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Statement by Chairman Thomas B. McCabe on b e h a l f of the Board of Governors of the Federal Reserve System b e f o r e the Senate Banking and Currency Committee May 11, 19k9 Mr. Chairman and Members of t h e Committee; I deeply appreciate the o p p o r t u n i t y t o appear b e f o r e you today on b e h a l f of t h e Board of Governors o f t h e F ^ i e r a l Reserve System. share a g r e a t r e s p o n s i b i l i t y . We You as the r e p r e s e n t a t i v e s of the people have l a i d down t h e broad monetary and banking p o l i c i e s r o f the n a t i o n . We as your i n s t r u m e n t a l i t y are charged w i t h t h e a d m i n i s t r a t i o n o f these p o l i c i e s i n such a way as t o c o n t r i b u t e t o the maintenance of a h i g h l e v e l of employment, s t a b l e values, and a r i s i n g standard of That i s t h e goal set by t h e Employment Act of 19l*.6# living* I t i s the basic guide f o r Federal Reserve System p o l i c y * We are emerging f r o m e i g h t years of mounting pressures. inflationary During these e i g h t years t h e p u b l i c f s t o t a l h o l d i n g s of l i q u i d assets n e a r l y quadrupled* The p h y s i c a l volume of p r o d u c t i o n , as n e a r l y as i t can be measured, expanded by only about h a l f again as much as the pre-war maximum. I t was t h i s g r e a t d i s p a r i t y be- tween demand and supply which drove consumers 1 p r i c e s up t o 75 per cent above p r e - w a r . When I t e s t i f i e d b e f o r e the J o i n t Committee on the Eco- nomic Report i n mid-February I s a i d , "Some easing of inflationary pressures has been i n d i c a t e d r e c e n t l y by marked d e c l i n e s i n p r i c e s of various commodities, p r i n c i p a l l y those t h a t have r i s e n most s h a r p l y , " and I c a l l e d a t t e n t i o n t o t h e f a c t t h a t " o v e r - a l l consumers 1 incomes and h o l d i n g s of l i q u i d a s s e t s , n e v e r t h e l e s s , have continued a t h i g h l e v e l s and are f a i r l y w i d e l y d i s t r i b u t e d * f f That i s s t i l l t h e case today. Last August when i n f l a t i o n a r y pressures were s t i l l mounting, you granted us c e r t a i n supplementary powers t o h e l p cope w i t h the s i t u a tion. A f t e r Congress acted a t the s p e c i a l session, t h e Board of Governors put t o use the a u t h o r i t i e s which i t had r e c e i v e d . Regulation W was r e - issued e s t a b l i s h i n g down payments and terms on consumer i n s t a l m e n t c r e d i t more l e n i e n t than those t h a t p r e v a i l e d when t h e power lapsed the preceding November, b u t s u f f i c i e n t t o exercise a wholesome r e s t r a i n t on the r a p i d growth of t h i s v o l a t i l e c r e d i t u A t t h e same t i m e , the Board increased reserve requirements of a l l member banks by two per cent on demand deposits and by l - l / 2 per cent on time d e p o s i t s . L a t e r i n the year the economic s i t u a t i o n t u r n e d . I n the i n t e r i m , however, the Treasury and Federal Reserve System underwent one more severe t e s t of t h e i r r e s o l v e t o m a i n t a i n s t a b i l i t y i n the market f o r government securities. From September 1 t o November 1 bonds i n the amount of 3 ~ l / h b i l l i o n d o l l a r s were purchased t o c a r r y out t h i s p o l i c y of stability. I n r e t r o s p e c t , I am c e r t a i n t h a t our a c t i o n i n support of the government s e c u r i t i e s market was t h e r i g h t one. gigantic operation. I n t h e two years 19^7 That program was a 19^8, t h e System 1 s t o t a l t r a n s a c t i o n s i n government s e c u r i t i e s amounted t o almost 80 b i l l i o n dollars. Despite t h i s huge volume of a c t i v i t y , t h e n e t change i n our t o t a l p o r t f o l i o was r e l a t i v e l y small* I am convinced t h a t we c o u l d n o t have abandoned our support p o s i t i o n d u r i n g t h i s p e r i o d w i t h o u t damaging repercussions on our e n t i r e f i n a n c i a l mechanism as w e l l as s e r i o u s l y adverse e f f e c t s on the economy g e n e r a l l y . Since the peak of i n f l a t i o n i n November, t h e r e has been a s i g n i f i c a n t readjustment i n the economic s i t u a t i o n * You are f a m i l i a r w i t h t h e general f e a t u r e s o f t h i s r e a d j n s t u e n t , b u t I should l i k e t o review them b r i e f l y * (Discussion o f accompanying ohsrtbook*) With t h e passing of t h e i n f l a t i o n a r y c r e s t we acted promptly to relax credit restraints* 1* Pour major steps were t a k e £ : On March 2 , t h e Eoard announced a r e l a x a t i o n o f t h e consumer i n s t a l m e n t c r e d i t r e g u l a t i o n * 2* On March 28, t h e Board reduced margin requirements froja 75 t o 50 P©r cent* 3# On A p r i l 22, t h e Board f u r t h e r r e l a x e d Regulation W, making t h e maximum m a t u r i t y 2k i n s t e a d of 21 months across t h e board, reducing t h e down payments on a l l a r t i c l e s of f u r n i t u r e , appliances, e t c * , covered by the r e g u l a t i o n f r o m 15 t o 10 per c e n t , w h i l e r e t a i n i n g t h e o n e - t h i r d down payment on automobiles* t h a n $100 were exempted* A l l a r t i c l e s c o s t i n g less Previous exemptions had a p p l i e d t o a r t i c l e s c o s t i n g l e s s than $50* On A p r i l 28, t h e Board reduced reserve requirements f o r a l l member banks $ t h e e f f e c t b e i n g t o release approximately 1-1/1+ b i l l i o n d o l l a r s of r e q u i r e d reserves* I t has been of g r e a t h e l p t o us t o have the b e n e f i t of c l o s e cooperation w i t h t h i s Committee, and w i t h t h e Banking and Currency Committee of t h e House, B e f o r e coming t o d e c i s i o n s on a l l m a t t e r s o f p o l i c y , the Reserve Board has t h e i n e s t i m a b l e advantage of b e i n g a b l e t o comm u n i c a t e w i t h and o b t a i n f a c t u a l i n f o r m a t i o n , as w e l l as o p i n i o n s , f r o m t h e t w e l v e F e d e r a l Reserve Banks and t h e i r t w e n t y - f o u r branches t h r o u g h o u t t h e c o u n t r y , on whose boards are more t h a n 250 d i r e c t o r s , drawn n o t o n l y f r o m b a n k i n g b u t f r o m t h e w i d e l y d i v e r s i f i e d in- d u s t r i a l , commercial, a g r i c u l t u r a l and p r o f e s s i o n a l p u r s u i t s o f t h e nation. The d i r e c t o r s , t h e o f f i c e r s and s t a f f s o f t h e •Reserve Banks and t h e Board, t h e F e d e r a l A d v i s o r y C o u n c i l , and t h e member banks comprise t h e Reserve System w h i c h , as I have o f t e n s a i d , i s l i k e a v a s t p y r a m i d , whose b r e a d t h and s t r e n g t h i s i n i t s base. The Board has c o n s t a n t l y a v a i l a b l e c u r r e n t i n f o r m a t i o n , drawn from t h i s great System t o supplement t h e v a s t mass o f f a c t u a l and s t a t i s t i c a l data g a t h e r e d t h r o u g h o t h e r governmental s o u r c e s . Moreover, t h e System sponsors s p e c i a l s t u d i e s as o c c a s i o n demands. I n a d d i t i o n , we a r e always a t p a i n s t o c o n s u l t w i t h r e p r e s e n t a t i v e businessmen, t h e s m a l l as w e l l as t h e l a r g e r ones, w i t h t r a d e a s s o c i a t i o n s and, i n f a c t , a l l who are a f f e c t e d by System o p e r a t i o n s . Vie t r y t o weigh c a r e f u l l y t h e i r views and t o d i s t i n g u i s h broad n a t i o n a l c o n s i d e r a t i o n s those r e f l e c t i n g narrower i n t e r e s t s . from I m e n t i o n t h e s e m y r i a d sources o f i n f o r m a t i o n t o emphasize t h a t we do n o t f u n c t i o n i n a vacuum. with - * 5 We do n o t w i s h t o exaggerate t h e r o l e which monetary and c r e d i t p o l i c y has p l a y e d i n t h e p e r i o d f r o m which we a r e now emerging. It f a i r t o say, however, t h a t i n t h e l a s t y e a r of upsurge e s p e c i a l l y , e x e r t e d some r e s t r a i n i n g i n f l u e n c e . is it We t h i n k we may f a i r l y say t h a t we used t h e powers w h i c h Congress e n t r u s t e d t o us f l e x i b l y , and t h a t we have made an e a r n e s t e f f o r t t o take i n t o account e v e r y r e l e v a n t f a c t and c i r c u m s t a n c e , i n c l u d i n g t h e h a r d s h i p s o r inconveniences imposed on those s u b j e c t t o r e g u l a t i o n s and requirements #f We can a l l t a k e s a t i s f a c t i o n f r o m t h e f a c t t h a t t h e many banks o f t h e c o u n t r y are on a more secure f o u n d a t i o n now than ever b e f o r e i n our h i s t o r y . The bankers themselves, as a r e s u l t o f their v o l u n t a r y e f f o r t s t o r e s t r i c t loans i n t h e face of s t r o n g i n f l a t i o n a r y p r e s s u r e s , deserve a g r e a t d e a l of t h e c r e d i t f o r t h i s c o n d i t i o n . At t h e same t i m e , we must recognise t h a t our e x i s t i n g banking s t r e n g t h i s i n p a r t t h e p r o d u c t of nafcicr:&l economic and f i n a n c i a l developments s i n c e the m i d - t h i r t i o s . Today our commercial banks s w i t h about 50 per cent o f t h e i r t o t a l loans ana investments i n government s e c u r i t i e s l a r g e l y a c q u i r e d as a r e s u l t o f war f i n a n c e , e n j o y an e x c e p t i o n a l unprecedented l i q u i d i t y . T h e i r c a p i t a l accounts, w h i l e n o t y e t a t a d e s i r e d l e v e l i n r e l a t i o n t o d e p o s i t growth since pre-war y e a r s , are over fvO pei* cent g r e a t e r t h a n b e f o r e t h e w a r , r e p r e s e n t i n g i n l a r g e p a r - a steady p l o w i n g back o f e a r n i n g s . Sot only do our many u n i t banks possess unusual s t r e n g t h , b u t t h e F e d e r a l Reserve System, as a r e s u l t o f t h e Banking A c t o f 1955» i s in - 6 * f a r b e t t e r p o s i t i o n t h a n ever b e f o r e t o a s s i s t member banks, and t h r o u g h them a l l banks. I t s g r e a t e r experience enhances i t s a b i l i t y t o meet t h e c r e d i t needs of a time when surpluses r a t h e r t h a n s c a r c i t i e s p r e v a i l and p r i v a t e e n t e r p r i s e r e q u i r e s encouragements r a t h e r t h a n r e s t r a i n t s . I n h i s Economic Report t o t h e Congress l a s t January t h e P r e s i d e n t p o i n t e d out t h a t t h e monetary a u t h o r i t i e s should a t a l l times btf i n a p o s i t i o n t o c a r r y out t h e i r t r a d i t i o n a l f u n c t i o n of exerting e f f e c t i v e r e s t r a i n t upon excessive c r e d i t expansion i n an i n f l a t i o n a r y p e r i o d and c o n v e r s e l y o f e a s i n g c r e d i t c o n d i t i o n s i n a t i m e o f t i o n a r y pressures. defla- He asked t h a t Congress p r o v i d e c o n t i n u i n g a u t h o r i t y t o t h e Board t o r e q u i r e banks t o h o l d supplemental reserves up t o t h e l i m i t we had requested i n August, 10 p e r c e n t a g a i n s t demand d e p o s i t s and Ij. p e r cent a g a i n s t t i m e d e p o s i t s . He s t a t e d t h a t t h i s authority should n o t be c o n f i n e d t o member banks, b u t should be a p p l i c a b l e t o i n s u r e d banks. all The P r e s i d e n t asked t h a t t h e a u t h o r i t y f o r t h e r e g u l a t i o n of consumer i n s t a l m e n t c r e d i t be c o n t i n u e d i n o r d e r t o e x e r t a s t a b i l i z i n g i n f l u e n c e on t h e economy. The P r e s i d e n t made t h e s e requests a f t e r a most c a r e f u l and e x h a u s t i v e survey o f t h e s i t u a t i o n w i t h t h e Board and t h e requests had t h e unanimous a p p r o v a l o f t h e Board. That r e p o r t was p r e p a r e d and s u b m i t t e d n e a r l y f o u r months ago, f o u r months i n which i n f l a t i o n a r y pressures have a b r u p t l y abated and t h e economic s i t u a t i o n g e n e r a l l y has changed i n many r e s p e c t s . I n view o f t h e s e developments I come h e r e t o d a y w i t h somewhat changed recommendations• We now f e e l t h a t we w i l l have adequate powers f o r t h e p e r i o d i m m e d i a t e l y ahead i f t h e Congress w i l l extend t h e two t e m p o r a r i l y g r a n t e d a u t h o r i t i e s voted by t h e s p e c i a l session l a s t August and make t h e a u t h o r i t y t o i n crease reserve requirements a p p l i c a b l e t o a l l i n s u r e d commercial banks. Elbow room i s e s s e n t i a l t o an i n s t i t u t i o n such as t h e Federal Reserve System performing c e n t r a l banking f u n c t i o n s . Congress has made t h e System r e s p o n s i b l e f o r t h e maintenance o f sound c r e d i t c o n d i t i o n s i n t h i s country i n t h e i n t e r e s t o f h i g h - l e v e l economic s t a b i l i t y . To c a r r y out t h a t r e s p o n s i b i l i t y we must always be i n a p o s i t i o n t o operate f l e x i b l y , c o u n t e r a c t i n g t r e n d s as t h e y set i n , e i t h e r toward i n f l a t i o n m l or d e f l a t i o n . We must take i n t o account how much l a t i t u d e e x i s t s t o move i n e i t h e r d i r e c t i o n from t h e p o s i t i o n t h a t seems c o r r e c t f o r the near f u ture. Viewed i n t h i s p e r s p e c t i v e , t h e present powers o f t h e Federal Re- serve System are ample f o r our needs d u r i n g a downward t r e n d . i n the o t h e r d i r e c t i o n , however, are l i m i t e d . Our powers So l o n g as we have t h e huge Federal debt t o support we cannot count on use e i t h e r o f t h e discount r a t e o r operations i n the open market t o e x e r t t h e same degree of i n f l u e n c e t h a t t h e y d i d before t h e war. To an extent h i t h e r t o not contemplated, we are f o r c e d t o place g r e a t e r r e l i a n c e on reserve requirements as a defense against i n f l a t i o n a r y t r e n d s . Vie are at t h e moment, however, v e r y close t o the l i m i t s o f t n a t power. Vve come before you, t h e r e f o r e , t o ask you t o m a i n t a i n what we regard as the miminum o p e r a t i n g leeway t h a t i s needed i n view of our responsibilities. Y>e do not plan t o use those powers now. In fact, reserve requirements may be f u r t h e r reduced i f present t r e n d s continue. But we do want t h e powers i n case an emergency s i t u a t i o n should a r i s e . The basic concept u n d e r l y i n g t h e Federal Reserve System i s t h a t i t should have a t a l l times r e s i d u a l power t o deal f l e x i b l y w i t h changing s i t u a t i o n s , - not that i t * 58 shbuld come t o Congress whenever an emergency e x i s t s . i n g backward a t t h e s i t u a t i o n , I Look- f e e l i t would have been b e t t e r f o r t h e economy i f we had been i n a p o s i t i o n e a r l i e r t o r e s t r a i n consumer i n s t a l ment c r e d i t expansion and t o i n c r e a s e r e s e r v e r e q u i r e m e n t s . You u n d e r s t a n d , I am sure, t h a t t h e a b i l i t y of t h e F e d e r a l Reserve System t o i n f l u e n c e c r e d i t developments i s always s u b j e c t t o limitations, even when our r e s i d u a l a u t h o r i t i e s g i v e us much g r e a t e r elbow room t h a n we have a t p r e s e n t . I n l a r g e p a r t these l i m i t a t i o n s a r i s e out o f t h e complex o r g a n i z a t i o n o f f i n a n c e i n a h i g h l y developed c o u n t r y such as o u r s . I n p a r t t h e y r e f l e c t t h e many d i f f e r e n t types o f a c t i v i t i e s t h a t are c a r r i e d on w i t h i n t h e Government financial itself. As members of t h i s Committee r e a l i s e , t h e e x i s t e n c e o f our huge p u b l i c debt and t h e need t o assure o r d e r l y c o n d i t i o n s i n t h e government bond market have g r e a t l y c o m p l i c a t e d t h e problems faced by t h e System i n a d a p t i n g p o l i c i e s t o a d j u s t t h e supply o f money and c r e d i t t o the needs o f a s t a b l e , high-employment economy. At t h e present t i m e our commercial banks h o l d about 60 b i l l i o n d o l l a r s o f marketable government debt ties. Non-bank p u b l i c i n v e s t o r s h o l d an a d d i t i o n a l 70 b i l l i o n . securiWhenever any s e c u r i t y which i s a p a r t o f t h i s 130 b i l l i o n i s bought by t h e F e d e r a l Reserve t h e r e i s ari i n c r e a s e i n bank r e s e r v e s , and t h e r e s e r v e so c r e a t e d then becomes t h e p o t e n t i a l b a s i s o f a m u l t i p l e c r e d i t expansion. Of course, t h e F e d e r a l Reserve i s n o t always i n v o l v e d . may be a balance o f buyers and s e l l e r s i n t h e market and o r d e r l y may e x i s t w i t h o u t Federal Reserve p a r t i c i p a t i o n . There conditions But i f t h e r e are more s e l l e r s t h a n buyers a t any t i m e , t h e F e d e r a l Reserve must e n t e r t h e market• I t t h e r e b y makes reserves a v a i l a b l e t o t h e b a n k i n g system r e - g a r d l e s s o f -whether such r e s e r v e s a r e needed f o r t h e s t a b i l i t y o f t h e economy. I f t h e money s u p p l y ( d e p o s i t s p l u s c u r r e n c y ) i s a l r e a d y ample i n r e l a t i o n t o t h e goods and s e r v i c e s f o r w h i c h i t can be exchanged, t h e f u r t h e r i n c r e a s e t h r o u g h b a n k . c r e d i t expansion on t h e b a s i s o f t h e new bank r e s e r v e s serves m a i n l y t o e x e r t i n f l a t i o n a r y p r e s s u r e s . The i n i t i a t i v e i n a l l such o p e r a t i o n s r e s t s w i t h t h e market and n o t w i t h « t h e F e d e r a l Reserve. Thus t h e System cannot always c o n t r o l t h e a b i l i t y o f bank r e s e r v e s . It avail- s h o u l d a c c o r d i n g l y be equipped t o v a r y t h e r e q u i r e d amount o f r e s e r v e s so as t o n e u t r a l i z e t h e i n d i r e c t e f f e c t s i t s government s e c u r i t y of transactions. I oome now t o our most c o n t r o v e r s i a l r e q u e s t . The n a t u r e o f t h e p r o b l e m compels us t o p l e a d t h a t t h e a u t h o r i t y i n r e s p e c t t o supple- m e n t a l r e s e r v e s be made a p p l i c a b l e t o a l l i n s u r e d commercial banks, r a t h e r t h a n o n l y t o members o f t h e F e d e r a l Reserve System. Failure i n c l u d e a l l such banks w i l l s e r i o u s l y i m p a i r t h e e f f e c t i v e n e s s n a t i o n a l monetary p o l i c y i n a c r i t i c a l p e r i o d . to of I t w i l l work t o t h e d e t r i m e n t of our whole b a n k i n g s t r u c t u r e a t a t i m e when t h e situation c a l l s f o r c o n s i s t e n c y and u n i f o r m i t y i n n a t i o n a l monetary p o l i c y . c a t e g o r y o f commercial b a n k i n g s h o u l d be exempt t o t h a t No call. We are n o t s u g g e s t i n g t h a t t h e nonmember i n s u r e d commercial banks c a r r y t h e same r e s e r v e s as t h e member b a n k s . t h e y w o u l d be u n a f f e c t e d b y t h i s l e g i s l a t i o n . I n normal p e r i o d s We a r e p r o p o s i n g o n l y t h a t t o t h e e x t e n t s u p p l e m e n t a l o r i n c r e a s e d r e s e r v e s may be r e q u i r e d - 10 - under the p r o v i s i o n s of t h i s act the percentage amounts would be t h e same f o r b o t h member and nonmember i n s u r e d commercial banks* Under our p r o p o s a l t h i s would mean a t t h e v e r y maximum an increase over e x i s t i n g S t a t e requirements of no more t h a n k per cent on demand dep o s i t s and 1 - 1 / 2 per cent on t i m e d e p o s i t s * W i t h a huge p u b l i c debt i t would be w h o l l y u n r e a l i s t i c t o have no means of steadying or s u p p o r t i n g t h e market* i n t h e F e d e r a l Open Market Committee* We have t h a t means W i t h o u t i t no one c o u l d be sure of a ready market or o f the r a t e s t h a t might p r e v a i l * The v i t a l p o i n t t o bear i n mind i s t h a t t h i s f u n c t i o n and o p e r a t i o n i s a p r o t e c t i o n f o r a l l banks o f t h e country ~ member banks* not merely A H commercial banks have i n t h e i r p o r t f o l i o s l a r g e amounts of government s e c u r i t i e s * relatively Every bank, member or non- member, can have confidence i n i t s a b i l i t y t o f i n d a market i f neces- sary f o r those s e c u r i t i e s w i t h o u t exposure t o t h e r i s k s t h a t would p r e v a i l i f t h e r e were no r e s i d u a l purchaser* I t should be emphasized as s t r o n g l y as p o s s i b l e t h a t nonmember banks have b e n e f i t e d and p r o f i t e d f r o m a l l of these operations and a c t i o n s , y e t they have not had t o bear t h e i r p r o p o r t i o n a t e share of the burden* That i s why we say i t i s o n l y f a i r and e q u i t a b l e t o ask a l l i n s u r e d banks t o shoulder t h e i r p r o p o r t i o n a t e share o f a l o a d which i s imposed f o r t h e b e n e f i t of t h e e n t i r e banking community and f o r t h e country* - 11 * As I have sometimes p u t i t , t o be a member i n t h e F e d e r a l Reserve System i s l i k e b e i n g a c o n t r i b u t i n g member t o a l o c a l v o l u n t e e r f i r e company. So l o n g as enough neighbors c o n t r i b u t e $ t h e p r o t e c t i o n w i l l be adequate* I n case o f a c o n f l a g r a t i o n , however, n o n c o n t r i b u - t o r s also receive help* T h i s i s i n e q u i t a b l e , b u t i t i s humane and necessary t o p r e v e n t s p r e a d i n g o f t h e danger t o t h e whole community® N e v e r t h e l e s s i n t h e e x i s t e n c e and m a j o r i t y support o f t t e there i s great s e c u r i t y f o r institution all® We are n o t a s k i n g t h a t nonmember i n s u r e d commercial banks be r e q u i r e d t o become members or t o become s u b j e c t t o a l l of t h e o t h e r r e quirements and o b l i g a t i o n s w h i c h member banks have t o meet* Member-* s h i p o f S t a t e banks i n t h e F e d e r a l Reserve System i s v o l u n t a r y and our membership w i l l be endangered i f t h e c o m p e t i t i v e relationship i s t o o glaring® We are aware, as you a r e , t h a t t h e r e i s s t r o n g o p p o s i t i o n t o t h e p r o p o s a l t o i n c l u d e nonmember i n s u r e d banks under the supplemental reserve authority® I t w i l l be s a i d t h a t i t i s s i m p l y t h e a t t e m p t o f another Government agency t o grasp f o r more power; t h a t i t trespasses upon S t a t e s 1 r i g h t s j and t h a t i t i s a s t e p toward u l t i m a t e destruction o f t h e d u a l banking system® I can o n l y assure you t h a t t h e Board does n o t seek power f o r t h e sake o f power; i n f a c t , we would p r e f e r , as a m a t t e r of - 12 * p e r s o n a l choice and convenience, t o have l e s s f o r m i d a b l e r e s p o n s i b i l i ties. A t b e s t , t h e a d m i n i s t r a t i o n of r e g u l a t o r y powers i s a headache* C e r t a i n l y we would be remiss i f we f a i l e d t o e x p l a i n t o the b e s t of our a b i l i t y t h e s i t u a t i o n as we see i t and t h e way i n which we f e e l t h e r e s p o n s i b i l i t i e s e n t a i l e d can best be met # I do n o t f e e l t h e r e i s a r e l e v a n t o b j e c t i o n on t h e score of S t a t e s 1 r i g h t s * Insured banks are a l l under t h e aegis^of F e d e r a l l e g i s l a t i o n and f o r many years member and nonmember banks a l i k e have been s u b j e c t t o F e d e r a l law p r o v i d i n g f o r stock market margin r e q u i r e ments* The d u a l banking system, which I have l o n g upheld and w i l l continue t o support v i g o r o u s l y , i s not j e o p a r d i z e d by t h i s proposal* I t i s s p e c i f i c a l l y drawn t o leave w i t h t h e State bank s u p e r v i s o r y o f f i c i a l s f u l l d i s c r e t i o n and a u t h o r i t y t o apply and enforce* I t seems t o me t h e t e s t must be n a t i o n a l needs and not groundless f e a r s t h a t State c h a r t e r i n g and s u p e r v i s i o n are t h r e a t e n e d * not* C l e a r l y t h e y are Moreover, we contend t h a t what we propose w i l l f o r t i f y and s t r e n g t h e n t h e d u a l banking system by arming a l l banking i n t h i s c o u n t r y against a danger t h a t would undermine p r i v a t e banking* A few S t a t e s have cooperated t o t h e f u l l e s t e x t e n t p o s s i b l e under t h e i r laws t o p a r a l l e l or approach t h e reserve requirements of t h e System* I t would be d e s i r a b l e , of course, i f t h e r e were g r e a t e r - 13 * u n i f o r m i t y and e f f e c t i v e n e s s under S t a t e r e s e r v e r e q u i r e m e n t s , combined w i t h a d i s p o s i t i o n by a l l State a u t h o r i t i e s t o pursue p o l i c i e s of p a r a l l e l action* We cannot s a f e l y hope, however, f o r separate and p a r a l l e l a c t i o n by most of t h e S t a t e s * I n a d d i t i o n t o a u t h o r i t y w i t h r e s p e c t t o bank r e s e r v e s , we request you t o continue a u t h o r i t y t o r e g u l a t e consumer i n s t a l m e n t credit* • As you know, t h i s type of c r e d i t i s associated p a r t i c u l a r l y w i t h t h e sale of what are known as consumer durable goods, i n c l u d i n g automobiles, r e f r i g e r a t o r s , r a d i o and t e l e v i s i o n s e t s , washing machines, f u r n i t u r e and s i m i l a r a r t i c l e s which have become so much a p a r t of our Americari standard of l i v i n g t h a t v e r y l a r g e s e c t i o n s of our economy depend on t h e i r p r o d u c t i o n and s a l e * Because t h e p r o s p e c t i v e buyer of these a r t i c l e s can e x e r c i s e so much l a t i t u d e i n b o t h t h e s e l e c t i o n and t i m e of h i s purchase, sales are s u b j e c t t o wide f l u c t u a t i o n * The c r e d i t r e l a t e d d i r e c t l y or i n d i r e c t l y t o t h e i r ownership i s consequently extremely volatile* The development of consumer i n s t a l m e n t f i n a n c i n g has come l a r g e l y d u r i n g t h e p e r i o d since World War I * By t h e m i d - t w e n t i e s , consumer i n - stalment c r e d i t outstandings p r o b a b l y d i d not exceed a b i l l i o n and a - quarter d o l l a r s . 64 * Today the f i g u r e i s n e a r l y 8.5 b i l l i o n . Since the m i d - t w e n t i e s f l u c t u a t i o n s i n c r e d i t volume have been w i d e , consumer spending power i n expansion periods and reducing i t contractions. swelling during Because i n s t a l m e n t c r e d i t has become so i m p o r t a n t a f a c t o r i n t h e main d i s t r i b u t i o n of durable goods, i t s wide swings have c o n t r i b u t e d t o i n s t a b i l i t y i n the p r o d u c t i o n and marketing of these goods, Yife are f u l l y cognizant o f t h e usefulness of these c r e d i t s t o t h e durable goods i n d u s t r i e s , t o consumers, and t o t h e ^ e n t i r e economy, and we e a r n e s t l y d e s i r e t o see t h i s usefulness continued and extended. We are n a t u r a l l y apprehensive, however, l e s t t h i s c r e d i t grow t o o f a s t under t h e pressure o f unsound c r e d i t p r a c t i c e s and terms and thus a t some p o i n t c o n t r i b u t e t o serious i n s t a b i l i t y of markets and purchasing power. We b e l i e v e t h a t a f u r t h e r p e r i o d of t r i a l under more normal c o n d i t i o n s f o r t h e r e g u l a t i o n o f t h i s c r e d i t can w e l l serve the p u b l i c interest. A p p r o p r i a t e r e g u l a t i o n of i n s t a l m e n t c r e d i t can be e s p e c i a l l y h e l p f u l d u r i n g times when more purchasing power serves only t o b i d up prices. I n periods when p r o d u c t i o n and demand approach a balance, such r e g u l a t i o n can be r e l a x e d c o n s i d e r a b l y . This the Board has done t w i c e r e c e n t l y i n respect t o i t s present a u t h o r i t y , and the Board w i l l have no h e s i t a n c y i n suspending any p a r t or a l l of t h e r e g u l a t i o n should cond i t i o n s make such a c t i o n d e s i r a b l e . The i m p o r t a n t t h i n g i s t h a t the power be a t hand t o e x e r c i s e r e s t r a i n t when necessary t o m a i n t a i n sound credit conditions. Regulation W i s of course n o t i n i t s e l f t h e answer t o the problem o f i n s t a b i l i t y which our h i g h standard of l i v i n g presents. The - 15 problem i s f a r more fundamental* * But we are convinced t h a t proper r e g u l a t i o n of t h i s v o l a t i l e type o f c r e d i t , i n c o n j u n c t i o n w i t h o t h e r credit restraints, constitutes a substantial contribution to s t a b i l i t y * I n summary, t h e n , we are suggesting extension of the a u t h o r i t i e s which you delegated t o us l a s t summer but w i t h t h e a p p l i c a t i o n o f t h e reserve requirement a u t h o r i t y e q u a l l y t o t h e nonmember i n s u r e d banks as w e l l as t o t h e member banks* We are suggesting t h e extension of these a u t h o r i t i e s i n t h e hope t h a t t h e Congress w i l l i n t h e Meantime survey t h e e n t i r e framework and f u n c t i o n i n g of our f i n a n c i a l system and o f the r o l e of banking and Government t h e r e i n * I t i s e v i d e n t f r o m the r e s o l u t i o n s which members o f t h i s Committee have sponsored t o c r e a t e a N a t i o n a l Monetary Commission t h a t you are w e l l aware of t h e need f o r a thorough and p a i n s t a k i n g study of t h i s whole complicated and d i f f i c u l t subject* We hope t h a t you w i l l press ahead t o a u t h o r i z e such a review and r e a p p r a i s a l i n a l l i t s r a m i f i c a t i o n s o f the f u n c t i o n o f the e n t i r e banking system and i t s r o l e i n c o n t r i b u t i n g t o n a t i o n a l economic s t a b i l i t y through t h e f i n a n c i n g o f i n d i v i d u a l s , business e n t e r p r i s e , and Government* We i n t h e Federal Reserve System are n a t u r a l l y concerned over t h e areas of c o n t r o v e r s y t h a t surround t h e System 1 s f u n c t i o n i n g and r e s p o n s i b i l i t i e s as a c e n t r a l b a n k i n g , monetary, r e g u l a t o r y , and supervisory authority* We t r u s t t h a t Congress w i l l review i t s d e l e g a t i o n o f a u t h o r i t y and r e s p o n s i b i l i t y t o t h e System t o be sure t h a t t h e y are commensurate w i t h each o t h e r and w i t h the o b j e c t i v e s e s t a b l i s h e d by Congress. Such a r e v i e w would i n c l u d e c o n s i d e r a t i o n : ( l ) of t h e System 1 s open-market powers and t h e i r r e l a t i o n t o Federal f i n a n c i n g and - 16 * t h e a d m i n i s t r a t i o n o f t h e p u b l i c d e b t ; (2) of t h e use of s e l e c t i v e c r e d i t c o n t r o l s such as those over s e c u r i t y loans and consumer i n s t a l ment loans and o f t h e proper sphere f o r t h e a p p l i c a t i o n of such types of c o n t r o l ; (3) o f t h e d i s t r i b u t i o n of r e g u l a t o r y and s u p e r v i s o r y power among the various Government agencies; (l\) of t h e need f o r some mechanism of p o l i c y c o o r d i n a t i o n on the domestic f i n a n c i a l f r o n t as we have a v a i l able through the N*A*C* on t h e i n t e r n a t i o n a l f i n a n c i a l f r o n t ; (5) of the o b j e c t i v e s of c e n t r a l banking and s u p e r v i s o r y p o l i c i e s f and (6) of the r e l a t i o n of t h e Federal Reserve System as a c e n t r a l banking o r g a n i z a t i o n t o t h e banks o f the n a t i o n , b o t h member and nonmember* I n any such review t h e r o l e and f u n c t i o n of reserves w i l l e v i t a b l y r e c e i v e prominent c o n s i d e r a t i o n . in- As you know, t h e System has been conducting e x t e n s i v e s t u d i e s of t h i s s u b j e c t and b e l i e v e s t h a t a more s c i e n t i f i c f o r m u l a f o r e s t a b l i s h i n g reserves can be determined by the Congress. I f e e l c o n f i d e n t t h a t s o l u t i o n s t o these problems can be found w i t h o u t impairment o f our long e s t a b l i s h e d i n s t i t u t i o n s , or encroachment upon e i t h e r State or n a t i o n a l p r e r o g a t i v e s * Indeed, i t is i m p e r a t i v e t o f i n d s o l u t i o n s t h a t a v o i d , on t h e one hand, extremes of c e n t r a l i z a t i o n which would t h r e a t e n the d u a l banking system, o r , on the o t h e r hand, j e o p a r d i z e .the e f f e c t i v e n e s s of n a t i o n a l p o l i c y by d i s u n i t y , d i s c r i m i n a t i o n , and d i v i d e d counsels, I hope t h e Committee w i l l i n c l u d e i n i t s review of our f i n a n c i a l system an i n q u i r y i n t o t h e adequacy of our supply of e q u i t y capital* I do n o t need t o remind members of t h i s Committee of t h e funda- mental, v i t a l importance of t h i s s u b j e c t . This n a t i o n grew great and - 17 * s t r o n g on the e n t e r p r i s e of i t s c i t i z e n s . I t used t o be p o s s i b l e f o r a man w i t h a good idea t o get c a p i t a l t o g e t h e r , s t a r t a business, and market t h a t idea. I t i s s t i l l p o s s i b l e , b u t i t i s becoming much more d i f f i c u l t t o do so, and I t e l l you, as a businessman, t h a t when our a l e r t and up and coming young men of ideas are unable t o get the venture c a p i t a l t o s t a r t and grow, then t h e American way of l i f e i s on i t s way out. I n c o n c l u s i o n , I would l i k e t o g i v e t h e Committee my ideas T on t h e present business s i t u a t i o n . N a t u r a l l y I am o p t i m i s t i c about the f u t u r e of American b u s i n e s s , and although many of my business f r i e n d s are p e s s i m i s t i c about the present s i t u a t i o n , I f e e l s t r o n g l y t h a t we are i n a h e a l t h y readjustment p e r i o d . There must o f n e c e s s i t y have been a t r a n s i t i o n f r o m i n f l a t i o n a r y p r i c e s t o more normal ones and a t r a n s i t i o n f r o m the concept of mass p r o d u c t i o n t o one of merchandised p r o d u c t i o n . I f e e l s t r o n g l y t h a t we have l e t our merchandising s k i l l s get r u s t y i n t h e past e i g h t y e a r s . was on p r o d u c t i o n . The pressure F i r s t we were engaged i n a l l - o u t p r o d u c t i o n of the m a t e r i a l s and machines of war. Then came these past t h r e e lush years when pent-up demand beat on the doors of our f a c t o r i e s f o r almost every type of consumer a r t i c l e . skills. There was no need t o exercise merchandising The more u r g e n t d e f e r r e d demands o f consumers have now been s a t i s f i e d and most goods a r e i n p l e n t i f u l s u p p l y . TOien sales are a l i t t l e d i s a p p o i n t i n g , as compared t o the abnormal y e a r s , t h e r e seems t o be an i n c l i n a t i o n t o look f o r excuses r a t h e r than get down t o fundamentals of product p r i c e and q u a l i t y , and consumer s e r v i c e s . It - 18 * i s p r i m a r i l y by t h a t constant improvement i n q u a l i t y , accompanied by lower p r i c e s , t h a t our c o m p e t i t i v e system has f u n c t i o n e d so phenomenally i n improving the American standard o f l i v i n g . I , f o r one, am g l a d t o see t h e r e t u r n o f t h e c o m p e t i t i v e c o n d i t i o n s which are so v i t a l a f a c t o r i n our e n t e r p r i s e system.
@FedFRASER