccLEs. I f I have not, I am willing to.
Mr. FARLEY. In your speech at Columbus, you stated there were
$24,000t000,000 in circulation. Do you think it would be a good
thing if we increased that circulation!
Governor EccLES. How is it possible to increase it!
Mr. FARLEY. Why do we not use the authority we gave the execu­
tive department to issue $8,000,000,000, to take up some of these
bonds bearing interest!
Governor EccLES. How would that increase circulation!
Mr. FARLEY. Well, it would give these banks the actual cash
instead of bonds.
Governor EcctES. What would they do with the cash! They
would immediately send it back to the Federal Reserve bank and
it would be in the Reserve banks as their excess reserves, and actual
circulation would not change. The banks would have, in lieu of
Government bonds, $3,000,000,000 additional excess reserves.
Mr. FARLEY. I was in a bank not so long ago and the banker made
this statement, and he said he wanted to sell $80,000 worth of bonds,
and he could get immediate credit without any trouble if he called
Chicago and New York, but he could not dispose of them. He
wanted the money on the bonds he had in his safe—
Governor E ccLE s. You mean Government bonds!
Mr. FARLEY. Yes.
Governor EccLES. You mean he could not sell Government bonds!
Mr. FARLEY. That is the statement that he made—that is, without
a little sacriSce at that time.
Governor EccLES. He is misaken. He could have gone to the
Federal Reserve bank and borrowed par on those bonds and possibly
at a discount rate of 2 percent. I f they were 3-percent bonds he
would have gotton more than the interest on his loan. He could
have borrowed the funds at par from the Reserve bank.
Mr. FARLEY. In your judgment, we do not need any more circulat­
ing medium right now!
Governor EccMS. In my judgment, you cannot possibly force out
and keep in circulation more currency than you have now. You
may substitute------

Mr. CRoss. Right there, may I ask a question!

Governor, if mat be true that this money would go right back—
if that be true—and if you were to take tne $3,000,000,000 that he
refers to and buys bonds with it and you could not keep that money
in circulation, it would go right back out o f circulation!
Governor EccLES. That is right.
Mr. CRoss. That is unquestionably true, is it!
Governor EccLES. There is no question about it.
Mr. CRoss. Why not pay off all of the Government bonds and get
rid of paying any interest—because that would be inflation itself!
Governor EccLBS. Here is what would happen: We have out­
standing some twenty-odd billions of dollars and Mr. Cross asked
the question, why do we not do that, and I think I should explain



that such action would simply increase the reserves of the banking
system by the amount of Government bonds which were purchased
with currency. The currency would go out, if it was $10,000,000,000 or $20,000,000,000 or $3,000,000,000, whatever amount the Govern­
ment paid out in currency to retire its bonds; but the currency would
immediately go into the banks and from the banks into the federal
Reserve banks and be destroyed, and you would just have additional
reserves, additional excess reserves.
The CHAIRMAN. Do you not think this bill rests upon the theory
that it is necessary to control the excess reserves, because of the
fact that it would have a bearing on the circulation ?
Governor EccLEs, Yes. You get to the point of increasing the
reserve requirements a sufBcient amount to extinguish the excess
reserves created by the amount of the Government bonds retired.
Mr. GOLDSBOROUGH. That is when the banks really begin to 6ght,
is it not ?
Governor EccLES. Now, let me follow that point through and see
what the situation would be. In the first place-----Mr. GOLDSBOROUGH. Can I just carry out the question so vou can
answer this too! Have we not actually given the banks over
$13,000,000,000, and if we undertake to pay the bonds off in the way
indicated by Mr. Cross we would simply be taking away from them
what we have already given them!
Governor EccLEs. The thought is that you are giving the banks
an interest payment that is unnecessary and is therefore a subsidy;
and that, by the Government paying its bonds in currency and thus
increasing the reserves of the banks by the amount of Government
bonds retired, it would be necessary to increase the reserve require­
ments by that amount in order to extinguish the reserves; otherwise
this operation could carry possibility of credit inflation to almost
unknown heights.
The CHAIRMAN. You mean by that that the release of that cur­
rency would tend to bring about inflation, but there would be under
this bill the power ih the Board to control that tendency or defeat it!
Governor EccL E S. It would have to get started first. Of course,
the $2,000,000,000 that we now have in the excess reserves should
tend to do that, and it has not done it. But following out the ex­
tinguishing of these reserves, that would close thousands of banks
for this reason: About 39 percent of the total loans and investments
of banks is represented by Government bonds. Therefore, if the
bonds, we will say, which are held by the banks are retired, it would
mean that the reserve requirements would be increased by the amount
of Government bonds that are retired. Some banks have only 10
percent, and that is particularly true of nonmember State banks:
and, of course, if this only applied to the member banks, you would
destroy the Reserve System, because they would all leave it and
become honmember State banks. That is one thing that it would do.
I f all the banks were members of the Reserve System, and the
principle of increasing the reserve requirements by the amount of
total bonds that were retired through currency were put into effect,
a bank that had 10 percent of its assets in Government bonds would
be required to increase its reserve requirements, we will say, by 39
percent. That would mean that that bank would have to Hquidate
the difference between the 39 percent and its Government bonds,



unless you simply would say to the bank that its reserve requirement
increases only by the amount of the Government bonds taken up with
currency; in that case the bank that had the largest amount of Gov­
ernment bonds would suffer the greatest loss of earning assets and
would have the largest increase in reserve requirements. This would
be thoroughly unworkable.
For the time being, it does not seem to me that is the alternative
at all, because it would create a condition that would do anything
but make for recovery. It would create a condition that would be
terribly deflationary. It would put the banking system in the posi­
tion that you do not want to put it in. After all, whether we like
the system or not, we have it today; and to make a change of this
sort would be so revolutionary that it would bring about, as I said,
a condition of great deflation.
Mr. HoLMSTER. Would it not, incidentally, scare every sound busi­
ness man to death !
Governor E ccLES. I say, without question, that it would bring
about a condition that would be almost as bad as the bank holiday.
Mr. HoLLiSTER. Which would be reflected immediately in decreas­
ing employment, would it not!
Governor EccLES. It would close up thousands of banks, because
there is not any question that you cannot take away from the banking
system 39 percent of its present investments, when we all know that
they are not operating today very proEtably-----Mr. Caoss. Governor, if tnat should happen-----Mr. HoLLiSTER. Let him finish, please.
Governor E ccL E s. We have not taken a most important feature
into account, and that is the service which the bank renders. I f a
bank has to carry reserves equal to its demand deposits, why on
earth would a bank take demand deposits and become the book­
keeper for the community funds, for eveiy individual that carries an
account, and act as a collection agency Dor the purpose of clearing
and facilitating individual business transactions from all over the
Np,tipn, unless that institution made up by service charges, what it
lost through having to carry increased reserves by the amount of
Government bonds retired with currency! This would be anything
but popular with the people of this country.
Mr. GOLDSBOROUGH. The service charge would be assumed by so­
ciety, of course. The Government would assume the service charge!
Governor E ccL E s. Of course, and that is exactly what is being
done today through the Government paying this interest on its
bonds. That means that the service charge is being assumed by
Mr. GOLDSBOROUGH. In other words, you agree that bonds—it is
not necessary for the Government to issue bonds; in other words, to
borrow money, it is just the same as the Government issuing a circu­
lation medium, is it not!
Governor E ccLES. As a mechanical proposition, yes. But after
all, we have established a method of financing, not only in this
country, but in every other country—Russia is the only excep­
tion-----Mr. GOLDSBOROUGH. WelL we do not have to do things that are
wrong simply because somebody else does it.



Governor E ccL E s. Whether it is wrong or not, is a question. I am
pointing out what are the customs, what are the practices, and to
make a change, as proposed, which is revolutionary, would destroy
confidence and so delay and retard recovery that I do not think it is
desirable, and I do not believe that there are any particular advan­
tages or arguments for the retirement of Government bonds by the
issuing of currency.
It may be interesting to see just what the Government is paying
the banks. There have been some very exaggerated statements
made with reference to this subject, and it has been claimed that
the banks were getting as much as $1,000,000,000 a year subsidy in
the form of bond interest.
Mr. GOLDSBOROUGH. You are the only one that ever has called that
by its true name, subsidy. We have never heard that before. You
cannot End a metropolitan daily in the country that has the guts
to call it a subsidy. You are the only one who has ever had nerve
enough to call it by its right name.
Governor EcOLES. Society, then, is paying the banking system
for a service—and you admitted that it was necessary that society
should pay for the service which the banking system renders the
people and communities-----Mr. GOLDSBOROUGH. Yes; but they should pay it directly and not
by the banking system. That is the bunk, and if the public under­
stood what the banking system was, if the public knew that the
banks were allowed to loan the same money 10 times, they would
not exist 24 hours, because Congress would be forced to change
the law.
Governor EccKES. I do not know that the banking business has
been the most desirable or proRtable, even with all of the subsidies
and privileges you claim it gets.
Mr. GOLDSBOROUGH. Your reasoning is that, when deflation starts
there is no way on earth to stop it!
Governor E ccL E S. I would not go that far.
Mr. GOLDSBOROUGH. I f you are on a 100-percent basis, you could
not have deflation, because the money would always be in existence.
Governor EccLES. I think that, mechanically, inflation is far more
easy to control than is deflation.
Mr. GOLDSBOROUGH. You cannot control deflation under our system,
and you cannot do it for this reason: That the creation of money
amounts simply to the extension of credit, and whenever the banks
start—when the banking system starts to collect its debts, it imme­
diately decreases the circulation medium, it immediately causes a
fall in all values, and it immediately causes the calling m of other
debts. You just cannot stop it when you once start it under our
system of fractional reserves.
Can I illustrate that in this way? In 1920 a very distinguished
Member of this House, who is now on one of the boards down town,
came to speak for me in my district. He said he had just had a
talk with Mr. W. P. G. Harding, who was then Governor of the
Federal Reserve Board. Cotton was then 30 cents a pound. He
said Harding had told him they were going to bring the price o f
cotton down to 25 cents and stabilize it. I said, " My G od! If you



ever start that, you can't stop it." And cotton did not stop until it
got down to 5 cents a pound. That is what happened.
Mr. FoRD. Mr. Chairman, the Governor was going to read some­
thing that I am very much interested in-----The CHAIRMAN. Yes; we are all interested in that.
Governor EccLES. I had a memorandum on this subject, because I
had anticipated that that question might be discussed. With refer­
ence to the general opinion that banks are being paid $1,000,000,000
a year by the Government in interest, that is a greatly exaggerated
statement. The total interest paid on the national debt during the
calendar year 1934 was $817,000,000. Now, the banks, under the
most generous estimate that you can figure, taking the bonds that
they had, received about $260,000,000. And these are member banks.
Figuring all banks, $320,000,000 is the maximum.
If the refunding operations of the Government continued until
the holdings of the banks were converted into securities, bearing
the current average yields, the interest received would fall to
Now, it must be remembered that there are expenses in connection
with the issuance of currency and keeping it in circulation; and it
may be interesting to note that the cost of keeping the greenbacks
and notes of the United States in circulation today is more per
annum than the present rate that the Government is paying on its
180-day bills.
Mr. GOLDSBOROUQH. I f they are entitled to some further consider­
ation, do you not think it is a shame that we are refunding and
giving them less interest!
Governor E ccL E S. I am not arguing for consideration. I am
pointing out the diCiculties with no advantages of making the ad­
justments which you propose and which would be revolutionary, of
the whole banking and monetary system, and I think, at this time,
it would be disastrous.
Mr. HANCOCK. Will the cost of keeping the greenbacks out com­
pare with the cost of issuing the 180-day bills ?
Governor EccLES. It is estimated here about Rfteen-hundredths of
1 percent per annum on the greenbacks, and the 180-day bills were
on the basis of eleven-hundredths of 1 percent, about one-tenth of
1 percent, which is less than the cost of keeping the greenbacks out.

Mr. HANCOCK. Where is the cost in keeping the greenbacks out!
Governor EccL E S. The destruction is rather rapid and they have
to be reprinted, and the cost of shipping them out and shipping
them back is something. Then there are insurance charges and ex­
press charges and there is personnel accounting, and other expenses.
Mr. HANCOCK. Does that same cost ratio apply to the Federal
Reserve notes!
Governor E ccL E s. I do not know what that cost ratio is. Do you,
Mr. GoEDENWEiSEH. It is less than that, because of the fact that
the denominations are large. In the Federal Reserve notes there
are no $1 bills.
Mr. FARLEY. Mr. Chairman, I read into the record a while ago a
rather emphatic protest from the State Bankers Association of In­
diana, and just for the Governor's benefit I want to read just a little



paragraph from the second largest national bank in the State of
Indiana, and which; by your grace, survived all of the storms and
is still a wonderful institution:
We might say we have given the whole bili very careful consideration. In
fact, we discussed it for nearly 2 hours in our directors' meeting yesterday,
and we believe that the bill, on the whole, is pretty good and meets the
present needs.

That is a national bank's attitude.
Governor Eccms. I am interested, of course, to get that reaction,
and I have found, whenever I have had an opportunity to sit down
and meet the arguments and questions with reference to the legisla­
tion, invariably the bankers feel that this bill is not what it has
been reported to be by many of our financial writers and economists.
Most of the criticism directed at the bill could be directed toward
the act that we have been operating under for the last 20 years.
The CHAIRMAN. Mr. Williams, did you say you have a question,
to ask!
Mr. WiLLiAMS. Yes. Governor, in connection with the interest
that is being paid by the Government to the banks—there has been
a good deal said about the interest that has been paid on bonds
in the national banks and Federal Reserve System, and keeping or
using those same bonds as the basis for issuing and lending out
money which they get on account of that issue, and getting interest
on it. Of course, in other words, that would be double interest, in­
terest on the bonds which they deposit, or which they sell for the
purpose of securing the issue, and the currency which they lend out,
so they would get double interest on it, would they not!
Governor E ccLES. You are speaking of national bank notes!
Mr. W iLLiAM S. National and Federal Reserve notes.
Governor E ccL E S. The Federal Reserve member banks, of course,,
do not deposit bonds and issue Federal Reserve notes, but the na­
tional banks have the privilege of issuing national bank notes,
which right has now been eliminated.

Mr. W iLLiAM S. Here is th e q u e s tio n . How m u c h , in n u m b e r of
b o n d s , is u se d as th e b a s is o f th e c u r r e n c y is s u e !
Governor EccL E S. There is about $800,000,000 of national-bank

notes outstanding. They are the only cases where the bonds are
used by banks for the purpose of issuing currency.

Mr. W iLLiAM S. What about the Federal Reserve bank notes!
Governor E ccL E s. The Federal Reserve banks have paid off their
liability on Federal Reserve bank notes.
Mr. W iLLiAM S. That is right recently, is it not!
Governor Eccms. Yes; recently. There was never more than
about $150,000,000 issued, and that was issued right after the bank
holiday; and those Federal Reserve bank notes were put out on the
basis of sound assets other than Government bonds and other than
Mr. W iLLiAM S. Well, now, I see a statement that the Treasury pro­
poses also to retire bonds upion which the national banks issue notes.


E ccL E S.

That is right.

Mr. WiLLiAMS. When that is done, that activity will be removed
from the picture!

Governor EccLES. That is right.



Mr. WiLLiAMS. In other words, there will be no cost of Govern­
ment interest upon its bonds ?
Mr. EccLES. There are greenbacks which, of course, have been
out for a good many years, about $300,000,000-----Dr. GOLDENWEISER. $346,000,000.
Governor EccLES. $346,000,000, with a certain amount of gold held
back of those greenbacks.
Mr. W iLLiAM S. And there is the argument that is being made by
a great many people, that the Government has favored the banks
by permitting them to deposit bonds-----Governor EccLES. And issuing currency.
Mr. W iLLiAM S. And; issuing currency, receiving currency, and
lending it out and securing interest on it, and at the same time secur­
ing interest on the bonds which they deposit for that purpose. Now,
as I understand, that is a thing of the past?
Governor EccLES. The Treasury last Monday announced that they
were calling the 2-percent consols and 2-percent Panama's as of
July 1, approximately $675,000,000 in total, and on July 1 the cir­
culation privilege which was given to other Government bonds ex­
M r . W iLLiAM S. Have there been none of them used for the p u r ­
pose of Federal Reserve note issue?
Governor E ccL E S. No; not used by the Reserve banks. The Fed­
eral Reserve banks are required to deposit with the Federal Reserve
agent gold equivalent to 40 percent of the notes outstanding, and
the balance of 60 percent may be made up of eligible paper or
Government bonds.
M r . W iLLiAM S. That is what I am getting at. Those bonds have
been deposited, have they?
Governor E ccL E s. Only by the Federal Reserve banks, from one
department of the bank to another. In other words, the bank has
been required to deposit with the Federal Reserve agent, who ^s the
chairman, gold certificates and bonds, or gold certificates, bonds, and
eligible paper.
We are proposing to eliminate the collateral requirement for the
Federal Reserve notes; because it serves no purpose, it only adds
additional expense, and has no relationship to the amount of cur­
rency in circulation, and is not required in any other central bank
that has been recently set up anywhere in the world.
Mr. W iLLiAM S. In other words, you propose to abolish the prin­
ciple that has heretofore been followed of issuing currency based
upon Government bonds!
Governor EccLEs. Yes.
Mr. SPENCE. Have all of the banks that had that privilege that
availed themselves of it been national banks!
Governor EccLEs. Yes; no other banks had that privilege.
The CHAIRMAN. They are using about $150,000,000 extended under
the relief act and-----Dr. GoLDENWEiSER. That was in the Home Loan Act of 1932.
Mr. SPENCE. What proportion of them have not availed them­
selves of the privilege! Have you any figures on that subject,
Governor EccLES. Mr. Smead could get that. What percentage
of the national banks have not availed themselves of that privilege ?



Mr. SMEAD. Of the 8,422 reporting licensed national banks on
June 30, 1934, there were 4,600 banks issuing circulating notes, and
822 banks which did not exercise the circulation privilege.
The CHAIRMAN. Well, there will be no more notes issued by the
national banks, based upon Government bonds!
Governor EccLEs. That is right.
Mr, CRoss. Governor, I want to go back to where we were awhile
ago, when I asked you about the $3,000,000,000. As I understood
your first statement, it was that if you were to take that $3,000,000,000 and buy bonds with it, call it in or buy that much bonds,
it would not cause any inflation to come back; but, as a secondary
proposition, there would be inflation through the banks, because they
would have more business; is that correct!
Governor EccLES. There would be a possibility of inflation
through the banks, by reason of the increased reserves from-----Mr. CRoss. The $3,000,000,000!
Governor EccLES. You have a potential inflation, but you would
have to use the existing $2,000,000,000 of excess reserves before the
$3,000,000,000 would have any effect.
Mr. CRoss. Now, we realize one thing, and this is what is disturb­
ing me: As I get your attitude, we cannot get a measure of value—
that is, we cannot make the dollar the measure of value, and I do
not know why the atmosphere seems to be so surcharged with the
idea of expanding the currency. Everybody is talking about infla­
tion, yet we have inflation until we are as Hat as a flounder in the
Now, we certainly cannot come back until we reflate, and I should
say that, if we started reflating, we can get back to the normal situa­
tion ; that we are helpless, or we must go ahead and start on a wild
spree of inflation until we explode and plunge back and down into
the mud again.
Governor EocEEs. I do not think that is necessary.
Mr. Cmes. That is what I am contending, that it is not necessary.
My idea is that, with the levers you have, you ought to be able to
agree on a price level that would give you a measure of value in dol­
lars, but if we have these things recurring and are helpless, that is
a tremendous indictment of our intelligence.
My idea is that we should certainly be able to get a measure of
value. In other words, just to illustrate the proposition, that A
borrows from B a certain amount of money, and the present price
of the dollar, we will say, is money covering one particle of all of the
things that are necessary to feed and clothe and supply the comforts
and luxuries of life. Now, the next year, when he wishes to pay it
off, because there is no value in the dollar, he has got to pay back
two particles of that commodity that will buy the necessities and
comforts of life, and it appears to me it is just as much within the
law robbing the poor devil as if I had loaned you $100 and I met
you on the street next year, when it was due, and took out a 6-shooter
and said, "Give me t&at ^200 you have in your pocket", because I
am taking it from you, and it will supply me with twice the things
that the $1001 let you have would supply me with. In other words,
if $1 will take care of me all of my life, t do not need but $1.
Governor EccLES. Yes; what you say is true, that it is an injustice
for a debtor to have to pay back debts m goods and services that have



substantially less value when he pays his loan than it had when he
received it.
Assuming that a dollar a bushel is Axed for the price of wheat,
and the total wheat production at $1 is 400,000,000 bushels, are the
farmers, as a whole, any better off than they would be with 800,000,000 bushels of wheat selling at 75 cents a bushel! In one case the
income from the wheat would probably be $600,000,000 and in the
other case it would be $400,000,000.
Mr. CROSS. I do not think you can take any one commodity.
Governor EccLES. The point I am making is, it is production we
are interested in. No one can pay his debts in terms of the price
level. Higher prices do not help a business that only has one-half
of the volume of business with which to pay its debts. You need
to maintain not only the price level but also production.
Mr. Cnoss. I understand. You said that a number of times; but
do you think it is possible to get a measure of value or have the
dollar come to where it would be the true measure of value!
G o v e r n o r E ccLES. I d o n o t t h in k t h a t is p o s s ib le .

Mr. CROSS. Then we are helpless.
Governor EccLEs. No; I do not think we are helpless.
Mr. SPENCE. The Federal Reserve can exercise their power to
regulate the rate of interest paid by banks to depositors on time
deposits and savings deposits!
Governor EocLEa. That is right.
Mr. SpENCE. I think that is a very beneficial thing, because they
have been the victims of competition or of the depression. Now,
there is no authority in any national agency to regulate the rates
paid by State banks, is there, at this time!
Governor EccLES. Nonmember!
Mr. SPENCE. Yes.
Governor E ccL E S. There is no authority, unless the Federal Deposit
Insurance Corporation has it.
Mr. SPENCE. I do not think the Federal Deposit Insurance Cor­
poration ought to have that power.
Governor E ccLBS. That is taken care o f in the Banking Act o f
Mr. SPENCE. I think that would be welcomed by the banks, because
they are the victims of their own competition.
Governor E ccL E S. It is absolutely essential that member banks
should not be subject to competition of nonmember banks by a limita­
tion of the maximum interest that the member banks can pay and
have the nonmember banks benefited and protected by the Deposit
Insurance, and at the same time permitted to pay any rate of interest,
whether it is a sound rate or not, that they wish to pay.
Mr. SPENCE. It would be very much better, i f they could all do
that and-----Governor E ccL E s. The Banking Act of 1935 provides for that in
section 323 (c), page 67, lines 1 to 7.
Mr. SPENCE. Have they exercised that power!
Governor E ccL E S. The act has not been passed.
Mr. SPENCE. This act, you mean!
Governor Eccuss. Yes.



Mr. FoRD. Let me make an observation there. The banks are
fixing the amount of interest that they can pay for deposits, are they
Governor E ccLES. We fix the maximum only. There are a great
many cases where they pay much less.
Mr. FoRD. Would there not be a good deal—there is no attempt
made to Rx the maximum interest they might charge when they
loan that money!
Governor EccLES. Most States have usury laws.
Mr. FoRD. I understand, but they are pretty liberal. We make
the price, we will say, to the miller, of wheat at $1 a bushel, but
he can charge $10 a barrel for the Hour, if he can get it, and that
is a competitive matter and I do not think can be fixed. You
could not say any maximum rate of interest that the bank would
charge, because it was getting money from its depositors at 2 percent,
because the demand for that money and the volume of it would
determine what rate it would get!
Governor EccL E S. It will bring the rates down, and it is bringing
the rates down.
Mr. FoRD. But it is a fixed thing, is it not!
Governor EccL E S. Fixing the maximum rate of interest o n de­
posits tends to bring down the rate on loans. That is the effect.
Mr. WiLLiAMS. Governor, in order that we might have this clear,
did I understand you to say that there is in the proposed law a
provision which authorizes the Insurance Corporation to fix rates
that could be paid by any member bank!
Governor EccL E S. Requires them to fix the rate! It is fix e d by
the Reserve Board for the member banks.
Mr. W iM JA M S . Where is that!
Governor EccLEs. Pages 66 and 67. We have not gone into that,
because that is in title III of the bill. That is in title III.
Mr. FoRD. What page!
Governor E ccL E S. Pages 66 and 67.
Mr. WiLMAMS. Does that apply to the nonmember banks!
Governor E ccL E S. Yes, that is what it does apply to.
The CnAiRMAN. The purpose of that is to prevent one bank inside
o f the Federal Deposit Insurance Corporation fighting against an­
other bank!
Governor E ccL E S. That is right.
The CnAiRM A N . And t a k in g a n u n d u e a d v a n t a g e o f i t !
Governor EccLEs. That is right.
The CHAIRMAN. Gentlemen, may we not quit until 3 o'clock! I
think we had better adjourn until 3 o'clock.
(Thereupon, a recess was taken in the hearing until 3 p. m.)

The CHAIRMAN. Governor Eccles, I believe Mr. Ford desires to
make some inquiries.
Mr. FoRD. Governor, I am not going to take you into the backalley Rnance in my statement. I am just simply going to say, in a
very short statement, that it is my reasoned conviction that the pres­
ent bill, while not perfect as to all of its details, and undoubtedly



requiring some minor technical amendments, seeks, on the whole, to
accomplish the following desirable results:
First, by broadening the eligibility requirements of the Federal
Reserve bank discounts, to uncover a great reservoir of potential
credit, which will be made available. Is that true!
Governor EccLBS. There is ample credit today ^but, without change
in the eligibility features, there will be great hesitancy on the part of
the banks to loan on other than short-term commercial paper or
Government bonds.
Mr. FoRD. All right. We will change that to make it " available
so far as the borrower is concerned."
Governor EcoLES. It makes it available, not because they need to
borrow funds to do it; but it makes it available because they would
be willing to loan existing funds, if they could get borrowers, on
longer time loans, that, otherwise, they would feel unsafe in making.
Mr. FoRD. My second point is that, tby placing in the hands of the
Federal Reserve Board the authority to initiate open-market opera­
tions, we give them the power to regulate in a material degree or to
stabilize in a material degree business operations. Would it do that!
Governor EccLES. The three powers of monetary control—open
market, discount rate, and reserve requirements—put into the hands
of the Federal Reserve Board a power to control inflation. And
they also put into their hands the power to prevent deflation, so far
as can be done by the creation of excess reserves and by the reduction
of interest rates.
There is no action that the Board itself can take that will induce
people to borrow, induce corporations to borrow, the excess funds
which the banks may have as a result of the Board's action in creat­
ing excess funds.
Mr. FoRD. But it is an effective check on the impulse for inflation,
on the one hand, and credit deflation, on the other hand, is it not ?
Governor EccLES. I think so. I think the eligibility changes and
the control over the supply of money would certainly tend toward a
prevention of deflation.
Mr. FoRD. In addition to that, in the third place, does it not add two
other desirable things: By broadening the eligibility requirements of
the Federal Reserve Board, each member bank with sound but long­
term paper could, under emergency conditions, take this paper to the
Federal Reserve bank and get currency and thus better serve the needs
of its community or meet a sudden emergency ? Would that be a clear
Governor EccLES. The Reserve banks will have the power to loan
to member banks on sound assets, which would enable the member
banks to meet the demands of their depositors.
Mr. FoRD. Certainly.
Governor Eccms. Which otherwise they might be able to meet only
by forcing a contraction of credit or by selling securities; or it might
be that they would be unable to meet the demand and thus be forced to
Mr. FoRD. Now, if I understood you correctly when you were mak­
ing your various statements, you said that the Federal Reserve banks
today had at least $10,000,000,OOOthat seeks profitable investment.
Governor EccLBS. No, sir. 1 said that the commercial banks had
$10,000,000,000 of time deposits.



Mr. FoRD. I mean the member banks of the banking system had
excess funds.
Governor E ccLES. No. The banking system has excess funds seek­
ing investment of over $2,000,000,000.
Mr. FoRD. What was that 10-billion-dollar Bgure that you used:
Governor E ccL E s. I said that the time funds or saving funds held
by the commercial banks amounted to more than $10,000,000,000.
Mr. FoRD. But that would be seeking profitable investment, would
it not!
Governor EccLES. A good deal of those funds are loaned already
in various types of loans. A great deal of those funds are no doubt
invested in Government bonds and other securities and bonds guaran­
teed by the Government. The excess reserves of the banks, which are
in excess of $2,000,000,000, are suiEcient in amount to enable the bank­
ing system as a whole to extend new loans or to purchase additional
bonds to the extent of more than $20,000,000,000 without the banking
system as a whole being required to borrow from the Federal Reserve
The banking system creates money through its loans and invest­
ments. A bank making a loan of $1,000 to a customer creates $1,000
of deposits. However, for every $1,000 increase in the deposits of
the bank the excess reserve decreases by 10 percent of the amount
of that deposit increase, so that a loan of $1,000 increases the assets
of the bank by $1,000 and the liabilities, in the form of deposits, by
a thousand, and the reserve requirement by $100, approximately.
You see, this increase in deposits would increase reserve require­
ments by 10 percent of that amount.
Therefore, 2 billion dollars of reserves in the System as a whole
are a sufRcient amount to enable the banks, on the basis of 10 for 1,
to extend credit to the extent of 20 billion dollars, without having to
go to the Reserve banks and discount or borrow money.
Excess reserve can be increased or decreased by open-market oper­
ations or by a change of reserve requirements! That is where you
get your monetary control.
Mr. FoRD. Now, then, at the present time we have a potential
credit reservoir of about 20 billion dollars.
Governor E ccL E S. That is right.
Mr. FoRD. I f paper eligible for rediscount came along, the banks
would be free to make those loans, wouldn't they, knowing that they
could take that paper, in an emergency, to the Federal Reserve banks,
if they got into trouble!
Governor EccLBS. They would be. It would be very profitable to
make those loans if they were available.
Mr. FoRD. In comparison with the 2% percent to the banks on
long-term Government bonds, you are holding out an inducement
to the banks, through this bill, to exercise their functions as banka
and make every possible loan that they can-----Governor EccLES (interposing). With safety.
Mr. FoRD. I did not mean that they should go out and go crazy^
But, when people come in wanting money, they would be in a posi­
tion to loan it to them.
That is a thing that has always bothered me. I do not know
whether I have got the explanation of it or not.



Now, I note that since 1922 the volume of commercial paper in
the United States—the normal commercial paper, under the old law,
the 90-day paper, has been greatly diminished. Now, my under­
standing or my belief is that the reason for that diminution in that
commercial paper was that many corporations, both large and small,
instead of going, as they used to do, to their banks and getting their
short-term requirements, have found that, through the investment
bankers, they could issue securities and get that money all in a lump.
And in many cases much of that money, after they had gotten it,
did not go to their own bank, but went to New York, to be used for
other loans, for speculation. Is not that true ?
Governor E ccL E S. Partly. It seems to me that the transition that
has taken place in our business and banking systems during the
life of the Federal Reserve System has been that our business sys­
tem has become more concentrated, into larger and larger units;
and that there is today a greater concentration of corporate opera­
tions in the country, in fewer companies, than we have ever had
before. The trend is in that direction, as evidenced by the chainstore development and the developments in almost every 8eld of
manufacturing activity.
Mr. FoRD. Steel and all others.
Governor EccLES. We see a drift toward consolidation and merg­
ers, making for bigness and a greater concentration of control.
That has tended to concentrate commercial deposits to a greater
extent than formerly in the centers where the headquarters of the
various companies are located; and it has also, in cases where there
has been borrowing, largely concentrated all borrowing, at very low
rates, on the commercial-paper basis, in the money market; so that
the average small bank, or the banks in the towns of 10,000 people
or even 25,000 people, and less, have not had the demand, and have
not had even during the period of our great activity, in the twen­
ties, the commercial loans to their local business concerns that they
had prior to the developments to which I have referred.
It is true that many of the consolidations and mergers were
brought about through Rotations of securities, bonds, and stocks,
and the effect of those Rotations was that the banks that formerly
carried commercial loans and short-term loans for the carrying on
of business transactions, furnished the money through the pur­
chase of bonds, or through loaning to customers, who purchased bonds
or stock. So that there was a substitution, to, no doubt, quite an
extent, of bonds and collateral loans in banks; whereas, formerly,
particularly before the war, commercial paper was used to a far
greater extent.
And, of course, in the case of farmer Rnancing, that has been taken
away from the local banks to quite an extent through the Produc­
tion Credit Corporation. The Production Credit Corporations,
which are a part of the Farm Credit Administration, get most of
their funds by the sale of 6-month and 9-month debentures, outside
of their capital, which has been furnished to them by the Gov­
These debentures are sold in the market and the present rate is
somewhere on the b&sis of 1% percent per annum. The big banks,
in the centers, with the surplus funds, are the purchasers, largely, of



these debentures, thus providing the funds to the Production Credit
Corporation, and the Production Credit Corporation supplies the
funds to the farmers, through the local communities. So, it means
that the banks in the centers, through the Production Credit Corpora­
tion, are financing agricultural production; and that, of course, takes
away from the banks in the agricultural areas the eligible agricultural
Mr. FoRD. I note that in 1929 the commercial paper; that is, the
commercial loans made by banks, were only $4,396,000,000, and that
was at the peak of our so-called " prosperity ", and that in 1934 that
sum had dropped to $2,144,000,000; so that there has been a gradual
diminution or gradual disappearance of commercial paper as a source
of business to these banks, and there is very little likelihood of any
substantial increase in that.
Governor EccLES. For the reason that, if you will examine the
statements of most of our business concerns, it will be found that they
have an excessive working capital. One of the difEculties today is
that they are the owners of huge pools of deposit money now in the
banking system, which they are not using and are not able to utilize;
so that, even with an improvement of business the most that could be
expected from many of our business concerns would be that they would
put into use the funds that they now have, and under no circumstance
would they be required to borrow.
Now, I am speaking of our business concerns in very general terms.
In number there may be, and no doubt are, a great many business con­
cerns that would be required to borrow; but, measured in the volume
of the business which they do, which, of course, is the important ele­
ment, there would be a small percentage.
Mr. FoRD. Well now, that being the case, if the reason for the exist­
ence of our banks is continued, then we have got to afford them some
additional opportunity, where their funds can be employed; and it
seems to me that the long-term real-estate loan is about the only out­
let that appears on the horizon at the present time to any great
Is that an admissible statement!
Governor E ccL E S. There is no prohibition now against banks
making collateral loans which are not eligible; and there is no prohibi­
tion against banks buying long-term bonds. So long, then, as there
is no prohibition now against the banks investing depositors' money
in those Reids, which are likely, in the event of depression, to be just
as frozen as real-estate loans, there should be some liberalization with
reference to the power of the member banks to make long-term realestate loans. To what extent that will be utilized by borrowers it is
impossible to say.
Mr. FoRD. On, I realize that. But we all know, if we read our
correspondence, and I know from my particular experience, that it
is almost impossible, or it has been up to quite recently, to get a
real-estate loan from any bank. Now, the reason the banks gave
for that was that that was an unliquid paper, and if they put their
money in there it would stay there, and they would have no way of
getting it out if they had a call.
Governor EccLES. They had been made to feel that a real-estate
loan is a slow and an undesirable asset to have. And inasmuch as



the banks have most of the loanable funds, and mortgage companies
and the savings and loan associations, as a whole, have very little,
and in most of the communities have no funds to loan, but are in the
process of reducing and bringing pressure to bear, it would seem
that the situation would be helped and relieved by permitting and
encouraging the banks to make long-term, sound, real estate loans.
Mr. FoRD. Not with the idea, Governor Eccles, of making the loan
today and taking it to the bank tomorrow and getting a discount,
getting the money and coming back to make another loan; but with
the idea of making a loan that was a profitable loan—and in our
country the rate is 7 percent, which is quite different from 2% per­
cent—they could put that money into that market. Then, should
there be a sudden demand on them for more money, tHey could
always take those securities to the Federal Reserve bank and get the
money for them, could they not, under this law!
Governor Ecci*ES. The Federal Reserve banks would have the
power legally to loan to member banks on the notes of the member
banks, secured by mortgages or other collateral, with such margin
as they thought was advisable to make the loan sound. Certainly
member banks would not loan money on mortgages and then borrow
from the Reserve banks so long as the member banks had excess
funds to loan. It could be expected that the member banks would
be willing to pay interest on borrowed money from the Federal
Reserve banks only when a condition was reached by any member
bank that made it necessary for it to borrow to meet its shrinking
It has never been a policy of the Federal Reserve System to per­
mit its member banks to borrow continuously or to borrow for the
purpose of reloaning because there was a pront between the discount,
rate at the Reserve banks and the loaning rate of the member banks.
Mr. FoRD. They were only there for the purpose of the bank get­
ting the money when it actually had to have it and for a proper
Governor EccLEs. To meet the current demand.
Mr. FoRD. Now, Governor Eccles, there is just one other observa­
tion I want to make.
There seems to be some apprehension in the minds of some of
my correspondents as to this bill being an inflationary measure.
We have had that out here before, but I just want to make an
observation on it. We discussed this morning the question of fixing
a price level.
Now, my conception of the possibilities lying dormant in this
bill, and which can be developed if it is passed, for credit, is this:
It will make available—and when I say available I do not mean
that it does not now exist—but it will make it a little easier and
more attractive for the banks to go into the business of loaning
money, for the purpose of bringing our production up to a maxi­
mum. I f we could do that we would bring our unemployment down
to a minimum. The result would be a large pool of money poured
out over the country and that would give purchasing power to the
consumers of the country generally, and that would tend not only
to stabilize business but to bring a gradual increase in the price
level, up to some point where there might be an attempt made to



peg it, within certain limits. Would not that be one of the ways of
doing it!
Governor E ccLES. I do not know that I understand what you
mean when you say, " Would not that be one of the ways of doing
i t " ! Do you mean the bill as now drawn!
Mr. Foim. I am talking about bringing our production up to a
At every meeting that this committee has had there have been
people who said, "Now, industry cannot get money; and, when in­
dustry cannot get money, it cannot produce; and the reason it
cannot get money is that the banks are afraid to loan."
Now, die loaning of money of real estate might conceivably have
a tremendous influence on industry, because it would put men to
work. Now, if you could create conditions so that money could
be easily gotten by industry, with a prospect of getting it back and
getting a profit, that would immediately create a wage pool, and
it would give an increase of income to the country and, with the
increase of income to the country—and the wide spread of the
purchasing power that goes to the men that do the work is one of
the factors—it would naturally put purchasing power in the country,
and, with an increased demand for goods, the price level of all
goods would come up, would it not!
Governor ECCLES. Yes.
Mr. FoRD. And if there was a tendency on the part of prices to
go up wildly, could not the Reserve Board, under this bill, put
an appreciable brake or check on that!
Governor EccLES. Yes; a general increase means an inflation;
and that can be, in my opinion, controlled through the powers that
this bill provides to be given to the Federal Reserve Board.
Mr. FoRD. Well now, taking the questions that I have asked and
the picture that I have painted, I ask if this bill tends to make that
possible! Do you think it does!
Governor E ccL E S. I do.
Mr. FoRD. All right. That is why I say in the beginning, that I
believe this is the measure that the country needs and that I am
going to feel very comfortable in supporting this bill in the House.
The CHAIRMAN. A ll right.
Does anybody else on this side have any questions!
Mr. CLARK, it will take only a minute for my questions, Mr.
I do not think that Mr. Cross, Governor, is very much satisfied
with our helplessness in this situation.
In the amendment that you have proposed three objectives are
tentatively stated: First, stable business conditions; second, full em­
ployment ; and, third, a more or less stable price level.
I believe that you stated that, if this bill were passed, it would
give the Federal Reserve Board a control over the volume of money.
That is right, is it not!
Governor Eccii&s. I think it gives the Board a control of the vol­
ume of money on the up side. It does not give it such a complete
control of the volume of money on the down side.
Mr. CLARK. No; but it tends to give the Board a more nearly
complete control of the volume of money than it has had heretofore.



Governor EccLES. Oh, yes; through monetary control plus the
eligibility features.
Mr. CLARK. But you stated, however, that in order to achieve
these desirable results—stable business conditions, full employment,
and a more or less stable price level—that in addition to the con­
trol of the volume of money, there would necessarily have to be more
control of the velocity of money—by the velocity of money meaning
the ratio between the volume and the national income.
That is right, is it not!
Governor EccLES. That is right.
Mr. CLARK. And you stated—I believe this is of fair inference from
your testimonv—that monetary action alone could control only re­
motely the velocity of the money; that is, by making the money
available !
Governor EccLBS. That is, to the extent that low interest rates and
abundant supply will induce its use; only to that extent.
Mr. CLARK. Then that is where Mr. Cross, I believe, stopped; that
is to say, that is where the matter was let drop. However, I believe
that, earlier in your testimony, you stated that there were two other
factors which, if added to the control of the volume of money, might
tend, in your opinion, to have a control over the velocity 0 1 money,
namely, a tax system and a program of Government spending. Am I
correct in that!
Governor EccLEs. Those are the other two elements which, it seems
to me, in our capitalistic economy, must be taken into account to bring
about a suHiciently equitable distribution of the national income, to
keep up a full employment, full production, and keep the productive
facilities adjusted in relationship to the buying power of the Nation.
Mr. CLARK. Yes; that is right. In other words, we have got, in
your opinion, a three-legged stool; and this bill is one leg of the stool.
Governor E ccLBS. That is right.
Mr. CLARK. This bill is designed to give control over the volume of
Governor E ccL B S. That is right.
Mr. CLARK. Now, in order to make our stool stand up and in order
to get out of that helpless condition in which Mr. Cross assumed we
are—as we are—it is desirable, in your judgment, not only to pass a
bill of this kind, or something of this kind, in order to build up this
leg, but we should do more. Let us take the second leg of the stool—
and I do not want to lead you astray, Governor Eccles, but it ties in.
We are going to try to get somewhere and we want to get to a stable
basis. Mr. Cross thinks it is an indictment of the human intelligence
if we do not get somewhere, and I agree with him.
You say we need a tax system, and by that, I assume, you mean
regulation of income taxes to the extent that when times are getting
better and the price level is increasing and the full employment is
reached the income taxes would be raised, as, I believe, you said they
should have been raised in 1928, instead of having been lowered. So
that is the second leg of the stool.
And then your third leg is a fixed national policy of Government
spending, wnich would be controllable as conditions fluctuated.
By using those three things: Rrst, monetary control, as proposed
by this bill; secondly, shifting the income-tax rates; and, thirdly,
increasing and diminishing the Government expenditures, not as an



emergency proposition only, but as a Rxed national policy; those
factors would tend, in your opinion, to achieve this desirable state of
stable business conditions, full employment, and reasonably stable
prices, within limits.
Does that state it thoroughly!
Governor E ccL E S. You have stated the case, I think, very com­
Capitalism, sooner or later, has got to pay whatever it may cost,
through the tax bill, to provide employment for people who are
employable, and to provide an adequate, decent living for those who
are unemployable, when the private employer fails to give employ­
ment on a sufEcient scale to utilize our available labor.
That is the cost that we have to pay for capitalism; and the sooner
we begin to recognize it when unemployment develops, the less the
cost will be.
We have never questioned the duty of the Government to protect
its citizens, no matter what the cost, against the encroachment of a
foreign enemy. We have no more reason to question the obligation
of the Government to protect the citizens, through insuring them
employment, when private capitalism fails to insure that.
Mr. FoRD. That is it.
Mr. CLARK. I think that is all. I really wanted to get that picture,
because this is the first step along those lines.
Mr. S iss o N . By Government spending, Governor Eccles, the third
leg of the stool of which Mr. Clark spoke, am I right in assuming
that what you mean is what might be called and what has been
termed a long-range or long-term plan of public works, to be car­
ried on when employment shows signs of becoming slack; and that
kind of public work or that kind of Government spending to be car­
ried on largely-----Governor E ccL E S (interposing). To keep up the national income.
Mr. SissoN. Yes; and such as will least come into competition with
private industry, with private business.
Governor E ccL E s. I believe that, under capitalism, Government
cannot compete with private business without the socialization of
whatever Held of private business it undertakes to compete in; and
that Government spending should be in the fields of socially beneBcial, public, noncompetitive activities, either directly or through
grants to cities, counties, and States, for use in the same field.
I have no brief to offer against Government entering those Reids
which may be better handled in the public interest if owned and
operated by the Government than i f operated privately. But I
do believe that when the Government steps in beyond the exercise
of its regulatory powers, as a competitor, the natural effect is that
all investment in that Reid, all private investment, stops; and that the
Reid then must be absorbed and monopolized, sooner or later, by the
Does that answer your question!
Mr. SissoN. Yes.
Mr. HANCOCK. Governor Eccles, is there any way of intelligently
estimating what percent of short-time paper is usually renewed!
Governor E ccL E S. You mean commercial or business paper held
by the banks!



Governor EccLEs. I think it would be practically impossible to
do that.
The loan is paid in one bank out of the proceeds of a loan gotten
in another bank. That is the way commercial paper is usually
We will take, for instance, a concern is borrowing $10,000,000 on
90-day commercial paper. A number of banks buy that paper and,
at the expiration of the 90-day period, the loans are paid* You will
find that the borrower on that paper has possibly only reduced the
amount outstanding, or may even have increased it, by borrowing,
by offering paper m the market, and another group of banks, or
the same banks, will purchase their 90-day bills, just as the Gov­
ernment now does in its short-time financing. It is offering 182day bills; and the purchasers of that paper have short-time paper;
but it is only paid by a refunding operation for 182 days, or for two
hundred-and-some-odd davs by selling new bills—maybe not to the
same institutions, but in the market.
Mr. HANCOCK. Well, the reason that is permitted, and the bankers
up to now have been seeking short-term paper, has been due to the
fact that, if it ran beyond a certain period, it would not be eligible
for rediscount.
Governor EccLEs. Under the law, it would not be eligible except
as 90-day commercial paper or 9-month agricultural or livestock
Mr. HANCOCK. But, under this bill, there is no time limit with
respect to the eligible paper!
Governor EocLES. You mean there is no time limit as to maturity
of the paper that is used to secure advances!
Governor Eccles. No; there is no time limit.
Mr. HANCOCK. That would be left to the rules and regulations of
the Federal Reserve Board or to the rules and regulations of the
individual Federal Reserve banks!
Governor EccLES. It would be left to the rules and regulations of
the Reserve Board, yes, sir; as to the terms upon which advances
could be made by Reserve banks to members on sound assets.
Mr. HANCOCK. Governor, there is no limit to the maturity of the
paper that could be discounted, is there, under the bill!
Governor BccLES. What!
Mr. HANCOCK. There is no limit as to the maturity paper which
could be rediscounted, is there!
Governor E ccL E s. Except as the Board may make rules and regu­
Mr. HANCOCK. I mean under the proposed law.
Governor Ecci*ES. No.
Mr. HANCOCK. Is it not a fact, Governor Eccles, that the banks
have usually made most of their profits and earnings on so-called
"slow paper"!
Governor E ccLES. I think that, without question, the greatest part
of the banks' income would be on paper that is not eligible, because
over 80 percent of all the paper OT tne banks, even in 1929, was not

Mr. HANCOCK. Now, Governor, just one or two other questions.



This morning, you made a comparison as to the cost, between keep­
ing greenbacks out and, the cost on 182-day paper. With respect
to the 182-daybills, is there any actual money passed in that trans­
action! Is it not just a sheer bookkeeping transaction! Is it not
as I asked just a matter of bookkeeping! No real money is passed
or put out.
Governor EccLES. That is true of any loan, any loan a bank makes.
It is a bookkeeping entry, and the money does not pass until the
borrower wants to draw it out in currency or check against it; and
the check has the same effect as currency. The money is passed then
as the account is checked against or as currency is drawn out and
used. And the same is true with the Government borrowing. The
banks take the bills or bonds and they credit the account of the Treas­
ury and they debit the assets account of their loans and investments;
and the Treasury draws against those funds as and when it desires to,
just like any other depositor.
Mr. HANCOCK. How much money does the Government carry on
deposit with the banks today ?
G o v e r n o r E ccL E S. I d o n o t k n o w e x a c t ly . I w o u l d s a y a r o u n d a
b i llio n a n d a h a l f .
Mr. HANCOCK. And what interest do they receive on those deposits!
Governor E ccL E S. They do not receive any.

Mr. HANCOCK. No interest return whatever!
Governor E ccL E S. No, sir.
Mr. HANCOCK. Of course, the banks that carry those large deposits
would naturally buy this short-term paper at a very low rate of
interest. Its really the Government's money they are lending to the
Governor E ccLES. The deposits that they have are of absolutely
no value to them, because they carry those deposits to the Federal
Reserve at no interest. So there is really a, loss in the handling
of them under the present circumstances.
As a matter of fact the Government deposits of a billion and a
half, upon which the banks pay no interest to the Government, and
which the banks must secure by Government bonds, are not profit­
able for the banks at this time when they have large excess reserves.
Taking the banking system as a whole, it carries with the Federal
Reserve banks more deposits in excess of what is required than the
Government carries with the banks. Therefore, the entire Govern­
ment deposits could be moved to the Reserve banks; and thereby the
excess reserves of the member banks would be reduced from some­
thing over $2,000,000,000—whatever it is today—by the amount of
the transfer of those Government funds. For that reason, so long
as the banks have excess reserves larger than their Government de­
posits, the Government deposits are of no value; there is no profit
to the banks.
Mr. HANCOCK. Governor, let me get this straight in my mind.
Did I understand you to say this morning that the policy of this
administration and the Government from now on would be not to
issue any more currency against Government bonds!
Governor E c cL E s. I have no way of knowing what the future
policy may be. All I know is that the action which was taken by
the Treasury to call, as of July 1, the bonds which were used to



secure circulation, means that it eliminates from the national banks
the right to issue national bank notes. Now, unless legislation is
passed which again permits the national banks to issue currency
against bonds which they deposit with the Treasury, that privilege
will not exist.
Mr. HANCOCK. I may be misinformed about it; but I was under
the impression that, under the present act, the President had the
right to extend the time within which that process could be carried
on; and that he had recently extended that time for another 2-year
Governor EccLES. No. It may be that you are referring to the
extension of the right of the Federal Reserve banks to issue Federal
Reserve notes, secured by Government bonds, in lieu of commercial
Mr. HANCOCK. I was probably confused about that. That right
still exists!
Governor E ccL B S. That was extended a short time Ago.
Mr. HANCOCK. Were any other bonds originally issued to the
national banks to support their circulation other than the Consols
and Panamas?
Governor BccLES. All of the bonds yielding 3% percent or less.
That right expires some time in July, and it cannot be extended
without legislation, which means that any currency of the national
banks that has been issued on a basis of the 3%-percent bonds, Ipr
bonds yielding a lesser amount, will have to be taken up.
Mr. HANCOCK. Well, I am glad to get that information from you,
because I had wondered, in my own mind, why the Treasury was
calling in the 2-percent Consols and 2-percent Panamas while leav­
ing out the 3%-percent bonds if the purpose was to lighten the
interest burden on the people.
Governor E ccL E S. They are not calling in the b o n d s , b u t the bonds
lose their circulation privilege, which was conferred upon them for
3 years-----Mr. HANCOCK (interposing). The circulating privilege?
Governor E ccLES. The circulation privilege, which will make it
necessary for the banks which have used that circulation privilege to
pay to the Treasury the amount of money representing the notes
which they have used.
Mr. WOLCOTT. Governor Eccles, I have a very few questions t o
ask. I think all the questions that I had have been quite fully cov­
ered, with the exception of one or two.
There has been a feeling on the part of many economists that there
should be very little aHUiation between the currency of the country
and the national debt. I presume that they have in mind that if we
are called upon to manipulate the currency as our national debt in­
creases or decreases, that that tends to an unstable currency.
In reading this bill I can see some adliation between the action
of the Federal Reserve Board and the national debt, inasmuch as
they have the right, in the open-market operations, to help the Gov­
ernment in maintaining its credit, by at least retiring that part of
the national debt which matures within the current year. Do you
think that is rather a dangerous practice!
Governor EccLES. It seems to me that the Government spends
only those funds which the Congress appropriates. The Congress



that has the power to appropriate money also has the power to cre­
ate a means of providing that money, if it is not done through the
existing banking system. Therefore, I do not feel that to make it
impossible for the Government to finance the appropriations which
Congress makes is necessarily going to defer what the Government
spends, but it is likely to jeopardize the existing banking and credit
structure. For that reason, it is desirable and necessary that there
should be a relationship existing between the banking system and
the Government in the interest, it seems to me, of the preservation
of the existing banking system.
Mr. WOLCOTT. And would you say, also, the maintenance of the
national credit by the use of the banking system of the country!
Governor E ccL E S. The national credit is not dependent upon the
willingness of the banks to, supply it.
Mr. WoLcoTT. Now, in that connection, I assume that those openmarket operations—that the Federal Reserve Board can, by adopt­
ing a policy which I understand to be mandatory in its operations
upon the member banks, compel the member banks to invest in Gov­
ernment securities, so that, if we came to a time when, as I under­
stand now, a great deal of our Government indebtedness is in the
form of short-term paper!
Governor E ccLES. About $13,000,000,000.
Mr. WoLcoTT. About half of our national debt is in the form of
short-term paper!
'Governor EccLES. Under 5 years.
Mr. W oL coT T . And there was an endeavor on the part of the banks
to unload that for the purpose of making more remunerative invest­
ments in industry, then, the Federal Reserve Board, through its
open-market committee, could control that situation. So I see a
direct relationship between the national debt and the possible amount
of currency which is in circulation and the volume of currency which
is in circulation.
Governor E ccL E S. Do you mean by currency, deposit money as
Mr. WoLcoTT. I think we can confine it to Federal Reserve notes,
because, if I understand this bill, together with the policy of the
administration, our trend is toward a single currency.
Governor EccLES. Yes; but I think there is absolutely no relation­
ship between the Government debt and the amount of Federal Re­
serve notes in circulation. There may be absolutely no Government
debt, and there still may be, and likely would be, the same amount
of currency in circulation. There is no relationship between the two.
And it was interesting to note, in looking over some charts of other
countries, where the debts have greatly increased—in Japan, partic­
ularly, I noticed the amount of its currency did not vary 5 percent.
And the same thing would show here, that, as A matter of fact, our
debt has increased during the last 2 years, and the amount of cur­
rency outstanding has come down as the debt has gone up.
Mr. WoLcoTT. Surely it has not increased in proportion to the
Governor EccLES. It has decreased.
Mr. WoLCorr. When the debt was about $20,000,000,000, we had
$4,250,000,000 of currency, or something like that, and at the present
time we have $5,600,000,000.



Governor E ccL E S. Something like $5,500,000,000 in currency at the
present time.
j .
Mr. WOLCOTT. When you say that it has decreased-----Governor EccLES (interposing). Decreased in comparison with
what it was 2 years ago.
Mr. WOLCOTT. It has increased about $1,000,000,000 in the last
4 years. It has not increased in the last 2 years, but in the last 4
Governor EccLEs. Yes, I think that is right; and that is due to two
causes largely: One is the decreased use of checking accounts, due
to the service charges and check tax, and also due to reduced in­
comes of people, which caused many of them to carry currency
instead of using the checking account. There has also been a reduc­
tion in the number of small banks throughout the country, and thus
there are many small communities which formerly supported banks
and which today do not and cannot possibly support banks, thus
requiring the use of currency in those communities. I think that is
largely responsible for the increased use of currency. There is also
some hoarding, I suppose, but I do not know how much of a factor
that is now.
Mr. WOLCOTT. In other words, instead of a man who owed several
people an aggregate of $100, drawing as many checks as he has
debtors, he would either draw one check or go to the bank and draw
it out in cash, and, for that reason, there has been more demand for
Governor E ccLE s. That is right. There have been less checks and
more currency in circulation.
Mr. WoLcoTT. So that you claim there is no relativity between the
amount of the national debt and the amount of currency in circula­
Governor EccLES. That is right.
Mr. WOMOTT. Getting back to the question which was asked a
few minutes ago, about the use of some, of this gold profit to retire
these Consols, upon which the national banks based their circulation,
I assume from that and from this bill that it is the policy of the
Government to eventually create a situation where we have a single
currency, which will be whatever silver is needed for change and the
Federal Reserve bank notes.
Governor EccLES. This action will reduce the currency to the silver
certificates which, from all present indications, may be a permanent
part of our currency, and the greenbacks, which are $346,000,000.
Outside of those two currencies, the Federal Reserve notes will be
the only other currency in use; and, of course, the Federal Reserve
currency will represent the great percentage of the currency in use.
Mr. WOLCOTT. So that the Congress, in Bie adoption of that policy,
bv passing this bill, would further contribute to the criticism of the
(jongress as having delegated its authority to coin money. I am
not criticizing that policy. I am merely asking for the information.
I f there has been criticism of our having ddegated heretofore to
the Federal Reserve banks the prerogative of Congress to regulate
the currency, there is a likelihood of a further criticism of our
having centered the control of the volume of money in the Federal
Reserve System, is there not!



Governor EccLES. Reaction of Congress in taking away from the
national banks this right to create money does not seem to me that it
should subject Congress to criticism, it has not deprived the Con­
gress of any of itspower to regulate money.
Mr. WOLCOTT. Well, it surely cannot be considered as a recapture
of any of the prerogatives of Congress, which they have under the
Constitution, to issue currency, can it!
Governor EccLES. I do not think that it either takes away from
or gives to the Congress any powers.
Mr. WOLCOTT. Well, I listened with a great deal of interest to a
radio address by Father Coughlin, whom you have no doubt heard.
Governor EccLES. I have not. I have never heard Father Cough­
lin. I have heard of him a plenty.
Mr. WoLcoTT. I will not attempt to quote him exactly, of course,
but, in the course of his discussion, which was, I believe, the night
that it was announced that $642,000,000 of the gold proRts would be
used for the purpose of retiring these consols, ne at least expressed
some pleasure at the fact that, at last, the administration was using
some part of this fund as a base for the issuance of currency. Now,
if I understand that operation correctly, we merely retired national
bank currency and substituted therefor Federal Reserve notes. Is
that right?
Governor EccLES. That is right. The calling of the consols,
$675,000,000, by the use of the gold proRt, resulted in reducing the
national debt out of the proRts that were created through devalua­
tion? to the extent of $675,000,000.
Mr. GOLDSBOROUGH. It was a deRationary gesture, too, wasn't it!
Governor E ccL E S. The national-bank notes outstanding, which
were secured by the consols which were called, were naturally re­
Mr. WoLcoTT. Well, then, by retiring the consols, the Panama con­
sols and these other consols—and there is another consol. What is
the other!
Governor EccLES. The Panamas and the consols.
M r . W oL coT T . B y r e a s o n o f h a v in g r e t ir e d th o s e c o n s o ls , o f c o u r s e ,
i t is n e c e s s a r y t o r e t ir e a lik e a m o u n t o f t h e c u r r e n c y t h a t w a s
s t a r t e d b y th o s e c o n s o ls .

Governor EccLBS. That is right.
Mr. W oL coT T . So that, unless we issued Federal Reserve notes to
replace them, the volume of money we have outstanding will be
$642,000,000 less, provided that was the money out against the con­
Governor EccLES. That is right.
Mr. W o L c o T T . So that, instead of being inRationary, instead of
using any part of the gold proRt for the purpose of increasing the
amount of money outstanding, it takes out of circulation the
national-bank currency in that amount!
Governor EccLES. No. There is no difference in the amount of
money. Federal Reserve notes will be substituted for the nationalbank currency; and it will be done unconsciously, because people
bolding national-bank notes will use them in the course of business,
just the same as they would use Federal Reserve notes or silver certiRcates. There is no distinction made in the use of the currency.
Now, as the national-bank notes become mutilated, the banks will



send in the currency, as it comes in through the deposit windows and
is sorted—and, as the old notes are sent in to the Reserve banks, new
Federal Reserve notes will be sent to the member banks in place of
those notes, to meet the demands of the customers. The Federal
Reserve banks will send in these mutilated national-bank notes to the
Treasury and the Treasury will destroy them; whereas, in the past,
they would issue new notes, keeping up the Row.
Now, the national-bank notes will just gradually pass out of exis­
tence as they become mutilated and, as mey pass out of existence,
Federal Reserve notes will take their place, it might take a year
before the whole process is worked out.
Mr. WOLCOTT. It was on that that I predicated my previous ques­
tion concerning the concentration of the circulating medium in the—
or the regulation of the volume of the currency in the Federal
Reserve System, taking from the national banks the money outstand­
ing against these consols, and the Federal Reserve System issuing
in place Federal Reserve notes.
Governor EccEEs. That is right.
Mr. W o L c o iT . There are two provisions in the bill on which I have
had a great deal of correspondence. I do not know whether you are
acquainted with one of them, Governor; that is, the provision with
respect to the examination of private banks. Now, in the bill which
we passed in 1933^ we provided that within 1 year after the operation
of the act all private banks which were not inspected by a State
examiner, must, in order to continue to receive deposits, submit to
examination by either a Federal Reserve examiner or a national-bank
examiner. They had their choice as to which they would elect to
be examined by.
Now, I notice that in this bill the law is to be amended some­
what ; and I wondered what the reason for that was. It is amended
in subsection (b) of section 303, page 52 of the bill. It is an amend*
ment to paragraph 2 of subsection (a) of section 21 of the Banking
Act of 1933 and it provides that:
The expense of the examinations required hereunder shall be assessed against
and paid by, the institution subject to examination in the manner and with
the same effect as provided by section 5240 o f the Revised Statutes, as

What would you say was the purpose of that!
Governor Ecci^s. That is under title III of the bill; and there
are, of course, a good many phases that the Federal Reserve are in­
terested in under title IH , that have not come up or been discussed
here. It was my understanding that the discussion at this time
would be confined to title II of the bill.
Mr. WOLCOTT. Well, this directly affects the Federal Reserve Sys­
Governor EccLEs. Well; there are quite a number of-----Mr. WOLCOTT (interposing). I do not quite understand it. I am
not very well acquainted with this and it is something that you might
not be acquainted with, because it is a matter of detail, and these
are a few isolated cases.
Governor EccLES. Title II I is composed largely of the legislation
that was in the omnibus banking bill of the last Congress. There
are some additions and some modifications and the particular section



referred to is a section that is recommended by the Comptroller of
the Currency. Under title III there are, I think, some 32 provisions.
Thirteen of the provisions, of the total of 32, are provisions that the
Federal Reserve System recommended and was interested in. The
other sections were proposed by the Comptroller of the Currency
and the Federal Deposit Insurance Corporation. They are largely
of a technical nature.
Mr. WOLCOTT. Then, you are not in a position, as coming from
the Federal Reserve Board, to say what the purpose of those was!
Governor E ccL E S. No: I am not; because that was developed by
the Comptroller of the Currency.
Mr. WOLCOTT. Would that be true also of the prohibition against
bank oiBcers and executives borrowing from their banks ?
Governor E ccL E s. That prohibition is already in the existing law.
Mr. WOLCOTT. But, there is a change. I have introduced a bilL
at the suggestion of the Treasury, and Senator Copeland introduced
the bill. It was suggested that I introduce it in the House; and I
understand that they have used the language of it here in this bill.
I wanted to ask some questions on that. This bill gives bank oSicers
and executives 2 years m which to retire their investments.
Governor E ccL E S . Three more years in which to retire loans made
before the enactment of the Banking Act of 1933.
M r . W o L co T T . I w o n d e r e d i f a n y t h o u g h t h a d b e e n g iv e n t o p l a c ­
in g a lim it u p o n th e a m ou n t th a t th e y c o u ld b o r r o w a fte r th a t o r
a t th e p r e s e n t tim e .
Governor E ccL E S. There was no consideration given to that by the

oHicials of the administration who considered that particular legisla­
tion. And the Federal Reserve Board and, also, the CMRce of the
Comptroller of the Currency have felt, as I stated here this morning,
that bank ofScers should be prohibited from borrowing from their
own institutions; and that, m cases where they have loans, they
should be given an extension of 3 years.
Mr. WOLCOTT. I was interested in the matter only to the extent
that several have written me about it; and it seems to me that the
prohibition would work an injustice in small cities, where there is
only one bank. And they think that they should be permitted to
make emergency loans, up to $1,000 or $1,500, or something like that.
I am not particularly interested in the section, but I am inquiring.
Governor EccL E S. We are not recommending that bank oiBcers be
permitted to borrow from their own banks under any circumstances;
and it is my personal view that it would be a mistake to permit bank
ofHcials to borrow under any conditions from their own institutions.
Mr. W oL coT T . I appreciate thej?urposes of this legislation. Yes­
terday, I think, Congressman Gifford was questioning you, and you
remarked that the British national debt is only 7 percent of the
national income.
Governor EccLES. That the servicing, the interest, on the British
debt is a little over 5 percent of the national income.
Mr. WOLCOTT. And that the interest on the United States national
debt is about 1 percent of the national income.
Governor Eccijcs. That is right.
Mr. WoLcoTT. In arriving at that conclusion did you take into
consideration the internal, municipal debt o f the United States!



Governor EccLES. No; only the national debt. I think I have the
figures on the other debt in my mind. The British municipal debt
is, of course, much smaller in proportion than the American debt.
Mr. WOLCOTT. They have a more centralized government?
Governor EccLES. That is right. I think that the total public
debt of Great Britain, so far as the figures are available—and it is
difEcult to get very accurate figures—is about $48,000,000,000. That,
of course, is figuring the pound on the old parity basis of $4.85, and
the American debt—in considering the Federal debt, as I said yes­
terday, the question of what we deduct from it by way of assets
which are held in the form of loans that are made by the Recon­
struction Finance Corporation, or other loans that are made by other
Government agencies, should be given consideration.
Mr. WOLCOTT. After those deductions were made, I believe you
said it was about $25,000,000,000 ?
Governor EccLEs. I said it was less than $25,000,000,000, without
deducting the gold profit, which now makes up the stabilization
fund—say, $22,000,000,000. I think the municipal debt would be
around $17,000,000,000 to $18,000,000,000.
Mr. WOLCOTT. So that our total public debt would be in the
neighborhood of $40,000,000,000?
Governor E ccLES. That is right, as against the British debt o f
about $40,000,000,000, whereas our national income-----Mr. WOLCOTT (interposing). Governor, for my purposes, probably
we can shorten this up by saying that the public debt of the United
States, based upon your previous statement, is something less than
2 percent of the national income ?
Governor E ccL E S. No. The public debt of the United States, in
total, would be about 50 percent of the annual national income—the
normal national income.
Mr. WOLCOTT. I should not have said that. I should say the
carrying charges—the interest—for the total public debt.
Governor EccLES. The ratio between interest on the public debt
and national income depends, of course, upon what income you
figure—whether you figure on the present income or whether you
figure on what you term a normal national income.
Mr. CROSS. What is a normal national income ?
Mr. WOLCOTT. Based on the normal national income.
Governor E ccL E S. It would be less than 2 percent of the normal
national income. Our normal national income, if we can figure
1927, 1928, and 1929 as normal, was about $83,000,000,000.
Mr. WOLCOTT. Do you know what the normal national income of
Great Britain has been!
Governor E ccL E s. Last year it w a s about $18,000,000,000, and $20,000,000,000 is about as high as it has been.
Mr. WOLCOTT. Does public debt, in the sense that you are using it,
include the debts of municipalities, counties, towns, and villages!
Governor E ccL E s. That is right. It is between $17,000,000,000 and
$18,000,000,000, in addition to the Federal public debt, making a
total of around, say, $46,000,000,000 of public debt.
Mr. S iss o N . Do you use the term "national debt" in the same
sen se!


E ccL E s.




Mr. WOLCOTT. No. At least I am distinguishing between the na­
tional debt of the United States Government itself and the internal
public debt of the States, counties, cities, townships, and so forth.
And that public debt, other than the national debt, is between
$17,000,000,000 and $18,000,000,000; and the national debt of the
United States Government, according to the testimony, is, in round
figures, $22,000,000,000.
Governor E ccL E s. The national debt, as I stated, d e p e n d s on what
you deduct by way of the gold profit and the assets.
Mr. S iss o N . The guaranteed obligations of the Home Owners'
Loan Corporation was not included in the national debt!
Governor EccL E S. No.
Mr. SissoN. They are not a direct part of the debt, are they!
Governor EccL E S. No. I am not including those as a direct part
of the debt.
Mr. Cnoss. When you said a little less than 2 percent, you meant
that the national debt, plus the other debts of the municipalities, and
so forth, required a little less than 2 percent to service the interest
Governor EccL E S. Yes.
Mr. CROSS. Do you include in public debts, national debts, munici­
pal, State, and other local governmental debts!
Governor EccLES. The questions of Congressman Wolcott called
for making a comparison between the total public debt, which in­
cluded the State, county, and city debts, plus the Federal debt, as
between the United States and Great Britain.
Mr. C R oss. Yes; I understand that; but I wanted to get it stated
in the record so that those statements would show clearly that when
you said public debt you meant by that the public debts, Federal,
State, county, municipal, and so forth.
Governor E ccLE S. That is right.
Mr. WOLCOTT. Then, inasmuch as we have not taken into consid­
eration the contingent debt of Great Britain, but have taken into
consideration the contingent debt of the United States Government,
our total national debt at the present time, without making these
deductions, is $31,000,000,000, and our State, county, and municipal
debts are $17,000,000,000. That would make a gross public debt of
$48,000,000,000, would it not!
G o v e r n o r E ccLES. That is right.
Mr. W oL coT T . Or within $1,000,000,000 or $2,000,000,000 of the
total British debt?
Governor EccLES. I think the gross national debt now is $27,000,000,000 plus. It is not $31,000,000,000. It would be $45,000,000,000,
if we included State and municipal debts without deducting the
balances on hand or the advances which will be repaid, or the gold
Mr. FoRD. Governor, do the obligations include any of the obliga­
tions of the Reconstruction Finance Corporation!
G o v e r n o r E cci,E S . Yes; t h a t is in c lu d e d .
Mr. FoRD. That includes their obligations!
Governor E ccL E S. Yes.
M r . FoRD. A n d f r o m t h a t s h o u ld b e d e d u c t e d t h e ir a ssets?
Governor E ccL E S. Most o f the increase in the Government

not due to spending but to lending.

debt is
For instance, $1,000,000,000 of



the increase in the Government debt went to the purchase of pre­
ferred stock and debentures of the banks and $800,000,000 have gone
to the receivers of closed banks as loans against their assets, in order
to hasten their liquidation. There are other loans which have gone
to the insurance companies, the railroad companies, the mortgage
companies, and so forth. In fact, the entire Reconstruction Finance
Corporation operation is a huge credit-expending operation, and
the amounts will largely be recoverable.
Mr. SissoN. Are you taking into consideration at all the matter
which Mr. Ford referred to? I would assume that what be meant
by the assets of the Reconstruction Finance Corporation was the re­
payments. You cannot tell exactly what those repayments are
gomg to be.
Governor Eccijss. That is right.
Mr. SissoN. You are not deducting, then, from the national debt
the probable repayments, are you ?
Governor EccLEs. Not in figuring the $27,000,000,000. There was
no deduction. That was the total outstanding debt; and, from that
you would have to deduct the balances on hand, which were over
$1,500,000,000, as well as all of these assets; and, of course, there
are also the commodity credit loans that have been made, running
up to $600,000,000 or $700,000,000. There is also, as I say, the
$2,000,000,000 in the stabilization fund. That is not taken into
Mr. SissoN. In this comparison which was made between the na­
tional debt of this country and the national debt of Great Britain,
did your figures contain any comparison which would show what
the debt of this country is per capita, as compared with the British
debt per capita and what our income is per capita as compared with
the British income per capita?
Governor EccLEs. I do not recall just what those figures are. Of
course, it would be a very easy matter to get those figures.
Mr. SissoN. I remember reading them, getting them from other
sources; but I thought that, before basing any conclusions on those
figures, we ought to have them authoritatively. I know that our
debt is very much less in proportion than the British debt and that
our debt is very much less per capita than the British debt.
Governor EccLEs. Oh, yes. I f the committee is willing, I think it
may be well, in this connection, and I would like to insert in the
record a coordinated, connected statement covering this comparison.
The CHAIRMAN. There is no objection to that. We shall be glad to
have it.

The kind of comparison most frequently made between public debts o f two
countries is in terms o f debt per capita. The most recent authoritative figures
of this kind were prepared by the Treasury for the Joint Committee on Internal
Revenue Taxation. For national debt per capita—that is, the debt of the cen­
tral government alone—the figures originating from that source are $S50 fo r
the United Kingdom and $215 for the United States. The debt per capita for
all public bodies, including central governments, counties, municipalities, school
districts, etc., is $991 in the United Kingdom and $370 in the United States, or
about two and a half times as much in the United Kingdom as in the United
States. Only very tentative estimates can be made of the national income in



the two countries for the year 1934, but such information as we possess indi­
cates that the national income in the United Kingdom was about $430 per
capita as against $400 per capita in the United States. In all these compari­
sons the rate used to convert the British into the American monetary unit is
$5 to the pound.
Because o f the very dMHcult questions connected with selecting the proper
rate o f exchange between two currencies in making comparisons of this kind,
and because the income of a country is more important than its population in
considering questions as to the burden of its pubiic debts, per capita tigures o f
the kind just given may be misleading. For this reason the figures below on
the relation of interest on public debt, public debt, and national income are
presented. National income as used here means the total money incomes ac­
tually paid to all the inhabitants of a country.
Net central government debt, after deduction o f Treasury balances, stabiliza­
tion funds and other assets, is 38 percent of national income in the United
States and 15S percent in the United Kingdom, or about four times as much
of the national income in the United Kingdom as in the United States.
The debt of all public bodies—that is, the net central government debt plus
the debts of all other civil divisions—is 74 percent o f national income in the
United States and 194 percent in the United Kingdom, or about two and onehalf times as much o f the national income in the United Kingdom as in the
United States. In round numbers, the net debt of all public bodies in the
United States is $37,000,000,000. I f it was as large in relation to our national
income as the British public debt, it would be $97,000,000,000.
Interest on the central government debt is 1.6 percent o f the national income
in the United States and 5.4 percent in the United Kingdom. Interest on the
debt of all public bodies is 3.3 percent of the national income in the United
States and 8 percent in the United Kingdom.
The foUowing are the figures on which these comparisons are based:
As of 1934

N et^ ^ sJ gwwnmentdebt (after deduction of treasury balances, stabilization



BiMion* of BKHom of


AHHioMof -MWHow* of
Interest paid by ail other government bodies...... ...............................................
* Excluding war debt.

The CHAIRMAN. Governor Eccles, I want to suggest to you that it
would be instructive if you would at some place in the record explain
what eligible paper is, or what may be eligible paper under the exist­
ing law. I will not ask you to do mat now. Just put it in the record.
Governor EcctES. All right.
The CHAIRMAN. I f there is no objection, the committee will meet
again Monday morning at 10:30. Governor Eccles, we want you
back here at that time, please.
Thereupon the committee adjourned until Monday, Mar. 18,1935,
at 10:30 a. m.)

M ONDAY, M ARCH 18, 1935

D. ^7.

The committee met at 10:30 a. m., Hon. Henry B. Steagall (chair­
man) presiding.
The CHAIRMAN. Gentlemen, we are ready to resume the discussion
with Governor Eccles. Mr. Hollister, if you wish, you may have
the discussion this morning.
Mr. HoLMSTER. Governor Eccles, I would like to ask you a few
preliminary questions before going into the actual gist of the bill
Would you mind telling the committee—and these questions are
with respect to title II, because with respect to title I and title III,
I think there will be very little discussion. Would you mind telling
the committee how this title II was prepared, who wrote it chiefly,
and how it was drafted!
Governor Eccuss. The members of the legal, economic, and oper­
ating staff of the Federal Board, together with myself, were ap­
pointed a committee by the board, to prepare Federal Reserve
legislation to be considered by what is known as the " Interdepart­
mental Loan Committee", which the President had asked to con­
sider all legislation dealing with financial matters. That in general
is the way the legislation was prepared. Of course, it was-----Mr. HoLLisTER (interposing). That was initiated by the Federal
Reserve Board!
Governor EccLES. What is that!
Mr. HoLLisTER. Was that initialed by the Federal Reserve Board,
did I understand you to say!
Governor EoCLES. The Federal Reserve Board appointed, at my
request, a committee to develop this legislation.
Mr. HoujsTER. And who was that committee!
Governor E ccL E S. The committee were members of the staff. I
was the chairman of the committee. The other members of the com­
mittee were Dr. Goldenweiser, who has been with the Federal Re­
serve Board for about 15 years, Mr. Wyatt, general counsel, who
has been with the Board for nearly 18 years, Air. Morrill, the secre­
tary, who has been with the Federal Reserve Board for 4 or 5 years
and prior to that was with the Federal Farm Loan Board, and Dr.
Currie, who is Dr. Goldenweiser's assistant. That was the immedi­
ate committee.
They were assisted, of course, by other members of the staff, such
as Mr. Smead, chief of the Division of Bank Operations, and Mr




Paulger, chief of the Division of Examinations. Those men have
been with the Federal Reserve Board for a good many years.
This committee worked with me in the development of legislation
which was considered necessary and advisable. The proposed legis­
lation was, in turn, cleared with a subcommittee of the Interdepart­
mental Loan Committee, which reviewed it and suggested modifica­
tions and changes. Mr. Morgenthau was appointed by the Presi­
dent as chairman of the Interdepartmental Loan Committee.
Mr. HoLMSTER. May I ask you there, was not that Interdepart­
mental Loan Committee appointed some time ago as a clearing house
for the various departments' financial requirements!
Governor EccLES. No; not altogether. It was appointed to clear
any legislation that was coming up from certain departments. All
legislation that was to come up trom nine departments, including
the Federal Deposit Insurance Corporation, the Federal Reserve
Board, the Reconstruction Finance Corporation, the Home Owners
Loan Corporation, and the Farm Credit Administration, was to be
cleared through this committee or a subcommittee. That commit­
tee was to-----Mr. HoLLiSTER (interposing). It was to clear legislation as well as
to coordinate finance!
Governor E ccL E S. Largely to clear legislation.
Mr. HoLLiSTER. This d r a ft w en t b e fo r e a su b com m ittee fo r co n ­
s id e r a tio n !

Governor E ccL E S. Yes, sir.
Mr. HoLLiSTER. Who were the members of that subcommittee, if
you remember!
Governor ECCLES. Yes. There was Mr. Coolidge, the Under Sec­
retary of the Treasury, Mr. Oliphant, general counsel of the Treas­
ury, Mr. Jesse H. Jones, Mr. Lynn P. Talley, who was formerly
governor of the Federal Reserve Bank of Dallas and is now assistant
to the directors of the Reconstruction Finance Corporation, and
Mr. Leo T. Crowley. I think, Mr. J. F. T. O'Connor, Comptroller of
the Currency, was in at one or two meetings, at the last. But most
of the work on title II was gone over and discussed by Mr. Coolidge,
Mr. Oliphant, and myself, and-----Mr. HoMJSTER (interposing). Title II, then, as it was drafted and
presented in this bill, was the result of the preliminary draft which
the committee appointed by the Federal Reserve Board had pre­
pared, after it had been checked over by the subcommittee of the
Interdepartmental Loan Committee!
G o v e r n o r E ccL E S. That is right.
Mr. HoLLiSTER. Was that discussed at all with, or was the benefit
of the advice received of, any of the governors or the directors or
ofBcers of any of the Federal Reserve banks!
Governor JEccLES. No; not the governors. The matter was not
discussed with them.
Mr. HouJSTER. This was a presentation, it might be said, from
the point of view of the present Federal Reserve Board!
Governor EccL E S. That is right.
Mr. HoLLiSTER. Was this draft, before being presented to Congress,
approved by the Federal Reserve Board!
Governor E ccL E S. No. The Board was not asked to approve it.
The Board was kept advised of the legislation.



Mr. HoLLisTER. The Board did not give any final approval of the
Governor EcCLES. In fact, they felt that it would be better to take
no ofBcial action in the matter; but they were constanly advised as
to the development of the legislation, and individually they were
invited to express themselves about it, which they did.
Mr. HoLLisTER. But, prior to the introduction of this bill, there
was no consultation whatsoever with any of the individual bankers
of the country!
Governor Eccuas. Oh, yes.
Mr. HoLLisTER. Federal Reserve or otherwise!
Governor E ccL E s. OfBcials of the American Bankers Association.
Mr. Rudolph S. Hecht, president, Mr. Robert V. Fleming, first vice
president, and Mr. Tom K. Smith, second vice president, of the
American Bankers Association, were advised with—particularly Mr.
Mr. HoLLisTER. While the bill was being drafted!
Governor EccLES. Yes: and the report in the press as to the atti­
tude of the American Bankers Association is entirely untrue. I
think that, as a matter of fact, they have been cooperative and
Mr. HoLLisTER. I d o n o t k n o w w h a t t h a t r e p o r t i n t h e p r e s s is
t h a t y o u r e f e r to .

Governor EccuES. I just saw a report that represented the Amer­
ican Bankers Association as being opposed to title II of the bill. I
think it appeared along with an account of the Liberty League's
opposition, which, of course, was not-----Mr. HoLLisTER (interposing). There was consultation, then, with
some of the oiBcers of the American Bankers Association!
Governor E ccLES. Oh, yes.
Mr. HoLLisTER. But not with any of the governors of the Federal
Reserve banks!
Governor E ccLBS. Not specifically with reference to this particular
bill; but I discussed banking legislation with Governor Harrison, in
a general way, but not the specific provisions of this bill.
The proposal to broaden the eligibility requirements has been gen­
erally recognized by all the bankers as desirable for some time. The
proposed combination of the positions of chairmen and governors is
desirable to the governors. It is undesirable to the chairmen, if they
are to be eliminated, or it is undesirable to the governors if they are
to be eliminated. But the principle of the combination of those
ofEcers-----Mr. HoLLisTER (interposing). I do not want at the present time
to go into that in detail.
Governor EccLEs. Yes.

Mr. HoujSTER. What I was trying to get was the preliminary pic­
ture and how much consultation there was with those who were to be
very substantially affected by the bill, if it were to go into effect in
its present form.
Governor E ccLES. Yes.
Mr. HoujSTER. You have submitted to us a memorandum contain­
ing some eight modifications, which you suggest.
Governor E ccL E s. There is one of them which is not important,
and I prefer to withdraw it. That is the one that suggested-----



Mr. HoLLiSTER (interposing). No. 6, you mean, the suggestion as
to the authority over open-market operations being vested in the
Federal Reserve Board %
Governor Eccuss. It is the one which suggested that two members
on the Federal Reserve Board be selected from Federal Reserve
banks, men who have had experience as ofEcers or directors of Fed­
eral Reserve banks.
Mr. HoLLiSTER. Well, I d o n o t seem t o fin d s u c h a p r o v i s io n o n t h is
m em ora n d u m .

Governor EccLEs. Well, anyway, I don't think that is very im­
Mr. HoLLiSTER. Well, these modifications that you have suggested
to us, have they been checked up in the same way in which the original
bill was drafted! Were they prepared by your committee of the
Federal Reserve Board and checked with the interdepartmental Loan
Governor E ccL E S. No. They have been checked only with some of
the individual members of the committee, not as ofEcial committee
action. They were, of course, checked very thoroughly with our own
committee and were also checked with the ofEcials oi the American
Bankers Association.
Mr. HoLLiSTER. Now, as I understand it, there is still another
change suggested—that is, the withdrawal of one of these sug­
Governor EccLES. Well, I do not think it is very important one
way or the other. It was not mandatory but simply a suggestion
that, in selecting the members of the Federal Reserve Board, the
President considered the advisability of including at least two mem­
bers who shall have had experience as ofEcers of the Federal Reserve
banks. The difficulty I see about that is that it is practically im­
possible to get any ofEcials from a Federal Reserve bank to go on
the Federal Reserve Board; because the compensation paid the of­
ficials of the Federal Reserve banks is two or three times the com­
pensation paid the members of the Federal Reserve Board.
Mr. HoujSTER. Is it probable that, as we go along, there will be
still further suggestions made to change the draft of the bill as
Governor E ccL E s. t o u mean by me!
Mr. HoLMSTER. By you or those representing the Interdepart­
mental Committee or the Federal Reserve Board.
Governor EccLBS. I do not think there will be any. O f course, I
cannot say. I cannot speak for others.
Mr. HoLMSTER. I realize that.
Governor E ccL E S. There may be.
Mr. HoLLiSTER. What I am trying to get at, of course, is to what
extent the draft of the bill presented to us is a kind of rough draft,
which is perhaps quite controversial at points, and how much it is
the well-considered judgment, as you might say, of all the financial
interests of the administration. Of course, if it is to be submitted
in one form and suggestions made for changes by, perhaps, first one
branch and then another ranch, perhaps the committee would have
a little different feeling about it than if it was in one form, which
could be finally agreed upon and considered the united suggestions
of all the financial branches of the administration.



Governor EccLES. All except one of these suggested changes were
very minor modifications. For instance, the approval of the ap­
pointment of governors by the Board each 3 years, instead of
Mr. HoLLisTBR. That is rather a major change.
Governor EccLES. Some may consider it major, but, at least, it is
not fundamental. It is extending the period of approval only.
When we prepared the legislation we expected, certainly, that modi­
fications would be suggested or made, as is true in all legislation.
Mr. HoLLiSTER. Perhaps we might discuss section 201, then, right
off. Of course, a Federal Reserve bank is a private bank, which is
owned by private capital, the individual banks having the capital
stock in that Federal Reserve bank.
Governor E ccL E s. It is quite different from the ownership of most
private corporations, since the member banks are limited to a 6-percent return on their capital under every circumstance. The board
of directors of a Reserve bank must get the approval of the Federal
Reserve Board with reference to expenditures and so forth. It is
quite different from the average private bank.
Mr. HoLLiSTER. It is not exactly the same, o f course.
Governor EcOLES. No.
Mr. HoLLiSTER. But the fact is that it is the money of private
banks which goes to buy the stock of the Federal Reserve banks;
and the theory of the Federal Reserve banks was that the private
banks, which have the stock, would control the boards.
Governor E ccL E s. Of the Federal Reserve Board!
Mr. HoLLiSTER. Of th e i n d iv id u a l b a n k s . Now, y o u h a v e
s ta te d --------

Mr. BROWN (interposing). May I interrupt a moment!
Mr. HoLLiSTER. Yes.
Mr. BROWN. I have not seen a discussion o f it yet, but the law still
provides for the issuance of stock to the Government of the United
States. I do not think any was ever taken.
M r . H o u jS T E R . B u t , a t th e p r e s e n t tim e , a l l o f th e s t o c k is o w n e d
b y th e p r iv a t e b a n k s .

Mr. BROWN. That is the fact, is it not, Dr. Goldenweiser!
Dr. GoLDENWEisER. Mr. Wyatt says th e r e is s u c h a p r o v is io n .


h a d f o r g o t t e n it.

Mr. BROWN. It was in the original Federal Reserve Act.
Governor EccLEs. The purpose of that provision was to enable the
Government to provide capital for the Federal Reserve banks if the
banks failed to subscribe for suiBcient stock; but they did not fail
to do so.
Mr. BROWN. It was not put in the alternative, like that, was it!
Governor E ccL E S. Yes; I think it was.
Mr. HoLLiSTER. It was similar to the method by which the Gov­
ernment had to establish a number of these organizations which are
private organizations; to start them by Government backing. It
was similar to the home-loan banks, for instance.
You have stated that you did not consider that the change sug­
gested (as to the approval of the Governor) from 1 year to every
3 years, was a major change!
Governor EccLES. Nothing fundamental. It in no way changes
the operation of the system.



Mr. HoLLiSTER. It is true, is it not, that the right o f the Federal
Reserve Board to approve every year the appointment of the chief
executive ofHcer—the governor—of the regional banks, makes it
possible, of course, for the Federal Reserve Board to insist on some­
one who is absolutely satisfactory to the Board, and to do it every
Governor EccL E S. Well, of course, the right of approval would
make it necessary that the Governor be satisfactory to the Federal
Reserve Board.
Mr. HoLLiSTER. And if that is changed to 3 years, just to that
extent the power of the central board over the chief executive of the
regional bank is weakened.
Governor E ccL E s. It was intended in the original Federal Reserve
Act that the chief executives of the regional banks should be the
Mr. HoLLiSTER. Theoretically, but not as a matter of fact.
Governor EccL E S. Yes; but I think they could possibly be made
to be.
Mr. HoLLiSTER. Under existing law ?
G o v e r n o r E ccL E S. O h , y e s .
r e g a r d t o th e c h a ir m e n a t a ll.

T h e la w

has n ot been ch a n ged


Mr. HoLLiSTER. I know that. But I know of no situation, in any
corporation, where the board of directors might not designate powers
in such a way as to make either the chairman of the board or the
president chief executive ofRcer. In some corporations the chairman
of the board is the chief executive ofRcer and the president has very
little authority, and in some corporations the president is the chief
executive ofEcer and the chairman of the board is merely a figure­
governor EccLEs. It depends largely on the strength of the men
the respective offices of governor ana chairman. The governors have
usually exercised more influence than the chairmen. I f it was their
purpose, the board might make the chairman the chief executive of
the bank.
Mr. HoLLiSTER. But in the ordinary corporation, if it came to a
conflict between two executive ofBcers, the one that would get the
power would be the one that the board of directors backed up, would
he not ?
Governor EccLEs. I suppose he would. That is one of the reasons,
if you are going to operate a unified Federal Reserve System; that
it is very necessary and desirable that such conflicts should not exist
and that there be cooperation throughout the entire system. Other­
wise the function of a central bank cannot be successfully carried out.
Mr. HoLLiSTER. Well, there is a difference, of course, between coop­
eration, coordination, and control. What I am trying to get at is
whether section 201 does not really take away the control of the
regional banks from those who are duly appointed to handle their
affairs; that is, their directors, two-thirds oi whom are appointed by
the banks who own the stock, and actually vest that control in the
Federal Reserve Board.
Governor E ccL E S. You are not vesting it in the Federal Reserve
Board because the Federal Reserve Board would not designate the



Mr. HoLMSTER. They can throw him out at the end of the year if
they do not like him. It is rather a strong weapon to hold over his
Governor EccLEs. They can only disapprove of the person selected
by the board of directors of the bank. The proposal is that the head
of the bank be acceptable to the Federal Reserve Board and to the
board of directors of the bank, which is certainly necessary if you
are going to have coordination. It would not be good organization
for a local board to elect or appoint a governor who is also to be a
class C director and chairman of the board of directors, under this
provision, if that appointee were not acceptable to the Federal Reserve
Mr. HoLLiSTER. Is the governor at the present time a class C
director ?
Governor EccLES. No; he is not a class C director. He cannot be.
Under the present law the Federal Reserve Board appoints all three
class C directors and designates one of them as chairman. Under
this bill the Board is giving up its power or right to appoint one of
the class C directors and to designate a person of its own selection as
Mr. HoLMSTER. There is no necessity of that if this other suggestion
is not effected. There is no particular need of making the governor
a class C director.
Governor E ccLES. If he is going to be chairman he would have to be
a class C director.
Mr. HoLLiSTER. Yes; if he is chairman he would have to be a class C
director; but could you not provide for a governor and not change the
law with respect to class C director!
G o v e r n o r E ccL E S. T h e le g is la t io n c o u ld b e l e f t ju s t as i t is a n d y o u
w o u ld c o n t in u e t o h a v e a c h a ir m a n a n d g o v e r n o r , ju s t as y o u n o w
h a v e.

Mr. HoLLiSTER. You could abolish the chairmanship and still leave
the governor, the chief executive oBicer, appointed by the board of the
bank itself.
Governor EccLES. And have no chairman!
Mr. HoLLiSTER. And have no chairman.
Governor E ccLES. The chairman of the board is always a director.
Mr. HoLMSTER. Yes; but the governor could be appointed from one
o f the class A or class B directors.
Governor EccLES. That would require that the banks give up their
selection of one of the six directors they now select.
Mr. HoLLiSTER. I should imagine that in order to keep their control,
by having a governor who would not be removable each year, they
would be willing to give that up.
Governor E ccL E s. I Rnd that the combination of the oHices of gov­
ernor and chairman is universally looked upon as desirable.
Mr. HoMJSTER. And I agree with that. The thing I am doubtful
about, very frankly, is the increase in the control of the Federal
Reserve Board over the powers of the individual banks.
Governor EccLEs. With this change to a 3-year period, the Ameri­
can Bankers Association is very favorable to this feature. The only
opposition comes from one source, and that is New York. Every
other place except New York agrees to that change.



Mr. H oL u sT E R . The question is whether the independent banks
ought not to have the right to name their own chief executive officers
without any interference by the Reserve Board.
Governor EccLEs. They cannot do that without at the same time
depriving the Federal Reserve Board of the power of appointing or
approving of the ofHcers. In that case you might as well do away
with the Federal Reserve Board. The Board has no purpose if you
are going to make 12 separate banks, to operate as separate banks.
Why have a Board if you do that! I do not know what the desire of
Congress may be in that regard, but certainly if you want to have 12
independent banks, then there is no reason or no purpose for having a
Federal Reserve Board. But if you are going to have a Federal
Reserve Board, then it has to be charged with responsibility and it has
to be given some authority.
Mr. HoLLisTER. But you have today a Federal Reserve Board that
is charged with responsibility, and no one would deny that the Fed­
eral Reserve Board today has enormous power, enormous authority,
and enormous responsibility; and also that, to all intents and pur­
poses, there are 12 banks which have considerable—not considerable,
but some— independence; not as much as they used to have. I am
not asking that they have more, but I just dread taking away what
that have left.
Governor EccLES. I do not believe that we are taking it away,
because you are giving to them the right to select a chairman and
class C director, which they do not now have; and as a consideration
for that the Federal Reserve Board would be given the right to
approve of the appointment every 3 years. You would have any­
thing but a satisfactory bank situation if the executive^ head of each
of these 12 banks were entirely unsatisfactory to and uncooperative
with the Federal Reserve Board.
Mr. HoLLisTER. Well, just to be more specific, at the present time,
under the present set-up, what are the unsatisfactory conditions that
arise out of the fact that governors of the regional banks are not
subject to removal each year or at the end of any specified time by
the Federal Reserve Board! I do not mean exactly removal, but
they will be in such a position that they may be unapproved at the
end of a certain specific time. What are the conditions that arise-----Governor EccLEs (interposing). You mean with the present law!
M r . HoLLisTER. A t t h e p r e s e n t t im e i n o p e r a t io n .

Governor EccLES. All the legal relationship of the Board with
the bank is through the chairman. The governors, as I stated a
while ago, are not directors of the banks. It seems to me that it is
A bad organization and that no one would set up a private organiza­
tion on such a basis.
Mr. HoLLisTER. Well, I understand there are certain mechanics
that have to be ironed out, but what I am trying to get at is this:
What are the objections under the present operation to having the
chief executive omcer, who is appointed by the regional bank's board
itself-----Governor Ecci^s (interposing). The regional banks will appoint
their chief executive ofHcers.
Mr. HoLLisTER. Yes: I k n o w . But h e c a n b e d is a p p r o v e d a t th e
e n d o f a y e a r . He c o u l d b e d is a p p r o v e d a t th e tim e h e is a p p o in t e d ,
and i f h e d o e s n o t a c t th e way-----



Governor Eccuss (interposing). He can be disapproved at the end
^f 3 years.
Mr. HoLMSTER. That is under the suggested changes ?
Governor EccLBS. That is under the suggested changes. He could
be disapproved at the end of 3 years, which, I think, is very necessary
and desirable in order to avoid friction and to have cooperation and
Mr. HoLMSTER. Can you point out instances of where governors
of the regional banks have conducted themselves in such a way that
the Federal Reserve Board has disapproved, and to what extent
and what are the nature of such actions ! What I would like to get
before the committee, if there are such things, is what action these
governors take which the Federal Reserve Board feels it should
have the right to disapprove. If it is merely a question of making
one man both the governor and the technical chairman of the
board—that is, of course, easy to settle. What I am trying to get at
is, what is the purpose of giving the Federal Reserve Board the right
to say to a regional bank, " You cannot appoint the man you want",
or, at the end of the year, " You cannot reappoint the man you
want" !
Governor E ccLES. Do you not think that there are enough good
men so that it is possible to get a man that would be agreeable both
to the Federal Reserve Board and to the regional bank board? Do
you think it is necessary to have as the head of one of the Reserve
banks a man who is unacceptable, because of ineiBciency, we may
say, of because of incapacity, and yet have him retained because of
the personal relationship existing between the managers of these
banks, or the governors, and the local boards? There is a senti­
mental relationship and friendship that is built up due to very close
contacts, and a director of a bank, who personally has no stock
ownership in a bank, and only goes to a meeting once every week or
so, or every month, is not likely to oppose the reappointment of a
governor, even though he may &el that he could be improved upon,
or that he may not be entirely desirable.
M r . HoLLiSTER. I c a n a n s w e r t h a t v e r y e a s ily b y s a y i n g t h a t su ch
a m a n s h o u ld n o t b e a d ir e c t o r .
Governor E ccLES. That is very true. But, after all, the directors

are not stockholders. You must realize that.
Mr. HoiiLisTER. Would not your objection be met by a suggestion
that the governor could be removed for cause, just as you pointed
out the other day that the members of the Federal Reserve Board
may be removed for cause, or the Governor of the Federal Reserve
Governor EccL E S. I think they already have that power now—to
remove for cause.
Mr. HoLLiSTER. What did y o u say!
Governor EccLES. They aiready have that power—to remove for
Mr. HoLMSTER. The governor or one of the directors of one of the
regional banks!
Governor E ccL E S. Yes.
Mr. HoLLiSTER. Well, then, there would be no necessity for this.
I f a man is inelEcient or incapable, he c&n be removed, so that this
legislation is not needed for that purpose.



Governor EccLES. The legislation^ I think, is very greatly needed.
The matter of inefEciency or inability is a very dimcult thing to
prove. A man may be filling a position that somebody else could
Rll more satisfactorily. Questions of ability or efEciency are mat­
ters of degree and you would have a very difEcult problem if you
should attempt to remove a man for cause unless there were some
glaring lack of capacity or some personal act that would justify the
Mr. HoLMSTER. Well, it really comes down to this, then: that you
believe that, as between the relative efEciency or inefEciency of sev­
eral men, the power of designating one of such men to conduct that
regional bank should be in the Federal Reserve Board rather than
in the board of directors, the majority of whom have been elected by
those whose money is invested in the stock of the regional bank.
Governor E ccL E S. I think that, in the interest of the System, it is
very necessary that the Federal Reserve Board have the approval
of these governors who are selected by the directors of the Reserve
banks; and, as I stated, it would seem to me that there should be a
sufBcient number of able men to permit appointments that are de­
sirable to both the Federal Reserve Board and the local board. The
governors are the liaison ofEcers under this relationship between the
12 Federal Reserve banks and the Federal Reserve Board; and, for
this reason, it seems to me, the Federal Reserve Board should have
the approval. Any governor who objects and any board that objects
to this Board approving would be actuated by the desire to retain
ofEce, even though their retention was unsatisiactory and unaccept­
able to the Federal Reserve Board.
Mr. HoLLiSTER. O f course that is a question as to whom the heads
of the regional banks should be acceptable. I had understood that
the theory of the Federal Reserve organization was that high-class
bankers, of independent judgment, should have some say in the con­
duct of the System. Now it would seem to me to be fairly clear
that, if the head of each regional bank must completely follow what
the Federal Reserve Board indicates at all times, he ceases to be a
banker of independent judgment. Of course, if that is the desire of
Congress, that settles it; but that was not the original plan of the
Federal Reserve System.
Governor E ccL E S. There is no thought or expectation that such a
thing will happen. In practice, I am certain that the banks will be
run under this bill very largely, so far as everything except monetary
policy is concerned, by the local boards of directors and by the gov­
ernors of the banks. There is* nothing in this bill that provides
that the Federal Reserve Board shall select or force on a bank a
governor who is unacceptable to the board of the bank.
Mr. HoLLiSTER. N o; tney could not force anybody on the bank who
was unacceptable to them; but they could keep refusing to appoint
people who might be acceptable to the board of the regional bank,
Governor E ccL E S . Why should not the governor be acceptable to
both boards? I f you want good organization, is it not better to
have the governor acceptable to both boards!
Mr. H oM JSTER. You have had enough experience to know that if
you have a situation of that character, where something must be ac­
ceptable to people, absolutely, that they would have the control.



Governor EccLES. The Farm Credit Adminstration operates in
that way, in the question of fhe appointment of land-bank oiBcers.
They are appointed by the local boards, subject to the approval of
the Farm Credit Administration, and the banks are owned by the
local farm associations, which is private ownership, so that you have
an example and it has worked out very well.
Mr. HoLLiSTER. Of course their functions are somewhat different
from those of the Federal Reserve System.
Governor Eccnss. Yes.
Mr. HoujSTER. Now, moving to section 203, and raising again this
question of independence: In the draft of the bill at the present time
the Governor of the Federal Reserve Board cannot be very inde­
pendent if he can be removed by the President at will. He cannot
be particularly independent from the Executive's desire.
Governor E ccLES. You mean in the present legislation?
Mr. HoLLiSTER. The proposed legislation.
Governor E ccLES. That is true in the present legislation. There
is nothing in the proposed legislation with reference to that.
Mr. HoLMSTER. What is the exact wording of the present legisla­
tion with respect to the removal of the governor!
Governor EccL E S. Do you have that, Mr. Wyatt!
Mr. HoLLiSTER. What section is that!
Mr. W YATT. Section 10, page 26, of the 1933 edition of the Federal
Reserve Act.
Mr. HoLLiSTER. Would you read that into the record?
Mr. WTATT (reading:)
Of the 6 persons thus appointed, 1 shall be designated by the President as
Governor and 1 as Vice Governor of the Federal Reserve Board. The Governor
of the Federal Reserve Board, subject to its supervision, shall be its active
executive officer.

Mr. HoLLiSTER. Is that all there is!
Governor E ccLES. Is that all you have on that?
Mr. HoLLiSTER. Is there anything in that which permits the Pres­
ident to remove the Governor of the Federal Reserve Board ?
Mr. WTATT. It has been interpreted in practice that it does.
Mr. HoLMSTER. I realize that it is so stated, and it has been stated
in this room a number of times. It has been stated in the papers,
but I have never yet been able to Rnd where the President of the
United States has the power to remove the Governor of the Federal
Reserve Board.
Mr. SissoN. Is it not true, Mr. Hollister, that these o&cers are
executive or administrative ofHcers, and is it not true that any exec­
utive or administrative oCicer may be removed arbitrarily by the
Mr. HoLMSTER. I think it has been settled by the United States
Supreme Court.
Governor Eccuss. Yes, sir.
Mr. SissoN. It has been settled, I think.
Mr. HoLLiSTER. Let us not get into a discussion of that. I do not
want to get into a discussion with any members of the committee,
although I think I can point out to Mr. Sisson that he is incorrect
in his interpretation of the decision.
Let me ask you a question right in that connection. The Comp
troller of the Currency is appointed for how many years?



Governor E ccL E S. Five years.
Mr. HoLMSTER. Can the Comptroller of the Currency be removed
by the President!
Governor E ccL E S. I do not think so. The term of his oSice is
provided under the statute.
Mr. HoLLiSTER. Is the term of oiEce of the Governor of the Fed­
eral Reserve Board provided by the statute!
Governor E ccL E s. Not as Governor. His term as member is pro­
vided for.
Mr. HoLLiSTER. It is a 12-year term as director!
Governor EccL E S. That is right.
Mr. HoLMSTER. Then he is appointed Governor!
Governor E ccL E S. Yes.
Mr. HoLLiSTER. So, theoretically, he is Governor up until he is
Governor EccL E S. Up until the time Governor Meyer was ap­
pointed the President designated the Governor each year. It had
been the custom from the beginning of the Federal Reserve System
for the President to designate the Governor from year to year.
Mr. HoLMSTER. And the fact remains that at the present time it
is provided that the Governor shall be appointed, and there is no
statement as to how he can be removed. It is also true that the
change from the existing statute to the proposed statute is that, in
the existing statute, there is a provision for the appointment of the
Governor, with no provision as to removing him from oEice; whereas
in the proposed statute it is speciRcally provided that he shall serve
solely at the will of the President. That is the case, is it not!
Governor E ccL E S. That is correct. It seems to me that it is a mat­
ter that should be clarified and that, if it is not the wish of Congress
that the Executive shall have the right to appoint a Governor and
remove him, the term of ofBce as Governor should be made specific,
and the interpretation that has always been placed upon it should be
Mr. HoLLiSTER. I agree with you fully. I am merely trying to
bring out by questioning what mis bill does. Naturally, the Con­
gress must make the decision as to what they want. I want to make
it perfectly clear what the provision of the proposed law will bring
about; and it is also true, is it not, that if the changes which you
have suggested in your memorandum are not made elective, as I
think you have stated earlier in the hearing, it would be possible,
always assuming that an Executive desires to do it, for the President
to change completely the personnel of the Federal Reserve Board by
designating each member of the Board Governor in turn and
removing him the next day.
Governor E ccL E S. I do not believe that is possible.
Mr. HoLLiSTER. I t h in k it is h i g h l y im p r o b a b le , b u t i t is p o s s ib le .
Governor Eccuss. I f a member of the Reserve Board desired to
retain his position on the Board, he would refuse to accept the posi­
tion of Governor, knowing that he would go out the next day or the
next week. If, on the other hand, he did not choose to stay on the
Board if the President desired to remove him, he very likeiy would
resign without going through the formality of being appointed as



Mr. HoLLisTER. I think that is highly probable. What I am trying
to get at is—I do not like to be influenced into legislation which
would make make possible the arising of a dangerous condition,
when some irresponsible person might be in the position of Chief
Executive, and when such legislation is not necessary. I believe,
to that extent, the suggestions for amendment which you have made
are excellent.
Governor E ccL E s. The possibility of a President resorting to sharp
practice of that sort in order to change the Board, of course, did
not occur to me, or, I think, anybody else who had anything to do
with this legislation. The reason for providing that a Governor's
term as a member shall expire when he is no longer designated
as Governor was not to give to the President additional power but
to make it possible for a Governor who was no longer designated
as " Governor " to resume business without waiting for a period of
2 years.
Mr. HoLMSTER. Of course, that could be done by other phraseology.
Governor E ccLES. That is what is proposed. In other words, the
same thing has been accomplished, for all practical purposes, by the
suggested change; and because of the objection tnat was raised,
that you mention now, the amendment was proposed.
Mr. HoLLisTER. D o you consider it wise that the President should
have complete control over the Governor of the Federal Reserve
Governor EccLES. I think so. It is my feeling that the President
should have the right of appointment of the Governor of the Fed­
eral Reserve Board. That is true in practically every country in
the world.
M r . H o u jS T E R . H e s h o u ld h a v e th e r i g h t o f a p p o in t m e n t ; b u t I
a m t a lk in g a b o u t th e r ig h t o f r e m o v a l.
Governor EccLES. That is right. He should have, it seems to me,

the right of appointing the Governor to serve at his pleasure. I
think that is in the interest of the Federal Reserve System. I think
it is very necessary that there be a very close relationship and liaison
between the banking system and the administration in power; and
I think that the Governor of the Federal Reserve Board is the
channel through which that relationship should develop, in the inter­
est of the banking business.
Mr. HoLLisTER. Can you not conceive of a situation where political
exigencies might be in direct conflict with wise banking policy and
wise credit policy ?
Governor E ccLES. All I can say is that, if you have such exigen­
cies—war is a case in point and depression is a case in point—then
I think it would be very unfortunate if the administration was unable
to carry out its program. I stated, I think, when I Rrst testified,
that the responsibility of any administration in power is largely
a social and an economic one. Practically all political questions
relate to social and economic problems. An administration cannot
be charged, when it comes into power, with dealing with those
problems separately, free, apart, and divorced from the money
Mr. HoLLisTER. You believe that even though from the point of
view of wise banking and a wise handling of the financial business
of the country a certain policy would be desirable, that if an admin­



istration decided that it should pursue a policy which might be
otherwise, it should be in a position to control the banking and credit
systems, to force it along with its policy, irrespective of what the best
minds of independent banking might think!
Governor EccLES. Of course, we have an independent banking
system, to an extent; and I do not believe that anybody would feel
that for the system to be more independent would be in the best in­
terests of the bankers-----Mr. HoujSTER. I do not want to interrupt you. I believe there is
a great deal in what you say. I do not believe we can answer present
questions by referring to the improper actions of the past. I am
just asking the question of whether or not it is unwise to put the com­
plete control into the hands of the Executive; and I am generalizing
entirely, with reference to no particular executive and no particular
condition of the country. Before you answer, let me put it a little
more specifically. In our democracy, every so often the party in
power must appeal to the country, once every 4 years for Presidential
elections and once every 2 years for congressional elections. It is a
definite time at which such things have to be done, unfortunately.
Is it not very unwise to give the power of manipulation to the Execu­
tive entirely when it comes to the credit situation and the banking
situation! Would it not be probable that the greatest man imagin­
able, with an election coming on, would try to take advantage of
every possible facility to see that that election is assured, and would it
not be possible for him to control the banking and credit system
of the country for that purpose!
Governor EccLEs. There is nothing in this bill that proposes that.
Mr. HoLLiSTER. But it gives the President a much greater control
over the credit and banking facilities of the country!
Governor E ccL E S. In what way, except as the Federal Reserve
Board has increased power!
M r . HoLLiSTER. I t g iv e s th e F e d e r a l
pow er.
Governor E ccL E S. That is right.

R eserv e

B oa rd

in c r e a s e d

Mr. HoLLiSTER. It gives the President greater power over the
Governor E ccL E S. No. The President has no different power over
the Board.
Mr. HoLLiSTER. Well, the President has greater power over the
Governor, who is the Chief of the Board.
Governor Eccuis. Not unless you construe the proposal to mean
that it gives the President greater power than he now has. Of
course, there has never been a legal test as to the power of the Presi­
dent to remove the Governor; but as I say, in practice it has always
been accepted as giving him that power.
Mr. HoLLiSTER. I f i t d o e s n o t g i v e a n y m o r e p o w e r th a n a t p r e s e n t,
th e r e is n o n e e d o f th e c h a n g e .
G o v e r n o r E ccL E S . N o : th e r e is n o p r o p o s a l t o m a k e th e c h a n g e ,
e x c e p t --------

Mr. HoLLiSTER (interposing). As to the ability of the Governor
to go back into business!
Governor E c cL E s . That is the sole purpose of it; and there was
no purpose or expectation that this was giving to the President addi­
tional power.



M r . HoLLisTER. T h e n y o u w o u ld be p e r f e c t ly w i l l i n g t o s tr ik e o u t
th e p r o v i s io n f o r r e m o v a l?

Governor EccLBS. I do not see a particle of objection to it, be­
cause, in practice, that is what happens and will happen.

Mr. HoLLisTER. You say you see no objection to striking it out?
Governor E ccL E S. The whole purpose of getting that into the legis­
lation was to make it easier to get someone to act as Governor; in
other words, to make it easier to get a man to accept.
Mr. GOLDSBOROUGH. May I interrupt? In that connection, Gov­
ernor Eccles, if there is in fact any legal obstacle to putting into
effect the practice that now obtains, you would favor a change in the
language which would legalize and carry forward the practice?
Governor EccL E S. Yes; I think it is desirable in the interest of
banking and in the public interest that the administration in power
designate the governor and that the governor serve during the pleas­
ure of that administration. That has been true in most other
M r . HoLLisTER. T h a t is n o t tr u e in E n g la n d .
Governor E ccLES. England is about the only

exception. It is
true in practically every other country. It has been recognized, in
the establishment of all the central banks, within recent years,
that it is very necessary and desirable that the administration in
power have that responsibility and that authority.
Mr. HoLLisTER. Now, with respect to those banks, of course, you
have one central bank, where the board is privately elected or ap­
pointed, and the chief executive, governmentally appointed, who, of
course, cannot exceed what the board will let him do. The board
itself controls the executive ofHcers, even in the Bank of France—
or in most of the great countries, outside of Italy and Russia. In
all those cases the board itself, which ultimately controls the chief
executive ofEcer, is privately elected or appointed.
Governor E ccLES. There are differences in the various organiza­
tions. The Bank of Canada is the most recent; and in Canada the
board is really an advisory board and the governor can veto an
action of his tioard. He does not have to follow their recommenda­
tions or their authorizations, as I understand it.
M r . HoLLisTER. I n t h e C a n a d ia n b a n k a b o a r d o f se v e n d ir e c t o r s
is e le c te d f r o m d iv e r s ifie d o c c u p a t io n s b y th e s h a r e h o ld e r s .

Governor Ecci^s. That is right.
Mr. H 0LM 6TER. The Canadian bank has a governor, a deputy
governor, and an assistant deputy governor, who have to be ap­
pointed for Yyears by the Governor General in council.
Governor EccLEs. The board does not control the governor there
to the extent-----Mr. HoLLisTER (interposing). But, after the first term, however,
these ofEcials shall be selected by the directors, subject to the ap­
proval of the Governor in council.
So that still puts the control of the central bank pretty well in
the hands of the private shareholders.
Governor E ccL E s. It puts it in the hands of the Governor in Can­
ada, practically. Of course, there is this difference. In every other
country except this country, the commercial banks are not the share­
holders, but the public are the shareholders.
Mr. HoujsTER. That is so in England.



Governor E ccL E S. It is so in Canada, too. I think it is so in
France, and it is so in practically all the countries. I believe this is
the only coutnry where the banks control the central banking system
through their stock ownership and the majority of the board of
Mr. HoLLiSTER. But the public owns the stock in the banks, which,
in turn, own the stock in the Federal Reserve banks.
Governor Eccms. There is a great difference between-----Mr. HoLMSTER (interposing). The governors-----Governor EccLEs (interposing). In fact, in some o f the countries
the banks are directly prohibited from owning any stock whatever
in the central banks, and the bankers are prohibited from being rep­
resented on central banks.

Mr. HoLEiSTER. Well, of course, under our system, with our re­
gional banks, we have only half of the directors that can be appointed
by the member banks.
Governor E ccL E s. No. Two-thirds of them are appointed by the
member banks.
Mr. HoLLiSTER. Yes; b u t h a l f o f th e se a re d r a w n f r o m in d u s t r y ,
an d o n ly h a lf m a y b e ban k ers.
Governor E ccL E S. Yes; but they

are appointed by the banks. Twothirds of the board are appointed by the banks, and the stock is
owned by the banks.
Mr. EfoLLiSTER. I want to bring out the change in control this bill
will make, so I will take up for a few minutes section 205, which pro­
vides for the open-market committee, a committee of Rve, which is
to be appointe3 and will consist, Rrst, of the Governor of the Federal
Reserve Board, who, in turn, serves at the pleasure of the President;
next, two members of the Federal Reserve Board; and, next, two
governors of the Federal Reserve banks, who, in turn, if the provi­
sions of this bill should become effective, may fail of approval by the
Federal Reserve Board at the end of a year, in the event, we will
say, that they are unwililng to go along with what the Federal
Reserve Board desires. That, o f course, places the open-market
committee and its operations entirely in the control of the Federal
Reserve Board, does it not?
Governor E ccL E S. You are discussing the provisions of the bill
with reference to the operation of the open-market committee, as pro­
vided in the bill.
In my opening statement, if you will recall, I stated that that
provision of the legislation was not satisfactory, and that openmarket operations should be placed with the same body that haa the
authority to Rx discount rates and reserve requirements; that they
were three functions of monetary control that should be together, in
the same body, and that I felt that the Federal Reserve Board was
the body charged with the public interest; and that it should, there­
fore, have that power and authority, subject, however, to securing the
advice of a committee of 5 governors selected by the 12 banks. I
made that suggestion in my opening statement. I suggested that,
rather than having an indirect way of putting the Federal Reserve
Board in complete control.
Mr. HoLMSTER. Your theory is that it might just as well take the
whole thing right over and have no control whatever by the regional



Governor EccLES. I feel that the authority over open-market policy
must be placed in a body that is charged with the responsibility that
the present legislation gives to the governors, who are not even
directors of the banks, the right to make open-market policies. The
Board approves or disapproves o f the policy, and then the 12 banks
can either participate in the adopted program or they can refuse to
do so, so that you have------

Mr. HoEMSTER (interposing). You say all of the 12 banks or each
of them!
Governor E ccLES. Each or any.
Mr. HoLMSTER. And any of them might nullify what the others
<H d-

Governor EccuBS. And what this proposed legislation is doing is
putting the responsibility and the authority for open-market policy,
discount rates, and reserve requirements, which are three instruments
of monetary controh in the Federal Reserve Board.
Mr. HoLMSTER. You feel, then, that, notwithstanding how clear
it might be, we will say, to practically all the bankers in one par­
ticular locality of the country, Dallas, San Francisco, or wherever
it might be, they should not participate in the open-market opera­
tions. The Federal Reserve Board should have complete power, and
no matter how much the bankers might disapprove they should be
compelled to take participation!
Governor E ccLES. Absolutely. The question of monetary policy
is a national matter, and it cannot be dealt with regionally without
having such situations as we have had in the past. I think openmarket policy, discount rates, and reserve requirements should be
controlled by the Federal Reserve Board, while making it mandatory
that the Board advise with the committee of governors before any
action is taken with respect to any one of the three instruments of
monetary policy that the Board controls.
Mr. HoLLiSTER. That, however, is not in the draft as presented.
Governor EccLES. No. That is the recommended provision.
Mr. HoLLiSTER. Just a few questions on the matter of the col­
lateral behind the Federal Reserve notes. In discussing this ques­
tion on the days you have been before us you have stated that you
did not see the collateral added anything to the value of the notes.
Governor EccLEa. That is right.
Mr. HoLMSTER. Do you feel that the gold provision does!
Governor EocRES. It certainly does not under present circum­
stances. And under past circumstances, when there was not sufBcient gold, or we felt there was not, to back up notes which were
secured and issued, the requirement was suspended, as an emergency
matter. In other words, when we get into an emergency, these
rigid requirements are suspended. So long as everything goes nor­
mally and there is no diHiculty in carrying out the requirement, they
seem to operate all right.
Mr. HoEMSTER. Wen, of course, there are those who do not quite
agree with the wisdom of suspending such requirements, who do not
believe that the emergency justified the suspension. But I am try­
ing to get at your viewpoint. You say that the collateral does not
add anything, neither does the gold. Query: Do you go the whole
way, that we should remove all provision for some kind of collateral
behind Federal Reserve notes!



Governor Ecci*ES. No. Personally I think it is very desirable to
leave the gold-reserve requirement back of the Reserve notes, and
also back of the deposits. The law provides that 35 percent of gold
should be held back of the deposits.
Mr. HoLMSTER. Gold or lawful money?
Governor EccLES. Gold or lawful money; and, of course, our law­
ful money now is-----Mr. HoLMSTER (interposing). Not gold.
Governor EccLEs. Gold certificates and other forms of currency.
The CHAIRMAN. That provision was written into the law when
the law was that the legal money was gold!
Governor EccLES. Yes.
Mr. HoLLisTER. What is the advantage of that gold behind the
notes! Is it the limitation on the amount of notes that might be
Governer EccLEs. That is the effect it might have, I suppose.
Mr. HoLLisTER. So t h a t th e r e is s o m e u p s t a ir s lim it , b e y o n d w h ic h
you can not g o ?
Governor E ccu E S .

I f you have a bank run, and banks closing, just
as we did have, and you permit demands in gold again, and you per­
mit the exportation of gold freely, then, through that action you
precipitate financial troubles and bring about a suspension of the
requirement. Now, if the payment of gold against deposits and the
free exportation of gold should be suspended, and serious banking
diCiculties develop again, we would possibly go off the gold standard,
and then these restrictions would be suspended.
Mr. HoLLisTER. Oh, we are olf it today, of course, aren't we ? But
I don't want to get into a long discussion of that. Some people say
there is a gold standard, simply because we can ship gold to settle
international obligations.
The CHAIRMAN. Nobody can get gold.
Governor EccLES. We have a price for gold now.
Mr. H o u jS T E R . You believe there should be a gold reserve behind
the Federal Reserve notes that should be maintained!
G o v e r n o r E ccL E S. I t h in k i t is d e s ir a b le t h a t i t s h o u ld b e .

Mr. HoLMSTER. What is the reason for it? Is it to give confidence
to the holder of the note that there is something behind it, or what
is it?
Governor EccLES. I think that there is no necessity of making the
change. There would be nothing particularly to be gained by it.
Without that requirement of holding so much gold back of deposits
and back of currency, you would have, I suppose, no restriction of
any kind. I think, psychologically, it would have a very bad effect
upon the country, and it is unnecessary. It would, of course, leave
our money a completely managed currency without any relationship
to gold.
Mr. H oLLisTER. In o t h e r w o r d s , i t w o u l d s h a k e p e o p l e 's c o n fid e n c e
in t h e p ie c e s o f p a p e r t h a t t h e y c a r r ie d a r o u n d i n t h e ir p o c k e t s !

Governor EccLES. I think it would. Whether justifiable or not,
that is the effect it would have.
Mr. H oLLisTER. A n d th e s h a k in g o f t h a t c o n fid e n c e w o u l d im m e ­
d ia t e ly b e in fla t io n o f a k in d , w o u l d i t n o t !
Governor E ccL E S . I doubt that. It has


seemed difEcult to get



Mr. HoLMjSTER. What I am trying to get at is, if the gold reserve
of the Federal Reserve notes were entirely removed, you say it would
have a bad psychological effect and it would shake the people's con­
fidence in some way?
Governor EccLBS. Yes.
Mr. HoLLiSTER. What would be the result of that, stagnation of
business and increasing unemployment!
Governor EccLEs. I f you eliminate any gold requirement for Fed­
eral Reserve notes and for Federal Reserve deposits, then you would
be completely divorced from gold. Your currency would be purely
and completely a managed currency, without any regard whatever
to a metallic base. It would be a complete divorcement. Now, if
it is desirable completely to abandon gold now, to make all the gold
we have serve only as a commercial commodity, then, of course, it
would be desirable to abandon all Reserve requirements for Federal
Reserve notes. Otherwise, it is desirable to keep them, because it is
the only recognition we have of the use of gold as a base for money.
Mr. HoLLiSTER. You see, what I am trying to get at is the advan­
tage of collateral behind notes.
Governor EccLES. That is a very different matter, the question
of gold and that of collateral.
Mr. HoLMSTER. Both are some assurance of value.
Governor E ccLES. Why not have collateral back of deposits! Gold
is held as a reserve against both deposits and notes. Now, other
countries have gold requirements back of their notes, but most have
no collateral requirements back of them. They have gold require­
ments back of their deposits, but they do not hate collateral require­
ments-----Mr. HoLLiSTER. B u t we d o n o t have.
Governor EccLES. Oh, yes.
Mr. HoLMSTER. It does not require gblds.
Governor E o C L E g . Or lawful money. >
Mr. HoLMSTER. Yes.
Governor EccL E S. But, of course, that was based upon the require­
ment that lawful money was redeemable in gold.
Mr. HoLLiSTER. Y o u think that there is an advantage in retaining
Governor E c c L E S . I think at this time there is, until it is deter^
mined what is likely to develop in the future, with reference to the
gold standard, and whether other means of stabilizing exchanges can
be developed. To divorce completely our money frbm gold at this
time would seem to me to be rather a costly thing for us to do,
while we own 40 percent of the world's gold supply.
Mr. HoLLiSTER. You feel, as I understand you to say, that there is
some advantage in limiting the total amount of Federal Reserve
notes that may be issued by the keeping of the gold requirement!
Governor EccLss. The Keeping of the gold requirement does not
put a limit, in and of itself, on Federal Reserve notes. As I ex­
plained the other day, the notes which the Federal Reserve System
issues are the notes which the customers, the depositors, of the com­
mercial banks requite to conduct the business of the country. Only
when unlimited hoarding is permitted would there be any possi­
bility of the need of suspending specie payments and gold exports.



The amount of gold, of course, which is held, without regard to
the gold held by the Treasury, is considerably more than 100 per­
cent of the amount of notes outstanding. The amount of notea
outstanding is as great as we have ever normally used in our busi­
ness operations.
Mr. HoLLiSTER. But the existence of the gold requirement does
make a decided limit, beyond which Federal Reserve notes could not
be issued!
Governor EccLES. It is a limit beyond which Federal Reserve
notes could not be issued. You would have terrible inflation long
before you reached the limit.
Mr. HoLLiSTER. Unless further devaluation occurred, in which
event you would have still more!
Governor Eccms. That is right.

Mr. HoLLiSTER. Still more gold, against which you could issue
more Federal Reserve potes!
Governor E ccLE s. Yes.
Mr. HoLLiSTER. I would like to ask this question: Is there any­
thing in the existing situation, or what anybody could reasonably
predict, that makes this legislation a matter of great present
urgency ?
Governor E ccL E S. I think it is very desirable and necessary that
it be passed. I think it is several years late. I think that if legis­
lation of this sort had been passed 4 or 5 or 6 years ago we might
have avoided most of the banking di&culties that the country went
Mr. HoLMSTER. One of the chief purposes to be accomplished that
you see, is the power of checking speculation under the p o w e r s
granted by this proposed legislation!
Governor EccLES. Control of speculation is one of the important
features. Another is to make a better coordination of the system
through the changes in the relationship of the Board to the banks
and me governors, combining the governors' positions with those
of the chairmen. The eligibility feature is a very n<ecessary and
important change in the legislation, in order to make banks fee!
more free to extend long-term credit.
Mr. HoLMSTER. There are many of the provisions of the Federal
Reserve Act, are there not, that ought to be revamped, gone over,
and studied pretty thoroughly!
Governor Eccles. There are quite a number of provisions pro­
posed in title III o f the bill.
Mr. HoLLiSTER. I realize that.
Governor E ccus. That go quite a way toward correcting and
toward clarifying the existing Federal Reserve legislation. I ao not
believe that we will ever reach a point in this country where we
will have perfection in our banking legislation. We are, of course,
in a changing economy and, looking over the past hundred years,
we have found that no one has been able to develop a perfect system
of money and banking; and I do not believe that this proposed
legislation means that we have reached the millenium in banking
and in dealing with our banking and money problems.
Mr. HoLMSTERf It comes down to the individuals who are running
the thing, Rnally.



Governor E ccL E s. What is that!
Mr. H oLLiSTE R . I say, it comes down to the individuals who are
running the thing, finally.
Governor EccLES. The individuals who are managing the enter­
prise are certainly a very important element in any private or public
field of activity. The administration can go a long way toward
either wrecking or making successful what is done under any
Mr. H oL L iS T E R . I asked that because there is a difference in
philosophy of government. Some people say there is no need of
checks and balances, if you can secure a race of supermen to run
things properly. But there is no indication that we are going to
have supermen running the banking system any more than in the
past, no matter in whose hands it is put.
The CHAIRMAN. You mean there is no such thing as a benevolent
Mr. HoLLiSTER. I think that is very well put. I think that ques­
tion really answers itself.
With respect to the raising of rediscount rates, the strengthening
of reserve requirements, Mid entering the open m a r k e t , it has been
stated by vou and others, with a great deal of justice, that our
trouble in the past has been that our so-called "great bankers " have
not been equal to the emergency and have not foreseen what was to
happen, or, if they did, they did not have the strength to take ad­
vantage of the machinery which was available to stop the inflation
and boom. Realizing that these men were theoretically the best
bankers of their time, are we going to be in any better position by
placing the matter entirely in the hands of a Federal Reserve Board,
appointed by the Chief Executive! What is there to indicate that
the men so appointed, having these supreme powers, would be able
to handle them any better than they were handled by the so-called
" great bankers" of the past!
Governor EccLES. There is a great difference between thousands
of banks acting independently and a small board charged with the
responsibility of monetary control. In the first place, the bankers
acting independently have no way of expanding money, and they
had ho way of stopping the contraction of money, even had they so
desired, becaupe they did not have control over the issuance of
money, such as is held by the Federal Reserve System. In other
words, the independent, private, commercial bank is not a central
bank charged with or having central-bank functions, neither has
the Federal Reserve Board in the past been charged with the duty
of creating business stability. I feel that certainly a board, if
given the authority and charged with the responsibility for our
monetary policy, is more likely to feel personally that great re­
sponsibility ana to discharge its obligations and its duty in the
public interest than we have had any reason to expect in the past
of the banking system, as it has been constituted.
Mr. HomsTBB. Do you not fear that—and this is a repetition of
the question that I asxed you a little earlier—that in the event the
situation were to create a condition of continued deficits, a time
arising when the floating of Government bonds became more and
more diiEcult—would it not be almost impossible for the Federal
Reserve Board, constituted as it would be under this bill, to refuse



to cooperate with the Treasury in continuing a financial policy winch
independent bankers might deem was unwise?
Governor EccLES. I think it would be extremely unfortunate for
the bankers if a situation was reached where the Government, hav­
ing a continuous budgetary deficit, was unable to get the coopera­
tion and support necessary "from the Reserve banks and the bankers;
for the reason that it would probably mean, under those circum­
stances, the issuance of currency rather than bonds to pay for the
budgetary deficits. It would mean the possibility of the Govern­
ment taking over the banking system. As I stated the other day,
it seems to me that a Congress that can appropriate money to carry
out emergency needs, which create deficits, also has the power to
create the means of providing that money, in case the existing pri­
vate system fails to do it. Certainly we would not question that, if
we were in war, and the private system failed to meet the demands
of Congress in the emergency, the means would be provided other­
wise. I think that, in the interest of the banking system, it is im­
portant and it is necessaiy that you have this cooperation in helping
to finance the program or the administration in power.
Mr. H 0LM8TER. You have just stated that Congress, of course,
would have to use its various powers. That is admitted.
Governor EccLES. Yes.
Mr. HoLLiSTER. This bill, however, asks Congress to give to the
Federal Reserve Board these powers, which is quite a different prop­
osition ; and I ask you whether it is wise to give these powers to. a
board which undoubtedly would have to be, to a great extent, con^
trolled by the Executive. The question is whether we could afford
to give tnese powers to follow a certain procedure which might be
very unwise, from a banking point of view. If Congress were re­
taining its power, that would be quite a different matter, but it is not.
Governor EccLBS. I f I understand your question, it is whether or
not I think it is desirable that the Federal Reserve Board, or the
Federal Reserve System should be in a position where it could
finance a continuing budgetary deficit.
Mr. HoLMSTER. No matter how unwise it might appear.
Governor EccLES. Yes.
Mr. HoLLiSTER. That is, you understand the question!
Governor EccLES. Yes.
Mr. HoLMSTER. Your answer to that is yes!
Governor EccLEs. Yes.

Mr. HoLLiSTER. I meant to follow up the question asked you a
little while ago. I f the fate of any system depends ultimately upon
men, whether or not it was not wiser to include checks and balances!
Has consideration been given to the fact that legislation might be
so drafted that, in the event of a rise of a certain percentage in
commodity prices or an expansion of deposits over and above com­
mercial loans by certain proportion, or of stock prices^ or of capital
exports, that then there should be, automatically^ rediscount raises^
and the reserve requirements strengthened, and open market opera­
tions, so that the discretion is not as broad as this bill would give—
almost unlimited discretion!
Governor EccLES. It is not unlimited. The proposal which was
made the other day as to what should be the objective confines the
responsibilities of the Federal Reserve Board and places upon it a



very definite obligation. The proposal was that it should be the
duty of the Federal Reserve Board to exercise such powers as it
possesses to promote conditions making for business stability.
Mr. HoLLisTER. Exactly. I understand that. But the very point
I am raising is that, because of the frailty of human nature, the
Board either would not perform its duty or would not be able to do
it, and is it not wiser to put some checks and balances in there?
Would the Board be gifted with such insight that they would be
able to tell-----Governor EccLES (interposing). In the past, the Board had neither
the authority nor the responsibility. That has been the trouble in
the past.
Mr. HoLMSTER. The trouble in the past was not the lack of au­
thority or responsibility. The trouble m the past was that they did
not see what was coming. No one has intimated that the failure to
check the boom was due to lack of authority or responsibility.
Governor ECCLES. I do not know; but certainly there were a good
many people who thought they knew what was coming.
Mr. HoEMSTER. They were voices crying in the wilderness.
Governor EccLES. However, I personally think it would be a great
mistake to put into this bill rigid mandatory requirements that may
be impossible of accomplishment ; and, even if they are possible, they
may not be desirable. Even if the attainment of certain mandatory
requirements were desirable at the moment it may be that the condi­
tions and circumstances would be such in a year or in 2 years or 3
years that these automatic controls would not be desirable at all.
Air. HoLLisTER. I note that there has been stricken out in the pro­
posed act subsection (c), section 12A of the Federal Reserve Act,
which provides that:
The time, character, and volume of nl! purchases and SHlm of paper de­
scribed in section 14 of this act as eligible for open-market operations shall be
governed with a view to accommodating commerce and business and with re­
gard to their bearing upon the general credit situation of the country.

What was the purpose of taking that out ?
Governor EccLEs. Because we do not think that should be the ob­
jective of monetary policy. The provision that we are proposing to
substitute for it, and which I think is much more desirable, as ex­
pressing what should be the objective, is the promotion of conditions
conducive to business stability and the mitigation of unstabilizing
influences in the general level of production, trade, prices, and em­
ployment, so far as may be possible within the scope of monetary
Mr. HoELiSTER. That is a pretty big order.
Governor EccLES. I know. But simply to attempt to provide
credit for agriculture, commerce, and industry does not meet the
problem at all. Credit is now provided for agriculture, commerce,
and industry.
Air. HoLLisTER. I f these powers are granted, if the bill should go
through approximately in its present form, what powers of a cen­
tral bank will the Federal Reserve Board not have, outside o f its
ownership of gold, or the right to change its value, of course!
Governor EccLES. It will exercise all the powers of a central bank,
so far as monetary policy is concerned, which is very desirable and
very necessary.



Mr. HoLLiSTER. That is what I am getting at. This bill really
makes an entirely Government-controlled central bank.
Governor EccLEs. No; not an entirely Government-controlled cen­
tral bank. The Federal Reserve System is not a Government-controlled system.
Mr. HoLLiSTER. When this bill becomes effective, what powers are
there, which the Federal Reserve Board, which is appointed by the
President, and the Governor, who is subject to removal by the Presi­
dent—what power hasn't it got!—You say it has the power but is
not govemmentally controlled!
Governor EccLES. No; it is not govemmentally controlled.
Mr. HoLLiSTER. You say it is not govemmentally controlled!
Governor EccLES. The members are appointed for 12 years.
Mr. HoMJSTER. It will be more govemmentally controlled than it
is at the present time.
Governor EccLES. The Board will not be more govemmentally
controlled. The Board will be given more power. What I am con­
tending for is not a govemmentally controlled central bank at all.
What I am contending for is a central body, charged with responsi­
bility for monetary control, in the public interest. Now, whether
it is the Federal Reserve Board or some other board is a thing for
Congress to decide. But what I am advocating is that the power
and the responsibility for monetary policy be placed in a central
body that is charged with the public interest, iand if it is felt that
the Federal Reserve Board is a political board and will be dominated
by political expediency, let us say, rather than public interest, in
monetary policy, then, certainly, there should be some changes.
But I do not think that the Federal Reserve Board under this legis­
lation should be considered a body that will act in connection with
its monetary policies, by reason of political expediency rather than
in the public interest.
Mr. HoLLiSTER. Is it not true, as a matter of fact, however, that,
as a general rule, boards with limited terms, appointed by the Execu­
tive, are to a great extent under Executive control, particularly
when the chief ofRcer can be removed at will!
Governor EccLEs. I do not think that that is necessarily true.
Twelve years is rather a long period for board members. I have
suggested, in order to make the board members even more inde­
pendent, that there be an increase in compensation for future ap­
pointive members, and that pensions apply to all members, if they
are not reappointed. I think that would give them a degree of inde­
pendence, under the provision which is suggested or provided for
m this legislation.
Mr. HoLLiSTER. That is all.
The CHAIRMAN. Well, gentlemen, it is 20 minutes to 1. I suggest
that we meet again at 3 o'clock.
Mr. GOLDSBOROUGH. Just one moment. This is not a question of
mine, but one of the members called my attention to it. On page 46
of the bill, at the bottom of the page, the second paragraph o f sec­
tion 16, it is said:
Every Federal Reserve bank shall maintain reserves in lawful money (other
than Federal Reserve notes or Federal Reserve bank notes) of not less than
35 percent—

And so forth.



At this time, what is that lawful money—what does it consist of ?
Do you remember?
Governor EccLES. There is, first, the national-bank notes, which
have just been called; and then there are the greenbacks, $346,000,000;
and there are silver certificates. And there is coin, of course, the
silver dollar and smaller coins.
Mr. BROWN. Gold certificates could be used also for that purpose.
Mr. GOLDSBOROUGH. Do you remember how much that amounts to—
how much that reserve could amount to?
Governor EccLEs. Well, of course, the national-bank notes will soon
be out.
Mr. GOLDSBOROUGH. Yes; I know that.
Dr. GOLDENWEISER. I can give you an answer in a few minutes.
Mr. GOLDSBOROUGH. Will you give us that later!
(Recess, 12:45 p. m. to 3 p. m.)

The committee reconvened at 3:15 p. m., Hon. Henry B. Steagall
(chairman) presiding.
The CHAIRMAN. Tell us about the amount of money in circulation.
Governor EccLES. According to Doctor Goldenweiser, the amount
of lawful money outside of Federal notes was approximately


The CHAIRMAN. This language excludes Federal Reserve notes and
Federal Reserve bank notes!
Governor EccLES. With the retirement of the national-bank notes,
which have now been recalled, the amount of lawful money will be re­
duced to approximately $1,500,000,000.
The CHAIRMAN. Of what would that consist!
Governor EccLES. Silver certificates----The CHAIRMAN. How much!
Governor EccLES. $702,000,000 the Rrst of the year; silver dollars,
$32,000,000; subsidiary silver. $309,000,000; and minor coin, $130,000,000; United States notes, $346,000,000. The national-bank notes,
on January 1, amounted to $888,000,000, and Federal Reserve notes
amounted to $3,520,000,000.
The CHAIRMAN. Federal Reserve notes are excluded!
Governor EccLES. Yes. After the call of the national-bank notes,
there will be $1,500,000,000 lawful money outside of Federal Reserve
Mr. SissoN. I should like to clear up or correct a statement that
I made this morning which has reference to an observation of Mr.
Hollister. He made the statement, in substance, that it was well
settled by the Supreme Court of the United States that the President
has the power arbitrarily to remove any administrative or executive
oiBcer appointed by him. I want to modify that in this way: It is
my understanding that in every instance where the question has been
raised as to the power of the President arbitrarily to remove any
executive or administrative oBicer appointed by him, where that
question has been decided by the Supreme Court the Court has upheld
the power of the President so to do. Mr. Hollister, very likely with
some reason, says that is not settled. There is, of course, as we
know, a case before the United States Supreme Court involving that



question, which case has not been decided. My own opinion is that
at any time that question is decided by the United States Supreme
Court that power of the President will be upheld. In view, however,
of the fact, that it is not entirely conceded, at least it seems to me,
as the chairman this morning suggested, that it becomes of some
importance to the committee to decide whether the language recom­
mended by Governor Eccles in this bill should be contained in the
bill. Therefore, that question does become of some importance
here. It appears to me, aside from the reason that the chairman
advanced, that it becomes of some importance to have it in the act,
so that, in the light of experience, it might obviate a contest in the
future. I think that any limitation upon the power of the Presi­
dent in this regard would be unconstitutional—that is, if we at­
tempted to say that he shall not have the power—but for the reason
stated by the chairman and also in the interest of clarity, as Gover­
nor Eccles has said, and also that it might obviate any question being
raised about it in the courts, if we believe that this should be a
national body in which there should be some unity of purpose
between the administration and the body in control of the monetary
policy, it seems to me that at least this committee should decide it
while considering the bill. I myself favor the language recom­
mended by Governor Eccles.
I think that is all I have to say.
The CHAIRMAN. Mr. Brown, do you desire to ask questions?
Mr. BROWN. I should like to ask Governor Eccles what the present
policy of the Federal Reserve Board is relative to open-market
Governor EccLES. The open-market committee is composed of the
12 governors. The law recognizes it as their responsibility to intiate
a policy and to submit recommendations to the Board for its
approval, disapproval, or suggestions; so that the law as now con­
stituted does not require the Federal Reserve Board as such to adopt
an open-market policy; except, as I understand it, in giving their
approval or disapproval to the policy initiated by the governors'
committee, they are required to take into account the credit needs
of agriculture, commerce, and industry.
Mr. BROWN. Under the present section B of 12-A you are given
practical control of open-market operations, are you not?

Governor EccLES. In the present law!
Mr. BROWN. Under present law.
Governor EcCLEs. under proposed amendments!

Mr. BROWN. N o; under present law. Section B of 12-A provides
No Federal Reserve bank shaU engage in open-market operations under sec­
tion 14 o f this Act except in accordance with regulations adopted by the
Federal Reserve Board. The Board committee from time to time shall con­
stitute, adopt, and transmit to the committee and to the several Federal
Reserve banks regulations relating to the open-market transactions o f such
banks and the relations of the Federal Reserve System with foreign-controlled
or foreign banks.

It seems to me that the power to regulate there is the power to con­
trol. I addressed my question having in mind that you are asking
us to vest complete authority which will be largely, I think to a
greater extent than at present, under the control of the Federal



Reserve Board; and I think it would be interesting to Members of
Congress, and particularly to this committee, to know what your
policy would be under present conditions. I assume it is the same
policy we have at the present time.
Governor EccLES. I cannot speak for the Federal Reserve Board
as to what the policy of the Board would be if this legislation is
enacted. That would naturally be a matter that the Board would
have to determine.
Mr. BROWN. Do you not think it is fair for us to ask what you
would do if given this power under present conditions! It seems
to me that we ought to know, that Congress ought to know your
attitude as chairman of the Board.
Governor EccLBS. I can speak only for myself with reference to
the matter. I cannot speak for other members of the Board, who
would be just as independent in exercising their judgment as I
would try to be.
Mr. BROWN. When I say " your " I am referring directly to you.
Governor EccLES. Yes; I understand. Under present circum­
stances there is very little, if anything, that can be done.
Mr. GOLDSBOROUGH. You mean you cannot push a string.
Governor EccLBS. That is a good way to put it, one cannot push
a string. We are in the depths of a depression and, as I have said
several times before this committee, beyond creating an easy money
situation through reduction of discount rates and through the crea­
tion of excess reserves, there is very little, if anything that the re­
serve organization can do toward bringing about recovery. I
believe that in a condition of great business activity that is develop­
ing to a point of credit inflation monetary action can very effectvely
curb undue expansion.
Mr. BROWN. That is a case of pulling the string.
Governor EccLES. Yes. Through reduction of discount rates, mak­
ing cheap money and creating excess reserves, there is also a possibil­
ity of stopping deflation, particularly if that power is used combined
with this broadening of eligibility requirement.
Mr. BROWN. Does not a Federal Reserve bank have two main
functions! Eliminating the temporary loans we provided for last
year and other various forms of aid to all banks and industries, are
not the main functions of a Federal Reserve bank, first, rediscount­
ing of paper turned in by; the member banks!
Governor EccLES. Eligible paper.
Mr. BROWN. And, secondly, to engage in open market transactions,
which, as I understand, relates to the buying of warehouse certifi­
cates and other evidences of property back of indebtedness through­
out the country as a whole and not confined to the particular Federal
Reserve district!
Governor EccLES. It is largely the purchase of Government bonds.
Mr. BROWN. Do you not engage in the purchase of warehouse cer­
Governor EccLES. Bankers' acceptances.
Mr. BROWN. Sometimes you do and sometimes you do not. Is
not that a question which the open-market committee decides
whether you shall engage or not in that line of work?



Governor Ecci^s. The open market committee determines whether
or not it shall purchase or sell Government bonds and bankers'
Mr. BROWN. Under section D of 13-A of the present law you
cannot compel a particular Federal Reserve bank to engage through
your open-market committee or Federal Reserve Board in openmarket operations, can you!
Governor EccLES. That is right.
Mr. BROWN. Under the proposed bill is it your idea that such
authority will vest in the open-market committee!
Governor EccLES. That is right.
Mr. BROWN. In other words, you feel that it is proper for the
Federal Reserve Board to say to a Federal Reserve bank that it
shall engage in the purchase of Government bonds and bankers'
Governor EccLES. That is right. The way it is done is through
the system account. The holdings are largely prorated to the banks
in relation to (heir size and their own reserve situations.
Mr. BROWN. Under the second portion of the present bill, section
12-A, it really does not seem to me that it gives you authority to
compel banks to engage in open-market operations. I do not Rnd
anything in there requiring them to do so. It says that " they shall
conform open market operations to the provision hereof." I do not
think it provides that they shall engage in open-market operations
against the wishes of their own board of directors.
Do I understand that you have proposed an amendment to section
Governor EccLES. Do you mean additional amendments to the bill
that was introduced!
Mr. BROWN. Yes.
Governor EccLES. Yes.
Mr. BROWN. Is there any language in your amendments that makes
it obligatory upon the Federal Reserve banks to engage in openmarket operations if they do not want to do so.
Governor Ecci*ES. It was expected in the original legislation that,
where there was a committee of Rve proposed, the governor and two
other members of the board, and two governors of reserve banks, the
reserve banks would be required to participate in the purchase o f
securities or bills as determined by the open-market committee.
Mr. BROWN. Does your general counsel think that the language of
the act as you propose is suiBciently broad to enable the Board to so
command the Federal Reserve banks! It does not seem so to me.
I f it is desirable that such an authority should be effected, I think
the language o f the bill should be broader.
Governor EccLES. It was intended to be; whether it is or not I do
not know.
Mr. WrATT. The bill as introduced contains this language, on page
45, lines 3 to 9: " The committee from time to time shall consider,
adopt, and transmit to the Federal Reserve banks resolutions setting
forth policies which, in the judgment of the committee, should be
followed with respect to open-market operations of the Federal Re­
serve banks, and the Federal Reserve banks shall conform their openmarket operations to the provisions thereof." That means that the



Federal Reserve banks must conform their open-market operations
to the provisions of the resolutions adopted by the committee*
Mr. BROWN. Suppose the bank says, "W e have only suRicient
funds, in our judgment, to take care of the necessary rediscounting
of our own member banks and we do not desire to engage in openmarket operations." Is there anything in that law to compel them
to so engage in open market operations!
Mr. W YATT. Suppose that the committee adopts a resolution direct­
ing that the banks shall purchase a billion dollars worth of Gov­
ernment bonds and that each bank shall buy its pro rata share of such
bonds. How can they conform to the provisions of that resolution
without each bank buying its pro rata share!
Mr. BROWN. By simply refusing to engage in open-market opera­
tions and confining their business to rediscounting with its own mem­
ber banks. That is a logical conclusion, I believe.
Mr. WYATT. I think the point you raise is a good one and that
the bill should be clariRed so as to eliminate any doubt on the point.
Governor EccLES. The intention is to make it mandatory, other­
wise it would be impossible effectively to carry out any monetary
Mr. BROWN. I do not mean to say that I approve the policy, be­
cause I am inclined to agree with some things Mr. Hollister indicated
this morning, among them being that such control of Federal banks
and district banks is more than we ought to give. I want to point
out that it did not seem to me that your statement at the beginning of
these hearings said it was desirable.
Governor E ccLES. It seems to me that when we speak of central­
izing control outside of the banks we fail to recognize the peculiar
structure of our Federal Reserve banking system as contrasted with
central banks elsewhere in the world. It we had here, which may
have been the more desirable arrangement, one bank with 12 branches,
or as many branches as may be necessary to serve the country, then
the board of directors would be charged with the responsibility of the
monetary policy as well as the responsibility of providing credit to
business, agriculture, and industry.
Mr. BROWN. Instead of that kind of system we have 12 separate,
distinct banks.
Governor EccLES. Yes.

Mr. BROWN. With 12 different capital set-ups varying in amounts
of surplus.
Governor EccLEs. Capital and surplus do not determine the ability
to lend or to participate.
Mr. BROWN. It determines the amount of money they have avail­
Governor EccLES. No; they create money.

Mr. BROWN. Only based upon the assets!
Governor EccLES. Only based upon the gold limits.
Mr. BROWN. So that you are attempting here to give such control
to the Federal Reserve Board similar in authority to that of a
board of directors over one bank with 12 branches!
Governor EccEEs. But, actually, so far as open-market policy is
concerned, if we recognize the need of a monetary policy, it must
be carried out in the public interest. It cannot be left to the 12
banks, acting independently.



Mr. BROWN. I grant that. But I do not agree with you that your
control relates only to open-market operations. You are establishing
under this law, or, at least, you are given the right to establish,
general rules for the eligibility of paper for discount.
Governor EccLEs. That is correct j but that does not mean that
the Federal Reserve Board has anything to do with the passing upon
the loans which are made. The Board has only the responsibility
of making rules and regulations with reference to the conditions
under which Federal Reserve banks can rediscount for or lend to
member banks; and its power is strictly limited, according to the
present statutes, to permit loans only upon certain specific types of
paper, of which there is very little in existence.
I f the Board were given more discretion, the system would become
more flexible. The proposed amendment in no way gives the Board
power to compel the Reserve banks to make the loans. It is expected
that the Reserve banks will be just as independent as they have been
with reference to their autonomy in matters of regional interest.
Mr. BROWN. Principally rediscounting!
Governor EccLES. Not only in rediscounting, but also in all rela­
tions with member banks. The examinations are all conducted
through the Reserve banks. The Federal Reserve Board depends
upon the Reserve banks to carry on all of the relationships with the
member banks and with the communities. We are only providing
here for the placing of responsibility in a comparatively small body
that can be charged with the public interest, to deal with monetary
policy. That seems to me to be absolutely essential, if we expect to
avoid in this country the dangers inherent in a purely banker control
over the creation and the extinguishing of credit. We have had ex­
perience with that, and we know that it does not work very satisfac­
torily. Whether it will work any differently under the proposed ar­
rangement, time alone will determine. But it does seem to me that
to deal with the monetary needs of a Nation on other than a national
basis and with any other purpose than that of serving the public
interest is to invite disaster.
Mr. BROWN. In that connection, I note that by section 208 of the
pending bill, you repeal the provisions of the banking law, I think,
of 1933, by which we authorized the issuance of Federal Reserve
notes based upon the eligible paper that had been turned over to the
Federal Reserve banks by the member banks. And it was under the
authority of that section that the President recently extended the
right so to do from March 3, 1935, on for 2 years. That was done
2 or 3 weeks ago, was it not!
Governor EccLES. That is right
Mr. BROWN. Now you are repealing that provision of the law!
Governor ECCLES. That is right.
Mr. BROWN. And you propose to substitute section 16 of the law,
I presume, where the Federal Reserve Board have practically com­
plete control of that matter of the issuance of new money, is that
Governor Ecci^s. As I understand what you mean, the Emergency
Banking Act referred to permitted the Federal Reserve banks to
secure Federal Reserve notes with Government bonds, in addition
to commercial paper. The period of time during which that could
be done was extended, very recently, for a perioa of 2 years.



Mr. BROWN. That is right. Governor Eccles, not only Govern­
ment bonds, but notes, bills of exchange, and acceptances were eligi­
ble as collateral for the issue of Federal Reserve notes, were they not?
Governor EccLEB. Yes; that is right.
Mr. BROWN. Now we are repealing that section of the law.
Governor EccLES. Because we are making it unnecessary to put Up
any collateral with the Federal Reserve agent for the purpose of
securing Federal Reserve notes. It adds nothing whatever to the
value of the notes, as I have explained here on several occasions;
and it is an unnecessary requirement. No central bank requires it
except that it is still adhered to in the Bank of England; but no
other bank in the world requires it, and the amount of Federal Re­
serve notes that are used has no relationship whatever to the col^
lateral requirement. Federal Reserve notes may be required in great
amount when there are practically no discounts. The amount of the
rediscounts by member banks with the Reserve banks has no direct
relationship to the amount of Federal Reserve notes required. Only
the people of the country can determine the amount of currency is
required by the drawing of currency instead of checks.
Mr. BROWN. It seems to me that there is a considerable disagree­
ment upon that matter of policy. We specified in the Banking Act
of 1933 certain types of commercial paper that were eligible as
collateral for the issue of Federal Reserve notes, the issue of new
money. Now, you repealed that, and, under section 16, you cover it
all by one sentence: "Federal Reserve notes shall be issued and
retired under such rules and regulations as the Federal Reserve
Board may prescribe and shall be legal tender for all purposes."
Now, is it hot a fact that when people borrow money from banks
it shows that they are engaging in business, that they need credit!
Their notes are turned over to the Federal Reserve banks and money
Governor Eccuss. No.
Mr. BROWN. It was under the Banking Act of 1933.
Governor EccLES. No currency is issued as a result o f that trans­
action at all.

Mr. BROWN. I am glad to hear that, because we have heard a great
deal over in the House about money being issued. You say there is
none issued!
Governor EccLES. No. The borrowing by a member bank from
the Federal Reserve bank does not determine the amount of cur­
rency that the member bank or the banks as a whole or the public
as a whole may require or use.
Mr. BROWN. Well, was not that law passed for the purpose of
supplying the need of banks for currency to pay their depositors
when they demand it !
Governor EccLES. No; 40 percent of the amount of notes outstand­
ing must be secured by gold certificates and 60 percent was required
to be secured by commercial paper. As a matter of fact, there was
so little commercial paper that it was impossible to provide the 60
percent ; and therefore at one time there was over a billion dollars
of gold, in addition to the 40 percent gold reserve, that had to be
used as a substitute for the lacking commercial paper. In other
words, it was used to help make up the 60 percent; because there



was not suRicient commercial paper available. There is not the
quantity of commercial paper in the country upon which to-----Mr. RRowN (interposing). How about the individual banks? Let
us take a bank with a capital of a million dollars and a deposit lia­
bility of 10 million dollars, and it has commercial paper that would
be eligible under this section of the Banking Act of 1933. I think
this committee supposed that if that bank wanted to convert that
commercial paper into cash it would be able to do so.
Governor EccLES. It still can do it under this. There is no change
in the law proposed that prevents that. That bank can still go to
the Reserve bank and can take that commercial paper and can get
credit in its reserve account with the Reserve bank and can draw
down currency to the extent that it needs-----Mr. BROWN. That is, by rediscounting its notes!
Governor EccuEs. Or, as we are proposing here, if it has not the
eligible paper and it has other sound assets.
Mr. BROWN. I may be dense on this, but it seems to me that you are
throwing out the basis for the issue of currency by issuing currency
upon the resolution of the Federal Reserve Board instead of basing
the issue upon the assets that are in the vaults of the member banks
of the country and the demand for money on the part of the depositing
Governor EccLES. Let me explain that again.
The Federal Reserve banks have two kinds of liabilities—three with
their capital and surplus: Deposit liability, note liability, and the
capital and surplus liability. Loans and discounts and investments,
lawful money, and gold certificates are the assets of the Reserve banks.
The member banks which carry their reserves with the Reserve
banks ask the Reserve banks for currency only to the extent that they
have deposits with the Reserve banks. They must maintain a mini­
mum reserve balance with the Federal Reserve banks, and when they
want currency they must acquire additional balances to which they
can charge the currency withdrawn. In order to get that, they may
send paper to be discounted with the Reserve banks.
The member banks supply currency to their customers, to their
depositors, when the depositors want to draw out their deposits, or a
portion of them, in currency; and if a bank reaches a position where
the customers have called upon the bank for currency and it is unable
to meet that call, that bank closes. Many of the banks in this country
were unable to meet that call, not because they were not sound but
because they did not have the eligible paper with which to go to the
Reserve bank and get credit; and therefore, because of the fact that
the banks were unable to do that, those banks were compelled to close.
As the number of banks closing increased, the demand for currency
increased, not because of the activity of business but because of hoard­
ing ; and the very fact that the banks were unable to go to the Reserve
banks with sound assets to meet the demands of these depositors meant
finally a banking collapse. Had the banks been able to pay their
depositors in currency, the depositors would not have wanted the
currency, as was demonstrated after the bank holiday.
Mr. BROWN. Does it not come down then to this question, or to this
situation: That the reason for the collapse of the banks that were
actually solvent, but that had so-called "frozen assets" or "frozen
loans "-----



Governor EccLES (interposing). Deflation created a frozen con­
Mr. BnowN. But it was a lack of liberality in regard to the eligibil­
ity o f paper for rediscounting that caused a good deal of the distress.
And) by your next section, 206, you seek to liberalize those redis­
counting rules!
Governor EccLES. That is right.

Mr. BROWN. Now, that brings me to the meat of my discourse,
What are those rules going to be! That is the same question I asked
you regarding the open market operations. I think this committee
and this Congress ought to know what your own idea, Governor
Eccles, is and what those rules of eligibility are going to be. I
recognize that the law sets a standard as to real-estate loans.
Before vou make your answer let me get one of my favorite objec­
tions to (Government practice in the past with regard to those notes
stated on the record. I am thinking of a small national bank in the
country. Now, the Comptroller's ofHce has a rule by which certain
collateral listed on the New York Stock Exchange, or other large ex­
change, is recognized as collateral and the paper which that collateral
secures is eligible for loans. We have tens of thousands of small
manufacturing concerns, whose securities are good, but which are not
listed upon the New York Stock Exchange or the Detroit Stock
Exchange or the Chicago Stock Exchange, or any other large ex­
change. Their statements show them to nave plenty of cash assets
back of those securities. But, because of the rules of the Comptrol­
ler's OfBce—and I am not very familiar with the examination made by
the Federal Reserve banks, but I presume they are the same—the col­
lateral of those small concerns does not stand nearly as well for loans
as does the stock of large concerns. Now, it seems to me that that
condition is unfortunate for the small banks and the small businesses;
and I am wondering, with respect to that situation, whether or not
there is going to be any liberalization regarding the eligibility of
that type of paper as collateral for loans rediscounted with the
Federal Reserve banks.
Governor EccLES. The matter that you refer to has reference to
the treatment of certain types of loans m banks by the Comptroller's
Mr. BROWN. Well, and by the Federal Reserve Board's examiners.
Governor EccLES. The Federal Reserve Board's examiners accept
the Comptroller's examinations for all national banks. They make
no independent examinations. That would be only a duplication.
The Comptroller's examinations are accepted by the Federal Reserve
Mr. BROWN. That would apply to thousands of member State
Governor EccLES. There are only 900 State banks, and these are
examined by the Reserve banks. But there is no prohibition either
under the law or in the regulations, to my knowledge, against banks
making loans secured by other than listed collateral, either stocks or
Mr. BROWN. You say there is none!
Governor EccLES. There is no prohibition either in the regulation?
or in the law against them.
Mr BROWN. There is in the practice.



Governor EccLES. No; not in practice.

Mr. BROWN. I disagree with you.
Governor EccLES. There is none in practice. The question is, of
course, to establish values back of loans which are secured by un­
listed collateral. Now, if collateral is listed it becomes much easier
to establish whether or not that particular loan is adequately secured
than is the case where the loan is secured by some local security that
it is very closely held and has no market ability. It becomes dMBcult for an examiner to determine whether or not a loan is adequately
and safely secured for that reason, but-----Mr. BROWN (interposing). Governor Eccles, don't you know it to
be a fact that, with regard to the bonds of concerns throughout the
country, the Comptroller's ofEce has refused to approve bonds that
are not listed on the New York Exchange or some other large ex­
change so as to be readily marketable ?
Governor EccLES. Refused to accept them for what!
Mr. BROWN. As loans.
Governor EccLES. To secure loans!

Mr. BaowN. Yes.
Governor EccLES. There is no prohibition in the law.
Mr. BROWN. There is no prohibition in the law, but the practice
is to decline to approve such loans.
Governor EccLES. There is no such requirement.
Mr. BROWN. What I am wondering is if you are going to be a
little more liberal on this!
Governor EccLES. I know that there are literally thousands of bond
issues, municipal issues, all kinds of issues, which are held by banks;
and, so long as those bonds are not in default, and their payments
are being met-----Mr. BROWN (interposing). I will except municipal bonds.
Governor EccLES. There is no restriction or prohibition against
the holding of those bonds. It is true that the examiners make an
eDFort to establish the value back of them, in the absence of a quoted
market, which is very desirable and necessary, in order to determine
whether or not the loan which the bonds or stocks secure, or the bonds
which are held directly, are worth what they purport to be worth.
Now, in the case of a local stock issue or local bond issue, there
is, naturally, the problem of attempting to determine the value of
that security.
t know, in my own banking experience, over a period of 20 years,
that we have had no trouble with the Comptrollers oHice with refer­
ence to matters of that sort; and many loans have been made on
local securities, and various bond issues have been purchased that
were not listed. The main thing is to have available and be able
to give to the examiner information with reference to the local
company whose stock is put up as collateral or whose bonds are put
up as collateral. Such information is necessary to establish the
value of the collateral which secures the note in question.
I find that most of the trouble is that in accepting local securities,
stocks or bonds, banks fail to provide suiBcient information to enable
the examiners to substantiate the value of the securities which they
have taken. It is lack of information.
Mr. BROWN. I want to say to you that it is my judgment, then,
that the attitude of the Comptroller's oiEce has been very much more



severe in the Chicago district than it has been in the San Francisco
district or the Salt Lake City district, because that rule was enforced
when the banks were reorganizing in Michigan and Ohio in 1933 and
1934; and they did insist that those bonds be listed bonds.
I am glad that you have stated in the record what I think is a
more liberal policy regarding local stocks as collateral, as well as
local bonds.
I have two or three other questions, but I would like a little fur­
ther answer to my question as to what other classes of paper, in
your judgment, the Federal Reserve Board should determine to be
eligible paper, for rediscount in the Federal Reserve banks.
Governor EccLES. It would be my personal opinion—I cannot
speak for the Board—that very broad rules and regulations should
be made with reference to this subject and that a broad discretion
should be left to the Federal Reserve banks. I think that, in matters
of local credit concerning each Federal Reserve district, if they are
given discretionary power, the Federal Reserve banks can be relied
upon to make only sound loans; and I do not think, as a practical
matter, that there should be a lot of limitations and restrictions with
reference to what may be considered sound paper.
Mr. BaowN. Well, for instance, as I understand it, 3-months'
paper has been rediscounted, one renewal allowed, and after that it
was taken out of the class of commercial paper that was eligible for
discount. That was a general rule in the Minneapolis and Chicago
districts and always enforced. Now, that was a general rule,
whereas there are a great many businesses that take a year for a turn­
over; and they were limited there to 6 months' credit. Now, would
your own personal disposition be to so liberalize the rule, if what I
say is true of that, so that paper for 9 months or 12 months could
be taken ?
Governor Ecci^s. I would not like to say, under normal condi­
tions, that paper should be taken on a bills-payable basis, for longer
than a 6-months' period, because it is always an easy matter to renew
the paper.
Mr. BROWN. Well, what would you say!
Governor EccLES. That would be up to the Reserve banks, the
question of renewal would be up to them. Certainly it would be bad
for the banking system as a whole to permit continuous borrowing
from the Reserve banks by the member banks. Continuous borrow­
ing from the Reserve banks by the member banks could only mean
that the member banks were lending money and rediscounting or
borrowing because of the difference in the rate that they paid the
Reserve banks and the rate at which they were able to loan. How­
ever, I can well imagine a situation where you would have a crop
failure, drought conditions, catastrophes, and so forth, where it
would be very necessary for the Reserve banks in those areas not to
expect liquidation in that particular area; and it would be desirable
to carry the loans over for an additional time. Past experience and
the attitude of member banks toward borrowing indicate that we
can be assured that member banks are not going to borrow from the
Reserve banks except for short, seasonal periods of time, unless an
emergency develops, which may require that they borrow for longer
periods of time; and that is the purpose of this legislation.
130417— 35-------14



Mr. BcowN. But I am talking about the small business man now.
It happens that in my district, m one of the large resorts of Michi­
gan, the practice in the merchandising business there is for a mer­
chant to buy his goods in December. If he can pay for them then
he gets a substantial discount. He will not get his return on the
bulk of those goods until the following August. Now, it seems to
me that it is just as legitimate for that purpose to get a 9 months'
loan, in that type of business, as it is in certain other types of busi­
ness, where the turnover is made in 3 months, as it is in the grocery
business; and that he should be accommodated for the 9 months'
period. Now, do you have in contemplation, when you lay down
these rules and regulations for eligibility, sucn a situation, and that
the normal course of a business of that character should be accom­
modated !
Governor EccLES. There is nothing to prevent the individual banks
from making loans of that sort today.
Mr. BROWN. I am talking about rediscounts.
Governor EccLES. Of course, there is not any rediscounting today.
There are excess reserves of tremendous amounts.

Mr. JpROWN. There is, o f course, in some banks.

Governor EccLES. That is true of the country as a whole. There
is practically no borrowing from the Reserve banks, and most banks
bave excess reserves. In addition to that, if they had to borrow,
they would borrow on their Government bonds; because they would
be the easiest assets upon which to borrow.

Mr. BROWN. Well, I take it that, on all these questions, you are
very much adverse to stating what, in your judgment, the policy
of the Federal Reserve Board will be in regard to the rediscounting
of paper.
Governor EccuBS. I think------

Mr. BROWN (interposing). But, with the utmost good humor, I
do not think you have told me yet of any particular liberalization
that you propose to make in the rediscounting rules.
Governor E ccLE S. Rediscounting rules today are not made by the
Mr. BROWN. But they will be under this bill, if it becomes a law*

Governor EccuBS. Yes; but the law today states that only certain
specific types of paper, which are known now as eligible, short-term,
self-liquidating paper, are eligible. Now, this proposed legislation
broadens the power to a point where the Reserve Board is able to
make rules and regulations which will permit Reserve banks to
make advances against any sound assets.
Mr. BROWN. What I am trying to find out is, what is your idea as
to what they should do!

Governor EccLES. I would leave that up to the Reserve banks. I
would favor broad enough rules to leave discretion to the Reserve
banhs in passing upon credit. You might put a limitation of 6
months advances on a bills-payable basis. To make rules and regu­
lations in Washington as to what would be adequate security for
advances to member banks would be rather a complicated procedure
and would certainly be inadvisable and unnecessary.
Mr, BROWN. But the banks are given the authority, under the law,
to make those rules and regulations.
Governor EccLEs. Which banks!



Mr. BxowN. The Federal Reserve banks and the Federal Reserve
Board are given that authority.
Governor EccLES. That is right.
Mr. BaowN. To determine the maturities and other matters.
Governor EccLBS. That is right.
Mr. BaowN. Now, what I am trying to And out is what your pres­
ent attitude is toward the eligibility of the various classes of paper.
Governor EccLBS. I am just saying that I would permit the Reserve
banks to loan on any and all assets, real-estate mortgages, collateral
loans, bonds, or other assets, which they considered sound, on such a
basis as they considered sound.
Mr. BaowN. And with what maturities!
Governor EccLBS. My personal opinion, without giving any
thought or study particularly to the problem, would be that 6 months
advances on a bills-payable basis should be adequate. That does not
necessarily mean that a bank, at the end of 6 months, could not renew
for another 3 months or 6 months. But I do not believe that, on a
bills-payable basis, for advances, that 6 months would be working
any hardship upon the banks.
But in case of a rediscount^ you would have maturity based upon
what would be considered the period of natural liquidation. For
instance, agricultural and livestock loans are 9 months, as it is con­
sidered that the underlying transactions 'take that length of time.
Those are rediscountable now. Collateral loans, loans which are not
considered rediscountable and are not self-liquidating, through the
completion of business transactions, such as loans against mortgages
or loans against bonds, would likely only be made m cases of emer­
gency^ in cases of deflationary situations, and they would not be
made m the natural course of business except to a very limited extent.
Certainly, the Reserve bank should be given the power to enable a
bank that has an unusual shrinkage of its deposits, and yet has sound
assets, to get credit on them until it can carry out a normal process of
liquidation, without closing and without bringing about an undue
de&ition. That is the purpose of this legislation.
The CHAIRMAN. And you mean sound assets made within the limi­
tation of the law establishing the rules under which those loans
should be made!
Governor Ecctzs. Yes.
The CHAIRMAN. In other words, if the borrowing bank had made
those loans within the law!
Governor EccEEs. That is right.
Mr. BROWN. Now, getting back to commercial paper—expressed in
my poor way—should not the rule be that the discount should be
permitted for such length of time as would cover the normal period
from production to sale of the goods!
Governor EccLES. I think that is what is contemplated under the
law now.
Mr. BROWN. Personally, I would like to have you say that you
feel that way about it yourself. In other words, that you feel that
that is the kind of rediscounting that you, as a member of the Board,
would favor.
Governor EccLES. You mean in case the Board is making rules
with reference to rediscounting!
Mr. BaowN. Yes.



Governor EccLES. What do you have in mind, what particular
Mr. BROWN. Let us take something that you and I know something
about. Suppose we did not have the system of handling sugar by
warehouse receipt. It takes from September, generally, to August,
in Michigan, to bring about the cycle from payment to the farmer
for the production of sugar beets, to the final payment for the sugar
and collection. Now, it seems to me that the period of discounts
should be that length of time and that notes for that period should
be eligible for rediscount.
Governor EccLES. Do you mean on a straight bills-payable basis?
Mr. BROWN. Straight bills-payable basis; yes.
Governor EccLEs. As a general rule, manufacturing companies,
such as sugar companies and other companies, borrowing from the
banks, seldom want to borrow for a period longer than 6 months, or,
maybe, even 90 days, because they are constantly reducing the out­
standing loans.
Mr. BROWN. That is right.
Governor ECCLES. And they do not know exactly by what amount
they are going to be able to reduce it; and, hence, they do not want
to rediscount up to the maximum amount of the financial require­
ments for a period of 9 months, because it may be that they can pay
a substantial amount in 3 months and renew the balance. I believe
that, even if a 9-month rediscount were permitted in that type of
transaction, there would be very few that would use it.
Mr. BROWN. But you might find one fellow that would want to
Governor EccLES. I see no objection to that, if the condition of the
company is such that an open line of credit is desirable, and they
were willing to borrow for 9 months, and the bank should take 9
months' paper. There would be no reason for the Reserve bank not
taking such paper as quickly as they would take livestock paper.
Mr. BROWN. In other words, you feel that no such rule should be
established by the Federal Reserve Board as would prevent the tak­
ing of paper having such maturity or length of time as would cover
the normal period from production to final consumption, sale, and
Governor EccLES. It would seem to me that that should be per­
mitted. I f a borrower wanted to borrow for that length of time and
the credit was good credit, and the member bank was willing to
accept that type of credit as being self-liquidating commercial credit,
there should be no objection and the Reserve bank should be per­
mitted to take that type of loan from the member bank.
Mr. FoRD. Governor Eccles, you used the phrase there "good
credit." Now, is not the Federal Reserve bank in a district, when
a member bank comes to the Reserve bank with its assets, going to be
reasonably certain that the assets ofered are sound !
Governor Ecci*ES. I think there is no question about it.

Mr. FoRD. Then, I think that the question that Mr. Brown brings
up is largely a matter of local prestige, based on the actual knowl­
edge of the member bank that makes the original loan, of the sound­
ness of the person who makes the loan, and it can back him up if St
has to go to the Federal Reserve bank.



Mr. BROWN. Up to the present time they have held them down to
the 3-months' period, which I think is too short.
Governor EccLES. I think that is largely due to the member banks,
rather than to the Reserve banks. The member banks prefer 90-day
paper, because they have seen in the past the very wide fluctuation in
the value of commodities against which they loan. In loaning for
a period of 9 months on any commodity, there is room for very wide
fluctuations in prices; and it is my belief that the member bank
passing on the credit, for its own protection, will adhere to 90-day
paper, and renew; because, after all, even if it borrows from the
Reserve bank, it is responsible for the obligation, and the Reserve
bank is not making the loan directly to the original borrower.
Mr. FoRD. Would there be anything wrong with this type, or
would there likely be a refusal to discount this type of paper: A
man borrows $20,000 for 90 days; at the end o f 90 days he pays
38,000 back; there is still $12,000 left. An emergency arises, where
the local bank has to go to the Federal Reserve bank to rediscount;
would there be anything against that remaining $12,000, if it. were
sound, if it is part of the renewal note!

Governor EccLES. Not the fact that it is a renewal note.
Mr. FoRD. Does it not give it the status of the original?

Governor EccLES. Yes. In fact, that is what is usually done
with commercial paper. It is paid off by renewals.
Mr. BROWN. The rule has been in the Minneapolis district, at
least, that they would allow one renewal, and at the end of 6 months
you would have to pay back.
Governor EccLES. The member banks did that.
Mr. BROWN. The member banks would.
I want to discuss with you just a moment a subject that I took
up with Mr. Crowley, Chairman of the Federal Deposit Insurance
Corporation, this matter of bank examinations. It seems to me that
we have too many governmental authorities examining banks. We
have 3 at the present time, and 4 if we include the Reconstruction
Finance Corporation, which, I grant, is a temporary organization.
We have the Federal Reserve banks, the Comptroller's OfEce; the
Federal Deposit Insurance Corporation has now asked for authority,
in the present bill, to examine national and member State banks.
I want to ask first if the Federal Reserve Board has followed
the policy of appointing only such examiners as are designated by
the ComptroMer of the Currency! Now, I will explain that. Under
the first section of the law on bank examinations, it appears to have
been the policy of the act to require that Federal Reserve bank
examiners should be designated by the Comptroller of the Currency.
Then, under a section or so later, it is provided that the Federal
Reserve authorities themselves may designate examiners.
Now, what I am wondering is whether the general practice has
been to get examiners designated by the Comptroller of the Cur­
rency or to use the authority conferred in the second portion of the
law, which is section 483 of the United States Code, annotated. The
first section I referred to is section 481.
Governor EccLES. I cannot speak as to what the Reserve Board
may have done in the past. I am not familiar with it. But it is
my understanding that the Federal Reserve Board chooses its own
examiners entirely. The Examining Division of the Federal Re



serve Board deals, of course, with the member State banks. The
Comptroller's examinations are accepted for national banks.
Mr. BROWN (interposing). For the national banks?
Governor EccLES. There is no point, of course, to duplications
of examinations.
Mr. BROWN. Well, am I right in assuming, then, that the Comp­
troller is not examining member banks of the Federal Reserve Sys­
tem who are not national banks!
Governor EccLES. That is correct. They are not examining them,
and the Federal Reserve Board is not examining the national banks.
Mr. BROWN. No.
Governor EccLES. The examination reports are available and are
given to the Federal Reserve banks, so that they can get any and
all information that they desire from the Comptroller's olRce, with
reference to national banks, which, of course, are members.
Mr. BROWN. The statute says that the Comptroller of the Cur­
rency shall appoint examiners who shall examine every member
bank. Evidently the law is not being followed in that respect. I
do not have any objection to it.
Governor EccLEs. Do you know whether that question has ever
come up, Walter!
Mr. WYATT. The original Federal Reserve Act required the Comp­
troller to examine all members banks; but section 9 was amended
by the act of June 21, 1917, so as to say that State member banks
shall not be subject to examination by the Comptroller of the Cur­
rency but shall be subject to examination by examiners selected or
approved by the Federal Reserve Board.
Mr. BROWN. You will Rnd, two sections later, that special exam­
inations are provided for by the Federal Reserve Board, but I do
not believe that the first section was ever repealed. But that is an
academic question; I am not particular!y interested in that. But
I believe mat the examinations should be conducted by 1 bureau
of the Government and not by 8.
Governor EccLES. So do I.
Mr. BROWN. And I think it is a good time to change the law in
that respect. The expense of the Government examination of the
bank is borne by the bank!
Governor EccLES. It is.
Mr. BROWN. Not only the examination by the Federal Reserve
Board but the examination by the Comptroller's ofEce!
Governor EccLES. That is right
Mr. BROWN. Take a community having 3 banks, 1 a national bank
and 2 member State banks, and you have a great deal heavier expense
upon that bank by reason of a trip by the national bank examiner
and then a subsequent trip for the examination of the other 2 banks
by the Federal Reserve bank examiner; and it seems to me that it
is an unjust and unnecessary expense upon the banks.
Now, the Federal Deposit Insurance Corporation is the only allinclusive bureau with respect to the examination of banks in the
Government, is it not!
Governor EccLEs. I do not understand that the Federal Deposit
Insurance Corporation was given the power to examine national



Mr. BROWN. Yes; it is under this bill. They may, with the con­
sent of the Comptroller of the Currency and with the consent of
the Federal Reserve Board, examine any bank.
Governor EccLES. Yes.
Mr. BROWN. National banks or member State banks.
Governor EccLEs. Yes.
Mr. BROWN. I say " an all-inclusive bureau ", with respect to the
examination of banks, because of the fact that they, of course, in­
clude all national banks, all member banks in the Federal Reserve
System, and a great many nonmember banks; in fact, all non­
member banks which are in the Federal Deposit Insurance Corpo­
ration. That is a fact, is it not—that they cover them all!
Governor EccLES. They cover them all.
Mr. BROWN. And the only banks in the country that they do not
cover are the uninsured banks, which are very few in number?
Governor EccLES. That is correct.
Mr. BROWN. I think I will close that part of the discussion by
this: I understand that you, yourself, feel that it would be best if
we could have one examining authority to examine all the banks
of the country.
Governor EccLES. Let me Rrst state that the existing duplication is
not as serious as it appears on the face of things. The Reconstruc­
tion Finance Corporation make no examinations, as a regular thing.
The examinations they made were in connection with subscriptions
to preferred stocks and debentures; and those examinations were
made only once, at the time they were determining their invest­
ment in the capital stock of the particular bank.
Mr. BROWN. And, to be perfectly fair, I understand now that they
are not making even that examination. They are accepting the
other examinations.
Governor EccLES. That is right; and they have always accepted
the other examinations, except in very important instances, where a
great deal of money was involved and there was a good deal of
question about the bank.
The Federal Reserve Board only examines the member State
banks. Their examinations are usually made along with the State
banking examinations, so as to avoid duplication. The Comptroller's
o&ce examines all national banks. No other agency examines na­
tional banks. The Federal Deposit Insurance Corporation makes
no examination of national banks and makes no examination of
State member banks but examines the nonmember State banks; along
with the State banking departments, so as to avoid duplication
there, so that there is really not the duplication in actual examina­
tions that would appear on the face of things.
However, there is, of course, a division of the examining author­
ity between the 48 State banking departments, with reference to
State banks, and the Comptrollers omce with reference to the na­
tional bahks, and the Federal Reserve with reference to the State
member banks, and the Federal Deposit Insurance Corporation with
reference to all banks. There is not any question that you would
get a much more general uniRcation of the policy in making exami­
nations if the examining were all done under tne direction of one



Mr. BROWN. You certainly would eliminate the duplication of
Governor EccLES. That is right. You would eliminate the dupli­
cation of organizations, more than duplication of examinations.
Mr. B uow N . Or, w e might say, triplication of organizations.
Governor EccLES. Yes, sir; you would do that; and you would
make, probably, for a greater unity of examination policy, which
has been very sadly lacking. However, there has been a great
amount of work done in the past 6 months with reference to im­
proving the matter of unifying the policy as to examinations. The
Comptroller's OiBce, the Federal Deposit Insurance Corporation,
and the Federal Reserve have had a great many meetings^ and much
progress has been made toward the development of unification of
The CHAIRMAN. Let me ask you a question. What is the purpose
o f the examinations?
Governor EccLEs. To determine the condition of the banks.
The CHAIRMAN. What I want to develop in asking you the ques­
tion is this: Is not one of the purposes of the examination of the
banks to develop and disclose bad practice and any fraud that is
being perpetrated by those in charge?
Governor EccLES. It is to see that the bank is carrying out the
provisions o f the law.

The CHAIRMAN. One purpose of conducting the examination is to
make sure there is no criminal violation or mispropriation of funds?
Governor EccLES. That is one reason.
The CHAIRMAN. Do you think that one system of examination,
under one standard, is more likely to uncover or disclose fraud in
the conduct of a bank than two examinations?
Governor Ecci^s. As a matter of fact, there is only one system
in effect now. As I explained, the Federal Reserve accepts the
Comptroller's examinations of national banks. I f the banks were
required to pay the examination expense of all these independent
agencies, they could be constantly harassed and bothered with two
examinations a year from each one of them; and I cannot see how
they could endure it. As if is today, the banks are pretty well
harassed with examinations and with the various reports that they
are required to make to the various agencies, which is a great
expense to them.
The CHAIRMAN. Are not the reports worse than the examinations?
Governor EccLEs. They are both bad enough, but necessary.
The CHAIRMAN. From what I have heard, it would appear that
the reports are worse than the examinations.
Governor EccLEs. In most countries they have no examinations.
In Canada there are no bank examinations whatever; and there
never have been any bank examinations whatever. They have never
had them.
The CHAIRMAN. Of course, they enforce criminal law in Canada,
you know.
Governpr EccLES. They have reports. As I understand it; in
Canada they have complete monthly reports. That is correct, is it
Dr. CuRRiE. Yes, sir; but they also have examinations now.



Governor EccLES. No; not examiners going out into the banks.
What they do is this, they get the monthly reports into the head
oiRce; and there are two examiners that go over those reports in the
head oiEce. What I meant was that there are no examiners who go
out into the banks and carry out the examinations.
Mr. FoRD. Unless they Rnd something wrong with the report!
Governor EccLES. They make an inquiry. But, you see, those
banks have numerous branches, and the banks themselves have their
own examiners. That is the way the British banks operate, in the
same manner; they have their own examiners.
It is not expected that this proposed legislation will create a per­
fect banking system by any manner of means. We will still have
plenty to consider, looking into the future.
The CHAIRMAN. Mr. Brown, have you finished!
Mr. BROWN. There is nothing in there to abolish the human equa­
Mr. CROSS. I was wondering how to abolish these glass eyes.
The CHAIRMAN. Well, gentlemen, we will ask Governor Eccles to
come back in the morning, at 10:30.
(Thereupon the committee adjourned until tomorrow, Tuesday,
Mar. 19, 1935, at 10:30 a. m.)


TUESDAY, M ARCH 19, 1935


Z7. (7.
The committee met at 10:30 a. m., Hon. Henry B. Steagall (chair­
man) presiding.
The CHAIRMAN. Governor Eccles, Mr. Goldsborough desires to ask
you some questions.

Mr. GOLDSBOROUGH. Governor, you have been here for some time
norv and have been exceedingly patient, and I will not take very
long, I am sure.
During the discussion of this bill, and, practically every bill the
committee considers, the question of inflation is raised. I do not
want to get outside of the issue, and I do not think I am. I have
made, so far as I am able, a very careful study of so-called " infla­
tion." I understand it means an increase in the volume of money
to the point where its value is either worthless or partially worthless.
I am unable to find in history any single instance where, under a
stable government there has ever been that sort of inflation, and I
am wondering if you are able to cite a case where there has been
any inflation under a stable government.
Governor EccLES. I am not much of an authority on the subject
of what has happened throughout the history of the world with
reference to the matter of inflation. What study I have given to it
applies more to recent developments, particularly since the war.
The conditions in this country at the present time are in no way,
to my mind, parallel with the conditions m those countries that have
had more or less inflation.
Mr. GOLDSBOROUGH. Generally, the cases that are cited by those
who are sometimes called reactionaries—and I do not want to be
offensive, but that is the best I can do—the cases cited by them are
the continental money, the French assignats and the German money
after the war. O f course, the Continental money was issued at a
time when nobody knew in this country whether we were going to
be under a king or under a president, or what the government was
going to be. Conditions were almost absolutely chaotic.
The same thing existed when the assignats were issued in France,
and insofar as Germany was concerned, that inflation was deliber­
ately created for the purpose of destroying the internal debts.




I remember not very long ago, Mr. Bernard Baruch had an article
on inflation in the Saturday Evening Post—you may have seen it—
which was propagandized by pictures, some 3 or 4 pictures or cuts
were in the article depicting the printing presses in Germany during
the immediate post-war period, which seemed to me to be so utterly
unfair and inappropriate as to make the article absolutely valueless.
In this bill which we are considering, the banking system is allowed
to remain in exactly the same position that it has been for a great
many years. We have in all the banks, State and national, capital,
surplus, and undivided profits of less than $7,000,000,000. The de­
posits of those banks have been as high, I think, as $57,000,000,000
during 1929.
Governor EccL E S. Including time deposits.
Mr. GOLDSBOROUGH. Including time deposits. Do you care to ex­
press your opinion as to that sort of a system, or do you think that
is outside the inquiry!
Governor EccLES. What was the question ?
Mr. GOLDSBOROUGH. I am asking you if you care to express your
opinion about a monetary system which is not the creation of society;
but is the creation of a private institution, and which is based on

As I said before, that may be, in your opinion, so far afield ^hat
you do not care to discuss it.

Governor EccLES. I do not believe that it is practical at this time
to abandon the present system of creating money by bank credit.

Mr. GOLDSBOROUGH. By bank debt.
Governor EccLES. Bank credit means a debt of somebody.

Mr. GOLDSBOROUGH. It is better to use the word debt, because that
is what you are speaking about.
Governor EccLES. I do not know that we have any alternative.
It is my view that we should attempt through this legislation to make
the existing system of banking more responsive to the needs o f the
country than it has been, and also to exercise a greater degree o f
conscious control over the creation and the extinguishing of money,
and thereby attempt to create a greater degree o f business stability
than we have had in the past.

Mr. GOLDSBOROUGH. You agree with me, do you not, that permanent
prosperity cannot be based on debt! You cannot have debt, which
is increasing all the time, and have any sort of permanent pros­
perity, can you!
Governor EccLES. I do not agree that it is not possible to have
permanent prosperity with the existing banking system, if, in con­
nection with its operation, a taxing system is recognized as an ad­
junct in helping to bring about a more equitable distribution o f
income during periods o f prosperity.

Mr. GOLDSBOROUGH. We never have had any such tax system, have
Governor EccLES. N o; we never have, and we have never had very
much control over the banking system.

Mr. GOLDSBOROUGH. Do you or not agree with me that under the
present set-up, insofar as banking is concerned and currency is
concerned and taxation is concerned, we can only have pseudo pros­
perity which will collapse from time to time—do you think that
is true!



Governor EccLES. In our past history we have had periods of
prosperity by the process of ouilding up debt and then periods of
depression by the process of bankruptcy and the extinguishing of
debt. That has been true of all capitalistic countries.

Mr. GOLDSBOROUGH. That has not been the condition in France,
has it, where the banks only have about a 50-percent reserve?
France has never had these recurring periods of collapse.
Governor EccLES. It is more or less true of every country, I think.
Possibly it may be less true in France than it has been here, and
I think it is possibly less true in Britain than it has been here
because in recent years they have exercised, I think, a better control
over their money system than we have.
The volume of money in Great Britain during the period of our
depression did not decline. It remained very stable.
The wiping out of a third of our deposit money by bank liquida­
tion, of debt, and by bank closings, accentuated the depression.
Mr. GOLDSBOROUGH. Now I am old enough to remember that part
of the deflation period from 1886 to 1896, and I, of course, remember
the much better economic condition existing between 1898 and 1914.
I think it is thoroughly understood and agreed by everybody that
it was the want of money which caused the depression in 1879 and
1896, which culminated m the Bryan free-silver campaign. After
that time gold was discovered in South Africa, in the Klondike, and
in Australia—we were on the gold standard, with a continually
increasing supply of money—so that from about 1898 to the opening
of the World War this country had what can be termed, at least
relatively speaking, " considerable prosperity."
It was not the banking system, or fractional reserve system, that
gave us that prosperity. It was the fact that we were able to put
into the market a continuously greater supply of money. I do not
believe anybody disputes that. Let us see what happened to our
debt structure during this period about which I have just spoken,
^rom 1896 to 1914, and up until 1920.
After 1920 our supply of gold was of such a character that we
could not put it in tne market as fast as^our production wanted to
increase, so our production did not increase, but our debt increased
and our speculation increased.
Take, for instance, the period from 1913 to 1921. Our real estate,
Government, State, and local debts increased from $38,000,000,000 to
$75,000,000,000, and $15,000,000,000 of that was the war debt.
So that, as a matter of fact, our debt increased, outside of the war
debt, 60 percent, and our income increased 83 percent. Our national
wealth increased 67 percent.
In the period from 1922 to 1929 which is spoken of as a period of
prosperity—and I never could see any prosperity during that period
and I have never been able to see any since; it was a period of
speculation—during that period our debt, that is, our real-estate
debt, our Government debt, and our State and local debts increased
from $75,000,000,000 to $126,000,000,000. The increase was 68
Our wealth only increased 20 percent; that is, from 321 billions to
385 billions. Our income only increased 29 percent, from 66 billions



to 85 billions. We liquidated during that period $4,000,000,000 of
long-term debts, and we took on $55,000,000,000 of other debts.
That was a period in which our present monetary system, as
handled by bankers, was in full sway, but a period in which our
money supply, based on the gold standard, was not increasing. It
ended up in collapse.
I have never seen anybody who could, but if you can, I wish you
would give us your view as to how, loaded up with all this debt,
we are going to get out of this depression under the present system,
with what amounts on the average, to a 10-percent bank reserve.
iss we have complete deflation and
vo ways of doing it. One is the
way you have just stated, that is, continuing a process of delation
and wiping out a large part of existing debts through the process o f
bankruptcy, because the national income at the present time is not
sufRcient to support the existing debt structure.
And that is one reason we are possibly not getting recovery today,
because liquidation and the pressure of debt is very, very great, and
it acts as a millstone around the neck of the economic system.
The other way to get recovery, the only other way I can think of,
is by a process of renation.
Mr. GOLDSBOROUGH. Under our present system we cannot have any
reflation without an accumulation of more debts, you know.
Governor EccLES. I believe it has been very genereally recognized,
certainly since March 1933. when the banking structure collapsed
and closed, that it was not practical or possible, without involving
veiy great political and social upheavals, to continue the process o f
deflation. The situation had reached the limit of human endurance,
beyond what the people were willing to stand by way of delation,
which creates unemployment and all of the other attendant ills, and
reflation was desired and was expected.
The only way that that can be brought about is by increasing the
means of payment, either currency or bank deposits, in the hands o f
thqs9 ,who wiU spend faster than production increases.
MK ^OLDSBOROPGH. Cah you spend faster than you accumulate
debt, under our present system ! that is the difEculty, the debt is
always ahead of the spending.
G overn or EccLEs. In terest is a very im portan t elem ent in connec­
tio n w ith th e creation o f m oney b y debt. V ery low interest, it seem a
to m e, creates a fa r less dangerous situ ation than d ebt created on a
basis o f v ery h ig h interest.

Mr. GomsBORouOH. That is true, but of course the banks ordi­
narily now charge the same interest as they always have been charg^ovemor E ccus. Not generally. Most of the debt today is at a
much lower rate than it was. I would say the average interest in­
come o f the banks today is 40 percent less than it was in 1928 and
THr*. GoM*S%oRouon. Thdtf isTb^dause they have accumulated long­
term Government obligations.
Governor E ccus. And other Government obligations.



Mr. GOLDSBOROUGH. When they loan to their customers they do
charge a large rate. In our State it is 6 percent. They have not
reduced it, certainly within the range of my observation.
Governor EccLES. I think that is true more in the country banks
than in the city banks, where they are largely inSuenced and affected
by the money market. And the rate of lending goes up and down
in pretty close relationship with the general supply of money, and
you get an excess of money as you have now, when the rates are at a
ridiculously low figure for certain short-term eligible paper.
Now, to get back to the question of creating prosperity out of debt
It is true that the bulk of the means of payment under the present
system is created by an expansion of bank credit.
Mr. GOLDSBOROUGH. In other words, you create more debt to pay
the present debt.
Governor EccLBS. A part of the debt of the country is not bank
debt. The debt that the banks create in creating money is, in fact,
only a small part of the total debt.
M r. GOLDSBOROUGH. That is true,
Governor EccLBS. And it is not by any means the burdensome part
of the total debt.
Money is created in our present system by banks loaning to cor­
porations, to individuals, and to the Government. During the past
2 years there has been no increase in the supply of money as the
result of the banks lending to individuals or to corporations. As
a matter of fact, the money supply would have been actually dimin­
ished since 1933 had it not been for the Government not only making
up the deficiency, but greatly exceeding it by its borrowing ana
spending. Had it not been for the Government's budgetary deficit,
I do not believe the deflationary processes would have stopped.
The credits which the banks have extended to others than the
Government are less now by several hundred millions than they
were right after the bank holiday.
The Government has been forced to supply the money deficiency
by reason of the other creditors being either unable or unwilling
to supply it. I believe I made a statement yesterday in coaJteetipa
with the Government supplying money by borrowing from the banks
tha,t might have been misunderstood. I ant sure it was misunder­
stood by many of the press comments that were made. That is,
the question o f the Government paying the banks a subsidy.
Mr. GOLDSBOROUGH. I probably made the mistake of accentuating
that too much myself. I am at fault probably more than anybody
Governor EccLES. I would like, for the purpose of the record, to
make an explanation of my understanding of the question of the
Goveminent interest paid to the banks.
In purchasing offerings of Government bonds, the banking system
as a whole creates new money, or bank deposits. When the oanks
buy a billion dollars of Government bonds as they are offered—and
vou have to consider the banking system as a whole, as a unit—the
hanks credit the deposit account of the Treasury, with a billion
dollars. They debit their Government bond account a billion dol­
lars, or they actually create, by a bookkeeping entry, a billion dollars.
Mr. GOLDSBOROUGH. By a sort of magic or necromancy.



Governor EccLES. The Government in turn draws out those de­
posits and disburses them in the payment of all of its obligations and
various appropriations.
Mr. GOLDSBOROUGH. These payments, of course, go in the banks.
Governor EccLES. Yes; these payments of the Government, of
course, immediately go right back into the banks, and therefore the
total deposits of the banks are not changed; but the ownership of
the deposits is transferred from the Government to individuals and
corporations, who can spend it or use it to reduce their debts to
Mr. Goldsborough brought out the point that the Government,
because of its sovereign power, is able, i f Congress so wills, to finance
its operations by payment of currency for its obligations, and that
it could go so far as to take up its bonds by paying out currency.
The result of that operation, insofar as the bonds were purchased
from others than banks, would be that bank deposits would increase.
Mr. GOLDSBOROUGH. Bank reserves, not deposits.
Governor EccLBS. Deposits. I f the Government paid its bills in
currency, that currency would be disbursed, the money would come
into the banks to the credit of individuals and corporations, and thus
the deposits would be increased in exactly the same way.
Mr. GOLDSBOROUGH. I wish you would speak about that for a while.
The deposit would not increase, but the reserves would increase.
Governor EccLES. Both would increase, both the reserves and the
deposits would increase. To the extent that the bonds were pur­
chased from banks, reserves would increase and deposits would not.
To the extent that bonds were purchased from others both deposits
and reserves would increase.
The proposal was that, when you substituted currency for bonds,
the reserves would be greatly in excess of what they now are;
because the banks would not have the deposits invested in Govern­
ment bonds, but would be carrying those deposits as excess reserves,
and to the extent that present holdings of governments by the banks
we^e taken up by currency, the reserves of the banks would increase
by about 11 or 12 billions of dollars. Thus, you would have excess
reserves of, say, 13 or 14 billions including the more than 2 billions
n&w held by simply taking up the existing holdings of Government
That, of course, would be a means of potential inflation of a
tremendous amount.
Mr. CRoss. Could you not raise the reserves of the banks so as to
check that!
Governor EccLES. I was just going to say, it was suggested that
the reserves of the banks would be increased by the amount of the
Government bonds that were taken up, as the result of the issuance
of currency in payment for them, and the currency would come right
back into the banks as a deposit.
- The point I raised was that the banks would under no circum­
stance be willing to handle the deposits which would be created
without getting a return, without being able to invest them at int&rest. But, if reserve requirements were increased by the amount of
the increase in reserves, the banks would be unable to perform the
services which they do perform in the handling of the business of
the community, of their customers, of the clearing of financial trans



actions and the keeping of the individual and corporation accounts
without making service charges that would compensate them for
their loss of income or interest^ as a result of depriving them of
interest on the Government obligations.
Mr. Goldsborough stated the other day that that charge could be
socialized and I stated that the best way to socialize it was to do as is
being done now, by permitting them to get interest on Government
Instead of the interest on Government bonds being a subsidy to
the banks, it seems to me it is a payment for services which they are
rendering in handling the deposit accounts which are created as a
result of the Government deHcit.
Mr. GOLDSBOROUGH. Now, Governor, it seems to me, now, and has
always seemed to me that the real way to do a thing is to do it
directly, instead of going through the pretense of issuing bonds to
the banks that have not anything to loan, except what their book­
keepers can put on their books.
The banks have nothing except their capital and surplus, which
amounts to less than 7 billion dollars, and they have used that up
long ago in loaning to individuals.
Governor EccLES. Except their time-deposit funds.
Mr. GOLDSBOROUGH. Except their time-deposit funds.
Governor E ccLES. That represents half of the deposits of the
banking system.
Mr. GOLDSBOROUGH. But long before that they come to the Govern­
ment for help. They have used up all they have.
We go through the racket—and that is all I am able to see that it
is—of issuing to the banks, sending to the banks bonds, and they
put a money credit on their bank books in favor of the United
States Government. The United States Government by depositing
that money as it does, when it gets the money credit, lends the money
back to the banks and proceeds to pay them interest on it. That is
a racket.
I f we owe the banks for that service they render, and we do^
there is no doubt about that, they render service outside of their
lending service and they should be compensated for that; they will
have to be compensated for that to live.
But there is created in the public mind the idea, and it is done
deliberately by the class which controls the money of the country—
there is created in the public mind the idea that there is some eco­
nomic impropriety in the Government furnishing its own medium
of exchange, that it has to do it through borrowing money from
the banks that the banks do not have.
Society has everything; the banks have nothing, and yet we go
through this farce of borrowing money from the bank and creating
the impression that it is inflationary for society itself to issue the
necessary medium of exchange with which to conduct the country's
What I am getting to is this. I am not suggesting any immediate
revolution. But we could pay these bonds as they are callable; we
could pay these bonds when they come due with money issued on
the credit of the Government o f the United States. And if the
public knew that would be done it would have two effects, first it
130417— 35------ 15



would reconcile them to this debt, which is having a terribly de­
pressing effect on their minds and on their psychology. It would do
And the second thing it would do would be to have them under­
stand, to make them understand, that society is not dependent upon
a banking system for its currency. Our currency system in this
country was not the creation of society; it was the creation of the
Last year about this time a subcommittee of this committee con­
sidered what was called a monetary authority bill. The goal of that
proposed legislation—whether it could be reached or not—the goal
of the proposed legislation was to separate the profession of bank­
ing from the issuing of the money of society. It placed the issuing
and the control of the money which society uses in the hands of an
independent authority, which would have no selfish interest in mak­
ing the medium of exchange as scarce as possible and as high as
I am wondering if something of that same idea is not involved
in this present bill, which undertakes to take from the Federal Re­
serve banks and place in the hands of the Federal Reserve Board the
control of the open-market operations of the Federal Reserve System.
Governor EccLES. Discount rates and reserve requirements.
Mr. GOLDSBOROUGH. Discount rates and reserve requirements. la
that so !
Governor EccL E S. It is contemplated to centralize the respon­
sibility and the authority for control over the volume of money.
As I have stated upon several occasions, so long as most of our
money supply is created by the willingness of private citizens and
corporations to borrow from banks, the control of deflation is much
more difKcult than that of inflation. I f there^ is too much borrowing
from banks and, as a result of that operation, the creation of infla­
tion, when the means of payment is increasing faster than the raising
of discount rates and the selling of securities m the market would, dis­
courage further expansion of private borrowing from the banks and
would act as a means of retarding the inflationary process.
On the down side, the reverse action, the reduction of rates and
the creation of excess reserves, would tend to slow up liquidation and
would tend to encourage the use of credit.
In our present money system I know of no other means within the
banking system itself of influencing or effecting a control over the
supply of money.
I have stated that we should seek to use these controls which I have
just mentioned to combat deflation, which means unemployment, and
unemployment means reduction in national income, in wealth pro­
duction, and wealth consumption.
That is where the problem must be met, and it must be met, it seems
to me, by society as a whole, through government.
The tax system—our income-tax system—must be worked in and
timed with the money system. When private credit is expanding and
there is a budgetary surplus, the Government debt should be reduced.
The reduction of the Government at a time when there is a rapid
expansion of private debt tends to offset the inflationary effect of the
expansion of private debt. That is where the contraction comes, as
result of the banks reducing their holdings of Government bonds.



It is very important that the problem of income taxation and the
operation of a central banking monetary policy should be coordinated
and properly timed. A substantial increase in taxes at the present
time, if they would pull into the Treasury money which would other­
wise be spent and thus reduce private spending, would be of n o par­
ticular help in our economic as a whole. The time to increase income
taxes, of course, is when incomes are such that income taxes would
produce substantial revenue; in other words, in the upswing.
I believe that there is only one way by which we will get out of
the depression, and that is through the process of budgetary deficits
until such time as private credit and private spending expands. The
expansion of private credit depends upon the will and ability of
private interests to borrow and spend. Until private borrowing and
spending expands, and puts people to work, the Government must
do the borrowing and spending.
Mr. GOLDSBOROUGH. Governor, going back to the subject of infla­
tion, it seems to me that the tear of so-called " inflation " is the
thing which makes it increasingly difReult to improve our monetary
I have been following this whole matter through for a great many
years, and I remember very distinctly that back in 1931—I do not
want to go too far back—but I remember that in 1931 we were told
that if we adopted the policy of buying Government bonds that wouM
cause violent inflation. That was when the original so-called
" Gdldsborough b ill" was passed through the House.
During that period, and before that period, if anybody had sug­
gested that it was possible for the Government to raise any money
except by borrowing it from the banks, he was immediately cast
into outer darlmess; he was not even thought fit to sit in the room
with intelligent people. That was the exact condition.
We went'off the gold standard and nothing happened. We passed
the so-called " inflationary b ill" in 1933 and nothing happened.
And it is the feeling, I am sure, of a great many Members o f Con­
gress—it is certainly my own feeling—that one of the things we
need in this country is more real money and less false money in
If, as a matter of fact, we could get to the point where the money
we use was real money and could not be contracted by the payment
of debt, then you could not have any violent deflation; we could not
have any violent inflation; you could n ot have either on$.
Governor EccLES. It depends upon the distribution of that money
and the willingness of people to put it in circulation.

Mr. GOLDSBOROUGH. I know that it would be very much more difBcult than it is now to have deflation, or inflation, either.
Governor EccLES. I agree with you that all o f this inflation talk
we have heard for 3 years has been largely imaginary.

It is true that, based upon existing excess reserves of the banha,
thei*e is a possible means of creating a tremendous credit inflation.
That, of course, does not necessarily mean that you are going to get
that inflation.
In the first place, in order to get it, we have to get people willing
to use the bank credit. It cannot be gotten in any other way.



Then it also would be necessary that there be no control exercised
after private credit began to expand to a point where prices were
going up rapidly and production had reached a peak.
I do not believe that it is going to be so easy to get inflation.
Certainly efforts have been made now for several years to get it;
but from all indications, we are as far from it now as we were 2 or
3 years ago. There is not the slightest indication of inflation.
Unless the people in this country have money and jobs or are
put in possession of money through jobs or without jobs, so that the
means of payments increases, and unless those people and corpo­
rations with money will spend the money that they have, we can­
not get inflation.
It cannot be obtained merely by changing the gold content, or
by silver legislation, unless the result of such changes will actually
put money in the hands of people to spend, and unless it induces
the holders of existing money to spend. Otherwise you do not
increase the volume of money and you do not increase the velocity
of money, both of which are necessary in order to get inflation.
Mr. KoFPLEMANN. Mr. Eccles, with reference to section 210, page
49, in regard to making loans on mortgages, you know about that!
Governor EccuES. Yes.

Mr. KoppLEMANN. As I understand it, it authorizes commercial
banks to make loans on real estate for a period of 3 years, and
repayment is to be made in full at one time or up to 20 years to be
amortized. It puts commercial banks and investment banks in the
building and loan business.
Governor E ccL E S. They are already in.
Mr. KoppLEMAyy. But this bill is intended to put them into it fur­
ther than ever.
Governor EccLES. No. The bill is not for the purpose of putting
them into any particular business that they are not already in.
They are in the investment business and in the mortgage business
and have been to a very large extent for a great many years. They
are in the investment business in that there is no limitation as to
the amount of long-term bonds of all kinds that they are permitted
to buy. There is a limitation with respect to malting nrst realestate mortgages on improved properties. That limitation is 50
percent of the time deposits and up to 50 percent of the appraised
value of the properly, and up to a period of 5 years; and the bank­
ing system today holds over $2,000000,000 of those mortgages.
Therefore, they are not being ptit into any business that they are
not already in. What we are attempting to do in this case is to
permit them in the making of real-estate loans to make loans on an
amortized basis over the life of the loans or over a period of time
which would give to the borrowers some assurance of being able
to pay. The straight 5-year mortgage has proven to be a very bad
form of instrument, both for the banks and for the borrowers, and
also for the building and loan companies engaged in making mort­
gage loans and a few insurance companies and mutual savings
institutions engaged in that type of mortgage lending.
I have said, and I repeat, that either the banks in this country will
have to give up their time deposits or they will have to be permitted
to invest or loan those deposits in the same Reid where the mutual
savings banks, the insurance companies, and the savings and loan



institutions, loan their deposits; because the time deposits of the
banking system are of the same type and represent the same type
of money as the funds which the mutual savings banks and the
b u '"
practice of the banks which
caused the debacle.
Governor EccLES. I do not agree with that

Mr. KoppLEMANN. Did not the banks themselves claim that it was
their long-time loans which were the chief cause of their difficulty^
Governor EccLBS. I do not think so.

Mr. KoppLEMANN. Is it not commonly so stated?
Governor EccLEs. It is commonly stated; but it is not the fact.
Mr. KoppLEMANN. I might digress for a moment and ask you if
you can in a single statement, without taking too much time o f this
committee, let me have what is your opinion of the cause o f the
difficulty o f the banks!

Governor EccLES. I think the record of my answers to the ques­
tions that have been asked quite a number of times shows it; but
I can state it very very briefly. One of the principal troubles or
diRiculties that brought about me depression was not the shortage in
the supply of money altogether, but it was due in part to the in­
equitable distribution of income which contributed to a speculative
situation in the security markets and to an expansion of productive
capacity out of relationship to the ability of the people of the
country to consume under the existing distribution of income.
That condition was not created by the banking system. Long-term
credits were not responsible for the depression; they only became
unsound when the national income shrank. A perfectly good credit
over a short term or a long term may become a very bad credit if
business conditions change. Short-term credit is not necessarily a
sounder loan than long-term credit. Most of the short-term bonds
which were held by the banks that became due during the depression
could not be paid but had to be refunded.
Mr. KoppLEMANN. Supposing that I ask you this further question.
Governor EccLES. In order to obviate that situation of forced de­
flation, this bill proposes that Reserve banks be legally permitted to
make advances to member banks against sound assets. The only
place where liquidity can be created is through the Reserve System
and that would permit the Reserve System to stop forced credit de­
flation and bank failures so long as banks had assets upon which
they could secure credit.
Mr. KoppLEMANN. In part you anticipated the question I was
about to put to you, which is: Are loans made on real estate ex­
pected to be rediscounted by the Federal Reserve!
Governor EccLES. They are expected to be available as security
for advances to be made by the Reserve banks. The credit depart­
ments of the Reserve banks will pass upon credit extended to member
banks in the future as they have always done in the past, except
that in the past they have been limited by statute to a certain type
of what is known as eligible paper which today is small in volume.
Mr. KoppLEMANN. Where in this bill does it provide that such dis­
counting, or in effect rediscounting, can be done! ^
Governor ECCLES. It provides in section 206 that section 13 of the
Reserve Act is to be amended so as to authorize the Federal Reserve



banks, subject to the regulations of the Federal Reserve Board, to
discount for member banks any commercial, agricultural, or indus­
trial paper and to make advances to member banks on their promis­
sory notes secured by any sound assets.
Let me say this in connection with extending credit against mort­
gages. That does not mean that Reserve banks will discount a 20year mortgage for 20 years. It means that the Reserve banks can
make advances to the member banks for such periods as reasonable
banking practice permits, which would be 90 days or possibly 6
months, secured by mortgages, collateral loans, or bonds with such
margin as the credit divisions of the Reserve banks may deem
necessary to protect the Reserve banks.
Mr. KoppLEMAXX. Then it does not compel the Federal Reserve
to rediscount these loans ?
Governor Ecci^s. No.
Mr. KOPJPLEMANN. Now, supposing I go to you as a banker and ask
for a loan upon my property in the iorm of a mortgage and the
banker knows that he cannot rediscount, what will be the effect upon
your mind if I ask for a loan of you as a banker!
Governor EccL B S. The banks today will not make such loans. In
the first place, they cannot make real-estate loans for more than 5
years. That precludes people from borrowing. Nobody today that
can secure a long-term, amortized loan will go to a bank and borrow
on a straight loan for a period of 5 years. They want longer-term
credit on mortgage loans.
Mr. KoppuEMANN. I am trying vary hard not to take any more
o f your time than possible. Now, if section 210 should succeed in
encouraging banks to make long-time loans, they cannot be redis­
Governor E ccL E S. But they can be borrowed against.
Mr. KoppLEMANN. Yes. What becomes the bank's liquidity which,
after all, as you and I know, is the foundation of the safety of a
commercial banking system!
Governor E ccL E S. The liquidity of the banking system depends
upon the Reserve System as 1 have indicated.
Mr. KoppLEMANN. What I am trying to bring out is this. I am
not opposing the bill nor do*I want to appear unduly critical.
What I am trying to bring out is that the enect of section 210 is
more apparent than real. It seems to me that it contains language
rather than a real and effective method of giving property owners
a chance to obtain mortgage loans.
Governor EccLES. That will depend entirely upon the willingness
o f the banks themselves to extend mortgage credit. In the absence
o f any Reid for investment of the excess funds of the banks, it seems
to me that there will be a willingness, not only a willingness but a de­
sire, o f bankers to invest those funds where a substantial portion of
the deposit money is represented by time money upon which they
are paying 2 to 2% percent.
Mr. KoppLEMANN. Right there may I ask you this question! You
talk about time loans. Are not time deposits in reality nothing more
than demand deposits!
Governor E ccE E s. Only in case of bank runs. The time deposits
in a bank remain stable unless banks are permitted to fail.



Mr. KoppLEMANN. That answers my question. Only in time of
bank runs.
Governor E ccL E s. That is right. At other times time deposits
fluctuate very little and, as a matter of fact, usually, or at least dur­
ing the past, they have shown a gradual increase over a long period
o f years.
M r . KoppLEM ANN. W h a t e ffe ct w i l l su ch lo a n s h a v e u p o n b u il d in g
a n d lo a n a s s o c ia tio n s a n d d o y o u in t e r p r e t t h a t c o m m e r c ia l b a n k s
a r e t o c o m p e te w it h t h e m ?

Governor EccLEs. I think there is a Held for both. It seems to me
that we might ask what effect will it have upon insurance companies
and mutual savings banks.

Mr. KoppLEMANN. That is right.
Governor EccLEs. The more agencies we have for extending credit
the more likely the borrower is to get favorable terms for his credit;
and I think that, in the interest of recovery, long-term low rates are

Mr. KoppLEMANN. Yet under section 210 all of this is quite im­
probable of happening insofar as banks making loans due to the fact
that they cannot rediscount excepting on short time, as you say, 90
days, perhaps 6 months.
Governor EccLES. That is very true; but that will not deter the
banks from making long-time loans. The banks today can only bor­
row on Government bonds on a 15-day basis but they can renew.
Banks are certainly not expected to make real-estate loans and sell
them to the Federal Reserve banks and then take the funds and make
additional loans, because that would create credit inflation. Banks
should not loan beyond the amount of their available funds and the
rediscounting facilities of the Reserve banks are for the purpose of
enabling the bank system to meet temporary fluctuations in their
deposits and to meet withdrawals due to unusual conditions that may
Mr. KoppLEMANN. I agree with you that commercial banks should
do a safe and sound business, and that under section 210 of this bill,
it would be bad business to make these mortgage loans. That is all.
Thank you.
The CHAIRMAN. Would you like to come back this afternoon or
tomorrow morning?
Governor EocLEs. I would appreciate it i f I could come back in
the morning.

The CHAIRMAN. We will ask you to come back tomorrow morning
at 10:30. Mr. Goldsborough and Mr. Cross and Mr. Williams would
like to ask you some questions and with that we hope to conclude.
(Thereupon, at 12:05 p. m., the committee adjourned to meet
again at 10:30 a. m., Wednesday, Mar. 20, 1935.)


Z7. C .

The committee met at 10:30 a. m., Honorable Henry B. Steagall
(chairman) presiding.
The CHAIRMAN. Mr. Cross, do you desire to interrogate Mr. Eccles
at this time!

Mr. CROSS. Governor Eccles, you know, I am very much disturbed
about your testimony as it has been given. You have testiRed that
with the levers you have in this bill you feel that you could con­
trol inflation, but that the question of delation was another story.
In other words, you have a string with which to pull down inflation,
but you have no string with which to pull up deflation.
And you also testmed as to the depression, as I recall your tes­
timony, that deflation meant depression, and as long as you have
deflation you will have depression.
What is troubling me is how to get some means by which we can
lift deflation.
Also, in your testimony you stated that you thought the incometax question would have to be worked into the monetary system
I introduced a bill—I do not suppose you ever heard of it, or
have ever read it—in an attempt to control the whole commodity
price level through the system of the income tax. That bill pro­
vided that when the wholesale commodity price level was below the
purchasing power of a dollar; say that the purchasing power was
up to twice what it was in 1926 and 1927, for the sake of argument,
that the Government, or some agency of the Congress be permitted
to lower the income tax, to pay the running expenses of the Gov­
ernment, the salaries of the civil-service employees, and the Army
and the Navy, and other governmental expenses, and pay off the
bonds and other obligations as they fall due by simple currency,
having it printed, until the prices of things rise, or the purchasing
power of the dollar fell, whatever it was, taking it in the year
that you are taking as a standard.
Now, if the prices rise more than 2 percent, as was provided in
the bill, above where they were in the year taken as a standard,
you are going to be laying on income taxes and taking currency




out of circulation; in other words, performing the same function
as the open-market transactions, and you would take currency out
of circulation the same as you would if you were to sell bonds and
take it out, or you put currency in circulation by paying the expenses
off, doing it in one or the other way.
Do you not think that by means of the currency you could get
a string to lift up your depression!
Governor EccLES. I do not know that I can add anything to what
I have already said on that subject.
Mr. Cnoss. It is very patent that we cannot get out of this de­
pression, depending upon credit, as long as the conditions remain
as they are. You can reduce the rediscount rate to nothing, and
you can put the reserves of the banks down to nil, but as long as con­
ditions are such that a man cannot produce his goods and sell them
for what they cost him, as long as there is no purchasing power
among the people he cannot get a price that will enable him to pay
the expenses of operating his factory or his farm, or whatever he
is operating, because the oanks could not loan him anything. I f I
was a banker, or if you were a banker, you could not afford to loan
him any money; he could not borrow that money to produce the
goods and pay the money back because he has to have buyers, and
that means purchasing power, and upon that depends credit.
I do not see any way m the world to bring the country out of this
depression unless we get it out by delation.
It is not a question of the income tax taking money out of circu­
lation; it will have the same effect as if you sold bonds and took
them out of circulation. It is the same thing, is it not!
Governor EccLBS. I do not see what you mean.
not the income tax.

You say it is

Mr. GOLDSBOROUGH. Mr. Chairman and Mr. Cross, I was examin­
ing the witness yesterday when I yielded to Mr. Kopplemann, and
now I have yielded to Mr. Cross. I had under discussion with Gov­
ernor Eccles yesterday the discussion of a major subject.
Mr. CRoss. You go ahead; I thought you were through.
Mr. GOLDSBOROUGH. You have started on a major operation.
Mr. CROSS. You go ahead.

Mr. GOLDSBOROUGH. Governor Eccles, at a meeting of economists
the other day, and also on the floor of the House, I made the state­
ment that, under our present banking system, if every man in the
United States had the financial genius of the senior Morgan ahd
the inventive genius of an Edison or a Ford, and the energy of a
North German farmer, we could not have any permanent prosperity
in the United States because of the fact that just as soon as they
began to show their ability and pay off this load of debt it would
immediately cause another deflation, and prosperity would there­
fore defeat itself.
What is your criticism of that statement!
Governor EccLES. That goes into the whole subject of the way
money is created and extinguished.
Mr. GOLDSBOROUGH. I mean under our system.
Governor EccLES. I feel that it is possible to have prosperity
under our system, if we have the intelligence to manage our bank­
ing and our monev svstems, and our tax system in conjunction there^



with, and our public spending, so as to insure employment; that you:
can have prosperity under the system whereby money is created
through bank credit, and is extinguished by the paying off of the
bank credit. Whether there are other ways of getting it or not, I
do not know that I am prepared to say. It is difficult to make
changes; we found that out.
People are prone to change their habits, their customs, and their
belief very, very slowly; and changes largely come about as the
result of social and economic pressure.
Mr. GOLDSBOROUGH. I will put it in another way.
Summer before last, at the Century of Progress Fair, a very noted
statistician made a speech in which he said that the country owed
in debts about $200,000,000,000, but that if we all got good and were
thrifty, and saved our money and kept out of saloons, and things
of that kind, we could pay off $25,000,000,000 of the debt a year,
and in 8 years we would not owe any money at all.
I knew him very well, and I wrote him a letter and asked him
what, under our system, we would use for money, when that happy
condition arose. He wrote back and said he had not thought o f
that. When the debts were all paid o f we would not have any
money with which to do business.
Governor Eccuss. When the community begins to pay its debt
to the banks, it extinguishes money, deposits currency, and if that
process of deflation gets under way it is more or less self-generating
and it is very difficult to stop it.
You can reduce rates through the operations of the Federal Re­
serve System; you can create excess reserves; you can broaden the
eligibility requirements so as to make it unnecessary for banks to
bring pressure to collect debt.
When the community's volume of money is rapidly contracting,
it means that unemployment is developing; and the compensating
factor is the budgetary deficit, which keeps up the volume of money,
and those funds are used to give employment when unemployment
That is what I meant when I said that the money system and the
tax system, Government borrowing and paying must be worked in
with our banking system as the compensatory agency. Otherwise,
it seems to me what you say is likely to be what will happen. It is
what has happened in the past, to a veiy large extent.
Mr. GOLDSBOROUGH. Of course, what 1 have in mind—and I do not
know that you should be questioned particularly about it. in view o f
Hie fact that it does not bear direcdy on any item in the bill—but
what I have in mind is that society should begin to bear in mind
the fact that our present banking system is an artificial one, built
up by the bankers themselves for the purpose of controlling money.
That society should begin immediately to endeavor to take that
control out of the hands of any one class and place it back where it
belongs; in society itself, and that one way to begin that is to inject
money into business. As an example, by reduction of Government
debt, paying o f Government debt with currency.
Governor EccLBS. I think that this discussion came up the other
day, and I stated my objection to paying o f the Government bonds
in currency, which would result in the creation of very large excess



reserves by the banking system, unless the reserve requirements were
increased accordingly.
Mr. GOLDSBOROUGH. Of course, that could be done by legislation,
and that very thing is contemplated by the bill we are now discussing.
i have never had in mind, and I have never introduced in Con­
gress any bill which would require the national debt to be paid im­
mediately. There is only about 5 billion dollars of bonds which are
callable now. It seems to me that to start a system of teaching
society that banking is one thing, and the issuance of currency an en­
tirely different thing, would not only relieve society of a tremendous
burden of interest, but would be a great educator, because in my
opinion we are never going to do anything by creating more debt
except to create a pseudo prosperity which will carry us along a
few years longer and then, as by building up capital goods and
selling on the installment plan with the use of more credit, have a
greater collapse than we have now.
Governor E ccL E S . I do not think the change in the system that you
propose would put money into the hands of people that do not
have it.
Mr. GOLDSBOROUGH. When you reduce taxes you declare a national
discount, do you not? You are speaking of income taxes, but that
would apply to any kind of taxes, any sort of taxes?
Governor EccLEs. Yes; when you reduce taxes that is true.

Mr. GOLDSBOROUGH. It is fair to suppose, is it not, that society
would get the benefit of that discount?
Governor E ccLES, I f you reduce income taxes it should be kept in
mindithat they are paid by a very small percentage of the total
population—it would mean that the funds saved by the class that
received the benefit of the reduction-----Mr. GOLDSBOROUGH. You do not think the ultimate consumer would
get any benefit at all?
Governor EccLES. They would possibly get some benefit; but it
would tend to go into the capital neld, and get productive facilities
out of relationship to consumer buying power.
I do not like the idea, personally, of paying off the Government
debt through currency; because it seems to me that it gives to a great
many people the idea of expecting benefits that they will not get.
The paying off of the debt by currency would simply increase the
bank reserves by the amount of Government bonds that they hold.
When the reserves are increased by that amount, you have created
a very difRcult problem, unless you increase the reserves by the
amount of the Government bonds that have been retired. Other­
wise you have huge excess reserves.
I f you retire the Government bonds with currency, that currency
is the property of the banks and they will immediately send it into
the Reserve banks; so it would not go into circulation at all. It
would simply become a credit to the member bank on the Reserve
bank's books; and, as I said, would make for an increase in the
excess reserves by the amount of the bonds retired with currency.
Let us see what problems that creates. In the first place, you
would have to increase the reserve requirements then by the amount
of bonds which you retired, which would be today about 40 percent



of the banks' loans and discounts. Government bonds are about 40
percent of the total loans and discounts.
Mr. GOLDSBOROUGH. If you retired them all at once.
Governor EccLES. Of course; or you would increase it as you
retired them.

You have a short-term financing of about 13 billion dollars, so
that there are more short-term maturities than the total holdings
of the banks. So in the course of a year or two the whole amount
could be retired, because of the very !arge amount of short-term
Let us assume, then, that you increase the banks' reserves by the
amount of the bonds which you retire, or, we will say, 40 percent.
Some banks only hold 10 percent of their resources in Government
bonds, and if a 40-percent increase in reserves were imposed upon
them they would have to reduce the credit they are now carrying
by 30 percent in order to meet the reserve.
Mr. GOLDSBOROUGH. Could not that be controlled by a system of
rediscounts between the banks %
Governor E ccLES. Reserves would have to be uniform among the
banks; you could not have every one of the banks with a different
reserve requirement. I f you made a uniform reserve requirement
in the bamdng system, with a bank holding 10 percent in bonds,
when the reserve requirement is 40 percent, it would either have
to go into the Federal Reserve System and borrow 30 percent, which
was the deficiency, or it would have to collect loans and discounts
to the extent of the 30 percent, in order to build up its reserves.
Most of the banks in small communities hold Government bonds
in the small amounts, and the deSation would come in those areas.
In the reserve cities the percentage of bonds held by banks, I
think, is in excess of 40 percent, on the average. That is one problem
it creates.
Another thing is that the State nonmember banks, which would
not be influenced by the increase in the reserve requirements made
by the Reserve System-----Mr. GOLDSBOROUGH. Yes; they would be.
Governor EccLES. They are not members of the Reserve System.
Mr. GOLDSBOROUGH. That does not make any difference, you can
put a check tax on them which will make them amenable.
Governor E ccL E s. And force them into the Reserve System!
Mr. GOLDSBOROUGH. No; but force them to abide by the Reserve
Board's dictum in the matter of raising and lowering reserves, under
penalty of having their checks taxed.
Governor E ccL E S. Then we get back to this problem. The retire­
ment of these bonds through currency, or through giving the banks
credit on the reserve bank books, would not, of course, m any way
reduce the total deposits of the banks. It is 12 or 13 billions of
the Government bonds issued.
Mr. GOLDSBOROUGH. You said yesterday it would increase the de­
posits. I agree it would not decrease them.
Governor E ccL E s. It would increase deposits if the Government's
expenses and its future deficits were paid with currency. That
would increase the deposits by the amount of the deficit. But if
you simply retire the bonds now held by the banks, it would in no
way change their deposits.



Mr. GOLDSBOROUGH. That was our discussion yesterday, in refer­
ence to the retiring pf bonds.
Governor EccLES. "That in no way would change the deposits.

Mr. GOLDSBOROUGH. In other words, we agree on that.
Governor EccLES. The deposits would just remain the same.
Governor EccLES. But those deposits are not the deposits of the
Government now. Twelve or thirteen billions of Government bonds
held by the banking system represent money which the Government
has spent. It has gone into circulation, and it has become the prop­
erty of the individuals and corporations, and the banks have the re­
sponsibility of managing it and serving those customers in the hand­
ling of their business, m their deposit accounts. Unless they can
invest those deposits which the Government has created as the re­
sult of its borrowings, at an interest return, they would have no
object at all in handling the deposits. I f they had to carry reserves
equal to the amount of the deposits which are created, there would
!be no interest in the banks handling the accounts. Therefore, I
Khimk, as you stated the other day, the cost of handling that busi­
ness should be socialized, and I stated that it was being socialized
through the interest which was being paid on the bonds which the
banks hold.
Mr. GOLDSBOROUGH. You think that is the proper way to so­
cialize it!
Governor EccLES. I think it is, and I do not think it is an unjust
way to socialize it for the reason that the banking system as a whole
has never been more remunerative than the average business, and
there is no indication at the present time that it is particularly at­
tractive. Bank stocks have possibly suffered as much or more than
a<ny other kind o f an investment security, and based on my own
experience in the banking business as well as in various other lines
of business, I would say that from an investment standpoint the
banking business is the least attractive.

Mr. GOLDSBOROUGH. My dear sir, before the war the banks were
extremely prosperous, and there were practically no bonds out at
that time.
Governor EccLES. Before the war we were in a rapidly growing,
new country; we were a debtor nation.
Mr. GOLDSBOROUGH. Being a debtor nation does not create pros­
Governor EccLES. Being a debtor nation creates a degree of pros­
perity for the banks; I mean, in part, because of the shortage of
capital, and the high interest rates that were generally being paid.
The banks, like every other business, have had periods of pros­
perity and profits, and then they have had reverses. But outside
of the banks in the large centers, the average banks throughout
the country have certainly not been overpaid for the services which
they render, and if any revolutionary change is made in the method
of creating money, and if we should take ail the Government bonds
up from the banks, as you propose, by currency and other methods,
how would they be compensated for the very necessary and the very
valuable and the very useful services which they render the com­
munity in the clearing and handling of the transactions which they
are required to handle!



Mr. GOLDSBOROUGH. But now an artiBcial institution, our present
banking system, creates the necessity of rediscounts, intermediate
credit banks, and the army of bank examiners, and divides the
country into simply a creditor and a debtor class.
It is this artincial system that has created all this trouble, and
you cannot cure that by making additional paper or additional col­
lateral eligible for rediscount; you are simply prolonging the final
You have to get some real money into circulation in this country,
in my opinion.
Governor EccLES. I do not know how, under capitalism, you are
going to avoid the debtor and creditor relationship. Communism or
socialism, of course, would not------

Mr. GOLDSBOROUGH. I did not even suggest communism or social­
ism. I did not intimate any such thing as that.
What I am suggesting is that in a country as rich as this is we
ought to be stockholders and not bondholders, and we ought to
get rid of the enormous creditor element and creditor complex and
manipulation which is going on in this country.
That is what I am talking about, and in my judgment, unless it
is done, we are ultimately destroyed; the debtor is a slave to the
creditor, and the tremendous banking forces of this country abso­
lutely run the country. Either that class has got to take its normal
position in society, or else it is going to swallow us all up, and for
this reason:
In this machine age where, as a matter of fact, labor is constantly
being released from industry, you have got to get some system
whereby you can declare a national dividend, either by a direct
dividend or by a discount system. It cannot be done in any other
way, in my opinion.
I am not suggesting for one minute that we shall revolutionize the
banking system in one stroke, but it does seem to me that we are not
helping matters any to be saying, " I t is not time now; let us wait
until next week, or next month, or next year." We have been saying
that for 200 years.

Governor EccLES. I think this bill is taking a very great step
forward, and I believe that it is as far as we should go at this time
with reference to the matter of control of our system o f money.
Mr. GOLDSBOROUGH. Just along that line—and I only have one or
two more suggestions I want to throw out—let me say this: During
all of the ages the battle of the people has been for a government of
laws and not of men; and all of my investigations during a period
of 35 years have taught me the truth of a saying of one of the
Rothschilds, " I f you give me control of the credit and money o f a
country, I will control everything in it."
So, it seems to me that a legislative direction ought to be directly
injected into the monetary system, and that too much discretion,
except insofar as the mechanics and the technical phases of the law
are concerned should not be left to the administrator. It seems to
me it is the duty of Congress to lay down the policy on behalf o f
the people, that policy to be carried out by technical experts.
Under this bill, members of the Federal Reserve Board—that is,
under the bill as amended—who are not necessarily benevolent
despots, and who are certainly not immortal, have almost the eco­



nomic destiny of the American people under their control, without
control. Doyou think that is a good thing?
Governor EccLES. I am proposing it. The Board is in session all
of the time; Congress is in session part of the time. There is noth­
ing to prevent Congress at any time it is in session giving such
instructions by congressional action as it chooses to give to the
Reserve Board, which is appointed by the President, and is required
to operate in accordance with the Federal Reserve legislation passed,
and amended from time to time, by Congress.
I cannot see how it is possible for Congress to operate a money
system except through a body such as the Federal Reserve Board, or
some other board that they may create for the purposes of carrying
out the wishes of Congress^ as provided in legislation which Congress
I do not think the proposed legislation in any way takes away
from Congress the sovereign power which they have and should have
and should retain. It is simply delegating to a body which should
represent the Nation and the interests of the Nation, the carrying
out of the mandates of Congress.
Mr. GOLDSBOROUGH. Of course, if we are going to assume that
Congress has no wisdom in this country, I agree with you.
Governor E ccL E S. I am not assuming that.
Mr. GOLDSBOROUGH. But if you are going to assume that Congress
has the wisdom it is supposed to have, then it certainly is fair to
say that Congress should give legislative direction to those who are
to carry out the law.
Governor Eccuas. I think that is being done here.
Mr. GOLDSBOROUGH. It is a declaration of policy.
Governor EccLEs. Yes.
Mr. GOLDSBOROUGH. Which, in the case of a cynical board, would
simply amount to a stump speech.
Governor EccLES. The question of how to make rigid requirements
that will better represent the best interests of the people is a ques­
tion I do not know how to answer, and I doubt if anybody else does.
Mr. GdLDSBOROUGH. I am going to conclude by saying this, that
in my judgment what you have proposed is innnitely better than
anything we have ever had before.
Governor E ccL E S. I thank you.
Mr. Cnoss. Governor Eccles, what disturbs me is that it seems
that this system upon which you rest, judged by your statement, is
that debt is a good thing, and the more debts the better off we are.
I cannot Rgure that out.
You say you think the Budget ought not to be balanced and we
should keep going in debt.
Governor EccLEs. N o; I did not say that.
Mr. CROSS. In substance.
Governor EccLEs. The Budget must be balanced over a period of
time; but I think we should not look at the question of Budget bal­
ancing purely on the basis of a year.
Mr. CROss. No; the more debt you have the more money you
create; that is, the more money the banks can create.
As you said a while ago, the banks are prosperous when there are
a lot of debts, with high rates of interest. But does that make people



Governor EccLES. The intimation is that all debts are created and
carried by banks, and that if we in some way can create money
without bank credit we have prevented people from getting in debt.
As a matter of fact, the money which we create as the result of
bank debt is not very much more than 10 percent of the debts of
the country.
Then, what about the insurance companies of this country! One
class of people save and pay into an insurance company, and an­
other class make it possible for the savings to return something to
their posterity, because somebody goes in debt.
The whole system of capitalism is built up on a basis of debtor
and creditor relationship, and the debt that the banks create, or the
money they create, is a very small part of the debt. You have not
taken the people out of the bondage of debt that you refer to by
simply changing the banking system and finding some other method
of creating money.
Mr. FORD. If it were possible to create money by a Government
just making the money, and if it should just go on paying its bills
and making money, would it be necessary for the Government ever to
go in debt, on the theory that it can just print the money and hand
it out!
Governor EccLES. The Government is a sovereign power, and it has
the power to create such money as the Congress appropriates. There
is no question about that, it does not have to depend upon the
banking system, as I have stated upon several occasions, to provide
credit for it. But it is my feeling that that is the most desirable
Mr. FoRD. If the Government could make all the money it needed^
it would not have to go into debt, would it!
Governor Seems. You mean if it could collect in taxes what was
Mr. FoRD. No; I am talking about this idea of running printing
presses. I f the Government could print all the money it needed,
it never would need to go in debt, would it!
Governor EccLES. It could do that, but if it did it to a suSicient
extent it would certainly make an inflationary condition which would
destroy the value of all money.
Mr. FoRD. It would break it down some.
Governor EccLES. Of course.
Mr. CROSS. You have to have controlled currency, if you are not
going to stick to a metallic base.
Governor EccLES. You have to have a managed currency, and
I believe that the present system, through the banking system, with
the public interest represented through the Federal Reserve Board,
is as desirable a way of controlling the value of money as has been
devised in capitalistic economies.
Mr. CROSS. The proposition is to devise something more than has
been devised, if possible, because under the very system we are talk­
ing about you may create debt and prices may rise and you create
more debt, and it is inevitable that the crash will come directly,
and we go right back into the condition in which we find ourselves
130417—35---- -16



Suppose we have a severe crisis, and people commit suicide, or
go into bankruptcy, and then finally come out again. Then the
same cycle starts over, and you keep going and coming back.
It seems to me we ought to have, if possible, more of what might
be called backbone money, or development money or credit-creating
money. If we can, we ought to get something that is more sub­
stantial than currency, or money that will fade out over night,
pocketbook money.
It seems to me our trouble is that when prices begin to fall, this
credit money, or check book money, all vanishes and leaves us help­
less, and ruins us.
Governor EccLES. It would be very fine if we could find some
method of avoiding these cyclical changes and always have com­
plete and full employment and business stability. But I do not
know o f any rule whereby we can accomplish that. We can make
that an objective.

Mr. CROSS. You will agree with me on this, will you not? Sup­
pose there was no money; as long as crops were good and people
raised plenty, it would be a golden era, would it not!
And if you had currency that would reflect the real exchange
values of those things which society needs; if you could get a cur­
rency that would reSect the real values of those things in response
to the law of supply and demand, we still ought to be in the heyday
of prosperity, ought we not!
Governor E ccL E S. It depends on whether or not the currency is
distributed so that people could spend. I f you still had inequitable
distribution to the point where a great majority of the people had
no money to spend, it would not make any difference whether you
used a currency system or some other system. The buying power
has to be in the hands of people, no matter what kind of money
system you use.
Mr. CROSS. When you trap a lot of people into debt and distress
them and they want to eat something, t!^n what would be the
Governor EccLES. But the banking system, as I have indicated,
is not responsible for trapping the people into debt. This system of
Government loaning agencies, the Howe Owners' Loan Corporation,
the Farm Credit Administration, and the Reconstruction Finance
Corporation, are three of the greatest credit-extending agencies or
creators of debt that we have in the Nation today.
Mr. CROSS. Really, it is just postponing the day of execution, is it
not, to shift that from private concerns to the Government! If
the Government insists on foreclosing later on it is just postponing
the day of execution, is it not!
Governor EccLES. There is not any question about it; but a debt
can be supported when the national income is sufficient to support it.
The trouble was that our national income went down in a hurry, and
it was going in that direction through the process of bankruptcy
and foreclosure. But debt was adjusting itself through that process
so that it could be supported by the national income.
Mr. CROSS. What I am trying to get at is this, if it can be done, t<*
evolve a system that is not fatalistic. I believe that if we continue
in this helpless condition, in substance, it will get in time where it
means the end of capitalism.



Mr. FoRD. Governor Eccles, is not the plan you have in mind of
'creating debt on the part of the Government for the purpose of
priming the pump, and when the pump catches and the fluid begins
to Sow, then let the Government, through its taxing power, wipe
out that deficit, and therefore have self-liquidating recovery. Is
that not what you want to do?
Governor EccLES. When you correct the causes for the deficit and
the deficit disappears, with an increase in employment and an in­
crease in the national income, the Government's revenues would in­
crease and you would no longer have a deficit.
As private-bank credit expands, and the velocity of existing funds
held by corporations and people in banks increases, you would likely
Tiave a condition of pretty full employment. At that time income
taxes should be increased and not decreased, and Government obliga­
tions should be reduced as the community's obligations are increas­
ing. Thus you would be creating a compensatory condition in the
money system which would help to iron out the diHiculties, if it is
done with proper timing. If it is done in that way it would help to
iron out the tremendous cyclical depressions which create booms and
collapses, which create huge armies of unemployed and the terrible
loss of national income.
Mr. FORD. We have that condition now, and we are trying to
prime the pump, and by priming the pump create increased busi­
ness and increased national income, and when the income increases,
then the plan, in substance, is self-liquidating, is it not!

Governor EccLEs. Yes.
Mr. WiLMAMS. Governor, I do not know that I have anything
additional to ask you about, but there is a feeling among some people,
as has already been indicated here, that we should substitute cur­
rency for Government bonds, retiring them as they become due, not
only what the banks hold, but the entire amount that the Government
has outstanding. What would be the result of that ?
Governor EccLES. In the case of the bonds that the banks have,
it would increase their reserves by that amount.

Mr. WiLMAMS. What percentage of the bonds outstanding do the
banks own!
Governor EccLES. Oh, I think, of the total outstanding it is some­
where around 44 to 45 percent.
Mr. WiLLiAMS. Almost half. What would happen to the rest of
them, to the other 55 percent!
Governor EccLES. Insurance companies are very large holders of
those bonds, and the savings banks are very large holders, and the
trusts o f various kinds, hospitals, educational institutions, and chari­
table organizations of various kinds, as well as private or individual
trust estates------

Mr. WiLLiAMS. Would not that release their holdings in bonds and
give them currency that might be invested in other securities!
Governor EccLES. Where other securities are available for such
investment. If they were available the excess reserves of the member
banks would go into those securities; but what that would create
would be an inflation of the security markets, because the volume of
money available in relation to the volume of investment securities
would cause the bidding up of the stocks and other securities.



Mr. WiLLiAMS. Then finally the currency would all come into the
Governor EccLBS. Yes; it would go into the banks immediately.
Mr. W iLLiAM S. And in the case of these other institutions that
have no use for it for investment purposes, what would they do
with it?
Governor EcCLES. They, of course, would deposit the currency in
the banks, which would increase the banks' deposits by the amount
of the 55 percent of the Government bonds they hold.
As to the bonds held by the banks, it would increase their excess
reserves by the amount of Government bonds they held but would
not change their deposits.
Mr. W iLLiAM S. It would possibly result in the entire amount o f
Government bonds going into currency being deposited in the banks,
increasing their reserves!
Governor EccLES. That is exactly what it would do.
Mr. W iLLiAM S. That would create either one of two conditions.
It would present a situation of unlimited inflation, unless-----Governor E ccL E S. Unless the reserve requirements were raised
by that amount.
Mr. WiLLiAMS. It would raise the reserve by that amount, but you
would not necessarily have to raise it to the full amount, would you!
Governor EccLES. You have already over 2 billion excess reserves.
You have enough excess reserves now to give you a large inflation;
and, if you did not raise reserve requirements by the full amount,
vou would have additional excess reserves over the 2 billion now
Mr. W iLLiAM S. Would the fact that the reserves were increased,
we will say, to 5 billion, tend to create an inflationary condition!
Would that help to make money more easy and induce people or
institutions to borrow !
Governor E ccL E s. I doubt that it would have any such effect. The
rates now on bankers' acceptances and commercial paper, and short­
term, high-grade bonds, and Government bonds are almost at the
vanishing point, lower than at any time, I suppose, in the history
of the country.
But I do not believe that increased reserves, beyond the present
excess, would induce any more borrowing or any more lending.
I f we begin to get recovery and private credit begins to expand,
and the banks increase their investments in securities, and the funds
go into the capital markets for building new capital facilities, by the
time the banking system had used up their present excess reserves
of 2 billion dollars, you would have a volume of money far in excess
of anything that the banking system has ever had, and with that
volume, with the income velocity that we had in 1927, 1928, and
1929, it seems to me you could have a great inflation, without using
any of the increase in the reserves. I mean without using any of the
increase in the reserves which would be brought about by retiring
Governments through issuing currency.
Mr. W iLLiAM S. In* other words, the credit expansion potentialities,
at least, are as great as you think they ought to be now!



or to raise the reserve requirements, before the present excess require­
ments were entirely used up.
Mr. WiLLiAMS. I would like now to get down to section 202 of this
bill, with reference to the admission of nonmember banks into the
Federal Reserve System, about which you talked a great deal.
In the first place, the bill itself as proposed here provides that
the Federal Reserve Board may waive the capital requirements for
admission, with the understanding that within the time specified by
them the bank admitted into the System makes up those require­
Governor EccLBS. That is right.
Mr. W iLLiAM S. That is the p r o v is io n o f the b i ll.
Governor EccLES. That is right.
Mr. W iLLiAM S. As I understand it, the amendment offered by
you—I did not understand that you presented any definite language.
Governor EccLES. We have definite language. I did not submit
it here, but I submitted this statement before the committee, and I
will read it, if you desire.
Mr. W iLLiAM S. I did not understand that you submitted definite
Governor EccLBS. Not here, but we are prepared to submit to
the committee suggested language, if they desire us to do so.
Mr. W iLLiAM S. That is exactly what I wanted to ask you about.
I understood your general statement to be that they may waive
this requirement and other requirements.
Governor EccLES. This is what that meant. This provision with
reference to the admission of insured nonmember Tbanks is very
short. It provides—
On the admission of insured nonmember banks, the Board shal! have author­
ity to waive not only capital requirements, but all other requirements for
admission, and the Board shail be permitted to admit existing banks to mem­
bership permanently with capital below that required for the organization
o f national banks in the same places, provided that their capita! is adequate,
or is built up within a reasonable time to be adequate, in relation to lia­
bilities to depositors and other creditors.

Your question was in relation to capital and all other requirements
for admission.
Mr. W iLLiAM S. What is meant by the waiving of all other require­
Governor EccLEs. I have in mind one particular situation. Quite
a number of banks that closed during the bank holiday and wanted
to reopen found it necessary to get waivers of a certain percentage
o f their deposits from their depositors. In getting those waivers
the banks issued to the depositors certificates of claims for the
amounts of the deposits which they waived, which were, of course,
secondary to the deposits of the reopened banks, but senior to the
stockholders' interest in the banks.
It has been construed by the counsel of the Federal Reserve Board
that, under our present Federal Reserve Act. that claim of the
depositors is a liability of the bank, and therefore that they cannot
figure they have any sound capital so long as those claims exist,
whereas those claims are secondary to the depositors' rights.
For all practical purposes, the depositors are as fully protected
under that arrangement as they would be if the claim did not exist,



and they are given that protection. That is the only ease I have
in mind at the moment; there may be others.
But we felt that we wanted the language of the bill broad enough
to give the Reserve Board the power to get nonmember banks into*
the system; whereas if conditions were imposed that they could not
meet, it would be undesirable, and that was not what the reserve
organization felt should be done.
Mr. W iLLiAM S. Is it your thought that these capital requirements
should be waived permanently, or that they should be required to
make them up after they get in?
Governor E ccL E s. No, s i r ; it is our thought that they should be
waived permanently, if the capital and surplus which they have is
adequate in relation to the bank's liabilities.
Mr. W iLLiAM S. And you would consider them solvent!
Governor EcCLES. Yes. For instance, a bank with $40^000 of
capital and surplus combined and with a deposit liability of $250,000
has adequate protection for its deposit liability. That is as much
protection, on the average, as the deposits have throughout the
banking system, as a whole.
Mr. W iLLiAM S. The thing that has disturbed me, and has disturbed^
me very much, is what we are going to do with the 8,500 nonmember
Governor EccLES. Seven thousand.
Mr. W iLLiAM S. That is , th e banks w h ic h during all these years
have not seen fit to come into the Federal Reserve System, and now
compelling them to come in if they are going to enjoy any of the
benefits of the Insurance Corporation.
Governor Eccuss. Of course, that is not a provision of this
M r . W iLLiAM S. I u n d e r s t a n d th a t , b u t w e a re le g is la t in g o n th a t
s u b je c t .
G overnor E ccLES. We are simply making it possible to liberalize

the Federal Reserve requirements so that the legislation requiring
their membership which was passed last year can be complied with
without hardship to the nonmember banks.
Mr. W :LLiAM S. You understand how it was passed?
Governor E ccL E s. It was passed and is in the law; and of course I,
personally, am very much in favor of it. I feel that this whole
banking policy cannot be successfully carried out so long as you:
have a substantial part of your banking system not under the Fed­
eral Reserve System. The control over your reserves and the con­
trol over your money is reduced just to the extent that a substantial
part of your banking system is entirely out of the Reserve System.
And, since the nonmember State banks came to the Federal Gov­
ernment in an emergency, the same as the banks under the direction
of the Reserve System And/or the Comptroller of the Currency, and
requested the benefits of the Reserve System and the Reserve System*
was rquired to lend to the nonmember State banks at the time of the
bank holiday, I believe that in the interest of the nonmember State
banks the legislation passed last year, with the amendment proposed^
is very necessary and a very constructive thing to require.
I have met with a lot of nonmember State bankers, and I know
that they feel that it is against their best interests to be members;
of the Federal Reserve System. That may have been true in the*



past, to the extent that they could carry their reserve balances in
the city banks and get 2 percent interest, I think, or 1% percent
Today they get no interest whatever on their reserves in the city
banks, and they would be just as well oR to have those balances in
the Reserve banks now as to carry them in the city banks, whereas
that was not true until the time of the Banking Act of 1933.
Another advantage in becoming a member of the Federal Reserve
System, that will exist if this legislation passes and that did not for­
merly exist, is that by the broadening of the eligibility features, it
will give them a protection that they did not have before.
The CHAIRMAN. May I interrupt you right there! That means,
of course^ with the inducements that are offered to the nonmember
banks to join the Federal Reserve System. There is not a nonmem­
ber bank in the United States that will object to entering into the
Federal Reserve System that tends to induce them to come m. Some
of them do not want to be forced in, and I do not think you have
given all the reasons for it yet.
For instance, one is in connection with the matter of their right to
charge for service rendered.
Governor EccLES. Exchange.
The CHAIRMAN. Which, in the case of a small community bank
with a small capital, goes a long way toward meeting their overhead*
And there is another reason. Nonmember banks come in contact
with member banks, or the officials of nonmember banks come in con­
tact with the official of member banks, and they get from those
contacts, in addition to what they gather otherwise, impressions as
to the desirability of membership in the Federal Reserve System,
and there has been unfortunately an accumulation of complaints on
the part of national banks that were automatically taken into the
Federal Reserve System.
This question here, if I may say so, comes back to this proposi­
tion. It seems to me it must be considered separate and apart from
the fundamental thought that enters into the policy that should be
finally deermined as to the unification of the entire banking system;
that is, our efforts to deal with the emergency that confronts us.
If we attempt to set up requirements of nonmember banks which
they cannot meet—if such a provision is put into effect—they can
have the benefit o f deposit insurance; and I think it is generally con­
ceded that would result in disaster, as a general rule, to small nonmember banks.
Governor EccLES. It would be suicide for the Reserve Board to
set up requirements that the small nonmember State banks could not
meet, ana thus force them out of the deposit insurance and force
them to close. There would be nothing constructive accomplished
by any such action as that.
The CHAIRMAN. I here and now register my complete acquittal
of you as to any fear of that kind. But we cannot have you in
control always. I wish you would live a hundred years, but you
Governor EccnES. I do not wish that.
The CHAIRMAN. We do not know who will be Governor of the
Federal Reserve Board 5 years from now.
Governor EocLES. Or next month.



The CHAIRMAN. Or possibly next month.
What happened when we were faced with the complete collapse,
or at least the complete closing—I guess it is fair to call it a col­
lapse—of the entire banking system of the Nation in 1933! The
bankers were desirous then of having Congress meet, and for once
they were willing to meet with Congressmen and confer, and we did
confer. We passed the Emergency Banking Act. You know how
it was written, I assume.
Governor EccLES. I read Huey Long's speech after he had voted
for it.
The CHAIRMAN. Huey Long was not the only one who felt that
way. The entire administration thought that way, and what hap­
pened was this—and that is what I was about to call attention to—
that the controlling voice in framing that legislation did not come
from nonmember State banks in the United States; and the result
was that when member banks found they could not get currency
enough to pay their depositors and keep their doors open, they
arranged for currency to be printed on their assets and supplied to
Governor Ecci^s. Clearing-house certificates.
The CHAIRMAN. Under the Emergency Banking Act of 1933, as
originally passed, we provided for the issuance of Federal Reserve
bank notes to member banks, but nonmember banks were not per­
mitted to have that privilege under that act.
Under that legislation, a town of 10,000 or 20,000 population might
have two banks, half of the business activity and life of the com­
munity being centered in one bank on one corner and the other half
in the other bank.
With this situation affecting the Nation under that bill we pro­
vided relief for half of that community and its interest and its
deposits in the member banks of the Federal Reserve System. And
we said to the member bank, "Here is the way you may print
money or get currency to take care of your deposits
and we said
to the people of the community interested in nonmember banks,
" You take care of yourselves." Of course, that was Rnally cor­
rected, but it took a struggle to do it.
They have that recollection before them; and there are a lot of
just such experiences, not just exactly like that but experiences of
that kind that influenced the nonmember bankers; and if we attempt
to set up arbitrary standards to force them into the Federal Reserve
System, I am not sure that we will not get into difficulties.
Governor EccLES. I f we had a unified banking system at the time
you refer to, the question as to whether or not a bank could get the
beneRts of advances from the Federal Reserve bank and receiving
therefor Federal Reserve bank notes would not have come up.
The question came up, because here was a system set up for mem­
ber banks, and all banks had been invited to join the Reserve Sys­
tem from its very beginning. An emergency developed after a
period of 20 years, and those banks that had not taken advantage
of the opportunity to join wanted in the emergency, the beneRts of
a system of which they were not members.
i recognize that it was in the public interest to do just what was



The CHAIRMAN. What was finally done, but not what was done
so long as we were moving under the counsel of one class of bankers.
Governor E ccLES. But I do think that the possibility of the re­
currence of such a condition should be prevented by getting a uni­
fication of the banking system. I believe you will never have in
this country a banking system that can withstand the pressure of
periods of financial distress, and we will never have a sound, de­
pendable banking system until we get a unified banking system.
And neither do I think it will be possible to exercise through mone­
tary policy the same control over the money system when a sub­
stantial number of banks which create money just the same as the
member banks are subject in no way to the regulation or control of
the authority that is responsible for monetary action.
I have been in the banking business for a period since 1913, a
period of 22 years, up until the time I came over here a little more
than a year ago.
My first banking connection was with about a million-dollar bank
which joined the Federal Reserve System shortly after the Federal
Reserve System was organized. It is a State bank. From that
period a banking organization of over $55,000,000 was built up, op­
erating over 25 banks, national and State, member and nonmember.
I found, as the result of experience, that it is in the interest of a
bank to be a member of Hie Federal Reserve System, whether it be a
small country bank or a substantial sized city bank; and I am
stating here my honest conviction of what, as a result of experience
and as a result of study for a period of years, I feel is in the public
interest and in the bankers' interest.
And I believe that the great majority of the nonmember State
banks, if they understood this problem, could be induced, in their
own interest, to become members. I have found in talking, as I
have upon many occasions, to nonmember State bankers, that invari­
ably they can be sold upon the idea, and the difEculty today with
very many of them is a lack of understanding and lack of informa­
tion with reference to the problem.
The CHAIRMAN. I think one reason why they have not wanted to
come in was because they did understand. When a bank becomes a
member of the Federal Reserve System its other connections are
practically terminated.
Governor EccLES. You mean its other banking connections.

The CHAIRMAN. Yes; its other banking connections. So far as
obtaining relief in an hour of need is concerned, those connections
are terminated, and any small bank, a member of the Federal
Reserve System, would be dependent upon its Federal Reserve bank
for relief in the hour of difficulty, as a general proposition. I think
that is undeniably true.
Governor ECCLES. Not altogether, because every bank carries
usually an account or two with a city correspondent.
The CHAIRMAN. Sometimes they do, but they do not always do
I can point you to instances in my own district where a bank in
a town of not over 20,000 population wag allowed to close. I know
the history of it.
I know that there were criticisms and faults to be found with the
management, and its papers were not all desirable. But the bank



came very near liquidating 100 percent to its depositors during this
depression. The Federal Reserve turned them down and abandoned
That very institution, if it had not been a member of the Federal
Reserve System, and had kept up the other connections that would
have existed, in all human probability would have been able some­
where to have secured relief to tide them over their difficulties.
Of course, that is one instance that happened many times.
I want to say in that connection that I think the story would have
been different if we had then the experience we have gathered since
that time and had had the legislation now proposed and had it
administered with some degree of common sense.
Governor EccLES. I think that there was a lack of power for the
Federal Reserve banks to extend the relief that they should have
been able to extend; there is not any question about that.

The CHAIRMAN. In connection with what I said, I want to add
this, that I have not the slightest doubt that this legislation, if it
is administered as I think it will be, and I believe it will be in the
light of our experience, with a more liberalized view of the situation
to be reflected m the administration of the Federal Reserve System,
will induce many State nonmember banks to join the Federal Reserve
System voluntarily.
Governor EccEES. There is not any question that the Reserve banks
were extremely rigid in their credit extension, in their interpretation
o f eligible paper. As the depression proceeded and as deflation con­
tinued, the attitude and the action of the Reserve banks, based upon
my experience, and I know upon the experience of thousands of
other bankers, was to the effect that the Reserve banks became more
Tather than less restrictive.
I think the experience of the past has been a very salutary one,
and I agree with Mr. Steagall that, if this legislation is passed and
is administered with understanding and in the spirit that has moti­
vated the legislation, a repetition of the banking catastrophes that we
liave had in the past would be impossible.
Mr. CAviccHiA. The other day, Governor, I asked you if this bill
aimed at a centralized banking system, or whether it was merely
1 notice this morning you used the word " unification." As I
understand it, this bill aims at unifying the National and State
banking systems under the Federal Reserve System^ am I correct!
Governor Ecc&Es. No; this bill does not deal with that problem
at all. That matter was covered by the legislation which was passed
in 1933.
Mr. CAViccmA. In what sense did you use the word unification?

Governor EccLEs. I wds simply stating that I thought a unifica­
tion of the banking system was necessary, and according to the leg­
islation that Congress passed in 1933 unification will be brought
about by 1937, when the nonmember State banks will be required to
become members of the Federal Reserve System in order to get
deposit insurance.
Mr. CAviccHiA. And yovr program is to unify the banking sys­
Governor Eccuss. No; that is the program which was passed, and
which I am favorable to.



Mr. CAVICCHIA. The aim of the legislation we passed and that
-which we are now considering it to unify the banking systems,
whether it be National or State!
Governor EccLES. That is correct.
The CHAIRMAN. You mean this legislation was not designed to
accomplish that purpose, but its purpose was of another nature, and
you merely accepted the existing law with reference to uniHcation.
Mr. C A v iccH iA . You s t ill h a v e th e t w o sy ste m s .
Governor EccLES. This legislation oniy facilitates the carrying
out of the legislation which has been passed, without imposing un­
necessary hardships on the nonmember State banks.
The (JHAIRMAN. You might state your views to be that a proper
interpretation and understanding of the proposed legislation is
that it really liberalizes the requirements heretofore imposed in the
act of 1933J
Governor Eccuss. Yes.
Mr. WiLLiAMS. I want to ask whether or not you think that State
legislation authorizing the creation of State banks ought to be en­
tirely abolished, making it one system, sure enough.
Governor EccLES. It is my personal belief that that may be
desirable, but it is impracticable at the present time.
In practically every other country m the world they have one
banking system; and, as the result of that, they have, I believe,
avoided many of the banking troubles which we have had. But
we are young, and I do not believe that we can make changes in
our metnods and habits too rapidly. We cannot go faster than the
people of the country are willing to have us go.
Mr. W iLLiAM S. It seem s t o m e w e a r e in e v it a b ly g o i n g t o th a t , and
I h a v e th e v ie w in r e fe r e n c e t o th e g e n e r a l p h ilo s o p h y o f t h e le g is ­
l a t i o n th a t w e a re c e r t a in ly g o i n g i n t h a t d ir e c t io n .

If it is desirable, as you think—and I am not controverting that
here—to have the entire system under a central control, so far as
the monetary policy is concerned-----Governor EccLES. That is what this would do, without eliminating
the State banking departments.
Mr. W iu jA M S . Undoubtedly; but it brings them into the picture,
subject to that policy.
Governor EccLES. Not so far as the examination of banks is con­
cerned, and not so far as the chartering of banks is concerned; but
it does unify the System by placing State banks under the in&uenca
of monetary policy of changes in Reserve requirements and changes
in discount rates.
Mr. W iLLiAM S. I f w e a r e g o i n g t o b r i n g th e m in t o o n e sy ste m , I
c a n see n o re a so n a t a l l f o r th e iu r t h e r e x is t e n c e o f S ta t e b a n k s . I
c a n n o t see th e n e ce s sity o f h a v in g a s e p a r a te e x a m in a tio n o f th e m .

Governor EccLES. There is not any question but what there are
many improvements that can be made in the banking system that the
proposed legislation has not provided for. But I believe that bank­
ing legislation must be evolutionary and not revolutionary. We can­
not expect in one session of Congress to get all the banking legisla­
tion we want, when we take into account the size of the country
and the habits of the country, the adverse and diverse opinions.
Therefore, what has been proposed here, it seems to me, is about



as far as we could expect to go at this time with reference to bank­
ing legislation, and the question of other problems of banking legis­
lation which have been discussed from time to time, such as the
matter of unification, the examining problem which you raised, Mr.
Williams, and the question of branch banking has come Up a good
many times here and it has come up in many State legislatures. All
of those problems are problems which will come up from time to
time for consideration. There is not any question about that.
Mr. CLARK. The Federal Reserve System as it has existed and has
been administered, as Mr. Steagall pointed out; has not been sold for
some reason or other to thousands of banka throughout the country
that did not want to join, whether they understood the facts or not.
In title H of this proposed legislation, if it is passed; I think,
personally, you have an article that will seH the System, if properly
But why do you think it is necessary to use the'F. D I C. as a
dub to force the sale of An article that ought to sell oh its 6wn
Governor EccMS. I think that membership inthe F. D. I. C.
should be conRned in the future to member hanks; In 1983 it was
found that the Federal Reserve System was the only agency that
could provide liquidity to (he banking system and thus enable the
banks of the country both member and nonmember banks, to re­
open and to make available the depositors' money. This had to be
dene at that time by the Federal Government, even though it had
nothing Whatever to do with the chertering or thesupervision of non­
member banks. The Government had the responsibility through the
Reserve System of giving them the beneRts and the protection of that
system in the same manner in which it was accorded to member banks.
Now, I do believe that, in the public interest, after a reasonable
time—and 1937 is a reasonable time—and after providing a liber­
alization of the requirements of membership, any bank which is
being insured by the Federal Deposit Insurance Corporation should
be required to become a member of the Federal Reserve System for
better protection to the Federal Deposit Insurance Corporation.
Although it is a bank mutual insurance plan, at the same time the
moral obligation of the Federal Government is there; because the
public looks to the United States Government to make that insur­
ance company solvent if the banks cannot or do not.
Mr. CLARK. You think, that the insurance features of the F. D. I. C.
are so closely involved with the entire banking system that it is good
practice in this instance, whereas ordinarily it would hot be, to use
one agency as a club to force membership into another agency;
that they are so interrelated and tied up that it is a fair thing to do.
Governor Eccna. I agree with you. I do not like the use of a
dub at all in dealing with human problems. The F. D. I. C. and the
Federal Reserve System are so closely interwoven that it is neces­
sary in the public interest to require membership of insured banks;
but I do not like to look upon the use of the F. D. I. C. as a club.
Mr. CLARK. That has been suggested several times while we were
discussing title I, and that is why I used the term. I merely wanted
to get your statement in the record because numerous State banks
hdve written members of the committee raising that very question,



stating; in pffect, that they were being clubbed by a desirable institu­
tion into joining the System, which, as presently constituted, they
db not like. .
That is one reason why I wanted to get your views in the record
so that wa might have the entire picture.
Mr. HoujSTER. With respect to section 210, which pertains to the
lending power of national banks, are you going to mention that!
Governor Eccuss. That is just what I was going to refer to.
Mr. HauMMEB. I was just going to bring that out.
Governor EccLES. I wanted to put in the record a suggestion with
reference to section 210, which is the provision dealing with realestate loans, a section that has possibly been misunderstood as much
or more than any other section, and a section which has been dis­
cussed here, possibly, as much as any other section.
I recommended before this committee that, instead of providing in
the bill a specific maximum amount based on appraisal that could
be loaned, a specific maximum period, and a maximum amount of
time funds, that there should be more Hexibility, and that the Re­
serve Board should be required to make rules and regulations govemingthemaking of real-estate loans by member banks.
There are many reasons for that which I do not think it is neces­
sary to review here. It has been suggested that it would be desir­
able, and that the proposal would be far more acceptable to the
bankers in general, if were were a limitation of 60 percent instead
ofthe7B-pereent limitation placed in the legislation; that is, to
permit the Board to make rules and regulations with reference to
real-estate loans, with the limitation that no loan made after the
passage of this legislation or after the promulgation of the Board's
rales and regulations could exceed 60 percent <3 the appraised value
of the property.
I see no objection to that. I do not believe the banks would loan
more than 60 percent on the appraised value in any case.
My purpose in suggesting the 75 percent was not with the expec­
tation that the banks in the future would loan 75 percent of the
appraised value of the property; bat it would enable them to carry
the more than 2 billion of real-estate loans which they have, which,
dueib ttepra?iatiOD values, are in excess or 50 percent in many cases,
possibly as high as 65, 70, or 75 percent in some cases. It would
permit them & tamry the loans they have and extend them over a
long period with an amortized basis of payment, rather than to bring
pressure bn the borrowers because the examiners bring pressure upon
the tw&Rt to mdpce (hase loans to the 60-percent limit, which would
farce the borrowers on to the Government, through the Home
Ownewf Loan and the Farm Credit Administration.
I would Mke to see the banks able to carry the real-estate loans
they haw, even though they are in excess of 50, or 60, or 70 percent,
and to refund those loan&
But I think a 60*pement limitation is desirable in Jthe case of
mhkinc new loans in the future. I have no objection to it, and
would like to ppcoaamend that, in connection with giving the Federal
Reserve Board the authority to make rules and regulations, such
a limitation be put upon that authority^



The CHAIRMAN. We have concluded with Governor Eccles, and
I want to thank you, in behalf of the committee for your faithful­
ness in attending these hearings, and for the very able presentation
you have made of this legislation. All of the committee, I am sure,
cannot agree with everything you have said, but we agree with you^
Governor ECCLES. I appreciate your courtesy and the patience
which the members of the committee have accorded me.
gf&temewf on

tucowte, mowey, awd income velocity, aw&mMfed
Gov. Jf. R.

land '

Income veloc­
veloc­ based
based Depart
Depart­ Money! on
Com­ lions)
So merce
(times (III)

cent­ change
cent­ change in
ininin in­ ye!occhange
in in­
(mange come
come, Departmoney ity, Depart^
Cope­ ment


192 9
193 0
19 1.......











3; 29


- 1.2




















-9 .0
-2 .9


! Dw^sS3eX^Se^play%sh^ntside banks As of June 30.

1. Sac. 201. The governors and chairmen and vice governors o f the Federal
Reserve banks shall be approved by the Federal Reserve Board every three
years rather than annually, so that their terms as governors woaM Coincide
with their terms as class C directors.
2. SEC. 202. On the admission o f insured nonmember banks, the Board shall
have authority to waive not only capital requirements, but all other require­
ments for admission, and that the Board be permitted to admit existing banks
to membership permanently without requiring an increase in capital, provided
their capital is adequate in relation to their liabilities.
3. SEC. 203. The pension provision shall be modified so that any member o f the
Board, regardless o f age, who has served as long as Rve years, whose term
expires and who is not reappointed, shall be entitled to a pension on the same
basis as though he were retired at seventy. That is, he is to receive a pension
of $1,000 for each year o f service up to twelve.
Smc. 205. Authority over open-market operations shall be vested in the Fed­
eral Reserve Board, but that there be created a committee of Bve governors
tf Federal Reserve banks, selected by the twelve governors of the Federal
Reserve banks, and the Board shall be required to consult this committee



before adopting an open-market policy, a change in discount rates, or a change
in member-bank reserve requirements.
5. SBC. 209. The Board shall not have the power to change reserve require­
ments by Federal Reserve districts, but only by classes o f cities. For this
purpose banks shall be classified into two groups: one comprising member
banks in central reserve and reserve cities, and the other all other member
banks. Changes in reserve requirements, therefore, would have to be either for
the country as a whole or for the financial centers, or for the country districts.
6. SEC. 210. The conditions on which ren 1-estate loans may be granted by
member banks shall be left to the discretion of the Federal Reserve Board to
be determined by regulation. No real-estate loan hereafter made shaU exceed
60 percentum of the appraised value o f the property; but this shall not prevent
the renewal or extension of loans heretofore made.
7. It shall be the duty o f the Federal Reserve Board to exercise such powers
as it possesses to promote conditions making for business stability and to miti­
gate by its influence unstabilizing fluctuations in the general level o f production,
trade, prices, and employment, so far as may be possible within the scope o f
monetary action.

(Thereupon, the committee took a recess until 3 p. m., this day.)