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r CO!tFIDENTlAL* -^ot yet released for pub li caiman. L-514 TESTIMONY OF HONORABLE MARHINER S. ECCLES BEFORE THE COMMITTEE ON BANKING AND CURRENCY OF THE HOUSE OF REPRESENTATIVES ON H . J . RES. 3 7 7 , AUTHORIZING THE DESTRUCTION OF FEDERAL RESERVE NOTES OF THE SERIES 0^ 1928 AND THEIR REPLACEMENT BY FEDERAL RESERVE NOTES OF THE SERIES OF 1 9 3 4 , OR A LATER SERIES, AT THE EXPENSE OF THE UNITED STATES. July 1 4 , 15 and 23, 1937. I -1- L-514 H. J . RES. 377 Authorizing the destruction of Federal Reserve Notes of the series of 1 9 2 8 , and their replacement by Federal Reserve Notes of the series of 1 9 3 4 , or a later s e r i e s , at the expense of the United States. Wednesday, July 1 4 , 1937 HOUSE OF REPRESENTATIVES, Committee on Banking and Currency, Washington, D. C. The Committee met at 1 0 : 3 0 o'clock a . n u , for the further consideration of House Joint Resolution 3 7 7 , Honorable Henry B. Steagall (Chairman) presiding. The Chairman. The Committee will be i n order. Governor ficcles, the Committee would like to have you discuss House Joint Resolution 3 7 7 , with which you are f a m i l i a r , and which provides a method for reimbursing Federal Reserve Banks for money expended by them for Federal Reserve notes which they have not used. I do not know whether you have read the statements in the hearings that have been held prior to this time. I f you have, you probably would know better just what l i n e you should direct your statement t o , b u t , i n any event, we would like to have your views on this resolution. STATEMENT OF HON. MARRINER S. ECCLES, Chairman of the Board of Governors of the Federal Reserve System. Governor Eccles. Mr. Chairman, I do not know that I can add very much to what has already been said upon this subject. The statement which was prepared and presented here by the representative of the Treasury, giving the reasons for the proposed l e g i s l a t i o n , seemed to be quite complete. I read your own statement, which to me sums up the situation in about as short, direct and terse a manner as it can be summed up, and I will just quote from i t : "The Government has sold notes to the banks which they have paid f o r , and as the banks now can not use them, does the Government want to take this money for the sale of something which has not been delivered and for which no benefit has been received by the banks, or does it wish to substitute something that the banks can use?" L-514 As you know, the banks are provided with federal Reserve notes which are supplied by the Treasury, and the notes in question, some of them completed and others i n the process of completion, have be^n paid for by the various Reserve banks. They were asked to discontinue the circulation of the series of 1928 notes, for the reason that they were redeemable in gold or lawful money, and i t was f e l t , in view of the Gold Reserve A c t , that the statement should be changed to make them no longer redeemable in gold, which of course was a fiction or a l i e on the face of the notes. They are not now redeemable in gold, and it was of course only proper that the circulation of them should be discontinued under the circumstances as soon as that could reasonably be done. The banks discontinued putting out these notes as rapidly as they wore provided with notes of the series of 1 9 3 4 , and of course they simply havo an inventory or a stock of those notes which the Treasury said they would be willing to replace with notes of the series of 1934 i f Congress would authorize them to do so, using such portion of the gold profit that they had for that purpose. Now, it would seem that i n view of the fact that theso notes of the 1928 series were made unusable as the result of an act to discontinue the gold redemption provision, and because at the same time a large gold profit accrued to the Treasury, something over two b i l l i o n eight hundred m i l l i o n , the banks should havo theso notes which were made ob solote as the result of this action replaced by the Treasury. Now, I know that some will say that the Reserve System should not receive a reimbursement, that they do not pay anything for their right to issue these notes, and that they are privately owned institutions. It should be pointed out, however, that the stockholders of the Reserve Banks are limited to a fixed amount, to 6 per cent dividends, upon their stock in the Reserve Banks, and that any earnings accruing to the Reserve ^anks i n excess of that amount at any time can be appropriated by Congress for such purposo as it sees f i t . The surplus of the Reserve Banks has been greatly reduced, was cut practically i n half as the result of an appropriation to the federal Deposit Insurance Corporation from that surplus. The surplus today i s not excessive, based upon what would seem to be the reasonable conservative needs of the Reserve System, and i f the Roservo System should earn funds in the future, thoso earnings would merely be added to the surplus, and the Congress, at any time that it saw f i t , could provide that such earnings as the Reserve System mado above such amount as the Congress thought was a proper and an adequate surplus could be diverted to the Treasury of the United States. The Chairman* Governor Ecclos, let mo ask you a question right there. I reckon that i t is a subject that might be discussed now with more freedom than v/ould have been permissible at other times i n our recent past. As a matter of f a c t , whatever might bo the showing on paper, either of tho member bank or of the ^'edoral Reserve B a n k i t s e l f , the condition of the member bank v/ould necessarily bo ruflected in the actual condition of the Reserve B a n k , and what I want to ask you is i f i t is not true that at one time our Federal K eservo B anks had inherent d i f f i c u l t i e s and problems as the result of the condition of their member banks, which tho public would not necessarily get from a paper statement of the condition of the Federal Reservo B ank? In other words, tho Federal Reserve Banks have not had all of the surplus all the time that they wero supposed to have, as would have been shown i f they had had to cash tho chips and get out of tho geano, had they? -3- L-514 Governor Eccles. Tho Reserve banks, of course, i n a senso, are l i k e any other i n s t i t u t i o n . They have their assets and their l i a b i l i t i e s . The l i a b i l i t i e s of course aro the deposits of tho member banks, and their notes i n circulation, and their capital and surplus. Their assets represent gold certificates today very l a r g e l y , and government bonds. The Chairman. But at one time they had largo amounts i n loans. Governor £«ccles. and 1 9 2 1 . That is right. Especially was that true i n 1920 Tho Chairman. And we all know that thousands of them were not i n position to pay t h e i r loans to the federal Reserve. Governor Eccles. They can of course sustain losses like any other institution. The Reserve Banks, i n times of depression, i n my view, should be much more lenient i n t h e i r credit extensions to member banks than they would be under times of more business activity. The Chairman. Let me call your attention to one thing. There was never anything much said about i t at the time, and it should not have been discussed at that timo, though some members of the House thought otherwise. When we were asked to pass tho Reconstruction Finance Corporation Act, we were told i n the conferences by some men from New York and elsewhere who were i n a position to know, and I do not doubt that their statements were correct, that 800 banks i n the Now York d i s t r i c t , with capital and surplus of 600 millions of d o l l a r s , 1 wore obligated at that time i n the amount ©f $ 4 7 5 , 0 0 0 , 0 0 0 . h&vo not the exact figures i n mind. Of course, those banks had large lfcans with tho Federal Reserve Bank i n New York, and any man can draw t h e conclusion i n a minute as to what that moant as to tho actual condition of the Foderal Reserve Bank of Now York, and I am speaking of that because that was tho particular case that was called to »ur attention. I do not mean that those conditions did not exist elsewhere, fcut that is what we were told about the New York Federal Reserve d i s t r i c t . S 0 that I have never been very much disturbed on account of any fear that the Federal Reserve Banks wore permitted to accumulate any larger surplus than good common sense would suggest. But excuse mo for intruding upon your discussion. Mr. G i f f o r d . I want to clear up the gold c e r t i f i c a t e matter. did you acquire the gold certificates? Governor Eccles. Mr. G i f f o r d . How Do y#u moan the Reserve Banks? *os. Governor Eccles. They acquired them i n exchange for the actual gold the Reserve System turned ovor to the Treasury. Mr. G i f f o r d . tho gold? So the gold certificates mean that you have a call on Governor Eccles. It moans what? Mr. G i f f f r d . Does i t mean that you have a call em the gold that we have on hand, i f and when gold may be freed? I -4- L-514 Governor Eccles. W e l l , I do not suppose, of course, that they would have a right to turn the gold certificates over to the Treasury and ask for gold. Under the law, the Treasury, of cpurse, has the right to issue licenses to release gold. The Reserve System has no right to release gold for any purpose, Mr, Gifford. The point that I want to make, that I want to clear up, is t h i s : Would it be a proper thing to use that gold to pay the public debt? You must hoar that discussed and argued. Governor ^ c c l e s . You say, would it be a proper thing? Mr. G i f f o r d , Is that gold idle? The gold c e r t i f i c a t e is not i d l e , but does the gold certificate represent the gold i t s e l f , and should it be held thero to meet those gold c e r t i f i c a t e s , or could i t be used to pay the public debt? Governor ficcles, I think that it should b e hold thero to redeem the gold c e r t i f i c a t e s , just as silver is held i n l i e u of silver certificates. Of course, there is the gold held i n the stabilization fund, which is a gold p r o f i t , and thero i s also the gold i n the sterilization fund, which i s gold in addition to the gold necessary to redeem the gold certificates held by the Reserve Banks. Mr, Gifford, Then you would say that that gold, perhaps seven b i l l i o n s , should not be used to retiro a part of the public dobt? Governor Ecclos, No, s i r , it should not. It should be held just whore it i s , back of the gold certificates which havo been issued to tho Reserve B0.nks and of credits to the Reserve banks payable i n gold certificates, Mr, G i f f o r d , Mr, Chairman, I wanted to bring that out, Mr, Patman, What about the idle gold? to reduce the public dobt? Why should it not be usod Governor Eccles. To use that to reduce the public debt, of courso, would immediately bring i t back as excess reserves, and i f you do t h a t , that would be merely d e s t e r i l i z a t i o n . I f you used the gold in the stabilization and sterilization funds, it would increase the excess reserves of the banks by somothing over three b i l l i o n dollars, and the Roservo System would have no power with which to control credit i n f l a t i o n , without getting further power to incroase reserves, Mr, Gifford, How much i d l e gold is there? Governor Ecclos, Mr, Gifford, Just what do you moan by idle gold? Theso certificates represent gold, I suppose. Governor Eccles. Yes, but do you mean gold outsido of -what the gold certificates cover? Mr, G i f f o r d . Y0s. We hoar so much about this idle gold. I -5- L-514 Governor E c c l e s . I do not know. I t seems to mo that you would havo to get those figures from the Treasury, Mr, G i f f o r d . How much i n gold c e r t i f i c a t e s has the Federal Reserve? Governor E c c l e s , Mr, G i f f o r d . question? How many gold c e r t i f i c a t e s havo you? Governor Eccles, Mr, Ford. What is t h e Has the Reserve System? Don't you mean the s t e r i l i z e d g o l d , Mr, Gifford? Mr. G i f f o r d , I t h i n k Father Coughlin waxed rather a n g r i l y when he found that tho gold c e r t i f i c a t e s were issued to the Federal ^ e s e r v o , and ho said that that was a call on that particular g o l d . I t h i n k -fchat i t i s a good thing at t h i s moment to find out i f we do have i d l e gold. Mr, Patman. D i d n ' t the Governor answer that when he said that tho only gold c e r t i f i c a t e s outstanding were the gold c e r t i f i c a t e s i n the hands of tho Foderal Reserve Banks, aggregating seven b i l l i o n ? We have about twelve b i l l i o n four hundred m i l l i o n s i n g o l d , but there i s only about seven b i l l i o n outstanding i n c e r t i f i c a t e s hold by F 0 d e r a l Reserve Banks. Governor E c c l e s . About oight b i l l i o n s eight hundred m i l l i o n gold c e r t i f i c a t e s and credits payable i n gold c e r t i f i c a t e s . in Mr. Patman. There must be two or three b i l l i o n dollars of i d l e gold at l e a s t , and the T r ( 3 Q S U r y statement every morning shows that there i s over a b i l l i o n dollars i n active goldt Mr. Gifford. I want that answerod very much, how much i d l e gold there i s ; but you agree that those gold c e r t i f i c a t e s are a call on that amount of gold? Mr. Patman. I t i s a rather f i c t i t i o u s proceeding that they aye going through. Of course, the Treasury has been turning these gold c e r t i f i c a t e s all over to the Federal Reserve Banks, to get c r e d i t . You cannot got gold for those c e r t i f i c a t e s , Mr, G i f f o r d . honored. Mr. Patman. When gold i s f r e e d , those c e r t i f i c a t e s would be I bog your pardon? Mr. G i f f o r d . I f and when that gold i s f r e e d , those gold cates would have a call on i t . certifi- Mr. Patman. B 0 0 a u s e of the way they obtained those c e r t i f i c a t e s , I do not know that they have any moral right to demand tho g o l d , because tho Federal Government favorod the Federal Reserve Banks i n that over every one e l s e , Tho Chairman, Havo not the Federal Reserve Banks turned over the actual gold when tho l e g i s l a t i o n was p a s s e d , and I want to ask i n that connoction how much gold the F e ( j e r a x Reserve Banks have surrendered as compared to the amount of gold c e r t i f i c a t e s outstanding. I -6~ L-514 Governor E cclos. Wo. 1, as I under stand i t , the *'odoral Rcscrvo Banks have gold c e r t i f i c a t e s , or a call on gold c e r t i f i e r t e s , of approximately eight b i l l i o n eight hundred million. They turned that much gold over. The Chairman. Mr. Patman, How is that? You aro bound to be mistaken about that. Governor ^ccles, About what? Mr, Patman, Do you mean to say that you actually delivered that much gold, oight billions eight hundred million? Governor Ecclos, Yes. That i s the amount of gold certificates tho Federal Reserve Banks report as "On hand and due from Unitod States Treasury," Mr, Patman. How much have you ovur had i n your possession, i n tho vaults of tho Federal Reserve Banks? Governor Ecclos. W e l l , I would have to go "back to answer t h a t . I do not know what amount of gold was had at the time tho Gold Roserve Act was passed, but whatever it was i t was turned over to tho Treasury, and thoy got gold c e r t i f i c a t e s . Since that timo—• Mr. Patman. Is i t not a f a c t — Governor Eccles. Since that timo the gold that has come into the country, of courso, has gone to the Treasury. All gold that has gone out of circulation has gone to tho Treasury, Mr. Patman, I f tho law compels turning i n the g o l d , and I turn it i n , does tho Federal Reserve B an ic claim any credit to that gold? Governor Ecclos. The Fodoral Reserve Bank turns that gold »ver to tho Treasury immediately. I f you go to a bank and deposit gold, or it comes from any source and it goes through a bank, you will get credit at tho Vank for that deposit, but that "bank immediately turns it ovor to the Reserve System, and tho Roserve System turns it over to the Treasury. Mr. Patman, do with that? But suppose that it is a gold certificate; Govornor ^cclos. Mr. Patman. That would be turned into the Treasury. You moan that you would turn it i n to tho Treasury? Governor Ecclos. Mr, Patman. One of the old gold certificates? ^os. Governor Ecclos, Mr, Patman. -what do you That is right. And the T r o a s U r y turns it right back to you for crodit I -7- L-514 oftentimes, and i s n ' t that the way that you acquired most of the certificates? Governor ^ccles, Mr, Patman, certificates. That is right, So that you did not got the gold, but the gold Governor Ecclos. I do not know the exact f i g u r e s , but whatever gold the Reserve System had, they delivered to the Treasury, Mr. Patman, Those figures are would be rather interesting to this much gold the Federal Reserve B a n k s Will you furnish the committee with available, and I think that it committee to know just oxactly how had in their physical possession. that information? Governor ficcles. That information, I am sure, could bo easily gotten. The gold was turned over at $ 2 0 , @ 7 an ounco, the same as gold held by anybody olso. Anybody holding gold turned it over at the old price of gold, and the difference between that and the increased prico of gold, of course, becomes a gold profit to the Treasury, Gold turned ever to the Treasury by the Federal K escrve banks on January 3 0 , 1 9 3 4 , i n accordance with the provisions of the Gold Reserve of 1934 was as follows: Gold coin Gold bullion Gold on deposit with Treasurer of the United States for account of Federal Reserve banks and agents $ 707,067,000 99,235,000 1,761,469,000 Total $2,567,771,000 Gold certificates held by the Federal Reserve banks on January 30, 1 9 3 4 , approximately ^ 1 , 0 0 0 , 0 0 0 , 0 0 0 , were all turned over to the Treasury on varitus dates in exchange for credits on the books of the Treasury payable in the new form gold certificates. Since January 30, 1 9 3 4 , gold coin withdrawn from circulation, domestically produced gold, and imported gold has all gone to the United States Treasury, On the basis of these gold holdings the Treasury between January 31, 1 9 3 4 , and July 1 4 , 1 9 3 7 , gave the Federal Reserve banks credits payable i n gold certificates i n the amount of about $ 5 , 3 0 0 , 0 0 0 , 0 0 0 i n exchange for deposit credits on the books of the Federal Reserve banks, which credits have been used by the Treasury to meet its current obligations, The procedure differs in no essential respect, so far as the Reserve banks are concerned, from that followed i n connection with the silver purchase program, in which silver i s purchased by the Treasury and silver certificates turned over to the Rosorve Tianks for deposit credit. I n the case of silver c e r t i f i c a t e s , however, unlike gold certificates the Reserve banks can and do pay out the certificates into circulation, whereas thoy must themselves continue to hold the gold certificates• I -8- L-514 Mr, Patman. You stated awhile ago that these gold certificates wore turned ovei* to the Treasury, They aro turned i n there f o r the purposo of obtaining difforont kinds of certificates. Supposing that you had ^ 1 0 0 , 0 0 0 worth; would you turn that i n and get one gold certificate for $100,000? Governor Eccles, As a matter of f a c t , for the bi. gest part of that g o l d , gold certificates have not oven >een'issued. It is merely an account. Over six b i l l i o n s of gold certificates have not been issued, Mr, Patman, I am anxious for you to describe one of these new kinds of gold certificates that they have gotten up for the purpose of being used by the Federal Reserve Banks, What does it look like? Governor ^ c c l c s . Mr, Patman, certificate, The new form? Governor Eccles, , Mr, Patman, I have a form here of the gold Yes, tho • Describe i t , form of 1 9 3 4 . t please. Governor ^cclos (Reading), "This i s to certify that there is on deposit in tho Treasury of the United Statos of -America, (blank) dollars i n g o l d , payable to tho bearer on demand as authorized by law. This certificate is a legal tender i n the amount thereof i n payment of all debts and dues, public and private. "(Signod) Treasurer #f tho United States. ' and Secretary j f the Treasury," Mr, Patman, I thought i t was supposed to be restricted i n use so that only the Federal Reserve Banks ctuld use i t t ,1s that right? Governor Eccles, The Federal Reserve Banks do not use them. Thoy merely hold them as they would a receipt in l i e u of the gold that thoy have, Mr, Patman, That i s what I thought, but that indicates that anyono getting possession of i t would have a right to take i t to the Treasury and get gold on i t . Governor -Eccles, It says, "On domand, as authorized by l a w , " Mr, Patinan, Suppose that he wanted the gold for export; he would have to get permission to export i t . Governor Ecclos, I f thoy wantod gold for any purposo, the law has given to the Secretary of tho Treasurer tho discretion on that, Mr, Patman, But that c e r t i f i c a t e , so far as being a claim on gold is concerned,, i s rostrictod to the provisions of the law, and domostically you cannot demand g o l d , and you cannot get gold on that certificate. L~514 Govornor Eccles. That is right, Mr, Patman. For domestic purposes. far as i t relates to domestic business, So it is merely a fiction so Mr, G i f f o r d , The other question i s . Suppose that the gold certificato is presented for money by you, and you roceivo United States b i l l s or paper, and you accept that; can you after that demand gold? I f you can, then I claim that the gold is not i d l e , that it i s working through the gold c e r t i f i c a t e . Governor Eccles, question? I do not get the point. Just what is your Mr. Gifford. I f I have a receipt, it means that I can demand gold that is freed, and I give up that receipt and take money that is being issued now. That gold receipt is a certificate for gold in the hands of the Treasury, but you have been paid the money and accepted i t . Governor Eccles. Whom are you speaking o f , the Reserve System? Mr, Gifford, Yes, and I want to ask i f you do not jeopardize your privilege of a demand for gold when you accept paper money? Governor Eccles, I s t i l l do not get your point. The law, of course, as you all know, required the Reserve System and everybody else holding gold or gold certificates to turn them in to the Treasury, at $ 2 0 . 6 7 an ounce* That was done. The Reserve System, i n lieu of the gold, was given these gold c e r t i f i c a t e * . The law requires that the Federal Reserve notes must be oovered by not less than 4 f per cent of gold—and in this case it would be gold certificates—so the gold certificate servos the same use under the law that the gold did serve, and the balance i s to be covered by either United States Government bonds or paper, commercial paper, eligible paper which the Reserve System has taken from the member banks. Mr. G i f f o r d , I do not think my question should be so d i f f i c u l t . I think I see the moral side of i t . I f you bring i n that gold certif i c a t e , and you take money, b i l l s , you lose the right to demand g o l d , don't you? The Treasury accepts gold oertificates for the money handed over the counter, and havon ! t you lost it thon so far as i t s being a demand for actual gold is concerned, or is it simply a bookkeeping arrangement? Governor Eccles. Tho Federal Reserve Banks do not turn gold cortificates over to the Troasury i n exchange for other kinds of currency. Mr. G i f f o r d . Don*t you have to give up the gold cortificates? Governor Eccles, They have to turn all o f the old series gold certificates over to the Treasury but not the new series certificates which are issued only to the federal Reserve Banks. Mr. G i f f o r d . You don't give them up? Governor Eccles. Mr. Patman. Not the new ones, I want to ask a question on this bill. I -10- L-514 Tho Chairman. Lot mo soo i f I understand what he is talking about. You have eight b i l l i o n eight hundred million of Federal Reserve notes now outstanding--is that right? Governor Eccles. The Chairman. How many did you say? Eight b i l l i o n eight hundred million. Governor Eccles. That is i n gold certificates. You have less than that of Federal Reserve notes outstanding. The Federal Reserve notes i n circulation amount to four b i l l i o n two hundred fifty-two m i l l i o n . gold The Chairman. certificatos? And you have eight b i l l i o n eight hundred million of Governor Eccles. certificates. The Chairman. Where are the gold certificates? Governor Eccles. Tho Chairman. Yes or a call on them. No matter how they have them, they are under their Govornor Eccles. The Chairman. They are i n the various Reserve Banks * Th ey have them now? Governor Eccles. The Chairman. control? Where are they, did you say? Yes. Governor Eccles. The Chairman. Gold certificates and credits payable in gold That is right. « Here i s whore they are-- That does not matter; I understand that part of i t . Mr. Hancock. You havo not actually got two b i l l i o n dollars in gold c e r t i f i c a t o s , havo you, in the System? Governor Eccles. What i/ras the question? Mr. Hancock. You have not actually got two b i l l i o n dollars in gold certificates i n the System? Governor Ecclos. They have eight b i l l i o n eight hundred and thirtyfive m i l l i o n , but there has only been two b i l l i o n eight hundred million actually delivered to the banks. Tho banks could get the balance at any time they wanted i t . The Chairman. I want to ask you t h i s , Governors They have four b i l l i o n , plus any Federal Reserve notes. What i s the cover for those notes now? Governor Eccles, It varies. Gold certificates on hand and due from the Treasury, $ 4 , 5 6 3 , 6 3 2 , 0 0 0 ; eligible paper, # 1 2 , 8 4 4 , 0 0 0 ; and United States Government bonds, $ 2 0 , 0 0 0 , 0 0 0 ; or a total of $ 4 , 5 9 6 , 4 7 6 , 0 0 0 , is what L-514 is hold by the Federal Reserve agents covering the Federal Reserve n«tes which they have issued or are outstanding* The Chairman* Of course, those notes are protected by all the assets of the federal Reserve Banks, and they have only ^ l 2 , 0 0 0 , 0 0 © i n commercial paper? Governor Eccles* bonds* And the rest i n gold certificates and government The Chairman* The rest i s i n gold c e r t i f i c a t e s , which are the*re1»i-. cally redeemable i n gold? Governor &ccles* The Chairman* idle gold? That is right* And then they have i n audition to that how much Governor Eccles* They have a total of eight b i l l i o n eight hundred thirty-five m i l l i o n , so that they would have the difference between four b i l l i o n five hundred and sixty-three million and eight b i l l i o n eight hundred thirty-five million not pledged against Federal Reserve notes* The Chairman* Over four billions more of gold to their credit which, so far as the Federal Reserve System is concerned, is now idle? Governor ficclos* It i s not i d l e , because that is to be used to cover deposits* The law provides that they must hold a 40 per cent coverage on Fedoral Reserve notes and 35 per cert on deposits, so i t is not i d l e , and it i s not wholly free* Mr* Goldsborough* I s n ' t this the situation, that the idle gold being discussed hero i s represented by two b i l l i o n dollars i n the stabil i z a t i o n fund and the so-called frozen gold which has boon recently purchased by the Treasury? I s n ' t that the total amount that constitutes the idlo gold, so-called? It amounts to about three b i l l i o n dollars? Governor ^cclos. I would say so, as far a s — The Chairman* I have undertaken to show the amount of gold that the Federal Reserve Banks now hold and the amount of notes that thoy havo outstanding and i n circulation, and the notes that they have outstanding and i n circulation are covored by nearly 100 per cent gold* Then thoy have i n excess of the gold required to bo covered by doposit ab#ut ono or two b i l l i o n moro* Governor ^ccles. dollars moro* I think about one b i l l i o n seven hundred million The Chairman* And the highost requirement we evor had as a gold protection against Federal Reserve notes was 40 per cent, wasn't it? Governor Eccles* Tho Chairman* 40 per cent, of course, is the legal requirement* I say, tho highest that we ever had? Governor Eccles* bonds a Tho difference has to bo made up by Government I -12- L-514 Tho Chairman. I am not talking about that. I mean that tho onlyrequirement, and the highest requirement, was 40 per cent. Governor E c c i g s # That i s right. The Chairman. That being tho case, we have how many millions of dollars of gold that could b e used as a base for Federal Roservo notes, i f wo only used the amount actually required? Governor E c c l e s . y o u W O u l d have tho excess, which is about one b i l l i o n seven hundred million dollars, plus the difference between the presont gold coverage and the required coverage. In other words— The Chairman. would it not? It would be something like fivo b i l l i o n of dollars, Governor ^cclos. nine hundrod m i l l i o n . It would be close to t h a t . About four b i l l i o n Tho Chairman. Above v/hat it would take to cover your notes with 40 per cent of gold? Governor E c c l o s . I n other words, i f you covered your notes with 40 per cent and your deposits with 35 per cent, you would have about four b i l l i o n nine hundred million of gold i n excoss of that minimum covorago. The Chairman. That is what the federal Reserve now has? Governor Eccles. That i s r i g h t . Tho Chai rman. And which they could use with a 40 per cent coverage for additional Federal Reserve notes? Governor Ecclos. That is right. « Mr. Hancock. That would serve as a crodit baso for something l i k e f i f t y b i l l i o n dollars, would i t not? Governor E c c l e s . I f issued by tho Reserve banks and redcposited Tiy member banks, it could servo as a basis of multiplo expansion by member banks, but the Resorvo banks could issuo it only i f they purchased that amount of securities in tho open market, which it would be impossible to do. The Chairman. How much of a further currency baso would it servo, assuming that you mado up tho other coverage by bonds or commercial paper? Govornor E C c l e s . Assuming that 60 per cent was mado up of bonds and commercial paper, and the gold was only used to the extent of 40 per cent covorago on notes and 35 per cent on deposits, that would leave about four b i l l i o n nine hundrod million of gold i n excess of that minimum requirement. The Chairman, Then how much additional issuo of Federal Reserve notes would that cover on the basis of 40 per cent, assuming 60 per cent I -13- L-514 i s mad© up of bonds and commcrcial paper? What I am trying to got at is t h i s : How many notes could the Federal Reservo Bonks put out and still protect then by the 40 per cent provision? Governor Ecclos: Twelve b i l l i o n two hundred f i f t y m i l l i o n . The Chairman, And s t i l l we have lots of people lying awake at night for fear wo are going to expand our currency too much and have inflation. That i s what I wanted to b r i n g «ut. Now, how much credit would your twelve billions make possible? Governor Eccles, The thing that determines the possible credit expansion of the banking system is the amount of excess reserves of the member banks. Now, those reserves are increased or decreased through two methods: through open market operations or through the actual increase or the decrease of reserve requirements. Prior to the action of the B 0 a r d i n increasing the reserve requirements last summer and this spring, and assuming there had been no increase in reserve requirements last summer and this spring, there would be approximately throe b i l l i o n dollars moro excess reservos held by the member banks than arc held today. Today there is about 900 million i n excess roserves. The member banks would hold very closo to four b i l l i o n dollars of excess reserves had Congress not given the Board power to increase the reserve requirements, and had the Board not used that power. You add to excess reserves to the extent that you buy securities in the market. As securities may be sold i n the market or are permitted to run o f f , i t diminishes the amount of the excess reserve. That is tho mechanism available i n the Resorvo Sy S ton the control of tho expansion or tho contraction of crodit, and the amount of gold hold by tho Reserve Systom influences it only to tho extent that it is not sufficient to cover the 40 per cent and tho 35 per cent. I f the gold resorvo was getting cl»so to the l i m i t , thon, as was the case i n 1 9 3 2 , it m a y b e impossible for tho Reserve System to carry out an open market operation i n attempting to ease tho monoy situation, but with the largo amount of gold available, it i s not a factor today i n either the expansion or the restriction of crodit by tho banks* Mr, Wolcott. Following thit thought furthor, you have expressed an opinion based upon the Chairman's question, to this e f f e c t , that i t appears that you can, upon the gold b a s i s , issue upon your gold oxcesses about twelve b i l l i o n five hundred million of currency. Now, is it your contontion that i f the Federal ^osorvo issuod twelve b i l l i o n five hundred million i n new currency, under tho quantitative theory of currency, that would not create inflation? Governor ^ccles. i f it issuod it? Mr, Wolcott, What would the K oserve System do with the currency Would it not find i t s way back into the excess reserves I -14of tho banks, and therefore bo usod as a basis for credit L-514 inflation? Governor Ecclos. In the f i r s t placo, thore is no way that that currency could bo gotten out. Mr, Wolcott, As I understand i t , tho thoory behind tho issuanco of monoy is to moot curront demands for currency, and you do not issuo any moro currency than is needed. Govornor Eocles, The Reserve System does not detormino the amount of curroncy issuod; the depositors dotormino that. Mr, Wolcott. currency? And that is influenced by the needs of business for Governor ficclos. In f a c t , tho greatest amount of curroncy wo had i n circulation was at the timo of tho bank holiday, when business was at the lowest obb, so that we cannot say that tho volume of currency is dotorminod sololy by the expansion and the contraction of businoss, Mr. Woloott, What determines, thoroforo, tho amount of currency which i s outstanding? Governor Eccles. I would say normally that businoss expansion and contraction—and tho price l e v e l , which i s a factor of course i n determining tho volume of money needed to do a cortain amount of b u s i n e s s would determine tho volumo of curroncy outstanding. I f curroncy is hoarded, as i t was at ono period, i t i s a factor i n dotormining tho amount of curroncy outstanding, but under a normal condition, where pooplo do not withdraw curroncy and hoard i t then tho amount of businoss activity largely determines the amount of curroncy i n circulation. Mr. Wolcott* I t is contonded by a great many members of Congross that v/hore thore i s a contraction of orodit f a c i l i t i e s , either duo to the tightening up by the banks or the f a i l u r e of borrowors to demand c r e d i t , it is desirable to issuo currency to balanco up the withdrawals of c r e d i t , What would normally happen to that increaso i n curroncy, i f that was dono under thoso conditions? Governor Ecclos. I t would come right back into the Reserve Banks and would be added to tho oxce-as reserves of moiiiber banks. Mr. Wolcott. And tho banks would bo requirod to invest those excess roservos i n federal bonds? Govornor Ecclos. W o l l , tho member banks would have the excess reserves, and I suppose that thoy could invest them wherever thoro was a demand. Mr. Wolcott, And when tho excess roservos got up to a point where you thought i t was dangerous and might cause i n f l a t i o n , thon you again would havo to raise tho reserve requirement to offset it? Governor E c c l e s , Tho Board has no further authority undor tho law to increase reserve requirement s , Mr. Hancock. Is it not a fact that undor our monetary system, the more prosperous and stable businoss i s , the less currenoy we use? f -15- L-514 Governor, Eccles. I should say that that is not an accurate statomont. It is t r u e , however, that business nay bo prosperous and stable, and we would use loss currency than we would i n a tine of c r i s i s , when people hoarded currency* Mr. Hancock. As long as people have confidence i n banks, they do not use currency, do they? Governor Ecclos. Tho greater the business a c t i v i t y , tho greater tho onount of cash needed to transact i t , and that incroases tho anount of currency i n circulation. Tho anount of currency i n circulation now is substantially more than it was a yoar ago. There was nore a year ago than two years ago. Tho onount of currency i n circulation has increased substantially, due to two factors, first tho large increase in the physical voluno of business and secondly sone increase i n tho price level. Mr. Hancock* Governor, there was nore currency outstanding i n February, 1 9 3 3 , than at any other t i n e i n the history of this nation. Governor £ccles. That is r i g h t . That was duo to tho fact that currency was carried i n l i e u of bank deposits, and it was carried i d l e ; i t is what wo call hoardod noney. Mr. Wolcott. And there was less i n circulation during tho peak yoar of 1929 than before t h a t . Governor Ecclos. That is correct. Mr. Fish. I think that i t would serve a useful purpose to put into tho record the onount of currency he refers to as boing outstanding in 1 9 3 3 , and the date, becauso I an under tho impression that we have today almost as nuch outstanding as at any other tine i n our history. I nay bo i n error thoro, but isn*t a fact that wo have nore outstanding now than we havo had for a groat nany years? Governor Ecclos. Mr. F i s h . We had nore i n 1 9 3 3 . How nuch noro i n 1933 than at the prosont tino? Governor Ecclos. The naxinum anount of noney i n circulation was scvun b i l l i o n trro hundred ninoty-four million on March 1 3 , 1 9 3 3 . Mr. Hancock. For about two weeks it ran protty close to sovon and a h a l f b i l l i o n dollars. Mr. Gifford. Mr. Patnan. Mr. Fish. The French peoplo are hoarding our currency. I would like to ask a few questions about the b i l l . had bettor onswor ny question first. Governor Ecclos. At the present tine (July 7) there is a total onount i n circulation of six b i l l i o n five hundred twenty-four m i l l i o n . That includes all kinds of circulation. Of that amount, about four I -16- L-514 b i l l i o n two hundred and f i f t y million i s i n Foderal notes. Then there are the silver c e r t i f i c a t e s , and the old Unitod ^tates notes,. Mr.- Fish,- I s n f t that tho largost amount, except for that one exception i n 1933 when wo had seven and a half b i l l i o n outstanding? Governor E c c l e s . ^es# Mr. F i s h . One other question. Will you state to the committee whethor you are i n favor of the s t e r i l i z a t i o n of gold? Govornor E c c l e s . Mr. F i s h . Y You are asking mo that question? os. Governor ficclos. Mr, Fish, Yos. Govornor Ecclos. Whether I am i n favor of it? Yos* Mr. Fish. And whether, i n view of the fact that wo took over 250 million dollars last month i n gold and sterilized i t , and placed it i n the inactive account, you are i n favor of continuing that policy indefin i t e l y , of holding those hugo sums of money? Governor Ecclos. You have one of two alternatives. You can either s t e r i l i z e gold i n that way, or -find some other way to do i t , or permit it to become excess reserves i n the banking system, i n which case tho credit control which now can bo exercisod by the Reserve Banks could no longer be exercised, Mr, Fish. I want to hear from you whether you consider i t possible for t h i s Government—not this administration, but tho T r o a s u r y Departmentto continue t h i s policy to which I havo referrod i n d e f i n i t e l y i n connection with any attempt to balanco the budget, because I understand that you want to balance the budget. Governor Ecclos. Of course, you got into a very large and involved subject when you discuss the gold question, and i t is one that I do not feel at liberty to discuss. I feel that inasmuch as c ongress has givon to tho Treasury tho responsibility for dealing with this subject, that I would prefer not to discuss i t , or to express porsonal opinions with reference to i t . Tho Chairman. G 0 ntlamon, the Members are aware of tho state of mind of tho Members of the House today on account of tho shocking doath of Senator Robinson, and I am sure that all tho Members here would like to be on the floor whon tho Houso moots. For that reason I am going to suggest that tho cornmittoo recess until 1 0 : 3 0 tomorrow morning. -17- L-514 You can bo back with us tomorrow morning, can you not? Governor -&cclos« The Chairman. tomorrow morning. I hope that wo may bo able to finish with you Without objection, the committee w i l l meet tomorrow morning at 10:30. (Thereupon, at 1 1 : 5 0 o'clock a . m . , tho committoe recessed until Thursday morning, July 1 5 , 1 9 3 7 , at 1 0 : 3 0 o'clock a . m . ) L-514 H. R . RES. 377 Authorizing the destruction of Federal Reserve notes of the series of 1928, and their replacement by Federal Reserve notes of the series of 1934, or a later series, at the expense of the United States, Thursday, July 15, 1937 HOUSE OF REPRESENTATIVES, Committee on Banking and Currency, Washington, D. C. The Committee met at 1 0 : 3 0 o'clock a . m . , for the further consideration of House Joint Resolution 377, Honorable Henry B. Steagall (Chairman) presiding. The Chairman. Gentlemen, we have Governor Eccles with us again this morning. He w i l l resume his statement on House Joint Resolution 377. Mr. Ford. Mr. Chairman, might I make the comment there that I hope, that the discussion w i l l be confined to the b i l l this morning. (Thereupon there was a b r i e f informal discussion, record.) The Chairman. off of the You may proceed, Governor Eccles. FURTHER STATEMENT OF HON. MARRINER S . ECCLES, Chairman of the Board of Governors of tho Federal Reserve System. Mr. Patman. Tho Chairman. Mr. Patman. aro they not? I would like to ask tho Governor some questions. Cortainly. The 1928 cortificates are tho ones involvod here, Govornor Ecclos. Yos, that is r i g h t . Mr. Patman. They aro tho ones that stato on thoir face that thoy aro payablo in gold at tho United Statos Treasury, or in gold or lawful money at any of tho Fodoral Rosorvo Banks? Govornor Ecclos. That is corroct. L-514 I -19- Mr. Patman. I believe that you stated yesterday that the now form of gdld certificate that is used botween the Fedoral Rcsorve Banks only usos tho phrase "as authorized by l a w . " In other words, tho statement is on the certificato that they arc rodoomablo in gold, but tho additional phrase is used, "as authorized by l a w . " That is tho only difforonco, is it? Governor Eccles. W e l l , to be sure that there was any greater diffcrenco, I would have to examine them, but, as I rocall i t , that is tho difference. Mr. Patman. That being true, why couldn't you just add that some phraso to theso b i l l s , "as authorized by l a w , " and mako thorn just tho samo as the other b i l l s now boing used? Governor Ecclos. Of course, tho b i l l s now being used arc not in circulation, I moan tho b i l l s that tho Treasury now givos to tho Reserve System for the gold which thoy took from tho System. Mr. Patman. I did not got that. Govornor Ecclos. I say, tho gold certificates which the Treasury has given to the Rosorve Bonks in paymont of gold which tho Resorvo System has turned over to tho Treasury, as I understand i t , are differont certificates than these Federal Resorvo notes payable in gold. Mr. Patman. Yos, s i r , they arc differont certificates, for differont purposos. Govornor Ecclos. usod But thoy aro not in circulation. Air. Patman. I think that you misunderstood mo. I am not talking about thoso at a l l . When you stopped paying out on thoso 1928 notos, you had about threo b i l l i o n dollars worth of thorn on hand, did you not? I moan tho aggrogato amount in notos in tho cages ovor there at the Buroau of Printing and Engraving. Governor Ecclos. Tho total amount involved would bo loss than threo b i l l i o n at the Buroau. Tho Fedoral Rosorvo agents also hold about a b i l l i o n and a h a l f . Mr. Patman. But you had in circulation notos just liko that, amounting to about two or threo billions dollars, or more? Governor Ecclos. Woll, there woro notes in circulation at that timo, but thoro was no way, of course, of rocalling those notes roadily, bocauso— Air. Patman. lion dollars? How much did thoy aggrogato? Two or throe bil- I -20Governor Ecclos. Mr. Smoad. Mr. Patman. L-514 What did they aggregate, Mr. Smcad? Probably a l i t t l e more than that. About four b i l l i o n dollars. Now, thoy remained in circulation, except those that havo been replaced bocauso they wore injured or damaged? Governor Eccles. Thoy aro boing roplacod constantly, as mutilated currency i s . of courso, Mr. Patman. Therefore tho System is rocognizing tho policy of paying those out and continuing thorn in circulation, although thoy do oxpross a lio, as you stated yestorday, on their face? Governor Ecclos. I think that that is possibly correct. Mr. Patman. You lot them be paid out every day, d i d n ' t you, those that wore paid out? Governor Ecclos. Prior to tho time when we wore aslcod to discontinuo their circulation by tho Treasury. Mr. Patman. You could withdraw than or capture them as thoy come over the counter, as you always capturo tho gold certificates? Govornor Ecclos. could bo done. Mr. Patman. It would be with great d i f f i c u l t y that that But it could bo dono? Govornor Eccles. I suppose that it could bo by a lot of extra oxponso and work, but you would havo to oxomino every Fodoral Reserve noto carefully. Mr. Patman. Tho point that I was ondoavoring to mako is t h i s , that thoro cannot bo so very much harm dono in paying theso out and using them, bocauso wo havo billions of notes out overy day and boing paid out by Federal Roservo Bonks. Govornor Ecclos. That of course is a quostion for tho Treasury to decido. The Resorvo System did not discontinue— Mr. Patman. The Troasury discontinued them? Govornor Ecclos. Mr. Patman. Yos, tho Troasury wore the onos that asked— When was that roquost mado? Governor Ecclos. When was it, Mr. Smoad? L-514 I -21- Mr. Smcad. December, Governor Ecclos. at a conforonco— 1935. And it was taken up with the bank prosidents, Mr. Patman. I wonder why the.question was not submitted to Congross at that time. Do you know? Governor Eccles. Tho Treasury agreed at tho time that they would submit it to Congress, but thoy did not do it at onco. Mr. Patman. yoars? It just has not been dono? And it has boon two Governor Eccles. No, that was in tho f a l l of 1935, and this is tho second sossion. Thoy wore going to do i t , but just did not got to i t , and tho mattor cojtio up to mo from tho so various banks. You sco, tho banks have funds invested in this account. Mr. Patman. I understand that. Govornor Eccles. And it is shown as an investment in currency, a currency inventory. What wo wore trying to do was to get tho thing cloarod out. Mr. Patman. How many of tho government bonds have on thoir faco, "payablo in gold"? Governor Ecclos. Mr. Patman. I could not toll you. A groat porcontago of them, I presume? Governor Eccles. Well, I supposo that a l l of those that wero dyit prior to tho Gold Roservo Act. Mr. Patman. do thoy not? Thoy havo tho spjiio kind of a lio on their faco, Govornor Ecclos. I think that is truo. Tho Chairman. Lot mo interrupt you ono minuto, just go tho rocord should show tho fact about that. Tho fact i s , Govornor Ecclos, that in tho legislation of 1934, wo providod for tho oxchango of a l l bonds with tho gold clause for bonds simply payablo in lawful money of tho United Statos, tho exchange to bo mado without oxponse to tho bondholder, did we not? Govornor Ecclos. Banks— Mr. Patman. I could not toll you. I want to ask you-- Of courso, tho Rosorvo I -22- L-514 Governor Ecclos. — or a holder of the present notes rodeomablo in gold could exchange those for tho 1934 series; that i s , "the holdors of tho sorios of 1928 could oxchango their notes for tho series of 1934. Mr. Patman. Without oxponso to thorn? Governor Ecclos. Mr. Patman. Do you mean notos or bonds? Governor Ecclos. Mr. Patman. Yes. Notos. That is when thoy aro do faced in some way? Governor Ecclos. No. What I moan is that if a person owns somo Foderal Reserve notes rodoemablo in gold or lawful money, they can naturally oxchango thoso notes for a noto not redeemablo in gold, in tho same manner t h a t — Mr. Patman. I want to ask you about this $ 1 3 9 , 0 0 0 , 0 0 0 takon from tho reserve funds of tho Fodoral Reserve Bank. It is my understanding that when the FDIC B i l l v/as pas sod, tho Government appropriated $ 1 5 0 , 0 0 0 , 0 0 0 from the Troasury to make up tho i n i t i a l fund, and $ 1 3 9 , 0 0 0 , 0 0 0 from tho Fodoral Roscrvo Banks' surplus fund, and tho remainder was ma'de up by assossmonts on tho banks, -nd after that there was a law passed to turn that $ 1 3 9 , 0 0 0 , 0 0 0 over to tho Federal Rosorvo Banks. Is that right or not, and I want to know what kind of a string was t i e d to that $ 1 3 9 , 0 0 0 , 0 0 0 ? Govornor Ecclos. I would havo to chock on the detail of that. Tho monoy has not boon roturnod to tho Fodoral Roscrvo Brinks, and thoro is no way i n which tho prosont Federal Rosorvo Banks can got that. Mr. Patman. I thought that for Industrial loans thoy could. Governor Eccles. No. The Treasury put up ono-half of tho amount for industrial loans, and tho Rosorvo System put up oneh a j f , and tho total amount rocoivod from tho Troasury by tho Federal Rosorvo Banks under soction 13-b is $ 2 7 , 4 2 1 , 0 0 0 . Th^t is tho total amount that wo got and upon that wo have to pay interest c.t 2 per cent. Mr. Patman. To whom? Governor Eccles. To tho Troasury i f it is earned. Mr. Patman. Do you moan to say that you w i l l havo to pay back tho monoy to the Troasury? Govornor Ecclos# it. Wo do not pay it back, but wo pay interest on I -23- L-514 Mr. Patman. It is my understanding that there i s no string at all attached to that money, that the law was so worded that the Troasury cannot forco the Federal Resorvo Banks to pay it back to the Troasury. Govornor Ecclos, cont. I think that is correct, but wo pay 2 per v Mr. Patman. Which law roquiros you to pay 2 per cont if you are not required to pay back the principal? Governor Ecclos. It was on arrangomont with tho Sccrotary of tho Troasury by Governor Black prior to my time, and I do not know tho circumstances under which tho arrangomont was made, but I cannot imagine that tho Rosorvo Systom would assume an interest obligation if i t had not boon roquirod to do so, Mr. Patman. That is what I cannot understand, that if thoy aro not roquirod to pay the money back, why they havo to pay intorost on i t . Governor Ecclos. Mr. Patman. how long? Tho lav/ requires that wo pay the 2 por cont. Tho law requires that you pay tho 2 por cent for Governor Ecclos. As long as wo havo the money. Mr, Patman. As long as you havo tho industrial loans? Is that right? Whon the industrial locals arc collected, you keep tho monoy and coaso to pay interest? Governor Ecclos. Mr. Smoad says that thoro is no such limitation. It has no relation to whether tho industrial loon is paid. Mr. Patman, pay interest? But you w i l l continuo to keop the monoy and to Governor Ecclos, Mr, Smoad. I cannot say that, I f oarnod. Govornor Ecclos, In other words, thoro is no opportunity of cTurning any money on that kind of a loon. It is in the nature of a loan at 2 per cont, Thero is a vory groat diffcronco between that monoy and tho monoy which was in the surplus o f tho Reserve Systom which they turned over to tho FDIC. Mr. Patman, In regard to this — Govornor Ecclos. Tho Roscrvo Systom cannot make 2 per cont on tho averago ovor a period of timo. Tho avorago yield on thoir presont holdings of govcrnmont bonds is around 1-1/2 per cont, and tho highost discount rate is 2 per cont today, and the lowest is -24. L-514 1-1/2 por cont, so that the gross return on any Federal Rosorvo loan or invostmont would nocossarily bo loss than tho 2 per cent which wo arc required to pay, cxccpt on industrial loans, where tho rate rocoivod is from 4 to 6 por cont. Most of the loans, I would say, would possibly averago 5 por cont. However, there is not much profit on those loons, bccauso of the typo of lorn. Thoy roquiro a groat doal of investigation and a groat deal of timo and attention in managing and looking after them. Mr. Patrnan. I am not claiming that you make any profit 011 them. That is roally a differ out point. Govornor Ecclos. I thought you v;orc making tho point that wo got our surplus of $ 1 3 9 , 0 0 0 , 0 0 0 back. Mr. Patman. I am making tho point, and I s t i l l bolievo that I cm right about i t , although I am not positive, that that | 1 3 9 , 0 0 0 , 0 0 0 is gono from tho Troasury without any strings 011 it at a l l , and that tho Troasury cannot make you pay that monoy back to the Troasury. Govornor Ecclos. In tho f i r s t placo-- Mr. Patman. I hopo that I am wrong about i t , you aro right, but I am s t i l l not convincod. and I hopo that Mr. Williams. Lot mo aslc a quostion right in that connection. This is my under standing of i t , that the original investment was $ 1 3 9 , 0 0 0 , 0 0 0 in FDIC stock. Govornor Ecclos. Mr. Williams. That is right. That was taken from tho Fodora.l Reserve surplus. Govornor Ecclos, That is r i g h t . Mr. Williams. Who 11 tho pormanent FDIC law was passed, that 0 1 3 9 , 0 0 0 , 0 0 0 was turned back to tho Troasury, was it not? Governor Ecclos. No* Mr. Williams. And the monoy which roprosontod it is not carried as a surplus now by tho Federal Rosorvo? Governor Ecclos. It is ontiroly out of tho Fodoral Rosorvo; it is nonoxistont as f a r as thoy arc concerned, Mr. Williams. sury. Woll, tho monoy to that oxtont is in tho Troa- L-514 I -25- Governor Eccles. anco Corporation. The money is in tho Federal Deposit Insur- ' Mr, Hancock. Is it not a fact that tho records of tho FDIC shoiv that tho Foderal Reserve System still owns $ 1 3 9 , 0 0 0 , 0 0 0 of stock? Governor Eccles. I could not say what t h e i r records show. Mr. Williams. I s n ' t this further the situation—and I would like to have this understood myself—that as those industrial loons aro mado by tho Federal Rosorve Banks, the money with which thoy arc mr.de comes from tho Treasury? Govornor Ecclos. Ono-half of i t . Mr. Will iams. And to that extent thoy appropriated to the Federal Resorvo B^nks approximately $ 2 7 , 0 0 0 , 0 0 0 ? Govornor Ecclos. That is r i g h t , reached its poak, too. and that has practically Mr. Williams. As a matter of f a c t , tho Fodoral Rosorvo Banks have not any of this surplus, oreopt tho amount that they havo invested in industrial loans? Governor Ecclos. Except the $ 2 7 , 0 0 0 , 0 0 0 which was turned over to thorn for tho purpose of making industrial loans, and upon which they aro roquirod to pay 2 per cent, i f oarnod. Mr. Williams. That is tho only amount of that surplus that the Federal Rosorvo Banks havo now, and they have to pay 2 per cont on that amount? Govornor Ecclos. Mr. Williams. If oarnod. I f oarnod? Govornor Ecclos. That is r i g h t . Mr. Williams. Tho point that I am trying to make is that you do not havo this $ 1 3 9 , 0 0 0 , 0 0 0 . That was takon away originally undor tho FDIC* Governor Ecclos. No. Wo havo had $ 2 7 , 0 0 0 , 0 0 0 roturnod from tho Troasury in tho form of an interest-boating obligation. Mr. Williams. And that is for tho purposo of making loans, and upon thoso you pay 2 por cont intorest? Govornor Ecclos. ting moro than that, industrial That is r i g h t , and thoro is no way of gotbocausc tho industrial loans aro doclining I -26- L-514 rather than incroasing. Tho aggregate industrial loans aro not increasing. Wo have roachcd tho poak. Mr. Williams. That $ 2 7 , 0 0 0 , 0 0 0 is carriod as part of tho surplus of tho Federal Rosorvo Banks on their books? Governor Eccles. Yos, it is carried under a separate surplus. Tho capital 5s $ 1 3 2 , 0 0 0 , 0 0 0 . Then you havo a surplus of $ 1 4 5 , 0 0 0 , 0 0 0 , and tho surplus under section 13-b of $ 2 7 , 0 0 0 , 0 0 0 . Mr. Williams. provis ion? It is carriod as a surplus undor a separate Governor Eccles. Mr. Williams. Making your total surplus now $ 1 7 5 , 0 0 0 , 0 0 0 ? Govornor Ecclos. Mr. Williams. That is r i g h t . That is r i g h t , $172,000,000. That is the situation now? Govornor Ecclos. That is corroct. Mr. Patman. It is my understanding from an investigation tho.t I ma do somo time ago — I hc.vo not gone into it recently— that t h i s $ 1 3 9 , 0 0 0 , 0 0 0 was authorized for industrial loan purposes, and as tho Federal Rcsorvc Banks used it for that purposo and tho loans woro collected, thcro is no way that tho Tro, sury con cause th; t monoy to be p a i d back into tho Treasury. Governor Ecclos. That is corroct, but the Treasury maintained a string on it that required tho Rosorvo Banks to pay interest. Mr. Patman. Havo you actually paid intorost? Govornor Ecclos. paid. I do notjlcnow how much interost has boon Mr. Smcad. A number of Fodoral Rosorvo Banks have; whenever it has boon oarnod* Govornor Eccles. Wo havo sot up a formula, that was agreed upon with tho Treasury, that thoy felt complied with tho law, and whenever i t shows an oarning on those l o a n s Mr. Patman. ojid so forth? Charging all oxponses of supervision to the loans, Governor Eccles. Thoy do not chargo o.ll that expense against tho Troasury, bccausc the Troasury suppliod only h a l f of the monoy. In other words, part of the monoy loanod is their oyjii fund, and part the Troasury 1 s, aaid oxponses aro chargcd in tho I -27- L-514 seme proportions, Mr. Potman. Chapter 16 of tho Federal Roservo Act says that whon Federal Resorvo n o t o s e x o issued to a Federal Reserve Bank, the Federal Reserve Board, under the original lav/, should cause that Foderal Resorvo Brink to pay the interest rate that was fixed by tho Federal Resorvo Boord, and I understand that at that time tho Board met and said, " W e l l , a l l the oxccss earnings go into tho Troasury, anyway, and wo w i l l just f i x tho zero rate of interest," Then in 1917 tho lav/was omonded, on Juno 21, 1917, so as to provide that tho Federal Reserve Banks would only pay interest on tho notos representing tho difference between the gold certificates that wore usod as collateral socurity or gold and the amount of the notes issued, and I have checked that up sinco 1917, and my investigation discloses, from information that w-.s obtained from your office that over sinco that tirno somo of those banks h.- vo obtainod notos in violation of that lav/. I f that is true, I would liko to know why the Board has not carried out that provision which roquiros an intorost charge to bo loviod, Govornor Ecclos. W e l l , as a matter of f a c t , it would seem that you ore of tho opinion, Mr. Patman, that private ownership of thoso rosorvo banks i s a dotorront, that some ono gets a particular advantage— Mr. Patman. That is not tho question at a l l . ing about that specific p o i n t . I am just ask- Governor Ecclos. I could not answer t h a t . Tho question has not como up sinco I havo boon connootod w i t h tho Board. It is a question that has never been r a i s e d , and the Reserve System has boon operating for tho last throo years with practically no profit v/hatovor. Mr. Patman. W o l l , of course, thoir income has boon principally from Govornmont bonds. Governor Ecclos. othor source. Entirely so, and it could not bo from any Mr. Patman. Don't you boliovc that that lav/ should havo boon complied w i t h , Governor, and that thoso bonks owe that money, that they s t i l l owe i t , end should pay it now? Governor Ecclos. I do not know what rate you would f i x upon tho use of that curroncy, and/if you fixed a rate on i t , the Gov* ornmont would turn ojround ond approprio.te funds to tho Rosorvo System to koop tho.t going. Ifr. Patman. But thoro is a difforonco. I f tho Government I -28- L-514 appropriates tho funds, thoy w i l l havo somo control of the way those earnings aro expended. Nov/ thoy havo no control. Governor Ecclos. Thoy havo a l l the control that Congress wants to onact. Mr. Patman. Affirmatively, yes, but we do not have tho question coming up where wo con take action, but i f wo had to appropriate monoy for tho continuance of the Federal Rosorvo Systom, wo would havo an opportunity to say how it should be oxpondod. Wo would probably stop th®-$30,000 and $ 5 0 , 0 0 0 s a l l i e s . Governor Ecclos. You moon if a l l the earnings should go to the Government and in turn all appropriations should bo made? Mr. Patman. That is r i g h t . Governor Ecclos. That is up to Congress. Mr. Patman. Yesterday, in reply to Mr. Hancock, you stated that you had botwoon four and fivo b i l l i o n dollars in gold upon which eurroncv could bo issuod, that i s , Federal Reserve notos, equal to 2-1/2 to 1, or about 12 b i l l i o n 500 hundred m i l l i o n . Govornor Ecclos. Approximately. said Mr. Patman. And thoro was something/about tho amount of expansion that could bo mado of tho currency. Is it not a fact that undor tho prosont Rosorvo roquiromonts, that you could havo an expansion oqual to about 75 b i l l i o n dollars of that money? Governor Eccles. Tho 5 b i l l i o n approximately of gold or gold cortificatos now hold by tho Rosorvo Systom in excess of tho gold reserve requirement to bo hold against doposits and note l i a b i l i t i e s would be sufficient to furnish 14 b i l l i o n dollars approximately on a 35 por cent reserve ratio of crcdit to tho member banks. In othor words, if the member banks woro loanod 14 b i l l i o n by the Rosorvo Bank, that would moan that their doposits would incrcaso with tho Rosorvo with tho Rosorvo Banks. Mr. Patman. In oxcoss rosorvos? Govornor Ecclos. Yos, by 14 b i l l i o n , and that 14 billions would roquiro noarly 5 billions of gold to bo hold against i t , but tho banks undor those circumstances would have 14 b i l l i o n s of additional oxcoss rosorvo upon which thoy could expand with tho prosont rosorvo roquiromonts, which is botweon 5 and 6 for Ij they could oxpand botweon fivo and six times tho amount of crcdit that that would give them, or botwoon 70 cjid 84 b i l l i o n dollr.rs. Mr. Patman. Govornor, in view of your statement, a mombor bank could soil to tho Foderal Reserve Bank a $ 1 0 0 , 0 0 0 bond, and havo to its crcdit in tho Fodoral Reserve Bank $ 1 0 0 , 0 0 0 in oxcoss I -29- L-514 reserve, raid then if it wanted to buy $ 6 0 0 , 0 0 0 in government bonds, it would bo privilogod to do so upon that reserve, would it not? In fact, noro than that? Governor Eccles, No, The individual bank, of courso, would only bo able to buy bonds to tho extent of its cxcoss reserves but tho banking system as a whole could do t h i s : Tho fact i s , that this bank with $100,000 of oxccss roservo would only havo $100 , 0 0 0 availablo with which to expand credit or mako investments, Howovor, whon tho bank mado tho loan or made tho investment, tho institution or tho individual getting the procoeds of that loon would doposit that loan in another b a n k Mr, Patman. I know, but we are presuming that you w i l l not do thp.t, and that tho rural carriers, tho postmasters, and a l l of tho Podoral omployoos in that particular town would collcct that much money. Governor Ecclos. Tho amount of expansion would dopend upon whether it was a central reserve city bank— Mr. Patman, But I am talking about the average. Governor Ecclos. to ono. Tho average would bo between five and six Mr. Patman. Governor, the Fedoral Intormodio.to Credit Bank is to agriculturo about the same as tho Rosorvo System is to industry generally, is it not? Govornor Ecclos. Mr. Patman. No, thoro is a vory groat differenco. I understand that i t is a go-botwoen. Governor Ecclos. There is no rolation to it at a l l , bocauso tho Intormodiato Crodit Bank of course is not a bank of issuo, Mr. Patman. It soils bonds to the public. Govornor Ecclos. That is r i g h t ; it sells debentures* soils its throe, six and nino months debentures. It Mr. Patman. But tho point that I want to ask you about is this: Whon an Intormodiato Credit Bank has accumulated a surplus equal to its subscribed capital stock, ono-half of tho remainder shall go into tho Treasury of tho United States as a franchise tax, and that is tho law today, and of course tho law has boon changed as to tho Fodoral Rosorvo 00 as to provide that nono of the profits aro required to go into tho Troasury as a franchiso tax, and sinco tho law has boon changed and all of this money has accumulatod, some two or throo hundrod million dollars as a surplus f u n d — I do not recall tho oxact amount— I -30Governor Ecclos. Mr. Patman. Whore? L-514 With the Federal Reserve? Yes. Govornor Ecclos. $ 1 4 5 , 0 0 0 , 0 0 0 is the only item outsido of this | 2 7 , 0 0 0 , 0 0 0 that they have topiy interest on. Mr. Patman. Sinco as a mattor of right that money belongs to tho Govornmont, because the Federal Rosorvo Board f a i l e d to carry out tho lav/ in making an interest char go—and the lav/ is plainly writ t o n — Govornor Ecclos. I would not agroo at all to that. Mr. Patman. And sinco tho Board has failed and rofusod to comply with tho law, and which if it had boon complied with that money would h-vo gone to the Troasury, it just occurrod to me that wo should not pay out any $ 3 , 0 0 0 , 0 0 0 to tho Fodcral Reserve Bonks on curroncy. Governor Ecclos. As a mattor of fact, tho $ 1 3 2 , 0 0 0 , 0 0 0 is the capital, and if tho Rosorvo System had no surplus whatover, of courso it would not bo in a position to operate very satisfactorily. It is true that it could call upon its member banks for tho payment of all of tho stock which thoy subscribed. They never called for more than ono-half of tho payment. Nov/ thoy could havo callod for all of i t , and if tho Troasury took tho surplus that they had, then thoy might havo to call upon the banks for $ 1 3 2 , 0 0 0 , 0 0 0 upon which they would havo to pay 6 por cont. Thoy havo callod upon tho banks for only one-half of the subscription to Fodcral Rosorvo bank stock, and only on that amount which has boon called for and paid in, do thoy pay any roturn. Tho total bonofits t o tho mombor banks by way of an income out of Fodcral Reserve earnings, i . e . , the total amount that they got, is 6 por cont on $ 1 3 2 , 0 0 0 , 0 0 0 , which is about $ 8 , 0 0 0 , 0 0 0 . So i f tho ownorship of tho Rosorvo Banks v/oro clsowhoro, i f i t was i n tho Govornmont, and tho avorago rato of interest which tho Government pays upon its long-term obligation, which you would have to figure i n this case, is between 2-3/4 and 3 por cont, tho total saving in the picture would amount to about $ 4 , 0 0 0 , 0 0 0 ; so that tho total amount that would bo saved to tho Government if thoy owned tho Reserve Systom as the banks now own tho Rosorvo Systom, would bo about $ 4 , 0 0 0 , 0 0 0 . Mr. Patman. That is in dollars and oonts, Governor, but I think that there is anothor view that should bo considered there, tho main view from my standpoint, and that is divorcing privato banks from tho Fodcral Rosorvo/oX!:uF'<?ly, so that thoy w i l l not in any way have any stock or interest in the Fodcral Rosorvo Systom, the bank of issuo, and I boliovo that that is of groatcr importance than tho quostion of tho saving of $ 4 , 0 0 0 , 0 0 0 . I -31- L-514 Governor E c c l e s . I think the question of the $ 4 , 0 0 0 , 0 0 0 is a small factor in the picture. The banks could continue to own the stock without having the voice that they have in the individual reserve banks. That voice, however, is not very important, because the monetary powers are largely i n the Board. The Open Market Committee used to be composed of the twelve bank governors or presidents. Those people, before tho Banking Act of 1935, were selected entirely by the directors of tho Reserve Banks, and two-thirds of the directors of the Reserve Banks wore selected by the banks. Therefore it did indirectly give to the banks certain powors over monetary control through that moans. But oven then all their decisions had to bo approved by the Federal Rosorvo Board boforo action could bo taken. Today tho powor to increase or decreaso reserve requirements is solely i n the Board. Tho mombors of the Board, as you know, aro all appointod by the Presidont, with the consent of tho Senate. Tho power to incroaso margins on collateral loans made by both banks and brokers is ontiroly in tho Board. The powor to f i x discount rates is ultimately in tho Board and intorost rates on timo funds aro regulated by tho Board. The Opon Market Committoo is a divided power. I did a l l that could to got that powor exclusively in tho Board, b u t , as you a l l know- I Mr. Goldsborough. I think that you w i l l agree that the Houso conforoos t r i e d to do tho samo t h i n g . Govornor Ecclos. As far as the Houso was concornod on that issuo, I havo no complaint* Mr. Patman. You havo s t a t e d - Governor Ecclos. So that whon you got to this picturo, bank ownership today i s not an important factor when it comes to tho question of tho oxorciso of monetary control. Tho Govornmont, through its powor to appropriate tho oarnings of the Fodoral Rosorvo Systom from timo to timo, is in a position to got tho benefits that may bo dorivod from tho oporation of the Rosorvo Systom should oarnings be in oxcoss of tho amount that may bo roquircd for an adequate surplus. It sooms to mo that tho b i l l that providod that whon the surplus was built up to a cortain amount, any oarnings thereafter woro to rovcrt to tho Government automatically, was not an undesirable situation. Personally, I would soo no objection to that sort of provision, bocauso thoro is nothing to bo gainod by piling up an amount in excess of tho need of tho Systom. Tho Rosorvo Systom is ontiroly a different institution than any privato financial or banking i n s t i t u t i o n , in that it doos not operate for p r o f i t . Tho policy that i t pursues should not be in any way motivated by whothor or not this or that oporation w i l l bring to it a profit I -32- L-514 or a l o s s . Whon it carries out an open market operation, as i t has dono i n times past for tho purpose of giving reserves to tho banking system, it might w e l l tako a loss whon it reverses that policy, b u t — Mr. Patman. You havo stated— Governor E c c l e s . But when i t carries out tho policy, the only factor to bo considered i s , what is in the public interest, and whether or not an easy money policy is advisable at tho timo. When discount ratos are raised, and you reverse your policy and extinguish tho oxcoss reserves, what that may cost tho Reservo System or what the System might rnoko out of such a policy i s , I am sure, never a factor* Mr. Hancock. Mr, Patman. w i l l bo through? Mr. Hancock. formation. Mr. Patman. Mr. Hancock. May I ask him a question right thore? W i l l you let me ask two or three questions, and I I was going to interrupt hero just to got this in- I just havo two or throe more questions, but go ahead. Whore is tho opon market? Governor Ecclos. What i s that? Mr. Hancock. Where i s there an opon markot i n tho United Statos, or whoro i s the opon markot? Governor Ecclos. On tho question of buying government securities, I suppose anywhere except buying them directly from tho Treasury. Mr. Hancock. Do wo havo any opon markot other than tho Now York markot, in actual practico? Governor Ecclos. In actual practico, not on a largo scale. Mr. Hancock. I was wondering i f in tho Stato of North Carolina we could not havo an opon markot ostablished, so that wo would not havo to sond to Nov/ York to got our bonds. Govornor Ecclos. Tho difficulty is with the banks. Thoy would liko to buy low and soil h i g h , and thoy would like the Rosorvo Systom under thoso circumstances to oporato as an accommodation for tho banks. Wo can hardly oporato by going into a state and buying government bonds when tho banks do not want to soli thorn. Mr. Hancock. Is that tho real reason for the sontimont in Now York that is oithor very pessimistic or vory optimistic, and you have never a modium, i n be two on? Govornor Ecclos. W e l l , I do not know. I think that thore may be a lot of roasons for t h a t . I do not think that the Government bond markot is tho solo roason. I -33- L-514 Mr. Patman. I just want to ask you ono or two moro questions, and I am through. Of course, you gave tho reasons usually given why tho Government should not own tho Federal Reserve Bank System. Governor Ecclos. Don't got mo wrong 0 I did not say that they should not own it« Mr. Patman. Would you find it objectionablo i f tho Govcrhment woro to provide for government ownership? Would that be objectionable to you? Govornor Ecclos. Thoro is no nood, there is no nocossity of thorc being any stock, as a matter of f a c t . Mr. Patman. I agroo with you. Governor Ecclos. Thoro does not necessarily need to bo any stock i n tho Resorvo Systom, Mr. Patman, Whatever stock is owned, I think that tho Government should own i t . Do you think that that would be objectionable, or not? Governor Ecclos, I do not think that it would be important ono way or tho other, Tho importance i s , what are tho powors that tho Roserve System has? Mr. Patman. That is it, Govornor Ecclos. It i s not so much the ownership. Tho Government could woll own tho stock, and tho Govornmont could well permit a mombor bank, without tho ownership of stock, i f it choso t o , to oloct somo of tho directors. In other words, tho mombor banks would not necessarily havo to hold stock to occupy exactly tho same position that they d o , Mr. Patman, Don't you t h i n k , in view of tho power of tho banks now on tho Open Markot Committoo and tho Federal Advisory Committee, which evidontly must havo somo hidden powors somowhoro, i f not other powors, bocauso I think cortainly thoy havo oxortcd somo influonco, that in spito of ovory argument that wo can logically mako, tho disposition of the banks i s to say, "Now that wo own tho stock in this systom, wo fool that you should do like wo want you t o " ? I just havo a fooling that wo would bo better off from tho public standpoint i f the Govornmont ownod that stock outright and tho banks did not havo any interest in it at a l l , and wo had no Federal Advisory Council, and would you opposo a b i l l pending in Congress that provides that tho Govornmont should own that stock? -34— Govornor Ecclos, tions wero. Mr. Patman, onumoratod. L-514 It would dopond upon what tho othor condi- I am talking about tho conditions that I just Govornor Ecclos. I f it involved net moro than just a more question of ownership, I do not know that it would make very much difference one way or tho other, Mr. Patman. You would not oppose i t , thon? fight i t , in othor words? You would not Governor Eccles. You moan, just that one provision? Mr. Patman. sir. Yos, Governor Ecclos. In othor words, i f tho Governmont proposod that thoy would furnish tho capital? Mr. Patman. That is r i g h t , and divorco it from tho bank control. Govornor Eccles. Whon you talk about control, do you moan i f it was a question of making tho Fodoral Rosorvo so that it did not havo a certain amount of indopondonco? I f it did not havo that independence, I would bo opposed to i t . Mr. Patman. It is all right to bo independent, I do not want a Prosidont to appoint a l l tho mombors of tho Board; I would like to havo it staggorod so that no one prosidont wculd appoint thorn a l l . Governor Eccles, And tho Board itself should not b o , nor tho s t a f f , subjoct to what wo may term a political influence. It should bo an indopondent, continuing public body. Mr. Patman, And you wculd not object to that, i f tho stock were ownod by tho Government? Govornor Ecclos, I would prefer to eliminate the stock, under thoso circumstances to havo no stock, and havo merely— Mr, Patman, Now— Govornor Ecclos. It is a question that I havo not given very much thought t o , I havo novor boon aslcod to testify on that subject in connoction with any b i l l , and it might bo that circumstances would exist with rolation to tho legislation whoroby I might find i t nccessary to oppeso a change i n tho ownership, so that I would net want to bo understood as saying at this time that I am i n favor of tho Govornmont owning tho stock of tho Federal Rosorvo Bc.nks without reservations, Mr. Pa.tman, Or against i t ? L-514 -35' Govornor Ecclos. Yos, or against i t ; that is r i g h t . Mr. Patman. After Mr. Goldsborough finishes with his b i l l , thoy arc going to havo a hearing on a b i l l sponsored by 160 members of this Houso proposing govornmont ownership of Federal Rosorvc Banks, and I an going to ask the chairman of the committee to invito you to t e s t i f y on that b i l l . Governor Eccles. Mr. Patman. All right, sir. Ono ether question, and I w i l l be through. This Federal Advisory Council, I f o o l , has influenced the Board to some extent. I do not know that they havo, but I havo that fooli n g , ospocially w i t h regard to commodity prices, and I havo a fooling now that tho Board should havo adopted a policy that would havo caused commodity prices to have incroasod, and it occurs to me that the actions of tho Board havo boon deflationary, unduly deflationary, and that they unduly hindered the advance in commodity p r i c e s . Don't you think that commodity prices should increase more, raw material p r i c e s , Govornor? Mr, Ford. Mr. Patman. Mr. Ford. Mr. Patman. Enumerate thorn. Cotton, corn, wheat, and other things. Cotton? Yes. Governor Ecclos. You say that tho Board has adopted a rostrictivo policy. I say that that is not tho ease at a l l . Mr. Patman. I did not say rostrictivo. adoptod occurrod to mo to bo deflationary. I said that tho policy Govornor Eccles. All right, then, deflationary. do you refer to? At what tiino in tho past? What policy Mr. Patman. All right; tho time when you increased tho resorvo requirement 50 per cont I considorod it was wholly unnecessary, because there was no ovidonco in the world of i n f l a t i o n ; and also when it was incroasod 50 per cont more—I refor particularly to cotton. I think cotton is entirely too low. Governor Ecclos. That is r i g h t , but tho excess rosorvos of tho banking systom would have made no differonco whatovor, on tho price of either wheat or cotton. Had tho Board not i n any way increased reserves or done absolutely nothing, in my opinion you would havo soon no difforent price lcvol than you soo today, for this reason— Mr. Patman. Now— I -36- L-514 Governor Ecclos. I f tho Board's action had brought about such a restriction in a lending policy of the mombor banks as to force liquidation, or as to make it impossible to got credit for purposes of production and also for marketing purposes, then you could say that tho action of tho Board was deflationary. As a matter of f a c t , tho interest rates today aro as low as thoy havo over boon. Just last wook on Monday tho Govornmont opened bids for $ 1 0 0 , 0 0 0 , 0 0 0 of govornmont b i l l s , $ 5 0 , 0 0 0 , 0 0 0 duo in nino months and $ 5 0 , 0 0 0 , 0 0 0 duo in December. Tho rate on those b i l l s , on those nine months b i l l s , was . 5 1 4 , which is slightly over one-half of one per cont. Tho debentures of tho Intermediate Credit Bank, which finance tho cotton and tho whoat farmors, are selling on tho market at loss than one per cont, so that ycu cannot say that the action of tho Rosorvo Systom has i n any way rostrictod crodit, and therefore i f thoro is a slump in certain commodities, it is not duo to a credit shortage or a restriction of c r e d i t . Tho Rosorvo Systom did not reverse policy when they increased roserves. Thoy woro merely adjusting the reserve requirements i n tho Systom to tho new gold position of tho country, caused by a not inflow of foreign capital. The foreign capital came in hero, and tho way i t is transferred i s , of courso, through tho shipment of g o l d . This gave to tho Rosorvo System the huge supply of gold that wo havo boon discussing, and it gave excess roserves to member banks, and i t was f e l t that the reserve requirements of the member banks should bo adjusted to absorb some of the excess reserves created by the gold inflow. In othor words, a part of that gold import was locked u p , because it was not nocossary to uso it as a basis of credit, but had it boon used i t would of courso havo croatod a very serious inflationary condition. Nov/, the timo to lock it up is whon tho banking systom has excess resorvos, gonorally speaking. Thoro was just a fraction of thorn that did not havo sufficiont excess reserves to meet tho requirements. Evon aftor putting into effect the incroascd reserve requirements, thoro is s t i l l approximately $ 9 0 0 , 0 0 0 , 0 0 0 of oxcoss roserves in the banking system today. I f wo had waitod until any substantial amount of oxcoss rosorvos had boon u t i l i z e d by maybe only a fow banks, i t would havo boon that much more d i f f i c u l t to make this adjustment. This was not a reversal of tho monetary p o l i c y , but it was merely an adjustment of the banking systom on a now basis of rosorvos, and as wo announcod at tho timo, wo w i l l uso a moro flexible instrument, tho open markot oporation, which doos not have an ovorall offeet such as an increase in tho reserve requirements doos. So that when the reserves woro increased in March and May, thoro was a b i l l i o n and a half of tho excess rosorvos locked up. Tho Rosorvo I -37- L-514 Systom, in order to facilitate tho adjustment of the banking system to that increased requirement, carried out an open market operation of approximately $ 1 0 0 , 0 0 0 , 0 0 0 . This left the not amount of tho increase a b i l l i o n four hundred million. Wo anticipated at tho timo that wo ordered tho increase in rosorvo requirements that xvo might havo to carry out an open market operation, and wo stated that wo had tho instrument w i t h which to doal with tho situation in tho public interest, Tho opon market operation that tho System carried out along in April was in no way a reversal of tho policy of increasing tho rosorvo accounts. Mr. Goldsborough. Govornor Ecclos— Mr. Patman. Just this 0110 obsorvation, and I guarantoe that I am through. I appreciate tho pationco of tho committee, but you havo noticod that Govornor Ecclos has taken up most of the time, and I am gleid'that he has, bocauso what ho has presented has been very interesting. Of course, the purchasos of government securities made by tha Federal Rosorvo Banks wore ccnsidorod inflationary, bocauso they put moro monoy in circulation, but tc mo it was deflationary and unnecessary to make tho incrcaso i n reserve requirements which was made. As to whether I an r i g h t , you havo your opinion and I have n i n e , and I havo boon hopoful that tho Board would adopt a policy that would not prevent commodity prices from going to tho level that I think thoy should bo incroasod t o . Mr. Luco, tions? Is thoro any opportunity for this side to ask ques- Mr. Goldsborough (temporarily presiding). By a l l moans. Govornor Ecclos, thore soon to bo in tho country two opinions regarding the inflationary offcct of tho policy of tho Fodoral Roscrvo Board, Ono is that thoro is no evidence of inflation in so far as tho business of tho country is concornod, but that there was ovidonce of inflation in stock prices, and that therefore the policy of tho Board should havo boon to incroaso tho marginal requirements rather than to incroaso the rosorvo requirements. Another opinion sooms to bo that the policy of tho Board in increasing tho reserve requirements undor indicated circumstances, and tho policy of tho Troasury in froozing gold, havo created a doubt in the business world as to what tho permanent policy w i l l bo, and that that has soriously interfered with reoovory. Now, I think that the so opinions havo boon broadcast, and that it would bo interesting to tho committee and to the country for you to give us your views about t h a t . I -38- L-514 Govornor Ecclos. Answoring tho first one, and expressing my views about i t , namely, that i f thero was i n f l a t i o n , it was i n tho stock market, and the Reserve System should have dealt with that problom not by increasing tho reserve requiromonts but by increasing tho marginal requiromonts, tho Reserve System, contrary to tho views of some pooplo, did not increase tho rosorvo requirements i n ordor to have a deflationary effect or to mako for tight money. I personally gave a statement along i n March to try to clarify at least my point of view on that subject. Wc did not do i t as a reversal of policy, as I havo explained. Now, so far as tho increase of margin requirements is concerned, the stock market was not expanding as tho result of credit. There was practically no increase i n crodit going into tho stock markot. Therefore an increase i n margin requirements would not necossarily havo beon effective to any appreciable extent, in my opinion, because the stock markot was very largoly a cash operation. Tho total amount of bank crodit on brokors' loans, loans by banks to brokers, was only slightly ovor ono b i l l i o n dollars, as against an eight and a half b i l l i o n dallar credit in 1 9 2 9 . Thoreforo tho situation did not call for an incroaso i n the margin requirements to deal with a speculative inflation in stock* Somo people thought that that was what to do. I say that that was duo to cash purchasos, and in no small measure to foroign capital coming ovor horo and buying for cash. Now, with roferonce to those people who say that thoro was no inflationary development— I Mr. Goldsborough* said. In so far as gonoral business was concorned, Governor Ecclos. That is truo. Wo had a groat army of unomployod , and wo had somo idlo f a c i l i t i e s , but on tho othor hand we did havo somo very definito evidences of an inflationary trend outside of tho stock markot* Tho building costs and ronts woro advancing vory rapidly, so far that thoy had tondod to retard the homo construction a c t i v i t y . The wages, particularly in industrial and building f i e l d s , had advanced vory, vory rapidly, rapidly throwing out of balance our oconomy. Wo know what happened to stool prices* Thoy are substantially highor today than i n 1929* Tho total production figuros aro vory closo to those of 1929 at tho present timo, yot in tho building industry, lumber production and coment, b r i c k , t i l o , plumbing equipmont and a l l the itoms that ontor into tho construction fiold aro s t i l l at a doprcssion lovol* Last year in this country we built something l i k e , as I r e c a l l , 3 0 0 , 0 0 0 housing units* In 1925 wo built over 9 0 0 , 0 0 0 housing u n i t s , w i t h , of course, a population vory much loss than the present population* It is estimated that the normal annual requirement for home construction today is nearly 6 0 0 , 0 0 0 housing u n i t s , to take caro of I -39- L-514 demolitions, destruction by f i r o , flood and cyclone, and to take caro of tho increasing population. Wo havo boon getting behind every year sinco 1 9 3 4 . Wo had an excess in 1929 of something close to onehalf million housing u n i t s . Construction f o i l off very rapidly, and wo had practically caught up with tho excoss that wo had by 1 9 3 4 . Sinco that timo wo havo built far loss than wo roquirod, until today wo possibly havo a doficioncy of around 5 0 0 , 0 0 0 or 6 0 0 , 0 0 0 housing units. So, i n crdor to riako up for tho backlog or tho doficioncy, and to take caro of tho normal rcquiromonts, wo should not build loss than 8 0 0 , 0 0 0 housing units for tho next four or fivo yoars, on an avorago, and yot last yoar wo had about 3 0 0 , 0 0 0 , as I r o c a l l , and this year it is too o a r l y , of courso, to say, but at tho present timo there i s a falling off in homo construction, duo i n vory largo measure to incroasod cost of building materials and l a b o r . Mr. Goldsborough. Now— Govornor Ecclos. Now, that is tho inflationary olomont in that f i o l d , and that i s tho bottleneck, i n my opinion, i n your recovery. Mr. Goldsborough. I understood you to stato a fow moments ago, in answor to ono of Mr. Patman*s quostions, that tho incroaso i n rosorvo requirements s t i l l loft ovor <$>900,000,000 i n excess rosorves, and that thoroforo legitimate borrowing was not intorforod with by that procoss. M o w , i f that i s truo, how would that procoss tond to lowor tho prico of tho raw product and incroaso tho ability of tho buildor to construct homes? Govornor Ecclos. Mr. Goldsborough. That i s a good question, ft did not do i t . I understood you to say that i t did do i t . Governor Ecclos. I say that it had no offeet on i t . In other words, I supposo that tho sizo of tho whoat crop in relation to the world supply may havo somothing to do with tho prico of whoat, and I think also that thattmay bo truo with tho cotton crop. Mr. Goldsborough. % quostion is a practical ono, I hope, and it i s f o r tho purposo of trying to got to tho country tho viow of tho head of tho Federal Rosorvo System, bcca.uso so far as I know the country i s confusocl about i t . Now, i f tho incroaso in rosorvos could have nc o f f o c t , why was tho regulation for an incroaso in rosorvos promulgated? Govornor Ecclos. Because wo woro gotting an increasing supply of gold that was going into tho banking systom. We knew that at no timo, so f a r as wo could soo, i n tho futuro, would thoro by any uso for such oxcoss rosorvos as woro being o.ccunulatod, and tho timo was I -40- L-514 horo to lock up those reserves. Before the Rosorvo Board could novo into position to oxorcise control, it had to got thoirosorvos down to a point whore its action would have influence, and we f e l t it was tine to at least novo into position so that through an open market operation wo could oxerciso an influence over the moneymarket, I am sure that increasing roservos of the banks throughout the systom, to the extent that wo havo i n tho last yoar, at a timo when there was a very groat ovidonco of an inflation and thoro was a hugo crodit oxpansion undor way would havo causcd such repercussions as to practically paralyze tho country. I do not think any Rosorvo Board could possibly havo faced a situation of that sort, Mr. Goldsborough. Is this your answer, that it was dono partly so that tho psychological offoct would bo tc. incroaso interest rates to a sufficient oxtent to provont a disastrous inflation? Docs that express anything at a l l to you? Governor E c c l e s . Yos; I say that interest rates duo to the hugo oxcoss rosorvos had gotten down to such a low rato that thoy could not bo oxpoctod to be sustained thoro for any oxtondod period of timo, that thoy had reached a point whoro your insurance companies, your mutual savings banks, your trustees and others were unwilling to buy your long-torm securities from the Govornmont down to a 2 , 2 avcrago—•that is tho low point that thoy got to—and that was aftor wo had incroasod rosorvos last summer by a b i l l i o n and a h a l f , and othor long-torn securities wcro selling on a 3 per cont or slightly ovor 3 , b a s i s . Tho dangor of investing funds in long-term securities at excessively low rates i s that i f rates go up through a restrictive policy, thoro would bo t e r r i f i c losses and depreciation on those securities. Tho Rosorvo Systen has some responsibility, and I . t h i n k that whon you tako into account tho public interest, you have t o . l o o k at tho mutual savings bank dopositors and tho holders of insurance p o l i c i e s , as wo11 as your fiduciary institutions generally. It i s true that dobtors would liko to soo interest rates vanish to a point ivhoro you would havo no interest. Mr. Goldsborough. Do you moan to say that you f e l t i t was tho responsibility of tho Federal Rosorvo Board to hold up tho prico of securities, for tho benefit of tho creditors? Govornor Ecclos. No, I do not moan to say t h a t . As I understand tho responsibility of tho Board, wo are concerned primarily with crodit noods of commerce, agriculture, and industry. Now, of courso, you can expand undor that provision to tako into account, it would soom to mo, tho public interest gonorally. Whon you havo tho noods of commorco, agricuituro and industry as an objective, as prices continuo to advance-Mr. Goldsborough. May I interrupt you thoro to say that I havo personally boon opposod to having those words i n tho law. I always thought that it should bo tho public interest, rather than to havo any specific designation. -41- Governor Ecclos. L-514 But I an saying that that is tho lav/. Mr, Goldsborough. Yos, that i s tho lav/. Governor Ecclos, Wo recognize t h a t , and i t soens to me to take that litorally would nean that whon an inflation starts, you would continue to pour out credit continually, because commerce, agriculture and industry would need more credit the further expansion went. Therefore i t v/ould seem we may be required to help the process of inflation through an interpretation that some may give to that requirement, and as credit contracted and deflation started, and as commorce, agriculture and industry would not need crodit, wo should adopt a contracting p o l i c y . As a matter of f a c t , wo really ought to do the reverse, i f you aro going to got stability and balance. As expansion goes beyond a certain point, and as it f a l l s below, there has to be an e f f o r t , on the part of the Reserve Systom, i f wo arc going to keep tho balance, to reverse tho policy, Mr. McKeough, May I ask tho Govornor a question in connection v/ith tho hearing on this House Joint Resolution? Mr. Goldsborough. Surely. Just a momont. Mr. Luco asked a question, and I am not sure that I understood him, but I think ho wanted to know whon ho might ask questions. Mr. Luco. Yos. Mr. Goldsborough. I was asking i f this sido would havo an opportunity. Certainly. Mr. McKeough. I w i l l bo glad to y i o l d . wore dividing tho timo between tho sidos, I did not know that you Mr, Goldsborough. Lot mo mako t h i s statoment, because I was in the chair at tho time, I did not rocognizo ono man any moro than tho other, Tho first follow that started questioning was recognized. The Chairman. Wo cortainly want Mr. Luco to bo givon tho privilogo of asking whatovor quostions ho has, but tho timo is about up now. I had hoped that we v/ould f i n i s h this morning, and that wo would devote tomorrow morning entirely to an oxocutive session. But it i s evidont that wo cannot do i t , and i f it meets with tho approval of tho committoo, I would suggest that wo adjourn now and ask Govornor Ecclos to come back tomorrow, so that ovorybody may have an opportunity to quostion him. -42- Mr. Ford. L-514 May we havo tho discussion tomorrow on tho b i l l ? Tho Chairman. The committee w i l l stand adjournod until o'clock tomorrow morning. 10:30 (Thereupon, at 1 2 : 0 5 o'clock p . m . , tho Committoo adjourned until Friday morning, July 1 6 , 1937, at 1 0 : 3 0 o'clock a . m . ) I -43- H. J . RES. L-514 377 / Authorizing the destruction of Federal Reserve notes of the Series of 1928, and their replacement by Federal Reserve notes of the Series of 1934, or a later s e r i e s , at the expense o f the United States. Friday, July 2 3 , 1937. HOUSE OF REPRESENTATIVES, Committee on Banking and Currency, Washington, D. C. The Committee resumed hearings on House Joint Resolution 377 at 1 0 : 3 0 o'clock a . m . , Honorable Henry B. Steagall (Chairman) presiding. The Chairman. The Committee w i l l be .in order. We have Governor Eccles with us again this morning, and, Governor, you may proceed. I have forgotten now whore we were at the time of the last hearing. Mr. Luce. I was about to ask some questions. The Chairman. You may proceed. STATEMENT OF HON. MARRINER S. ECCLES (Resumed) Chairman of tho Board o f Governors, Federal Reserve System. Mr. Luce. Governor Eoole§, will you be good enough to tell us who will be advantaged by the passage of this b i l l ? Governor Eccles. Mr. Luce. The Reserve Banks. Tho Federal Reserve Banks? Governor Eccles. Yes, sir. Mr. Luce. And, should thoy receive up to | 3 , 0 0 0 , 0 0 0 , that be added to their surplus? will Governor Eccles. It won't amount to $ 3 , 0 0 0 , 0 0 0 . It will be less than $ 2 , 0 0 0 , 0 0 0 . They w i l l merely have replaced notes, which due to no fault of t h e i r s , have been made obsolete, and it I -44- L-514 has been desired that those notes be not used. Mr. Luce. Would this amount bo added to their surplus? Governor Eccles. It would indirectly be added to their surplus or reduce their d e f i c i t , depending upon their operations for the year. To the extent that they would not be required to pay out as current expenses these funds for notes, it would reduce their expenses—that is what it would do, rather than to add directly to their surplus. Mr. Luce. After the war, this Committee learned that tho earnings of tho Federol Reserve Banks were .falling o f f Governor Eccles. Were what? Mr. Luce. The earnings of the Federal Reserve System were falling o f f by reason of the lessening o f demand for the rediscounting of commercial paper, as times grew better. What is the condition of the System at the moment? Is there danger that they cannot make enough money to pay their expenses? Governor Eccles. Tho Reserve System for several years has had practically no paper discounted with them, or no acceptances sold to them. That is always tho condition of a control bank when they have substantial excess reserves carried with them by the member banks. In other words, i f member banks have excess' reserves, naturally there is no occasion for those banks to use the credit f a c i l i t i e s of the Reserve System. Excess reserves tend to creato an easy credit condition, which is a desirable condition to have for the purpose of helping to finance, on a low interest b a s i s , business activity and recovery. With the excess reserves which prevail at the present time, and havo prevailed, in varying amounts, ever since shortly after the banking holiday, tho earnings of the Reserve System have been derived entirely from their holdings of government securities. Those securities, which now amount to $ 2 , 5 2 6 , 0 0 0 , 0 0 0 , were largely acquired by tho Reserve System prior to tho banking holiday as an open market operation. Thoy wore purchased by the Reserve System in order to help member banks got out of debt and to place them in an easy reserve position; in other words, it was an open-markot operation for the purpose of making easier money conditions. About 700 million of the 2 b i l l i o n 526 million was purchased after the banking holiday, and all but 96 million of these 700 millions was purchased within six months after the banking holiday. Mow, those securities held by the Reserve Banks, purchased for tho purpose at that time of creating an easy money condition, or relieving the money situation that existed, were the source of the revenue of the Reserve Banks. The purchase of those securities was not designed for tho purpose of providing income to the Re serve Banks, however, any more tha.n the decision to sell them I -45- L-514 would be determined by income requirements. The Reserve System must operate, as I said the other day, not with regard to its profit. There are times when it w i l l make money, but there are rightly other times when it will lose money; the earnings that it makes at.times above expenses place it in a position to lose money under other conditions. Its monetary policy is never determined by its desire or its need for earnings. The Chairman. Mr. Luce. May I ask a question right there? Certainly. The Chairman. As a matter of f a c t , Governor Eccles, it was never contemplated by tfie framors of the Feder* 1 Reserve Act, and it was never any part of the philosophy of that legislation, that tho Federal Reserve Banks should be money-making institutions, or that they should be operated for the Durposes of p r o f i t . Isn't that right? Governor Eccles. W e l l , I do not know what the view o f the designers o f the Act may have been in that regard. I only know that no central bank can serve the public interest that has profits as an objective. The Chairman. That is absolutely true, and, as a matter of fact, it has never been a money-making system, in practical results, for thoso who owned the stock, has it? Governor Ecclos. That is correct. The amount of its dividends, of course, has been limitod to the 6 per cent th^t is paid upon its stock, and that stock might just as well bo a preferred stock so far as that limitation is concerned. Tho Chairman. As a matter of fact, a great many member banks owning this stock have held the view that the ownership of tho stock was really a burden, and that the membership wcs a burden to the banks, rather then a p r o f i t . Governor Eccles. W e l l , I think that that fret has been true in the case of some of the banks, possibly of smaller banks. Tho Chairman. I s n ' t it also true that thousands of state banks which have never joined tho Fedoral Reserve System, and which have remained out voluntarily, have been free' to act as their own interests and tho matter o f profit might be involved, and that they have regarded it to their best interests not to join? Governor Ecclos. Mr. Luce. as you do. A large proportion o f them. Mr. Chairman, I understand that matter precisely I would like to state that, i f my recollection servos me -46- 1>514 right, ten or twelve years ago tho question whether tho banks should be paid their running expenses began to loom on the horizon, and there was discussion as to whether or not it might become necessary for tho Government to appropriate the money to keep the System going. Fortunately that did not come up, but it brought out rather sharply tho fact that the Federal. Reserve System is perhaps the one institution in tho country thot suffers when times are g^od, and it gains when timos are b a d , Nov/, let me give you, Governor Eccles, a homely illustration of what I am driving a t . We w i l l suppose that Smith finds that Jones owes him some money, and Jones goes around to Smith and says "See here, Smith; you think that I oWe you some money. Perhaps I do, and perhaps I don»t, b u t , anyhow, I am a l i t t l e hard up just n Do you need that money?" What I want to find out is whether the Federal Reserve System needs two million dollars o f money at a time when we are supposed to be trying, though not greatly succeeding, in cutting down expenses to balance the budget. Govern or Eccles. This does not come out of tho revenues of tho Government, All that is being asked in the case of this b i l l is to permit the use <vf a very small portion of the gold p r o f i t , which in no way would affect the budget situation, Mr. Luce. Why, my dear s i r , when a man pays two million dollars to another, ho is two million dollars shy, Govornor Eccles, But the $ 2 , 0 0 0 , 0 0 0 came into being as tho result of the revaluation, Mr. Luce. That does not affect the fact. Mr. Goldsborough. Society either owes this money to the Federal Reserve Banks or it does not owe i t . I f it does owe i t , it ought to be paid. I f it does not owe i t , it should not be p a i d . I f it pays i t , it has to come out of the Treasury, either directly or indirectly. It seems to mo that the question of whether or not this will come out of the revenues of the Government is not tho primary question. The primary question i s , does society owe this money to the Federal Reserve Banks, Governor Eccles, That is the primary question, and there is no question but what the Treasury, at least, seems to think that it is so obligated, for it has recognized the obligation; otherwise they would not have asked for the authority of .Congress to replace these notes, Thoy recognize the obligation, and they have asked for the authority from Congress to replace those notes which they havo, through their action, kept from being put in circulation. I -47- L-514 Mr. Goldsborough. Tou did not undertake to say to Mr. Luce that it makes any difference whether i t comes out of one pocket or another? The United States has that money to pay, one'way or another. Govornor Eccles. It is not a question, however, of collecting that much more money out of taxes, or borro\ving that much money with which to pay. I t would bo a question of taking those funds out of sone of the gold profit that i s lying unused. Now, it makos possibly a small d i f f e r e n c e , from purely an accounting standpoint, what— Mr, Hancock. May I ask a question right there, Mr, Chairman? Govornor Eccles. As a matter of good business proceduro, tho Treasury recognizos that thoy should replace those notos to tho Reserve Banks, and thus not make i t necessary for tho Rosorvo Banks to duplicate tho cxpens o of buying from tho Troasury the currency they need. In other words, tho exponso of tho Rosorvo Banks by roason of this action has boon increased—tho expense"of providing currency. They provide tho curroncy at thoir oxponso, thoy distrib* ute 1 it to tho member banks, and from the mombor banks i t goes to tho p u b l i c . Now, this action has greatly increased the oxponso of tho Rosorvo Banks, or w i l l increase the expense by this amount, beyond what i t othorwiso would b e , and it seems to mo that it is an expense that should bo borno by the Troasury. Tho Troasury rocognizos i t , and they aro w i l l i n g to boar tho oxponso. I f tho Rosorvo System should make earnings, which i s another matter asido from t h i s , and should not bo taken into account, i t seems to mo, Congress at any timo can make such disposition of the earnings of tho Rosorvo System as thoy think is in th© public interest. If Congress doos not soo f i t to authorize tho Troasury to do what thoy aro perfectly w i l l i n g and want to do, then the mattor w i l l have to bo disposed of by t h q p s o r p t i o n of this oxponso by the Rosorvo System, or by tho circulation' of those notos. What I am particularly anxious about is to got the matter sottlod ono way or tho other. It has boon ponding for two years, and certainly wo would oithor like to got tho notes roplacod, get tho item off tho books and absorb tho oxponso, or put in circulation tho notes which we havo hold out of circulation. Wo havo to do ono of throe t h i n g s , and i t is up to you gentlemen, i t sooms to mo, to determine which ono of those three things we should do. My purposo, of course, is to do tho business thing, and that is to havo tho.notes roplacod by notes which we can uso. It sooms to me to be a porfootly proper and legitimate business transaction botwoon tho Troasury and tho Rosorvo System. I -48- L-514 Mr. Luco« Frankly, Mr. Ecclos, you do not oonvineo mo that anybody would savo any monoy by burning up several 'tons of paper. That, howovor, is not what I V a s driving at at a l l . I want to find out, i f I can, why thoro is instant benefit to anybody from this bookkeeping transaction which w i l l add two million dollars to the oxponso of the Government of tho United States. Lot us go back to my original question and tho illustration that I gavo about Smith and Jonos, where Jones says to Smith, "Porhaps I owo t h i s money, and porhaps I do not, but I am hard up; con you wait a while?". It is up to Smith to give somo valid and serious reason why that transaction ought to bo immediately closod up, and i t struck mo from tho f i r s t , as you have said, that it is largoly a bookkooping quostion, oxcopt for the fact of that $ 2 , 0 0 0 , 0 0 0 of outgo from tho United States Treasury. Mr, Go ldsborough. When i t does involve an outgo of noarly tf2,000,000 to tho Unitod States Troasury, does not that immediately toko it out of a bookkooping transaction and mako it a transaction whoro tho Treasury of tho United States bocomos a debtor? Mr. Luco. I guoss that I wont too far in that concession. Mr. Goldsborough, I do not understand what is meant by a bookkooping transaction. When tho Government advances $ 2 , 0 0 0 , 0 0 0 i t costs $ 2 , 0 0 0 , 0 0 0 . Mr. Luco. It is duo to tho fact that i t w i l l ultimately como back again from tho surplus. Govornor Eccles, Tho Troasury does not take tho $ 2 , 0 0 0 , 0 0 0 and turn i t ovor to tho Reserve Bnnks at a l l . What tho Troasury doos is to pay for tho notes that thoy print for tho Reserve System. That w i l l spread ovor a period of a yoar, so that i t roally, in f a c t , i s not a question of a transfor of $ 2 , 0 0 0 , 0 0 0 to tho Rosorvo Systom. It is moroly turning ovor to the Rosorvo Systom, notes as thoy aro needed in the current business of tho Rosorvo Systom, without tho Rosorvo Systom boing roquirod to again chargo up to oxponso tho cost of those notos which thoy have already paid f o r . That is what i t really amounts t o . Mr. Goldsborough. Irrospoctivo of tho terminology, i t is a fact that i f this b i l l is not passod, tho Troasury would bo nearly $ 2 , 0 0 0 , 0 0 0 bettor o f f , would i t not? Governor Ecclos. Thoy m i l have $ 2 , 0 0 0 , 0 0 0 moro of tho storilizod or unused gold profit than thoy otherwise would have. Mr. Luco. But, Mr. Ecclos, tho last paragraph of this b i l l says: "Thoro is horeby authorizod to bo appropriated out of tho miscellaneous receipts covered into tho Troasury"— and so forth — I -50- "not oxooocling L-514 $3,000,000." When wo get to tho floor of tho House, our job i s to t e l l the House why wo wont the Troasury to bo up to $ 3 , 0 0 0 , 0 0 0 shy. Govornor Ecclos. It is loss than $ 2 , 0 0 0 , 0 0 0 , Certainly tho appropriation would only bo whatever tho oxact amount i s , which is loss than $ 2 , 0 0 0 , 0 0 0 . This is merely an authorization. Mr. Luco. Why was tho b i l l written for Governor Ecclos. Treasury. I do not know. $3,000,000? You would have to ask tho Thoy can only uso whatever the cost may bo to replaCo tho notes, and unless tho cost has increased very, vory much, tho cost would bo undor tho $ 2 , 0 0 0 , 0 0 0 . Mr, Luco. Now, Mr. Ecclos, one of tho arguments prosontod in favor of this transaction is that thoro aro in oxistonco certain complotod or partially comploted piocos of papor, which roprosont that thoy w i l l bo payablo i n gold. Govornor Ecclos. That i s r i g h t . Mr. Luco. And it i s said that that i s a decoption, and that tho Govornmont ought to got away from any such decoption. Nov/, tho present cortificc.to says: "This i s to cortify that thoro is on deposit in the Treasury of tho Unitod Statos of America, ( b l a n k ) , dollars in gold, payablo to isho boaror on demand as authorized by law." That is just as much of a deception and a fraud for tho avorago man as you havo urgod tho present cortificatos to b o . Thoro i s not ono man in a thousand in this country who v/ould not'toko that to bo a statomont that ho can got gold with tho cortificato, bocause only tho o l i t o , so to speak, understand what "authorized by law" moans. Would i t not bo w o l l , i f wo are going to got rid of one f r a u d , to got rid of another fraud? Govornor Ecclos. tho other is a f r a u d . Mr. Luco. That i s a question of opinion as to whothor That may bo your opinion. It cortainly i s mine. Governor Ecclos. Tho gold is hold in'tho Troasury back of that cortificato, i n accord with that statement. Mr. Smoad t o l l s mo that tho cortificato that you aro reading is tho cortificato which tho Troasury has given to tho Rosorvo Systom and I -50- L-514 i s meroly a certificate hold only by tho Rosorvo Banks, and docs not in any way got to tho p u b l i c , and it i s ontiroly out of circulation. Thoroforo, of course, the only holders of that c e r t i f i c a t e would bo the RosorVQ Banks, who understand very thoroughly tho clause which you havo just road, and for that reason would not havo cause to expect that upon demand thoy could got the actual g o l d , unless tho Secretary of tho Troasury doomed it in tho public interest to lot them havo i t for expert purposos. Mr. Luce. Then I have been misled, s i r , because I copied this out of your testimony when, unfortunately, I was unable to be horo, for I was out of town. So I took the pains to read your testimony, and I copied this out of i t , and I got ffrom.it tho impression that this was tho roal wording of tho present gold c e r t i f i c a t e . \ Governor Eccles. That i s the wording of tho gold certificate, of tho gold c e r t i f i c a t e , howovcr, not in circulation. Tho Reserve banks aro prohibited from paying out gold c e r t i f i c a t e s . . The present gold c e r t i f i c a t e , and tho only gold certificate now issued, was issued for tho gold hold by the Roserve Banks. Tho public is not p o m i t t o d to hold gold c e r t i f i c a t e s , and prirato holders woro required to turn in their old gold c e r t i f i c a t e s . Thoroforo, that testimony was correct, and tho gojtd certificates roforrod to aro hold only by tho Rosorvo Banks. I do not boliovo that in my testimony I stated that thoy woro in general circulation. Mr. Luce. No, I do not boliovo that you d i d . I am moroly pointing to tho fact that i f a deception oxistod in one, it exists in tho other. Whothor wo may assume that a misleading statement w i l l do no harm bocauso i t finds i t s way only into tho hands of financial'organizations or men acquainted with thoso things, is another problom. I should t h i n k , though, that a happier wording might havo boon used. Governor Ecclos. Mr. Hancock. Tho Chairman. I do not know who is responsible for that clause. Mr. Chairman, may I ask a quostion? " Yos. Mr. Hancock. Havo you given any spocial concern to tho procedont that this legislation might ostablish? Govornor Ecclos. Tho procedont? Mr. Hancock. In other words, i f you used a part of tho gold profit to pay the Fodoral Rosorvo debt, could wo not by tho same token use i t for any other govornmontal debt? Governor Ecclos. W o l l , thoro is a very close relationship horo to I -51- L-514 tho gold profit of this partial lar transaction, and that is by roason of tho fact that tho Fodoral Rosorvo noto which the Rosorvo Systom has boon roquostod not to circulate has tho clauso "Rcdoomablo in gold" upon i t , Mr. Hancock. I am not roferring to tho d o s i r a b i l i t y of making those notos speak the truth. Ify question is directed toward tho procodent that might bo croatod. Governor Ecclos, I understand t h a t , but thoro is a vory close relationship, it sooms to mo, ho r e , Mr, Hancock. How much of tho unusod gold profit remains in the Troasury now, that i s not particularly designated or allocatod? Govornor Ecclos, W o l l , of coursc, tho stabilization fund i s designated or allocated. The gold profit outsido of that i s , I t h i n k , ono hundred forty oao m i l l i o n s . Somo of the gold p r o f i t , as I understand i t , is not boing u s e d , but I am advised that t h e r o ' i s vory l i t t l e of it that has not boon allocatod, and that the unused part largoly represents gold that w i l l bo used to retire the national bank notos which wore called, as you w i l l romombor, some time ago, but which aro only taken up, of course, as the notes com© through for destruction, Mr, Hancock, Do you know whothor any portion of this fund has boon usod to pay the interest on tho certificates that are issued against tho now gold purchasos, tho sterilized gold? • Govornor Ecclos, I do not think so, that fund i s usod for that at a l l , Mr, Hancock, purpose? Whore doos tho Troasury got its monoy for that Governor Ecclos, Mr, Hancock, I do not believe any of Out of tho general f u n d , I s that authorized by law? Govornor Ecclos, I suppose i t i s , or thoy would not b e Mr, Hancock. You do not happen to know what particular authorizes tho issuanco of those c e r t i f i c a t e s ? doing it, soction Govornor Eccles. W o l l , those cortificates are not earmarked. The Troasury borrows such money as it noods from timo to timo, I suppose undor i t s gcnoral authority, and tho'funds that arc usod to storilizo gold imports aro, as I understand i t , just taken out of a general fund, and tho gold i s shown in tho Troasury statement, so at a l l timos i t is known how much of tho funds aro usod for that purpose. Mr, Hancock. In tho face of your prosent problem, financial problem, I assume you consider i t highly dosirablo not to lot any of I -52- L-514 this money get into circulation? In other words, you would not think that i t would bo wiso for us to authorize tho uso of any of t h i s unused profit in the payment of regular debts of tho Government, or tho salaries of Government employees, at this part i c u l a r time, would you? Govornor Ecclos. Not unless there was somo means given to tho Rosorvo System for dealing with the e f f e c t s of tho increase in rosorvos that such action would croato. A very small amount, of course, would not bo a vory important factor, but a large amount of funds, such a s tho amount of gold fehat has boon s t o r i l i z e d , added to the excess rosorvos, or tho gold in the stabilization fund added to tho excess reserves, would of course create an uncontrollablo credit s i t u a t i o n , and cortainly tho Reserve System would be unable to oxerciso tho responsibility for any credit control under those condit i o n s , unless Congress saw f i t to givo them somo additional powers to deal with that situation. Mr. Craivford. May I ask a question? The Chairman. Proceed. Mr. Crawford. Govornor Ecclos, I think that tho record w i l l show that tho inactive gold account was created around December 1st l a s t , and tho Secretary announced at that timo that that fund with which the gold was to bo purchased for the inactive account would be obtained through the issuance of government bonds or Treasury c e r t i f i c a t e s , and sold to the p u b l i c . Governor Eccles. That is right. Mr. Crawford* That was mado vory clear to tho pooplo. So that thoy would bo forewarned as to how tho money would be r a i s e d . Governor Eccles. That is correct. Mr. Spence. Governor, the quostion that sooms to disturb mo is that tho loss sustained by tho Federal Rosorvo System in this matter resulted from the enactment of a public law that was allegedly in the intorest of all the pooplo. Froquontly wo enact laws that cause lossos to various industries and to various a c t i v i t i e s . The railroads may sustain a loss by reason of l e g i s l a t i o n . Insurance companies may sustain such a l o s s , and d i s t i l l o r i e s and breweries frequently havo to change t h s i r methods of advertising, and their l a b o l s . Cortainly it would bo a clangorous precedent to say that tho private individual can recover for damages by reason of a chango in public law, and don't you think that it would bo a dangorous precedent to say that tho Federal Rosorvo could rocovor tho lossos that it sustained by reason of a law enactod in behalf of a l l of tho pooplo? Governor E c c l e s . Of course, you could say that the Federal Reserve System sustained a loss representing tho difference betweon the old prico I -53- L-514 of tho gold and the revalued prioo of the gold* Tho action i n changing tho prico of gold resulted, of course, in a profit to the Govornmont of two b i l l i o n oight'hundred and somo-odd million dollars. Individuals, many of thom, who complained about having to surrender thoir gold and thoir gold certificatos may claim that thoy sustained a loss as a result of i t . Of course thoy would havo no claim upon tho Govornmont any moro than tho Rosorvo System should as tho result of tho action of tho Govornmont in rovaluing tho d o l l a r . But this situation i s a l i t t l e d i f f o r o n t , it seems to mo* A govornmont might pass logislation that would interfere with or would roduco profit during an operation of an i n s t i t u t i o n . It might tond to put thom out of business through somo legislative action. But horo i s a ease whore tho Treasury furnishos tho notes in tho f i r s t instanco that tho Rosorvo Systom usos, and thoy roquiro that tho Rosorvo Systom pay thom for those notes as thoy arc dolivorod. Horo i s a situation whoro tho Rosorvo Systom owns those notos now on hand, and thoy should oithor know that tho loss has got to bo tnkon, and bo proparod to tako i t , for wo havo twolvo Reserve Banks, or tho so banks would like to havo somo instruction as to what disp osition to mako of this item. Until wo know whether or not it is a loss that tho banks must tako in proportion to tho notes printed for thoir b o n o f i t , it is impossible to mako a disposition of tho mattor, and, as I say, I think that i t i s only right and fair that the notes should bo roplacod by tho Treasury. However, tho itom involved, in relation to tho size of tho oporation, i s not what may bo tormod a vory important item in total amount, but i t is dosirablo, it soems to mo, that tho mattor bo disposed o f . Evon i f thoso notes wore pormittod to bo usod, thoro would not bo vory much difforonco in putting out tho now notos that had boon printed until they woro out, and in keeping out notos that wore alroady o u t . I folt at tho time that inasmuch as wo had gono on for a year using thoso'notos, and thatw) had a substantial amount of notes still outstanding, that thoro was no particular reason to not continue to uso tho inventory of notes that wo had on hand. Howovor, that is not up to mo to docido that mattor, but i f thoso notos aro not going to bo used,, thon wo should chargo thom off a n d forgot thom, provided tho Troasury is not to bo authorized to roplaco thom. Mr. Sponcok Would thoro be any difference between a case wherein wo had ordored tho distillers to change thoir labols in a certain fashion and this situation? Tho distillers had a groat amount of labcsls on hand, probably hundreds of thousands of dollars worth, that thoy had to chango to conform to tho national roquircmonts, and do you think that they could como back and say, "Wo sustained a loss by reason of this law which you should componsato us f o r ? " Your institution i s privatoly ownod* Govornor Ecclos. Not privately ownod in the sonso that thoy havo any bonofit whatever from profits boyond a fixed amount. In I -54- L-514 othor words, whothor tho Rosorvo Systom makes a largo or small p r o f i t , or no p r o f i t , is not a mattor of much concern to member banks, Mr, Sponco. This would not affoct your stockholders at a l l ? Govornor Ecclos* Not at all® Mr* Sponco* Your original stock was on tho b a s i s of 6 por cont of tho surplus and capital of tho bank, was it not? Govornor Ecclos, Fifty per cent of the f u l l amount* Mr, Sponoe. I moan that tho earnings were 6 por cont* Govornor S o c l e s . Mr. Sponco. Yes, of paid in c a p i t a l . Havo you ovor defaulted in tho paymont of interest? Govornor Ecclos* Dividends wore not paid immediately aftor tho organization of t h o Rosorvo Banks, but the dividonds aro cumulative and a l l back dividonds wore paid by the end of June, 1 9 1 S . Mr* Sponoo. That i s 6 por cont cumulative Govornor Ecclos* It is a dividend on tho intorost? stock* Mr* Sponco* And tho stockholders would novor know whether t h i s has boon paid or not? Govornor Ecclos, I think that that may bo t*U3# During and following tho war period, when thoro was a tromondous demand for c r e d i t , and when tho discounts of tho Rosorvo Systom woro irory, vory l a r g o , tho Rosorvo Syston mado vory largo profits and paid a largo franchiso tax to tho Govornmont. Vory shortly aftor tho timo whon tho Rosorvo System was organizod, wo got tho inflationary offoct of a World War, and i t roquirod a groat doal of credit for tho purposo of doing business on tho incroasod basis of prioos, and particularly was that true aftor tho war was ovor. So that while i t might havo takon a groat many years to build up a surplus in tho Resorvo System, tho sui>plus was b u i l t up vory, vory rapidly as thoresult of tho unoxpootod condition which dovolopod* Tho Chairman* Mr. Transuo* Mr* McKoough* Aro thore any moro mombors that havo questions? Mr, Chairman, I havo a question, which is vory short* I havo a question* Tho Chairman. Could you come back another day, Governor? Governor Ecclos. Yos, I could* I -55- L-514 Tho Chairman. I f we report on somo other b i l l s that we have boforo u s , wo w i l l not h^vo timo to hear you further, and what I had in mind was that wo v/ould resume this somo other time, and go into oxocutivo session to consider these other matters,. But i f v/e can f i n i s h with tho Governor shortly, I would bo glad to do i t . How many members hero want to ask questions? Mr. McKoough. % question w i l l not take me long. Mr. .Crawford. J,lay I ask tho Governor a question? The C h a i m a n . Go right ahead. Mr, Crawford. Govornor, immediately following the depression, commorcial banks began to liquidate all of the discount paper with tho Reserve Banks, and tho Reserve Bank earnings began to f a l l off did thoy not? ' Govornor Ecclos. That is correct. Mr. Crawford. And wo havo been going through that period now for yoars, whore tho earnings havo almost vanished? Govornor E c c l o s . Mr. Crawford. is concerned? Excopt from the source of government bonds. The .earnings havo vanished, so far a s discount paper Govornor Ecclos. That is right. Mr. Whito. As I understand the previous statements of the representatives of your dopartmont, tho passago of this b i l l w i l l not in any way affect tho volumo of crodit? Govornor Ecclos. Not at a l l . It. has no relation to it. Mr. . Whito. Now, then, how much money did tho Govornmont rocoivo as gold profit from tho Foderal Rosorvo Banks? Govornor Ecclos. Two b i l l i o n oight h u M r o d and some-odd millions; I do not romembor tho exact amount. Mr. W h i t e , In a way, that i s what wo might Mr. Patman (intorposing), That statement should not go in that way. That is ovidontly a mistake, Govornor.., Tho Govornment has made a gold profit of that amount, but I do not think that the Federal Rosorvo Systom is entitled to say that by reason of tho gold that it has turnod in to the Govornmont, tho Federal Rosorvo System caused tho profit of two b i l l i o n oight hundrod m i l l i o n , . I f I understand i t correctly, tho Fodoral Rosorvo had loss than threo b i l l i o n in gold and gold certifi c a t e s , only claimed that much. I -56- L-514 Govornor Ecclos. Most of tho g o l d , of courso, was held by tho Rosorvo Banks, outsido of "tho gold c e r t i f i c a t e s , I think that Congressman Patman i s r i g h t , I did not understand your question, Mr. Whito. Tho Rosorvo Banks hold $ 3 , 5 5 7 , 0 0 0 , 0 0 0 of gold and gold cortificatos on January 3 1 , 1 9 3 4 . Mr. Whito. What I had in mind was t h i s : As a result of that move, how much gold did the Govornmont rocoivo from tho Federal Resorvo that was previously to tho crodit of the Federal Rosorvo Banks? Govornor Ecclos. Of courso, tho profit on tho gold held by tho Fedoral Reserve Banks at the timo of devaluation could bo definitely d o t o m i n e d . A largo part of tho gold was hold by tho Reserve Banks, but it i s true that some of i t was in circulation or in hoarding at t lie timo, that i s some of it was gold hold outsido of tho System at tho timo of devaluation. Mr. W h i t e . You moan that there was an amount of two b i l l i o n s eight hundred m i l l i o n s — Govornor Ecclos. That was the total gold p r o f i t . Mr. Whito. That was i n the oxchoquer of the Fodoral Rosorvo * which was turned ovor to tho oxchoquer of tho Fodoral Govornmont? Governor Ecclos. No, Tho total gold steel* was four b i l l i o n s , out of which tho Fodoral Rosorvo had over threo and a half b i l l i o n s , so that you can figure that ovor 30 per cont of tho gold profit was profit on the gold hold by tho Rosorvo Systom, approximately. Mr. Whito. Can you toll mo, in f i g u r e s , how much money in tho Fodoral Rosorvo was turned ovor to tho Treasury as a rosult of that movo ? Govornor Ecclos, Something around throe and a half b i l l i o n dollars. Two b i l l i o n oight hundred million was tho profit on tho total gold taken by tho Troasury, from a l l sources. Mr. Whito. Nov/, that v/as sort of a dividond, in a way, was i t not, from tho Govornmont *s operation of tho Fodoral Rosorve Banks? Govornor Ecclos. Mr. Whito• No, I would not figure that, And its gold policy? Govornor Ecclos. Its gold policy mado possible the p r o f i t , Mr. Whito. Horo is tho thing that I om getting a t : The Govornmont received threo b i l l i o n dollars benefit thoro from tho Fodoral Rosorvo Systom. I f i t v/as a dividond, or a splitting up of moneys that accrued to tho Fodoral Rosorvo Banks, and then turnod over to tho Government, and this b i l l dees not pass, is it not exactly tho same thing? In other words, do you not g i v e tho Govornmont tho benefit of $ 2 , 0 0 0 , 0 0 0 on oxactly tho samo basis? I -57- L-514 Govornor Ecclos. The Federal Government would, of coursc, havo $ 2 , 0 0 0 , 0 0 0 nore for sono ether purpose than it would havo i f tho b i l l did not p a s s . Mr. White. That i s what I moan. Tho Federal Govornmont received thoso funds from tho Federal Reserve. I f this b i l l doos not pass, in offoct tho Government has received $ 2 , 0 0 0 , 0 0 0 noro, and i f tho Federal Government had tho right and it was proper for it to rccoivo the original funds, why i s it not proper also for it to rocoive tho benefit of this $ 2 , 0 0 0 , 0 0 0 ? That is tho point that I am making. This would simply require tho necessity of tho Federal Reserve assuming tho burden of tho exponse, and charging it off and getting rid of i t , b u t , novertholoss, on purposo lotting tho thing stand to the Fodoral Treasury. It is tho same t h i n g , is it not? Mr. Ford. Mr. Chairman, I w i l l havo to leave, and i f we aro going to go into oxocutivo session— Mr. Whito. Just ono othor question. I f this thing does go through, in view of tho fact that you say that tho Fodoral Govornmont is buying gold at the prosont timo out of its rogular funds, would i t not moan that tho Troasury would thorofore havo $ 2 , 0 0 0 , 0 0 0 loss to carry out its policy in that rospoct, and would that not bo a good thing? Governor Eccles. No, this would have nothing to do with that, because tho gold profit is not boing usod in any way for the purposo of buying g o l d . The gold that is coming into this country, that tho Government i s s t o r i l i z i n g , is boing purchased out of tho general fund, and tho general fund is being replenished out of borrowod monoy or taxes or whatever source of rovonue the Govornmont h a s . Mr. Whito. Mr. Chairman, I know that you aro anxious to got away, so I won't ask any noro questions. I w i l l just say that i f the Fodoral Troasury had tho right to tako tho monoy in tho first placo, they also havo the right and should ask tho Fodoral Rosorvo Banks to boar tho oxponso of this $ 2 , 0 0 0 , 0 0 0 . Tho Chairman. Gontlomon, it i s evident that wo aro not going to bo able to f i n i s h with Govornor Ecclos, and on some day next wcolc, satisfactory to tho committee, wo w i l l resume with Govornor Ecclos and try to f i n i s h . Wo cannot do i t today.. I w i l l havo to loavo i n a few minutes, and so w i l l Mr. Ford., Wo w i l l havo to go into oxocutivo session for a few minutes, to soo what we w i l l do about thoso othor b i l l s . Wo w i l l ask you to come back another .«lay, Governor Ecclos. (Thoroupon, at 1 1 : 5 0 o'clock a . m*, tho Committee wont into oxocutivo session,)
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