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JUNE 6, 1977


This is the basic draft of the speech but
Governor Gardner departed modestly from the written

Good m o r n i n g . It is a pleasure to be here and
be an early speaker on your program. There is always something going on in banking that is controversial, especially
where regulators are concerned. I have arranged an early
flight back to Washington today as a precaution. But it
would be a disservice to you if I did not express my observations and convictions with some candor for a number of
reasons. First, my private business experience for 28
odd years was in commercial banking and,second, my more recent
Governmental service has involved many regulatory policy
matters affecting all types of financial institutions. I
want to see a vigorous, sound banking industry, responsive
to social and economic change as a part of a larger, more
diverse, strong financial institutional structure commensurate
with the needs of the world's largest free economy. These
are fine broad goals that anyone could agree to. What
disturbs m e is the complex of impediments that delay change
and progress in banking and finance when the rest of the
world, and specifically our own economy, are changing at
an accelerating p a c e .
One can easily speculate on the reasons for the
difficulties. First, banks are more heavily regulated than
other financial institutions because they have a central role
in credit expansion and, thus, are vital to economic progress.
Banks hold such a large share of the savings and liquid
balances of individuals and businesses that society has
decided that the economic cost of bank failures is unacceptable.
Banks are chartered more carefully with more restrictions
than are imposed on other business. Banks can have Federal
charters unlike almost any other form of business corporation
except S&L's and credit unions, and they are regulated and
supervised at both the Federal and State levels. Their
services are restricted by statute and regulation. The examination of banks is the most comprehensive such oversight
Visited on any form of corDoration on a regular basis. The
Government, and incidentally the*public, have more information
on the affairs of banks than that available on any other type
of industry.
• This pervasive public oversight sets banking apart.
If the industry was not mature before the banking holiday of
the early thirties, after the codification and development
of our regulatory structure that occurred then, it surely
has been since. Maturity has its good points, but rigidity
or resistance to change is not one of them, in my opinion,
and banking as an industry has too often resisted change.
Understandably, change is more difficult to achieve in banking
because of the infrastructure of law and regulation. Key
measures must many times await the enactment of new laws.

-2But that, of course, is not the whole reason
for rigidity. Banking associations play a very natural
role in constraining innovation. Bankers very naturally
join and support a complex of industry associations which
are formed to represent their interests, as does most
industry. I am not complaining about associations, but
1 want to talk about them briefly. First, there are an
awful lot of them, and they are effective. Second, they
have an impossible j o b . They, the officers of the association and the legislative committees, have to achieve
consensus positions representing a broad heterogeneous
membership. Logically, then, they will have to find this
in a middle ground, a consertive position. A n d , too often,
as y o u know, a no-change philosophy can prevail. Once set,
however, associations' policies are very ably presented.
They have heavy impact, and I think you know the historic
results as w e l l as I do.
Thus, there are understandable reasons why it
is difficult to achieve change in banking that requires
any adjustment in regulation or law. But it is impossible
to forever maintain a strict status quo in America.
Maverick innovators find bypass ways of straining conventions. State legislatures sometimes are easier to convince than the Congress. The courts, from time to time,
have rejected the status quo when new developments were
protested and litigated. Statutory commissions study
change and most of the time, but not always, the real
world disregards their advice. All branches of the
Federal Government advocate revisions; administrations,
legislatures, regulatory agencies, and some ideas see the
light. I think it's all very cumbersome, and society
Would inevitably have suffered if there were not parallel
Movements going o n .
There are, of course, outside the banking industry
The fact that the value of liquid assets has increased so
steadily in our capital-short world and country in the
period since World War II has assured this result, as well
as the fact that individuals and households have become
the largest owners of liquid balances in our affluent
society. The demand for financial services among an ever
widening majority of our society has increased absolutely,
and the variety and numbers of nonbank suppliers of these
services have increased as w e l l . I'll confine my evidence^
to just financial institution competitors of b a n k s . Credit
unions, you know, are growing most rapidly. Conditions
are favorable for this growth to continue at a high rate,

-3and a significant number of them are paying a dividend
on share draft balances. The National Credit Union
Administrator has proposed by regulation that permission
be granted to all Federal credit unions to offer such
share draft accounts. Equally significant is the fact
that the ceiling on such dividend rates is not related
to Q ceilings and not administered in the same fashion,
i suppose he'll be sued by bank associations, but I
nave no ability to judge the outcome of such a suit.
£ne thrift institutions have been very active, as you
know. I do not need to recite what your competitors
in th is area have done in detail; telephonic transfers,
the CBCT controversy and preauthorized third-party
transfers for any purpose. Money market mutual funds
are also in the business. But all of this burgeoning
evidence of change only underlines the futility of
attempting to checkmate each new innovation.
When the Financial Institutions Act and the
Reform Act were debated last year, the charge
a s
often made that someone was trying to make commercial
oanks out of thrifts. If I had been more alert then, I
yould have realized that the someone w a s the consumer.
J-nese developments are basically responsive to the marketPlace and the m a r k e t p l a c e — t h e American consumer--is persistently seeking ways to not only simplify financial,
activities but also to earn a share of interest on outstanding liquid balances. The consumer has been intrigued,
cajoled and sold by every other industry that offers new
services, and the advantages of technological change that
Provide easier and more economic ways of doing things.
We should not be surprised that the same thrust is occurring in financial services.


Because of all the rigidities attending attempts
to change banking laws and regulations, w e seem to have
Slipped into a seasonal debate pattern. Last year at this
time and the year before at this time, we were dealing
with financial institutional structural change in the old
*IA and FRA that I referred to earlier. 1977 is no exception. There has been a lot of informal talk about a new
iegislative proposal, and there is going to be a lot more
talk when it is introduced. I happen to think that it's a
Pretty good idea to get on with the business of conforming
rederal banking statutes with the changes that are occurring

-4both in State laws and b y other innovations. It is clearlyunwise to artificially weaken the competitive position of
one type of institution against another. Further, we
should not permit the balkanization of the financial system to grow in the 50 States if w e intend for commerce to
flow freely through the nation. So I am now going to
talk for a few minutes about the basic rationale behind a
Proposal yet to be introduced in the Congress that I believe you should consider carefully.
I also think in
view of my earlier remarks that your own opinion of these
proposals should be expressed, both in and outside of
your industry association, particularly when you are not
fully satisfied with any one group's position.
To b e g i n , I would argue that w e ought to rationalize w h a t has already happened. Every banker is uneasy
about the real cost of demand deposits, and the implicit
costs have been h i g h . Large customers have exercised
this high bargaining power for many years and with the
ability to negotiate for extensive services and ready
access to the money market for overnight returns on
excess cash, there seems to be no question that businesses
have b e e n , and are obtaining, a near-maximum return on
liquid balances. In the aggregate the consumer has also
had bargaining power. You have aggressively pursued the
aggregate consumer with new buildings, drive-ins, a wide
variety of services, too often priced below cost, and,
ultimately, free checking or nearly free checking. The
Board staff
estimates that banks, as a group, subsidize
consumers checking accounts by an amount equivalent to
an interest rate of 4 to 4-1/2 per cent.
•v Meanwhile, in New England, the consumer has
enjoyed explicit interest on accounts similar to checking
accounts since 19 7 2 — n o t only at banks but also at savings
banks and savings and loan institutions. Other States
have permitted State-chartered thrift institutions to
offer noninterest bearing transaction accounts. An experimental group of federally chartered credit unions has
been authorized to issue transaction instruments on share
accounts. These developments are so widespread that the
Board's staff study of Interest on Demand Deposits released
earlier this year concludes, in one part, that some form
of interest bearing checking accounts will come shortly.

-5One of the first goals, then, of rationalizing
the process by which consumers may receive interest on
transactions accounts is that it be done fairly to not
disadvantage any type of financial institution,^and I
think the present trends are eroding the competitive
Position of commercial banks.
A second fundamental reason for a firm national
Plan is rooted in the economics of change. Price competition in our society should be more efficient than non-price
competition. Why should we encourage the continually
increasing use of checks, a costly means of payment, when
an incentive to limit such forms of transfers would benefit the consumer, the financial institutions and the ^
third party payees? Why should we not use the experience
gained in New England to phase in the transition costs of
change to minimize disruptions .within a financial industry
great economic importance to the public? Should we
not recognize that there are monetary policy implications
for the economy as the effectiveness of traditional m e a sures of the money stock are blurred by changes in the
character of demand and savings deposits?
The last justification for an orderly change of
law governing the payment of interest on transaction
c c o u n t s , the consumer benefits, is be an
arguable premise by many observers. I can't accept that.
The whole development that w e are discussing would not
have persisted and expanded in our markets without con'•'• sumer acceptance. The Board staff study found that consumers have gotten an effective rate o f return on their
accounts in New England. The return is expected to
decline but still be meaningful as banks and. thrifts
adjust too liberal early pricing techniques. I am also
unimpressed by the contention that the small checking
account depositor w i l l gain little, if anything, from
interest on a small active transaction account. That
assumes he has no other liquid assets and that the
incentive of interest will have no effect. I've been
in banking too long to believe either such assertion.

The legislative proposal that I expect to be
introduced in the Congress within days, or just a week^
or. two, will be a comprehensive, national plan to provide
an orderly transition to interest payments on transaction
balances. It will provide for a special class of accounts


for individuals similar to NOW accounts, at banks,_
thrift institutions and credit unions. It will guide
the developments carefully, providing for a year's
lead time. It will recognize competitive balance by^
providing for similar reserves and similar rate ceilings
for all depository institutions. It will address transition costs and explicit interest costs by providing that
interest be paid on the reserves required to be held
against such accounts. It will also provide for the
Payment' of interest on all transaction account reserves
held at the Federal Reserve. It w i l l phase in the
deserve requirement for non-members of the Federal Reserve
System that now offer NOW accounts. I expect it will also
restrict the ceiling rate on accounts to something less
than the passbook savings rate with temporary grandfathering in New England.
The evolutionary developments of new transaction
instruments within and outside of the commercial banking
system and the increasing attrition of Federal Reserve
membership have similar implications for stability of the
Monetary system, for competitive balance in the depository
financial industry, and for the execution of monetary
policy. These concerns are inseparable at the Board and
addressing all of them, as I expect the legislation to
do, is essential to the Board's support of any bill.
There surely will be other provisions in the
Proposed bill dealing carefully and fairly with the way
reserves may be held and provision giving the Federal
Reserve authority to make revisions in its clearing
system. But I have talked about the principal purpose
and thrust of the proposed legislation today, and those
features which address competitive balance, monetary
and financial conditions, and benefits and cost of membership in the Federal Reserve System. Those are the
key elements that should be considered and debated in
the legislature. In my own view we cannot wait too much
longer to rationalize the present diverse trends and address
the problems they present.
Next w e e k , the Western Chapter of the Bank Marketing Association is holding its annual conference in
San Francisco. The subject is THE DEPOSIT REVOLUTION.
1 hope many of you will attend. Reading the agenda, one
^ould have the impression that there was no other subject
for banking than that of how to meet this challenge. Let


me quote from the program: "Clearly, the die for change
has been cast. Change that will open up entirely new
competitive battlegrounds for the deposit d o l l a r ! N e w
££ markets ... new competition. That's what
tEIs conference
is all about. That's the deposit revolu1
It has been a privilege to open your session here
before you go on to hear from outstanding speakers on
broader topics. I can only hope that I have presented a
fair set of arguments which will encourage you to not let
an opportunity to manage change slip away again because I
am certain of the validity of that one line from the
San Francisco agenda. The line is, "Clearly, the die for
change has been cast."

Thank y o u .