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For Release on Delivery

Statement of Wm. McC. Martin, Jr.
Chairman, Board of Governors of the Federal Reserve System
on S. 3206 and S. 3268
before the
Subcommittee on Federal Reserve Matters
of the Senate Banking and Currency Committee
May 13, 1954.

I am glad to have this opportunity to testify on behalf of the
Board of Governors of the Federal Reserve System relative to the
proposed legislation which you have before you.

The Board of Governors

endorses both of these proposed bills.
S. 3206 would extend for another two years the authority (continuously provided since 1942) of the Federal Reserve to purchase up
to 5 billion dollars of United States securities directly from the Treasury.
Without this authority the Treasury and the Federal Reserve on occasions
would be unable to prevent the disturbing effects on the money market of
the sudden drains that occur at tax payment periods. The use of this
authority prior to tax payment dates avoids creating unnecessary financial strains that would otherwise occur if the Treasury had to draw
heavily on its accounts.

Temporary Treasury borrowing through this

means followed by prompt repayment from the proceeds of tax payments
provides a smooth operating mechanism, without the abrupt money
market fluctuations that would otherwise occur, and thus is helpful in
the conduct of Federal Reserve policy.

Use of this procedure as

required by law is reported each year in detail in the Board's Annual

We believe that this authority, under existing safeguards,

should remain available.


S. 3268 would repeal the provisions of Section 16 of the Federal
Reserve Act which prohibit a Federal Reserve Bank from paying out
notes of another Federal Reserve Bank.

Under present law it is

necessary for each Federal Reserve Bank to sort all of the millions of
Federal Reserve notes fit for further circulation which are received by
it from member banks, according to the Reserve Bank by which each
note was originally issued.

In addition, it is necessary for the Reserve

Bank to return such notes to the Reserve Banks that originally issued
Such sorting and crisscross shipping of currency are expensive.
It is estimated that the annual cost of these operations, which would not
be necessary except for the statutory restriction, is in excess of
$750,000 annually.

The pending legislation would remove a provision

of law which was thought to be important in the early days of the System
but which in practice has not proved to be so.
Experience over the years definitely establishes that the
requirement for the return of fit Federal Reserve notes to the Federal
Reserve Banks of issue has no effect on the amount of Federal Reserve
notes in circulation.

The notes that are returned to the Federal Reserve

Banks of issue, in accordance with the requirements of the law, are
again placed in circulation as demand for currency appears.


ing currency which is not needed by the economy is returned to the


Reserve Banks for credit to the reserve accounts of the member banks.
In other words, the amount of currency in circulation rises and falls
in accordance with changes in the demand for currency on the part of
the public, and is in no way affected by the return of fit notes to the
Bank of issue.

Accordingly no useful purpose is served by retaining

the restriction upon a Federal Reserve Bank's paying out of currency
issued by other Federal Reserve Banks. This matter has been thoroughly
studied by the Presidents of the Federal Reserve Banks and has their