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Release on Delivery

Statement of
William McChesney Martin, Jr.
Chairman, Board of Governors of the Federal Reserve System




before
Subcommittee No. 3
of the
House Banking and Currency Committee

June 28, 1960

Mr. Chairman and Members of the Subcommittee:
You have asked that I appear before you today in connection
with your consideration of the bills H.R. 85l6 and H.R. 8627, both of
which provide for retirement of the stock of the Federal Reserve Banks.
I an glad to be here and give to you such assistance as I can in your
study of these proposals.
I should like first to discuss H.R. 8516 and then conclude
with some observations concerning the similar bill H.R. 8627.
As you know the stock of Federal Reserve Banks is nontransferable, and each unit of that stock is an incident of the membership of a commercial bank in the Federal Reserve System. The question
raised by these bills, therefore, concerns not only the Reserve Banks,
which issue and service the stock, but also the commercial banks that
own it.
The Committee has already received the testimony of the
Presidents of Reserve Banks in the central, eastern, and western parts
of the country, and perhaps proposes to obtain the views also of commercial bankers representing both member banks and nonmember banks.
I mention the testimony of Presidents Allen, Hayes, and Mangels because
I believe you already have heard from three men well qualified to form
reliable judgments regarding the value of the present arrangements
regarding Reserve Bank stock and the effects to be anticipated, both
at home and abroad, if that stock were to be retired«




-2The first nine sections of H.R. 85l6 relate to "the retirement of Federal Reserve Bank Stock," as stated in its title. It is not
necessary to take your time to review the nature, amount, and ownership
of that stock, except to mention that about $400 million is outstanding;
all of it is owned by the 6,200 banks that are members of the Federal
Reserve System, in proportion to their own capital stock and surplus;
it is nontransferable; and it pays a dividend of no more and no less
than 6 per cent a year.
Reserve Bank stock of this nature, owned by member banks, has
been a feature of the Federal Reserve System from its establishment
almost 50 years ago. Such stock has not been a source of difficulty, and
does have positive advantages. Unless its elimination or modification
either offers a remedy for actual evils or offers new benefits, there
would seem to be no justification for changing the provisions of the law
with respect to stock ownership.
Neither of these circumstances appears to be present. I would
not be understood as claiming that theoretically the operation of the
Federal Reserve System could not dispense with member bank ownership of
Federal Reserve Bank stock. I simply express the conviction that the
existence of such stock has not produced, and does not threaten, any
material evils. On the contrary, it has served to integrate the member
banks and bankers into the guiding policies of the Federal Reserve System.
This is important because the commercial banks are the principal vehicle
through which System policy is effectuated and it is desirable that the
banks be as conversant as possible with the needs and purposes of policy
objectives.




-3It has been said that a purpose of this bill is to make it
easier for small banks to become members of the Federal Reserve System.
It is difficult to see how elimination of Reserve Bank stock would have
this effect. Far from being a deterrent to Federal Reserve membership,
the opportunity to acquire and hold such stock constitutes an incentive
to membership, although not a feature of major importance. I cannot
conceive of any small bank, otherwise unwilling to become a member of
the Federal Reserve System, deciding to apply for membership simply
because the stock subscription requirement had been done away with.
Another reason is sometimes advanced for elimination of
Reserve Bank stock: The termination of dividends on that stock, it is
said, would expand the Treasury's annual receipts by some $24 million.
Calculation of the actual net increase in Treasury receipts would be
very difficult because there are factors such as income taxation on the
dividends and diminished income from Federal Reserve Bank holdings of
Government securities that need to be taken into account. The net cost,
after these factors are allowed for, would be considerably less than the
figure of Reserve Bank expense.
This is not to say that any avenue of savings should be overlooked, even though relatively small, as governmental expenditure
figures go these days. If $4 million, $2 million, or even a few thousand
dollars could be saved with no loss of benefit, I would advocate the
necessary action. But the saving has always to be weighed against the
public interest benefits. In my judgment, the payment of dividends by
the Reserve Banks to member banks is adequately defensible in these terms.




-4To me, it seems clear that the reasons advanced in favor
of this bill do not provide a substantial affirmative basis for it.
But it might be asked whether, even if there is little to be said for
the proposal, are there any cogent objections to it?
To my mind, the strongest argument against action in these
circumstances is the sound principle that existing institutions, operating
well, should not be disturbed except to do away with evils or to gain
some new benefits. Whether or not it was true one hundred-odd years
ago, it is no longer true that our country is "a land of wonders," as
de Tocqueville said, "in which...every change seems an improvement."
In this matter, the proposed change threatens to bring
detriment rather than to promise improvement. Without laboring the
point, it is sufficient to say that elimination of Federal Reserve
Bank stock could, in my judgment and that of the other members of the
Board of Governors, be construed, both at home and abroad, as indicating
a change in the structure and character of the Federal Reserve System
that presaged a weakening of the resolution of the United States to
maintain a stable dollar.

The change would also adversely affect the

extent to which the commercial banking system reinforces, and renders
valuable service to, the functioning of the Federal Reserve System.
Some may say that these are merely psychological factors; I
can only reply that psychological factors are among the most important
in dealing with the monetary and credit streams that are the life blood
of our economy.




-5Up to this point I have discussed only the first nine of
the ten sections in H.R. 85l6, which deal with the elimination of
Federal Reserve Bank stock. The brief tenth section relates to a
different subject. Prior to these hearings, the purpose and effect
of section 10 were not clear. There was genuine concern that this provision might change for the worse the nature and value of Federal
Reserve membership and undermine a stated purpose of the Federal
Reserve Act—"to establish a more effective supervision of banking
in the United States."
However, it is my understanding now that section 10 is not
intended to diminish the authority and duty of the Board of Governors
to exercise discretion, within the statutory framework, regarding the
admission of commercial banks to Federal Reserve membership, and that
you, Mr. Chairman, have indicated that you would be agreeable to
clarification of the bill in this respect. In these circumstances,
it is not necessary to discuss the significance and possible shortcomings of section 10 in its present form.
To summarize my views on the principal purpose of H.R. 85l6—
elimination of Federal Reserve Bank stock—it appears to me that the
benefits, if any, would be relatively negligible, but that the potential
injury to confidence in the American monetary system, as it is now
conceived, might be considerable.




-6The Subcommittee also has under consideration H.R. 8627,
which is similar to H.R. 85l6. Instead of simply retiring Reserve
Bank stock, however, it would provide in effect that member banks should
maintain interest-bearing deposits of equivalent amount in the Reserve
Banks.
My remarks concerning H.R. 85l6 are applicable also to this
proposal. The additional feature of H.R. 8627—substitution of
interest-bearing deposits for Reserve Bank stock—would not, in my
judgment, produce any significant advantage, but would introduce a
complicating detail without justifying benefits. Consequently, I do
not favor enactment of this proposal.