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Major changes proposed in the Federal Reserve System since 1940

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Major changes proposed in the Federal Reserve System since 1940

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Content MAJOR CHANGES PROPOSED IN THE EEDERAL RESERVE
SYSTEM SINCE 1940
A T hesis
P re s e n te d to
the f a c u l t y o f the D epartm ent o f Economics
U n iv e r s ity o f South©ra C a lif o r n i a
I n P a r t i a l f u l f i l l m e n t
o f th e R equirem ents f o r the Degree
M a s te r o f A rts
John Douglas Cawley
Ja n u a ry 1952
UMI Number: EP44713
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This thesis, written by
JOHN DOUGLAS CAW LEY
under the guidance of hX&.,.Facuity Committee,
and approved by all its members, has been
presented to and accepted by the Council on
Graduate Study and Research in partial fulfill
ment of the requirements for the degree of
Faculty Committee
Chairman
TABLE O S’ CONTENTS
CHAPTER PAGE
i . i i T R o m r c T i o i ................................................................................. i
The problem . . 1
S tatem en t o f the problem • • • • • • • • • • 1
Im portance o f the s t u d y ............................ . . . . . 2
Terms and te rm in o lo g y « . . . ....................... 2
O b je c tiv i ty . . . . . . . ............................. . . . 2
O rg a n iz a tio n o f the t h e s i s ....................... • 3
I I . THE INTEREST RATE AND THE FEDERAL RESERVE
SYSTEM .............................................................. 6
E v o lu tio n o f an o r d e r ly m a rk e t, 1937 to 1941 • 7
An o r d e r ly m ark et ................................. 7
A norm al o p e r a tin g y e a r: 1938 • . . . . . . • 10
The f l e x i b l e p o r t f o l i o p o lic y •• ...••• 11
P r e p a r a tio n f o r n a t i o n a l d e fe n se ......................... 14
The war y e a rs and th e pegged m a r k e t ........................ 15
The e a r l y w ar y e a rs .................... . . . . . . . . 15
The l a t e w ar y e a r s .......................................................... 21
P o stw ar p o lic y • • • • • • • .................... . . . . 27
R e c a p itu la tio n and i n t r o d u c t i o n ............................. 27
The m ajo r com ponents o f Reserve System
p o lic y , 1945-1950 . . . .................... .. . . . 27
P r o p o s a l s ............................ 40
I l l
CHAPTER PASS
I n t r o d u c t i o n ............................* . ...................................... 40
The l o s s o f m onetary c o n tr o l . . . . . . . . 41
M a in ta in in g th e low r a t e - - p r o and eon • • • 46
R ecent developm ents in p o lic y . . . . . . . 53
Summary and c o n c lu s io n s . . . . . . . . . . . 56
I I I , TEE BOARD OF GOVERNORS AND THE OPEN MARKET
COMMITTEE............................ 60
O rg a n iz a tio n , f u n c tio n , and o p e r a tio n • . • • 60
The board o f g o v e rn o rs • . • • • . 60
The f e d e r a l open m a rk e t com m ittee .................... 63
The n a t io n a l d e b t and c r e d i t c o n tr o l
in s tru m e n ts 66
A m eeting o f th e com mittee . . . . . . . . . 67
M onetary p o lic y -m ak in g . . . . . . . . . . . 68
P ro p o s a ls • . . . . . . . . . . 70
T ra n s fe r the com m ittee powers to th e board • 70
T ra n s fe r the board powers to the com m ittee • 71
Summary and c o n c lu s io n s • . • • . . . • • • • 75
I ? . RESERVE REQUIREMENT PROPOSALS .................... 77
I n tr o d u c tio n ..... . . . . . . . 77
The s t r u c t u r e o f bank r e s e r v e s • • • • • • • • 76
Compulsory r e s e rv e re q u ire m e n ts ............................. 87
Arguments pro and con .................................. 88
IV
CHAPTER PAGE
The u n ifo rm r e s e rv e p ro p o s a l . . . . . . . . . 99
I n tr o d u c tio n . . . . . . . . .................................. 99
The u n ifo rm re s e rv e p la n .......................* . • • 100
A n a ly sis o f th e p l a n ’ s p r o v is io n s ......................... 102
Comments a h o u t th e p ro p o s a l . • • • » . . » • 108
Summary and c o n c lu s io n s . 108
Y• RESERVE REQUIEEMEHT PROPOSALS (CONTINUED) . . . » 112
la n k c r e d i t and i n f l a t i o n • 112
Bank c r e d i t — the cause o f i n f l a t i o n * • * . ♦ 113
Bank c r e d i t — the r e s u l t o f i n f l a t i o n • . • . 115
The s p e c i a l o r seco n d ary r e s e rv e re q u ire m e n t • 117
Development o f the p ro p o s a l . . * 117
The n e c e s s i t y and a d v a n ta g e s ,o f th e p r o p o s a l. 120
C r itic is m s o f the p r o p o s a l .......................... • • • 124
The u n ifo rm c e r t i f i c a t e p la n ................................. 133
The p ro p o s a l • • • • • . . . . . . . . . . . 134
A dvantages o f the p ro p o s a l . .. •• ••• • 135
The need f o r the p ro p o s a l ........................ 136
C r itic is m s o f the p ro p o s a l . ... •• «•• 138
Summary and c o n c lu s io n s . . . . . . . . . . . . 140
YX. THREE PROPOSALS: BARK HOLDING COMPANIES. THE
GUARANTEE QE LOANS TO SMALL BUSINESS, AND THE
NATIONAL MONETARY AND CREDIT COUNCIL .. ... 142
V
CHAPTER BAGS
The bank h o ld in g company . .................................• • 143
I n t r o d u c t i o n ................................................................................143
The p ro p o s a l .......................................................... 144
The need f o r f u r t h e r c o n tr o l • ....................... 146
The adequacy o f the p r e s e n t law 150
d iv o rcem en t o f nonbanking b u s in e s s e s —pro
and con ............................ 155
The g u a ra n te e o f lo a n s to sm a ll b u s in e s s . . . 157
le n d in g o p e r a tio n s o f th e R eserve System • • 158
V - l o a n e ....................... 161
The p ro p o s a l * • • • • * . . . . . . . . . . 163
Arguments f o r and a g a in s t th e p ro p o s a l • . • 168
The n a t io n a l m o n etary and c r e d i t c o u n c il • • . 175
Purpose o f th e c o u n c il 176
The s t r u c t u r e o f th e c o u n c il ....................... • 182
r
F e a tu r e s o f the c o u n c il—d is c u s s io n . . • • 184
Summary and c o n c lu s io n s 187
¥11* BASK SUPERVISION AND TEE EEDERAE RESERVE
SYSTSM.............................................. . . » .......................... 192
The components and a g e n c ie s o f hank
s u p e rv is io n ....................... 193
The components o f hank s u p e r v is io n • • . * . 193
The F e d e ra l a g e n c ie s in bank s u p e rv is io n • • 195
v t
CHAPTER PAGE
C o o rd in a tio n o f s u p e rv is o ry a g e n e ie s . . . . 198
The p o o lin g o f i n f o r m a t i o n ....................... 200
The u n ifo rm a s s e t a p p r a i s a l p o l i c y • . • . 200
f i e l d a c t i v i t i e s . . . . . . . . 202
A reas o f d is p u te . . ........................................... .... 202
f e d e r a l s u p e r v is io n and th e law 203
The purpose o f s u p e r v i s i o n ........................ . • 210
P ro p o s a ls —-the c o n c e n tr a tio n o f s u p e rv is o ry
a u t h o r i t y 214
The f e d e r a l R eserve System a s s u p e r v is o r • 215
Summary and c o n c lu s io n s * ........................ . . . . 219
V I I I . CONCLUSIONS...................................................................... . . 222
The tre n d o f c e n t r a l i z a t i o n . . . . . . . . . 223
The m acro-econom ic approach . . . . . . . . . 228
Debt management 230
A s in g le h an h in g system .................................. 231
BIBLIOGRAPHY ................................................................................................ 234’
APPENDIX A ......................................................................................... 241
APPENDIX B ....................... 264
LIST OF TABLES
TABLE BASE
I , The P a t t e r n o f B a te s , 1942 to 1947 .................... . 18
X I. lum ber and D e p o sits o f a l l Commercial Banks In
the U n ited S ta te s by C la ss o f Bank, June 30,
1949 ......................................................................................... @ 0
I I I . B a tio o f Gash A s s e ts to T o ta l D e p o sits o f a l l
In s u re d Commercial Banks by C la ss o f Bank,
June 30, 1949 82
IV. Be se rv e R equirem ents o f S ta te Commercial Banks
and T ru s t Companies, by Kind o f D e p o s it,
December 31, 1940 . . . . . . . . . . . . . . 63
V. Commercial Banks In th e U n ited S t a t e s : P e r c e n t
age o f Monmember Banks, by S t a t e s , June 30,
1949 ............................................... 86
V I. F e d e r a l A c t i v i t i e s In the F ie ld s o f Money,
C r e d it, and F i s c a l O p e ra tio n s , and th e Con
t r o l l i n g Government A gencies .................... 179
V I I . Some o f the P r i n c i p a l P ro v is io n s o f F e d e ra l
S t a t u t e s R e g u la tin g the P r i n c i p a l C la s s e s o f
Banks 207
LIST OF FIGURES
FIGURE PAGE
X# Ownership o f U.S* Government S e c u r i t i e s . . . . , 26
2 . Y ie ld s on U*S. Government S e c u r i t i e s ...................... S2
3* F e d e r a l Bank S u p e rv iso ry R e la tio n s h ip s . . . . . . 199
CHAPTER I
INTRODUCTION
The changes proposed in th e F e d e r a l R eserve System ,
p re s e n te d h e r e , were v i t a l is s u e s a t one tim e in t h i s n a
t i o n s m onetary l i f e * Some o f them s t i l l e x c ite I n t e r e s t .
W hether o f c u r r e n t o r o f p a s t I n t e r e s t does n o t le s s e n
t h e i r im portance f o r t h e i r own p a r t i c u l a r p e rio d o f tim e o r
f o r th e s tu d e n t who i s a tte m p tin g to u n d e rsta n d t h a t tim e .
The p e rio d o f y e a rs covered hy t h i s t h e s i s i s ro u g h ly
e le v e n , 1940 through 1950. In some c a s e s i t h as been n e c e s
s a ry to go in to the 1930*s, w h ile , in o th e r i n s t a n c e s , more
r e c e n t is s u e s were im p o rta n t to th e c o m p le tio n o f d is c u s
s io n s o f th e p r o p o s a ls . These e x te n s io n s have been k e p t to
a minimum.
I . THE PROBLEM
S tate m e n t o f the Problem
One co u ld c e r t a i n l y n o t, in a l l h o n e s ty , su g g e st
t h a t th e h i s t o r y o f t h i s n a tio n in th e p e rio d sin c e 1940 h as
been n o rm al. So i t was a ls o w ith the m onetary c o n d itio n s o f
the c o u n try . The s i t u a t i o n s w hich have c o n fro n te d th e F ed
e r a l R eserve System have been m et, o r f a i l e d to be m e t, in
d i f f e r e n t w ays. T h is t h e s i s i s concerned w ith v a r io u s
3
"a n sw e rs” w h ich 'h a v e 'been proposed to h e lp the R eserve Sys
tem m eet I t s o b l i g a t i o n o f m onetary r e s p o n s i b i l i t y .
Im portance o f th e Stud.v
A s tu d y such a s t h i s may o r may n o t have im p o rta n ce.
I f one i s to p r e d ic a te im portance upon th e enactm ent o f the
p ro p o s a ls in to law , l i t t l e w orth i s to be a tta c h e d to the
w ork. I f i t i s to be p r e d ic a te d upon a p r e s e n t a t i o n o f some
o f th e F e d e r a l R eserve System*s i s s u e s , p ro b lem s, and some
answ ers g iv e n to th e se same is s u e s and p ro b lem s, some w orth
may be found h e r e . I t i s p o s s ib le t h a t th e is s u e s a re n o t
J u s t p a s t r e c o r d ; p erh ap s th e y s h a l l l i v e a g a in . I f s o , one
t
can f in d how o th e r p e rso n s a tte m p te d to so lv e them in the
p a st# R erhaps a few le s s o n s can be fo u n d .
Terms and Term inology
Terms and te rm in o lo g y o f a te c h n ic a l n a tu re a re ex
p la in e d a s th e y a p p e a r in the t h e s i s . G e n e ra lly , te c h n ic a l
e x p re s s io n s have been u n n e c e s s a ry . A p a s s in g knowledge o f
econom ics should en a b le m ost r e a d e r s , i f such th e re w i l l b e ,
to g a in w hat h as been w r i t t e n .
O b je c tiv i ty
The r e a d e r should know t h a t e v e ry e f f o r t has been
made to keep the body o f each c h a p te r a s o b je c tiv e a s p o s
s i b l e . The w r i te r * s o p in io n ap p e a rs in th e c o n c lu s io n a t
3
th e end o f each ch a p te r* A ppendices A and B have a "bias
w hich i s h ereb y acknowledged* Such b i a s , where i t a p p e a rs ,
i s based on the o p in io n formed from the m a t e r i a l t h a t the
r e s e a r c h u n earth ed * I t i s hoped t h a t t h i s i s n o t a d e t r a c
t i o n . The a r e a o f s tu d y i s n o t one in w hich i t i s e a sy to
rem ain a s c o l o r l e s s a s t h a t p o la r c o n c e p tio n , th e o b je c tiv e
man*
X I. GHGANIZATIOH OF THE THESIS
The fo llo w in g i s a d is c u s s io n , c h a p te r by c h a p te r , o f
the rem a in d er o f the th e s is * C h ap ter I I i s a d ev elo p m en tal
tr e a tm e n t o f th e i n t e r e s t r a t e p o lic y o f th e F e d e ra l Heserve
System sin c e 1937* I t i s p a r t i c u l a r l y concerned w ith the
su p p o rt o f th e Government s e c u r i t i e s m arket by th e System .
T his c h a p te r i s a b a s i s f o r u n d e rs ta n d in g many o f the is s u e s
in v o lv e d in th e o t h e r c h a p te r s .
C h ap ter I I I r e v o lv e s around the q u e s tio n : Should the
powers and f u n c tio n s o f e i t h e r th e Board o f G overnors o r the
Open M arket Committee be merged in to th e o th e r? A b r i e f e x
p la n a ti o n and d e s c r i p t i o n o f each body i s g iv e n to b rin g th e
p o in ts in v o lv e d in to s h a rp e r focus*
C h a p ters XT and V a r e in r e a l i t y one c h a p te r co n c ern
in g p ro p o s a ls re g a rd in g r e s e rv e re q u ire m e n ts . The two chap
t e r s re v o lv e around f o u r p ro p o s a ls w hich, in t u r n , can be
4
d iv id e d in to two a r e a s . One h as to do w ith th e la e k o f
e q u ity in th e p r e s e n t c l a s s i f i c a t i o n and s t r u c t u r e o f r e
se rv e r e q u ire m e n ts . Two p ro p o s a ls to c o r r e c t t h i s c o n d itio n
a re p re s e n te d in C h a p ter IV. I n C h ap ter V two p ro p o s a ls a re
found which were p u t f o r t h to m itig a te th e i n f l a t i o n a r y
p r e s s u r e s o f the p o stw a r p e r io d . B oth o f th e s e p ro p o s a ls
assume t h a t th e p o lic y o f m ark et su p p o rt f o r f e d e r a l s e c u r i
t i e s w i l l he c o n tin u e d .
C h a p ter VI in c lu d e s th re e p r o p o s a ls . They a re n o t
r e l a t e d to one a n o th e r . They were en c lo se d in one c h a p te r
because s e p a r a te tre a tm e n t o f each would r e q u ir e a d e v e lo p
m en tal tre a tm e n t w hich would n o t in c re a s e th e r e a d e r ’s know
led g e to any g r e a t e x t e n t . The f i r s t p ro p o s a l o oncerns hank
h o ld in g com panies. The second recom m endation h in g e s on the
g u a ra n te e o f lo a n s to sm a ll b u s in e s s by the Reserve System.
The t h ir d p ro p o s a l d is c u s s e s a proposed c o o r d in a tin g c o u n c il
to u n if y th e Governm ent’ s c r e d i t and m onetary p o l i c i e s .
C h a p te r V II c o n ta in s a p ro p o s a l r e l a t i n g to bank s u
p e r v i s i o n . The p r o p o s a l i s o f two p a r t s ; (1) a d is c u s s io n
a s to w h eth e r the p r e s e n t arran g em en t o f bank s u p e r v is io n
should be co n tin u ed o r changed; and (2) depending upon the
outcom e, the l o c a t i o n o f s u p e rv is o ry r e s p o n s i b i l i t y .
C h ap ter v m t the c o n c lu s io n s o f th e w r i t e r , i s f o l
lowed by two A p p en d ices. Appendix A i s a s h o r t d is c u s s io n
5
o f m o n etary p o l i c y , f i s c a l p o l i c y , some o f th e c o n f l i c t s b e
tween th e tw o, and o th e r r e l a t e d m a te r ia l in t h i s g e n e ra l
area* Appendix B i s a c t u a l l y a c o n tin u a tio n o f the f i r s t
p ro p o s a l d is c u s s e d in C h a p ter V, i . e . , bank h o ld in g compan
i e s , The m a t e r i a l p re s e n te d was n o t p e r t i n e n t to th e t e x t
o f th e t h e s i s , y e t was o f s u f f i c i e n t i n t e r e s t to w a rra n t i t s
ap p earan ce i n an ap p e n d ix .
3!he p ro p o s a ls do n o t fo llo w any c h r o n o lo g ic a l a r
rangem ent and the r e a d e r should know t h a t each c h a p te r i s
co m p lete, to a la rg e e x t e n t , a s i t s ta n d s . E xcept f o r the
b a s ic C h a p te r I I no c h a p te r depends upon a n o th e r c h a p te r f o r
I t s own u n d e rs ta n d in g .
CHAPTER I I
THE INTEREST RATE AH I) THE FEDERAL. RESERVE SYST2M
The m ost Im p o rta n t lin k a g e betw een th e F e d e ra l Re
se rv e System and the T re a su ry D epartm ent I s In the manage
ment o f the F e d e ra l debt* The I n t e r e s t r a t e on t h a t d e b t
I s o f g r e a t moment to each o f th e se a g e n c ie s , an d , no l e s s ,
to th e n a tio n a s a w hole#1 W ith a t l e a s t two p a r t i e s con
n e c te d w ith I t , a s to p o lic y , I t should o c c a s io n no s u r
p r i s e t h a t th e re a re v a ry in g a t t i t u d e s and p r o p o s a ls con
c e rn in g th e r a t e o f I n t e r e s t . These d i f f e r e n t v ie w s, r e
f l e c t i n g d if f e r e n c e s o f O pinion a s to I t s purpose and e f f e c t
upon th e n a t i o n , p o in t up the d i f f e r e n t s p h e re s o f a c t i o n o f
the I n te r e s t e d p a r t i e s . The r e s o lv in g o f th e s e d i f f e r e n c e s
h a s n o t been e f f e c t e d h arm o n io u sly .
The m ajo r q u e s tio n s , th e n , w ith w hich we a re con
cern ed In t h i s c h a p te r , a r e a s fo llo w s? What h as been th e
p o lic y o f th e System w ith r e s p e c t to th e I n t e r e s t r a t e ?
How h a s t h i s p o lic y e v o lv ed ? What have been the c r i t i c i s m s
1 I t sh o u ld b e .b o rn e In mind in the fo llo w in g pages
t h a t though the T re a su ry h as the p rim a ry r e s p o n s i b i l i t y f o r
the d e te rm in a tio n o f the I n t e r e s t r a t e , th e R eserve System,
v ia th e Open M arket Com m ittee, h as the ta s k o f m a in ta in in g
th a t r a t e . A lso , I t should be remembered t h a t th e I n t e r e s t
r a t e I s I n r e a l i t y a s e r i e s o f r a t e s w hich d i f f e r a c c o rd in g
to the n a tu re o f th e s e c u r i t y .
o f t h a t p o lic y ? Why h as the R eserve System been, s u r p r i s e
in g ly enough, a c r i t i c o f I t s own a c tio n s ? What a re the
p r o p o s a ls f o r change o r m o d if ic a tio n In the i n t e r e s t r a t e
p o lic y ? 2
I , WQnJTIQH Of M ORDERLY MARKET COHOEPT* 1937 TO 1941
An O rd e rly Ma rke t
Open m ark et o p e r a tio n o f the System , l* e * , th e buy
ing and s e l l i n g o f Government s e c u r i t i e s , p r i o r to 1937
were p r im a r il y d ir e c te d a t th e In flu e n c in g o f the r e s e r v e s
o f the member hanks* A la r g e p a r t the r e s u l t o f g o ld Im
p o r t s , th re e b i l l i o n d o l l a r s In e x c e ss r e s e r v e s were owned
by th e member h an fcs-* a ll o f I t p o t e n t i a l l y I n f la tio n a r y *
A side from open m ark et o p e r a t io n s , th e se e x c e ss r e s e r v e s had
been a tta c k e d by r a i s i n g the re s e rv e re q u ire m e n ts by f i f t y
p e r c e n t In A ugust, 1936* I n th e se two ways the a b i l i t y o f
the member banks to buy and s e l l s e c u r i t i e s was r e d u e e d .2
On Ja n u a ry 30, 1937 the Board o f G overnors announced
2 The v e ry p e r t i n e n t m a tte r o f th e in flu e n c e o f the
f e d e r a l d e b t on m o n etary p o lic y i s d is c u s s e d in Appendix A
where m o n e ta r y - f is c a l r e l a t i o n s h i p s a re more f u l l y analyzed*
3
Annual R ep o rt o f th e Board o f G overnors o f the
f e d e r a l R eserve System , 1937 (W ashington: Board o f Gover
n o rs o f th e f e d e r a l R eserve System , 1938), p* 3* H e re in a f
t e r t h i s r e f e re n c e w i l l be n o te d a s Annual R eport w ith th e
y e a r o f i t s coverage fo llo w in g *
e
an a d d i t i o n a l r e s e r v e req u ire m e n t in c r e a s e . In o r d e r to
a llo w th e hanks tim e to make a d ju stm e n t f o r i t , h a l f o f the
in c re a s e was c a l l e d f o r on March 1 and th e r e s t on May l . 4
To m eet th e se re q u ire m e n ts the hanks began to s e l l s e c u r i -
g
t i e s , e s p e c i a l l y lo n g -te rm G overnm ents. The av e ra g e lo n g
term y ie ld on Government s e c u r i t i e s ro se from 2 - 1 /4 p e r c e n t
i n F e b ru a ry to 2 - 2 /4 p e r c e n t in A p r i l . T his upward y ie ld
tre n d was fo llo w ed by h ig h -g ra d e c o rp o ra te bonds.® The Re
se rv e System , th ro u g h th e Open M arket Com m ittee, ste p p e d i n
to the m arket to c o u n te r a c t the d e c lin e in p r i c e . From t h i s
p o i n t one can mark a tu r n in g in Am erican m o n etary p o lic y ; a
tu r n in g w hich h as y e t (1951) to become f u l l y r e s o lv e d .
Between March 10 and March 31, and betw een A p ril 4
and A p r il 28, 1927, the Committee e n te re d the m ark et to o f f
s e t the d e c lin e in Government s e c u r i t i e s . Inasmuch a s the
f a l l in p r ic e had n o t exten d ed to T re a su ry b i l l s and n o te s ,
th e Committee was a b le to p u rsu e i t s f ix e d p o r t f o l i o p o lic y ,
i . e . , buying lo n g -te rm is s u e s and s e l l i n g i t s h o ld in g s o f
s h o r t- te r m o b l i g a t i o n s , i t s t o t a l p o s i t i o n rem ain in g u n -
4
Annual R e p o rt. 1927. op. c i t . , p . 5.
5
The term , G overnm ents, i n d i c a t e s a l l ty p e s o f f e d
e r a l s e c u r i t i e s . U n le ss o th e rw ise s t a t e d , i t w i l l be to
such ty p e s o f is s u e s t h a t r e fe re n c e w i l l be made.
g
A n n u a l,R e p o r t. 1 9 2 7 . o p . o i t . . p . 8 .
9
7
ch an g ed .
The Open M arket Committee J u s t i f i e d i t s a c tio n s In a
memorandum o f A p r il 4 , s t a t i n g t h a t i t was p re p a re d to make
such p u rc h a s e s and s a l e s o f Governments in o rd e r
. . • (1) to ( e x e r t) i t s in f lu e n c e tow ards o r d e r ly con
d i t i o n s in the money m arket and (2) to ( f a c i l i t a t e ) the
o r d e r ly a d ju s tm e n t o f member hanks to the in c re a s e d r e
se rv e re q u ire m e n ts e f f e c t i v e May 1 , 1937* . •
E xcess r e s e r v e s , a r i s i n g from G overnm ental d e f i c i t s ,
reduced p r iv a te c r e d i t demand, and heavy gold in flo w s , i n
duced th e n a t i o n s com m ercial hanks to expand t h e i r h o ld
in g s o f F e d e r a l s e c u r i t i e s to m a in ta in t h e i r incom e, T his
e x p a n sio n , p r im a r il y o f bonds, acco rd ed to " tr e a s u r y f i n a n
c in g n ee d s and o p e r a t io n s , a s w e ll a s m ark et t r a n s a c t i o n s in
Government s e c u r i t i e s . . . im p o rta n t money m ark et f a c -
9
t o r s . . . ♦” The. F e d e r a l R eserve was a f r a i d t h a t d i s o r d e r
l y l i q u i d a t i o n o f bonds by banks co u ld " . . • cause r e p e r -
c u s s io n s n o t o n ly in the governm ent bond m ark et b u t a ls o in
c a p i t a l m a rk e ts in g e n e r a l , and p o s s ib ly in th e b u s in e s s
s i t u a t i o n . " 1^
7 L. V. C h a n d ler, " F e d e ra l R eserve P o lic y and F e d e r
a l D e b t," Am erican Economic Review, 3 9 :4 0 6 , M arch, 1949.
8 Annual R e p o rt, 1937. l o e . o l t .
^ Thomas B* McCabe, R eply o f th e Chairman o f the
Board o f Gove m o r s , (W ashington : Board o f G overnors o f the
f e d e r a l Reserve System , 1 9 4 9 ), p . IS .
10 I b i d *, p . 19.
10
The m ark et d e c lin e was stopped and even r e v e r s e d ,
b o th f o r Government and h ig h -g ra d e c o rp o ra te bon d s.
By such o p e r a tio n s the System in flu e n c e d d i r e c t l y —
n o t m e re ly th ro u g h i t s e f f e c t s on bank r e s e r v e s — th e
y i e l d s on b o th lo n g -te rm and s h o r t- te r m Government s e
c u r i t i e s and i n d i r e c t l y the y i e l d s o f o th e r s * 11
The o r d e r ly m a rk e t c o n c e p t, a s i t was d e v e lo p e d , in
no sen se meant a r i g i d y ie ld p a t t e r n . I n s t e a d , i t was th e
p re v e n tio n o f d i s o r d e r l y changes in F e d e ra l s e c u r i t y p r i c e s ,
A Normal O p e ra tin g Y e a r: 1958
The y e a r 1938 w as, ro u g h ly , a norm al one f o r the
System* The F e d e ra l R eserve was r e - e v a l u a t i n g i t s c o n tr o ls
o v e r bank o r e d i t . The t r a d i t i o n a l method o f c o n t r o l was
c e n te re d on th e u se o f open m ark et o p e r a tio n s and th e r e
d is c o u n t r a t e to in flu e n c e the a b i l i t y o f member banks to
ex ten d c r e d i t . E xcess r e s e r v e s were a c o m p a ra tiv e ly new
phenomenon. They were a t th e h ig h e s t l e v e l on re c o rd a t the
end o f the y e a r b e in g a p p ro x im a te ly th re e and one q u a r te r
b i l l i o n d o l l a r s . 18
I n t e r e s t r a t e s a ls o e s ta b li s h e d a r e c o r d — th e y were
a t t h e i r lo w e st re c o rd e d l e v e l . T his s i t u a t i o n o b ta in e d
from the G overnm ental p o lic y o f m onetary ease and th e Sys-
31
C h a n d ler, o p . c i t . . p , 406,
12
Annual R e p o r t. 1 9 3 8 , oja. n i t * , p . 9 .
11
te rn 's su p p ly in g banks w ith "• • • an abundant volume o f r e
s e r v e s , so a s to encourage them to expand t h e i r lo a n s and
in v e s tm e n ts ." 1® I n t h i s l i g h t , the o r d e r ly m arket p o lic y o f
th e System was c o n tin u e d , though i t w a s n 't n e c e s s a ry to en
gage in e x te n s iv e o p e r a tio n s u n t i l Septem ber o f the n e x t
y e a r when w ar broke in Europe#14
The F le x ib le P o r t f o l i o P o lic y
B efore the op en in g o f World War I I g o ld flow ed o u t o f
Europe in in c re a s in g am ounts. By the end o f 1939 the U n ited
S ta te s g o ld s to c k a t t a i n e d a t o t a l o f a l i t t l e o v e r # 1 7 ,6 0 0 -
000,0 0 0 — tw o - th ir d s o f th e w o rld ’ s m o n etary su p p ly . T his
I n f lu x in c re a s e d th e e x c e ss r e s e r v e s o f member banks to f iv e
b i l l i o n d o l l a r s , d e s p ite in c r e a s e s in the re s e rv e r e q u i r e
m ent. Bank lo a n s and in v e stm e n ts in c re a s e d and bank d ep o s
i t s reach ed new h ig h l e v e l s . Government bonds reach ed new
p r ic e h ig h s in J u n e - - t h e i r y ie ld was 2 - 1 /4 p e r c e n t. The
demand f o r s h o r t- te r m Governments was so s tr o n g t h a t the
S y ste m 's h o ld in g s o f T re a su ry b i l l s * #4 7 7 ,0 0 0 ,0 0 0 , was a l
lowed to ru n o u t a t the end o f the y e a r . 1®
^ A a n u a l.B e p o rt. 1 9 3 8 . o p . o i t . . p . 21. The change
from one o f r e s t r i c t i o n to encouragem ent was due to the
a b ru p t r e c e s s io n in the l a t t e r p a r t o f 1937.
14 C h a n d le r, o p . oit.. p . 407.
15 -Annual B e p o rt. 1939. op. c i t . . p p . 1 -4 .
12
The w ar, s t a r t i n g on Septem ber 1 , 1939, p r e c i p i t a t e d
an a b ru p t d e c lin e In Government s e c u r i t y p r i c e s , n o ta b ly
b onds, a s w e ll a s in o th e r t i x e d - I n t e r e s t h ig b -g ra d e c o r
p o r a te s e c u r i t i e s * The System u n d e rto o k l a r g e - s c a l e open
m ark et o p e ra tio n s * once a g a in , to m a in ta in an o r d e r l y m ar
k e t , and i n s t i t u t e d , i n re sp o n se to m onetary c o n d i tio n s , a
new p o lic y to im plem ent th e s e o p e r a t io n s — the f l e x i b l e p o r t
folio*^
The f a l l in m ark et p r i c e s was a tta c k e d on two f r o n t s :
(1) the System p u rch ased in the m a rk e t, commending A ugust
28, a t o t a l o f # 4 7 3,000,000 o f bonds; and (2) i t announced
t h a t a l l o f th e f e d e r a l R eserve Banks sto o d re a d y to len d
( r e d is c o u n t ) , to b o th member and nonmember b an k s, a t p a r on
id
I n re g a rd to t h i s new p o lic y the Board rem arked;
^ In e a r l i e r y e a rs changes in the System p o r t f o l i o had been
made w ith r e f e r e n c e to t h e i r e f f e c t on member bank in d e b t
ed n e ss o r th e volume o f e x c e s s r e s e r v e s . ” W ith the e x
tre m e ly la r g e member bank r e s e r v e s and w ith th e v a s t amount
o f fu n d s O u ts ta n d in g , th e Board co n tin u ed * open m ark et o p e r
a t i o n s , in p ch an g in g member bank r e s e r v e s , were o n ly a m inor
f a c t o r in tig h t e n in g o r e a s in g c r e d i t c o n d itio n s * The
Board em phasised, how ever, th a t . • such o p e r a tio n s e x e r t
an in flu e n c e on c o n d itio n s in th e c a p i t a l m a rk e t. . . . ”
T his in flu e n c e i s e x e rte d n o t o n ly on the p r i c e s o f the p a r
t i c u l a r s e c u r i t i e s bough and s o ld , ” * • • b u t a ls o on the
m ark et f o r Government o b l i g a t i o n s a s a whole and to some ex
t e n t on the c a p i t a l m a rk e t in g e n e r a l . ” Thus, th e p r a c t i c e
o f m a in ta in in g a c o n s ta n t amount o f s e c u r i t i e s in th e System
a c c o u n t (2*3 b i l l i o n d o l l a r s s in c e 1933) was abandoned* See
Annual R e p o rt. 1939. o p . o i t . . p . 9 .
13
G o v e m m e n ts* ^ The purpose o f t h i s l a t t e r a c t i o n was to a s
su re a l l hanks hairing la r g e Government bond p o r t f o l i o s t h a t
a tem p o rary m ark et d e c lin e d id n o t n e c e s s i t a t e liq u id a tio n *
The R eserve Banks were s ta n d in g re a d y to ad v an ce, In c a s h ,
p a r v alu e on th e s e s e c u r i t i e s when the hanks were In need*1®
The F e d e ra l R eserve Board s t a t e d t h a t I t had two p u r
p o se s In u n d e rta k in g I t s m ark et s t a b i l i z a t i o n program : f l )
to p r e v e n t d i s o r g a n i z a t io n In th e c a p i t a l m arket w hich could
Impede re c o v e ry ; and (2) to p r o t e c t th e la r g e h o ld in g s o f
Governments o f member hanks from ” • • • u n n e c e s s a r ily wide
19
and v i o l e n t f l u c t u a t i o n s in p r ic e * " But th e m ost Impor
t a n t p o lic y d e c l a r a t i o n o f th e B oard, to he remembered b o th
f o r i t s s ig n i f ic a n c e and f o r l a t e r r e f e r e n c e , was t h a t "The
System ca n n o t and does n o t g u a ra n te e any c u r r e n t p r i c e s o f
Government o b lig a tio n s * . . . "2® A lso , c o n tin u e d th e B oard,
i t does n o t u n d e rta k e to p r o t e c t th e p r o f i t s o r p re v e n t the
lo s s e s on th e se o b l i g a t i o n s to th e member b a n k s . ^
^ The d is c o u n t r a t e was the same to b o th and ranged
from one p e r c e n t, which f iv e o f th e R eserve Banks q u o te d ,
to 1 -1 /2 p e r cen t* Annual R e p o rt. 1939. o p . c j t *, p . 6
1 8 I d e m
19 P* s*
20
ZSSB* I t a l i c s n o t in the o r i g i n a l .
21 Idem
14
5*he m a rk et re c o v e re d r a p i d l y . By the end o f th e y e a r
the System n o ted t h a t the demand f o r F e d e ra l o b l ig a tio n s had
ta k e n such a la r g e amount from th e Be serv e a c c o u n t t h a t the
p o r t f o l i o h e ld $80 ,0 0 0 ,0 0 0 l e s s th a n a t the same d a te in th e
22
p re c e d in g y e a r . *
P r e p a r a tio n f o r N a tio n a l Defense
As th e c o u n try moved in to th e n a t io n a l d e fe n se p ro
gram the p o lic y o f the F e d e ra l B eserve co n tin u e d to be t h a t
o f m a in ta in in g an o r d e r ly m a rk e t. Open m ark et o p e r a tio n s o f
the System p re s e rv e d th e use o f th e f l e x i b l e p o r t f o l i o and
i t was to become an i n t e g r a l p a r t o f m ark et o p e r a t i o n s .2S
From 1939 to P e a r l H arbor th e System had to e n t e r the
m a rk et o n ly o n ce, the s p r in g o f 1940, and was a b l e , th ro u g h
s tr o n g m ark et demand, to red u ce i t s h o ld in g s o f bonds by a p
p ro x im a te ly $ 3 0 0 ,0 0 0 ,0 0 0 .2^ I n 1940, the p r ic e o f th e lo n g
e s t- t e r m Government bond reac h ed a new h ig h ; i t s y ie ld was a
l i t t l e l e s s th an two p e r c e n t. O th er Government s e c u r i t i e s
were a t low m arket y i e l d s a l s o . 25
22 Annual B e p o rt. 1939. o p , c l t . , p . 7.
23
Annual B e p o rt. 1940. o p . c i t . , p p . 1 - 3 .
24p G handler, o p . c i t , . p . 407.
28
fw e lv e -y e a r bonds, 1 -7 /8 p e r c e n t; th re e to f i v e -
y e a r ta x exempt n o te s , betw een 1 /4 and 3 /8 o f one p e r c e n t.
See Annual B e p o rt. 1940. op. p i t . . p . 4 .
15
Thus, 3 u st p re c e d in g the e n tr y o f t h i s c o u n try in to
the w orld c o n f l i c t , th e m onetary and c r e d i t p o t e n t i a l i t i e s
f o r f in a n c in g t h a t w ar were e x c e lle n t* The c o s t o f money
and c r e d i t (th e i n t e r e s t r a t e ) was low , th e a v a i l a b i l i t y
p o lic y was one o f e a s e , and th e m onetary su p p ly was l a r g e . 2* *
The i n f l a t i o n a r y a s p e c ts o f t h i s s i t u a t i o n were n o t , how-
27
e v e r , o v e rlo o k e d .
I I . THE W A R YEARS AND THE PEGGED MARKET
The E a rlv War Y ears
The e n t r y o f th e U nited S ta te s in to w ar b ro u g h t f o r t h
t h i s p o lic y s ta te m e n t from th e Board on December 8:
The System i s p re p a re d to u se i t s powers to a s s u re
t h a t an ample su p p ly o f fu n d s i s a v a i l a b l e a t a l l tim e
f o r fin a n c in g th e w ar and to e x e r t i t s in flu e n c e tow ard
m a in ta in in g c o n d itio n s in the U n ite d S ta te s Government
s e c u r i t y m ark et th a t a re s a t i s f a c t o r y from th e s ta n d
p o in t o f the G o v e rn m e n ts re q u ire m e n ts* 20
20 I n the B o a rd 's p u b lic a t io n f o r 1940 i t i s a s s e r te d
t h a t e x c e ss r e s e r v e s approxim ated seven b i l l i o n d o l l a r s . I f
one assum es an o v e r - a l l r e s e rv e re q u ire m e n t av erag e o f f i f
te e n p e r c e n t a t h e o r e t i c a l maximum o f 47 b i l l i o n d o l l a r s
was a v a ila b le f o r a lm o st imm ediate u s e . Annual R e p o rt,
1940. o p . c i t . . p . 2.
27
I n a memorandum to C o n g ress, th e B oard, th e Open
M arket Com m ittee, th e R eserve Bank p r e s i d e n t s , and th e E ed-
e r a l A d v iso ry B oard, i . e . , th e e n t i r e System in e f f e c t , d e
c la r e d t h a t the System needed e x t r a powers to p re v e n t i n f l a
t i o n . I b i d . . pp. 68 f f .
28
A nnual R e p o r t. 1 9 4 1 . o p . c i t . . p . 1 .
16
T his p o lic y was r i g i d l y adhered to d u rin g th e war y e a rs and
seldom , i f e v e r , did th e Government s u f f e r from la c k o f
fhnds*
The Open M ark et Committee e n te re d the m ark et immedi
a t e l y a f t e r B e a rl H arb o r. Long-term Governments d e c lin e d in
p r ic e a t o t a l o f a b o u t two and one h a l f p o in ts from th e n u n
t i l s h o r t l y a f t e r th e end o f the y e a r . System p u rc h a s e s ,
how ever, soon s t a b i l i z e d th e exchange and Government bond
y i e l d s re c o v e re d to a b o u t th e November levels.**®
By the end o f 1941 e x c e ss r e s e r v e s were down to 3 .1
b i l l i o n d o l l a r s . The p rim a ry ca u ses f o r t h i s g r e a t d e e lin e
from the p re v io u s y e a r 's l e v e l were t h r e e - f o l d : (1) th e e x
p a n sio n o f bank c r e d i t ; (8) the in c re a s e in re s e rv e r e q u i r e
m ents to the l i m i t o f th e Board*s a u t h o r i t y ; and (3) the
c e s s a tio n o f g o ld in f lo w s .3 ^
The m arket i s p egged. — The c o s t to th e Government was
29 The T re a su ry was a ls o a c tiv e in s u p p o rtin g the
m ark et a t t h i s time by I n v e s tin g some o f i t s t r u s t fu n d s .
See Annual R e p o rt. 1941, o p . c i t . . p . 6. I t has re p e a te d
t h i s p o lic y on s e v e r a l o c c a sio n s sin c e th e n .
I b i d . . p p . 7 f . Here a l s o , the Board n o ted the
r e c o g n i tio n g iv e n by th e Government to th e I n f l a t i o n a r y a s
p e c ts o f th e war m o b iliz a tio n program . I n t h i s y e a r a l l o c a
t i o n , r a t i o n i n g , and p r ic e c o n t r o l arran g em en ts were s t a r t e d
and th e Board re c e iv e d e o n t r o l o v er consum er c r e d i t . In
1942 wage c o n t r o l s w ere im posed.
17
v e ry low f o r the trem endous sums th e System made a v a i l a b l e
f o r the p r o s e c u tio n o f the w ar. Both th e R eserve System and
the t r e a s u r y b e lie v e d t h a t th e se low r a t e s were j u s t i f i a b l e
due to the e x c e ss r e s e r v e s o f the banks and due to th e d e
c re a s e d demand f o r i n v e s t i b l e fu n d s . They ag reed t h a t th e se
low r a t e s should be allo w ed to c o n t in u e .3*
On A p r il 3 0 , 1942 th e f e d e r a l Open M arket Committee
d ir e c t e d th e R eserve Banks to p u rch ase a l l t r e a s u r y b i l l s
o f f e r e d a t a d is c o u n t r a t e o f 3 /8 o f one p e r c e n t p e r annum.
I n A ugust t h i s d i r e c t i v e was supplem ented; the R eserve Banks
were d ir e c t e d to g r a n t to a s e l l e r o f b i l l s an o p tio n to r e
p u rch ase a t the same r a t e a com parable amount o f b i l l s o f
22
l i k e m a tu rity * These a c tio n s enhanced b i l l s a s a d e s i r
a b le In v e stm e n t, e s p e c i a l l y f o r id le fu n d s . They had become
a s l i q u i d a s c a s h .
The System a ls o adopted th e p o lic y o f buying a l l 12-
month c e r t i f i c a t e s o f in d e b te d n e ss a t th e p o ste d r a t e o f 7/8
o f one p e r c e n t . W hile r a t e s were n o t l i s t e d f o r th e lo n g e r
term is s u e s the R eserve Banks e n te re d the m ark et w henever
n e c e s s a ry to keep t h e i r y i e l d s from r i s i n g above th e "peg
ged" p a t t e r n — j u s t a s th e y d id on the s h o r te r - te r m s e e u r i -
3* C h a n d ler, l o o , c l t *
Annual R e p o rt. 1942. o p . c l t . , p . 14.
18
tie s * Table I shows th e w artim e y ie ld p a t t e r n t h a t was
m a in ta in ed * I n t e r e s t r a t e s were n o t allow ed to r i s e above
t h i s p a t t e r n u n t i l J u ly , 1947*
TABm I
TEE PATTERS Of RATES, 1942 TO 1947
' it in m — iw. mmin ' i.V V 1' ' ' i> 7 il~ l i . 1 1 ~ ' ■ m ~tm\ i 1 i ■ ' j . ii.i u* — n { ^
9Q-day T re a su ry h i l l s *375 p e r c e n t
12-m onth T re a su ry c e r t i f i c a t e s .875 " n
8 - to 1 0 -y e a r bonds 2 .0 0 0 ” n
Ik>ng-term bonds 2*500 n "
The d is c o u n t r a t e and p eg g in g *—B e sid e s open m ark et
o p e r a t io n s , th e System used the d is c o u n t r a t e to a id in
m a in tain in g : pegged s e c u r i t y p r i c e s , from F e b ru a ry th ro u g h
M arch, o f 1942, the d is c o u n t r a t e s a t th e v a r io u s R eserve
Banks were low ered to a unlfozm one p e r c e n t on ad v an ces s e
cu red by governm ents and o th e r e l i g i b l e p a p t e r . I n O c to b e r,
the d is c o u n t r a t e to member banks was reduced to o n e - h a lf o f
one p e r c e n t on c o l l a t e r a l n o te s se c u re d by f e d e r a l o b lig a
t i o n s m a tu rin g o r c a l l a b l e w ith in one y e a r o r l e s s . 33 L. V.
C h a n d ler, p r o f e s s o r o f econom ics a t A m herst C o lle g e , had the
o b s e rv a tio n t h a t th e s e low le n d in g r a t e s were n o t e x te n s iv e
l y u t i l i z e d by th e com m ercial b anks; the banks d isc o v e re d
t h a t i t was c h e a p e r to s e l l lo w -y ie ld s e c u r i t i e s when in
33
A nnual R e p o r t. 1 9 4 2 . o p. c i t . . p . 20.
1 9
34
need o f fu n d s .
Why the i n t e r e s t r a t e was pegged. —P egging imbued
Government I s s u e s w ith s e v e r a l d e s ir a b le c h a r a c t e r i s t i c s
from a b u y e r s p o in t o f view —l i q u i d i t y , s a f e t y , and a g u a r -
a n te e d Income. These s e c u r i t i e s found many e a g e r p u rc h a s
e r s , n e v e r la c k in g a m a rk e t. T his re a d y m arket was th e p r i
m ary re a s o n f o r p e g g in g ; the Government had an a s s u re d m ar
k e t f o r a l l o f the fu n d s i t needed t h a t were n o t r a is e d by
t a x a t i o n .
The R eserve System had a f o u r f o ld pu rp o se in m ark et
p e g g in g : (1) to make known, p r im a r il y to th e b an k s, t h a t th e
r a t e s were f r o z e n . Some, p e rh a p s many, p u r c h a s e rs m ight
have b een r e l u c t a n t to p a r t i c i p a t e in war lo a n s 3 ® I f th e y
C h a n d le r, o n . c l t . . p . 408. The System was n o t
unaware o f t h i s s i t u a t i o n , l o r exam ple, see Annual R e p o rt.
1942, o p. c l t . , p . 2 0 . A p o s s ib le e x p la n a tio n fo rm e m b e r
bank r e lu c ta n c e to borrow from the System , a s id e from t h a t
g iv e n , was r e l a t e d by M a rrin e r S. E c e le s . ”. . . th e r e a r e
Very few banks w i l l i n g to show any borrow ed money in t h e i r
f i n a n c i a l s ta te m e n t. They have a f e a r o f d o ing t h a t . The
e x p e rie n c e a t the tim e o f the bank c o lla p s e s In 1929-33, re *
v e a l t h a t the banks t h a t showed borrow ed money were the ones
t h a t c lo s e d up shop and th e y have n o t g o tte n o v e r the expe
r ie n c e th e y h ad . T h e re fo re borrow ing from th e R eserve Sys
tem I s a v e ry u n p o p u la r custom w ith th e b anking system th e se
d a y s .” The banks b e lie v e d t h a t a la c k o f borrow ed fu n d s
made a more a c c e p ta b le s ta te m e n t to th e p u b lic . See. XT.S.
C o n g ress, H earin g s B efore th e House Committee on B anking and
C u rre n c y . H.R. 2 1 ^4 . F e b ru a ry 27, 1945, p . 18.
35 To f a c i l i t a t e th e s a le o f s e c u r i t i e s d u rin g the
many bond d r i v e s , ” • • • banks were p e rm itte d to ©pen what
(was) t e c h n i c a l l y c a lle d a w a r-lo a n a c c o u n t, w hich (was) a
so
were u n c e r t a in a s to w h e th e r the n e x t lo a n m ight c a r r y a
more fa v o ra b le r a t e . s ^ Prom pt p u rc h a s in g o f th e o f f e r i n g s
was h eig h ten ed *
The o th e r w artim e p u rp o se s o f the System w ere:
• • • (2) to a s s u re a s tr o n g and s te a d y m ark et f o r o u t
s ta n d in g s e c u r i t i e s ; (3) to keep down th e i n t e r e s t c o s t
on the w ar d e b t; and (4) to l i m i t the grow th in bank and
o the r „ in v e s to r s.* e a rn in g s from t h e i r p u b lic d e b t h o ld -
la g s.* 57
The Reserve p o lic y o f pegging th e m a rk e t, b e g in n in g
in 1942, and th e 1929 d e c l a r a t i o n o f the B oard, t h a t i s ,
pegging was n o t and could n o t be a System p o l i c y , could o n ly
be r e c o n c ile d on the b a s i s o f e x p e d ie n c y , i f a t a l l . That
even t h i s was a tte m p te d h as n o t been found* The p r o f i t s o f
in v e s to r s were p r o te c te d ; l o s s e s were p re v e n te d .
d e p o s it a c c o u n t in th e bank to th e c r e d i t o f the T re a s u ry ,
• , . The g e n e ra l p ro o e ss was t h a t a bank co u ld pay f o r i t s
s e c u r i t i e s to the T re a su ry by sim p ly g iv in g i t c r e d i t in the
w a r-lo a n a c c o u n t, w hich m eant t h a t i n i t i a l l y th e bank p i c
tu r e would be an in c re a s e in th e T r e a s u r y 's d e p o s it a t t h a t
b a n k ," U .S . C o n g ress, H earin g s B efore th e Subcommittee on
M o n etary . C r e d i t , and F i s c a l B o l i d e s o f the~~Joint CommlTfee
on th e Economic R e p o rt. S tatem en t o f E a r l' R* Bopp, November
1 6 , 1949, p . 40, (T h is re f e r e n c e w i l l h e r e i n a f t e r be n o te d
by the name o f the Subcom m ittee’s ch airm an . S e n a to r B. H.
D o u g la s.) These w ar^ lo an d e p o s its were exempt from d e p o s it
in su ra n c e a ssessm en t and r e s e rv e r e q u ir e m e n ts . See Annual
R e p o rt. 1942, o p. c l t . . p . 15.
D ouglas Subcom m ittee, H e a rin g s . o p . c l t . . p . 40,
S tatem en t o f A lfre d H. W illia m s, Hovember l e , 1949•
27
McCabe, op. c l t . . p . 2 5 * ■ » -
31
The L ate War T ea rs
The p o lic y o f th e System , a s fo rm u la te d in 1941 and
1942, rem ained e s s e n t i a l l y th e same th ro u g h o u t the rem a in d er
o f th e w ar; w ar f in a n c in g w ith o u t I n f l a t i o n were th e c o r r e
l a t e d o b je c tiv e s * C e r ta in p r a c t i c e s , stemming from th e Re
serv e System ’ s m ark et p o lic y , developed in th e s e l a t e r
years* They w ere fu n d am en tal in p o stw a r c r i t i c i s m s and p r o
p o sa ls*
/ x
S la v in g the o a t t e r n o f r a t e s **--As Table I r e v e a le d , )
th e m aintenance o f a fix e d r a t e p a t t e r n by th e System e s t a b
l i s h e d a r e l a t i v e l y wide sp read betw een the s h o r t e s t and the
lo n g e s t s e c u r i t i e s * Each type s e c u r i t y had a g u a ra n te e d
f l o o r and was a s l i q u i d a s money* T h is "* * • p ro v id e d a
s tr o n g and c o n tin u e d inducem ent to i n v e s to r s to le n g th e n ma
tu ritie s* ^ ® ® Many o f the banks and o t h e r in v e s to r s were
soon aware o f t h i s m a rk et p re s s u re * I f " p ro p e rly " conducted
t h i s s h i f t i n g from s h o r t to lo n g term is s u e s y ie ld e d an e a sy
p r o f i t .
The F e d e r a l R eserve and the T re a su ry c o o p e ra te d to
the f u l l e s t in p la c in g a s much a s p o s s ib le o f th e p u b lic
b o rro w in g , e s p e c i a l l y b o n d s, in nonbanking h a n d s. The banks
28
K a rl R. Bopp, and o t h e r s , F e d e ra l R eserve P o lic y
(W ashington: Board o f G overnors o f th e F e d e ra l R eserve Sys
tem, 1 9 4 7 ), p* £1.
p r e f e r r e d to h o ld th e lo n g e r S overnm ents, b u t a f t e r th e see**
ond w ar lo a n d riv e th e y were lim ite d in th e amount^ o f t h e i r
d i r e c t bond s u b s c r i p t i o n s . 3 *^/^
The banks e a s i l y circu m v en ted th e bond l i m i t a t i o n
program* S h o rt-te rm i s s u e s , w hich th e y owned in la r g e v o l
ume and w hich had no s u b s c r i p tio n l i m i t , w ere so ld by them
to th e E eserve B anks. Bank e l i g i b l e bonds were th an p u r -
chased in th e m a rk e t. B ecause the lo n g e r- te r m s e c u r i t i e s
were l im ite d in su p p ly , t h e i r p r ic e would s t a r t up a t th e
end o f each bond d riv e a s th e bond s p e c u la to r s ru sh ed to buy
them. When th e bond d r iv e s were u n d e r way the banks and i n
d iv id u a l I n v e s to r s would s e l l t h e i r lo n g -te rm s a t th e h ig h
m a rk et p r i c e and th en p u rch ase the new bond I s s u e s a t p a r .
T his was p la y in g the p a t t e r n o f r a t e s . 4® As a s p e c u la tiv e
p r a c t i c e i t d e s e rv e s th e s e v e r e s t condem nation.
T his c o u rse o f a c t i o n , o f which th e above i s b u t a
fu n d am en tal o u t l i n e , ap p eared in v a r io u s f o rm s .41 D esp ite
Edwin W. Kemmerer and D. L. Kemmerer, The ABO o f
th e f e d e r a l R eserve System flew York; H arp er & B r o th e r s ,
1 9 5 0 ), p . 1747 '
40
I b i d . , p p . 174 f . I n e a r l y 1945 the demand f o r
bonds was so g r e a t t h a t a premium o f seven p e r c e n t was
p a i d . T his was a y ie ld o f 2 .1 p e r c e n t. See C h a n d le r, op.
c i t . , p . 410.
41
Some o f the v a r io u s form s in w hich i t ap p e ared are
p r e s e n te d in th e f e d e r a l R eserve B u l l e t i n . 3 0 :7 4 5 -6 , A ugust,
1944.
23
th e a lle g e d a tte m p ts o f the T re a su ry and the F e d e ra l Reserve
System to e r a d i c a t e I t 42 t h i s s p e c u la tiv e co n d u ct co n tin u ed
th ro u g h o u t th e w ar and I n to th e p o stw a r p e rio d * 43
R eserve Banks a s r e s i d u a l b u y e rs . —W1th the p u rc h a se s
o f the lo n g -te rm bonds by th e banks th e System became th e
r e s i d u a l b u y e r o f the s h o r te r - te im s e c u r i t i e s * From 1942
th ro u g h 1946 th e F e d e r a l R eserve reduced i t s h o ld in g s o f
lo n g -te rm Governments from 4*1 b i l l i o n to 1*4 b i l l i o n d o l
l a r s . D uring t h i s same p e rio d i t s h o ld in g o f b i l l s and c e r
t i f i c a t e s in c re a s e d from 1 .9 to 2 2 .4 b i l l i o n d o l l a r s . 4^ *
The b a s ic d i s t i n c t i o n betw een lo n g e r and s h o r te r s e
c u r i t i e s was l a r g e l y e lim in a te d by th e System *s open m ark et
o p e r a tio n s and by the T r e a s u r y 's m aintenance o f th e same
r a t e s .on s u c c e s s iv e i s s u e s o f s e c u r i t i e s . T his l e f t the
System a s th e r e s i d u a l b u y e r in th e m a rk e t, an d , in e f f e c t ,
th e u ltim a te r e p o s i t o r y f o r the s h o r t e r s e c u r i t i e s . The
System had to p u rc h a se the Governments o th e r s d id n o t w ish
to h o ld to m a in ta in th e announced r a t e p a t t e r n . The Open
42 F o r exam ples o f T re a s u ry -F e d e ra l R eserve c o o p e ra
t i o n in t h i s m a tte r , see F e d e ra l R eserve B u l l e t i n . 3 1 :2 9 7 -
301, A p r i l , 1945.
43
The a tte m p ts to e r a d i c a t e p la y in g the r a t e s i s
term ed " a lle g e d " b ecause the m ark et s u p p o rt p o lic y was the
cause o f the p r a c t i c e and no th o u g h t was g iv e n to i t s abon-
donment a t t h i s time* I n f r a . p p . 39 F.
44 C handler, o p . c l t . . p . 4 1 0 .
34
M arket Committee l o s t I t s I n i t i a t i v e pow ers In th e m ark et to
th e m a r k e t.4 ® E very s e c u r i t y p u rch ased by th e Committee
from th e member banks in c re a s e d the member b a n k s ' re s e rv e s *
A side from I t s m oderate c o n tr o l o v e r r e s e rv e r e q u ire m e n ts ,
th e System r e ta in e d l i t t l e in f lu e n c e in th e v i t a l a r e a o f
the m art*
Ihe i n f l a t i o n a r y p o t e n t i a l o f th e fo re g o in g was t r e
mendous* I n 1943 the Board o f g o v e rn o rs began to w orry
a b o u t w hat th e t r a n s i t i o n to p eacetim e would e n t a i l w ith
such c irc u m sc rib e d c o n tr o ls * 46
/
M o n e tiz a tio n o f the d ebt,*--M onetizing th e d e b t, i* e .
th e c o n v e rs io n o f d e b t in to money, was g iv e n i m p l i c i t re c o g
n i t i o n in th e im m ed iately p re c e d in g se o tio n s * I t w a s n 't u n
t i l r a t e s were pegged and s u c c e s s iv e s e c u r i t y r a t e s f ro z e n
t h a t i t was d e te c te d a s an i n f l a t i o n a r y elem en t o f dangerous
p ro p o rtio n s *
When the R eserve System p u rch ased s e c u r i t i e s p r e
s e n te d by th e member b an k s, th e b a la n c e o f w hich was lodged
a s p a r t o f th e b a n k s ' r e s e r v e s , the banks were a b l e , th ro u g h
th e f r a c t i o n a l r e s e rv e s t r u c t u r e , to expand t h e i r d e p o s its
( c r e d i t) to the e x t e n t t h a t th e y could p u rch ase more th a n
45 C h a n d ler, o n * c i t . . p p . 409 f .
See Annual R e p o rt, 1943. o p . c i t . , p p . 1 -1 0 .
25
s i x tim es th e amount o f s e c u r i t i e s used a s r e s e r v e s . 47 I t
made s l i g h t d if f e r e n c e w h eth e r a hank so ld th e s e c u r i t i e s to
the System o r w h eth e r th e y were so ld hy a nonhank i n v e s to r ;
when money w as^ d e p o site d a t a hank th e hank in c re a s e d i t s
r e se r v e s.4® ^/
/ /
Ihe amount o f s e c u r i t i e s h e ld o u ts id e the Government
and th e R eserve System , p re s e n te d in F ig u re 1 , a llo w th e d e
g re e to w hich m u ltip le e x p a n sio n was p o s s ib le to he m eas
ured*
In c r e a s in g th e i n t e r e s t r a t e to make F e d e ra l o b l i g a
t io n s more a t t r a c t i v e to h o ld , i . e . , a s an a n t i - i n f l a t i o n a r y
m e asu re, was r e f u te d hy the B oard. I t s t a t e d t h a t in c r e a s
in g the r a t e r a is e d ". .. fo rm id ab le q u e s tio n s a f f e c t i n g
the F e d e r a l b u d g e t, th e l e v e l s o f t a x a t i o n , and the am ounts
p a id on th e d e b t to th e banking sy stem . . . • "49 The Board
r e f e r r e d to th e 2 -1 /2 p e r c e n t r a t e , n o t to th e r a t e on
s h o r te r - te r m i s s u e s .
4 The assu m p tio n i s an o v e r - a l l f i f t e e n p e r c e n t a v
e ra g e f o r r e s e rv e re q u ire m e n ts , and the m u ltip le in c re a s e
in d ic a te d i s the maximum t h e o r e t i c a l in crem en t p o s s i b l e .
S h is assum es th a t a l l banks in th e System were a c t u a l l y p a r
t i c i p a t i n g in th e p r a c t i c e to th e f u l l e s t e x t e n t . A c tu a lly ,
some banks w ere, r e l a t i v e l y , m inor o f f e n d e r s .
48 Annual R e p o rt. 1945. o p . c l t . , p . 4 .
49 I b i d . . p . 6 .
26
T his p a r t i c u l a r a t t i t u d e was n o t lo n g s u s ta in e d hy
th e Board o f G o v ern o rs. As w i l l he se en In A ppendix A, a
r a t h e r h i t t e r d is p u te a ro se betw een th e T re a su ry D epartm ent
B i l l i o n s o f d o l l a r s BjQ l l o n s o f d o l l a r s
T O T A L .
ZOO
/S O
COKME.nCU\L
/oo
b a n k 5
5 0
K S
/O O
/A/& /V/,O V/>X$
CO, l ;PO
IPA
e iq c A/l GovTsj a
1940 194Z 1944 1946 1948 !9So /9 40 194S L 1944 1946 1948 1950
f i g u r e 1
OWNERSHIP OP U .S . GOVERNMMT SECURITIES50
and the Board a s to w h e th e r o r n o t th e r a t e should he me In-
j.
ta in e d a t 2 -1 /2 p e r c e n t. The Board opposed i t .
50 S o u rc e s: f o r th e y e a rs 1940 th ro u g h 1946, see An
n u a l R e p o rt, 1946, 0 £ . c l t . , p . 13; f o r the y e a rs 1947
through 1949, see Annual R e p o rt, 1949. o p . c i t . . p . 36; and
f o r the y e a r 1950, see the f e d e r a l R eserve B u l l e t i n . 36:
1658, December, I9 6 0 .
/
I I I . POSTWAR POLICY
27
H e c a p itu la tio n and I n tr o d u c tio n
W ith the w ar o v e r and th e economy adorns tin g to p e a c e
tim e p u r s u i t s , th e m onetary a u t h o r i t i e s were fa c e d w ith
problem s c a r r i e d o v e r from th e w ar p e r io d . They had to he
re s o lv e d w ith th e d i f f i c u l t i e s o f th e t r a n s i t i o n s ta g e . The
huge p u b lic d e b t (see f i g u r e 1) and i t s r e f u n d i n g , t h e
p o s i t i o n t h i s d e b t assumed among the a s s e t s o f b a n k s, c o r
p o r a t i o n s , I n d iv id u a l s , e t c ,,® 2 th e immense money and c r e d i t
s u p p ly ,53 and o th e r s i m i l a r c o n d itio n s were t y p i c a l o f the
problem s th e E eserve System fa c e d . I n f l a t i o n th r e a te n e d a s
the d i r e c t w artim e c o n t r o l s were removed, y e t th e pegged
m ark et was r e t a i n e d .
The M ajor Components o f R eserve System P o l i c y . 1945- 1950
I n i t s 1945 p u b l i c a t i o n , th e Board s t a t e d i t s b e l i e f
The " r o l l - o v e r ” o f the F e d e ra l d e b t h a s been a p
p ro x im a te ly f i f t y b i l l i o n d o l l a r s a y e a r s in c e the end o f
the w ar. See S , L. Bach, F e d e r a l R eserve P olicy-M aking (Hew
Yorks A lfre d A. Knopf , 1950) , p . "471
C O
Government s e c u r i t i e s , a s a p r o p o r tio n o f t o t a l
a s s e t s , in c re a s e d in the p e rio d 1959-1948 from SO to 62 p e r
c e n t in m utual s a v in g s b an k s, 40 to 70 p e r c e n t in commer
c i a l b an k s, and from 27 to 50 p e r c e n t in l i f e in su ra n c e
com panies. See C h a n d ler, op, c i t . . p . 42S.
Kg
C urren cy and d e p o s its in c i r c u l a t i o n in c re a s e d
from f o r t y b i l l i o n d o l l a r s in 1940 to 127 b i l l i o n d o l l a r s
in 1945. See Annual R e p o rt. 1945. o p , c i t . . p . 2*
28
in a com pensatory m o n etary poX icy; i t should he th e "predom
in a n t p u rp o se ” b eh in d F e d e ra l R eserve a c t i o n s . 5^ T his type
p o l i c y , the Board was co n v in ced , would c o n tr ib u te m ost to a
h e a lth y economic en v iro n m e n t. I t s im p le m e n ta tio n , o r a t
tem pt a t im p le m e n ta tio n , was to be a c e n te r o f c o n te n tio n .
The d is c o u n t r a t e . —On A p ril 25, 1946 th e Board d i s
c o n tin u e d th e p r e f e r e n t i a l d is c o u n t r a t e o f o n e - h a lf o f one
p e r c e n t to member b a n k s. The one p e r c e n t p r e f e r e n t i a l
r a t e to nonmembers was e lim in a te d a t th e end o f th e m onth.
M arket r a t e s on Governm ents in c re a s e d s l i g h t l y , b u t pegging
o p e r a tio n s p re v e n te d more th an a n e g l i g i b l e r i s e . 55 The low
d is c o u n t r a t e 55 had had th e u n f o r tu n a te e f f e c t o f e n c o u ra g
in g banks to borrow a t th e R eserve Banks "• . . i n o r d e r to
h o ld o r to p u rc h a se a d d i t i o n a l Government s e c u r i t i e s , o r to
len d to o th e r s a t low r a t e s f o r the (same) p u rp o se . . •
The money su p p ly was in c re a s e d and d e b t m o n e tiz a tio n f u r
th e re d by th e se a c t i o n s .
Annual R e p o rt. 1945. op. c i t . . p . 1 .
55 Annual R e p o rt. 1946. o p . c i t . . p p . 2 , 92 f .
55 There a r e th re e d is c o u n t r a t e s a t each R eserve
Bank, b u t th e d is c u s s io n in t h i s p a p e r I s c o n fin e d to th e
one c o n c e rn in g e l i g i b l e p a p e r. A c tu a lly , m ost borrow ing by
banks i s acco m p lish ed by means o f advances and the volume o f
com m ercial p a p e r d is c o u n te d i s r e l a t i v e l y s m a ll.
67 IM & -. P- 93.
29
The Board w ished to d is c o n tin u e th e low d is c o u n t rat©
in l a t e 1945 h u t T re a su ry a c q u ie sc e n c e was n o t fo rth c o m in g
u n t i l e a r l y 1 9 4 5 .58 The Board o f G overnors had, th u s , p u r
sued a l i n e o f m onetary p o lic y w ith w hich i t had n o t a g re e d .
The d is c o u n t r a t e rem ained a t one p e r c e n t u n t i l
Ja n u ary 12, 1948 when i t was advanced to 1 * 1/4 p e r c e n t,
l a t e r i n the y e a r , A ugust 13, i t was in c re a s e d hy a n o th e r
o n e - q u a r te r p e r c e n t . 89 The purpose was to induce member
banks to r e t a i n t h e i r s h o r t- te rm s e c u r i t i e s which would a l
low th e Board to p u t p re s s u r e on hank re se rv e s.®® On A ugust
25. 1950 th e r a t e was a g a in advanced hy o n e - q u a r te r p e r
c e n t.
Open m ark et o p e r a tio n s and th e i n t e r e s t rate .* —F e d e r
a l B eserve p o l i c y , w ith r e s p e c t to p r e v e n tin g y i e l d s from
r i s i n g on G overnm ents, was c o n tin u e d a f t e r th e w a r. As the
p a s s iv e p u rc h a s e r o f Government s e c u r i t i e s th e m arket d id
n o t a b s o rb , th e System gave im petus to d e b t m o n e tiz a tio n and
i n t e n s i f i e d th e i n f l a t i o n a r y p r e s s u r e s on th e economy# I t
80 D ouglas Subcom m ittee, H e a rin g s , op. c l t . . p . 45,
S tatem en t o f A lfre d S p ro u l, December 2 , 1949# From t h i s
p o in t th ro u g h th e rem ain d er o f the c h a p te r , s e v e r a l T re a s
u r y -F e d e ra l B eserve p o l i c y d i f f e r e n c e s w i l l be p o se d . Only
c u r s o ry re a s o n s w i l l he g iv e n , i f an y , f o r such d if f e r e n c e s
a s th e y form a m a jo r p o r tio n o f A ppendix A.
59
Annual B e p o r t. 1 9 4 8 . o p . c l t . . pp. 8 4 , 88 F .
60 I b i d . . p . 8 5 .
c o n t r ib u t e d , w ith i t s p o lic y o f e a s e , to th e amount o f c r e
d i t and c u rre n c y a v a i l a b l e , w hich, in tu r n , was u sed to b ia
SI
up the p r i c e s o f s c a rc e goods and s e r v i c e s . The Board
s a id t h a t t h i s was n o t a System p o lic y ; i t had been accom
p lis h e d " . • . on th e v o l i t i o n o f th e banks i r r e s p e c t i v e o f
n a t i o n a l m onetary p o l i c y . • . , ,f62 The Board claim ed t h a t
i t la c k e d the n e c e s s a ry c o n t r o l s to o f f s e t t h i s d e v e lo p -
/ • I V
ment* However, the in d ic tm e n t t h a t i t was an easy-m oney
p o lic y rem ains u n a f f e c te d by Board c l a i m s .64
The F e d e ra l B eserve System was n o t c o m p le te ly a t
f a u l t in i t s a c t i o n s ; th e T re a su ry was a d v e rse to abandoning
the s u p p o rt l e v e l s . * F o r re a s o n s which a re g iv e n elsew h ere
in th e t h e s i s , the System would n o t go c o u n te r to th e w ish e s
fig
o f the T re a su ry D epartm ent. I n the p o stw a r p e r io d , a s th e
Board rem arked,
. . . m onetary p o lic y w i l l need to be c l o s e l y r e l a t e d to
th e management o f th e p u b lic d e b t, and w i l l r e q u ir e con-
61 C h a n d le r, oja. c i t . . p . 411.
62
Annual R e p o rt. 1945. o p . c i t . , p . 4 .
6 3 I d e m
64 ’
C h a n d le r, op. c i t . . p . 412.
66 D ouglas Subcom m ittee, H e a rin g s , o p . c i t . . p . 431,
S tate m e n t o f A lla n S p ro u l, December 2, 1949.
66 See A ppendix A.
31
tin n e d c o o p e ra tio n betw een th e p o l i c i e s o f th e T re a su ry
and th e F e d e r a l B e s e rv e .67
On J u ly 10, 1947 the Open M arket Com m ittee, w ith the
T re a su ry D e p a rtm e n t's a p p ro v a l, d is c o n tin u e d I t s buying r a t e
o f t h r e e - e i g h t s o f one p e r c e n t on h i l l s . The In v estm en t
a t t r a c t i o n o f t h i s type s e c u r i t y in c re a s e d im m e d ia te ly ,68
and some r e s t r a i n t was p la c e d on f u r t h e r m o n etary expan
s io n . 69 T h is a c t i o n marked the f i r s t r e t r e a t from th e p eg
ged m a rk e t hy the System , w h ile , a t the same tim e , i t r e - i n
tro d u ced some m a rk e t f l e x i b i l i t y . Y ie ld s on h i l l s were k e p t
w ith in the pegged r a t e s on c e r t i f i c a t e s h u t th e r a t e p a t t e r n
on th e se l a t t e r s e c u r i t i e s was abandoned on A ugust 8 o f th e
70
same y e a r .
There were two re a s o n s f o r l i f t i n g th e p e g s : (1) to
make th e s h o r t e r i s s u e s more a t t r a c t i v e to b u y e rs so the
System would f in d a m ark et demand when i t so ld them to r e
duce r e s e r v e s ; and (2) a d e s ir e to see th e banks h o ld a sub
s t a n t i a l p o r tio n o f them M . • • and f e e l th e y have a s u f f i
c i e n t r e t u r n . . • in o r d e r n o t to re a c h o u t f o r the r i s k y
67
Annual R e p o rt. 1946. o p . c l t . . p . 4 .
68 At t h i s tim e th e System h eld a l l b u t 1 .5 b i l l i o n
o f the 16 b i l l i o n d o l l a r s o f b i l l s o u ts ta n d in g .
Annual R e p o rt. 1947. o p . c l t . , p p . 5 , 9£ f .
70 I f tl d . . PP. 94 f .
32
o r m a rg in a l l o a n . ”7* /
F ig u re 2 shows th e l e v e l o f y i e l d s and t h e t r f l u c t u
a t i o n s b e fo re and a f t e r the l i f t i n g o f s u p p o rts on the th re e
B O N O S
IS YEARS OR MORE
CERTIFICATE o f ,
9 - 12. M ONT
'MDEBTEDNESV'
HS
v • —
TREASURY
N E W /SSL
BILLS
1950
F ig u re 2
YIELDS ON U .S . GOVERNMENT ISSUES72
m ain ty p e s o f Government s e c u r i t i e s ; lo n g -te rm b o n d s, c e r
t i f i c a t e s , and b i l l s . The y i e l d s , from 1942 to m id-1947,
were a p p ro x im a te ly the same and th e r e f o r e were n o t In c lu d e d .
The T re a su ry , to m a in ta in a m ark et f o r i t s s h o r t e r -
71
U .S. C o n g ress, H e a rin g s B efore th e House Committee
on B anking and C u rre n c y . S .J . R es. 1 5 7 7 "S ta te m e n t o f Thomas
McCabe, A ugust 2 , 1948, p . 132. H e r e in a f t e r , t h i s re f e r e n c e
w i l l be known a s H e a rin g s . H ouse. S .£ . R es. 1 5 7 .
72 S o u rc es: f o r th e y e a rs 1947 th ro u g h 1949, see An-
f p a l R e p o rt, 1949, oja. c l t . . p . 9; f o r the y e a r 1950, see”
F e d e r a l R eserve B u l l e t i n . 36 :1 6 5 2 , December, 1950.
33
teim i s s u e s , had to in c r e a s e th e r a t e s on new s e c u r i t i e s
eoming in to th e m a rk e t. The r a t e on c e r t i f i c a t e s was g ra d u
a l l y in c re a s e d to 1 -1 /8 p e r c e n t. T h is allo w ed th e y i e l d s
on h i l l s to r i s e to ah o u t one p e r c e n t, where th e y rem ainded
u n t i l m id -1 9 4 8 .73
The t h i r d r e t r e a t from th e r i g i d y i e l d p a t t e r n hy the
System was th e r e d u c tio n in the s u p p o rt p r ic e f o r th e lo n g - ,
e r - te r m s e c u r i t i e s on December 24, 1947. As f i g u r e 2 r e
v e a l s , t h e i r y i e l d s had p e r s i s t e d helow t h e i r 2 -1 /2 p e r e e n t
coupon r a t e . In O cto b e r 1947, Government bonds s t a r t e d to
f a l l in p r i c e . The re a s o n s f o r th e p r ic e d e c lin e were
t h r e e f o l d : f1) an in c re a s e d p r i v a t e lo a n demand; (2) the
la r g e am ounts o f c o rp o r a te s e c u r i t i e s b e in g f l o a t e d ; and (3)
a T re a su ry o f f e r i n g o f a lo n g -te rm 2 -1 /2 p e r c e n t n o n m ark et-
a b le bond to i n s t i t u t i o n a l i n v e s t o r s . 74 The Committee gave
some s u p p o rt to th e bonds a t t h e i r red u ced p r i c e s in Hovem-
b e r , an d , th e n , the n e x t m onth, announced th e low er su p p o rt
p r ic e .- I t became an a c tiv e b u y er to m a in ta in the new l e v e l .
Bonds were n o t , how ever, allow ed to f a l l below p a r . 7®
C h a n d le r, l o c . c i t .
74 I b i d . , p . 412.
7K
Annual R e p o rt, 1947. o p . c i t . , p . 6. A ^ f o u rth
d e p a r t u r e ” from th e r i g i d y ie ld p a t t e r n was th e r a i s i n g o f
the 12-m onth c e r t i f i c a t e r a t e to 1 - 1 /4 p e r e e n t on O cto b e r
1, 1948. See C h a n d ler, l o c . c i t .
34
The above a c t i o n s o f the System I n s t i l l e d some upward
f l e x i b i l i t y In y i e l d s and i n t e r e s t r a t e s , h u t t h i s f l e x i b i l
i t y was l a r g e l y co n fin e d to the s h o r te r - te r m I s s u e s and I t
was n o t o f g r e a t m a g n itu d e . The s h o r t e r I s s u e s , a l s o , were
n o t allo w ed to descend below p a r . The Board s t a t e d t h a t i t
was g o in g to m a in ta in a n o r d e r l y m a r k e t . ^
These a c t i o n s d id have th e m e r ito r io u s e f f e c t o f
e l im in a tin g the p r a c t i c e o f p la y in g the r a t e p a t t e r n . T h is
allo w ed th e System to s e l l much o f i t s h o ld in g s o f b i l l s .
By a c q u ir in g bon d s, i t s p o r t f o l i o o f F e d e ra l o b l i g a t i o n s was
b ro u g h t more in to b a la n c e w ith the r e q u i s i t e s o f a c t i v e open
m ark et o p e r a t io n s .
A r e c e s s io n , w hich l a s t e d n e a r ly a y e a r , began a b o u t
O cto b er 1948. To f o s t e r re c o v e ry the Open M arket Com m ittee,
a f t e r c o n s u l t a t i o n w ith th e T re a su ry , announced on June 28,
1949:
• • . w ith a view to in c r e a s in g the su p p ly o f fu n d s
a v a i l a b l e in th e m a rk e t to m eet th e needs o f commerce,
b u s in e s s , and a g r i c u l t u r e i t w i l l be the p o lic y o f the
Committee to d i r e c t p u rc h a s e s , s a l e s , and exchanges o f
Government s e c u r i t i e s by the F e d e r a l Reserve Banks w ith
p rim a ry re g a rd to th e g e n e ra l b u s in e s s and c r e d i t s i t u a
t i o n . The p o lic y o f m a in ta in in g o r d e r ly c o n d itio n s in
th e Government s e c u r i t y m a rk e t, and th e c o n fid e n c e o f
i n v e s to r s in Government bonds w i l l be c o n tin u e d . Under
p r e s e n t c o n d itio n s th e m aintenance o f a r e l a t i v e l y f ix e d
p a t t e r n o f r a t e s h as the u n d e s ir a b le e f f e c t o f a b s o rb in g
r e s e r v e s from th e m ark et a t a time when the a v a i l a b i l i t y
Annual R e p o r t. 1 9 4 7 . o p . c i t . . p . 93.
35
77
o f c r e d i t sh o u ld be increased*.
T his announcement was fo llo w ed hy a r e d u c tio n in mem
b e r hank r e s e rv e re q u ire m e n ts two days l a t e r . 78 M arket
p r i c e s in c re a s e d and y i e l d s dropped s h a r p ly (see F ig u re 2 ) ,
e s p e c i a l l y on the s h o r t e r i s s u e s , a s th e member hanks so u g h t
to I n v e s t t h e i r r e le a s e d re s e rv e s * The System made s h o r t
term s e c u r i t i e s a v a i l a b l e from i t s p o r t f o l i o and th e m ark et
soon r e c o v e r e d ,78
The th e n Chairman o f th e B oard, Thomas MeCahe, avowed
t h a t t h i s June s ta te m e n t o f the Committee was a " s i g n i f i c a n t
77
Annual R e p o rt. 1949. o n * c i t * . p* 115* The v ag u e
n e s s o f t h i s announcem ent 'has been HuEbed " s p h in x - lik e " by
one o b se rv e r* He b e lie v e d th a t i t was p u rp o s e ly drawn in
t h i s m anner so , d e s p ite a change in s u p p o rt p o lic y , i t would
le a v e peo p le in doubt a s to w h eth e r bonds were to be p a r
su p p o rted o r w h eth e r th e System was ed g in g away from su ch a
p r a c t i c e . See D ouglas Subcom m ittee, H e a rin g s , o p . c i t . ,
p . 257, S tatem en t o f I . E . Brown, November 22, 1949* To the
System , Thomas McCabe s a i d , i t m eant f l e x i b i l i t y b o th w ays,
i . e . , up in an i n f l a t i o n and down in a r e c e s s io n o r d e p r e s
s io n . He u n d e rsto o d t h a t the T re asu ry so i n t e r p r e t e d i t .
Idem , p . 494, December 3 , 1949. To some p e r s o n s , how ever,
c e r t a i n p h ra s e s o f the announcem ent caused worry* F o r ex
am ple, "w ith p rim a ry re g a rd to th e g e n e r a l b u s in e s s and c r e
d i t s i t u a t i o n , " "u n d er p r e s e n t c o n d i t i o n s ," and " a t a tim e
when th e a v a i l a b i l i t y o f c r e d i t should be in c r e a s e d ," l e f t
P a u l McCracken a p p re h e n siv e a s to w h eth e r o r n o t m onetary
p o l i c y ’ s " in d e n tu r e " to f i s c a l and d e b t management was now
c o n c lu d e d . He rem arked, "The answer i s by no means a s e l f -
e v id e n t y e s ." See P . W. McCracken, "The P r e s e n t S ta tu s o f
M onetary and F i s c a l P o l i c y ," Jo u rn a l o f F in a n c e . 5 :3 4 -3 5 ,
M arch, 1950.
78
The tem p o rary in c re a s e in re s e rv e re q u ire m e n t
a u t h o r i t y g ra n te d to th e Board by C o n g ress, in 1948, ended.
79
A n n u a l R e p o r t. 1 9 4 9 . o p . c i t * . pp. 8 f .
26
m i l e s t o n e .” I t n o t o n ly r e f l e c t e d a J o in t T re a s u ry -F e d e ra l
B eserve p o s i t i o n , b u t i t a ls o " . . . s i g n i f i e d rem oval o f
the s t r a i t - J a c k © t in w hich m o n etary p o lic y has been o p e ra -
80
t i n g f o r n e a r l y a d ecad e. . . *n Ju x tap o sed w ith t h i s was
h i s rem ark t h a t the Open M arket Committee would c o n tin u e
t h e i r o p e r a tio n s w ith due re g a rd f o r ” • . . the s t a b i l i t y o f
the F e d e r a l d e b t and i t s r e p e r c u s s io n s upon th e e n t i r e d e b t ;
81
s t r u c t u r e . ” The Com m ittee, how ever, d e c la re d t h a t the on
l y change i n p o lic y from p re v io u s d i r e c t i o n " . . • was in
the r e f e r e n c e to o r d e r ly c o n d itio n s a s d is tin g u ls h e d from
s t a b l e and o r d e r ly c o n d itio n s in the Government s e c u r i t y
82
m a r k e t.” These s ta te m e n ts , drawn from th e same announce
ment by th e g u id in g e lem e n ts o f System p o lic y , would a p p e a r
to be c o n f l i c t i n g .
To a v o id a b s o rb in g fu n d s t h a t m ig h t be made a v a i l a b l e
to p r i v a t e b o rro w e rs, th e B oard, in June 1949, s t a t e d t h a t
i t had ”. . . d is c o n tin u e d the p r a c t i c e of making Government
bonds a v a i l a b l e in re sp o n se to m ark et dem and.”®^ As Wood-
D ouglas Subcom m ittee, B e a rin g s , o p . c i t . , p . 471,
December 2 , 1949.
81 Iflbnu I t a l i c s n o t in the o r i g i n a l .
82 Annual B e p o rt. 1949. o p . c l t . . p . 114. I t a l i c s
n o t in the o r i g i n a l .
8S I b i d . . p . 1 0 .
57
l i e f Thomas, economic a d v i s e r to th e Board o f G o v ern o rs, r e
marked in m id-1950, th e re was no q u e s tio n o f s u p p o rtin g
bonds a f t e r t h a t "• • • b ecause th e ten d en cy h a s been f o r
th e bonds to go up r a t h e r th a n to come down. . . . gjfcig
rem ained the s i t u a t i o n u n t i l s h o r t l y a f t e r th e tu r n o f 1951.
The lo n g -te rm r a t e .--A s h a s been s e e n , th e Board o f
G overnors began i t s e f f o r t s to se c u re f l e x i b i l i t y In the
s h o r t- te r m r a t e in 1946. I t d id n o t se e k an upward r e v i s i o n
in the b a s ic 2 -1 /2 p e r c e n t lo n g -te rm r a t e . Form er Board
Chairman M a rrin e r E c c le s s a i d : "The one th in g you c a n n o t do
i s to have c o n fid e n c e shaken in t h a t 2 -1 /2 p e r c e n t r a t e # " 8®
The th e n Board Chaizm an, Thomas McCabe, a g re e d w ith such a
p o s i t i o n # , f o r the f o r e s e e a b le f u t u r e # ”86 The T re a su ry
D epartm ent had s i m i l a r view s on t h i s p o i n t : " I th in k we a re
d e f i n i t e l y o o m m itted ," S e c r e ta r y Snyder a f f ir m e d , "to the
s u p p o rt o f a 2 -1 /2 p e r c e n t r a t e . " 87 The f i r s t two were to
84s U .S . C o n g ress, H ea rin g s B efore th e House Committee
on Banking and C u rre n c y . H.R. 7894. June 14, 1950, p . 452.
86 U .S . C o n g ress, H ea rin g s B efore th e J o i n t Committee
on th e Economic R e p o rt. December 10, 1949, p . 620• Mr. Ee-
o le s was Chairman o f th e Board from th e l a t t e r p a r t o f 1934
to the f i r s t p a r t o f 1948. From 1948 to the l a t t e r p a r t o f
1951, when he r e s ig n e d , he was one o f th e Board members.
86
H e a rin g s . H ouse. S . J . R es. 1 5 7 . o p . c l t . . p . 101,
A ugust 2, 1948. M r. McCabe"“was Chairman o f th e Board from
March 1948 to M arch 1951, when he r e s ig n e d .
87 I b i d . , p . 250.
38
change t h e i r m inds in a few y e a r s .
I n 1949 E c c le s d e c la r e d " n o th in g co n ld he w orse" th a n
f o r the Open M arket Committee to i n d e f i n i t e l y peg th e lo n g
term honds a t 3 -1 /2 p e r c e n t . " I t would he p e r f e c t l y s tu p id
O O
th e n to have more th a n one r a t e . " The f e d e r a l B eserve had
announced tim e and a g a in t h a t a prom ise o f an i n d e f i n i t e
su p p o rt a t p a r f o r a l l Governm ents had n e v e r heen g iv e n ,
89
e i t h e r hy th e System o r hy the Governm ent. I t c o n tin u e d ,
how ever, to su p p o rt th e m a rk e t a t p a r o r b e t te r * T his d i
chotomy o f m a rk et a c t i o n and p o lic y s ta te m e n t was h e s t sum
med up hy a p ro m in en t Chicago h a n k e r who s a id t h a t he would
do th e same. I . e . , s u p p o rt honds a t p a r in p r a c t i c e y e t n o t
90
g iv e a prom ise to do s o .
B a r e n t h e t i e a l l y , i t m ig h t he n o ted t h a t though con
f r o n te d w ith d e h t m o n e tiz a tio n , th e l o s s o f m o n etary pow ers,
e t c . , th e m onetary a u t h o r i t i e s d id n o t tak e a s tr o n g a n t i -
i n f l a t i o n a r y s ta n d . What th e y d id was to h e s e t C ongress
88
D ouglas Subcom m ittee, H e a rin g s , o p . c i t . . p . 241,
November 22, 1949.
89
See U .S . C on g ress, H e a rin g s B efore th e J o i n t Com
m itte e on th e Economic R e p o rt. S tatem en t o f M a rrin e r E c c le s ,
-April 177 1948, p . 16. A lso see D ouglas S ubcom m ittee, H ear
in g s , o p . c l t . . p . 439, S ta te m e n t o f A lla n S p ro u l, December
2 , 1949. ~ ~
90
I h i d • , p . 257, S tate m e n t o f E. E. Brown, November
2 2 , 1 949.
29
"• • • f o r a d d i t i o n a l pow er • . • to check: c r e d i t ex p an sio n
w ith o u t Im p e rilin g the 2 - 1 /2 p e r c e n t I n t e r e s t r a t e on lo n g
term Government s e c u r i t i e s * " 9- * - G* I* Bach, p r o f e s s o r o f
econom ics a t C arnegie I n s t i t u t e o f fe e h n o lo g y a s s e r t e d t h a t
th e B oard*s • « re p e a te d r e q u e s ts f o r new pow ers r e f l e c t
ed t h e i r b a s ic u n w illin g n e s s to u se t h e i r one p o w e rfu l weap
on— the w ith d ra w a l o f m a rk et su p p o rt f o r lo n g -te rm G overn-
92
m ent s e c u r i t i e s . " fh e In tim a te r e l a t i o n s h i p betw een the
i n t e r e s t r a t e problem and th e many p ro p o s a ls f o r a d d i t i o n a l
c o n tr o l re q u e s te d by th e Board was ob v io u s to som e.93
I n March 1951, a f t e r a b i t t e r In tra -G o v e rn m e n ta l d i s
p u te , th e F e d e ra l R eserve won th e f l e x i b l e m onetary p o lic y *
w ith r e s p e c t to m a rk et s u p p o rt, t h a t had lo n g been I t s s t a t
ed o b je c tiv e * She d eg ree o f f l e x i b i l i t y t h a t w i l l be a l
lowed I s n o t y e t a p p a r e n t, b u t th e s ig n i f ic a n c e o f th e lo n g -
e s t - t e m bonds d ro p p in g below p a r f o r th e f i r s t tim e in a
Bach, o p . c l t . . p . 140.
Idem * Mr. B ach, in an a r t i c l e on m onetary p o lic y ,
rem arked: w I n t h e p o stw a r p e r io d , o f f i c i a l F e d e r a l R eserve
pronouncem ents have su g g e ste d a s c h iz o p h re n ic u rg e to r a
t i o n a l i z e low i n t e r e s t r a t e s in i n f l a t i o n w h ile i n s i s t i n g
t h a t a l l th e l o g i c a l c o n c o m ita n ts o f low I n t e r e s t r a t e s m ust
be av o id ed i f d i s a s t e r I s to be p r e v e n te d ." G* I . Bach,
"fhe F e d e r a l R eserve and M onetary P o lic y F o rm a tio n ," Am eri
can Economic R eview . 2 9 :1 1 8 0 , December, 1949*
93
See D ouglas Subcom m ittee, H e a rin g s , o p . c l t *.
p . 180, S ta te m e n t o f W. R. B u rg e ss, November i f ; 1949.
4 0
decade was n o t l o s t on many o b s e r v e r s , The s ig n i f ic a n c e o f
such an e v e n t w i l l become r e a d i l y a p p a re n t In tb e n e x t s e c
t i o n ,
I ? , PBOPOSABS
I n tr o d u c tio n
The p r o p o s a ls f o r change in tb e i n t e r e s t r a t e p o lic y
o f tbe System co u ld be r e a d i l y summarized i n tbe f u e s t l o n :
Should tb e I n t e r e s t r a t e be r a i s e d , m a in ta in e d a t low l e v
e l s , o r allo w ed to become f l e x i b l e ? I n the p o stw a r y e a r s ,
the q u e s tio n was c l o s e l y lin k e d w ith th e i n f l a t i o n problem ,
d e b t management, and m arket s t a b i l i t y . The a b i l i t y o f mone
t a r y d e v ic e s a lo n e to r e s t r a i n i n f l a t i o n w as, th e Board d e
c l a r e d , w, . . a g r e a t l y m a g n ifie d view o f the in flu e n c e o f
m o n etary a c t i o n on th e co u rse o f economic l i f e , " 9^ Many
p e rs o n s were n o t c o n v in c e d .
An im p o rta n t c o n s id e r a ti o n in the v a r io u s p ro p o s a ls
was th e w e ig h t a s c r ib e d to the in flu e n c e o f the i n t e r e s t
r a t e on tb e economy. D isagreem ent on t h i s s u b je c t was w id e
s p re a d —many m o n etary e x p e r ts b e in g a t d i r e c t odds w ith
o th e r o f t h e i r b r e t h r e n , 95
94 Annual Repqr t . 1943, o p * c l t . , p . 10,
A C
Donald B, Woodward, docum enting each p o s i t i o n w ith
the s ta te m e n ts o f s e v e r a l m o n etary o r f i s c a l a u t h o r i t i e s .
41
The L oss o f M onetary C o n tro l
The p eg g in g o f th e m ark et and th e narrow range o f
f l e x i b i l i t y in the p o stw a r m ark et toad a n e n e r v a tin g e f f e c t ,
i t was s a i d , upon th e pow ers o f th e m onetary a u t h o r i t i e s *
As i t was pm t, th e R eserve S y stem 's p o lic y in h i b i t e d the use
o f h ig h e r i n t e r e s t r a t e s to combat i n f l a t i o n . 96
That th e System was p o w e rle ss to r e s t r i c t c r e d i t on
an o v e r - a l l b a s i s , w h ile m a in ta in in g low y i e l d s in th e m ar
k e t , was p r e d ic a te d on two o p p o r tu n ity c o s t s ' p re m is e s .
F i r s t , the freedom o f Government s e c u r i t y i n v e s to r s to s e l l
t h e i r h o ld in g s a t t h e i r own o p tio n was unham pered. They
co u ld u se th e r e c e i p t s o f t h e i r s a l e s to le n d o r in v e s t f o r
any d e s ire d p u rp o s e . I f the r a t e s on p r i v a t e o b l i g a t i o n s
in c r e a s e d , r e l a t i v e to F e d e r a l i s s u e s , i n v e s t o r s were
prom pted to s e l l them to in c re a s e th e r e t u r n on t h e i r
p r e s e n te d th e fo llo w in g c o n f l i c t i n g view s co n c e rn in g the i n
t e r e s t r a t e : ”. . . low r a t e s s tim u la te in v e s tm e n t, r a t e s
a re n o t an Im p o rtan t c o n s id e r a tio n in in v e stm e n t d e c is io n ,
h ig h r a t e s s tim u la te in v e s tm e n t, low r a t e s s tim u la te s a v in g ,
r a t e s a re n o t im p o rta n t in th e m o tiv a tio n o f saving* h ig h
r a t e s s tim u la te s a v in g s ." See 2>. B. Woodward, "The P u b lic
D ebt: E f f e c t s on I n s t i t u t i o n s and Incom e," A m erican Economic
R eview . P ro c e e d in g s . 3 7 :1 7 8 -7 9 , May, 1947.
96 See XJ.S* C o n g ress, R ep o rt o f th e Subcommittee on
M o n etary . C r e d i t , and F i s c a l P o l i c i e s o f th e J o I n i Committee
on th e Economic R e p o rt. Ja n u a ry 23, 1950, p . Z i • As w ith
th e C o n g re s sio n a l h e a rin g s from w hich t h i s r e p o r t is s u e d ,
t h i s re f e r e n c e w i l l h e r e i n a f t e r be n o te d by th e name o f th e
S u b co m m ittee's ch airm an , S e n a to r P . H. B o u g las.
42
m oney.97 Second, the R eserve System had to sta n d re a d y to
buy a l l o f th e Governm ents n o t d e s ire d by in v e s to r s i n o r d e r
to m a in ta in the narrow y ie ld l i m i t s i t had e s ta b lis h e d * The
y ie ld s a c r i f i c e d on the s e c u r i t i e s so ld r e p r e s e n te d th e c o s t
o f a c q u ir in g money from th e System . T his " c o s t" was n e g l i
g ib le * T h is p a s s iv e marlcet r o le was a s s u ra n c e to s e l l e r s
t h a t money was a v a i l a b l e to them a t t h e i r own o p tio n and in
u n lim ite d q u a n t i t i e s . 98 I f a T re a su ry s u r p lu s was used to
r e s t r i c t th e su p p ly o f money and c r e d i t th e e f f e c t s o f th e
a c t i o n was o f f s e t by t h i s p r a c t i c e . "
97 '
D ouglas Subcom m ittee, R e p o rt, l o c . c i t . I n 1948
the Board had s ta te d t h a t in o r d e r to m a in ta in economic s t a
b i l i t y and to av o id i n f l a t i o n , d i r e c t c o n t r o ls would be n e c
e s s a r y in th e t r a n s i t i o n p e r io d to p re v e n t i n v e s t o r s from
s h i f t i n g o u t o f Governments f o r p u rp o se s o f s p e c u la tio n and
to p re v e n t the b id d in g up o f sc a rc e com m odities, r e a l e s
t a t e , e tc* See A nnual R e p o rt. 1948. o p . c i t . . p . 1 0 . M ost
d i r e c t c o n t r o l s , how ever, were abandoned w ith in one hundred
days a f t e r th e w a r 's en d . The B oard, th e n , r e i t e r a t e d i t s
1948 sta n d o f th e r e l a t i v e i n e f f e c t i v e n e s s o f m o n etary p o l i
cy a c t i n g a lo n e . I t a ls o argued t h a t th e u t i l i z a t i o n o f
t r a d i t i o n a l m o n etary powers a g a in s t th e i n f l a t i o n a r y f o r c e s ,
a s some were u r g in g , d id n o t tah e in to p ro p e r c o n s id e r a tio n
" . . • e i t h e r th e in h e r e n t l i m i t a t i o n s o f th e S y stem s' ex
i s t i n g s t a t u t o r y pow ers, u n d er p r e s e n t- d a y c o n d i tio n s , o r
th e i n e v i t a b l e r e p e r c u s s io n s on th e economy g e n e r a l l y and on
the G overnm ent's f in a n c in g o p e r a tio n s in p a r t i c u l a r o f an
e x e r c is e o f su ch e x i s t i n g powers to a d egree to be an e f
f e c t i v e a n t i - i n f l a t i o n a r y i n f l u e n c e ." Annual R e p o rt. 1946,
o p * o l t . , p . 1 .
98 D ouglas Subcom m ittee. R e p o rt, l o o , c i t .
99
I n the p o stw a r p e r io d , the T re a su ry had a s u r p lu s
in two y e a r s , 1947 and 1948, and in 1946 had a c a sh s u r p lu s
from an o v e r s a le i n th e E ig h th War Loan d r i v e . Most o f the
42
The f u n c tio n s o f open m a rk et o p e r a tio n s were r a d i c a l
l y changed by th e S y ste m 's p o l i c y . The a c c u r a te c o n t r o l i t
had fo rm e rly p o s s e s s e d , h e in g a h le to huy o r s e l l p r e c i s e l y
th e amount o f s e c u r i t i e s i t deemed a p p r o p r ia te , w ith re g a rd
to economic c o n d i tio n s , was g o n e .100 The He se rv e System had
to p u rc h a se s e c u r i t i e s from a l l h o ld e r s w ith o u t re g a rd to
how th e money would he u s e d .
The t r a d i t i o n a l f u n c tio n o f the System , I . e . , a c tin g
a s a hankers* hank and c o n t r o l l i n g the volume o f member hank
r e s e r v e s th ro u g h th e Open M arket Com m ittee, had v a n is h e d .
A ll i n v e s to r s w ere a h le to se c u re B eserve System c r e d i t by
s e l l i n g s e c u r i t i e s . The immense p u b lic d e b t h e ld o u ts id e
the System and the Government made t h i s an im p o rta n t
C hange.101
s u r p lu s e s were used to r e t i r e o r redeem s e c u r i t i e s h eld by
th e R eserve B anks, b u t th e com m ercial banks r e s i s t e d t h i s
d e f l a t i o n a r y move to the e x te n t t h a t th e y so ld s e c u r i t i e s to
the System and re p le n is h e d d e p le te d r e s e r v e s . The S y ste m 's
h o ld in g s o f Government s e c u r i t i e s d e c lin e d o n ly s l i g h t l y .
See Kemmerer, op. c i t . « p p . 186 f . As I t was p u t by one
m onetary a u t h o r i t y , the s tr o n g e s t a n t i - i n f l a t i o n a r y d e v ic e ,
a T re a su ry s u r p lu s , was l o s t th rough the a b i l i t y o f f ir m s ,
b a n k s, e t c . , to f*. . • b a i l th em selv es o u t o f t h i s l i m i t a
tio n by b orrow ing o r by re a d y s a l e s o f Government s e c u r i
t i e s .'* See M cCracken, p p . c i t . . p . 32.
100 C h a n d le r, p p . p i t . , p . 417,
Brooke W i l l i s b e lie v e d t h a t th e low -
y ie ld p o lic y o f the System was u n s a t i s f a c t o r y a s a c r i t e r i o n
o f c e n t r a l bank p o lic y f o r " . . . i t rem oves a l l l i m i t s upon
the a v a i l a b i l i t y o f bank r e s e r v e s and r e n d e rs th e c e n t r a l
44
D esp ite the f a c t t h a t th e Committee had the power to
s e l l s e c u r i t i e s to r e s t r i c t c r e d i t , i t was co m p elled , ” . • •
u n d e r t h i s p o l i c y , to buy them hack a g a in to p r e s e n t a r i s e
in y i e l d s . " 3,02 Open m a rk et o p e r a tio n s were a t th e m ercy o f
th e m a rk e t.
B e d ise o u n t r a t e s , in s o f a r a s th ey co u ld a id in c u rb
ing i n f l a t i o n , had l i t t l e m eaning due to th e r a t e p o lic y
fo llo w e d . They were e f f e c t i v e in one d i r e c t i o n o n ly , and
t h i s was a c o u rse c o n tr a r y to th e one r e q u ir e d . Banks were
more I n c lin e d to s e l l G overnm ents th a n to d is c o u n t them .3,0* 5
As L e s te r 7* C h a n d le r, p r o f e s s o r o f econom ics a t Amherst
C o lle g e , a rg u e d :
. . . d is c o u n t r a t e s below th e y i e l d s on Governments may
ten d to ea se c r e d i t , b u t r a t e s above the y i e l d s on Gov-
bank p o w e rle ss to c o n t r o l th e su p p ly o f d e p o s i t s . " See J .
B. W i l l i s , "The Case A g a in s t th e M aintenance o f the Wartime
P a t t e r n o f Y ie ld s on Government S e c u r i t i e s , ” Am erican Eco
nomic Beylew, 3 7 :2 2 4 , May, 1947.
102 jjo u g las Subcom m ittee, Be p o r t , l o o , c i t .
103
The r e d is c o u n t r a t e h as to ad h ere c l o s e l y to the
Com m ittee*s buying r a t e on s h o r t- te r m s e c u r i t i e s . When th e
member banks m eet t h e i r r e s e r v e re q u ire m e n ts , th e y o f te n
borrow o v e r - n ig h t fu n d s , p e rh a p s f o r two o r th re e d ay s,
r a t h e r th an go th ro u g h th e m a rk e t. I f th e d is c o u n t r a t e i s
much h ig h e r th a n th e b u y in g r a t e " . • . th e banks w i l l buy
and s e l l b i l l s and c e r t i f i c a t e s to a d j u s t t h e i r re s e rv e po
s i t i o n s . " I n t h i s case th e d is c o u n t r a t e would be c o n s id e r
ed a " p e n a lty " r a t e . See D ouglas Subcom m ittee, B e a rin g s ,
o p. c i t . , p . 226, S tate m e n t o f M a rr in e r S. E e e le s , November
I I , 1949.
45
ern m en ts w hich hanks can s e l l f r e e l y to the F e d e ra l He-
se rv e a re l i k e l y to he l a r g e l y m e a n in g le ss* 104
The much to u te d p s y c h o lo g ic a l e f f e c t s o f an in c re a s e
in r e d is c o u n t r a t e s w ere m itig a te d sin c e th e member hanks
were l a r g e l y o u t o f d e b t to th e System* W ith t h e i r la r g e
h o ld in g s o f s e c u r i t i e s th e y were in no im m ediate d an g e r o f
becom ing s o . 106 The m oral s u a s io n o f th e System was weaken*
ed by the freedom from in d e b te d n e ss o f the member banks*
The power o f an in c re a s e in r e s e rv e re q u ire m e n ts was
g r e a t l y le s s e n e d by th e S y ste m 's I n t e r e s t r a t e p o l i c y . Be
cause th e n a t i o n 's com m ercial banks h e ld such la r g e am ounts
o f s e c u r i t i e s r a i s i n g r e s e rv e re q u ire m e n ts to th e maximum
n e c e s s i t a t e d the s e l l i n g o f o n ly a sm a ll p o r tio n o f th e
b a n k s ' s e c u r i t y h o ld in g s to r e p a i r t h e i r p o s it io n s * 106 C re
d i t ex p a n sio n was r e ta r d e d " . . . o n ly to th e e x t e n t t h a t
104 C handler* 0£ . c i t . . p . 419*
105 B ouglas Subcom m ittee, R e p o rt, l o o , c i t * A lfre d
W illia m s, p r e s i d e n t o f th e P h ila d e lp h ia R eserve Bank, a g ree d
t h a t th e d is c o u n t r a t e s were l e s s im p o rta n t th a n th e y had
been in th e p a s t . b ecause r e s e r v e s a re in flu e n c e d
th rough open m ark et o p e ra tio n s * . . . " He d e n ie d , how ever,
the "w eakness" o f the d is c o u n t r a t e . " I th in k we can u n d e r
e s tim a te th e in f lu e n c e o f th e d is c o u n t r a t e because o f the
p s y c h o lo g ic a l a s p e c ts o f t h i s t o o l . ” See D ouglas Subcom
m i t t e e , H e a rin g s , o p . c i t . . p . 33, November 16, 1949. T. B.
McCabe b e lie v e d : "3n in c r e a s e in th e d is c o u n t r a t e h as g r e a t
p s y c h o lo g ic a l e f f e c t , " e s p e c i a l l y in th e s h o r t- te r m m a rk e t.
See H e a rin g s . House, S * J. R es* 1 5 7 . o p . c i t *. p . 134, A ugust
g , 1948. ~
1.06 * '
C h a n d ler, oja. c i t . . p . 420.
46
■banks (were) r e l u c t a n t to reduce t h e i r h o ld in g s o f (Jovern-
1Q7
m ents in o r d e r to a c q u ir e o th e r a s s e t s . ”
M a in ta in in g th e Low B a te —Pro and Oon
I n 1948 th e Board gave f o u r re a s o n s f o r m a in ta in in g
low I n t e r e s t r a t e s d u rin g th e w a r.108 W ith th e c e s s a tio n o f
the w orld c o n f l i c t the r a t e p a t t e r n rem ained unchanged, o r
o n ly s l i g h t l y s o , and th e r e a s o n s , g iv e n f o r th e w ar, were
a p p lie d to th e p o stw a r economy. T his co u rse o f a c t i o n was
d e c r ie d hy some and u p h eld hy o t h e r s .
She c o s t to th e country. » I n 1945 the Board o f
G overnors a v e rre d t h a t an in c re a s e in th e i n t e r e s t r a t e on
th e f e d e r a l d e b t would mean an in c re a s e in th e n a t i o n 's ta x
b i l l . ^ ® She Board members s k e p t i c a l l y re g a rd e d any p r o -
107 C h a n d le r, l o c . c i t .
I n f r a , pp. 19 f .
109
S h is s e c t i o n w i l l n o t c o n s id e r th e in f lu e n c e o f
in c re a s e d ta x e s on th e n a t i o n a l income; the argum ent o f
th o se p r o f e s s in g the Hew Econom ics, t h a t i s , th e d e b t i s i n
t e r n a l l y h eld and th e r e f o r e we owe i t to o u r s e lv e s ; o r , t h a t
one c l a s s g a in s a t th e expense o f th e o t h e r , in th e payment
o f th e d e b t b u rd e n .
n o
Annual B e p o rt. 1945. op. c i t . . p . 5 . She Board
e r r o n e o u s ly s t a t e d t h a t a one p e r c e n t in c re a s e on th e 880
b i l l i o n d o l l a r d e b t would c o s t an a d d i t i o n a l one b i l l i o n
d o l l a r s in ta x e s . I n th e s h o r t ru n , i t depends upon th e
amount o f the d e b t b e in g refu n d ed and t h i s m ight have been a
b i l l i o n d o l l a r s , b u t i t seems h ig h . I n th e lo n g r u n , a f t e r
a l l the d e b t had been re fu n d e d , a one p e r c e n t in c re a s e
would add a 8*8 b i l l i o n d o l l a r in c re a s e to d e b t c o s t .
47
posed in c re a s e * I n t h i s m a tte r , th e T re a s u ry D ep a rtm en t’s
view s c o in c id e d e x a ctly ."* "^
T hat a r a t e in c re a s e would augment th e c o s t o f the
d e h t was in c o n te s t ih le * To many m onetary e x p e r t s , how ever,
t h i s p la c e d th e em phasis in th e wrong p l a c e . These c r i t i c s
a s s e r t e d t h a t the low r a t e f o s te r e d i n f l a t i o n w hich, in
t u r n , c o s t th e c o u n try much more th a n would a sm a ll advance
in ta x e s . K a rl R. Bopp, v ic e p r e s i d e n t o f the P h ila d e lp h ia
F e d e r a l E eserve Bank and n o te d m o n etary e c o n o m ist, co ntended
t h a t inasm uch a s th e F e d e r a l b u d g et had t o t a l l e d f o r t y b i l
l i o n d o l l a r s a n n u a lly s in c e th e w ar,
A th r e e p e r c e n t in c re a s e in the p r i e e s o f th e goods and
s e r v ic e s p u rch ased by the Government would c o s t a s much
a s a tw e n ty -fiv e p e r c e n t in c re a s e in the t o t a l i n t e r e s t
c o s t to the Government*!-^5 *
L. V. C h a n d ler ag ree d w ith such a s th e fo re g o in g and
advanced a s te p f u r t h e r . He s a id the co n seq u en t e n ric h m e n t
o f th e bondholding c l a s s , by an in c re a s e in th e r a t e , could
be a tta c k e d th ro u g h t a x a t i o n . The s h i f t s in w e a lth induced
by i n f l a t i o n , he a l l e g e d , were much more a r b i t r a r y th a n
s h i f t s o f income in v o lv e d in p ay in g h ig h e r ta x e s .
111 gee U .S . C o n g ress, H ea rin g s B efore th e J o i n t Com
m itte e on the Economic R e p o rt, S tate m e n t o f S e c r e ta r y &ny-
d e r , November 28, 1947*, p . 247.
112
D ouglas Subcom m ittee, H e a rin g s , o p . c i t . , p . 5G.
Movember 16, 1949. -----
113 C h a n d ler, 0 £ . o i t . . p . 428.
48
H aul M cCracken, p r o f e s s o r o f econom ics a t th e U n iv er
s i t y o f M ich ig an , c o n c u rre d w ith view s su ch a s C h a n d ler ex
p r e s s e d , h a t he was aware o f d i f f i c u l t i e s o f a more p r a c t i
c a l n a tu re * He n o te d t h a t C o n g ress, h e in g ta x c o n s c io u s ,
would tak e a " ja u n d ic e d " view o f in c r e a s in g ta x e s to pay a
h ig h e r r a t e on th e p u b lic d e h t * ^ ^ He b e lie v e d t h a t th e
T r e a s u r y ’ s knowledge o f t h i s s i t u a t i o n made t h e i r low i n t e r
n s
e s t r a t e b i a s ’’p e r f e c t l y u n d e rs ta n d a b le * " w
A r e l a t e d c r i t i c i s m was t h a t h ig h e r r a t e s would g iv e
th e com m ercial banks e a rn in g s on to p o f a l r e a d y e x c e s s iv e
income* J . B* W i l l i s , o f Columbia U n iv e r s ity and th e Chase
n a t i o n a l Bank, d en ied t h a t bank e a rn in g s w ere e x c e ss iv e *
The a d v o c a te s o f low y i e l d s on Government s e c u r i t i e s
a r e p e rh a p s l e s s co n cern ed w ith th e e x c e s s iv e n e s s o f
bank e a rn in g s a s such th a n w ith the f a c t t h a t a la r g e
p a r t o f bank e a rn in g s a re d e riv e d from Government se c u
r i t i e s * ^
Some e x p e r ts h e ld t h a t the c o u n try had l o s t an o p p o r
t u n i t y to fin a n c e th e w ar a t a low er c o s t* They contended
th a t th e banks had a g u a ra n te e on t h e i r e a r n in g s from Gov-
" In th e p r e s e n t s t a t e o f k now ledge," he s t a t e d ,
"th e bacon Congressmen a re e l e c t e d to b r in g home i s n o t more
ta x e s to p ay , more i n t e r e s t Income to th o se who, i t i s s u s
p e c te d , have too much money anyhow*" M cCracken, o p * c i t * ,
p . 28. -----
Idem* He d id n o t s t a t e t h a t t h i s " b ia s " was d e
f e n s i b l e o r c o r r e c t .
116 W i l l i s , 0£ . c i t *. p. 2 1 9 .
49
erom ent s e c u r i t i e s , w hich in v o lv e d l i t t l e r i s k o r work on
t h e i r p a r t . 1* 7
2?he o p p o sin g view was g iv e n hy P . W. M cCracken,
I t may . . . he d e s ir a b le to fin a n c e th e war a t r a t e s
h ig h e r th a n n e c e s s a r y in c id e n t to w ar f in a n c in g i f the
e x is te n c e o f the d e b t i s n o t to se rv e a s a m ajo r i n s t r u
ment o f i n f l a t i o n in the p o stw a r p e r i o d .118
He b e lie v e d th e World War I I r a t e s t r u c t u r e was " r e tr o s p e c -
<
t i v e , " i . e . , i t looked back to th e d e p r e s s io n y e a r s , and
la c k e d "two n o tc h e s " o f b e in g h ig h enough in th e p o stw a r
B ebt m anagem ent. I n s t i t u t i o n a l h o l d e r s , and i n f l a
t i o n * - - I n e x t r i c a b l e from th e fo re g o in g i s th e q u e s tio n o f
re fu n d in g th e d e b t. W hile the System d id n o t (n o r does n o t)
d eterm in e th e d e s ig n a te d r a t e on s e c u r i t i e s , i t m a in ta in e d
the m a rk et r a t e , w hich was d eterm in ed j o i n t l y w ith th e I r e a -
117 One p e rs o n arg u ed t h a t i t sh o u ld have been a one
p e r c e n t w ar. See P . A. Sam uelson, "fhe E f f e c t o f I n t e r e s t
Bate I n c r e a s e s on the Banking S y stem ," A m erican Economic Re
v iew , 3 5 :1 6 -2 7 , M arch, 1945. f o r a s i m i l a r a t t i t u d e , see
S. E. H a r r i s , "A One P e r Cent War?" A m erican Economic Re
v ie w . 3 5 :6 5 7 -7 2 , S eptem ber, 1945.
118 M cCracken, o n . c i t . . p p . 31 f .
119 I b i d . . p . 3 2 . W ith t h i s i n m ind, th e Board
Chairm an rem arked: "Ih e m ost im p o rta n t le s s o n o f th e w ar and
f in a n c in g e x p e rie n c e i s t h a t i t was d e s ir a b le to have a s t a
b i l i z e d l e v e l o f r a t e s d u rin g th e w ar, b u t n o t n e c e s s a r i l y
th e p a r t i c u l a r h ig h ly abnorm al s t r u c t u r e o f r a t e s w hich h ap
pened to e x i s t a t th e b e g in n in g o f th e w a r." McCabe, o p .
c i t . , p . 26.
50
s u r y .
fixe T re a s u ry , w ith I t s enormous y e a r l y re fu n d in g op
e r a t i o n s , d e c la r e d t h a t a low r a t e and a s t a b l e m ark et were
a n e c e s s i t y to p ro p e r d e b t m anagem ent. I n f l a t i o n i s b e s t
a t ta c k e d , th e T re a su ry was co n v in c e d , by a b u d g et s u r p lu s
a p p lie d to d e b t re d u c tio n .^ -20 I n 1945 th e Board a g ree d w ith
t h i s s ta n d . At t h i s tim e , i t arg u ed t h a t th e re was no a s
su ra n c e t h a t a n in c re a s e i n th e s h o r te r - te r m r a t e s would
p r e v e n t d e b t m o n e tiz a tio n . An in c re a s e would be o f no a s
s is ta n c e in co m b attin g th e i n f l a t i o n a r y p r e s s u r e s w hich had
a r i s e n from th e la rg e volume o f money o u ts ta n d in g and the
i n s u f f i c i e n c y o f p r o d u c tio n in r e l a t i o n to demand.-*-2*
120
See H e a rin g s B efore th e J o in t Committee on the
Economic R e p o rt. S tate m e n t o f S e c r e ta r y Snyder, November 28,
194*7, p p . 246 i .
12* Annual R e p o rt. 1 9 4 5 . o p . c i t . . p p . 5 f . H. C,
W a llie h , a s s o c ia te d w ith th e f e d e r a l R eserve Bank o f New
Y ork, a g re e d t h a t a "m ild " r i s e in the i n t e r e s t r a t e would
do l i t t l e to r e s t r a i n i n f l a t i o n . He b e lie v e d t h a t a se v e re
c r e d i t t i g h t e n in g m ight o v e rs h o o t th e mark and th e c o u n try
could e n t e r a downward s p i r a l . "Thus, b o th a s a n a n t i - i n
f l a t i o n and an a n t i - d e p r e s s i o n d e v ic e , t r a d i t i o n a l i n t e r e s t
p o lic y a p p e a rs to be s ty m ie d .* * H. C. W a llie h , "The Changing
S ig n if ic a n c e o f th e I n t e r e s t R a te ," Am erican Economic Re
v ie w . 3 6 :7 6 3 , December, 1946. M a rr in e r I c c l e s p o in te d o u t
t h a t th e s i x to e i g h t p e r c e n t r a t e in c re a s e in 1929 d id n o t
s to p th e s to c k m ark et i n f l a t i o n . Re was adam ant in h i s view
t h a t i t was C o n g ress, w ith i t s b ra k e s on f i s c a l p o l i c y , and
n o t m o n etary p o l i c y w hich was th e p rim a ry i n f l a t i o n c o n t r o l .
See H e a rin g s . B efo re the House Committee on Banking and C ur
r e n c y . The C r e a tio n and C o n tro l o f tir e d i t by the F e d e r a l
G overnm ent, p a r t 3 , June 3 , 1947, p p . 337 f .
51
The Board a ls o p o in te d o u t t h a t an in c r e a s e in th e
g e n e r a l l e v e l o f i n t e r e s t r a t e s would induce a f a l l in the
m a rk et v a lu e s o f o u ts ta n d in g s e c u r i t i e s , c r e a t i n g m a rk e tin g
d i f f i c u l t i e s f o r t r e a s u r y r e f u n d in g .122 F i n a n c i a l f irm s and
i n s t i t u t i o n a l h o ld e r s o f la r g e in v e stm e n ts in F e d e r a l se c u
r i t i e s would he u n fa v o ra b ly a f f e c t e d hy a m ark et d e c lin e ,
th e Board d e c la r e d , and th e y m ig h t p r e c i p i t a t e a s e l l i n g
p a n i c . 123
As to th e e f f e c t s o f a h ig h e r r a t e on F e d e r a l c r e d i t ,
in d u c in g a l o s s to in v e s t o r s and p o s s i b ly a ru s h to s e l l ,
W i l l i s rem arked t h a t such f e a r s were e x a g g erate d * Those who
would s u s t a i n th e g r e a t e s t l o s s , he a rg u e d , would he th e
s p e c u la to r and th o se i n s t i t u t i o n s who, assum ing th e e o n tln u -
Annual R e p o rt. 1945. o p . c i t . . p . 7 . E c c le s em
p h a s iz e d th e f a c t t h a t i f th e m ark et f o r Governments w a sn ’ t
s t a b l e i t would he d i f f i c u l t to s e t th e p r ic e o f new is s u e s
coming o nto th e m a rk e t. I n v e s t o r s , he d e c la r e d , would he
l o a t h to p u rc h a se them f o r i t would he im p o ssib le to d e t e r
mine w hat t h e i r p r ic e would he a f t e r th e y had b een p u r
c h a se d . See H e a rin g s . H ouse. J3..J* R es. 1 5 7 . o p . c i t . ,
p . 183, A ugust 3 , 1948. ~
122 Annual R e p o rt. 1945. l o o , c i t . I n May 1920, the
F o u rth l i b e r t y lo a n bonds f e l l in p r ic e to 8 2 .5 due to la r g e
s e l l i n g s by h o ld e r s . A co n seq u en t l o s s to s e l l e r s r e s u l t e d .
See Kemmerer, oj>. c i t . . p . 8 8 . W. E. B u rg e ss, a pro m in en t
Hew Y ork b a n k e r and fo rm er member o f the Board o f G o v ern o rs,
b e lie v e d t h a t t h i s p a s t e v e n t re g a rd in g Government s e c u r i
t i e s was in th e f o r e f r o n t o f T re a su ry c o n s id e r a ti o n s con
c e rn in g th e m a rk et su p p o rt program# S ee.B o u g las Subcom
m i t t e e , H e a rin g s , o p. c i t . , p . 184, lovem ber 1 8 , 1949, The
Board p o lic y p e r 1939 seems o u t o f p la c e h e r e . I n f r a . p . 13.
52
ance o f a pegged r a t e , a tte m p te d to m axim ize t h e i r c u r r e n t
Income*3,24
One a u t h o r i t y s t a t e d : "A p a r s u p p o rt p o lic y fco u ld
n o t) he j u s t i f i e d on th e grounds t h a t th e so lv e n c y o f f i n a n -
125
c i a l i n s t i t u t i o n s would he Im p a ire d . . . . ” Ho l o s s
would r e s u l t , he a l l e g e d , u n le s s the s e c u r i t i e s were s o ld ,
w hich i s th e p r e c i s e s i t u a t i o n d e s i r e d . 1 2 ^
The argum ent t h a t low y i e l d s had to he m a in ta in e d to
p re v e n t a c a p i t a l l o s s to h o ld e rs o f s e c u r i t i e s was a l s o u n
c o n v in c in g to L* V* C handler* H is c o n v ic tio n was based on
th r e e c o n s id e r a ti o n s : (1) one group should n o t a s k o r e x p e c t
to r e c e iv e p r o t e c t i o n a g a i n s t a money d e p r e c ia t io n o f m ar
k e ta b le s e c u r i t i e s ; (2) p r o t e c t i o n from m ark et d e p r e c ia t io n
would n o t p r o t e c t s e c u r i t y h o ld e rs from a l o s s o f p u rc h a s in g
power in an i n f l a t i o n ; and (3) o u ts ta n d in g Governments could
he refu n d ed a t a h ig h e r coupon r a t e e n a b lin g s e c u r i t i e s to
he s o ld a t p a r v a lu e in a tig h te n e d money m a r k e t.127 He
p ro p o sed t h a t th e System r e g a in i t s c o n t r o l o v e r the volume
o f l n v e s t i b l e f u n d s —a n a c t i o n w hich n e c e s s i t a t e d the u t i l i -
124 W i l l i s , ojd. c i t *. p p . 223 f .
125
M cCracken, o p* c i t . . p . 27.
186 Idem
1 C han d ler, ojj. o l t .. p. 4 2 7 .
53
z a tio n o f th e v a r i a b l e i n t e r e s t r a t e to m eet th e f l u c t u a t i n g
m a rk e t demand#*28
R ecent D evelopm ents i n P olle.v
I n the l a t e 1 9 4 0 's , th e Board o f G overnors became an
o u tsp o k e n c r i t i c o f th e lo w -y ie ld p o l i c y on s h o r t- te r m i s -
1 2 9
sues#* As h as b een n o te d , i t re c e iv e d some o f th e f l e x i
b i l i t y i t d e s i r e d . ^ * W ith t h i s even the t r e a s u r y had to
in c r e a s e th e r a t e on t h e i r new s e c u r i t y i s s u e s . McCabe
s t a t e d t h a t th e o r d e r l y m ark et was m a in ta in e d
. . . n o t" p r im a r i ly because o f an im p lied commitment to
128 C h a n d le r, o p . c i t *. p . 428.
129
P e rh a p s t y p i c a l o f many o f the B o a rd 's s ta te m e n ts
were th o se o f E ccles* when he ap p eared b e fo re C ongress and
d e c la r e d t h a t th e r e was l i t t l e o r n o th in g th e Board co u ld do
a b o u t the g e n e r a l c r e a t i o n o f c r e d i t . • o u r in f lu e n c e
in s to p p in g th e I n f l a t i o n a r y developm ent t h a t to o k p la c e was
p r a c t i c a l l y n e g l i g i b l e . W e c a n n o t s to p th e c r e a t i o n o f c r e
d i t a s lo n g a s we s u p p o rt th e Government bond m a rk e t. • « . "
He th en p re s e n te d s e v e r a l p r o p o s a ls f o r i n f l a t i o n c o n t r o l
w hich form a p o r t i o n o f t h i s t h e s i s . See H ea rin g s B efore
th e House Committee on B anking and C u rre n c y . Tke C r e a tio n
and C ontro 1 o f d r e d i t by the F e d e r a l Governm ent, p a r t 2,
June 1 2 , 1947, p p . 290 f . M r. E c c le s r e v e a le d t h a t th e Open
M arket Committee had been In f a v o r o f r a i s i n g th e s h o r t- te r m
r a t e s s in c e e a r l y 1946, b u t "we ra n in to r e s i s t e n c e alw ays
w ith th e T r e a s u r y ." He s a id he d i s l i k e d p egging th e lo n g
term s e c u r i t i e s b u t " . . . c o u l d n 't f ig u r e o u t any a l t e r n a
t i v e } " n o n -s u p p o rt would n o t have red u eed th e demand and
c o u ld have caused p a n ic s e l l i n g . See D ouglas Subcom m ittee,
H e a rin g s , o p. c i t . . p p . 228 f f , November 22, 1949.
1S0 I n f r a , p p . 2 7 f f .
5 4
w artim e i n v e s to r s t h a t t h e i r sa v in g s would he p r o t e c t e d ,
n o r to a id th e T re a s u ry in re fu n d in g m a tu rin g d e h t, h u t
heoause o f the w id esp re ad r e p e r c u s s io n t h a t would in su e
th ro u g h o u t the economy i f the v a s t h o ld in g s., a f the pub-
l i e d e h t were f e l t to he o f u n s ta b le v a l u e . 161
The r e c e n t (1951) abandonment o f the lo n g m a in ta in e d
and s tr o n g ly defended lo n g -te rm 2 -1 /2 p e r c e n t r a t e and the
i n s t i t u t i o n o f a more f l e x i b l e m ark et p o lic y was a n example
o f th e System m o d ify in g a p o lic y fa v o re d hy th e T re a su ry
h u t n o t hy i t s e l f .
T his r e c e n t in c r e a s e in s e r v ic e ch arg e to the T re a s
u r y had re c e iv e d a p p ro v a l in a t l e a s t one C o n g re s s io n a l
g ro u p , th e D ouglas Subcom m ittee, p r i o r to i t s b e in g e f f e e t u -
132
a te d by th e R eserve System . T his group view ed i n f l a t i o n
a s th e prim e d a n g e r, n o t T re a su ry re fu n d in g d i f f i c u l t i e s o r
new f in a n c in g . I t s t a t e d t h a t th e re was ”. . . no good r e a -
H e a rin g s . H ouse. S .J . R es. 157, o n . c i t . , p . 8 9 ,
A ugust 2 , 1948. T h is statem ent" d id n o t r e p r e s e n t a com plete
abandonm ent o f th e R eserve System*s p o s i t i o n on r e f u n d in g ,
b ecau se a s McCabe l a t e r s a i d , the ty p e s o f s e c u r i t i e s o f
f e r e d f o r re fu n d in g " . • • have a b e a rin g upon the demands
f o r bank c r e d i t and th u s upon th e F e d e r a l R eserve S y ste m .”
See McCabe, o n . c i t . . p . 3 7 . The June 28, 1949 announce
m ent, he s t a t e d , was p r e d ic a te d on the grounds t h a t the d e b t
had s u f f i c i e n t l y s e t t l e d in the hands o f s t a b l e h o ld e r s to
a llo w a more f l e x i b l e p o l i c y to be fo rm u la te d . See D ouglas
Subcom m ittee. H e a rin g s , o p . c i t . . p . 471, December 3 , 1949.
122
A ll in a l l . C ongress was e x tre m e ly l a x in com bat
t i n g th e I n f l a t i o n a r y f o r c e s o f the p o stw a r p e r io d , l i t t l e
l e g i s l a t i o n o f n o te was p a sse d to c o u n te r a c t th e s e f o r c e s .
T h e ir c o u n s e ls were too lo n g and t h e i r d ee d s too few; p ro p
e r c o n s id e r a ti o n was n o t g iv e n to the r e s u l t s o f t h i s s i t u a
t i o n .
5 5 !
son to b e lie v e t h a t s e c u l a r l y low i n t e r e s t r a t e s (would) be
In th e n a t i o n e l I n t e r e s t * • • *B ^ 33 I n s t e a d , i t was firm in
i t s b e l i e f o f th e d e s i r a b i l i t y o f a s low an i n t e r e s t r a t e a s
p o s s ib le • w ith o u t in d u c in g i n f l a t i o n a r y p r e s s u r e s , "
and f u r th e r e d b e lie v e d , "• • • f l e x i b i l i t y o f i n t e r e s t r a t e s ,
w ith o u t w hich a f l e x i b l e m o n etary p o lic y i s im p o ssib le*
should be r e s to r e d * " ^ 34
The C o n n ell o f Economic A d v ise rs took e x c e p tio n to
the Com mittee*s s ta te m e n ts *
Our view i s t h a t low i n t e r e s t r a t e s a re alw ay s d e
s i r a b l e , In p e r io d s o f i n f l a t i o n th e y have the u n d e
s i r a b l e c o l l a t e r a l consequence o f c o n t r ib u t in g to i n f l a
tio n a r y f o r c e s , b u t even th e n th e y have the economic a d
v an tag e o f f a c i l i t a t i n g th e e x p a n sio n o f p ro d u c tiv e c a
p a c i t y w hich i s th e b e s t road to s t a b i l i t y . . . W e
would r e t a i n the a d v a n ta g e s o f cheap money and a d o p t
o t h e r m easu res to c u rb th e i n f l a t i o n a r y fo rc e s* 1 3 5
H* C. W a llie h , ru m in a tin g a s to w h e th e r th e c o u n try
fa c e d a s e e u la r s ta g n a ti o n tr e n d , b e lie v e d m ost ec o n o m ists
would a g re e t h a t o v e r - a c t i v i t y was l e s s l i k e l y th an u n d e r
a c t i v i t y , i f one o r th e o t h e r had to p r e v a il* He th e n posed
t h e ^ i n t e r e s t i n g q u e s tio n : " I f r a t e s a re p e rm a n e n tly low .
I s2 D ouglas Subcom m ittee, R e p o rt. o p . c i t * . p . 28.
134 iaem
1 55
U .S . C o n g ress, H earin g s B efore th e J o i n t Commit
te e on th e Eoonomlo R e p o rt. Ja n u ary 1 7 , 1950, p . 88* The
CM was s p e c i f i c a l l y d i r e c t i n g i t s rem arks a t th e R ep o rt o f
o f th e D ouglas S ubcom m ittee.
56
Will th e y have the same s ti m u la tin g p o t e n t i a l a s f a l l i n g
r a t e s ? " 1^ 6
¥ . SOM M ARY AN© G0HC1USI0NS
The F e d e ra l R eserve System im m ed iately p r i o r t o , d u r
in g , and sin c e World War I I , engaged In m ark et o p e r a tio n s to
in f lu e n c e the I n t e r e s t r a t e on F e d e ra l s e c u r i t i e s # An e x
tre m e ly low r a t e was m a in ta in e d by them* w h lc , w h ile a c c e p t
a b le d u rin g th e w ar, when i n f l a t i o n a r y f o r c e s co u ld be co n
ta in e d by d i r e c t c o n t r o l s , was s e v e r e ly c r i t i c i z e d in the
p o stw a r y e a r s . T re a su ry f in a n c in g n e e d s and re fu n d in g o p e r
a t i o n s on the huge n a t i o n a l d e b t w ere th e E eserve System *s
prim e c o n s id e r a ti o n In th e r e t e n t i o n o f the low r a t e . Op
p o n e n ts co ntended th a t t h i s p o lic y d e t r a c t e d from th e mone
t a r y c o n t r o l s o f the System and c o n tr ib u te d to I n f l a t i o n .
/
I n tim e , a f t e r the c o u n try had w itn e s s e d an I n f l a t i o n , the
System was a b le to r e g a in some o f i t s p o stw a r a u t h o r i t y .
The p r o p o s a ls f o r a change In p o lic y came from many
s o u r c e s , even from th e System i t s e l f * The numerous a rg u
m ents a s to th e purpose and e f f e c t o f the i n t e r e s t r a t e d id
n o t h e lp e a se th e System ’ s ta s k o f f in d in g a w orkable p r o
gram .
W a llie h , o p . c i t . . p . 764. I t a l i c s in th e o r i
g i n a l .
57
W hile t h i s I s n o t th e p la c e to d e t a i l the d o m in a tio n
o f th e R eserve System hy th e T re a su ry D ep artm en t, I t s men
t i o n c a n n o t he o m itte d I f one i s to p r o p e r ly u n d e rs ta n d the
p o l i c i e s p u rsu ed hy the System in th e p a s t d e c a d e . The
management o f th e F e d e ra l d e h t a t th e lo w e s t c o s t w as, and
y e t re m a in s, in th e f o r e f r o n t o f T re a su ry c o n s i d e r a t i o n s .
The R eserve System w as, and i s , co n n ected I n e x t r i c a b l y w ith
t h a t d e h t; I t form s I t s prim e a s s e t and th e ma;Jor in v e stm e n t
o f th e com m ercial b an ts.-* 37 The f i n a n c i a l s a f e t y o f th e
b a n k s, and many i n s t i t u t i o n s and i n d i v i d u a l s , r e s t e d upon
th e soundness o f Government s e c u r i t i e s . The R eserve System
co u ld n o t ig n o re them. T h is , how ever, i t n e v e r in te n d e d
d o in g . I t s d e s i r e was to m a in ta in o r d e r l y c o n d itio n s in the
m a rk e t, i . e . , a f l e x i b l e p o lic y d e sig n e d to m it ig a t e the e x
c e s s e s and d e f i c i e n c i e s o f th e n a t i o n 's m o n e tary l i f e . The
T re a su ry w anted an o r d e r l y and s t a b l e m a rk e t, i . e . , a m ark et
w ith r i g i d p r ic e s u p p o rt f o r i t s s e c u r i t i e s — i t g r e a t l y sim
p l i f i e d i t s ta s k o f h a n d lin g the d e b t.
The R eserve System y ie ld e d to th e d e s i r e s o f th e
T re a s u ry f o r re a s o n s w h ich a re more f u l l y g iv e n i n Appendix
A, That th e y y ie ld e d i s th e im p o rta n t p o i n t h e re f o r i t
■ * 37 Commercial b an k s have become in v e stm e n t banks t o
day in f a c t i f n o t in th e o r y . More th a n h a l f o f t h e i r a s
s e t s c o n s i s t o f in v e s tm e n ts , l a r g e l y G overnm ents.
58
m eant t h a t th e T re a s u ry was d e te rm in in g th e dom inant p a r t o f
m o n etary p o lic y * Such a r e v o lu ti o n a r y change r e s u l t i n g o v e r
th e seem ing innocuous m a tte r o f a f r a c t i o n o f a p o in t o r so
on Sovernm ent s e c u r i t i e s i s h ard to com prehend.
The o p in io n s o f the E eserve System and th e t r e a s u r y
r e f l e c t two c o n c e p tio n s a s to the s tr e n g t h o f th e i n t e r e s t
r a t e in th e m odern economy# The System would arg u e t h a t a
low and r i g i d i n t e r e s t r a t e s t r u c t u r e prom otes i n f l a t i o n ,
d e t r a c t s from i t s m o n etary c o n t r o l w eapons, an d , in g e n e r a l,
makes the System a b ro g a te i t s m o n etary r e s p o n s i b l i t y . The
t r e a s u r y would n o t s p e c i f i c a l l y deny t h i s b u t would p o in t
o u t the s iz e o f the n a t i o n a l d e b t, th e s t r a t e g i c p o s i t i o n i t
h o ld s in th e economy, and the im p o rtan ce o f a low s t a b l e i n
t e r e s t r a t e p a t t e r n to the debt* The T re a su ry would r e l y on
ta x a ti o n to c o n ta in i n f l a t i o n . I t would em phasize th e c o s t
to the c o u n try o f an in c re a s e in th e r a t e o f i n t e r e s t on th e
d e b t. The E eserv e System would h o ld t h a t th e com pensatory
f i s c a l p o lic y fa v o re d by the T re a s u ry (which h as n o t y e t a p
p e a re d in p r a c t i c e a s i t has in p r i n t s i s a ls o fa v o re d by
i t s e l f . I t would th e n a s k , how ever, w h eth e r t h i s type a c
ti o n was to be p u rsu ed in the ca se o f th e i n t e r e s t r a t e .
E i t h e r a p o s i t i v e o r n e g a tiv e an sw er would p la c e the T re a s
u r y in an e m b a rra ssin g p o s i t i o n in view o f i t s i n s i s t e n c e on
low I n t e r e s t r a t e s .
M s w r i t e r i s o f th e o p in io n t h a t the r i g i d y ie ld
p o l i c y r a p i d l y l o s t i t s o r i g i n a l purpose a s the p o stw a r p e
r io d le n g th e n e d . The t r a n s i t i o n to a c o n su m e r-c e n te re d from
a w a r-c e n te re d economy n e c e s s i t a t e d r e v i s i n g p o l i c i e s to
m eet th e changed m o n etary c o n d i tio n s . Only m inor a tte m p ts
to r e l e a s e the r i g i d m a rk e t were made in 1947 and 1949; a
more f l e x i b l e i n t e r e s t r a t e p o l i c y was n eed ed . An in c re a s e d
ta x b u rd en would have been p r e f e r a b l e to th e i n f l a t i o n .
The p o stw a r y e a r s have had the d i f f i c u l t y , o th e r
th in g s c o n s id e r e d , o f b e in g one in w hich v a s t changes in th e
m o n etary f i e l d w ere in p r o c e s s . The tr e n d o f t h i s change
h as y e t to be f u l l y re s o lv e d an d , c o n s e q u e n tly , th e r e l a t i v e
p o s i t i o n o f th e I n t e r e s t r a t e h as n o t y e t found a firm
fo u n d a tio n . T h e re fo re , w h ile i t i s e a s y , w ith h i n d s i g h t , to
d e t r a c t from p a s t p o l i c i e s , i t i s Im p o rta n t to se ek o u t the
le s s o n s w hich th o se p o l i c i e s should r e v e a l to th e s tu d e n t.
To t h i s w r i t e r , th e le s s o n to be le a rn e d h e re i s t h a t d e b t-
management c o n s id e r a ti o n s sh o u ld n o t p red o m in ate o v e r mone
t a r y p o l i c y in p e a c e tim e .
CHAPTER I I I
THE BQARJ) OP GOVERNORS AM D TEE OPEN MARKET COMMITTEE
The Board o f G overnors lias been th e fo re m o st m onetary
p o lic y -m a k in g body i n t h i s c o u n try o v e r th e p a s t s e v e r a l
decades* However* w ith th e im portance t h a t h a s been at-?
ta c h e d in r e c e n t y e a rs to th e p u rc h a s e s and s a l e s o f G overn
ment s e c u r i t i e s , th e F e d e r a l Open M arket Committee h a s come
in to p o s s e s s io n o f th e prim e d ev ice o f m o n etary c o n t r o l .
T hat p o lic y w ith o u t c o n t r o l o r t h a t c o n t r o l w ith o u t w ise
p o l i c y would be e q u a lly i n e f f e c t u a l o r even d i s a s t r o u s I s
a p p a re n t to b o th g ro u p s . The n e c e s s i t y o f b o th g ro u p s w ork
in g to g e th e r f o r a harm onious s y n th e s is o f a c t i o n i s p a lp a
b l e .
The q u e s tio n t h a t h as a r i s e n , and w ith w hich t h i s
c h a p te r i s co n c e rn e d , i s , sh o u ld one o f th e s e b o d ie s be
a b o lis h e d and i t s d u t i e s and r e s p o n s i b l i t i e s merged in to th e
rem a in in g one? The a n sw e rs, o r p r o p o s a ls , were g e n e r a lly
p r e d ic a te d on the em phasis and u n d e rs ta n d in g g iv e n to the
p a r t i c u l a r f u n c tio n a t t r i b u t e d to each o f th e two.
I . ORGANIZATION, FUNCTION, AND OPERATION
The Board o f G overnors
The Board o f G overnors c o n s i s t s o f seven p e r s o n s , who
61
m u st, by s t a t u t e , r e p r e s e n t the c o u n try g e o g r a p h ic a lly and
e c o n o m ic a lly , i . e . , b u s in e s s , a g r i c u l t u r e , commerce, and f i
nance m ust have r e p r e s e n t a t i o n on th e B oard. Each member i s
a p p o in te d f o r a f o u r te e n y e a r term by th e P r e s i d e n t w ith the
S e n a t e 's c o n s e n t. The P r e s id e n t d e s ig n a te s one o f th e Board
members Chairman and one V ice C hairm an. They se rv e in t h i s
c a p a c ity f o r a f o u r y e a r p e r io d .*
The m a jo r r e s p o n s i b i l i t i e s o f the Board a re (1) th e
fo rm a tio n o f m onetary p o l i c y , (&) th e s u p e r v is io n o f th e n a
t i o n 's com m ercial b an k s, in c o n ju n c tio n w ith S ta te and o t h e r
F e d e ra l a u t h o r i t i e s , and (3) the perform ance o f numerous
o th e r s e r v i c e s w h ich , w h ile im p o rta n t, a r e more o r l e s s o f a
2
ro u tin e n a t u r e .
The Board can be compared w ith the d i r e c t o r s o f any
t y p i c a l bank* F o r i n s t a n c e , i t does no ban k in g I t s e l f .
I t i s a lm o st e n t i r e l y a d e l i b e r a t i v e , p o lic y -m a k in g
body; v i r t u a l l y a l l o p e r a tio n s a r e c a r r i e d on by the
* U .S .f S t a t u t e s a t L a rg e , P u b lic Laws (W ashington:
U .S . Government P r i n t i n g O f f ic e , 193d ) , XLIX, p . 704.
2
U .S . Commission on O rg a n iz a tio n o f th e E x e c u tiv e
B ranch o f th e Governm ent, Task F orce R e p o rt, R e g u la to ry Com
m is s io n s . A ppendix H (W ashington: U .S . Government P r i n t i n g
O f f ic e , 1 9 4 9 ;, p . 107. ( H e r e in a f te r , t h i s r e f e r e n c e w i l l be
n o te d a s Task F orce R e p o rt, w ith th e f i r s t h a l f o f th e t i t l e
f o llo w in g ) . The s e r v ic e s th e Board p erfo rm s c o n s i s t o f such
th in g s a s " . • • c le a ra n c e o f c h e c k s, s e rv in g a s f i s c a l
a g e n t f o r th e T re a s u ry , h o ld in g o f member bank r e s e r v e s ,
p r o v is io n o f c u rre n c y f o r h a n d -to -h a n d c i r c u l a t i o n , and
f u r n is h in g economic and s t a t i s t i c a l d a t a . ” Idem
62
tw elve F e d e r a l E eserve B anks. • • I t s p o lic y -m a k in g du
t i e s c o n s i s t l a r g e l y o f c o n tin u o u s s u r v e il la n c e o f mone
t a r y , f i s c a l , p r i c e , p r o d u c tio n , em ploym ent, and o th e r
tr e n d s t h a t g o v e rn th e l e v e l s o f Income, em ploym ent, and
p r i c e s In th e modern f r e e e n t e r p r i s e sy stem .
The u se and e f f e c t o f th e B o a rd 1 s c r e d i t c o n t r o l s . - -
The Board h as two prim e c r e d i t c o n t r o l in s tr u m e n ts , th e r e
d is c o u n t r a t e and r e s e r v e re q u ire m e n ts . I n th e 1920*s ,
th e s e In s tru m e n ts w ere th e ma^or d e v ic e s f o r c o n t r o l l i n g th e
volum e, c o s t , and a v a i l a b i l i t y o f c r e d i t . T h is was e s p e c i
a l l y tr u e o f th e r e d is c o u n t r a t e s in c e r e s e rv e re q u ire m e n ts
were n o t f l e x i b l e . Open m ark et o p e r a t io n s , a t t h a t tim e ,
were • . d e sig n e d to a c t a s a supplem ent to the r a t e p o l -
4
le y o f the R eserve B a n k s .” As se e n In th e e a r l y p a r t o f
C h a p te r I I , t h i s t r a d i t i o n a l ap p ro ach was abandoned in the
l a t t e r p a r t o f th e 1930*8*
The u t i l i z a t i o n o f th e se two c r e d i t e o n t r o l to o l s can
b e s t be g le a n e d from a h y p o th e tic a l exam ple. Assuming t h a t
c r e d i t I s ex panding a t a r a t e the Board b e l ie v e s i s u n w ise ,
i t c a n , s in c e 1933, in c re a s e re s e rv e re q u ire m e n ts w ith in
s t i p u l a t e d l e g a l l i m i t s .® T his a c t i o n te n d s to im m obilize
Task Force R e p o rt, R e g u la to ry C om m issions, l o o .
c i t .
4 R. L. C a r l s , P r i n c i p l e s o f Money, C r e d i t , and Bank
in g (Hew York: The M acm illan Company, 1 9 3 4 ), p . 504.
® The d a t e , 1933, i s used in s te a d o f the more w id e ly
c r e d i te d d a t e , 1935. F o r v a l i d a t i o n , c f . p o s t , p . 77.
63
e x c e s s r e s e r v e s , a n d /o r to fo rc e member banks to l i q u i d a t e
com m ercial p a p e r and to c a l l f o r n o te payment* I n such an
atm o sp h e re , new demands f o r bank c r e d i t w i l l be c l o s e l y s u r
veyed* The r e d is c o u n t r a t e i s in c re a s e d to p r e v e n t th e Mem
b e r banks from b orrow ing a t the R eserve Banks i n o r d e r to
make new lo a n s and in v e stm e n ts* Bank i n t e r e s t r a t e s r i s e a s
the su p p ly and a v a i l a b i l i t y o f c r e d i t i s d e c re a se d and i t s
c o s t i s in c re a se d *
I f th e Board w ished to ea se c r e d i t , i t would r e v e r s e
the fo re g o in g a c tio n s *
The F e d e r a l Open M arket Committee
A ll o f the sev en Board members se rv e on the Open M ar
k e t C om m ittee, y e t a l l o f th e Committee members a r e n o t on
th e B oard— f iv e R eserve Bank p r e s i d e n t s com prise the rem a in
d e r o f th e group* F o u r o f th e R eserve p r e s i d e n t s a r e e l e c t
ed a n n u a lly by th e o t h e r R eserve Banks who a re grouped f o r
e l e c t i v e p u rp o ses* The p r e s id e n t o f th e New York R eserve
Bank h a s a perm anent s e a t upon the Committee* I t i s r e
q u ire d to m eet f o u r tim e s a y e a r* 6
The Committee has the r e s p o n s i b i l i t y o f g o v e rn in g the
R eserve Banks in t h e i r p u rc h a s e s and s a l e s o f Government
L* V* C h a n d le r, The Economics o f Money and Banking
(Hew Y ork: H arp er & B r o t h e r s , 1 9 4 8 ), p p • 247 f * T E o f te n
m eets more th a n t h i s number o f tim e s y e a rly *
64
s e c u r i t i e s . 7 Ho He se rv e Bank can r e f u s e to fo llo w th e Com-
Q
m i t t e e 's d i r e c t i o n s .
The a c c o u n t o f th e Open M arket Committee f o r th e Sys
tem I s , in r e a l i t y , a s in g le a c c o u n t lo d g ed a t th e Hew York
B eserve Bank. "The a c t u a l ow nership o f the s e c u r i t i e s hy
th e in d iv i d u a l R eserve Bank i s d i s t r i b u t e d from tim e to
tim e* 1,9 M ost, in d e e d , v i r t u a l l y a l l o f th e S ystem ’ s e a r n -
7 Task f o r c e R e p o rt, R e g u la to ry Com m issions, o p *
o l t . . p . 108. M a rr in e r E c c le s has p o in te d o u t the im p o rta n t
p o s i t i o n p la y e d hy open m a rk et o p e r a tio n s i n R eserve p o l i e y .
" . . . t h e y a r e th e p r i n c i p l e means th ro u g h w hich d eb t-m an -
agem ent p o l i c i e s o f th e Government a re e f f e c tu a te d * They
a re th e means by w hich a n o r d e r ly m a rk e t f o r Government s e
c u r i t i e s i s m a in ta in e d . W ith th e r a p id grow th o f the p u b lic
d e b t • • • w ith th e c o n tin u a n c e o f a b u d g e t o f e x t r a o r d in a r y
s i z e , w ith m a jo r re fu n d in g o p e r a tio n s in view and the p r o s
p e c t o f d e f i c i t f i n a n c i n g , th e re can be no doubt o f th e r e
s p o n s i b i l i t y t h a t w i l l c o n tin u e to r e s t w ith the . . . Sys
tem f o r open m ark et p o l i c y . " See U .S . C o n g ress, H ea rin g s
B efore th e Subcom m ittee on M o n etary . C r e d i t , and F i s c a l
P o l i c i e s o f th e J o i n t Committee on the Economic R e p o rt, Ho-
vem ber 22, 1943, p . Z Z T T . H e r e i n a f t e r , t h i s r e f e r e n c e w i l l
be known by the name o f th e S u b co m m ittee's C hairm an, S e n a to r
P . H. D o u g las.
8
P r i o r to 193g, R eserve Banks could r e f u s e to fo llo w
the C o m m ittee's d i r e c t i v e s * A lo n g -tim e member o f th e Sys
tem , K* R. Bopp, h as s t a t e d th a t to h i s knowledge no Bank
e v e r r e f u s e d to fo llo w o r d e r s . I b i d . , p . 3 8 , Hovember 16,
1949.
9
Idem. A condensed v e r s io n o f th e fo rm u la f o r d e-
te rm ln g a R eserve B a n k 's s e c u r i t y ow nership in th e System
a c c o u n t was p r e s e n te d by Bopp* He s a id th e s e c u r i t i e s a re
a l l o c a t e d "... by th e F e d e r a l Open M arket Committee . . .
on the b a s i s o f t h e i r expense and d iv id e n d r e q u ir e m e n ts .
The form ula i s b ased on e s tim a te s f o r the y e a r o f ea ch F ed
e r a l R eserve B a n k 's e x p e n se s , d iv id e n d s , and e a rn in g s from
s o u rc e s o t h e r th an s e c u r i t i e s in the System open m a rk e t a e -
65
Lags a r i s e from th e income on th e s e c u r i t i e s in t h i s a c
c o u n t, th e p rep o n d eran c e o f which a re Government s e c u r i t i e s .
ghe e f f e c t s o f open m ark et o p e r a t i o n s . —A h y p o t h e t i
c a l example o f th e u se o f open m ark et o p e r a tio n s can b e s t
i l l u s t r a t e i t s e f f e c t s on the c r e d i t s i t u a t i o n . Assuming
t h a t c r e d i t i s I n c r e a s in g a t too ra p id a p a c e , th e Committee
can s e l l s e c u r i t i e s from i t s p o r t f o l i o . A p u rc h a s e r w i l l
draw down on h i s d e p o s it a c c o u n t in o rd e r to pay f o r h i s
new ly a c q u ire d s e c u r i t i e s . The check i s c o l l e c t e d hy the
H eserve Bank from th e b u y e r 's bank, which w itn e s s e s a re d u c
ti o n in i t s c u s to m e r 's d e p o s it a c c o u n t an d , a l s o , a c o n tr a c
t i o n o f i t s r e s e r v e a c c o u n t a t th e E eserve B a n k . ^ $hus,
the p o t e n t i a l le n d in g c a p a c ity o f th e bank i s d im in is h e d .
M u ltip ly th e fo re g o in g many tim es and th e c r e d i t c o n t r a c tio n
p o t e n t i a l i s o b v i o u s , ^ I f th e com m ercial banks have no ex
c e s s r e s e r v e s , the o b je c tiv e o f the Committee i s a c h ie v e d .
I f the Committee b e lie v e s c r e d i t i s n o t expanding
f a s t enough, i t can r e v e r s e th e above p r o c e s s , i . e . , by bu y -
c o u n t. E a tio s o f the e s tim a te s f o r each f e d e r a l E eserve
Bank to th o se f o r th e tw elve f e d e r a l E eserve Banks combined
a re th e n computed and s e c u r i t i e s In the System open m ark et
a c c o u n t a re a l l o c a t e d on th e b a s i s o f th e s e r a t i o s . ” Idem
i o
D ouglas Subcom m ittee, H e a rin g s , o p . c i t . . p . 36,
S tate m e n t o f K. R. Bopp, lovem ber 1 6 , 1949.
11
Idem . S tate m e n t o f S e n a to r P . H# D ouglas.
66
12
in g s e c u r i t i e s i n the m a rk e t.
The H a tio n a l Debt and C r e d it C o n tro l In s tru m e n ts
The n e c e s s i t y f o r the co n c o m itan t u t i l i z a t i o n o f th e
th re e m a jo r c r e d i t c o n t r o l in s tru m e n ts a r i s e s from th e ex
is te n c e o f th e huge F e d e r a l d e b t. I n the p o s s e s s io n o f com
m e r c ia l b a n k s , th e se Government s e c u r i t i e s a r e , in many r e
s p e c t s , e x c e s s r e s e r v e s . R eserve re q u ire m e n t and r e d is c o u n t
r a t e in c r e a s e s can o n ly p a r t i a l l y and in c o m p le te ly c o n t r o l
them . There i s a l i m i t to th e e x t e n t r e s e rv e re q u ire m e n ts
can be in c r e a s e d , and, a s seen in C h a p ter I I , r e d is c o u n t
r a t e s have l i t t l e power p e r s e . ^ Open m a rk e t o p e r a tio n s
rem ain a s th e m ajor c r e d i t c o n t r o l in s tru m e n t. Through i t ,
th e System i s a b le to tak e the i n i t i a t i v e i n the m a rk e t,
e i t h e r p u t t i n g fu n d s in o r ta k in g them o u t . - ^
12 ujkg Com m ittee, g e n e r a l l y , does n o t i t s e l f o p e ra te
in th e open m a rk e t. I n s t e a d , i t d e a ls w ith any n f a number
o f a c c r e d i t e d Government s e c u r i t y d e a le r s in buying and
s e l l i n g . M a rr ln e r F c e le s n o te d t h a t th e s e d e a l e r s , th ro u g h
t h e i r b u y in g and s e l l i n g i n th e m a rk e t, were o f c o n s id e r a b le
a id in th e r e f u n d in g o f th e n a t i o n a l d e b t. T h e ir f e e , he
c o n tin u e d , was e x tre m e ly low in r e l a t i o n to th e s e r v ic e th e y
p e rfo rm , b e in g o n ly 1 2 .0 8 f o r each one m i l l i o n d o l l a r s o f
T re a su ry b i l l s p u rch ased o r s o ld . See U .S . C o n g ress, H ear
in g s B efore the House Committee on B anking and C u rren cy .
HTrT &8gg March 4 . 1947. p p . 41""?.
O f, a n t e , p . 44.
14
The System can tak e th e i n i t i a t i v e o n ly when th e
m a rk e t i s n o t pegged o r n a rro w ly c o n t r o l l e d . A lso , member
banks can n u l l i f y c o n t r a c t i o n e f f o r t s by m u ltip ly in g c r e d i t .
67
A M egting o f the Committee
She day p re c e d in g each o f th e q u a r t e r l y m e e tin g s o f
the Open M arket Committee In W ashington, I s c u s to m a r ily w i t
n e s s to a g a th e r in g o f th e tw elve R eserve Bank p r e s i d e n t s .
In t h i s se ssio n * th e R eserve h a n k e rs d is c u s s c r e d i t p o l i c y
d evelopm ents o f r e c e n t o r i g i n and problem s common to each o f
the R eserve B anks. She p r e s i d e n t o f th e Raw York Bank I s
o f t e n th e le a d e r in th e s e discussions.'*-®
She Open M arket Committee m e e tin g , the n e x t d a y , I s
In fo rm a l and l a r g e .
D is c u s s io n t y p i c a l l y ra n g e s f r e e l y o v e r th e e n t i r e
f i e l d o f e r e d i t p o l i c y . Those R eserve Bank p r e s i d e n t s
who a r e n o t a t th e tim e members o f th e Committee a ls o
I n v a r ia b ly a t te n d and p a r t i c i p a t e a s f r e e l y in th e d i s
c u s s io n s a s do th e Committee members. S h is means . . .
t h a t m e e tin g s o f th e Committee c o n s i s t o f a minimum o f
tw e n ty -fiv e to t h i r t y p e rs o n s (seven Board members*
tw elve p r e s i d e n t s , and te n o r so s t a f f members from th e
Board and B a n k s), th e m a jo r i ty o f whom f e e l f r e e to p a r
t i c i p a t e a c t i v e l y in d i s c u s s i o n .
*-® S. Ii. B ach, "She F e d e r a l R eserve and M onetary B o l-
le y F o rm a tio n ," Am erican Economic Review . 3 9 :1 1 7 6 , December,
1949. Bach s t a t e d t h a t the p r e s i d e n t s were more in c lin e d to
p o l i c i e s l e s s d i s r u p t i v e to the member banks th a n were th e
B oard. He rem arked t h a t w h ile th e re was l i t t l e c o n c re te
e v id e n c e , " . . • I t a p p e a rs t h a t th e re h as som etim es been a
ten d en cy f o r the p r e s i d e n t s to c o n s id e r th e m se lv e s a s some
th in g o f a ^ l o c 1 d u rin g p e r io d s o f c o n tro v e rs y w ith the
Board o v e r o p en -m ark et and re s e rv e p o l i c y . " I b i d . ,
p p . 1176 f . ~
I M d . , p . 1177. Bach d e c la r e d t h a t th e la r g e s iz e
o f t h i s group p re c lu d e d i t from b e in g an e f f e c t i v e e x e c u tiv e
body. C o n seq u en tly , i t f u n c tio n e d , p r i m a r i l y , a s a medium
f o r th e d is c u s s io n and e x a m in a tio n o f p o lic y I s s u e s , Idem
68
The cum bersomeness o f t h i s la r g e group i s a l l e v i a t e d ,
to some e x t e n t , by the e x is te n c e o f an e x e c u tiv e co m m ittee,
composed o f th r e e Board members and two r e p r e s e n t a t i v e s from
th e Bank p r e s i d e n t s . 3 * 7 T his body i s e n t r u s t e d w ith th e mak
in g o f d e t a i l e d p o lic y w ith in th e broad l i m i t s imposed by
the f u l l C om m ittee. In n e g o t i a t i o n s w ith the T re a s u ry , the
e x e c u tiv e com m ittee i s g e n e r a l l y r e p r e s e n te d by i t s chairm an
and v ic e ch a irm an , who a r e , r e s p e c t i v e l y , the Chairman o f
th e Board o f G overnors and th e p r e s i d e n t o f th e Hew York Re
se rv e Bank*3 -8
M opetary P o licy -M ak in g
The m a jo r m o n etary p o l i c i e s f o r th e e n t i r e R eserve
System a r e fo rm u la te d w ith in the C om m ittee, an d , e s p e c i a l l y ,
in th e r e l a t i o n s o f th e e x e c u tiv e com m ittee w ith th e T re a s -
19
u r y D ep artm en t. I n th e s e T re a s u r y -e x e c u tiv e com m ittee
3,7 Sdwin W. Kemmerer and B. L. Kemmerer,. The ABC o f
th e f e d e r a l R eserve System (flew York: H arp er & B r o th e r s ,
I9 6 0 ), p . 141.
] Q
Task f o r c e R e p o rt, R e g u la to ry Com m issions, o p .
c i t *. p . 113.
1 9
The in tim a te r e l a t i o n betw een th e System and th e
T re a s u ry in the p a s t decade h as c e n te re d around th e i n t e r e s t
r a t e . The C om m ittee’ s buy in g r a t e and the r a t e on new i s
s u e s , u se d f o r re fu n d in g o r d e f i c i t f in a n c in g , h a s b een i n
s e p a r a b le . S ince the System w i l l n o t u s u a l l y pro ceed coun
t e r to T re a su ry p o l i c y , th e d e te r m in a tio n o f open m ark et
p o l i c y h a s , a t the m o st, been a T re a s u ry (d e b t) p o l i c y , and,
a t th e l e a s t , a j o i n t (m o n etary * d eb t) p o l i c y .
6 9
s e s s io n s
A ll m ajo r d e c is io n s a s to the Government s e c u r i t y m ark et
r a t e s t r u c t u r e a re c o n s id e r e d . • • Such p o lic y d i s c u s
s i o n s , c o v e rin g th e e n t i r e range o f f in a n c in g and c r e d i t
p o l i c y , have b een * lo n g and tim e consum ing. T h e ir s iz e
and f o r m a lit y vary* R e c e n tly , th e Board Chairman and
th e Hew York R eserve Bank p r e s i d e n t . . . have f r e q u e n t
l y met in f o rm a lly w ith the S e c r e ta r y and U n d e r-S e c re ta ry
o f th e T re a s u ry . O fte n a few s e n io r s t a f f members from
b o th a g e n c ie s a re In c lu d e d .
Out o f th e se n e g o t i a t i o n s f i n a l l y comes an a g re e d
program , o r a t l e a s t an o p e r a tio n s b a s i s f o r n o n -co n
f l i c t i n g p o lic ie s * On T re a su ry f in a n c in g th e f i n a l de
c i s i o n s a r e made by th e S e c r e ta r y o f th e T re a s u ry , who
may g iv e more o r l e s s w e ig h t to f e d e r a l R eserve c o u n s e l.
On c r e d i t p o lic y th e f i n a l d e c is io n s a re made by th e Re
se rv e a u t h o r i t i e s , b u t o v e r the p a s t decade th e y have
a lm o st n e v e r d iv e rg e d s h a r p ly from th e T re a su ry p o s i t i o n
on m a jo r p o l i c y * ^
The Committee c o n s id e r s , a d o p ts , and tr a n s m its to th e
R eserve Banks b in d in g r e g u l a t i o n s p e r t a i n i n g to the open
m ark et o p e r a tio n s o f th o se B a n k s.2* R ecords o f th e Commit
t e e ' s a c t i o n s and p o l i c i e s a r e k e p t and m ust be in c lu d e d in
the B o a r d 's y e a r l y r e p o r t to C o n g re s s .22
P a l l y a c t i v i t i e s .--T h e d a y -to -d a y o p e r a tio n s o f the
Committee a re e a r r i e d o u t by th e m anager o f the System a c
c o u n t, who i s a v ic e p r e s i d e n t o f th e Hew York Bank. He
m a in ta in s c lo s e c o n t a c t w ith th e le a d e r s o f th e e x e c u tiv e
20 B ach, o£ . c i t . , p p . 1177 f .
21
kem raerer, o p * c i t . . p . 141.
22 I b i d . , p . 142.
23
com m ittee ana the t r e a s u r y D epartm ent. The l a t i t u d e o f
the m a n a g e r's a u t h o r i t y v a r i e s a c c o rd in g to th e i n s t r u c t i o n s
he r e c e i v e s , y e t h i s in f lu e n c e i n th e money m a rk et i s con
s id e r a b le and r e q u i r e s s u b s t a n t i a l d i s c r e t i o n . 2^
X I. PROPOSALS
T r a n s f e r the Committee Powers to the Board
G. I*. Bach h a s recommended t h a t a l l o f th e f u n c tio n s
and pow ers o f th e Open M arket Committee be v e s te d in a r e
c o n s t i t u t e d Board o f th r e e members, e l e c t e d f o r a s i x y e a r
p e r io d * 2^ He arg u ed t h a t th e p r e s e n t la r g e s iz e o f th e Com
m itte e re n d e re d i t i n e f f e c t i v e f o r th e type o f work i t h as
to p erfo rm .
C o n c e n tra tio n o f a l l p o lic y r e s p o n s i b i l i t y in the Board
coupled w ith a s t a t u t o r y re q u ire m e n t f o r p e r io d ic f u l l
c o n s u l t a t i o n w ith th e tw elve R eserve Bank p r e s i d e n t s ,
would v e s t r e s p o n s i b i l i t y f o r th e n a t i o n 's money su p p ly
in a s p e c i f i c a l l y p u b lic body, a p p o in te d by th e P r e s i
d e n t w ith th e a p p ro v a l o f th e S e n a te , w h ile p r o t e c t i n g
a d e q u a te ly th e b road r e g io n a l i n t e r e s t s w hich th e r e
g io n a l system was aimed to s a f e g u a r d .26
23 B ach, o p . c i t . . p . 1178.
2 4 E a e m
25 I b i d . . p . 1190.
2 ^ Idem, f o r an i d e n t i c a l p r o p o s a l, see Task F orce
R e p o rt, R e g u la to ry C om m issions, o p . c i t . , p . 114. Inasm uch
a s Mr. Bach was on the Task F orce t h a t drew up t h i s recom
m e n d atio n , the i d e n t i t y o f th e two p la n s sh o u ld n o t o c c a s io n
s u r p r i s e •
71
Thomas McCabe d id n o t recommend any change f o r he
27
could n o t f in d th e need f o r o n e. I f a change was i n th e
o f f i n g , how ever, he prom ulgated a p la n w h ich , w h ile c l o s e l y
re se m b lin g th e f o r e g o in g , d e v ia te d from i t in a few r e
s p e c t s , He b e lie v e d t h a t a fiv e -m a n Board would be d e s i r
a b l e . I t would c o n s i s t o f th r e e p e rs o n s a p p o in te d f o r
tw elve y e a rs by th e P r e s i d e n t , w ith th e S e n a te 1s c o n s e n t,
and two K eserve Bank p r e s i d e n t s e l e c t e d by the o t h e r p r e s i
d e n t s , s e rv in g f o r one y e a r , and d e v o tin g t h e i r f u l l tim e to
the work o f th e B oard.
Such a p ro p o s a l would te rm in a te the e x i s t i n g a r r a n g e
m ent u n d er w hich a u t h o r i t y o v e r in s tru m e n ts o f c r e d i t
p o l i c y a re d iv id e d betw een th e Board . . . and th e • . •
C o m m ittee.28
T ra n s f e r the Board Bowers to the Committee
A lla n S p ro u l, p r e s i d e n t o f th e Hew York F e d e ra l Re
se rv e Bank, h as s u g g e s te d :
. . . the r e s p o n s i b i l i t y f o r a l l m a^or In s tru m e n ts o f
F e d e r a l R eserve p o l i c y sh o u ld be lodged in the group now
c a l l e d the F e d e r a l Open M arket C om m ittee. O ther mone
t a r y c o n t r o l s m ust be i n t e g r a t e d w ith open m ark et o p e r a
t i o n s , and th e r e i s c e r t a i n l y s tr o n g lo g ic on th e s id e
o f u n i f i e d d i r e c t i o n o v e r a l l o f them . Such a change
27
He s t a t e d : " I t i s my c o n s id e re d o p in io n t h a t th e
p r e s e n t arra n g e m e n t w orks v e ry w e l l . " Thomas B. McCabe, Re
p ly o f the Chairm an o f the Board o f G overnors (W ashington:
Board o f G overnors o f the F e d e ra l R eserve System , 1 9 4 9 ),
p . 78,
28 I b i d . . p . 79.
72
would a ls o a s s u re th e r e g u l a r r e p r e s e n t a t i o n o f a c t u a l
o p e r a tin g e x p e r ie n c e , and an aw aren ess o f d i f f e r i n g re-*
g io n a l p ro b le m s, i n ,t h e fo rm u la tio n o f the i n t e r r e l a t e d
a s p e c t s o f a n a t i o n a l m onetary p o lic y * 25?
He arg u ed t h a t th e d i v i s i o n o f r e s p o n s i b i l i t y f o r the
m a jo r in s tru m e n ts o f c r e d i t p o l i c y was n o t good a d m in is t r a
tiv e p ro c e d u re . She C om m ittee, he b e l ie v e d , was th e l o g i c a l
r e p o s i t o r y f o r System c o n t r o l : i t b ro u g h t to g e th e r men who
re p r e s e n te d view s and o p in io n s , n o t o n ly o f th e G overnm ent,
b u t o f th e many r e g io n s o f th e c o u n try * 3®
I t i s th e b e s t e x p r e s s io n w hich we have o f th e F e d e r
a l c h a r a c t e r o f th e System , a c h a r a c t e r which i s in tune
w ith o u r p o l i t i c a l o r g a n iz a tio n , w ith the c o n tin u o u s ly
e x p re s se d i n t e n t o f the C o n g ress, and w ith th e d e s i r e s
o f o u r p eo p le.* 5 !
M a rr in e r E e c le s d is a g re e d w ith S p r o u l's p r o p o s a l. He
a v e rr e d t h a t su ch a p la n would le a v e to the Board o n ly s e c
o n d ary po w ers, i f an y , and would n o t j u s t i f y i t s c o n tin u
a n c e . He d id sa y , how ever, th a t
To the e x t e n t . . . such s u g g e s tio n s re c o g n iz e th e p r i n
c i p le t h a t r e s p o n s i b i l i t y f o r o v e r - a l l c r e d i t and mone
t a r y p p lio y sh o u ld be f ix e d in one p la c e , I would
a g r e e .^ 2
H r. E c e le s was su re t h a t A lla n S p r o u l’s p ro p o s a l a e -
^ D ouglas Subcom m ittee, H e a rin g s , o p . c i t . . p . 444,
December 2 , 1949.
3® Idem
21 P*
r b i d . . p p . 220 f . , November 22, 1949.
73
e e n tu a te d th e p r e s e n t i n c o n s i s t e n c i e s " in th e Com m ittee.
So him , the f a c t t h a t th e R eserve Bank p r e s i d e n t s w ere e l e c
te d hyo th e n in e d i r e c t o r s o f the R eserve Banks ( s i x e l e c t e d
by th e r e g io n a l member banks and th r e e d i r e c t o r s a p p o in te d
by th e B oard) o b v ia te d S p r o u l’ s p la n . He s a id th a t n e i t h e r
the d i r e c t o r s n o r the p r e s i d e n t s had an y d i r e c t r e s p o n s i b i l
i t y to C ongress o r th e A d m in is tr a tio n .23 These same R eserve
Bank p r e s i d e n t s s a t w ith th e P r e s id e n t a p p o in te d and Con
g r e s s approved Board members in th e fo rm u la tio n o f p o l i c i e s
w hich v i t a l l y a f f e c t e d th e whole b an k in g sy ste m . T h is made
the Open M arket Committee a n o v e lty , to E e e le s , among F e d e r
a l a g e n c ie s? the r e g u l a t o r and th e one b e in g r e g u la te d w ere,
p a r t i a l l y , one and th e same. He contended t h a t th e in ro a d s
in to Board f u n c tio n s sh o u ld be h a l t e d ; i t was w ith th e Board
t h a t the C om m ittee’s pow ers sh o u ld be lo d g e d .34
Mr. S p ro u l d e n ie d t h a t th e R eserve Bank members o f
th e Committee e x e r c is e d a u t h o r i t y w ith o u t r e s p o n s i b i l i t y .
The System members on th e Com m ittee, he d e c la r e d , re c e iv e d
t h e i r r e s p o n s i b i l i t i e s and d u t i e s from w r i t t e n law . The
members d e riv e d t h e i r a u t h o r i t y from C o n g re s s .35
33
D ouglas Subcom m ittee, H e a rin g s , o p . c i t . , p . 281,
November 22, 1949.
34 Idem
35 I b i d . . p . 445, December 2 , 1949.
74
I f I t were found p r e f e r a b l e f o r some o f th e R eserve
Bank p r e s i d e n t s to d eterm in e n a t i o n a l m o n etary and c r e d i t
p o l i e y , Mr* E c e l e s f p r o p o s a l would be t h a t a l l tw elve o f th e
p r e s i d e n t s • • be c o n s t i t u t e d th e m o n e tary and c r e d i t
a u t h o r i t y , and th e y should tak e o v e r th e f u n c tio n s o f th e
Board* * * . The B oard, he c o n tin u e d , sh o u ld be d i s
s o lv e d w ith su ch an e v e n t u a l i t y . He would r e t u i r e the
p r e s i d e n t s to be a p p o in te d by th e S e n a te , to whom th e y would
r e p o r t , i n o r d e r to f i x t h e i r r e s p o n s i b i l i t y . 37
M r. l e c l e s d e c la re d t h a t h i s p ro p o s a l was a s e r io u s
one; i t was b ased on lo n g e x p e rie n c e * " I am o f f e r i n g t h i s
s e r i o u s l y . T h is i s n o t a c o u n te r - p r o p o s a l" (to th e p la n
» 38
g iv e n by A lla n S p r o u l) .
M r. S proul c a l l e d S o c le s second p r o p o s a l, d e s p ite th e
l e t t e r ’ s d e c l a r a t i o n o f good f a i t h , an "• . • argum ent by
t h r e a t , by p o s in g a w h o lly u n a c c e p ta b le s o l u t i o n a s the o n ly
a l t e r n a t i v e to th e g iv in g o f a d d i t i o n a l pow ers to th e . , •
C om m ittee.
38 D ouglas Subcom m ittee, H e a rin g s . o p . c i t . , p . £21,
Hovember 22, 1949.
37
I f th e R eserve Bank p r e s i d e n t s co u ld p erfo rm the
d u t i e s o f th e Board a s w e ll a s m a in ta in t h e i r d u t i e s a t th e
R eserve B anks, Etaeles n o te d t h a t i t would givenadded re a s o n
f o r a b o lis h in g the f u l l - t i m e seven-m an B oard. Idem
38 Idem
gQ
I b i d . , p . 4 4 5 , D ecem ber 2 , 1 9 4 9 .
75
A lfre d W illia m s , p r e s i d e n t o f th e P h ila d e lp h ia Ke-
se rv e Bank, endorsed. S p ro u l* s p la n b ecause i t would n o t d i s
tu r b th e lo c u s o f c o n t r o l , y e t would g iv e th e Committee more
f i r s t - h a n d e x p e rie n c e from the f i e l d to draw upon. W illia m s
a g re e d w ith S p ro u l t h a t , in e f f e c t , th e p la n would f u r t h e r
f e d e r a l i z e th e System by g iv in g th e member banks a g r e a t e r
sh a re i n m a jo r p o l i c y d e t e r m i n a t i o n . ^
I I I . SO M M A H Y ABU COKCITTSrOHS
She g r e a t im portance o f the open m a rk e t o p e r a tio n s o f
the F e d e r a l R eserve System , b e in g the c e n t e r o f R eserve
p o lic y -m a k in g , h a s fo cu sed a t t e n t i o n on the f u n c tio n s , du
t i e s , and r e s p o n s i b i l i t i e s o f th e Board o f G overnors and the
F e d e r a l Open M arket C om m ittee. She a c c e p ta n c e o r r e j e c t i o n
o f the p r o p o s a ls , as to th e in c o r p o r a tio n o f one in to the
o t h e r , a p p e a r to be d iv id e d a s to th e o r i g i n a t i o n o f the
p la n . Ihe System members o f the Committee f a v o r th e Com
m itte e a s th e r e p o s i t o r y f o r a l l m o n etary po w ers. Ihe Board
members a r e p a r t i a l to th e B oard.
3?oday* th e Committee i s th e im p o rta n t group in th e
R eserve System . The i n e f f e c t i v e n e s s o f o th e r m o n e tary co n
t r o l s and the e x is te n c e o f la r g e am ounts o f Government s e c u -
40 D ouglas Subcom m ittee, H e a rin g s , op. c i t . , p . 74,
November 1 6 , 1949.
76
r i t i e s in banking bands* e x c e s s r e s e r v e s in e f f e c t , makes
any change p roposed in th e Committee one w o rth y o f co n sid er--
a t i o n .
T his w r i t e r d o es n o t see the need f o r any ch an g e.
The p r e s e n t p r o p o s a ls seem to stem from a d e s i r e o f b o th the
Board members and the B eserve Bank p r e s i d e n t s to grow in
pow er, The p r e s e n t arran g em en t a c t s a s a cheek and b a la n c e
a g a i n s t e i t h e r one o r th e o th e r g a in in g th e s u p e r io r hand,
f h e r e h as been l i t t l e c r i t i c i s m , a s f a r a s can be d e t e r
m ined, o f th e C o m m ittee's p r o c e d u ra l m ethod, fh e r e h as been
much d is c u s s io n o f the p o l i c i e s I t h a s s u p p o rte d b u t t h a t i s
beyond th e is s u e h e re and b e lo n g s to such m a t e r i a l a s was
found in C h a p ter XX. The a b i l i t y o f th e Committee to move
q u ic k ly and w ith fo rc e i s n o t d en ied by e i t h e r s i d e . The
d i s c o n te n t w hich some o f th e Committee members u n d o u b te d ly
f e e l w ith th e p r e s e n t o r g a n iz a tio n i s n o t enough to w a r ra n t
a ch an g e, a t l e a s t n o t w ith th e re a s o n s a s g iv e n so f a r .
CHAPTER TV
RESERVE EEQUIEEimT PROPOSALS
I . INTRODUCTION
l a 1933 th e Board o f G overnors f i r s t re c e iv e d th e
power to v a r y r e s e r v e re q u ire m e n ts o f th e member b a n k s ♦ As
a c r e d i t c o n t r o l in s tr u m e n t, t h i s d e v ic e m et w ith o n ly f a i r
s u c c e s s i n th e 1930*8, m a in ly due to th e e x is te n c e o f e x c e s s
re s e rv e s * The l a s t d e c a d e , how ever, th e 1940*s , was h o s t to
d i s q u i e t i n g m o n e tary c o n d i tio n s , d i f f e r e n t i n q u a n t i t y and
q u a l i t y from th o se o f th e d e p r e s s io n . The r e s e r v e r e q u i r e
ment s t r u c t u r e o f th e f e d e r a l R eserve System and th e many
S ta te s was th e to p ic o f d is c u s s io n among many m onetary a u
t h o r i t i e s . P r o p o s a ls t h a t th e e x i s t i n g a rra n g e m e n ts be mod-
* K . R. Bopp. and o t h e r s , f e d e r a l R eserve P o lic y
(W ashington: Board o f G overnors o f th e f e d e r a l R eserve Sys
tem , 1 9 4 7 ), p . 15. As p r e s e n t l y u n d e rs to o d , th e Board f i r s t
re c e iv e d th e a u t h o r i t y to v a ry r e s e rv e re q u ire m e n ts in 1935.
T e c h n ic a lly , how ever, t h i s a u t h o r i t y had been in e x is te n c e
s in c e 1933, The May 1 2 , 1933 amendment to s e c tio n 19 o f th e
f e d e r a l R eserve A ct r e a d s : **. , . the f e d e r a l R eserve B oard,
upon th e a f f i r m a t i v e v o te o f n o t l e s s th a n f iv e o f i t s mem
b e r s and w ith the a p p ro v a l o f the P r e s i d e n t , may d e c la r e
t h a t a n em ergency e x i s t s by re a s o n o f c r e d i t e x p a n s io n , and
may by r e g u l a t i o n d u rin g such em ergency in c re a s e o r d e c re a s e
from tim e to tim e , in i t s d i s c r e t i o n , the r e s e rv e b a la n c e s
r e q u ir e d to be m a in ta in e d a g a in s t e i t h e r demand o r tim e d e
p o s i t s . " U n ite d S ta te s S t a t u t e s a t L a rg e , P u b lic Laws
(W ashington: U .S . Government P r i n t i n g O f f ic e , 19347"!
X L V III, p . 54.
78
i f l e d , to m eet th e changed en v iro n m e n t, were fo rth c o m in g
from many s o u r c e s , in c lu d in g the Board o f G overnors*
The f o u r recom m endations, t r e a t e d i n t h i s and the
n e x t c h a p te r , f a l l , r o u g h ly , u n d e r two h e a d in g s . U nder th e
a n t i - i n f l a t i o n a r y c a te g o r y a re two p r o p o s a ls , th e s p e c i a l o r
se co n d ary r e s e r v e p la n and th e u n ifo rm c e r t i f i c a t e p la n .
U nder the g e n e r a l p ro v in c e o f e q u ita b le tr e a tm e n t, member
banks v e r s u s nonmembers, a re the two recom m endations d e a l t
w ith in t h i s c h a p te r , com pulsory re s e rv e re q u ire m e n ts and
unifozm r e s e r v e re q u ire m e n ts .
I I . THE STRUCTURE OF BANK RESERVES
Am e s s e n t i a l p a r t o f the m onetary-m anagem ent mechan
ism i s the r e s e rv e re q u ire m e n ts o f th e com m ercial b a n k s.
The volume o f d e p o s its t h a t th e banks can c r e a te and
have o u ts ta n d in g a t any one tim e i s l im ite d by th e d o l
l a r volume o f l e g a l r e s e r v e s t h a t th e y can command and
by the h e ig h t o f t h e i r l e g a l r e s e r v e r e q u ir e m e n ts . The
m o n e tary a u t h o r i t i e s In flu e n c e the g e n e r a l m o n etary and
c r e d i t s i t u a t i o n b o th by r e g u l a t i n g the d o l l a r volume o f
bank r e s e r v e s and th e term s on w hich th e s e r e s e r v e s a re
made a v a i l a b l e and by r e g u l a t i n g r e s e rv e r e q u ir e m e n ts .2
R eserve re q u ire m e n ts a re imposed on th e member com
m e rc ia l banks p r i m a r i l y in the i n t e r e s t o f p ro m o tin g econom
2 U .S . C o n g ress, R ep o rt o f th e Subcom m ittee on Mone
t a r y , C redi t , and F i s c a l P o l i c i e s o f the J o I n t CommiTtee on
the Economic R e p o rt, Ja n u a ry 23, 1950, p.~SB . T his r e f e r -
ence w i l l h e r e i n a f t e r be n o te d by the name o f the Subcommit
t e e ' s c h a in n a n , S e n a to r P . H. D ouglas.
79
ic s t a b i l i t y th ro u g h in f lu e n c in g th e money and c r e d i t su p
p l y . A se c o n d a ry , though im p o rta n t, c o n s id e r a ti o n i s th e
m ain ten an ce o f the soundness o f the e n t i r e h an k in g system *3
In c o n t r a s t to th e r e s e r v e s o f S ta te h a n k s, th e y a re n o t
fu n d a m e n ta lly a p p lie d w. . . f o r the purpose o f p r o v id in g a
c u sh io n to p r o t e c t th e in d iv id u a l hank*"4
The Board o f G overnors d e te rm in e s , w ith in th e maximum
and minimum l i m i t s e s t a b l i s h e d by C o n g ress, the l e g a l r e
se rv e re q u ire m e n ts o f th e member b a n k s. Honmember b a n k s ’
re q u ire m e n ts a r e f ix e d by the v a r io u s S ta te a u t h o r i t i e s .
U nder the a e g is o f F e d e r a l c o n t r o l a r e a p p ro x im a te ly f o r t y -
n in e p e r c e n t o f th e n a t i o n ’ s 1 4,150 com m ercial b a n k s.
These banks h o ld a b o u t e i g h t y - f i v e p e r c e n t o f a l l d e p o s i t s ,
a s shown in liable I I on th e n e x t p a g e .
The minimum p e rc e n ta g e o f r e s e r v e r e q u ir e d a g a in s t
d e p o s its o f member banks i s th ir te e n * te n , and seven p e r
c e n t f o r c e n t r a l r e s e r v e c i t y b an k s, r e s e r v e c i t y b a n k s, and
c o u n try banks r e s p e c t i v e l y . Three p e r c e n t i s the minimum
3 Thomas B. McCabe, R eply o f th e Chairman o f th e
Board o f G overnors (W ashington: Board o f G overnors ojFThe
F e d e r a l R eserve System , 1 9 4 9 ), p . 59,
^ U .S. C o n g ress, H ea rin g s B efore th e Subcom m ittee on
M o n e ta ry . C r e d i t , and F i s c a l P o l i c i e s o f th e J o i n t Commrttee
on th e Economic R e p o rt. S tate m e n t o f M a rr in e r E c c le s , Hovem-
b e r 22, 1949, p . 216. T his r e f e r e n c e w i l l h e r e i n a f t e r be
n o te d by th e name o f th e Subcom m ittee’ s ch a irm an , S e n a to r
F . H* D ouglas.
80
re q u ire m e n t f o r tim e d e p o s its a t a l l member b a n k s. The max*
Imum re q u ire m e n t f o r th e th r e e c l a s s l f i c a t i o n s I s tw e n ty -
TABLE I I
NUMBER AND DEPOSITS Of ALB COMMERCIAL BANKS IN UNITED
STATES BY CLASS OF BANK, JURE SO, 19495
Number o f banks T o ta l d e p o s its
Number
P e r c e n t
age o f
t o t a l
M il lio n s P e r e e n t-
o f age o f
d o l l a r s t o t a l
Member banks
N a t i o n a l .................... 4 ,9 8 7 3 5 .3 78,219 5 6 .8
S ta te • • • • . •
1,913
1 3 .5 3 8 ,7 4 5 2 8 .2
T o ta l . . . . . 6,900 4 8 .8 1 1 6,964 8 5 .0
In s u re d nonmembers. 6,517 4 6 .0 1 8,410 1 3 .4
N o n in su re d . . . . . 733
5.8 2 ,1 4 6 1 .6
A ll com m ercial. . . 1 4 ,1 5 0 1 0 0 .0 137,520 1 0 0 .0
s i x , tw e n ty , and f o u r te e n p e r o e n t r e s p e c t i v e l y , w ith a s i x
p e r c e n t maximum tim e d e p o s it r e q u ir e m e n t.6
Nonmember banks have r e s e r v e re q u ire m e n ts t h a t v a ry
w id e ly from S ta te to S t a t e . " In one S ta te th e r e i s no l e g a l
re q u ire m e n t a t a l l ; a t th e o th e r extrem e a re S ta te s w ith
p e rc e n ta g e re q u ire m e n ts a t l e a s t a s h ig h a s th o se o f member
7
b a n k s .” The ty p e s o f a s s e t s t h a t may be co u n ted a s r e
6 S o u rce: McCabe, p$>. c i t . , p . 65.
6 D ouglas Subcom m ittee, R e p o rt, o p . c i t . . p p . S3 f .
7 I b i d . , p . 3 4 . I l l i n o i s i s th e S ta te w ith o u t a l e
g a l r e s e rv e re q u ire m e n t.
81
s e r v e s "by nonmember banks v a r i e s among th e S t a t e s , b u t th e y
u s u a l l y c o n s i s t o f c a s h in v a u l t , e a s h ite m s i n th e p ro e e s s
o f c o l l e c t i o n , d e p o s its w ith c o rre s p o n d e n t b a n k s, and " , * •
in some c a s e s even e a rn in g a s s e t s sucb a s Government s e c u r i
t i e s . ^ 8
When a l l th e s e f a c t o r s a r e ta k e n in to c o n s i d e r a t i o n ,
member bank r e s e r v e re q u ire m e n ts a r e on th e av e ra g e s i g
n i f i c a n t l y more o n ero u s th a n th o se o f nonmember b a n k s.
I n a d d i t i o n to t h e i r l e g a l l y r e q u ir e d r e s e r v e s , a l l o f
w hich m ust be i n the form o f n o n e a rn in g d e p o s its a t the
F e d e r a l R e se rv e , b u s in e s s n e c e s s i t y r e q u i r e s member
b anks to h o ld o th e r n o n e a m in g a s s e t s in th e form o f
c a s h i n v a u l t , b a la n c e s w ith o t h e r b an k s, and c a sh ite m s
i n th e p r o c e s s o f c o l l e c t i o n . B ut th e nonmember banks
a re p e rm itte d to c o u n t a l l o f th e s e toward t h e i r l e g a l
r e s e r v e r e q u ir e m e n ts .9
f a b le I I I , on the n e x t p a g e , r e v e a ls th e e x t e n t to
w hich th e r e s e r v e re q u ire m e n ts o f nonmember banks a r e lo w er
th a n th o se o f member b a n k s . Nonmember b a n k s, on th e av e ra g e
need to c a r r y a s m a lle r amount o f ca sh ite m s o r t h e i r e q u iv
a l e n t , p e r c e n ta g e w is e , th a n do th e member b a n k s; t h e i r non
e a rn in g a s s e t s a r e s m a lle r in am ount.
f a b l e IV10 shows th e r e s e rv e re q u ire m e n ts f o r th e
f o r t y - e i g h t S ta te s and th e D i s t r i c t o f Colum bia. I t should
be n o te d t h a t th e range o f l e g a l r e s e r v e re q u ire m e n ts v a r i e s
8 D ouglas S ubcom m ittee, R e p o rt, l o c . c i t .
9 Idem
^ I f lf r a . PP* 83-85*
82
among th e S t a t e s w ith o u t p a tte r n *
A n o th er f e a t u r e o f th e nonmember, hanks i s t h a t th e y
a re n o t g e o g r a p h ic a lly d i s t r i b u t e d on a u n ifo rm b a s is * The
TABLE I I I
RATIOS OF CASH ASSETS TO TOTAL DEPOSITS OF ALL IHSCBED
COMMERCIAL BANKS BY CLASS OF BARK, JUNE 3 0 , 1 9 4 9 H
Member banks
T o ta l
C e n tr a l r e s .
c i t y banks
Re
se rv e
c i t y
banks
Coun
t r y
banks
su re d
no n -
membe r
banks
Hew
York
C h i
cago
Cash in v a u l t • • . 1 .3 0 .5 0 .4 1 .1 2 .1 2 .6
B a la n c e s due from
banks* * * * « • • 4*4
0 .3 2 .5 4 .0 7 .2 1 4 .7
Cash ite m s in c o l
l e c t i o n p r o c e s s . * 5 .1
9 .3 > 5 .8 5 .9 1 .9 0 .6
S u b to ta l* * * * . 1 0 .8 1 0 .1 8 .7 1 1 .1 1 1 .2 1 7 .9
R e se rv e s w ith F .R .
B anks• • • • • . . 1 5 .2 2 0 .0 1 9 .3
5 .5 1 1 .8
T o ta l, c a sh a s -
se t s * * * • • • 2 6 .0 3 0 .1 2 8 .0 2 6 .5 2 3 .0 1 7 .9
number o f nonmember banks in each S ta te and th e p e r c e n t o f
t o t a l d e p o s its th e y h o ld in eaeh S ta te i s p r e s e n te d in Table
On th e b a s i s o f the d a ta p r e s e n te d , th e fo llo w in g
p r o p o s a ls should o c c a s io n l i t t l e s u r p r is e *
- * - 1 S o u rce: D ouglas Subcom m ittee, H e a rin g s , o p * c i t . ,
p . 475, I n s e r t e d In to th e re c o rd by Thomas McCabe, December
3 , 1949.
Lnfra. pp. 86 f*
83
TABLE IV
RESERVE REQUIREMENTS Of STATE COMMERCIAL BANES AND TRUST
COMPANIES, BY KIND Of DEPOSITS (DEMAND AND TIM E),
DECEMBER S i , 1 9 4 8 1 3
(P e rc e n ta g e o f D e p o s its )
''' U niform
r e s e rv e
S ta te a re qu I re * *
m ents on a l l
d e p o s its "
D i f f e r e n t r e s e r v e
re q u ire m e n ts on—
Demand Time
deposits** d e p o s its "
Alabama . . . . . . . 15 4
A rizo n a • • • • • • • 15,80 10°
A rkansas* . . . . . . 1 5 ,8 0 ,5 0
m * m m m m m m
C a lif o r n ia * . • . . * 1 8 ,1 5 .1 8 5
C o lo ra d o ....................* * 1 5 ,8 5
m m m m m m m m
C o n n e c tic u t • • • • • 16
Ql
D elaw are* . . . . . .
m m «» *•
16
D i s t r i c t o f Colum bia.
m m m m m m m t
88
F l o r i d a * . •' . . . . 80
m m m m m m m m
G eo rg ia . . . . . . .
r n m r n m m m m ,
15 5
Idaho . . . . . . . . 15
m m m m
I l l i n o i s ? , . • • • • •
m »>. * . . . . m * m m m m
In d i aha . . . . . . .
— --
18)1
3
Iowa. . . . . . . . . 7,10
3
K an sa s. . . • • • • • 18/4,80,85 5 ,1 0
K entucky, . . . . . .
— ——
7 ,1 0 3
L o u is ia n a . . . • • • 80 0
Maine . . . . . . . . 14 6
M a ry la n d .............................. 16 6
M a s s a c h u s e tts • . . . 1 5 ,8 0 0°
M ic h ig an . . . . . . . 18
M in n eso ta • • • • • ,
m m m m m m m m
1 8 ,1 5 5
M is s is s i p p i • • • • .
m m m m m * m m
1 5 ,8 5 7 ,1 0
M is s o u r i. . • • • • .
— 1 5 ,1 8 3
M ontana . . . . . . . 10,15
m m m m m m m m m m m ? ^ m m
N e b ra sk a .............................. 1 5 ,8 0 5
N evada. . . . . . . . 1 5 ,8 5
m m r n m r n m m m m m m m m m m
New Hampshire . . . . 15 5
New J e r s e y ........................ 15 3
New M exico. • • • • , 18
m m m m f m m m m m m i m m m
New Y ork. • • • • , .
-----
1 4 ,8 0 ,8 6
1$ S o u rc e : D ouglas Subcommittee « HosLirizKS , o p . c i t .
S ubm itted by Maple H a r l, November 17, 1949, p p . 189 f~.
84
TABLE IV ( c o n t in u e d )
RESERVE REQUIREMENTS OR STATE COMMERCIAL BANES AND TRUST
COMPANIES* BY KIND OE DEPOSITS (DEMAND AND TIM E),
DECEMBER S i , 1 9 4 8
(P e rc e n ta g e o f D e p o s its )
S t a t e a
U niform
re serve
r e q u i r e
m ents on a l l
d ep o sits®
D iffe r e n t r e s e rve
re q u ire m e n ts on—
Demand
d e p o sits®
Time
d e p o s its '
S outh C a ro lin a * • « • 15 5
N o rth D ak o ta. .
— — —
10 5 ,1 0
O h io ......................... 15 10
Oklahoma. • • • 15,18 5
Oregon* . . . . • • • 15 5 ,1 0
P e n n s y lv a n ia . • 14 6
Rhode Is la n d * • 15 0
S outh C a ro lin a* • • • 7 3
South D akota. . V t%
T ennessee * • • • ♦ • 10 3
Texas * * * * * • « • - - - - 1 5 ,2 0 5
U ta h .........................
m f
1 5 ,2 0 5°
Vermont®. . • • 20 6
V i r g i n i a . . . • 10 3
W ashington* • • 15
West V i r g i n i a • • ♦ • 10 5
W isco n sin . . . 1 2 ,2 0
« ■ * « • w *
Wyoming * * * *
- - - - 20 10°
a I n m ost c a s e s th e s e a re th e r a t e s p r e s c r ib e d in
th e S ta te law i t s e l f * Where th e law empowers b anking a u
t h o r i t i e s to change r e s e r v e r e q u ir e m e n ts , the r a t e s a c t u a l
l y in e f f e c t on December 31, 1948, were a s c e r ta in e d by c o r
resp o n d en ce o r o th e rw ise *
Where two o r th r e e p e rc e n ta g e s a re shown, th e s e c
ond and t h i r d a p p ly to banks d e s ig n a te d o r approved a s r e
s e rv e d e p o s i t a r i e s , o r to banks i n c e n t r a l r e s e r v e o r in
r e s e rv e c i t i e s , s p e c i f i e d c i t i e s , c i t i e s w ith s p e c i f i e d
p o p u la tio n , e t c .
0 The r e s e r v e re q u ire m e n ts shown i n th e tim e d e p o s
i t s column f o r A riz o n a , C a l i f o r n i a , C o n n e c tic u t, M assachu
s e t t s , N eb rask a, Rhode I s l a n d , U tah , and Wyoming a p p ly o n ly
to d e p o s its in th e sa v in g s d e p a rtm e n ts o f Com m ercial banks
85
TABLE IV ( c o n t in u e d )
RESERVE REQUIREMENTS OF STATE COMMERCIAL BANKS AND TRUST
COMPANIES, BY KIND OF DEPOSITS (DEMAND AND TIME).
DECEMBER 2 1 , 1 9 4 8
and t r u s t com panies. O th e r tim e d e p o s it? a re s u b je c t to
h ig h e r re q u ir e m e n ts , b u t in s p e c tio n o f S ta te b an k in g d e
p a rtm e n t a n n u a l r e p o r t s d i s c l o s e s t h a t su ch d e p o s its in
C a l i f o r n i a . C o n n e c tic u t, M a s s a c h u s e tts , and Rhode I s la n d
a r e r e l a t i v e l y sm a ll in com parison w ith d e p o s its in sa v in g s
d e p a rtm e n ts ; th e same th in g p ro b a b ly i s tr u e in th e o t h e r
S t a t e s , to th e e x t e n t th e y have s e p a r a t e l y o p e ra te d sa v in g s
d e p a rtm e n ts in com m ercial b a n k s.
a No s t a t u t o r y r e s e r v e re q u ir e m e n ts .
® The tw en ty p e r c e n t re q u ire m e n t a g a i n s t demand and
se x p e r c e n t a g a i n s t tim e d e p o s its became e f f e c t i v e F e b ru
a r y 1 5 , 1949.
TABLE 7
COMMERCIAL BANKS IE THE UNITED STATES; PERCENTAGE OP
NONMEMBER BANKS, BY STATES, JUNE 3Q, 194914
S ta te
Number
o f
banks
P e r c e n t
o f
nonmem
b e r s
P e r c e n t
t o t a l d e
p o s i t s h e ld
b y n o n -
member banks
M i s s i s s i p p i • . • , . . . 202 8 4 .7 6 2 .0
G eo rg ia . . . . . . • . 294 8 3 .5 2 8 .9
South C a ro lin a * . • . . . 150 78.8 3 2 .5
N o rth C a ro lin a # « . • . • 226 76.1 4 5 .4
Iow a, * • • . , . • . . * 665 75.5 4 8 ,1
T ennessee • • • . . . . . 295 7 2 .2 2 2 .9
N o rth Dakota* • • • . . * 160 7 2 .0 5 7 .4
L o u isia n a * * • • « . * * 161 7 1 .4 2 3 .0
K entucky......................... • * * 385 70.9 3 7 .6
A rk a n sa s . * • . • . , . * 220 70.9 3 2 .1
W isc o n sin .................... • * . 551 70*2 3 4 ,0
M isso u ri* • • • * •
. * . 599 6 9 .9 2 1 .6
M in n eso ta .................... • • • 68 2 69*6 2 6 ,9
N eb rask a. . * * * • . # . 416 6 5 .6 2 6 ,4
Kansas* • * • • • • . . . 610 6 4 .8 3 6 .0
South Dakota* • • • . * • 170 6 2 .5 3 3 .8
P lO rld a . . . . . . . . • 190 6 1 .6 2 3 .0
Alabama . . . . . . • . • 226 5 9 .7 1 8 .1
W ashington* . . . . . . . 122 5 6 .6 7 .9
Oregon* . . . . . . . . . 69 5 6 .5 8 .2
D elaw are. . . . . . . . . 29 5 6 ,4 3 3 .7
A rizo n a . . . . . . . * * 11 54*5 1 6 .5
M ary lan d ......................... . . . 162 5 2 .8 2 6 .2
In d ia n a • • • * • • • • • 486 5 1 .6 2 7 .3
M ichigan* . • • . . • • • 446 4 8 .2 1 3 .7
Rhode is la n d * • • . . * . 19 4 7 .4 2 0 .0
Utah* •# ••«• . . . . 55 4 2 .6 1 6 .5
C a lif o r n ia * * * * * • * . 204 4 3 .6 8 .5
I l l i n o i s * . . . . » . . , 891 4 3 .2 9 .6
Vermont * .................... . . . 70 4 2 .9 4 8 .1
14 S o u rc e : D ouglas S ubcom m ittee, H e a rin g s , o p , p i t
S ubm itted by Thomas McCabe, December 2 , 1949, p , 4 8 1 ,* “'"
87
TAB LB V ( c o n t in u e d )
COMMERCIAL BANES IN THE UNITED STATES; PERCENTAGE OF
. NQNMEMBER BANES, BY STATES, JUNE 30, 1949
S ta te
Number
o f
banks
P e r c e n t
o f
nonmem
b e r s
P e r c e n t
t o t a l d e
p o s i t s h e ld
by non
member banks
C o n n e c tic u t .................... 114 4 2 .1 3 1 .4
Oklahoma. . . . . . . 387 4 1 .9 1 4 .0
M a i n e ............................. • 64 4 0 . 6 3 1 .4
W est V ir g in ia • • • • 179 4 0 .2 2 3 .0
Idaho • • 45 4 0 .0 1 3 .5
C o lo ra d o .............................. 147 3 7 .4 1 1 .0
Texas . . . . . . . . 898 3 6 .6 1 1 .1
O hio. . . . . . . . . 662 3 6 .0 1 1 .6
V i r g i n i a .............................. * • 314 3 5 .0 1 9 .3
New M exico. . • • • • 50 3 2 .0 2 0 .5
New Ham pshire . . . . 75 3 0 .7 3 2 .3
Wyoming • ......................... • ♦ 55 2 5 .5 1 6 .3
N evada................................... 8 2 5 .0 8 .4
M ontana . . . . . . . • 0 111
2 4 .3 1 3 .3
P e n n s y lv a n ia • . . . 979 2 4 .0 1 3 .5
M a s s a c h u s e tts • • • • 183 2 1 .9 8 .8
D i s t r i c t o f C olum bia. • 0 19 1 5 .8 6 .1
New J e r s e y . • • • • • • 0 334
1 5 .3 1 2 .5
New Y ork........................ • 648 1 2 .8 4 .5
I I I . COMPULSORY RESERVE REQUIREMENTS
The D ouglas Subcom m ittee h as n e a t l y summarized th e
com pulsory r e s e r v e re q u ire m e n t p r o p o s a l.
Many have p ro p o sed t h a t th e e x i s t i n g d is c r e p a n c ie s
betw een the r e s e rv e re q u ire m e n ts o f member banks and
th o se o f nonmember banks sh o u ld be ended, e i t h e r by r e
q u ir in g a l l b an k s t h a t h o ld demand d e p o s i t s , o r a t l e a s t
a l l suoh in s u re d banks to become members o f th e E e d e ra l
R eserve System o r by r e q u ir in g a l l o f th e s e b an k s, even
the nonmembers, to h o ld th e same r e s e r v e s a s member
banks •
A rgum ents P ro and Con
The e f f e c t i v e n e s s o f m o n etary p o l i c y *--The c la im was
advanced t h a t th e e f f e c t i v e n e s s o f m onetary p o l i c y was d e -
c re a s e d b ecause more th a n h a l f o f a l l com m ercial h an k s and
a b o u t f i f t e e n p e r c e n t o f th e n a t i o n s 1 hank d e p o s i t s w ere
beyond th e r e a c h o f th e S y s t e m * T h e s e d e p o s i t s w ere e x
empt from th e System ’ s r e s e rv e req u ire m e n ts* As th e th e n
Chairm an o f th e Board o f C o v e ra o rs p u t i t :
• . * i t m ust he remembered t h a t th e e f f e c t i v e n e s s o f
r e s e r v e re q u ire m e n ts l i e s n o t o n ly in th e a g g re g a te v o l
ume o f d o l l a r s r e q u ir e d to be h e ld a s r e s e r v e s ; to a
v e ry c o n s id e r a b le e x te n t i t l i e s in the d i r e c t im pact o f
th o se re q u ire m e n ts upon th e lo a n and in v e stm e n t p o l i c i e s
o f th o u sa n d s o f i n d iv i d u a l hanks and th e in f lu e n c e th o se
p o l i c i e s e x e r t upon th e m yriad u s e r s o f bank c r e d i t . * 7
A lla n S p ro u l was can d id i n h i s a p p ro v a l o f the p ro p o
sa l* He b e lie v e d t h a t n a t i o n a l m o n e tary and c r e d i t p o l i c y
should have th e s u p p o rt o f a l l o f th e n a t i o n ’s b an k s:
, th e y sh o u ld m eet th e re q u ire m e n ts o f th e n a t i o n a l
m o n etary and c r e d i t p o l i c y so f a r a s i t r e l a t e s to th e money
s u p p l y .”18
IS D ouglas S ubcom m ittee, R e p o rt, o p * c j t * , p p . 34 f*
McCabe, 0£ . c i t * , p* 59*
17 I b i d * , p . 73.
18
D o u g la s S u b c o m m itte e , H e a r in g s , o p . c i t . . p. 4 3 9 ,
89
I f th e p r o p o s a l was p a s se d toy C ongress McCabe reoom -
mended t h a t d i r e c t a c c e s s to th e S y ste m 's lo a n and d is c o u n t
f a c i l i t i e s toe e x te n d e d to a l l com m ercial b a n k s, w h e th e r o r
n o t th e y w ere members.-*-^ In e n d o rs in g t h i s recom m endation*
one group w ro te , a c c e s s to R eserve System c r e d i t
• . . i s th e u l t i m a t e so u rce o f l i q u i d i t y in tim e o f
s t r a i n , to nonmembers a s w e ll a s member tanks (and)
would se rv e a v e ry u s e f u l p u rp o se n o t o n ly in p e r io d s o f
c r i s i s tout a ls o d u rin g p e r io d s o f r e c e s s io n # 2* *
T h is group toelieved t h a t i t would s tr e n g th e n m o n etary e f
f e c t i v e n e s s an d , th u s , the s t a b i l i t y o f the econom y.2^
The la c k o f g e o g ra p h ic u n if o r m ity , a s to th e l o c a t i o n
o f nonmember b a n k s , was h e ld to toe d e t r im e n ta l to n a t i o n a l
December 2 , 1949, F o r a s i m i l a r o p in io n , see U.S* Commis
s io n on O rg a n iz a tio n o f the E x e c u tiv e B ranch o f th e G overn
m en t, Task F orce R e p o rt, R e g u la to ry C om m issions. Appendix N
(W ashington: U .S . Government P r i n t i n g o f f i c e , 1 9 4 9 ), p . IIS ',
19 MoCatoe, o p , c i t , . p , 69*
20
D ouglas Subcom m ittee, R e p o r t, o p . p i t . . p , 3 6 .
21
Idem * McCabe s u c c i n c t l y p u t t h i s when he rem ark
e d : "Qur b an k in g and c r e d i t economy c o n s i s t s o f an in c r e d
i b l y com plex s t r u c t u r e o f in te r l o c k e d a s s e t s and l i a b i l i
t i e s . Ho bank can o p e ra te t h a t c a n n o t c o n v e rt i t s a s s e t s
q u ic k ly in to c a sh when d e p o s i t o r s 1 u se o f fu n d s r e s u l t s in a
d r a i n . In p e r io d s o f f i n a n c i a l s t r a i n th e r e i s no a l t e r n a
t iv e tout re c o u rs e to th e R eserve System . T h is re c o u r s e to
fu n d s i s alw ays a v a ila b le to a member bank, w ith f u l l a s s u r
ance th a t th e F e d e r a l R eserve w i l l be in a p o s i t i o n to m eet
h i s re q u ir e m e n ts , w h a te v e r th e y may b e . I would l i k e to see
t h i s re c o u rs e open a l s o to nonmember b an k s who c a r r y t h e i r
r e s e r v e s in th e F e d e r a l R eserve B a n k s." D ouglas Subcommit
t e e , H e a rin g s , o p . c i t . . p . 478, December 3 , 1949*
90
m o n etary p o lic y * "• • • The im pact o f F e d e r a l R eserve p o l i
c i e s and the p o s s i b i l i t i e s o f re n d e r in g a s s i s t a n c e and su p
p o r t in tim e o f n e e d ," a v e rr e d Chairman McCabe, " v a r ie s
w id e ly in d i f f e r e n t a r e a s o f th e c o u n t r y ." 22 I n t h i s r e
g a r d , one o b s e r v e r n o te d th e extrem e ran g e among S t a t e s as
to the p e r c e n t o f t o t a l b anking d e p o s its h e ld by nonmember
banks* To A lla n S p ro u l the f i f t e e n p e r p e n t o f n a t i o n a l d e
p o s i t s h e ld by nonmember b anks c o n ta in e d "some d e c e it * " He
p o in te d o u t , "• • . th e re a re p a r t s o f th e c o u n try where the
volume o f d e p o s its h e ld by nonmember b an k s i s a much l a r g e r
23
p e rc e n ta g e •"
The fo re g o lu g was d en ied by many. In summary, th e y
a l l s a id the same th in g . " I t i s n o t n e c e s s a r y f o r e f f e c t i v e
m o n etary c o n t r o l ; " th e y avowed, " th e F e d e r a l R eserve a l r e a d y
h a s c o n t r o l o v e r th e r e s e r v e re q u ire m e n ts o f banks h o ld in g
e i g h t y - f i v e p e r c e n t o f t o t a l d e p o s its * " 2^
W ith d ra w als from th e System . — The h ig h e r r e s e r v e s im-
22 McCabe, o n . c i t . . p . 73. F o r th e com plete range
o f nonmember banks by S t a t e s , see T able V, s u p r a , pp* 86 f .
?3
D ouglas Subcom m ittee, H e a rin g s. o p. c i t * . p . 429,
December 2 , 1949*' S p ro u l b e lie v e d "tha“ t even though f i f t e e n
p e r c e n t was l i k e th e t a i l compared to th e dog, " , . . th e
t a i l o u ght to be a p a r t o f the dog, w h e th e r i t i s sm a ll o r
la rg e * • • •" Idem
24
D ouglas Subcom m ittee, R e p o rt, l o c . c l t . The Sub
com m ittee was n o t a g a i n s t th e p ro p o s a l b u t was o n ly summa
r i z i n g a p o s i t i o n o f th e p l a n fs o p p o n e n ts.
91
posed on member banks and th e c o m p o sitio n o f th o se r e s e r v e s ,
i t was d e c la r e d , gave a c o m p e titiv e ad v an tag e to the nonmem
b e r banks* When the Board in c re a s e d r e s e r v e re q u ir e m e n ts ,
M a rrin e r S o c le s c la im e d , v o c if e r o u s o p p o s itio n to t h a t i n
c re a s e was im m e d ia te ly fo rth co m in g from th e member b a n k s.
He d id n o t b e lie v e t h a t su ch c o m p la in ts were w ith o u t re a s o n
a b le b a s i s , f o r th e h ig h e r th e member bank re q u ire m e n ts
w ere, th e g r e a t e r was th e r e l a t i v e d i s c r i m i n a t i o n a g a i n s t
th e m .25
Among th e R eserve Bank p r e s i d e n t s , th e re was th e f e a r
t h a t i f th e d if f e r e n c e i n r e s e rv e re q u ire m e n ts became su b
s t a n t i a l i t m ig h t r e s u l t in ” • . • w ith d ra w a ls from th e Sys
tem in num bers s u f f i c i e n t to be e m b a r r a s s in g .”25 A lfre d H*
W illia m s , a R eserve Bank p r e s i d e n t , c i t e d th e example o f a
b a n k e r in h i s a r e a who came to him and showed in d o l l a r s and
c e n ts th e a d v a n ta g e s o f le a v in g th e System b ecause o f th e
lo w er r e s e rv e re q u ire m e n ts a v a i l a b l e to S ta te ban ks .He
n o te d t h a t m em bership In th e System was n o t r e q u i s i t e to a
nonmemberf s a c q u ir in g th e s e r v ic e s o f th e System . Honmember
25 D ouglas S ubcom m ittee. H e a rin g s , o p . c i t . . p . 838,
Hovember 22, 1949.
26
I b i d . , p . 441, S tate m e n t o f A lla n S p ro u l, December
2 , 1 9 4 9 .
I h l d . . p . 6 1 , H ovem ber 1 6 , 1 9 4 9 .
93
b a n k s , th ro u g h t h e i r c o rre s p o n d e n t c i t y b an k s, u s u a l l y a
member, o b ta in e d th e S y ste m 's s e r v ic e s - - a n d w ith o u t c o s t to
th e m .28 M r. W illia m s answ ered a f f i r m a t l v e l y S e n a to r Doug
l a s ' q u e s tio n :
And, t h e r e f o r e , nonmembers i n th e ab sen ce o f s t r i n g e n t
S ta te r e g u l a t i o n s a re in g e n e r a l “ a b le to g e t many o f th e
a d v a n ta g e s o f th e F e d e r a l R eserve System b u t w ith o u t
s u b je c ti n g th e m se lv e s to th e se lim ita tio n s ? ® 9
(She Board o f G overnors e x p re s s e d s e n tim e n ts s i m i l a r
to the f o r e g o in g . The lo w er th e nonmember r e s e r v e r e q u i r e
m e n ts, th e Board s a i d , the g r e a t e r the d a n g e r c o n fro n te d by
the System . " I th in k i t i s a t h r e a t , " MoOabe d e c la r e d . " I
th in k i t d o es have an in f lu e n c e on th e Board in m aking i t s
d e c is io n s on in c r e a s in g r e s e rv e r e q u ir e m e n ts ." 3® He s a id
the B o a rd 's r e c o r d s r e v e a le d t h a t r e s e r v e re q u ire m e n ts w ere
s p e c i f i c a l l y g iv e n f o r w ith d ra w a l " . . . i n th re e o a s e s in
1947. W e had one i n 1948 . . . and we had f o u r In 1949. •
• , " 33- M a r r ln e r E c e le s s a id t h a t in the p a s t th e f e a r o f
d r iv in g b anks from th e System th ro u g h h ig h e r r e s e r v e r e
q u ire m e n ts had n o t o p e ra te d to r e s t r a i n th e B oard, b u t i f
th e Board had r e c e iv e d th e c o n t r o ls f o r which i t had ask ed
28 D ouglas S ubcom m ittee, H e a rin g s , l o c . c i t .
29 I b i d . , p . 63.
30 IM & . . p . 498, December 3 , 1949.
Idem
9 3
in 1948, i t , may w a ll h a v e ." 32
R andolph B a rg eas, a member o f th e N a tio n a l C ity Bank
o f New Y ork, d id n o t b e lie v e t h a t th e a b i l i t y o f banks to
w ithdraw from th e System h in d e re d th e Board o f G overnors i n
the u t i l i z a t i o n o f i t s pow ers, " I th in k th e y a re overem pha
s i z i n g t h a t d i f f i c u l t y , " Shore h a s n o t been a t any tim e* he
c o n tin u e d , any s u b s t a n t i a l d e f e c t i o n from the System ,
3 3
in s p i t e o f th e la r g e in c r e a s e s in r e s e rv e r e q u ir e m e n ts ,"
He was opposed to th e s u g g e s tio n t h a t r e s e r v e re q u ire m e n ts
be made a p p lic a b le to nonmember banks "because o f th e f e a r
3 4
o f en cro ach m en ts o f c e n t r a l i z e d Government p o w e r." Mr.
B u rg ess co n ten d ed th a t inasm uch a s m ost o f the b an k in g r e
s o u rc e s were w ith in th e He se rv e System , com pulsory r e s e r v e s
were n o t n e c e s s a r y . He a l s o b e lie v e d t h a t S ta te banking
law s w ere becoming more a d e q u a te .2®
22 D ouglas S ubcom m ittee, H e a rin g s , o p . c i t . . p p .
238 f , November 22, 1949.
33 I b i d . , p . 199, November 1 8 , 1949.
34 I b i d . , p . 200.
^ Idem. I n s u p p o r t o f h i s b e l i e f t h a t nonmember
ban k s v i a S ta te ban k in g law s were coming to have more a d e
q u a te r e s e r v e s , M r. B u rg ess n o te d t h a t the Septem ber 28,
1942 r e s o l u t i o n o f th e A d m in is tra tiv e Com mittee o f th e Amer
ic a n B ankers A s s o c ia tio n had been ad o p ted in w h o le, o r in
s u b s t a n t i a l p a r t , b y tw enty-one S t a t e s . She r e s o l u t i o n
s t a t e d t h a t the S ta te b an k in g a u t h o r i t i e s sh o u ld be g r a n te d
d i s c r e t i o n r e s p e c t i n g r e s e r v e s so t h a t th e y co u ld fo llo w the
le a d o f th e H eserve System . A lthough he s a i d : "When you
94
A n o th er c r i t i c i s m o f th e p ro p o s a l advanced was t h a t
th e e x i s t i n g a rra n g e m e n t im poses a n e c e s s a r y check upon Re
s e rv e System o f f i c i a l s * I t was claim ed t h a t " e x c e s s iv e ly
h ig h ” r e s e r v e re q u ire m e n ts would n o t he p la c e d upon th e mem
b e r banks f o r f e a r o f a r o u s in g t h e i r I l l - w i l l o v er th e i n -
e q u ito u s c o m p e titiv e p o s i t i o n in w hich th e y would be
p la c e d — th e System would lo s e members.®**
The c o s t o f rnonetary m anagem ent*— " I th in k i t i s
c l e a r l y u n f a i r and in e q u i t a b l e * ” d e c la r e d fhomas McCabe, "to
a sk member banks a lo n e to b e a r th e ( n a tio n a l m o n e tary p o l i -
37
c y } b urden*" He arg u ed t h a t th e su p p ly o f money and c r e -
tafce a c c o u n t o f t h i s a c t i o n i t n arro w s down t h i s nonmember
problem to v e ry sm a ll p r o p o r t i o n s ," he a ls o n o te d t h a t th e
u se o f t h i s a u t h o r i t y was o p tio n a l w ith the S ta te a u t h o r i -
t i e s . I b i d * , p . 201*
® * * D ouglas S ubcom m ittee, R e p o rt, l o o * o i t . A r e l a t e d
m a tte r o f w ith d raw in g from th e R eserve System i s th e c o n v e r
s io n o f a R a tio n a l bank t o - a S ta te b an k . Ihe law a s i t e x
i s t s to d a y d o e s n o t g r a n t a R a tio n a l bank th e s t a t u t o r y
r i g h t , u n d e r i t s c h a r t e r , to c o n v e rt in to o r to c o n s o lid a te
w ith a S ta te bank* A S ta te b an k , on th e o th e r h an d , can do
so i f th e C o m p tro lle r o f th e C u rren cy ap p ro v e s and th e bank
in g law s o f th e S ta te do n o t f o r b ld e i t . Ihe o n ly way a Ra
t i o n a l bank can e n t e r a S ta te b an k in g sy stem i s to p la c e
i t s e l f i n v o lu n ta r y l i q u i d a ti o n * f h t s b r in g s up th e q u e s
t i o n o f income and c a p i t a l g a in s t a x e s . B i l l s have been i n
tro d u c e d in t o C o n g ress to p la c e in g r e s s and e g r e s s from one
b an k in g system to th e o t h e r on a more e q u ita b le f o o t i n g .
F o r a d is c u s s io n o f t h i s s u b j e c t , see TJ.S. C o n g re ss, H ear
in g s B efore th e House Committee on B anking and C u rre n c y ,
I ^ r T 1 1 6 1 . J u ly 1 5 , 1949, p p . 62^ 6.
37 M cC abe, o p . o i t . . p . 59.
95
d i t i s in flu e n c e d th ro u g h r e s e r v e re q u ire m e n ts i n th e i n t e r
e s t o f economic s t a b i l i t y * M onetary p o lic y i s w eakened, to
th e d e trim e n t o f a l l b a n k s , " to the e x t e n t t h a t b an k s do n o t
b e a r t h e i r f a i r sh a re i n w hat i s a n a t i o n a l r e s p o n s i b i l i t y .
t»38
• • •
The nonmember banks escap ed th e c o s t o f m o n etary man
agem ent n o t o n ly in th e q u a n t i t y o f r e s e r v e s r e q u ir e d b u t a l -
5 5 9
so i n th e q u a l i t y o f th o se r e s e r v e s . " "The h o ld in g o f n o n -
e a m in g r e s e r v e s i s in a se n se a n e c e s s a r y c o s t o f m o n etary
c o n t r o l , b u t a t th e p r e s e n t tim e th e member banks have to
c a r r y more th a n t h e i r f a i r s h a re * " 4® The d i f f e r e n c e s b e
tween the c o m p o sitio n o f r e s e r v e re q u ire m e n ts o f member and
nonmember banks was p u t f o r t h by M r. McCabe.
Member banks a re r e q u ir e d to h o ld b a la n c e s w ith F ed
e r a l R eserve Banks a s r e s e r v e s a g a i n s t t h e i r d e p o s i t s .
Honmember b a n k s, on the o th e r h an d , may h o ld t h e i r r e
s e r v e s in th e form o f v a u l t c a s h , b a la n c e s due from
o t h e r com m ercial b a n k s , a n d , in some S t a t e s , c e r t a i n
am ounts o f s e c u r i t i e s o f th e U n ited S t a t e s , S t a t e s , and
p o l i t i c a l s u b d iv i s io n s . O nly th e v a u l t c a s h , w hich m ust
be o b ta in e d i n d i r e c t l y from th e F e d e r a l R e se rv e , w i l l be
r e f l e c t e d d o l l a r - f o r - d o l l a r in the demand f o r R eserve
Bank c r e d i t . V a u lt c a s h , how ever, c o n s t i t u t e s o n ly a
V ery sm a ll p o r t i o n o f r e q u ir e d r e s e r v e s o f nonmember
b an k s; t h e i r r e s e r v e s c o n s i s t l a r g e l y o f b a la n c e s due
from o t h e r b a n k s. B a la n c e s due from o t h e r b a n k s, s in c e
McCabe, l o o , o i t .
S u p ra « P* 8 1 . A lso see Table I I I , s u p r a . p . 82.
4® D ouglas S ubcom m ittee, R e p o rt, o p . c i t . . p . 3 5 .
96
th e banks w ith w hich th e fu n d s a rc d e p o s ite d can le n d o r
in v e s t them, do n o t r e s t r i c t c r e d i t e x p a n sio n e x c e p t to
th e sm a ll e x t e n t t h a t r e s e r v e s a re h e ld a g a i n s t th e s e
d e p o s its i n the form o f vault; c a sh o r o f b a la n c e s a t th e
F e d e r a l R eserve B anks. B a la n c e s d e p o s ite d w ith c o r r e
sp o n d en t h anks a re i n la r g e p a r t a v a i l a b l e f o r le n d in g
by c o rre s p o n d e n t banks and th u s may c o n t r ib u t e to the
p ro c e s s o f m u lt ip le c r e d i t e x p a n sio n on th e b a s i s o f a
g iv e n amount o f b a s i c r e s e r v e s . R e se rv e s c o n s i s t i n g o f
s e c u r i t i e s a r e n o t e f f e c t i v e a s r e s e r v e s i n a m o n etary
s e n s e — i . e . , a s a means o f r e g u l a t i n g th e t o t a l amount
o f e r e d i t t h a t can be s u p p lie d by th e b an k in g sy stem —
b ecau se th e y a r e n o t im m obilized a s s e t s b u t r a t h e r a re
a s s e t s w hich r e f l e c t e r e d i t e x p a n s io n . A r e s e r v e r e
q u ire m e n t in th e form o f s p e c i f i e d s e c u r i t i e s , e . g . ,
U n ite d S ta te s Government s e c u r i t i e s , i s , how ever, a lim
i t a t i o n on th e p r o p o r tio n o f bank fu n d s w hich c a n be i n
v e s te d in o t h e r lo a n s and s e c u r i t i e s .
W ith r e f e r e n c e to r e q u ir e d r e s e r v e s , i t sh o u ld be
p o in te d o u t t h a t member banks i n p r a c t i c e h o ld a s w ork
in g b a la n c e s c e r t a i n am ounts o f v a u l t c a sh and d e p o s its
w ith c o r r e s p o n d e n ts , i n a d d i t i o n to t h e i r r e q u ir e d r e
s e r v e s w ith F e d e r a l R eserve B anks, w h ereas nonmember
banks can c o u n t t h e i r minimum w orking b a la n c e s a s r e
q u ire d r e s e r v e s , f h u s , the d i f f e r e n c e s in p e r c e n ta g e s
o f d e p o s its r e q u ir e d to be h e ld a s r e s e r v e s do n o t a c
c u r a t e l y r e f l e c t th e a c t u a l d i f f e r e n c e s in e f f e c t i v e r e
s e rv e s t h a t m ust be h e ld by th e member and nonmember
b a n k s .41
3?he d u a l b an k in g sy ste m . — fhomas McCabe d id n o t p r o
pose t h a t com pulsory m em bership i n th e F e d e r a l R eserve Sys
tem be r e q u ir e d o f a l l b a n k s . H is w ish was to e lim in a te
" c o m p e titio n in l a x i t y " i n re g a rd to r e s e rv e r e q u ir e m e n ts .42
41 McCabe, o p . c l t . . p p . 72 f .
^ I b i d . , p . 71. McCabe arg u ed f o r th e en actm en t o f
h i s recom m endations b u t tem pered them b ecau se o f th e p a s t
re c o r d o f s u c c e s s en jo y e d by l e s s te m p e ra te m o n e tary p la n s .
He n o te d t h a t l e g i s l a t i o n had b een e n a c te d i n th e p a s t to
p ro v id e f o r the e v e n tu a l i n t e g r a t i o n o f a l l banks i n to one
97
T h is co u ld b e s t be a t t a i n e d , be b e l ie v e d , by h av in g a l l
banks o b se rv e th e same r e s e rv e re q u ire m e n ts*
Such l e g i s l a t i o n would n o t a f f e c t th e a u t h o r i t y o f the
S ta te s u p e r v is o r s o v e r nonmember b an k s b u t i t w ould r e
move once and f o r a l l th e d a n g e r t h a t th e r e l a t i v e com
p e t i t i v e a d v a n ta g e s o f m em bership, a s compared w ith
nonm em bership, in th e F e d e r a l R eserve System would a f
f e c t th e a g g re g a te money su p p ly o f t h i s c o u n try .4 3
Mr* McCabe su p p o rte d th e d u a l ban k in g sy stem ” . . . a s a
so u rce o f f l e x i b i l i t y and d e c e n t r a l i z a t i o n in ( th e f b an k in g
s u p e r v is o r y s t r u c t u r e . 1 ’44 He b e l ie v e d , how ever, t h a t "d u a l
b a n k in g ” sh o u ld n o t be confused w ith th e " d iv id e d b a n k in g ”
sy ste m , w hich he d e fin e d a s . • th e d i v i s i o n o f banks i n
to members o f th e F e d e r a l R eserve System and nonm em bers."46
sy stem , b u t t h a t "p o w erfu l f o r c e s " had n u l l i f i e d e a c h e f
f o r t . I b i d * , p p . 65 f . Two in s ta n c e s o f t h i s m ig h t be the
R a tio n a l B anking A ct o f 1863 and s e c t i o n 12B (j} ( I f o f the
B anking A ct o f 1935* T his l a t t e r s e c t i o n , r e p e a le d i n June
1939, s t i p u l a t e d t h a t a f t e r 1941 S ta te b an k s w ith a n n u a l
av e ra g e d e p o s i t s o f one m i l l i o n d o l l a r s o r more had to b e
come a member o f th e System to be a b le to c o n tin u e t h e i r d e
p o s i t in su ra n c e * T h is re p e a le d law was re v iv e d in m o d ifie d
form in th e Hoover Commission recom m endation t h a t . . a l l
in s u r e d banks be made s u b je c t to r e s e rv e re q u ire m e n ts a p p l i
c a b le to F e d e r a l R eserve member b a n k s .” See Task F orce Re
p o r t , R e g u la to ry C om m issions, o p * c i t . , p . 118*
4® McCabe, o n * c l t * , p* 69*
44 I b i d * . p* 66* A lso see D ouglas Subcom m ittee,
H e a rin g s , o p* c i t * , p . 433, S ta te m e n t o f A lla n S p ro u l, De
ce m b er/3 . 1949.
46 McCabe, o p , c i t *, p* 69* D i t t l e d o u b t e x i s t s a s
to th e C o n s t i t u t i o n a l a b i l i t y o f C ongress to g r a n t th e Board
th e power to e x te n d r e s e r v e re q u ire m e n ts to nonmember b a n k s .
A r t i c l e I , s e c t i o n 8 o f th e C o n s t i t u t i o n g r a n t s to C ongress
98
A lf re d W illia m s rem arked t h a t th e h e s t way he knew
f o r nonmembers to r e t a i n th e p r i v i l e g e o f re m a in in g o u ts id e
th e System was , • to make i t c l e a r "by t h e i r a c t i o n s t h a t
th e y a r e n o t p r o f i t i n g by b e in g o u t o f the S y ste m .”46 He
s t a t e d t h a t a s In th e p a s t so in the f u tu r e would he c o n t i n
ue to em phasize to nonmembers t h a t the System i n d i r e c t l y ,
th ro u g h member c o rre s p o n d e n t b an k s, gave them g r e a t e r s t a
b i l i t y . He b e lie v e d p r o g r e s s was b e in g made in t h i s f i e l d ,
b u t f a i l i n g to so lv e th e problem by o t h e r th an c o e re iv e
m eans, he would ” • • • sta n d f ir m ly f o r com pulsory r e s e rv e
r e q u l remen t s • ”47
The D ouglas Subcom m ittee d id n o t b e lie v e t h a t p ro p o » i
s i t i o n s su c h a s t h i s would t h r e a t e n d u a l b an k in g o r S ta te s *
r i g h t s .
The S t a t e s w ould r e t a i n t h e i r r i g h t to c h a r t e r and s u
p e r v is e b a n k s, and th e b an k s would be a b le to m eet th e
r e s e r v e re q u ire m e n ts and s t i l l p r o s p e r , j u s t a s S t a t e -
c h a r t e r e d banks t h a t e l e c t e d to j o i n th e F e d e r a l Re-
th e power ”to c o in money and r e g u la te th e v a lu e t h e r e o f . "
F o r an e x c e l l e n t d is c u s s io n o f t h i s i s s u e , w hich c i t e s c o u r t
c a s e s and t h e i r a p p l i c a t i o n , see th e docum ent p r e s e n te d by
George B. V e s t, G en e ra l C ounsel o f th e Board o f G o v ern o rs,
in U .S . C o n g ress, H e a rin g s B efore the House Committee on
Banking and C u rre n c y . 5S.J. R es. 1 5 7 . A ugust 2, 1949, p p .
1 2 4 -2 7 . ~ “
46 D ouglas Subcom m ittee, H e a rin g s , o p . c i t . , p . 71,
November 1 5 , 1949.
47 Idem
99
se rv e have done In th e past.'®'8
O b v io u sly , th e nonmerahers would view com pulsory r e
s e r v e s a s a t h r e a t to S ta te s * r i g h t s and to th e d u a l han k in g
sy ste m . Some I n d i c a t i o n o f the s u p p o rt r e c e iv e d hy the d u a l
h an k in g sy stem , a s e x i s t s , i s a p p a re n t In w hat a r e t i r i n g
p r e s i d e n t o f the A m erican B ankers A s s o c ia tio n w ro te :
The d u a l h a n k in g system n e e d s no J u s t i f i c a t i o n . I t
w o rk s. I t m e e ts the f i n a n c i a l n ee d s o f th e com m unities
i t s e r v e s . I t h as m et th e g r e a t e s t n e e d s o f th e G overn
m ent In th e g r e a t e s t c r i s i s o f a l l tim e . These a re th e
t e s t s hy w hich i t m ust he m e a s u r e d .
IT . THE U1IP0BS BBSEHVE PBOBOSA1
I n t r o d u c t i o n
The Board o f G overnors h as I n fo r m a lly o f f e r e d f o r
p u b lic c o n s id e r a ti o n a recom m endation t h a t th e c o m p o sitio n
o f hank r e s e r v e s he changed. The u n ifo rm r e s e r v e p ro p o s a l
was n o t o f f i c i a l l y p a sse d hy th e B oard. The t e n t a t i v e p la n
was d r a f te d hy th e B o a rd ’ s e c o n o m ists a f t e r num erous c o n s u l
t a t i o n s w i t h p r i v a t e h a n k e rs and th e f i e l d s t a f f s o f th e
v a r io u s He se rv e Banks
D ouglas S ubcom m ittee, B e p o rt. o p . c i t . , p . 36.
^ 3?, G, B a th je , "The Dual System W orks," B anking Daw
J o u r n a l . 6 3 :8 , J a n u a ry , 1946.
D ouglas S ubcom m ittee, H e a rin g s , o p . c i t . , p . 499,
S ta te m e n t o f Thomas McCabe, December 3 , 1949, A s i m i l a r
p ro p o s a l was d r a f te d in 1931 hy a s t a f f com m ittee o f the
100
The Board o f G overnors f i r s t s u g g e ste d t h i s p r o p o s a l
i n 1947 to . . m oderate th e a r b i t r a r y i n e q u i t i e s among
banks w hich r e s u l t from e x i s t i n g s t a t u t o r y re q u ire m e n ts#
W hile a g e n e r a l summary o f the p la n was p r e s e n te d , i t was
n o t u n t i l 1948 t h a t i t was p r e s e n te d i n more com plete form*
The g e o g r a p h ic a l b a s i s o f member bank r e s e rv e r e
q u ire m e n ts , i . e * , c e n t r a l r e s e r v e c i t y b a n k s, r e s e rv e c i t y
b a n k s, and c o u n try b a n k s , o r i g i n a t e d w ith th e n a t i o n a l Bank
in g A c t. R eserve re q u ire m e n ts were based on th e type o f
d e s ig n a ti o n r e c e iv e d by th e c i t y in w hich a bank was located.*
T h is th r e e t i e r c l a s s i f i c a t i o n o f c i t i e s was in c o rp o r a te d
In to th e F e d e r a l R eserve Act# I t i s the c la im o f th e advo
c a t e s o f t h i s p ro p o s a l t h a t th e j u s t i f i c a t i o n f o r th e con
tin u a n c e o f t h i s c l a s s i f i c a t i o n i s no lo n g e r i n e f f e c t . 52
The U n ifo ra R eserve P la n
The Board o f G overnors c o n s id e r s th e p r e s e n t s t r u c
Board a f t e r th re e y e a rs s tu d y b u t was found to be a d m in is
t r a t i v e l y too d i f f i c u l t . As a p la n , how ever, i t is s a id to
be b e t t e r th a n th e p r e s e n t p r o p o s a l. See U .S . C o n g ress,
H e a rin g s B efore th e J o i n t Committee on the Economic R e p o rt.
S ta te m e n t o f V ioodlief Thomas, May 2 7 , 1948, p p . 136 f . T his
r e f e r e n c e , f o r t h i s p a r t i c u l a r d a t e , w i l l be known th ro u g h
o u t t h i s c h a p te r a s H e a rin g s . Economic R e p o rt.
A nnual R eport o f the Board o f G overnors o f th e
F e d e r a l R eserve System . 1947 (W a s h in g to n :h o a rd o f G overnors
o f th e F e d e r a l R eserve System , 1 9 4 8 ), p . 9.
52 D ouglas Subcom m ittee, R e p o rt, l o o , c i t .
101
tu r e o f r e s e r v e r e q u ir e m e n ts la c k in g to some d eg ree In f a i r
n e s s and e q u i t y . fhe amount o f r e s e r v e s a bank sh o u ld h o ld
and th e b a s i s f o r d e te rm in in g t h a t amount I s , to th e B o ard ,
a problem n o t o n ly w o rth y o f s o lv in g b u t i n need o f s o lv i n g .
I t was con ten d ed t h a t the Board p la n "♦'v. • was a more l o g i
c a l and e f f e c t i v e method o f d e te rm in in g th e d i s t r i b u t i o n o f
r e s e r v e r e q u ire m e n ts among member b a n k s. • • »w53 The f o l
lo w in g i s th e p la n a s was en d o rse d by th e B oard:
A p la n : $ h is p la n c o n te m p la te s t h a t th e F e d e r a l Re
se rv e A ct be amended to —
f l ) E lim in a te d e s ig n a ti o n s o f c e n t r a l r e s e r v e and r e
se rv e c i t i e s .
(z) P r e s c r ib e b a s ic I n i t i a l r e s e r v e re q u ire m e n ts
a g a i n s t c l a s s e s o f d e p o s its a s f o llo w s ; (a) 30 p e r c e n t
a g a i n s t In te r b a n k d e p o s its w h e th e r demand o r tim e ; fb |
20 p e r c e n t a g a i n s t o t h e r demand d e p o s its l e s s c a sh
Item s in th e p r o c e s s o f c o l l e c t i o n ; (c) 6 p e r c e n t
a g a i n s t tim e d e p o s i t s , o r p e rh a p s 6 p e r c e n t a g a i n s t
s a v in g s d e p o s i t s and 20 p e r c e n t a g a i n s t o th e r tim e d e
p o s i t s .
(3} Empower th e F e d e r a l Open M arket Committee to i n
c r e a s e o r d e c re a s e th e s e b a s ic re q u ire m e n ts by some
s u i t a b l e p r o p o r t i o n —p e rh a p s a maximum o f 50 p e r c e n t —
In e i t h e r d i r e c t i o n a s to any o r a l l c l a s s e s o f d e
p o s i t s .
(4) P e rm it v a u l t c a sh to be co u n ted a s p a r t o f r e
q u ire d r e s e r v e s .
(5) P e rm it a member bank to d e d u c t from I t s r e q u ir e d
r e s e r v e s a p e rc e n ta g e o f i t s b a la n c e s due from o th e r
member b an k s e q u a l to th e p e rc e n ta g e o f r e s e r v e s r e
q u ire d to be h e ld a g a i n s t in te rb a n k d e p o s i t s , f h i s
H e a r in g s . Economic R e p o rt, o p . c i t . . p . 139,
S ta te m e n t o f iC * R. Bopp. M r. Bopp, who p u t t h i s p la n f o r
ward In C o n g ress, s t a t e d t h a t a s y e t i t was n o t com plete and
t h e r e f o r e i t was n o t a s p e c i f i c recom m endation. From r e a d ^ i
in g i t , how ever, one o b ta in s the f e e l i n g o f c o m p le tio n .
102
would r e p la c e th e p r e s e n t method o f a llo w in g a member
hank to d e d u o t from I t s demand d e p o s its th e amount o f
i t s b a la n c e s due from o t h e r banks b e fo re com puting i t s
r e q u ir e d re s e rv e s # I t m ig h t be b e t t e r a s w e ll a s sim
p l e r to t r e a t "c a sh ite m s in th e p r o c e s s o f c o l l e c t i o n "
a s th e e q u i v a le n t o f "due from b a n k s ," in s te a d o f a s a
d e d u c tio n from demand d e p o s its #
(6} Empower th e Board o f G overnors to w a iv e , by re g u
l a t i o n , d u r in g a t r a n s i t i o n p e r i o d , p e n a l t i e s f o r d e f i
c i e n c i e s in, R e serv es r e s u l t i n g from in c re a s e d r e q u i r e
m ents on th e p ro p o sed new b a s i s * 54
A n a ly s is o f th e P l a n * s P r o v is io n s
Of th e s i x p r o v is io n s o f th e recom m endation, the
p r e s e n t pow ers o f th e f e d e r a l R eserve A ct, Mr# Bopp d e c la r e d
to the C om m ittee, were s u f f i c i e n t to p u t th e l a s t o n e, item
s i x , in to o p e ra tio n # The re m a in in g f iv e ite m s would r e q u ir e
a d d i t i o n a l a u t h o r i t y f o r t h e i r im p o s itio n . These he d i s c u s
sed a t le n g th #
C l a s s i f i c a t i o n o f b a n k s#—The p r e s e n t b a s is f o r bank
c l a s s i f i c a t i o n was h e ld to r e s u l t in i n e q u i t i e s . By law ,
th e Board o f G overnors can c l a s s i f y th e b anks w ith in a c i t y
i n o n ly one o f th r e e w ays, c e n t r a l r e s e rv e c i t y , r e s e r v e
c i t y , o r c o u n try b a n k s . W ith some e x c e p tio n s , a l l the banks
w ith in a c i t y a r e c l a s s i f i e d , th e sa m e .6S Banks o f s i m i l a r
^ H e a rin g s . Economic R e p o rt, o p . c i t . . p p . 1 3 9 -4 1 ,
S ta te m e n t o f £ • R. Bopp.
U n t i l r e c e n t l y , th e Board o f G overnors had no s e t
r u l e s f o r the d e s ig n a ti o n o f r e s e rv e c i t i e s , f o r a d i s c u s
s io n o f the m ethods u s e d , see Ray B. W e s te r f ie l d , Money.
C r e d it and B anking flew Y ork; Ronald P r e s s Company, 1 9 4 7 ),
103
s iz e and doing s i m i l a r ty p e s o f b u s in e s s can be s u b je c t to
d i f f e r e n t re se rv e re q u ire m e n ts. F o r example, a sm all bank
In a r e s e rv e c i t y h o ld in g no In te rb a n k d e p o s its w i l l be sub
j e c t to re q u irem e n ts alm o st twice as h ig h , p e rc e n ta g e w ise ,
a s a bank o u ts id e o f the c i t y . I f the bank o u ts id e o f the
c i t y i s h o ld in g la rg e in te rb a n k b a la n c e s , the c i t y bank w i l l
be p e n a liz e d to the e x t e n t t h a t i t does n o t hold t h i s type
o f deposit.®**
C l a s s i f i c a t i o n o f d e p o s its f o r re s e rv e p u rp o s e s . —
•Karl Bopp noted t h a t th e re were two opposing p o s i t i o n s f o r
changing d e p o s it c l a s s i f i c a t i o n f o r re s e rv e re q u ire m e n ts .
F i r s t , i t has been advanced t h a t d e p o s its should be u n c l a s
s i f i e d o r u n i f o r a f o r a l l c l a s s e s o f d e p o s i t s , and second,
. . . i t has been argued th a t a d e t a i l e d c l a s s i f i c a t i o n
should be made based on such c h a r a c t e r i s t i c s a s tu r n
o v e r, v o l a t i l i t y , s i z e , and economic a c t i v i t y o f d e p o s i
t o r —w hether an in d iv i d u a l o r a b u s in e s s , w hether l o c a l
pp. 629 f . On March*1 , 1948, the Board p u t in to e f f e c t a
tw o -p a rt sta n d ard f o r the d e s ig n a tio n o r te rm in a tio n o f r e
serve c i t i e s . They now w i l l be determ ined ” . . • (1) by
th e r a t i o o f in te rb a n k demand d e p o s its held by member banks
in each c i t y to the a g g reg a te amount o f in te rb a n k demand d e
p o s i t s h eld by a l l members o f the F e d e r a l Reserve System,
and (2) by such a r a t i o in com bination w ith a r a t i o o f i n
te rb a n k demand d e p o s its h e ld by member banks i n each c i t y to
the ag g reg a te amount o f a l l demand d e p o s its held by member
banks in such c i t y . " The sta n d a re d i s to be a p p lie d a t
th r e e - y e a r i n t e r v a l s . Annual R e p o rt. 1947. o p . oi t . . p . 39.
By t h i s new s ta n d a rd , one c i t y was promoted to re s e rv e c i t y
s t a t u s and s e v e r a l were demoted to c o u n try bank s t a t u s .
D o u g la s S u b co m m ittee, R e p o r t, o p . c i t . . p . 3 7 .
1 04
o r n a t i o n a l . 57
He contended the f i r s t recommendation would c re a te
huge ex c ess r e s e rv e s In the c e n t r a l and re s e rv e c i t y hanks,
w h ile d e f i c i e n c i e s would o ccu r else w h e re . The second f l a n
would c r e a te a d m in is t r a tiv e d i f f i c u l t i e s and would n o t
ach iev e the presumed o b j e c t i v e , which he s t a t e d , was w. . .
to g iv e the m onetary a u t h o r i t i e s s e l e c t i v e as w e ll a s g e n e r
a l in flu e n c e o v er the Q u a n tity and flow o f c r e d i t in v a r i
ous segments o f the economy*”5® The t h r e e f o ld c l a s s i f i c a
ti o n o f the p ro p o s a l he fa v o re d , however, would achieve
o v e r - a l l c o n tro l w h ile m inim izing the d is tu rb a n c e s endemic
i n the t r a n s i t i o n to the new s y ste m .59
Mr. Bopp p r e s e n te d fo u r re aso n s f o r t r e a t i n g i n t e r
bank d e p o s its d i f f e r e n t l y from demand d e p o s i t s . (1^ They
are l e g a l r e s e r v e s f o r nonmember banks. (Z) Member banks,
in d i v i d u a l l y , t r e a t them, i . e . , t h e i r "due from bank*” as
som ething more than seco n d ary r e s e r v e s , i n p r a c t i c e , the
members use them in p re fe re n c e to r e s e r v e s to make lo a n s o r
to m eet w ith d ra w a ls. A lso, th ey are e a s i l y co n v erted in to
re s e rv e b a la n c e s a t th e Reserve Banks. (3) H igher r e q u i r e -
57 H e a rin g s . Economic R e p o rt, o p . c i t . . p . 144.
5 8 I d e m
59 I b i d . . p . 1 4 5 .
105
ments a g a i n s t In te rb a n k d e p o s its would conform to the old
F e d e ra l and to the p r e s e n t S ta te laws which re q u ir e hanks
h o ld in g o th e r h a n k s1 r e s e r v e s to m a in ta in h ig h e r re s e rv e r e
q u irem e n ts, (4) The "com pelling p r a c t i c a l r e a s o n ," he r e
marked, was th a t
e l im in a tio n o f d e s ig n a tio n o f c i t i e s w ith o u t s e p a ra te
tre a tm e n t o f in te rb a n k d e p o s its would r e s u l t in the c r e
a t i o n o f la rg e ex c e ss re s e rv e s a t c e n t r a l re s e rv e and
re s e rv e c i t y hanks and o f la r g e d e f i c i e n c i e s a t o th e r
hanks i f o v e r - a l l req u irem e n ts were s e t so a s to m ain
t a i n ap p ro x im a tely the c u r r e n t volume o f t o t a l re q u ire d
reserves,& Q
The B o a rd 's a u t h o r i t y to v a ry re q u ire m e n ts , — The m in
imum req u ire m e n ts a s s p e c if ie d in the p la n were s e le c te d so
t h a t the t o t a l re s e rv e req u irem en ts would eq u al the maximum
amount re q u ire d a s o f 1948, Bopp noted t h a t m u ltip le depos
i t expansion could s t i l l occur through the r e tu r n o f c u r r e n
cy from c i r c u l a t i o n , g o ld in flo w s, o r th e s e l l i n g o f Govern
ment s e c u r i t i e s . F or th e se r e a s o n s , the accep ted p r a c t i c e
o f changing re s e rv e req u irem e n ts to c o n t r a c t o r to expand
c r e d i t f a c i l i t i e s would he r e t a i n e d . T h e a b i l i t y o f the
Board to v a ry the re s e rv e req u irem e n ts o f each c l a s s d e p o s it
would enable i t to e x e r t a . d i f f e r e n t i a l in flu e n c e on
hanks doing d i f f e r e n t ty p e s o f b u s in e s s ." ® 2
60 H e a rin g s . Economic R e p o rt, l o c . c i t .
61 I h i d . , p . 146.
62 I b i d . , p , 147.
106
V a u lt c a s h , r e s e r v e s , and c r e d i t c o n t r o l *--The t r a n
s i t i o n to the new p la n would he f a c i l i t a t e d hy a llo w in g the
hanks to count v a u l t cash as l e g a l rese rv e s* The c o u n try
hanks, h o ld in g la rg e amounts o f v a u l t cash , could o f f s e t the
in c re a s e on demand d e p o s its in t h i s way. Mr. Bopp b e lie v e d
t h a t System membership to nonmemhers m ight he made more a t
t r a c t i v e in t h i s manner because the nonmemhers lo o k upon
v a u l t cash a s t h e i r p rim ary r e s e r v e *6®
M a rrin e r S o c le s wanted the p ro p o s a l made a p p lic a b le
to a l l h an k s, p r im a r il y because nonmemhers had th e advan
ta g e , eo m p etiv ely , in t h e i r r e s e rv e re q u ire m e n ts, He d id
n o t b e lie v e th e y c a r r ie d t h e i r f a i r share o f n a t i o n a l c r e d i t
p o l i c y . 64 Thomas McCabe was o f the same o p i n i o n .65
A lla n Sproul favored r e l a t i n g r e s e rv e re q u ire m e n ts to
the type o f d e p o s it. He said the p ro p o sa l r e s te d upon
, , . c o n s id e r a tio n s o f e q u ity among hanks and on the
d e s i r a b i l i t y o f m odernizing a c o n t r o l a p p a ra tu s in o r d e r
to p e rm it th e System to c a r r y o u t i t s g e n e ra l mandate
from „Congress in the most e f f i c i e n t p r a c t i c a b l e man
n e r * 65
65 H e a rin g s . Economic He p o r t . l o c . c i t .
64 Bougies Subcommittee, H e a rin g s, o p . c i t . , p . £15,
November £2, 1949
I h l d . . P* 449, December 3, 1949.
66 I b i d * . p , 434, December 2, 1949.
107'
The tr e a tm e n t o f b a la n c e s due from h an k s»—Item fiv e
o f the p ro p o sa l was designed so th a t a g iv e n amount o f r e
s e rv e s would su p p o rt the same volume o f In te rb a n k d e p o s its ,
I r r e s p e c t i v e o f w h eth e r the owner bank ” , . • keeps a l l o f
I t s re s e rv e s w ith i t s F e d e ra l Reserve Bank, o r keeps a por«*
t l o n o f i t on d e p o s it w ith a c o rre sp o n d e n t—and, t h e r e f o r e ,
i n d i r e c t l y w ith a . * • Reserve B ank,”* * 7 Thus, o n ly v a u l t
cash o r b a la n c e s on d e p o s it w ith the Reserve Bank, d i r e c t l y
o r I n d i r e c t l y , would c o n s t i t u t e l e g a l re se rv e s# Mr. Bopp
s t a t e d t h a t c o rre sp o n d e n t b a la n c e s would be r e l a t e d to r e
se rv e s so th a t
. . . fa) a s h i f t o f funds by member banks in to o r o u t
o f "due from banks" would n o t a f f e c t the t o t a l volume o f
ex c ess re s e r v e s in - th e System as a w hole; fb) " re se rv e
c r e d i t " would be allow ed f o r p r e c i s e l y the p o r t i o n o f
"due from banks" t h a t i s on d e p o s it in the F e d e ra l Re
serve Bank—by way o f th e re s e rv e re q u ire m e n t Imposed on
d e p o s its due to b anks— and* fc) co rresp o n d e n t bank r e
l a t i o n s h i p s and in te rb a n k b alan ce s would be recognized
a s an e s ta b li s h e d p a r t o f o u r banking system b u t would
be n e i t h e r encouraged o r d is c o u ra g e d .68
Comments about the P ro p o sa l
The u niform re s e rv e p ro p o sa l has not been the s u b je c t
o f w idespread c o n tro v e rs y . Comments co n cern in g i t a re i s o -
67 H e a rin g s. Economic R e p o rt, o p . c i t . , p . 148.
^ 3ftT l d «, pp. 147 f* This marks the end o f the p ro
p o s a l a s so f a r com pleted by the Board. I t i s d o u b t f u l l ,
d e s p ite c o n tr a r y Board s ta te m e n ts , t h a t I t could be c a lle d
in co m p lete. S u p ra. p . 101.
108
l a t e d and la c k com prehensiveness. The fo llo w in g r e p r e s e n t
a l l o f the rem arks p e r ta in in g to i t t h a t could be found.
The Douglas Subcommittee d id n o t endorse the Board*s
p la n a s i t was p u t f o r t h . I t d id , however, recommend t h a t
**. . . s e rio u s c o n s id e r a ti o n be g iv e n to i t . " 69
Two d is c u s s io n s o f i t agreed to the main is s u e s o f
the p r o p o s a l. E. S. Adams, p r o f e s s o r economics a t lew York
U n iv e r s it y , s t a t e d t h a t i t combined ” . • • two d i s t i n c t
id e a s ; (a) u n if o rm ity o f r e s e r v e s , and a l o s fb) a s u b s ta n
t i a l in c r e a s e in the a u t h o r i t y o f the . . . Board to i n -
70
c re a se re q u ire m e n ts above p r e s e n t l e v e l s . O n e review
concurred w ith Mr. Adams, and went on to say:
A doption o f t h i s p la n would have l i t t l e b e a rin g on
the q u e s tio n o f r e s t r a i n i n g u n n e c e ssa ry ex p an sio n o f
bank c r e d i t in an i n f l a t i o n a r y p e r io d , o r o f r e l i e v i n g
p re s s u re on the banking system in a p e rio d o f d e f l a t i o n .
But changes in the re s e rv e re q u ire m e n ts o f the banks as
a means o f a c h ie v in g those ends could be a p p lie d q u ite
a s w e ll to the proposed system o f re s e rv e re q u ire m e n ts
a s to the e x i s t i n g s y s te m .71
Y. SUM M ARY AID G01CLUSI01S
I n the p a s t s e v e r a l y e a rs i t has been proposed t h a t
Douglas Subcommittee, B e p o rt. o p . c i t . . p . S.
70 E. S. Adams, M onetary Management flew York: Ronald
D ress Company, 1950), p . 78.
VI jjqw York F e d e ra l Reserve Bank. M onthly Review.
3 0 :7 3 , J u ly , 1948. -------------------------
109
(1) a l l ’ banks "be made s u b je c t to the re s e rv e req u irem e n ts o f
the F e d e ra l Reserve System and (2) t h a t th e re he a new p r o
cedure f o r d ete rm in in g the re s e rv e re q u ire m e n ts o f hanks*
While these two p ro p o s a ls a re n o t r e l a t e d in the sense th a t
they were urged j o i n t l y o r f o r the same p u rp o se, th e y do r e
l a t e to the same a r e a , hank re se rv e s*
I t was recommended t h a t a l l hanks become members o f
the System in o r d e r to in c re a s e the e q u i ty o f r e s e rv e r e
q u ire m e n ts, R a tio n a l hanks v e rs u s S ta te hanks* P roponents
o f the p la n b e lie v e d t h a t i t would (1) in c re a s e the e f f e c
tiv e n e s s o f m onetary p o l i c y , (2) reduce the number o f a c tu a l
o r p o t e n t i a l w ith d ra w a ls from th e System, and (3) make a l l
commercial banks share the c o s t o f m onetary management* Op
ponents o f th e p ro p o s a l r e f u te d each p o in t; they b e lie v e d
th e e x i s t i n g arrangem ent was the b e s t one*
fhe unifozm re s e rv e p ro p o s a l was o f fe re d as a more
more e f f e c t i v e and e q u ita b le method o f determ ing bank r e
s e r v e s . Roughly, i t would r e l a t e the amount o f r e s e r v e s to
be h eld by a bank to the d i f f e r e n t types o f d e p o s its the
v a r io u s banks possessed*
f h i s w r i t e r f a v o r s b o th plans* fhe f a c t t h a t mone
t a r y p o lic y i s p u t f o r t h f o r a l l b an k s, f o r the p r o t e c t i o n ,
a i d , and b e tte im e n t o f the banking system as a w hole, r e n
d e rs i t incom prehensible t h a t some banks should re c e iv e
1 1 0
th e se b e n e f i t s y e t do n o th in g to share t h e i r c o s t . The Sys
tem i s the prime source o f hanking s a f e t y a n t l i q u i d i t y .
The S ta te hanks know t h i s and know a lso t h a t the System can
n o t h e lp a id in g them In normal tim e s. E ig h ts and p r i v i l e g e s
should c a r r y d u t i e s and o b l i g a t i o n s ; the S ta te banks should
own up to the ad v an tag es the He serve System g iv e s them.
I t has n o t been suggested t h a t th e S ta te banks become
N a tio n a l banks; i t has o n ly been proposed t h a t they s u b je c t
them selves to the same re s e rv e re q u ire m e n ts as do the Na
t i o n a l banks* I f t h i s could be accom plished w ith o u t t h e i r
becoming Statemember b an k s, through an in c re a s e in the r e
quirem ents o f S ta te banking law s, p o s s i b ly much o f the r e
s is ta n c e to the p ro p o s a l could be red u ced . This would a ls o
have a marked e f f e c t on the member banks who f e e l much d i s
s a t i s f a c t i o n w ith th e p r e s e n t s i t u a t i o n .
I t i s to be doubted th a t the System w i l l s u f f e r
g r e a t l y i f the arrangem ent rem ains as i t i s , b u t the con
s t a n t annoyance, th e b e t t e r co m p etitiv e p o s i t i o n o f the
S ta te banks, w i l l n o t make r e l a t i o n s between the two more
am icab le.
The a r c h a ic method o f c l a s s i f y i n g b an k s, th u s d e t e r
m ining t h e i r re s e rv e re q u ire m e n ts , has l i t t l e use in the
modern s o c i e t y . I s f a r a s i t is u n d e rsto o d , the w r i t e r f a
v o rs the B o a rd 's p ro p o sa l o f uniform re s e rv e re q u ire m e n ts.
Ill
I t t s much more dynamic * i t a llo w s more f l e x i b i l i t y o f con
t r o l , and i t would seem to give more e q u ity to the im p o si
ti o n o f re se rv e re q u ire m e n ts , $he p r e s e n t method works w e ll
enough but the newer method would p ro b a b ly work b e t t e r in
a l l r e s p e c t s .
CHAPTER V
HE SERVE REQUIREMENT PROPOSALS (OOUTIBTJED).
The two p ro p o s a ls co n sid ered in t h i s c h a p te r, the
s p e c i a l re se rv e req u irem e n t and the u niform c e r t i f i c a t e
p la n , were o ffe re d a s methods o f m i t i g a t i n g i n f l a t i o n . Re
l i e f from i n f l a t i o n a r y p r e s s u r e s was to he attem p ted by
m onetary means. When th e y were under d is c u s s io n ( f o r i n t e r
e s t in them has now somewhat waned) th e su p p o rt p o lic y o f
the Reserve System was an i n t e g r a l p a r t o f i t s m arket a c
t i o n , Whether o r n o t t h a t p o lic y was r i g h t o r wrong, f o r
the p e rio d d u rin g which i t was in o p e r a tio n , was (and i s ) a
dehated s u b je c t. However, the System d id fo llo w th a t m ar- .
k e t su p p o rt p o l i c y , i t did n o t s e r i o u s l y q u e s tio n abandoning
i t , and i n f l a t i o n was in p ro g re s s in the p o stw ar p e r io d .
Both p la n s ac cep ted m arket su p p o rt as a p o lic y to he con
tin u e d .
The two p r o p o s a ls , e s p e c i a l l y the s p e c i a l re se rv e
p ro p o s a l, r a is e d the q u e s tio n o f w hether o r n o t hank c r e d i t
was a source o f i n f l a t i o n . This i s c o n sid ered f i r s t .
I . BAHK CREDIT AND IHFMTXOI
A f te r World War I I the n a tio n was h o s t to an i n f l a
tio n a r y s p i r a l . Expanding i r r e g u l a r l y , a l b e i t c o n tin u o u s ly .
1 1 2
I t was I n te r r u p te d o n ly once— the s l i g h t r e c e s s io n from m id-
1948 to l a t e 1949. The f a c t o r s t h a t c o n trib u te d to the i n
f l a t i o n were un d o u b ted ly m yriad, b u t the q u e s tio n which was
im p o rta n t to the Board o f Governors and to the n a t i o n 1s
b an k e rs was the r e l a t i o n s h i p , i f any, between advancing
p r i c e s and expanding bank c r e d i t . Which was f i r s t ?
Bank C r e d i t — The Cause o f I n f l a t i o n
H a r r i n e r S o c le s b e lie v e d the b a s ic source o f the
p o stw ar i n f l a t i o n could be l a i d a t th e d o o rste p o f war f i
n an cin g and the tremendous d e f i c i t s t h a t r e s u l t e d t h e r e
fro m .1 The commercial banking system and the Reserve Banks
absorbed n in e ty b i l l i o n d o l l a r s , o r f o r t y p e r c e n t, o f the
t o t a l borrow ings o f the Government from mid-1929 to m id-
1946. The money and c r e d i t su p p ly c o n c o m ita n tly in c re a s e d .
E r . E e c le s s t r o n g ly emphasized " . . . t h a t th e banking s y s
tem was the in stru m e n t and n o t the i n s t i g a t o r o f t h i s sw ol
l e n money su p p ly .
D esp ite the f o re g o in g , i t was Mr. E ec le s c o n te n tio n
t h a t th e b an k s, in t h e i r d a y -to -d a y b u s in e s s o f su p p ly in g
1 U .S. C ongress, H earings B efore the Senate Committee
on Banking and C u rren cy , S .J . Res. 157, I n s e r te d testim o n y
o f M a rrin e r E c c le s b efo re th e J o i n t Committee on the Econom
ic R eport, December 2, 1947, p . 68. H e r e in a f t e r , t h i s r e f
erence w i l l b e known as H e a rin g s . S e n a te . , S .J . Res. 157.
^ I b i d . ) p . 6 9 .
114
c r e d i t f o r t h e i r cu sto m ers, in c re a se d the amount o f c r e d i t
o u ts ta n d in g , T h is, in tu r n , was used to h id up the p r i c e s
o f sc arce goods and s e r v i c e s , n o t to in c re a s e p ro d u c tio n # 3
The q u e s tio n we must ask i s w hether any f u r t h e r expan
s io n in the ag g reg a te amount o f c r e d i t i s d e s ir a b le o r
dangerous. I f i t , in f a c t , c a lle d f o r t h more produc
t io n I t would he d e s i r a b l e . I f i t on ly p e rm its one b o r
rower t o bid a g a i n s t a n o th e r would-be buyer f o r sc arce
goods and th u s adds to the upward p re s s u re on p r i c e s , i t
i s dan g ero u s. I t i s our (The Board o f Governors) b e s t
Judgment t h a t o v e r - a l l expansion o f the money supply a t
t h i s time i s i n f l a t i o n a r y . 4
H r. E ec les accused the p r iv a te b an k e rs o f ta k in g a
m icro-econom ic view o f the s i t u a t i o n . A lthough he b e lie v e d
they were s in c e r e in t h e i r o p in io n th a t the lo a n s th ey were
ex te n d in g were d e s e rv in g r i s k s , n e c e s s a ry f o r the m a in te
nance o f f u l l p ro d u c tio n , he s t a t e d : "That c o n v ic tio n , hon
e s t l y h e ld , i s u n h a p p ily c h a r a c t e r i s t i c o f boom p sy c h o lo
gy*"3 He argued th a t the banks had u n lim ite d means to ex
tend e r e d i t to s a t i s f y the tremendous p r i v a t e demand and
t h a t t h i s demand was s u s ta in e d by i n f l a t i o n and, concomi
t a n t l y , c o n trib u te d to i t . To him, demand and c r e d i t ex
p a n sio n were b o th cause and e f f e c t . 3 The Board, to p ro p e r ly
3 H ea rin g s. S en ate. S .J . Res. 157. oo. c i t . . on.
74 f . " ~ “ ’■
4 I M d . , p . 75.
3 Idem
6 Ife id . , p . 7 4 .
115
f u l f i l l i t s m onetary r o l e , he s t a t e d , needed a d d i t i o n a l con
t r o l s . He asked Congress f o r a s p e c i a l re s e rv e r e q u i r e
m ent. 7
Bank C r e d i t—The B e s u lt o f I n f l a t i o n
B ohert V. Flem ing, a p r iv a te hanker and member o f the
F e d e r a l A dvisory C o u n c il, c o n te s te d the v a l i d i t y o f Eecles*
rem arks. Speaking f o r the C o u n cil, he s a id :
The C ouncil w ishes i t c l e a r l y u n d ersto o d th a t i t s h a re s
the ap p reh e n sio n o f the Board o f Governors w ith r e s p e c t
to i n f l a t i o n d a n g e rs. I t d o es, however, most s t r e n u
o u s ly o b je c t to the s in g l in g o u t o f the in c re a s e in bank
lo a n s a s a p r i n c i p l e c o n t r ib u t in g f a c t o r . . . . 8
The b a s ic cause o f the i n f l a t i o n , he c o n tin u e d , was n o t in
c u r r e n t banking p o l i c i e s b u t in the wartime expansion o f
o
buying power. There were many r e c e n t i n f l a t i o n a r y c a u se s .
^ H e a rin g s , S e n a te , .S.J* Be s . 1 5 7 , o p . c i t . , pp.
72 f* In an e a r l i e r appearance b efo re Congress he o u tlin e d
t h i s and f o u r o th e r methods to h a l t i n f l a t i o n : f l ) in c re a s e
p ro d u c tio n ; (2) hold back on wage and p r ic e in c r e a s e s ; f3)
expand the sa v in g s bond campaign; and (4) m a in ta in a budget
s u r p lu s . See T T . S. C ongress, H earings Before the J o i n t Com
m itte e on the Economic Be p o r t . Hovember 25, 1947, ppT“To f .
Throughout the rem ainder o f t h i s c h a p te r , t h i s r e f e re n c e
w i l l be noted a s H e a rin g s . Economic R e p o rt.
8 H e a rin g s . S en ate, S .J . Bes. 1 5 7 , p p . c i t , . p . 77.
^ Idem. As he noted them, th ey were (1) "The f o r e ig n
a id program.;** (2) "A cycle o f wage in c r e a s e s in ex c ess o f
in c r e a s e s in .e ith e r the c o s t o f l i v i n g o r p r o d u c t i v i t y ; ”
(3) ”A s h o r t e r working w eek;" (4} "A s h o r t co rn c r o p ;" (5}
"Veterans* bonuses and r e l i e f paym ents;" (6} " A g r ic u ltu r a l
p r ic e s u b s i d i e s ; " (7) "The n a t i o n a l b u d g e t." Idem
116
The Board o f G overnors r e p l i e d to the C o u n c il's r e
f u t a t i o n o f Mr. l o e l e s ' claim s by r e i t e r a t i n g h i s rem arks.
The Board s a id t h a t the ra p id expansion o f hank c r e d i t was
" . . . g r e a t l y in e x c e ss o f needs and has heen an im p o rta n t
b a s i s o f postw ar i n f l a t i o n a r y p r e s s u r e s . " 10 I t was i n c o r
r e c t " . . . to contend th a t because i n f l a t i o n c a l l s f o r t h an
in c re a s e d demand f o r bank lo a n s , th ese bank lo a n s do n o t
c o n tr ib u te to i n f l a t i o n , " 11
" . , . The c u r r e n t expansion o f bank c r e d i t , " A llan
S proul observed, " i s more a r e s u l t than a cause o f advancing
p r i c e s . " 12 He s t r o n g l y endorsed the p o lic y sta te m e n t o f a
p re v io u s F e d e ra l Reserve Board, which had o b serv ed :
. . . p r ic e f l u c t u a t i o n s proceed from a g r e a t v a r i e t y
o f c a u se s , most o f which l i e o u ts id e the range o f i n f l u
ence o f the c r e d i t system . Ho c r e d i t system could un
d e rta k e to perform the f u n c tio n o f r e g u la tin g c r e d i t by
re fe re n c e to p r i c e s w ith o u t f a i l i n g in the endeavor.
The p r ic e s i t u a t i o n and the c r e d i t s i t u a t i o n are no
doubt f r e q u e n tly involved in one a n o th e r, b u t the i n t e r
r e l a t i o n s h i p o f p r i c e s and c r e d i t i s too complex to ad
m it o f any sim ple s ta te m e n t, s t i l l l e s s o f a form ula o f
in v a r ia b le a p p l i c a t i o n . . , I t i s the view o f the Fed
e r a l Reserve Board t h a t the p r ic e s i t u a t i o n and the c r e
d i t s i t u a t i o n w h ile sometimes c l o s e l y r e l a t e d , are nev
e r t h e l e s s n o t r e l a t e d to one a n o th e r as sim ple cause and
10
H e a rin g s . S e n a te . S .J . Res. 157, op. c i t . , pp.
98 f . “
11 if r i a . . p . 99.
12 ". . • W e have h e r e ," he s a i d , "the makings o f a
ch ick en and egg a rg u m e n t.” I b i d . . p . 228, December 8, 1947.
117
e f f e c t ; t h a t th e y a re r a t h e r h o th to "be reg ard ed a s the
outcome o f common cau ses t h a t work in the economic and
■business s i t u a t i o n . 13
A common m eeting ground between the two s id e s was n o t
a t t a i n e d .
I I . THE SPECIAL OB SECONDARY- RESERVE REQUIREMENT
Development o f the P ro p o sa l
In i t s 1945 y e a r l y r e p o r t to C ongress, the Board o f
Governors suggested t h a t i t be empowered to r e q u ir e a l l com
m e rc ia l banks " . . . to hold a s p e c if ie d p erce n ta g e o f
T reasu ry b i l l s and c e r t i f i c a t e s as secondary r e s e rv e s
a g a in s t t h e i r n e t demand d ep o sits."* -4 The Board did n o t
s t i p u l a t e the p e rce n ta g e re q u ire m e n ts n e c e s s a ry , ,f. • . a l
though a fig u re o f tw e n ty -fiv e to t h i r t y p e r c e n t o f n e t de
mand d e p o s its was m entioned a t t h a t time by (Board) o f f i c a l s
. . . in p u b lis h e d sp eech es."I®
Aside from b i l l s and c e r t i f i c a t e s , v a u l t cash a n d /o r
ex c e ss r e s e r v e s were co n sid ered a c c e p ta b le as r e s e r v e s , e s -
1 3 H e a rin g s , S e n a te , S .J . Res. 1 5 7 . op. e i t , , p. 229.
Sproul was q u o tin g from the 1925 annual p u b lic a t io n o f the
Board.
14
Annual R eport o f the Board o f Governors o f the
F e d e ra l Reserve System , 1 9 4 5 (W ashington: Board o f Governors
o f the F e d e ra l Reserve System, 1946), p . 8. H e r e in a f t e r ,
t h i s re fe re n c e w i l l be n o ted as Annual R e p o rt.
1® J . Brooke W i l l i s , "Secondary Reserve R eq u ire
m e n ts ," J o u rn a l o f F in a n c e , 3 :2 9 , June, 1948.
118
p e c t a l l y In a id in g the hanks to meet the re q u ire m e n t, The
Board asked t h a t i t he g ra n te d some a d m in is tr a tiv e f l e x i b i l
i t y ” , • • to meet d i f f e r e n c e s among hanks a s w e ll a s to a d
j u s t to the changing needs o f the economy f o r hank c r e d i t
ex p an sio n o r c o n t r a c t i o n . ”- ^
The b e n e f i t s t h a t would stem from t h i s m easure, the
Board contended, were t h r e e f o l d : (1) the p u b lic d eb t would
he s t a b i l i z e d ; (2) the commercial h an k s' demands f o r s h o r t
term s e c u r i t i e s r e l a t i v e to lo n g -te rm Government o b l i g a t i o n s
would he b e t t e r r e g u la te d ; and (3) ” , . . i t would leav e
c o n s id e ra b le freedom f o r movement o f i n t e r e s t y i e l d s on non
government p a p e r o f s h o r t- te r m m a tu r ity * ”-^
Congress ac ce p ted the p ro p o sa l w i t h . s i l e n c e . When
the Board a g a in emphasized i t a s an i n f l a t i o n a r y c o n tr o l
measure the fo llo w in g y e a r, 1946, C ongress took no immediate
a c t i o n on i t u n t i l the l a t t e r p a r t o f the y e a r . The propo
s a l was now somewhat a l t e r e d and f a r more d e t a i l e d .
A Annual R e p o rt, 1945. l o e . c i t . I n t h i s same pub
l i c a t i o n the Board a ls o p re s e n te d f o r C o n g ressio n al c o n s id
e r a t i o n two o.ther m easures f o r in c r e a s in g the B o a rd 's pow
e r s . They ware the power to p la c e a maximum on the amount
o f lo n g -te rm s e c u r i t i e s any commercial bank eould hold
a g a in s t demand d e p o s i t s , and the power to in c re a s e the b a s ic
re s e rv e re q u ire m e n ts . I b i d . . pp. 7 f . Aside from comments
h ere and th e r e , n o th in g came o f these two m easures.
Idem
119
The p r o p o s a l*—M a rrin e r E c c le s appeared b efo re Con
g r e s s in the l a t t e r p a r t o f 1947 and argued f o r the a d o p tio n
o f the s p e c ia l re s e rv e plan* His testim o n y o u tlin e d the
p ro p o s a l in d e t a i l * The f e a t u r e s o f the proposed tem porary
a u t h o r i t y w ere:
fl) Banks s u b j e c t to the p r o v is io n s would be r e q u i r
ed , in a d d i t i o n to t h e i r r e g u la r r e s e r v e s , to hold a
s p e c ia l r e s e rv e c o n s is tin g o f —
(a) O b lig a tio n s o f the U nited S ta te s in the form
o f b i l l s and n o te s (w ith o r i g i n a l m a t u r i t i e s o f two
y e a rs o r l e s s ) ; o r
(b) Cash ite m s , a s d e fin ed in the n e x t p a ra g ra p h ,
to the e x t e n t t h a t t h e i r t o t a l exceeds twenty p e r c e n t
o f g ro s s demand d e p o s its p lu s s i x p e r c e n t o f time de
p o s its *
(2) F o r t h i s p u rp o se , cash item s would in clu d e the
fo llo w in g :
(a) B alan ces w ith Eeserve Banks, in c lu d in g s t a t u
to r y re q u ir e d r e s e r v e s .
(b) Coin and c u rre n c y .
(c) Cash item s in p ro c e s s o f c o l l e c t i o n .
(d) B alances due from in ex c e ss o f b a la n c e s due
to banks in the U nited S t a t e s .
(3) The s p e c i a l re s e rv e req u irem e n t would a p p ly to
b o th demand and time d e p o s its and would be s u b je c t to a
maximum l i m i t fix e d by s t a t u t e . A maximum o f tw enty-
f iv e p e r c e n t o f g ro s s demand d e p o s its and a maximum o f
te n p e r c e n t o f time d e p o s its w i l l p ro b ab ly be adequate
f o r the tem porary p e rio d covered by the proposed s t a t
u t e .
(4) The re q u ire m e n t would a p p ly to a l l banks r e c e i v
ing demand d e p o s i t s , in c lu d in g member banks of the F ed
e r a l Reserve System and nonmember b an k s— in su re d and
n o n in su re d . I t would n o t a p p ly , however, to banks th a t
do e x c lu s iv e ly a sa v in g s b u s in e s s .
(5) The power to impose and to v a ry the s p e c ia l r e
serve req u irem e n t would be v e s te d In the F e d e r a l Open
M arket Committee and would be li m i t e d by law to a tem
p o ra ry p e rio d o f th re e y e a rs .
(6) The req u irem en t would be in tro d u c e d g r a d u a lly as
c r e d i t c o n d itio n s w a r ra n t. The a u t h o r iz in g s t a t u t e e s
ta b lis h e d o f te n p e r c e n t a g a i n s t g ro s s demand d e p o s its
and f o u r p e r c e n t a g a in s t time d e p o s i t s , in the s p e c ia l
1 2 0
r e s e rv e to "be b u i l t up, could f u r t h e r provide t h a t f u
tu re changes would n o t exceed f iv e p e r c e n t o f g r o s s de
mand d e p o s its and two p e r c e n t o f time d e p o s its a t one
time* Ample n o tic e should he g iv e n b e fo re the e f f e c t i v e
d a te o f the i n i t i a l a p p l i c a t i o n o f the req u irem en t o r o f
su b seq u en t changes, to allow banks adequate time to make
a d ju s tm e n ts .
(7) The fo llo w in g c o n s id e r a tio n s should determ ine the
tim ing o f the in tr o d u c t i o n o f , o r changes i n , the sp e
c i a l re s e rv e re q u ire m e n t:
fa)' The volume and ownership o f s p e c i a l re s e rv e
a s s e t s and o f o th e r a s s e t s r e a d i l y c o n v e r tib le in to e l i
g i b l e a s s e t s ;
(b) P a s t and p ro s p e c tiv e go ld movements, c u r r e n
cy f l u c t u a t i o n s , o r o th e r f a c t o r s ca u sin g changes in
th e volume o f bank r e s e r v e s ;
fc) C o n d itio n s in the Government s e c u r i t i e s mar
ks t ; and
fd) The g e n e ra l c r e d i t s i t u a t i o n .
(8) S p e c ia l r e s e r v e s and req u ire m e n ts would be com
puted on a d a i l y average b a s i s f o r m onthly p e r io d s , o r
f o r o th e r p e rio d s by c l a s s e s o f banks as the Open Mar
k e t Committee m ight p r e s c r i b e . The p e n a lty a g a in s t
average d e f i c i e n c i e s in the req u irem en t would be one -
h a l f p e r ce n t p e r month, payable to the U nited S t a t e s .
(9) The F e d e ra l Open M arket Committee would be a u
th o riz e d to iss u e re q u ire m e n ts governing the a d m in is t r a
t i o n o f the re q u ire m e n t, to r e q u ire n e c e s s a ry r e p o r t s ,
and to d e le g a te a d m in is t r a tio n w ith r e s p e c t to nonmember
banks to o th e r a p p r o p r ia te F e d e ra l o r S ta te banking
a g e n e ie s .lQ
The n e c e s s i t y and A dvantages o f the P ro p o sa l
The need f o r i t s im p o s itio n . — The Board o f Governors
p r e s e n te d s e v e r a l re a so n s f o r i t s need o f the s p e c i a l r e -
H e a rin g s . Economic R e p o rt, op. c i t . , pp. 646 f ,
December 10, 1947. The i d e n t i c a l p la n a ls o appeared in the
F e d e ra l Reserve B u l l e t i n , 3 4 :1 4 -2 3 , January, 1948, Mr. Ec
c l e s d id n o t o r i g i n a t e the p la n alth o u g h he s a id t h a t he
wished he had. The Board o f Governor*s s t a f f o f econom ists
was g iv e n f u l l c r e d i t by him f o r i t s developm ent. See
H e a rin g s . S e n a te . S .J . R es, 157. op . c i t . . p . 171.
1 2 1
serve p la n . (1) I t was claim ed t h a t th e a b i l i t y of commer
c i a l banks to in c re a s e t h e i r r e s e r v e s on t h e i r own i n i t i a
t i v e , which the Board was po w erless to p r e v e n t, m u lt ip lie d
bank c r e d i t and in c re a s e d the i n f l a t i o n a r y p o t e n t i a l . (2)
The Reserve System needed to su p p o rt th e Government s e c u r i
t i e s m a rk e t. With the huge F e d e r a l d e b t, i t s la rg e " r o l l
o v e r, " the w idespread h o ld in g o f t h a t d e b t, e t c . , the Board
b e lie v e d t h a t i t could n o t purchase and s e l l s e c u r i t i e s w ith
an eye e x c lu s iv e ly on the co u n try * s need f o r bank c r e d i t .
(3) The in c re a s e o f i n t e r e s t r a t e s would n o t be an e f f e c t i v e
m onetary in stru m e n t f o r c u r t a i l i n g the i n f l a t i o n . (4)
With the p r o p o s a l, s t a t e d Mr. E c c le s , the Eeserve System
could im m obilize a p o r t i o n o f the a s s e t s l i s t e d in the p la n ,
and p re v e n t t h e i r b ein g used a s a d d i t i o n a l r e s e r v e s to f u r
t h e r bank c r e d i t e x p a n s io n .2®
J . Brooke W i l l i s observed th a t the n e c e s s i t y f o r the
p ro p o sa l r e s te d
. . . upon the assum ption th a t the p r i c e s o f Government
s e c u r i t i e s must be supported i n d e f i n i t e l y a t a r b i t r a r y
l e v e l s by the F e d e ra l Open M arket Committee. These sup-
o p e r a tio n s them selves c o n s t i t u t e one o f the p r i n c i p l e
^ Mr. E e c le s s t a t e d : "We have • • . b e e n compelled
to seek some b e t t e r a l t e r n a t i v e than h ig h e r i n t e r e s t r a t e s
to r e s t r a i n f u r t h e r b a n k - e r e d it e x p a n s io n ." See H e a rin g s .
S e n a te . S .J . Bes. 15 7 . op. c i t . . p. 73.
20 H ea rin g s, Economic R e p o rt, o p . c i t . . pp. 623-26,
December 10, 1947.
122
so u re e s o f new cash re s e r v e s which in tu r n f a c i l i t a t e
the f u r t h e r expansion o f hank lo a n s and in v e s tm e n ts .2* ^ -
Chairman E c c le s d id n o t s t a t e t h a t the s p e c ia l r e -
serve would be enough, by i t s e l f , to sto p i n f l a t i o n . He
s a id , I t ” • . . i s o n ly a p a r t , though a n e c e s s a ry p a r t , o f
any e f f e c t i v e a n t i - i n f l a t i o n program . . • . ”22 To the ex
t e n t t h a t a c t i o n s were tak en to combat i n f l a t i o n on o th e r
f r o n t s , e s p e c i a l l y through f i s c a l p o l i c y , ” . . . the need
23
f o r t h i s a u t h o r i t y would be l e s s . • . . ”
The ad v an tag es c la im e d . —Mr. E c c le s l i s t e d s e v e r a l
ad v an tag es o f th e s p e c ia l r e s e rv e p ro p o s a l o v er o th e r m eth
ods o f r e s t r i c t i n g bank c r e d i t ex p a n sio n . F i r s t , the p la n
would have the same e f f e c t a s in c r e a s in g b a s ic re s e rv e r e
q u ire m e n ts, b u t i t would allo w the banks to r e t a i n the same
volume o f e a rn in g a s s e t s . An in c re a s e in b a s ic re s e rv e r e -
21 W i l l i s , ojo. c i t . . p . 31.
22
H e a rin g s . Economic R e p o rt, op. c i t . . p . 597, De
cember 10, 1947.
23
Idem. I t i s to be doubted th a t Mr. E c c le s had
hopes o f such a c t i o n s b ein g ta k e n , even though he argued
t h a t th ey sh o u ld . In r e p ly to a S e n a to r ’ s q u e s tio n , ". . .
when do you th in k or how many y e a rs w i l l i t be b e fo re we
g e t away from the s i t u a t i o n t h a t you have ijust d e s c rib e d
here o f t h i s t e r r i f i c d e b t, and the n e c e s s i t y f o r c o n t r o l
l i n g the s i t u a t i o n , and s e t t i n g the i n t e r e s t r a t e ? ” E c c le s
answ ered: "Never. Not in your l i f e t i m e o r m in e .” He b e
lie v e d we would have to r e c o n c ile o u r s e lv e s to a c e n t r a l
government c o n t r o l l i n g the c r e d i t s and money. She S en ato r
sig h e d , ”1 h o p e le ss s i t u a t i o n . " See H e a rin g s. S e n a te . S .£ .
R es. 15 7 , o p . c i t . . pp. 178 f , December 4, 1947.
123
OLuirements would force the banks to reduce their earning a s
sets and would lower their earning position* 2 4
Second, i t would reduce the r a t i o o f p o t e n t i a l c r e
d i t ex p a n sio n on a g iv e n re s e rv e in crease* At the maximum
a u t h o r i t y u n d er the p la n , the r a t i o would be lowered from
2 R
s i x to alm ost two and o n e - h a lf to one* 0
T h ird , th e p ro p o s a l would in c re a s e the i n t e r e s t r a te
on p r i v a t e d e b t w ith o u t d is tu r b in g the i n t e r e s t r a t e on the
p u b lic d e b t. The e a rn in g s o f banks from t h i s source would
in c r e a s e . A lso , the r i s e in i n t e r e s t r a t e s would be borne
by p r i v a t e b o rro w ers, no t by a Government tr y in g to reduce
i t s d e b t . 26
F o u rth , the custom ary in stru m e n ts o f the Reserve
System f o r r e s t r a i n i n g bank c r e d i t ex p a n sio n — r e d is c o u n t
r a t e s and open m arket o p e r a t io n s —would be r e s to r e d to pow
e r . Through them the System could make i t more c o s t l y f o r
on
banks to borrow Reserve System fu n d s.
F i f t h , the e s s e n t i a l c r e d i t needs o f the economy
would s t i l l be met by the banks, but the banks would be u n -
^ H e a rin g s . S e n a te . S .J . Res. 15 7 . op. c i t . , p . 75,
December 2, 1947. “ -----
26 Idem
26 Idem
27 Idem
1 2 4
d e r p re s s u r e to meet them o u t of e x i s t i n g lo a n a b le fu n d s.
The p u b lic would be a s su re d t h a t th e banking system was
h ig h ly l i q u i d and s a f e . 28
S ix th , the main e f f e c t o f th e s p e c i a l r e s e rv e would
be to r e s t r a i n l e n d e r s , t h a t i s , the banks, from making c r e
d i t r e a d i l y a v a i l a b l e . The banks would be l e s s w i l l i n g o r
a b le to s e l l Governments to expand c r e d i t . "Such a p o s s i
b i l i t y , even w ith o u t a c t i o n being taken by the Beserve a u
t h o r i t i e s , would have a v e ry r e s t r a i n i n g i n f l u e n c e . " 28
C r iti c is m s o f the P ro p o sa l
A lla n Sproul read the fo re g o in g l i s t o f ad v an tag es
and was dubious a s to i t s v a l i d i t y . S h e t o r i c a l l y , he ask ed ,
CZQ
"Why does i t n o t c a r r y c o n v ic tio n ? " B a s i c a l l y , he b e
lie v e d the f a i l u r e o f the p la n l a y in ". . . the n e c e s s i t y
o f choosing between an e f f e c t i v e s p e c i a l r e s e rv e r e q u i r e
m ent, and one which (would) n o t cause too much i n i t i a l d i s
tu rb an ce •
In the t r a n s i t i o n to the re q u ire m e n ts o f the propo
s a l , he b e lie v e d the m arket would be deluged w ith lo n g -te rm
Government s e c u r i t i e s dumped by banks d e f i c i e n t in the sp e -
28 H e a rin g s . S e n a te . S .£ . B es. 157. l o c . c i t .
28 Idem
I b i d . . p . 234, December 8, 1947.
S1 Idem
125
c l a l re s e rv e s r e q u ir e d . This would o ccu r u n le s s the r e
quirem ent, was v e ry low. I f t h i s l a t t e r case was e x i s t e n t ,
then l i t t l e r e s t r a i n t on hank le n d in g would he f e l t . Share
would he no g u a ra n te e t h a t nonhank i n v e s to r s would come
f o r t h to take a l l o f the s e c u r i t i e s . The System, th e n ,
. . . would have to meet a m ajor t h r e a t to an a lre a d y
s e n s i t i v e Government s e c u r i t i e s m ark et, by buying la rg e
amounts o f (them ), th u s p u t t i n g more funds in to a mar
k e t we a re tr y in g to c o n tr a c t.* 52
J . Brooke W i l l i s t e s t e d the claim s o f the Board o f
Governors as to the e f f e c t i v e n e s s o f the p r o p o s a l. He p o s
t u l a t e d th re e ea ses in which the p rim ary r e s e r v e s o f a mem
b e r hank were in c re a s e d . They w ere, an in c re a s e in the gold
s to c k , a s a le o f F e d e r a l s e c u r i t i e s to the System by o th e r
than commercial hanks, and by a s a le o f Governments to the
System by a commercial hank. He assumed t h a t the secondary
r e s e rv e req u ire m e n t was a t a l e v e l h ig h enough to com plete
l y f re e z e re s e rv e e l i g i b l e s e c u r i t i e s a l r e a d y h eld by the
H e a rin g s . S e n a te . S. J . Res. 1 5 7 . l o o , c i t . Ac
co rd in g to a ta b le drawn up by the Board, no bank as a
group, t h a t i s , c e n t r a l r e s e r v e , re s e rv e c i t y , c o u n try , o r
in su re d nonmember banks, would have been d e f i c i e n t in sp e
c i a l re s e rv e a s s e t s w ith a te n and f o u r p e r c e n t req u irem en t
a g a in s t demand and time d e p o s its r e s p e c t i v e l y . I n d iv id u a l
banks, however, u n d oubtedly would have been d e f i c i e n t under
these re q u ire m e n ts . With a tw e n ty -fiv e p e r c e n t requirem ent
a g a i n s t demand d e p o s its and ten p e r c e n t a g a i n s t time depos
i t s , a l l banks, a l l groups o f banks, would have been d e f i
c i e n t . See the F e d e ra l Reserve B u l l e t i n . S 4;22, January,
19 43 .
1 26
commercial banks*33
In b i s f i r s t two exam ples, t h a t i s , an in c re a se in
the gold sto c k and s a l e s o f Governments by nonbank h o ld e r s ,
Mr* W i l l i s argued;
I f the Reserve System wished to p r e v e n t a l l lo an ex
p a n sio n and to p re v e n t secondary d e p o s it expansion i t
would be n e c e s s a ry f o r the Reserve Banks to s e l l r e
serve e l i g i b l e s e c u r i t i e s and s im u lta n e o u s ly to r a i s e
the secondary re s e rv e req u irem en t above i t s i n i t i a l
l e v e l . 34
He contended t h a t inasmuch a s d e p o s it ex p an sio n was what
measured the r e a l degree o f m onetary i n f l a t i o n , the second
a r y re s e rv e re q u ire m e n t would need to be r a i s e d to e ig h ty
p e r ce n t o f an i n i t i a l d e p o s it in c re a s e to p re v e n t i t . ' 3* 5
33 W i l l i s , 0£ . c i t *. pp. 32 f .
34 I b i d . . p . 37. I t a l i c s in the o r i g i n a l . T his r e
mark was s p e c i f i c a l l y d ir e c te d a t the f i r s t example g iv e n ,
b u t i t h o ld s t r u e , a s in d ic a t e d , f o r b o th exam ples.
33 The fo llo w in g i n d i c a t e s the changes in a b a n k 's
a c c o u n tin g balance which W i l l i s used in e x p la in in g the a c
t io n s o f the p ro p o s a l. Assuming a b a s ic re s e rv e requirem ent
o f 20 p e r c e n t and a $>1,000 In c re a s e in re s e rv e s ( d e p o s it s ) ,
$1,250 would be needed f o r the 25 p e r c e n t s p e c ia l re s e rv e
req u irem en ts (The assum ption i s , o f c o u rs e , t h a t the bank
was "loaned up" u n t i l t h i s d e p o s it was made), lo a n s would
be $2,750, which would give the bank $5,000 in a s s e t s and
$5,000 in l i a b i l i t i e s ( d e p o s i t s ) . Thus, i n f l a t i o n would be
j u s t a s much a t h r e a t w ith the 25 p e r c e n t re q u ire m e n t. I f
the secondary re q u irem e n t was 80 p e r c e n t ($4,000) and s e
c u r i t i e s could be purchased from nonbank h o ld e r s , th e re
would s t i l l be $5,000 in a s s e t s on the balance s h e e t and
$5,000 in l i a b i l i t i e s ( d e p o s i t s ) . Thus, to keep a d e p o s it
($1,000) a t the same l e v e l , 80 p e r c e n t o f s p e c ia l re se rv e
a s s e t s would have to be purchased from the Reserve Bank.
T his would g iv e , due from the Reserve Bank, $1,000, l e s s
127
I t would a p p e a r, t h e r e f o r e , t h a t H r. Eccles* p ro p o sa l
would n o t accom plish i t s purpose u n le s s the Reserve Sys
tem were g iv en complete d i s c r e t i o n a r y power to r a i s e
secondary re s e rv e re q u ire m e n ts . I f i t were g iv e n and
were to use such power, the e f f e c t o f the secondary r e
serve requirem ent would he to remove commercial hanks
from the lo a n m arket and to r e le g a te them to the so le
f u n c tio n o f p ro v id in g a m arket f o r Government o b l i g a
ti o n s .
I f the commercial hanks were to s e l l t h e i r lo n g -te rm
s e c u r i t i e s to the System, acco rd in g to Mr. W i l l i s 1 1 t h ir d
exam ple, the r e c e i p t s , on d e p o s it a t the Reserve Banks,
would r e p r e s e n t ex c ess p rim ary r e s e r v e s . Follow ing the
re a s o n in g p re s e n te d f o r the o t h e r two exam ples, the s p e c ia l
r e s e rv e req u ire m e n t, as i t was p r o f f e r e d , would he in a d e
quate to p re v e n t lo a n and d e p o s it ex p a n sio n . T h e refo re ,
the Reserve Banks would he re q u ire d to fo rc e the hanks to
huy s e c u r i t i e s up to e i g h t y p e r c e n t o f the p rim ary re s e rv e
i n c r e a s e . ”In e f f e c t , ” Mr. W i l l i s d e c la r e d , ”the member
$800, o r $200. The ex p an sio n p o s s i b l e , s t i l l assum ing a 20
p e r c e n t b a s ic re s e rv e re q u ire m e n t, would he $1,000. De
p o s i t expansion and the i n i t i a l d e p o s it would he the same.
W i l l i s , 0£ . c i t . . pp. 23-36. While he did n o t go to t h i s
d e t a i l , A lla n S proul ex p ressed views which follow ed t h i s
l i n e o f re a s o n in g . See H e a rin g s . S e n a te , S .J . R es. 157, op.
c i t . , pp. 234 f , December 8, 1947.
W i l l i s , o p . c i t . , p . 37. The s a l e s o f Governments
by nonhank h o ld e rs to meet lo a n demands would r e s u l t , in s o
f a r as hanks were concerned, in an i d e n t i c a l s i t u a t i o n .
T h eir d e p o s its and b a s ic r e s e rv e s would i n c r e a s e . To p r e
v e n t m u ltip le d e p o s it ex p an sio n , the Reserve System would
he r e q u ir e d to fo rc e the commercial hanks to purchase 80 p e r
ce n t o f the i n i t i a l d e p o s i t , used as r e s e r v e s , in s p e c ia l
re s e rv e a s s e t s . I b i d . , pp. 37 f .
128
banks would be com pelled to exchange lo n g -te rm Government
37
s e c u r i t i e s f o r s h o r t- te r m re se rv e e l i g i b l e s e c u r i t i e s . " '
Mr. W i l l i s concluded h i s a n a l y s i s o f the p la n by
s t a t i n g t h a t the p ro p o s a l could p re v e n t the banks from ac
q u ir in g a d d i t i o n a l p rim ary re se rv e s* through the s a le o f
s h o r t- te r m Governments, i f the fix e d s p e c ia l re s e rv e r e
quirem ent was h ig h enough. However, a s p re s e n te d above, he
showed th a t r e s e r v e s could a r i s e from o th e r sources.^® The
req u irem e n t could reduce p o t e n t i a l lo a n ex p an sio n b u t n o t
d e p o s it e x p a n sio n .
F o r t h e i r e f f e c t i v e n e s s in c o n t r o l l i n g c r e d i t , r e
serve re q u ire m e n ts depend n o t upon the p a r t i c u l a r p e r
ce n tag e s imposed, b u t r a t h e r upon c o n t r o l o f the volume
o f r e s e r v e - e l i g i b l e a s s e t s . I f the volume o f r e s e r v e -
e l i g i b l e a s s e t s i s l i m i t e d , a low re s e rv e req u irem e n t
w i l l be q u ite as e f f e c t i v e a s a h ig h re s e rv e p e rc e n ta g e ,
I f the volume o f r e s e r v e - e l i g i b l e a s s e t s i s n o t c o n t r o l
l e d , no fix e d re s e rv e req u irem e n t w i l l prove e f f e c t i v e
i n l i m i t i n g the expansion of commercial bank d e p o s its .
The b a s ic w eakness, p r a c t i c a l l y and t h e o r e t i c a l l y , o f
the proposed s p e c i a l re s e rv e req u irem e n t i s t h a t i t i n
37 W i l l i s , o£ . c i t . . p . 39.
Mr.. W i l l i s arg u ed : " F a ilu re to c o n t r o l the volume
o f r e s e r v e - e l i g i b l e i s a b a s ie m echanical weakness o f the
proposed device a s a c r e d i t c o n t r o l mechanism. To c o r r e c t
t h i s weakness i t would become n e c e s s a ry e v e n tu a lly e i t h e r to
remove a l l r e s e r v e - e l i g i b l e s e c u r i t i e s from nonbanking hands
o r to c o n v e rt e x i s t i n g bank h o ld in g s o f such s e c u r i t i e s in to
n o n -n e g o tia b le fo rm s ." T h is, in tu r n , would allo w the a u
t h o r i t i e s to s e t any i n t e r e s t r a t e th e y d e s ir e d on such s e
c u r i t i e s , " . . . and to r e g u la te t h e i r volume in accordance
w ith the need o f the T reasu ry f o r funds r a t h e r than by o v e r
a l l c r e d i t c o n s i d e r a t i o n s ." I b i d . . pp. 40 f .
129
tro d u c e s i n the re q u ire d r e s e rv e "base a new kind o f r e
s e r v e , s h o r t- te r m Government s e o n r i t i e s , a s u b s t a n t i a l
amount o f which i s h eld o u ts id e the banking system , and
the fu tu re volume o f which may change w ith the F e d e ra l
budget and the re fu n d in g p o l i c i e s o f th e T re a su ry .39
S ev eral o th e r m onetary a u t h o r i t i e s concurred in the
o p in io n t h a t m u ltip le d e p o s it expansion would n o t be pre-r
ven ted by the Board*s p ro p o s a l, R e p re s e n ta tiv e o f the two
were the rem arks o f S. G. Simmons, a p r o f e s s o r o f economics
a t Buke U n iv e r s it y .
The m u ltip le by which d e p o s its may be expanded would
n o t be reduced u n le s s the s p e c i a l re s e rv e req u irem en t
were f ix e d a t so high a l e v e l t h a t banks could n o t ob
t a i n a s s e t s o t h e r than le g a l p rim ary r e s e r v e s to s a t i s
f y the s p e c i a l re q u ire m e n t. With cash a s s e t s o p tio n in
the p la n , no such r e s u l t could be o b t a i n e d . ^
P r o f e s s o r Simmons contended t h a t a bank could r e le a s e r e
s e rv e s to o t h e r banks in the system , i f i t c o u l d n 't purchase
s h o r t- te r m i s s u e s , by s e l l i n g bonds and h o ld in g the balan ce
w ith a c o rre s p o n d e n t. "In no ev e n t would the ex p an sio n mul
t i p l e be reduced u n le s s s h o rt- te rm Government s e c u r i t i e s
were u n a v a ila b le in s u f f i c i e n t amounts to s a t i s f y the r e
q u irem en t.
39 W i l l i s , op. c i t . . p . 41.
40
E. C, Simmons, "Secondary Reserve Requirem ents
f o r a l l Commercial B a n k s,” American Economic Review, 41:128.
M arch, 1951.
41
Idem. F o r s i m i l a r s e n tim e n ts , see W. E. Bunkman,
"Postw ar Commercial Bank Lending P o l i c i e s , " Jo u rn a l o f F i
nance,, 4 :9 7 -9 8 , June, 1949.
130
H a ile Mr. E c c le s aid a c t "believe the p ro p o s a l was a
p a n a c e a ,42 he a v e rre d t h a t i t would give c r e d i t a r e s t r a i n t
n o t th en a v a i l a b l e ; i t would n o t make the ta x p a y e r h e a r the
burden o f th e r e s t r a i n t ; and, i t would impose "• . . v e ry
l i t t l e , i f any, h a rd s h ip on the b an k s. . . , n43 The propo
s a l , he s a i d , was " e v o lu tio n a r y ." 44
Changes in r e s e rv e re q u ir e m e n ts , one econom ist n o te d ,
42 Mr. Simmons e r r e d when he remarked t h a t the p la n
was so o f f e r e d . Simmons, op . c i t . , p . 132.
43 H earin g s, S e n a te , S .J . Res. 157, op. c i t . , p . 73,
December 3 7 T T O 7 “ “ “ ----- ----- -----
44 H e a rin g s . Economic R e p o rt, op. c i t . . p . 599, De
cember 10, 1947. In t h i s r e g a r d , f o r Mr. E cc le s b e lie v e d
the p ro p o sa l would be the same in purpose a s an o u t r i g h t i n
c re a s e in r e s e rv e re q u ire m e n ts , he r e c a l l e d the e x c lu s iv e
a u t h o r i t y the System re c e iv e d in 1935 to v a ry r e s e rv e r e
q u ire m e n ts. He a ls o remembered t h a t in l a t e 1940, the l e a d
in g o f f i c e r s o f the e n t i r e Reserve System s t a t e d to Con
g r e s s , in a memorandum, t h a t the System ’ s powers were in a d e
quate to d isc h a rg e i t s r e s p o n s i b i l i t i e s and, t h e r e f o r e , new
a u t h o r i t y was n e c e s s a r y . Idem. 3?he memorandum o u tli n e d a
f i v e - p o i n t program , o f which the f i r s t p o in t was the most
notew orthy* I t asked th a t to absorb the e x c e ss r e s e r v e s
(which were the source o f the System ’ s w eaknessJ, (1) e x i s t
ing s t a t u t o r y re s e rv e re q u ire m e n ts be r a is e d to the maximum;
(2j s h i f t the power to change re s e rv e re q u ire m e n ts to the
Open M arket Committee and g r a n t i t the a u t h o r i t y to f u r t h e r
in c re a s e re s e rv e re q u ire m e n ts; (3) a llo w the Committee to
change r e s e r v e s f o r any o f the th ree c l a s s e s o f banks w ith
o u t having to change them f o r the o th e r c l a s s o r c l a s s e s ;
(4f make the Reserve S y stem 's re q u ire m e n ts com pulsory f o r
a l l commercial banks; and (5) exempt 1 , 2, and 4 from depos
i t in su ran c e a ssessm en t. See the F e d e ra l Reserve B u l l e t i n ,
2 7 :1 -2 , Jan u ary , 1941. While the Reserve Bank p r e s i d e n t s
and the F e d e ra l A dvisory C ouncil endorsed t h i s 1940 p ro p o
s a l , th ey opposed s u b s t a n t i a l l y the same p la n in 1947. Ho
C o n g ressio n a l a c t i o n was tak en on the above program.
131
were u n p o p u lar w ith "bankers "• • • because o f the d i f f i c u l t y
of p la n n in g le n d in g and In v e s tin g program s and o f f i x i n g
s e rv ic e ch arg es w ith o u t knowing what re s e rv e re q u ire m e n ts
w i l l he in a d v a n c e .”^ 5 The s p e c i a l re s e rv e p ro p o s a l would
c r e a te d i f f i c u l t i e s , a s id e from the above, most o f the op
po n en ts o f the p la n a g re e d , e s p e c i a l l y f o r the s m a lle r banks
o f the co u n try who d id n o t have la r g e amounts o f s h o rt-te r m
4-6
s e c u r i t i e s . w
In answer to th e claim th a t the p ro p o s a l would open
the o p p o r tu n ity to in c re a s e p r i v a t e c r e d i t c o s t w ith o u t
r a i s i n g th e r a t e s on Government s e c u r i t i e s , E. C. Simmons
s t a t e d th a t a c o n d itio n would have to be f u l f i l l e d f i r s t *
I t could o ccu r w. • • o n ly i f the su p p ly o f s h o rt-te rm Gov
ernment s e c u r i t i e s were so lim ite d t h a t banks would have to
s a t i s f y the s p e c i a l re q u ire m e n t by h o ld in g la rg e amounts o f
cash a s s e t s . " ^ T h is, however, r a is e d c e r t a i n d i f f i c u l t i e s *
Under th ese c irc u m sta n c e s , banks would presum ably b id
f u r i o u s l y f o r the l i m i t e d supply o f Government s e c u r i
t i e s , much as banks d id in the n a t i o n a l banking e ra f o r
c i r c u l a t i o n bonds, w h ile a t the same time b e in g unable
45 G. L. P r a t h e r , Money and Banking (4 th e d i t i o n ;
Chicago: Richard D. I rw in , I n c . , 1949), p.. 508*
A
See H e a rin g s . S e n a te . S .£ . Res* 15 7 . op* c i t . , p.
79, S tatem ent o f R. V. Flem ing, December 2, 194TT
47
Simmons, ojo. c i t . . p . 129* Also see W i l l i s , op .
P i t * . p . 42.
132
Ag
to g r a n t lo a n s o r a c q u ire o t h e r e a rn in g a s s e t s . °
A d i f f e r e n t i a l 'between p r iv a te and p u b lic I n t e r e s t
r a t e s could p o s s i b ly occur by g r e a t l y c o n tr a c tin g the supply
o f s h o r t- te im I s s u e s and a l t e r i n g bank r e s e r v e s . P r o f e s s o r
Simmons, however, did n o t b e lie v e t h i s s i t u a t i o n would be
c r e a te d a s "• . . a tem porary measure by a government com
m issio n which has c o n s i s t e n t l y e x h ib ite d a commendable h e s l -
4.9
tan cy to embark on r a d i c a l e x p e rim e n ts.
I t was Mr. Simmons* o p in io n t h a t Inasmuch as the p r o
p o s a l was p r e d ic a te d on the co n tin u an ce o f m arket su p p o rt,
i t could n o t be reg ard ed ”. . . as a n y th in g more than a
means o f s im p lif y in g the problem o f d eb t management, . ,
t ?50
A. &, H a rt, p r o f e s s o r o f economics a t Columbia TJnl-
Simmons, l o c . c i t .
49 Idem
I b i d . , p . 125. Mr. Simmons, w hile condemning the
e x c e ss iv e claim s o f th e Board o f g o v ern o rs, was In fa v o r o f
a sim p le r and.more perm anent secondary r e s e rv e re q u ire m e n t.
He b e lie v e d i t would have p re v e n te d many bank f a i l u r e s in
the p a s t . "The concept o f secondary r e s e r v e s emerges only
when one re c o g n iz e s t h a t the r e a l b i l l s d o e trin e ( i . e . ,
s h o rt-te rm s e l f - l i q u i d a t i n g p ap er) i s w ith o u t fo u n d a tio n in
th e o ry o r i n f a c t and t h a t a s an o p e r a tin g r e a l i t y banks
can o p e rate s a t i s f a c t o r i l y o n ly i f a s u b s t a n t i a l p o r t i o n o f
t h e i r a s s e t s c o n s i s t s o f s h o r t- te r m open m arket p a p e r ." He
s t a t e d t h a t inasmuch a s the huge n a t i o n a l d eb t would be in
e x is te n c e f o r many y e a rs to come, i t o f fe re d an e x c e l l e n t
source o f secondary r e s e rv e a s s e t s . F or a d e n ia l o f the
r e a l b i l l s d o c tr in e and a development o f h i s secondary r e
serve p r o p o s a l, see h i s a r t i c l e , i b i d . , pp. 132-38.
132
v e r s i t y , reg ard ed the p ro p o s a l a s no l e s s th an a " d i s t a n t
c o u s in ” to the 100 P e r Cent P la n , which he b e lie v e d to be
unworkable.® 3* He contended t h a t i t could n e i t h e r p re v e n t an
i n f l a t i o n nor o f f s e t a d e f la tio n .® ^
I I I . THE UNIPOKM CERTIFICATE PLAN
I n 1940, when th e ex c ess r e s e r v e s o f the n a t i o n 's
commercial banks were a to p ic o f d is c u s s io n among m onetary
a u t h o r i t i e s , Lawrence H. S e l t z e r , economics p r o f e s s o r a t
Wayne U n iv e r s ity , su g g ested t h a t a uniform T reasu ry c e r t i f i
c a te be used a s bank reserves.® *5 I n 1946, P r o f e s s o r S e l t z e r
s t i l l b e lie v e d h i s p la n was w orthy o f c o n s id e r a ti o n . O ther
m onetary e x p e rts must have a g re e d , f o r s e v e r a l v a r i a t i o n s o f
h i s p ro p o s a l were prom ulgated.
51 A. C. H a rt, Money. Debt, and Economic A c t i v i t y
flew York: P r e n t i c e - H a l l , I n c . , 1948), pp. 449-52.
52
I b i d . . pp. 456 f . For a d is c u s s io n and c r i t i c i s m
o f th e 10 0 "’ P e r Cent P la n , see Ray B. f f e s te r f i e l d , Money.
C r e d i t and Banking (re v is e d e d i t i o n ; New York: Ronald P re s s
Company, 1947), pp. 699 f f .
63
L. H. S e l t z e r , ”A Uniform T re asu ry C e r t i f i c a t e as
Bank R e s e r v e ,” Jo u rn a l o f the American S t a t i s t i c a l A s s o c ia
t i o n . 3 5 :2 4 -2 6 , March, 1940. This source w i l l n o t be r e f e r
red to a g a in , f o r Mr. S e l t z e r r e s t a t e d h i s p ro p o s a l s ix
y e a rs l a t e r . The changed m onetary environm ent in the i n
te rim re n d e rs h i s l a t e r sta te m e n ts co n c ern in g h i s p la n more
v a lu a b le f o r c o n s id e r a ti o n h e re .
® 4 See the p la n s c o n sid e re d in the Committee f o r Eco
nomic Development, Jobs and M arkets (New York: McG-raw-Hill
134
The P ro p o sal
Mr, S e l t z e r m odified h i s o r i g i n a l p ro p o s a l somewhat,
in 1946, to meet the ehanged m onetary s i t u a t i o n . He b e l i e v
ed t h a t i t o ffe re d "th e l e a s t v i o l e n t " s o l u t i o n f o r the ma
j o r hanking problems a r i s i n g from the n a t i o n a l debt.® 5 The
p la n co n tain e d s e v e r a l f e a t u r e s . F i r s t , f o r the v a rio u s
Government s e c u r i t i e s h eld by the com mercial banks th e re
would be s u b s t i t u t e d a s in g l e uniform T reasu ry o b l i g a t i o n .
This s e c u r i t y would be used as a p a r t o f re q u ire d r e s e rv e s
o v er and above e x i s t i n g re s e rv e re q u ire m e n ts .
Second, a l l banks, in a d d itio n to S ta te and F e d e ra l
re s e rv e re q u ire m e n ts, would be re q u ire d to hold r e s e r v e s ,
in the form o f a Reserve C e r t i f i c a t e , which would be equal
in amount to a s t i p u l a t e d p ro p o rtio n o f t h e i r d e p o s it l i a -
Book C o ., I n c . , 1946), pp. 88-96; and S. S. I s l a n d , "The
Government, the Banks, and the n a t i o n a l D e b t," Commercial
and F in a n c ia l C h r o n ic le . 163;242;281-84, January 17, 1946.
55 1. H. S e l t z e r , "The Changed Environm ent o f Mone-
tary -B an k in g P o l i c y , " American Economic le v le w . P ro c e e d in g s ,
3 6 :7 6 , May, 1946. I t i s t h i s sta tem en t by Mr. S e l t z e r o f
h i s p la n t h a t w i l l be r e f e r r e d to in t h i s c h a p te r . His p r o
p o sa l w i l l be em phasized, fo r the o th e r two are too s i m i l a r
to h i s to w a rra n t t h e i r ap p earan ce. Mr. Leland did have
a n o th e r p la n , n o t c o n sid ered h e r e , which would have g iv en
the T reasury the power to borrow d i r e c t l y from the F e d e ra l
Beserve System f o r the funds n e c e s s a ry to fin a n c e the gov
ernm ent. See l e l a n d , 0£ . c i t . , pp. 283 f . F o r an e v a lu a
ti o n o f le la n d * s p la n , see H. C. C a rr, "The Problem o f Bank-
Held Government D e b t," American Economic Review. 36:833-42,
December, 1946. .
55 S e l t z e r , o p . c i t . , p . 7 7 .
1 35
b i l i t i e s . 57
T h ird , the Reserve C e r t i f i c a t e would "bear a low r a te
of i n t e r e s t . Mr. S e l t z e r su g g e ste d a r a t e of one p e r e e n t.
The C e r t i f i c a t e would be n o n m a rk e tab le , redeemable on d e
mand, and the commercial banks would be e x p e e te i to buy o r
s e l l them to meet the C e r t i f i c a t e re s e rv e re q u ire m e n t.
F o u rth , the Board o f S overnors would f i x , w ith in the
l i m i t s imposed by C ongress, the p e rcen tag e o f Reserve C er
t i f i c a t e s to d e p o s its r e q u ir e d . This p ercen tag e would be
pex m itted to v a ry between the c l a s s e s o f banks and the types
o f d e p o s its .® 9
F i f t h , the T re asu ry Department o r the F e d e r a l D ep o sit
In surance C o rp o ra tio n would be the d e p o s ito r y agency f o r the
new r e s e r v e s . This would e l im in a te , sa id Mr. S e l t z e r , the
j u r i s d i c t i o n a l l i m i t a t i o n s o f the banking a g e n c i e s .6®
Advantages o f the P ro p o sa l
Mr. S e l t z e r b e lie v e d th a t h i s p ro p o sal had s i x advan
ta g e s o v e r the e x i s t i n g arrangem ent. f l ) There would be a
low er i n t e r e s t c o s t on a la r g e p o r tio n o f th e F e d e ra l d e b t.
67 S e l t z e r , l o c . c i t .
66 Idem
5 9 T a
Idem
6® Idem
126
and re fu n d in g o p e r a tio n s would be e lim in a te d on t h i s p o r tio n
o f the d e b t. .(2 ) The Reserve System would r e g a in c o n tro l
o v er hank c r e d i t sin c e th e "basic re s e rv e re q u ire m e n ts would
govern c r e d i t ex p a n sio n . (2) I n t e r e s t r a t e s and the supply
o f money would he more s ta b le as t h r e a t s o f l a r g e - s c a l e s e l
l i n g o f Governments by banks would be m i t i g a t e d . (4) The
q u e s tio n o f bank e a rn in g s on th e n a t i o n a l d e b t would be
so lv e d , f o r i f th ey were too h ig h the i n t e r e s t r a t e could be
e a s i l y lowered on the C e r t i f i c a t e s . (5} The commercial
banks would be r e l i e v e d o f w orry o v e r the f u tu r e p r ic e s and
i n t e r e s t r a t e s o f Government o b l i g a t i o n s , which form the
m ajor p o r tio n o f t h e i r e a rn in g a s s e t s . The C e r t i f i c a t e s
would n o t be s u b je c t to p r ic e r i s k s . (6) E i t h e r an in c re a se
o r d ec re ase in commercial banks* h o ld in g s o f Government s e
c u r i t i e s would be b e t t e r r e g u la te d in re g ard to the e f f e c t s
on bank c r e d i t and on o th e r m onetary e f f e c t s . ^
The ffeed f o r th e P ro p o sa l
The o r i g i n a t o r s o f the s e v e r a l r e l a t e d p ro p o s a ls
found a number o f re a so n s f o r the a d o p tio n o f t h e i r p la n s .
The re a s o n s a re grouped to g e th e r here sin c e the p la n s are
v e ry s i m i l a r ; th e y a p p ly to S e ltz e r * s recommendation alm o st
as w e ll as th ey do to t h e i r own.
S e l t z e r , 0£ . c i t . . p p . 77 f .
137
Two re a s o n s were p u t f o r t h by the Committee f o r Eeo-
nomie Development. (1} The p ro p o sa l would n o t n e c e s s i t a t e
abandonment o f the Reserve System’s m arket su p p o rt p o lic y ;
and (2) ” the o n ly e f f e c t i v e and a c c e p ta b le avenue o f bank-
a s s e t c o n t r o l d u rin g the t r a n s i t i o n i s v ia r e s e r v e s . ”62
P r o f e s s o r L eland, o f the U n iv e r s ity o f Chicago, be
lie v e d h i s p la n would r e s t o r e the u s e fu ln e s s o f the t r a d i
t i o n a l c r e d i t c o n t r o l in stru m e n ts and b e t t e r b e n e f i t the
economy a s a whole than d id the e x i s t i n g a rra n g e m e n t.6^
Mr. S e l t z e r p re s e n te d f o u r re a s o n s f o r the need o f
h i s p la n . , (1) The banks* la r g e p o r t f o l i o s o f Governments
had im paired the S y stem 's c o n tro l o f bank lending* (2) The
q u a n t i t a t i v e c o n tr o l of bank c r e d i t by the System had been
in t e r r u p t e d by m arket s u p p o rt. (3) The e x is te n c e o f a d i s
pute a s to what the l e v e l o f e a rn in g s o f the commercial
banks, a r i s i n g from F e d e ra l s e c u r i t i e s , should b e. (4) The
commercial banks' e x c e ss iv e e a rn in g s , he s t a t e d , m ight p la c e
them in a p o s i t i o n where th ey would n o t be d isp o sed to un
d e rta k e the normal r i s k s o f commercial le n d in g . This i s
t h e i r most v i t a l r o le in the economic community.6^
Committee f o r Economic Development, o p . c i t . ,
p . 88.
63
L eland, c£. ci t . , p . 283.
6^ S e l t z e r , o p . c i t . . pp. 68-75.
138
C r iti c is m s o f the P ro p o sa l
In e f f e c t , the s p e c i a l r e s e rv e and the uniform c e r
t i f i c a t e p ro p o s a l are n o t too d i s t a n t l y r e l a t e d , A s p e c ia l
Government o b l i g a t i o n , o r r e t i r e d h o ld in g s o f h i l l s and c e r
t i f i c a t e s would serve the same p u rp o se, The p rim ary d i f
fe re n c e was in the f e a tu re o f the s p e c ia l re s e rv e p la n which
would allow the hanks to hold a d d i tio n a l re s e rv e b a la n c e s a t
the Reserve Banks, o r in ca sh , in p la ce o f h i l l s and c e r
t i f i e s t e s , S5 Aside from t h i s , the c r i t i c i s m s o f the s p e c ia l
r e s e rv e p ro p o s a l would a p p ly e q u a lly w e ll h e r e .
While the p la n could d e a l s a t i s f a c t o r i l y w ith depos
i t s h i f t s , in the ev e n t o f a g e n e ra l expansion o r c o n tr a c
t io n o f d e p o s i t s , i t , would le ad to c o m p lic a tio n s com-
66
p ared to the p r e s e n t s y s te m ,” Mr. C a rr, who i s a s s o c ia te d
w ith the Domestic B esearch D iv is io n o f th e Hew York F e d e ra l
Beserve Bank, n o ted t h a t on ly a sm all p o r tio n could he used
f o r c r e d i t expansion sin c e a p o r tio n of th e in c re a se d r e
K, R. Bopp, and o t h e r s , F e d e ra l Reserve P o lic y
(W ashington: Board o f G overnors o f the F e d e r a l Reserve Sys
tem, 1947), p . 115. I t was argued t h a t t h i s p r o v is io n was
n e c e s s a r y to e f f e c t i v e l y l i m i t hank c r e d i t ex p a n sio n , i . e . ,
the T reasu ry D epartm ent, o th e rw is e , would have to supply
h i l l s and c e r t i f i c a t e s to hanks; they would need them to
meet t h e i r secondary re se rv e re q u ire m e n ts. I f th e y did n o t ,
th e re would he a d e p o s it e x p a n sio n — th e re would he n o t r e
s t r a i n t . Idem
66 C a rr, pjo. c i t . , p . 838. Even though Mr. C a rr i s
r e f e r r i n g to L ela n d fs p la n , a s noted b e f o r e , b o th Leland and
S e l t z e r have s i m i l a r p r o p o s a ls .
139
s e rv e s would be r e q u ire d to go in to the s p e c ia l s e c u r i t i e s ,
and a p o r t i o n f o r r e g u la r r e s e r v e s , "This would be tr u e i f
the T re asu ry d id n o t spend the p ro ceed s i t had re c e iv e d from
the s a le o f the s p e c ia l s e c u r i t i e s . • . ."S ? i f t h i s did
o c c u r, then
any use would r e s u l t in s u c c e s siv e in c r e a s e s in d e p o s its
and s p e c i a l s e c u r i t i e s , a c o m p lic a tio n t h a t none o f the
a u th o rs o f t h i s and s i m i l a r p ro p o s a ls seems to have
tak en s u f f i c i e n t l y in to a c c o u n t.68
In the event o f a g e n e ra l d e p o s it c o n t r a c tio n , e . g . ,
d e p o s its in to c u rre n c y , low ering the b a s ic re s e rv e r e q u i r e
ments would o n ly p a r t i a l l y o f f s e t the l o s s o f r e s e r v e s by
the banks. The redem ption o f the s p e c i a l s e c u r i t i e s would
impose a d r a in on the T re a su ry " . . . which would n e c e s s i -
69
t a t e a d d i t i o n a l f in a n c in g . • • *n Mo m a tte r the course
«
o f a c t i o n pursued "• . • the banks would need to pay r e
serve funds in to the T re a su ry , th e re b y g iv in g r i s e to a
need f o r F e d e ra l E eserve c r e d i t . n7^
The p la n was f e d i c i e n t in s o f a r a s i t a id e d d e b t man
agement, s t a t e d H r. C a rr. I n the face o f i n f l a t i o n a r y
f o r c e s i t made no e f f o r t to t r a n s f e r F e d e ra l s e c u r i t i e s to
67 C a rr , l o o , c i t . I t a l i c s in the o r i g i n a l .
M2S* I t a l i c s i n th e o r i g i n a l .
69 I M d *. p . 839.
70 Idem
140
nonbanking in v e s to r s where t h e i r p o s i t i o n posed l e s s o f a
hazard
I V . SOM M AEY AMD CQICKTSXOFS
In the face o f the postw ar i n f l a t i o n , the Board o f
Governors endorsed a p la n which would i s o l a t e a la r g e p o r
t i o n o f h ank-held Government s e c u r i t i e s from the economy.
The Board argued th a t w ith the co n tin u an ce o f the m arket
su p p o rt p o lic y , the hank-owned F e d e ra l o b l i g a t i o n s o r i g i n a
ted and c o n tr ib u te d to the i n f l a t i o n . The p la n and the
B o a rd 's argum ents were denounced and re c e iv e d no more sup
p o r t than did the uniform c e r t i f i c a t e p r o p o s a l. This l a t
t e r p ro p o sa l a l s o d e s ir e d to " p la c e ” a p o r tio n o f the n a
t i o n a l d e b t, b u t in the form o f a s p e c i a l , low i n t e r e s t
b e a rin g c e r t i f i c a t e .
Both p la n s had s e v e r a l f e a t u r e s in common. (1) As
n o te d above, th e y wanted to s e p a ra te t h a t p o r tio n of the
F e d e r a l d eb t h eld by banks from t h a t h e ld by o th e r in v e s
t o r s . One p la n would do i t by means o f a s p e c ia l r e s e r v e ;
the o th e r would do by means of a c e r t i f i c a t e . Bank-held
s e c u r i t i e s were s a id to pose a t h r e a t to the c r e d i t o f the
economy* (2) Ih ey would impose a re q u ire m e n t, e i t h e r the
s p e c i a l re s e rv e or the c e r t i f i c a t e , t h a t would e lim in a te
C arr, l o c . c i t .
141
th ese s e c u r i t i e s from b ein g a b le to su p p o rt c r e d i t expan
s io n . (3) A ll banks would be s u b je c t to the p r o p o s a ls .
(4) They assumed a co n tin u an ce o f the m arket su p p o rt p o lic y .
The c r i t i c i s m s o f th e two recom m endations, e s p e c i a l l y
o f the s p e c ia l re s e rv e p r o p o s a l, tu rn to the same c o n c lu
s io n , they w i l l n o t do what th e y are o s t e n s i b l y tr y in g to
do; th e y would o n ly be an e x t r a burden on the b an k s. The
s p e c i a l re s e rv e p la n by f a r the b e t t e r o f the two, came in
f o r the remark t h a t i t would make the banks the prime mar
k e t f o r Government o b l i g a t i o n s and would remove them from
t h e i r p rim ary f u n c tio n , le n d in g c r e d i t .
As p r e s e n te d , n e i t h e r p ro p o s a l i s w orthy o f b ein g e n
a c te d in to law . The c r i t i c s a re a p t l y j u s t i f i e d in t h e i r
rem arks concerning the la e k o f a b i l i t y o f the two p l a n s . As
a t h e o r e t i c a l a tte m p t to so lv e the i n f l a t i o n problem , b o th ,
e s p e c i a l l y the s p e c ia l re s e rv e p r o p o s a l, d eserv e m e r i t . I t
would seem t h a t the l i n e o f reaso n in g used i s c o r r e c t ; the
s o l u t i o n fash io n e d from t h a t re a s o n in g , however, i s n e i t h e r
p r a c t i c a l n o r f e a s i b l e . The r e c e n t abandonment o f the m ar
k e t su p p o rt p o l i c y re n d e rs t h e i r u s e f u ln e s s an academic
q u e s tio n today.
CHAPTER VI
THREE PROPOSALS: BANK HOLLINS COMPANIES, THE
GUARANTEE OP LOANS TO SMALL BUSINESS, AND
THE. NATIONAL MONETARY AND CREDIT COUNCIL
The th re e p ro p o s a ls d is c u s s e d in t h i s c h a p te r a r e , as
the c h a p te r t i t l e i n d i c a t e s , in no manner r e l a t e d . They are
c o n sid e re d in one c h a p te r because s e p a r a te tre a tm e n t o f each
would n e c e s s i t a t e an e x te n s iv e h i s t o r i c a l o r developm ental
t r e a t . While i n t e r e s t i n g , t h i s would n o t come im m ediately
w ith in the framework o f t h i s t h e s i s n o r m a t e r i a l l y add to
the g e n e ra l knowledge o f the r e a d e r .
The p ro p o s a ls a re p la c e d in what i s c o n s id e re d to "be
t h e i r o r d e r o f im portance to th e F e d e r a l Reserve System,
the f i r s t having the l e a s t and the l a s t p ro p o s a l having the
most consequence. This i s , o f c o u rse , h ig h ly a r b i t r a r y as
each one i s o f i n t e r e s t f o r d i f f e r e n t r e a s o n s . The a r r a n g e
m ent, t h e r e f o r e , can be j u s t i f i e d o n ly , i f a t a l l , upon the
p r e ju d ic e s o f th e w r i t e r .
B r i e f l y , and in o r d e r o f t h e i r a p p earan ce, the th re e
p ro p o s a ls cover the fo llo w in g : (1) the bank h o ld in g company
p ro p o s a l i s a recommendation t h a t the Board o f G overnors be
g iv e n g r e a t e r c o n tr o l o v er h o ld in g company a c t i v i t i e s ; (2)
the second p la n p ro p o ses t h a t the F e d e ra l Reserve System be
allow ed to g u a ra n te e lo a n s to b u s in e s s , e s p e c i a l l y sm all
143
b u s in e s s ; (3) the t h i r d p ro p o sa l concerns the recommended
e s ta b lis h m e n t o f a c o o r d in a tin g c o u n c il o v er dom estic mone
t a r y and c r e d i t p o l i c i e s .
I . THE BANK HOLDING- COMPANY
I n t r o d u c t i o n
Bank h o ld in g com panies, a s known to d ay , had t h e i r
in c e p tio n in the 1 9 2 0 's . They were l a r g e l y u n re g u la te d un
d e r the o r i g i n a l F e d e ra l Reserve A ct; the law m erely d e
fin e d the r i g h t o f s to c k h o ld e r s o f n a t i o n a l banks to vote
such s to c k s . In the 1933 Banking A c t, s e v e r a l s e c t i o n s were
e x c lu s iv e ly devoted to bank h o ld in g com panies, c a lle d "h o ld
ing company a f f i l i a t e s . ” L im ita tio n s and r e s t r i c t i o n s were
p la c ed upon ” . . . the r i g h t o f such companies to v o te the
s to c k o f member banks which th e y owned.
In A p ril 1938, P r e s id e n t R o o se v e lt, i n a message to
C ongress, asked th a t l e g i s l a t i o n be en acted to p r o h i b i t
f u r t h e r expansion o f bank h o ld in g com panies. He had t h e i r
e l im in a tio n as h i s u ltim a te g o a l . 2 In 1940, th e C o m p tro ller
^ XT.S., C ongress, H earings Before the Senate Committee
on Banking and C u rren cy . S. 829, S tatem ent o f M a rr in e r E e-
e l e s , May 26, 1947, p . 11. The s e c tio n s o f the 1933 Banking
Act on bank h o ld in g com panies, a s w e ll as o t h e r s e c t i o n s ,
were the r e s u l t of e x te n s iv e C o n g re ssio n a l h e a r in g s , l a s t i n g
from 1930 to 1933. The fo re g o in g r e f e re n c e w i l l h e r e i n a f t e r
be known a s H e a rin g s , S. 829.
2 U.S. C ongress, H earings Before the Senate Suboom-
1 4 4
nt
o f the C urrency asked t h a t th e y he d is s o lv e d . In 1944, the
F e d e ra l D ep o sit In su ran ce C o rp o ra tio n urged C ongress to p r o
h i b i t them#4 I t was th e Board o f g o v e rn o rs, however, t h a t
took a c t i v e m easures to curb the h o ld in g companies# T h eir
"campaign” s t a r t e d In 1943#®
The P ro p o sa l
S e c tio n 2 (e) o f the Banking Act o f 1933 d e f in e s a
h o ld in g company a f f i l i a t e . In p a r t , i t s t i p u l a t e s :
(e) The t e r n 'h o ld in g company a f f i l i a t e 1 s h a l l include
any c o r p o r a tio n , b u s in e s s t r u s t , a s s o c i a t i o n , o r o th e r
s i m i l a r o r g a n iz a tio n —
(1) Which owns o r c o n t r o l s , d i r e c t l y o r i n d i r e c t l y ,
e i t h e r a m a j o r i t y o f the s h a re s o f c a p i t a l sto c k o f a
member bank o r more than 50 p e r centum o f the number o f
sh a re s v o te d f o r the e l e c t i o n o f d i r e c t o r s o f any one
bank a t the p re c e d in g e l e c t i o n , ojr c o n t r o ls in an.v man
n e r the e l e c t i o n o f a m a jo r! ty o f the d i r e c t o r s o f any
one bankl • • 75“
m it te e on Banking and C u rren cy . Si. 2318, S tatem ent o f Thomas
McCabe, March 1 , 1950, p . 24# H e r e i n a f t e r , t h i s re fe re n c e
w i l l be no te d -a s H e a rin g s . S. 2318.
3 Annual R eport o f the C o m p tro lle r o f the C u rrency.
1940 (W ashington: U .S. government P r i n t i n g O f f ic e , 1 941/,
p . 5.
4
Annual R eport o f the F e d e ra l D ep o sit In su ran ce
C o r p o r a tio n . 1944 (W ashingion: U.S. government P r i n t i n g Of
f i c e , 1945), pp. 10 f f .
3 Annual R eport o f th e Board o f g o v ern o rs o f the Fed
e r a l Reserve System, 194% (W ashington: Board o f g o v ern o rs o f
the F e d e r a l Reserve System, 1944), pp. 34-37. H e r e in a f t e r ,
t h i s re fe re n c e w i l l be noted as Annual R e p o rt.
^ U nited S ta te s S t a t u t e s a t L arge, P u b lic Laws (Wash
in g to n : U.S. government P r i n t i n g O f f ic e , 1904}, XLYIII,
145
A f u r t h e r p r o v is io n o f the law i s t h a t a hank h o ld
ing company h as to re c e iv e a p e rm it from th e Board o f Gov
e r n o r s to v o te the sto c k i t h o ld s in a member hank. The
Board can e i t h e r approve o r deny such a p erm it a p p lic a tio n *
As a c o n d itio n to g r a n t i n g o f the p e rm it the h o ld in g
company i s r e q u ir e d , on h e h a lf o f i t s e l f and i t s con
t r o l l e d hanks, to ag re e to subm it to e x a m in a tio n s, to
e s t a b l i s h c e r t a i n r e s e r v e s , to ag ree to d isp o se o f a l l
i n t e r e s t in s e c u r i t y com panies, and i t s o f f i c e r s , d i
r e c t o r s and a g e n ts are s u b je c t to the same p e n a l t i e s
f o r f a l s i f i c a t i o n o f re c o rd s a s those a p p lic a b le in the
case o f n a t i o n a l b a n k s .7
The Board o f Governors s ta te d th a t the law was in a d e
q u a te ; i t allow ed the h o ld in g companies to expand in an u n
r e g u la te d manner; s u p e rv is io n was h indered r a t h e r than
helped by the p e n a l t i e s p r e s c r ib e d , f o r i f the h o ld in g com
pany engaged in d e l e t e r i o u s a c t i v i t i e s , the Board had to
p e n a liz e the member banks d i r e c t l y and could on ly re a c h the
company i n d i r e c t l y , i . e . , through the member banks.® In
p . 163, I t a l i c s n o t in the o r i g i n a l . S tr e s s i s p la c e d on
the l a t t e r p o r t i o n o f the d e f i n i t i o n f o r re a s o n s which w i l l
be g iv e n l a t e r . At t h i s p o i n t , o n ly the e x te n s iv e n e s s o f
the a u t h o r i t y should be n o te d , e s p e c i a l l y the i t a l i z e d p o r
t i o n .
^ H e a rin g s . S. 829, op. c i t . , p . 11, S tatem ent o f
M a rrin e r E c e le s , May £6, 1947.
^ Annual R e p o rt. 1943. o p , c i t . , p . 35. I f a v o tin g
p e rm it i s revoked T . the member bank cannot re c e iv e de
p o s i t s o f p u b lic monies o f th e U nited S ta te s n o r pay any
f u r t h e r d iv id e n d s to the h o ld in g company." A R a tio n a l bank
may have i t s c h a r t e r revoked. A S ta te member banks may have
i t s System membership w ithdraw n. I b i d . . pp. 35 f .
1 46
•view o f t h i s s i t u a t i o n , the Board b e lie v e d t h a t i t was n e
c e s s a ry
• . • in the p u b lic i n t e r e s t and in keeping w ith sound
banking p r i n c i p l e s th a t the a c t i v i t i e s o f bank h o ld in g
companies be r e s t r i c t e d s o le ly to the banking b u s in e s s
and t h a t t h e i r a c t i v i t i e s be r e g u la te d a s a re the a c
t i v i t i e s o f the banks them selves#9
This recommendation to Congress was the b eginning o f
s e v e r a l h eated a tte m p ts by the Board to secure f u r t h e r con
t r o l o v e r h o ld in g com panies.
The Heed f o r f u r t h e r C o n tro l
U n reg u lated com panies. —In the two C o n g ressio n al
h e a rin g s th a t, have been h eld on t h i s s u b je c t, the Board o f
G overnors has p re s e n te d many argum ents showing the need f o r
t o
a d d i t i o n a l c o n t r o l s . A I t was d e c la re d t h a t Congress had
n o t in te n d ed t h a t some h o ld in g companies should be r e g u la te d
w h ile o th e r s were exempted. Mr. E c e le s n o ted t h a t the la w s 1
d e f i n i t i o n embraced o n ly those h o ld in g companies which eon-
9 Annual R e p o rt. 1943. op. c l t . . p . 37.
The, h e a rin g s rev o lv ed around two b i l l s , S. 829 in
1947, and S. 2318 in 1950. These, however, were the b i l l s
t h a t had h e a r in g s . Four b i l l s were p r e v io u s ly on the Con
g r e s s i o n a l c a le n d a r: one in 1945; H.R. 2776 and S. 792 i n
troduced s im u lta n e o u s ly in 1946; and l a t e r the same y e a r,
H.R. 6225. A ll s i x o f these b i l l were sponsored by the
Board. Ho a c t i o n was taken on the l a t t e r f o u r b i l l s . See
H e a rin g s , S. 82 9 . op. c i t . , p . 49, S tatem ent o f E l l e r y C.
H u n tin g to n , P r e s i d e n t , M o rris P lan C o rp o ra tio n , June 2,
1947. The s tr in g e n c y o f each new b i l l was l e s s than t h a t o f
i t s p red ecesso r*
147
t r o l l e d member "banks. T his exempted from r e g u l a t i o n those
companies which . . o p e ra te a s hank h o ld in g companies h u t
which c o n t r o l o n ly nonmemher hanks, even though, a s i s f r e
q u e n tly the c a s e , the l a t t e r in c lu d e in su re d b an k s. The
p e rm is s iv e n e s s o f the law was held to he the main rea so n f o r
t h i s s i t u a t i o n . B equests f o r v o tin g p e rm its hy the h o ld in g
company were p u r e ly o p tio n a l. Mr. MeGahe s t a t e d th a t upon
such a r e q u e s t, the h o ld in g company and i t s a f f i l i a t e d non
hanking i n t e r e s t were examined. I f c o r r e c t io n s were n e c e s
s a r y to meet the la w 's re q u ire m e n ts, they had to he made b e
fo re p e rm its were Is s u e d . In one e a s e , such a s the fo re g o -
12
in g , the -req u est f o r the p e rm it was dropped.
Companies n o t s u b je c t to the law . — I t was argued th a t
u n d er e x i s t i n g law a hank h o ld in g company could c o n tro l
hanks y e t own no s to c k in the hanks— i t could escape the
d e f i n i t i o n and r e g u l a t i o n o f the law . M a rrin e r E celes p r e
se n ted an a c t u a l example, which he s a id was p u rp o se ly con
s t r u c t e d to avoid the law . He a lle g e d th a t a management
company was e s t a b l i s h e d h y the in d iv id u a l owners o f some
hanks to manage the hanks th ey owned. This company, in
11 H e a rin g s . S. 829, 0£ . c i t . , p . 11, May 26, 1947.
F o r a s im ila r s ta te m e n t, see H e a rin g s . S. 2318, op. e f t . ,
p . 32, S tatem ent o f Thomas McCahe, March 1 , 1950.
12 Itoi-d. . p . 3 1 .
148
tu r n , p o sse sse d none o f the sh a re s o f sto c k o f the hanks i t
managed and, c o n s e q u e n tly , was n o t s u b je c t to the law.^-3
In a s i m i l a r r e g a rd , Thomas McCabe d e c la re d t h a t con
t r o l o v er bank a f f i l i a t e s could be e x e rc is e d w ith much l e s s
than the f i f t y p e r c e n t ow nership the law r e q u ir e d , Even
w ith o u t owning s h a r e s , he s a i d , c o n t r o l could be e x e rte d
The g r e a t ex p an sio n of h o ld in g com panies, —The expan-
o f bank h o ld in g company system s was h eld to be advancing f a r
beyond t h a t which was c o n s is te n t w ith banking s a f e t y .
I t i s in t h i s a re a th a t one o f the g r e a t e s t p o t e n t i a l
e v i l s o f bank h o ld in g company o p e r a tio n s e x i s t s . That
e v i l , which p e rm its a bank h o ld in g company w ith o u t l e
g a l h in d ran ce to dominate m ajor p o r tio n s o f the banking
f a c i l i t i e s o f p a r t i c u l a r s e c t i o n s , i s one which s t r i k e s
a t the h e a r t o f our t r a d i t i o n a l system o f co m p etitiv e
banking* 3-6
Mr, McCabe avowed t h a t "dangerous a b u se s" were p o s s i b l e , in
the absence o f e f f e c t i v e r e g u l a t i o n , through ”, . . combin
in g u n d er the same management < , . , la r g e segments of our
banking s t r u c t u r e w ith m is c e lla n e o u s nonbanking b u s in e s s ," I®
^ H e a rin g s , S. 829, op. c i t . , p . IS , May 26, 1947.
H e a rin g s , S. 2318, op. c i t . . p . 32, March 1, 1950.
Mr. McCabe was p ro b a b ly a l lu d in g to c a se s such a s E c c le s
p re s e n te d an d sm ight a ls o have been r e f e r r i n g to the power o f
pe r s o n a l in f lu e n c e .
^ H e a rin g s . S. 829. o p . c i t . . p . 17, S tatem ent o f
M. S. E c c le s , May 26, 1947.
^ H e a r in g s . S . 2 3 1 8 , o p . c i t . . p . 25, M arch 1 , 1 9 5 0 .
149
A C o n g ressio n al committee had, p re v io u s to h i s rem arks,
w r i t t e n s u b s t a n t i a l l y the same opinion.*1 -7
M a rrin e r S o c le s went in to d e t a i l a s to how a bank
h o ld in g company expanded in p r o p e r ty and power.
Under e x i s t i n g law a c h a rte re d bank may be p rev en ted
by the r e g u l a t o r y agency to which i t i s s u b je c t from
expanding i t s banking o f f i c e s w h eth e r by th e e s t a b l i s h
ment o f new b ran ch e s o r by ta k in g o v er and o p e r a tin g
the o f f i c e s o f o th e r b an k s. In o rd e r to e s t a b l i s h
b ra n c h e s, n a t i o n a l banks must f i r s t o b ta in p erm issio n
from the C o m p tro lle r o f th e C urrency, S ta te member banks
from the Board, and nonmember in su re d banks from the
SDIC. But the bank h o ld in g company i s n o t s u b je c t to
any such re q u ire m e n ts . I f a bank in i t s group i s de
n ie d the r i g h t to e s t a b l i s h an a d d i t i o n a l o f f i c e , th e re
i s n o th in g to p re v e n t i t from a c q u ir in g sto c k o f an
e x i s t i n g bank and sim ply adding the i n s t i t u t i o n to i t s
l i s t o f c o n t r o ll e d banks, o p e ra tin g i t , f o r a l l p r a c t i
c a l p u rp o se s, a s a branch o f the e n t i r e system .
This lo o p h o le , e n a b lin g a bank h o ld in g company to
expand a t i t s p l e a s u r e , le n d s i t s e l f r e a d i l y to the
am assing o f v a s t re s o u r c e s o b ta in e d l a r g e l y from the
p u b lic , which can be c o n t r o l l e d and used by the r e l a
t i v e l y few who com prise the management o f the h o ld in g
company, g iv in g them an u n f a i r and overwhelming advan
tage i n a c q u irin g a d d i t i o n a l p r o p e r t i e s and in c a rr y in g
o u t an u n lim ite d program o f ex p a n sio n . Such power can
be used to a c q u ire independent banks by m easures which
leav e the l o c a l management and m in o r ity s to c k h o ld e rs
l i t t l e w ith which to defend them selves e x c e p t t h e i r own
stre n u o u s pro t e s t s . 18
The le s s e n in g o f c o m p e titio n . —Aside from the p o te n -
17 H e a rin g s . S. 2318, op. c i t . , p . 15, March 1 , 1950.
E x e rp ts from Senate B eport Ho. 300, 8 0 th Congress, 1 s t s e s
s io n , in s e r t e d in to the re c o rd by Thomas McCabe.
19 H e a r in g s . S. 8 2 9 , o p . c i t . . p . 1 7 , May 26, 1 9 4 7 .
1 50
t i a l m o n o p o lis tic te n d e n c ie s p re s e n te d in the fo re g o in g , i t
was charged t h a t the nonbanking a c t i v i t i e s o f a hank h o ld in g
company m ight r e s u l t in the borrow er and the le n d e r being
one and the same, This was held to be a t h r e a t to the de
p o s i t o r , The nonbanking b u s in e s s o f a h o ld in g company May;:
be in a p r e f e r r e d p o s i t i o n a s a borrow er from a h o ld in g
company bank th an m ight a borrow er who was n o t a p a r t o f the
company system . In tim es o f s t r e s s , i t was d e c la r e d , the
owned banks m ight be fo rc ed to lend to the c o n t r o ll e d non-
1 9
banking b u s in e s s e s .
Summary, —I n summary, th e n , the Board asked t h a t the
d e f i n i t i o n o f a bank h o ld in g company be broadened, t h a t the
Board be g iv e n more c o n t r o l o v e r the expansion of the h o ld
ing com panies, t h a t th e h o ld in g companies be re q u ir e d to
g iv e up t h e i r in v e stm e n ts in nonbanking b u s in e s s e s , and t h a t
th ey be r e q u ire d ", , . to r e g i s t e r , make r e p o r t s , and su b
m it to e x a m in a tio n .”^
The Adequacy o f the P re s e n t Law
The a c tiv e opponents o f th e bank h o ld in g company
b i l l s were the r e p r e s e n t a t i v e s o f the T ransam erica C orpora-
H e a rin g s . S. 2518, op, c i t . . p , 59, Statem ent o f
Thomas McCabe, March 2, 1950.
20 Ifti-d. . p. 2 2 , March 1 , 1 9 5 0 .
151
ti o n and th e M o rris Blan C o rp o ra tio n o f A m erica. She r e a
sons f o r t h e i r sta n d were s e v e r a l .
Ihe p r e s e n t r e le v a n t la w s. —Mr. E l l e r y C* H untington
"believed the Board o f C o v e m o r’s e x i s t i n g c o n t r o l and i n f l u
ence o v er hank h o ld in g companies was more th a n ad e q u a te . In
i l l u s t r a t i o n o f t h i s he su b m itted the fo llo w in g ;
1 . A bank h o ld in g company may n o t v o te a s in g le share o f
sto c k h eld in n a t i o n a l o r member banks u n le s s the f e d e r
a l Reserve Board, in i t s d i s c r e t i o n , d eterm in es t h a t i t
i s in the p u b lic i n t e r e s t to iss u e a v o tin g p e rm it to
such h o ld in g company. (s e c . 5144, l . S . [12 TJ.S.C. 61J ;
a c t o f June 10, 1953 [l2 TX.S.C. 33 7 ].
2. Before a v o tin g p e rm it may be g r a n te d , the h o ld in g
company m u s t:
fa) Agree to exam ination o f i t s a f f a i r s and those o f
a l l banks w ith which i t i s a f f i l i a t e d , and must ag ree
to r e n d e r p e r io d ic r e p o r t s to the F e d e r a l Reserve Board,
fb) M a in ta in a re s e rv e fund amounting to 25 p e r o en t
of the p a r v alu e o f a l l bank sto c k s c o n t r o ll e d by i t .
(o) S u b je c t i t s e l f and i t s o f f i c e r s and d i r e c t o r s to
the same p e n a l t i e s f o r f a l s e e n t r i e s , e t c . , a s a re im
posed on member banks and t h e i r o f f i c e r s and d i r e c t o r s .
fd) Agree n o t to engage in the in v e stm en t banking
b u s ln e s s fi b i d . ).
3. Ho o f f i c e r , d i r e c t o r , o r employee o f a member bank
may serve on the board o f d i r e c t o r s o f any o th e r bank
w ith o u t the p e rm is sio n o f the F e d e ra l Reserve Board
fs e c . 8 C lay to n Act [15 U .S.C .A . 19] and R e g u la tio n "L"
Fed. Res. Bd).
4. The F e d e r a l Reserve Board may examine the a f f a i r s o f
any a f f i l i a t e o f a member o r n a t i o n a l bank ( s e c s . 9 and
21, F e d e ra l Reserve Act [12 TJ.S.C. 338, 48l] ),
5. Loans to and investm ent in the s e c u r i t i e s o f a l l a f
f i l i a t e s o f member banks are s e v e r e ly r e s t r i c t e d fs e c .
23A, Fed. Res. A ct [ l 2 TJ.S.C. 371e] ).2 1
H e a rin g s, j3. 8 2 9 . o p . c i t . , p . 52, June 2, 1947.
f h i s quote i s an e x a c t d u p lic a t io n o f the m a te r ia l a s i t was
o f f e r e d .
152
The B oard1s o m issio n o f e x i s t i n g law *—H r. S. B.
S te w a rt, co u n sel f o r Transam erioa C o rp o ra tio n , a l s o b e lie v e d
t h a t any e v i l e x i s t i n g in the h o ld in g companies could he
c o r r e c te d u n d e r e x i s t i n g law . He observed t h a t Chairman
McCabe, in h i s te stim o n y b e fo re C ongress, d id n o t co m p letely
quote the la w 's d e f i n i t i o n o f a h o ld in g company. The o m it
te d p o r tio n in c re a s e d to c o n s id e ra b le degree the scope o f
the B o a rd 's power o v e r t h a t which was g i v e n .22 The r e s t o f
the sen ten c e a f t e r the word " e l e c t i o n , " where McCabe s to p
ped, . , u n q u e s tio n a b ly w ith o u t m alice . . ." i s ". . .
o r c o n t r o ls in any manner the e l e c t i o n o f a m a jo r ity o f
o th e r d i r e c t o r s o f any one b a n k ." ^ 3 He found i t d i f f i c u l t
to u n d e rsta n d the absence o f t h a t l i n e in Board s ta te m e n ts
b e fo re Congress because f o r n in e y e a rs I t had been the b a s i s
o f the B o a rd 's c laim :
22 |«o r com plete wording o f the law , see s u p ra ,
p. 144.
23 H e a rin g s . S. 2518, ©£. c i t . , p . 147, March 15,
1950. Mr. S te w a rt r a i s e d a d e f i n i t e p o in t in t h i s m a tte r .
A l i t t l e f u r t h e r r e s e a r c h on h i s p a r t would have re v e a le d
t h i s same om ission o c c u rrin g time and a g a in . In the Annual
B e p o rt. 1945, op. c i t . . p . 55, the Board stopped a t the word
^ e l e c t i o n . w In h i s te stim o n y in 1947, Mr. E c c le s did n o t
proceed a f t e r " e l e c t i o n . " See H e a rin g s. S. 829, o p . c i t . .
p . 2, May 26, 1947. Mr. S tew art was r e f e r r i n g to McCabe's
te stim o n y i n 1950* See H e a rin g s . S. 2318. op , c i t . . p . 32,
March 1, 1950. This c o n s i s t e n t d e l e t i o n could n o t have been
u n c o n sc io u s. The i n t e n t , I t ap p e ars e v id e n t by the c o n s is
te n cy o f the o m issio n , was to convey a f a l s e im p ressio n o f
the scope o f the B o a rd 's a u t h o r i t y in t h i s m a tte r .
153
. . . t h a t T ransam erica was a h o ld in g company a f f i l i a t e
o f Bank: o f America, a lth o u g h d u rin g t h a t p e rio d the
Board knew t h a t T ransam erica d id n o t own o r c o n t r o l as
much as f i f t y p e r ce n t e i t h e r o f the t o t a l s h a re s o f
Bank o f America o r o f the number o f s h a re s v o ted f o r .
d i r e c t o r s . 24
Inasmuch as the p ro p o sa l was aimed a t T ransam erica
C o r p o r a tio n ,25 Mr. S tew art asked:
I s I t n o t s i g n i f i c a n t t h a t the pro p o n en ts o f t h i s h i l l
have f a i l e d to produce f o r the re c o rd one s in g le c r i t i
cism from a d e p o s i t o r in a T ransam erica a f f i l i a t e d
hank, or one word o f com plaint from a borrow er a t one
o f th e se h a n k s 6
He n o te d t h a t the S e c r e ta r y o f Commerce, C h a rle s Sawyer, r e
m arked, a f t e r a nationw ide to u r in 1948, t h a t sm all b u s in e s s
was com plaining o f the d i f f i c u l t y o f s e c u r in g lo a n s , ex c ep t
on the West C o a st. ^
H ea rin g s, S. 2318. op. c i t . . p . 147, March 15,
1950. Mr, S tew art sa id th a t fra n sa m e rie a had n o t c o n t r o ll e d
the Bank o f America sin ce 1937. In 1950, i t owned o n ly 1 1 .1
percicent o f the sto c k s o u ts ta n d in g . By a p p l i c a t i o n o f the
t e s t o f e i t h e r owning a m a jo r ity o f th e s to c k o r o f e l e c t i n g
a m a j o r i t y o f the d i r e c t o r s " . . . T ransam erica is no lo n g e r
a f f i l i a t e d w ith Bank of America. . . . " However, he con
tin u e d , the Board used f i g u r e s showing Transam era*s s iz e
which were m is le a d in g , f o r th e y in c lu d ed the Bank o f Ameri
c a . I b i d . , , pp. 178 f , March 16, 1950.
25
There i s l i t t l e room f o r doubt t h a t th e a c t i o n s
o f the Board to secure a d d i t i o n a l c o n t r o ls o v er bank h o ld in g
companies was aimed a t T ransam erica and th e Bank o f America
d i r e c t l y and o th e r h o ld in g companies g e n e r a l l y . See Appen
d ix B f o r an e l a b o r a t i o n o f t h i s and o th e r p o i n t s concerning
the Board and T ransam erica.
26 Xbid. . p . 199.
27 I h i d . . p. 3 1 2 , M arch 2 1 , 1 9 5 0 .
1 54
The absence o f m isco n d u c t. —^Pursuing a new approach,
Mr, S tew art observed t h a t the Board o f Governors w, * . t a l k s
ab o u t n o th in g b u t p ro s p e c tiv e e v i l s . . . ” f o r none e x i s t a t
the p r e s e n t . W h i l e th e re may be room f o r doubt a b o u t the
l a t t e r p o r t i o n o f h i s rem ark, the f i r s t p a r t i s t r u e , Mr.
E e c le s had remarked i n 1947:
. . . we a re n o t a s k in g Congress to hold in t h i s b i l l
t h a t the h o ld in g company i s n e c e s s a r i l y an e v i l . I t can
be abused, bu t in a g r e a t many in s t a n c e s , indeed in most
o f th e I n s ta n c e s , they have n o t abused t h e i r pow er.29
Mr. McCabe ta lk e d o f " p o t e n t i a l " e v i l s 2® and the " p o s s ib le "
dangerous ab u ses w ith o u t e f f e c t i v e r e g u l a t i o n , b u t n o t of
e x i s t i n g e v i l s . ^
The absence o f monopoly. —As to th e p o s s i b i l i t i e s o f
bank h o ld in g companies expanding w ith o u t l i m i t and a c h ie v
in g , p o s s i b ly , a monopoly, Mr. S tew art t h a t th e re were th re e
rea so n s f o r t h i s n o t o c e u rin g : (1) a n t i t r u s t laws and p r o s e
c u tio n ; (2) the m e tie u lu o u s s u p e rv is io n of the e x i s t i n g
a g e n c ie s ; and (3) a s lo n g a s stro n g c o m p e titio n e x i s t s in
the banking f i e l d , " . . . and i t i s conceded by the Board
28 H e a rin g s . S. 2318. op. c i t . , p . 337, March 21,
1950.
29 H e a rin g s . S. 829, 0£ . c i t . . p . 21, May 26, 1946.
so
H e a rin g s , S. 2318, op. c i t . , p . 58, March 2, 1950.
^ * P* 25, March 1, 1950.
155
t h a t s tro n g c o m p e titio n does e x i s t . . . " n o danger from ex
32
p e n s io n e x i s t s .
Divorcem ent o f Uonbanking Busine sse s —Pro and Con
Mr. McCabe re g a rd e d divorcem ent o f nonbanking com
p a n ie s from the h o ld in g companies as "one o f the most s a l u -
to r y re q u ire m e n ts o f the b i l l . . . . 2 ?© him, the bank
in g b u s in e s s was a p r o f e s s i o n and a "sa c re d p u b lic t r u s t . "
The moment you mix p r i v a t e b u s in e s s w ith ban k in g , and
t h a t p r i v a t e b u s in e s s i s a lre a d y i n c o m p e titio n w ith
o t h e r b u s in e s s e s , you th ereb y c r e a te the p o s s i b i l i t i e s
o f f a v o r i t i s m o f one b u s in e s s over a n o t h e r . ^4
H e a rin g s . S. 2518, op. c i t . , p. 337, March 21,
1950, Mr. J . 1 , Townsend, s o l i c i t o r f o r the B oard, noted
t h a t a n t i t r u s t laws were e f f e c t i v e to c o r r e c t monopoly only
a f t e r i t had o cc u rre d o r was te n d in g to o c c u r. He s a id t h a t
S. 2318 would give the Board the a u t h o r i t y to p re v e n t p u b lic
harm d u rin g the p e rio d b e fo re the a n t i t r u s t law s could be
b ro u g h t in to p la y . He b e lie v e d t h a t s iz e alone should n o t
be l e g i s l a t e d a g a i n s t , but s a id t h a t the b i l l d id n o t ", . •
l e g i s l a t e a g a i n s t mere s i z e ; i t l e g i s l a t e s a g a i n s t dangerous
s i z e , ” I b i d . . p , 224, March 17, 1950. I n e f f e c t , the Board
would have the a u t h o r i t y to determ ine who would and who
would n o t grow* The co n cep t "dangerous s i z e ” i s surrounded
w ith sem antic d i f f i c u l t i e s and i s s u b je c t to d e f i n i t i o n ,
l a r g e l y , w ith in the mind o f the re v ie w e r a lo n e . Begarding
t h i s , P r e s to n D elano, C o m p tro ller o f the C urrency, though in
s u b s t a n t i a l agreem ent w ith the p r o v is io n s o f S. 2318, s ta te d
” , , • the o n ly sta n d a rd o r c r i t e r i o n would be the view s o f
the Board o f Governors a t any one time a s to w hether t h i s o r
t h a t growth o f bank h o ld in g company power i s c o n s i s t e n t w ith
th e p u b lic i n t e r e s t , " He b e lie v e d such power to be too
broad and in need o f l i m i t a t i o n . I b i d . . p. 284. March 21.
1950.
m Ik id « » p . 35, March 1, 1950.
34 I b i d . . p. 2 1 6 , March 1 7 , 1 9 5 0 .
156
Mr. S tew art m in u te ly examined the two main rea so n s
p re s e n te d f o r div o rcem en t, i . e . , to p la c e the same l i m i t a
tio n s upon a bank h o ld in g company a s a re imposed upon banks,
and to p r e v e n t the dom ination o f le n d e r s and p o t e n t i a l b o r
row ers by the same management.
I t i s my view t h a t n e i t h e r re a s o n w i l l sta n d c lo se
s c r u t i n y . As o t h e r te stim o n y a l r e a d y shows, h o ld in g
companies are n o t banks and do n o t o p e ra te a s banks.
Banks in v e s t d e p o s i t o r ’ s money. H olding companies do
n o t. Banks in v e s t money which must be a v a i l a b l e to d e
p o s i t o r s on demand. Holding companies in v e s t s to c k
h o l d e r s ’ money which has been su p p lie d on d i f f e r e n t
terms and f o r a d i f f e r e n t p u rp o se , fo r e q u ir e t h a t such
d i f f e r e n t ty p es o f fu n d s be in v e s te d in the same manner
i s u n r e a l i s t i c . I f bank h o ld in g companies a re to be r e
q u ire d to f u n c tio n in e x a c t l y the same manner a s banks,
no u s e f u l purpose would be serv e d by p e r m it tin g them to
e x i s t a t a l l . I t would be f a r b e t t e r to meet the p ro b
lem head-on by a b o l is h in g bank h o ld in g companies and by
a u th o r iz in g the co n v e rsio n o f banks now owned by h o ld in g
com panies, where d e s ir e d , in to b ranch banks.
One o f the b e s t re a s o n s in the p u b lic i n t e r e s t f o r
having bank h o ld in g companies i s t h a t by d i v e r s i f i c a t i o n
o f a s s e t s among nonbanking i n t e r e s t , as w e ll as banking
i n t e r e s t , th e se bank sto c k h o ld e rs su p p ly an elem ent o f
s t r e n g t h to the banks in which they a re i n t e r e s t e d a
s a f e t y f a c t o r which no bank can su p p ly to i t s e l f . A
s tr o n g s to c k h o ld e r w ith d i v e r s i f i e d i n t e r e s t s i s in a
b e t t e r p o s i t i o n to a id banks in tim es o f d e p re s s io n than
i s a s to c k h o ld e r who has no nonbanking i n t e r e s t s which
could be used to s tr e n g th e n the banks a t such a tim e ,^5
Mr. S te w a rt contended t h a t n o t to allo w a h o ld in g
company to have nonbanking i n t e r e s t s d e fe a te d the purpose o f
the r e s e r v e , re q u ir e d by law, which a h o ld in g company s e t s
35 H e a r in g s . S . 2 3 1 8 , ©£. c i t . . p. 1 5 0 , March 1 5 ,
1 9 5 0 .
157
a s i d e , The th e o ry o f the r e s e r v e , he s a id , was t h a t a sto c k
owner has no l e g a l l i a b i l i t y , i n d i v i d u a l l y , to s e t a s id e a
re s e rv e to p r o t e c t h is in v e stm en t in a bank. The law made ?
i t m andatory f o r h o ld in g com panies.
To p r o h i b i t d i v e r s i f i c a t i o n o f a h o ld in g company's
a s s e t s , he a s s e r t e d , d isco u rag ed the stro n g f i n a n c i a l p o s i
t i o n w hich could a id banks in need o f such s t r e n g t h , ^
At the time of t h i s w r i t i n g (December 1951K Con
g r e s s has n o t seen f i t to e n a c t f u r t h e r l e g i s l a t i o n c o n c ern -
ing bank h o ld in g com panies, '
I I . THE GUAM! TEE OF LOANS TO SiALL BUSINESS
The Heserve Banks o f the F e d e ra l Deserve System have
long had the a u t h o r i t y to make lo a n s to p r i v a t e in d u s tr y .
T h eir a u t h o r i t y to do so o b ta in s from s e c tio n 13B o f the
F e d e ra l Deserve A ct, In r e c e n t y e a r s , they have endeavored
to have t h a t a u t h o r i t y broadened, r e l e a s i n g them from the
r e s t r i c t i o n s o f th e p r e s e n t law . T h eir s t a t e d o b je c tiv e has
36 H e a rin g s , S, 2318, op. c i t . , p . 152, March 15,
1950. ~
37
A f i n a l word m ight be sa id i n t h a t though m ost o f
the w itn e s s e s a t the h e a rin g s on S. 2318 d e c la re d them selves
a g a i n s t bank h o ld in g com panies, th e y o f f e r e d amendments to
i t which le s s e n e d i t s s t r e n g t h . As a rough e s tim a te , ab o u t
t h i r t y amendments were o f f e r e d , th re e o f which were p u t
f o r t h by th e then Board Chairman, Thomas McCabe—head o f the
agency which had sponsored the b i l l .
158
been to a i d th e sm all b u s in e s s e s o f the country* They claim
the p r e s e n t law b in d e rs th e r e a l i z a t i o n o f t h a t am bition*
Beyond t h i s g o a l, the Banks and the Board have even g r e a t e r
p la n s , f o r In the p a s t s e v e r a l y e a rs th e y have arg u ed :
• . . (the System) should be the m ajor F e d e r a l agency
making d i r e c t o r g u a ra n te e d lo a n s to b u s in e s s , and I t s
p o stw ar p o s i t i o n on the d e s i r a b i l i t y o f g u a ra n te e s
r a t h e r th an d i r e c t le n d in g has been c l e a r c u t *^8
Lending O p e ra tio n s o f the Reserve System
S e c tio n lgB.--*0n June 19, 1934, the F e d e ra l Reserve
Banks re c e iv e d the a u t h o r i t y to make lo a n s to I n d u s t r i a l and
commercial e n t e r p r i s e s * 39 I n making lo a n s th e y were to co
o p e ra te w ith com mercial banks and o t h e r f in a n c in g I n s t i t u
tio n s* This law , s e c t i o n 13B o f the F e d e ra l Reserve A ct, as
amended, Imposed f o u r r e s t r i c t i o n upon Reserve Bank lo a n s :
(1) the m a t u r i t i e s o f th e lo a n s must n o t exeeed f iv e y e a rs ;
(2) th e y must be to e s t a b l i s h e d I n d u s t r i a l a n d /o r commercial
e n t e r p r i s e s ; (3) th ey were to be used f o r working c a p i t a l
p u rp o ses o n ly ; and (4) the lo a n s must be made on a sound and
38 B. L, Bach, F e d e ra l Reserve Policy-M aking (lew
York: A lfre d A* Knopf, 1950), p. 117.
39 A c tu a lly , the Reserve Banks re c e iv e d C o n g ressio n al
a u t h o r i t y to make d i r e c t lo a n s to I n d iv id u a l s , c o r p o r a tio n s ,
and p a r t n e r s h i p s on J u ly 21, 1932. This a u t h o r i t y , however,
was hedged w ith many s t r i n g e n t p r o v is io n s from which the
RFC, under the same a c t , was f r e e . See U.S. S t a t u t e s a t
l a r g e . P u b lic Laws (W ashington: U .S. Government P r i n t i n g Of
f i c e , 1933), XWTT, pp. 711-15.
15 9
re aso n a b le b a s i s . 4® The R e c o n s tru c tio n Finance C o rp o ra tio n ,
a t a b o u t t h i s tim e, re c e iv e d i t s f i r s t a u t h o r i t y to engage
in d i r e c t le n d in g a c t i v i t i e s .
Funds f o r le n d in g o p e r a t i o n s . — The Reserve Banks had
ap p ro x im a te ly 139 m i l l i o n d o l l a r s s e t a s id e f o r them by the
T re asu ry d ep artm en t to be used f o r I n d u s t r i a l lo a n p u r
p o s e s .4^ * In o p e r a t io n , l i t t l e use was made o f the d i r e c t
lo a n f a c i l i t i e s o f the Reserve Banks r e l a t i v e to the o p e ra
tio n s o f the RFC. By 1947 o n ly 26 m i l l i o n d o l l a r s had been
re tu r n e d to th e Banks to re p la c e t h e i r s u r p l u s . 42
Annual R e p o rt. 1937, op. c i t * , p . 28. A b u s in e s s
does n o t go to a Reserve Bank a s the f i r s t source o f i t s c r e
d i t . I t m ust t r y to o b ta in i t in the u s u a l manner f i r s t ,
and th e n , i f i t IS u n a v a ila b le , re c o u rse may be had to the
Reserve Bank.
4- * - The e x a c t amount, $139*299,576.99, was a sm all
p o r t i o n o f the funds made a v a ila b le by go ld d e v a lu a tio n .
The law r e q u ir e s the Reserve Banks to pay two p e r c e n t i n
t e r e s t on th e money o b ta in e d from th e T re asu ry f o r in d u s
t r i a l lo a n p u rp o s e s . See U .S. C ongress, H earings Before the
Subcommittee o f th e Senate Committee on Banking and C urren
cy . S. 3639. JTT 89$8. Statem ent of S e n a to r James M. Mead,
^une“”l 2 , 1940, p . 9. ( H e r e in a f te r , t h i s r e f e r e n c e w i l l be
no ted a s H e a rin g s . S. 3839}. T his sum e q u a ls a l i k e amount
g iv e n by the Reserv«T Banks out o f t h e i r s u r p lu s to e s t a b l i s h
the F e d e ra l d e p o s it In su ran ce C o rp o ra tio n . The Reserve
Banks re c e iv e d an i d e n t i c a l amount o f c l a s s B s to c k in the
FdlC. Since no d iv id e n d s a re p a id on t h i s s to c k , i t i s c a r
r i e d on the Banks* ac c o u n ts a s having no v a lu e . See U.S.
C ongress, H earings Before the House Committee on Banking and
C u rren cy . H.R. 3268. C re a tio n and C o n tro l o f C r e d i t, B a rt *5,
S tatem ent o f &• S. E c c le s , June 3 , 1947, p . 302. (H erein
a f t e r , t h i s r e f e r e n c e w i l l be noted a s H e a rin g s , H.R. 3268).
42 Idem
1 6 0
Method o f o p e r a t i o n . — Ihe o p e r a tio n procedure o f a
Reserve Bank u n d e r s e c tio n 13B can c o n s i s t o f any one o f
th re e m ethods, the t h i r d o f which i s fa v o re d . (1) The Bank
can make a d i r e c t lo a n , d is r e g a rd in g the commercial banks.
(Z) Phe Reserve Bank can make p a r t o f a lo a n and secure a
commercial bank to c a r r y the rem a in d er. (3) A commercial
bank can make a lo a n and o b ta in a commitment to purchase the
lo a n from th e Reserve Bank. In t h i s l a t t e r c a s e , the maxi
mum amount the Bank can commit i t s e l f to purchase i s e ig h ty
p e r e e n t . ^
In c o n t r a s t to the RFC and i t s le n d in g a c t i v i t i e s ,
the le n d in g a u t h o r i t y o f the Reserve Banks, s e c tio n 13B,
remained unch an g ed .^4 C onsequently, the Reserve System
AZ
U.S. C ongress, H earings B efore the Senate Commit
te e on Banking and C u rren cy . S. 408, S tatem ent o f M. S. Ee-
c l e s , A p ril 17, 1947, p . 14. "“{ H e re in a fte r, t h i s re fe re n c e
w i l l be noted a s H e a rin g s . S. 408). Mr. E c e le s s a id t h a t
Reserve Banks n e v e r s o l i c i t lo a n s and alw ays t r y to g e t com
m e rc ia l banks to p a r t i c i p a t e in a lo a n . I b i d . , p . 15. Ihe
maximum i n t e r e s t charge on a Reserve Bank i n d u s t r i a l lo a n I s
f iv e p e r c e n t, fhe charge v a r i e s from te n to t h i r t y p e r
c e n t o f the f iv e p e r c e n t, a c c o rd in g to the p e rc e n ta g e o f a
lo a n a bank w i l l c a r r y . H e a rin g s . H.R. 3268. op. c i t . ,
p . 299, S tatem ent o f M. S. E c e le s , June 3 , 19477
^ Mr. H. J . Gunderson, a d i r e c t o r o f the RFC, noted
t h a t o n ly two c o n d itio n s a re imposed to d ay upon the a u t h o r
i t y o f h i s C o rp o ra tio n to lend money: (1) i f p r i v a t e lo a n
so u rc e s are' e x h a u ste d , and (2) " . . . i t has to be secu red
so th a t we a re a s su re d t h a t i t w i l l be r e p a id . . . .*» See
U .S. C ongress, H earin g s B efore the Subcommittee on M onetary,
C r e d i t, and F i s c a l P o l i c i e s o f the J o i n t Committee on the
1 61
gained l i t t l e e x p e r ie n c e , r e l a t i v e l y . In the I n d u s t r i a l
lo a n f i e l d .
V -loans
On March 26, 1942, u n d er E xecutive O rder No. 9112,
new fin a n c in g r e s p o n s i b i l i t i e s were c o n fe rre d upon the f e d
e r a l Reserve System. Under the p r o v is io n o f the O rd e r, the
War and Navy D epartm ents w ith the M aritim e Commission
. . . were a u th o riz e d to g u a r a n te e , and to make, lo a n s
f o r the purpose o f fin a n c in g c o n t r a c t o r s , s u b c o n tra c
t o r s , o r o th e r s engaged In any b u s in e s s or o p e r a tio n
deemed by those a g e n c ie s to be n e c e s s a ry , a p p r o p r ia te ,
o r co n v e n ien t f o r the p r o s e c u tio n o f the w ar, In c lu d in g
the o b ta in in g o r c o n v e rsio n o f f a c l l l t l e s . 4 5
The f e d e r a l Reserve Banks were d e s ig n a te d a g e n ts o f the
Government, u n d er the g e n e ra l s u p e rv is io n o f the Board of
G overnors, to c a r r y o u t the fo re g o in g p r o v i s i o n s . 4^
The Board Issued R e g u la tio n V, e f f e c t i v e A p r il 6,
Economic R ep o rt, November 17, 1949, p . 146. ( H e r e in a f te r ,
t h i s r e f e r e n c e w i l l be known by the Subcom m ittee’s chairm an,
S en ato r B. H. D o u g las). The l a s t c o n d itio n Mr. Gunderson
noted m ight o c c asio n c r i t i c a l comment In some q u a r t e r s . In
view o f c e r t a i n s i t u a t i o n s r e s u l t i n g in the p a s t f iv e y e a rs
from RFC lo a n s and t h e i r m isu se .
Annual R e p o rt, 1942, o p . c i t . . p . S3, f o r the
f u l l t e x t o f the E xecutive O rder, see U.S. C ongress, H ear
in g s B efore the House Committee on Banking and C u rren cy ,
S. 2250. I n s e r te d in to the re c o rd by Lawrence C la y to n , a s
s i s t a n t to the Chairman o f the Board o f G overnors, A p ril 27,
1942, pp. f f . H e r e in a f t e r t h i s re fe re n c e w i l l be noted
a s H e a rin g s . £5. 2250.
4 6 Idem
168
1942, which p r e s c r ib e d th e r u l e s and p o l i c i e s f o r Reserve
Bank guidance I n h a n d lin g lo a n g u a r a n te e s .
The f u n c tio n o f the Reserve Banks w i t h r e s p e c t to nego
t i a t i o n o f th e s e lo a n s in c lu d ed a n a l y s i s o f f i n a n c i a l
i n t e g r i t y o f the a p p l i c a n t , d e te rm in a tio n o f the type
o f f in a n c in g b e s t s u ite d to m eet d i f f e r e n t s i t u a t i o n s ,
and p r e p a r a t i o n o f the n e c e s s a ry d o cum ents.47
The Banks d id alm ost e v e ry th in g b u t lo a n the money.
The V -lo an program underw ent e x te n s io n and m o d ific a
t i o n as th e war p ro g re sse d b u t th e main s t r u c t u r e remained
s u b s t a n t i a l l y unchanged. By the end o f 1945, a p p ro x im a te ly
1 0 .3 b i l l i o n d o l l a r s o f p r i v a t e p ro d u c tio n c r e d i t s had been
e x te n d e d . Hot o n ly had th e program aid ed war p r o d u c tio n ,
i t had a ls o p aid f o r i t s e l f and even shown some p r o f i t .
The o v e r - a l l r a t i o o f l o s s e s , on the o t h e r hand, was v e ry
low, b e in g 0 .0 6 p e r c e n t o f lo a n a u t h o r i z a t i o n s . 4® By the
end o f 1946 the program*s u s e f u ln e s s had e n d e d .4®
Annual R e p o rt. 1942. o p . c i t *. p . 33. F o r a d i s
c u s s io n o f the, m echanics and p ro c e d u res by which lo a n s were
g u a ra n te e d , safe H e a rin g s . S. 8250. op. c i t . . pp. 113-36,
S tatem en t o f hawrence- C la y to n , May 1, 1942.
Annual R e p o rt. 1945. o p . c i t . . pp. 32 f .
^ Annual R e p o rt. 1946. o p . c i t . , p . 54. To f a c i l i
t a t e the defense e f f o r t , a V -loan program , s i m i l a r to th a t
o f World W a r,I I , was in a u g u ra te d un d er the Defense P roduc
t i o n A et o f 1950 and E xecutive O rder Ho. 10161 o f September
9, 1950. The F e d e ra l Reserve Banks were made a g e n ts f o r the
g u a ra n te e in g a g e n c ie s o f the D epartm ents of the Army, Havy,
A ir F o rc e, Commerce, I n t e r i o r , A g r i c u ltu r e , and the G eneral
S e rv ic e s A d m in is tra tio n . See F e d e ra l Reserve B u l l e t i n .
36:1283, O cto b er, 1950. !
1 6 3
Most o f the lo a n s g ra n te d u n d er the program had heen
made to sm a ll b u s in e s s e s , i . e . , b u s in e s s e s w ith l e s s than
#500,000 in a s s e t s . 5^ This f a e t was to be a fundam ental
f e a t u r e o f Board argum ents f o r th e g u a ra n te e p r o p o s a l.
The P ro p o sa l
Almost e v e ry y e a r sin ce 1945 the Board o f Governors
h as urged the enactm ent o f l e g i s l a t i o n which would a u th o riz e
the Be serv e Banks to a c t a s g u a r a n to rs o f lo a n s to b u s in e s s
e n t e r p r i s e s , e s p e c i a l l y sm all b u s in e s s e n t e r p r i s e s . 51 The
Annual R e p o rt. 1945. op . c i t . , p . 33. Mr. McCabe
d e c la re d t h a t o v er n i n e t y p e r c e n t o f the number and ap p ro x
im a te ly o n e - th ir d o f the amount o f the g u a ra n te e s went to
sm all and medium s iz e d b u s in e s s e s , t h a t i s , b u s in e s s e s w ith
t o t a l a s s e t s l e s s th an f iv e m i l l i o n d o l l a r s . See U .S . Con
g r e s s , H earings Be fo re the Senate Committee on banking and
C u rre n c y . S n a il B u sin ess A ct o f 1950, June 27, 1950, p . 129.
H e r e i n a f t e r t h i s r e f e r e n c e w i l l be noted a s H e a rin g s . Small
B u sin ess A ct o f 1950.
51 See the Annual R eport f o r the y e a rs 1944, 1946;
and 1947, p assim , i'o r C o n g re ssio n a l d is c u s s io n s , see H ear
in g s , S. 408, op. c i t . , A p r il 17, 1947; H e a rin g s . H.R."T£g§B,
op . cit*. . June 3 . 4, 10, 1947; and H e a rin g s . S n a il B u sin ess
A ct o f 1950, o p. c i t , . , June 22, 23, 27, 28, 1950. S en ato r
Mead was the sponsor o f two b i l l s on sm all b u s in e s s which
would have e s t a b l i s h e d a sm all b u s in e s s fin a n c e c o r p o r a tio n
u n d er the a u t h o r i t y o f the Board. I'o r h i s p ro p o s a l, see
H e a rin g s . S. 3839. op . c i t . . June 12, 14, 1940 and a l s o see
U .S. C ongress, H earin g s B efore the Subcommittee o f the Sen
a te Committee on Banking a n d ‘ C u rr e n c y . S. 1320. 3 u ly 25,
1946. The la c k o f s u p p o r t o r i n t e r e s t Tn h i s p la n , as w e ll
a s the i n t r i c a t e n e s s of i t s s t r u c t u r e , makes i t u n s u ite d f o r
f o r a p p e ara n c e . The p ro x im ity o f the Reserve System to h i s
p la n i s too remote f o r i t to be r e a l l y ta k en a s a proposed
change in the System.
1 6 4
p ro p o s a l and the re a s o n s advanced f o r i t s a p p ro v a l, a s ap
p e a rs in t h i s c h a p te r , w i l l he a com posite o f the B o a rd 's
s ta te m e n ts o f the p a s t few y e a r s .
I s a r e q u i s i t e to the enactm ent o f a g u a ra n te e lo a n
p r o v is io n the Board asked t h a t s e c tio n 13B o f the F e d e ra l
Reserve A ct, w ith a l l o f i t s r e s t r i c t i v e f e a t u r e s , he r e
p e a l e d , 52 The 139 m i l l i o n d o l l a r s a v a i l a b l e f o r lo a n a c
t i v i t i e s would he re tu r n e d to the T re a su ry D ep a rtm en t,53
F e a tu re s o f the p r o p o s a l, —The Board o f Governors
d e c la re d th a t enactm ent o f the p la n would h r in g s e v e r a l d e
s i r a b l e f e a t u r e s to the b u s in e s s o f lo a n g u a ra n te e in g .
F i r s t , th e re was the claim t h a t i t would he p e r m is s iv e , i . e .
i t would n o t p la ce the Reserve Banks in c o m p e titio n w ith the
Annual R e p o rt. 1946, op . c i t , . p , 9. Mr. E c c les
d e c la re d t h a t r e p e a l o f 13b alnd passage o f the p ro p o s a l
would g iv e l e s s a u t h o r i t y to th e Reserve System than i t now
p o s s e s s e d . I t would he a s u b s t i t u t i o n o f d i r e c t le n d in g f o r
• the r i g h t to in su re lo a n s t h a t are subm itted by the
b a n k s .* See U.S. C ongress, H earin g s Before the J o i n t Com
m itte e on the Economic R e p o rt. Bovembe r 25, 1947, p . 165,
33 Annual R e p o rt. 1946. l o c . c i t . In 1946, the Board
had argued th a t t h i s 139 m i l l i o n d o l l a r s eould be r e ta in e d
and used by the Reserve Banks f o r lo a n g u a ra n te e p u rp o se s.
Bo new a p p r o p r ia ti o n by the Congress would be n e c e s s a ry to
i n s t i t u t e the program i f t h i s was done. See Annual R e p o rt.
1944. o p . c i t . . pp. 61 f . A f t e r 1945, the Board changed
t h e i r t a c t i c s and the p o in t was u se d , a l b e i t i m p l i c i t l y ,
t h a t the T re a su ry would g a in f i n a n c i a l l y by passage o f the
p r o p o s a l, f o r the 139 m i l l i o n d o l l a r s would r e v e r t to the
T re a su ry D epartm ent; i t would n o t be needed f o r the su ccess
o f th e p la n .
1 6 5
p r i v a t e "banking system*®4 A ll lo a n s would o r i g i n a t e w ith
the p r i v a t e "banks and no lo a n ” . . . would he co n sid ered f o r
g u a ran te e e x c e p t on re q u e st o f the le n d e r p r i o r to the ex
te n s io n o f c r e d it# . . . 1,66 Bach Reserve Bank would have
f u l l r e s p o n s i b i l i t y in a c t i n g upon g u ara n te e r e q u e s ts made
to them*6®
Second, the g u a ra n te e p r o v is io n s would no t allow a
com m ercial hank to c a r r y a lo an l a r g e r th a n i t s l e g a l maxi**
mum, even though the lo a n was o f good q u a l i t y . In o th e r
w ords, the p ro p o s a l was ” . * . n o t to he used f o r th e p u r
pose of e n a b lin g the hanks to c a r r y e x c ess l o a n s , ” h u t was
Annual R e p o rt. 1946. op* c i t . . p# 10. Mr* E c e le s
s t r o n g ly argued t h a t no Government agency should extend c r e
d i t d i r e c t l y . See H e a rin g s . H.R. 3368. op . ci t . . June 3 ,
1947, p . 389. He b e lie v e d the w. . • r o le o f the Reserve
System in r e l a t i o n to Government le n d in g to b u s in e s s . . .
should he c l a r i f i e d . ” Douglas Subeom m ittee, H e a rin g s, o p .
c i t . . p . 317, Movemher 33, 1949. Mr. McCabe agreed w itn
such v ie w s. He observed t h a t Government le n d in g , once e s
t a b l i s h e d , tn e d s to be m a in ta in e d w ith the r e s u l t t h a t
♦ a growing s e c t o r o f our p r iv a te b u s in e s s economy may
come to depend f o r i t s c r e d i t advances on th e p u b lic o r e -
d i t . ” I b i d . . p . 483, December 3 , 1949.
Annual R e p o rt. 1946. op . c i t . . p . 9.
Jdem. Ihe then Board Chairman, M a rrin e r E c c le s ,
s t a t e d t h a t th e re would be no b la n k e t g u a r a n te e —each lo a n
would have to be approved by the F e d e ra l Reserve Bank con
c e rn e d , b u t the lo a n would n o t have to be r e f e r r e d to Wash
in g to n . Before a lo a n was made, however, i t would have to
be p re s e n te d to the Reserve Bank f o r a p p ro v al o f the g u a r
a n t e e , i f such a g u a ra n te e was d e s ire d by a bank. See H ear
i n g s . H.R. 3368. p p . c i t . . pp. 399, 310, June 3 , 1947.
1 6 6
". • • f o r the purpose o f g u a ra n te e in g c r e d i t s t h a t o t h e r
w ise can n o t he s e c u r e d .”57 O ther banks would have to p a r
t i c i p a t e in a lo a n one hank: could n o t handle alone* Ho
g u a ra n te e would he forthcom ing u n le s s th e Reserve Bank to
whom the a p p l i c a t i o n had been made was s a t i s f i e d t h a t a l l o f
the u s u a l lo a n so u rce s had heen e x h a u s te d ,55 I n the e v e n t
a g u a ra n tee d lo a n in te r c e p te d d i f f i c u l t i e s , the Reserve
Bank, to p r o t e c t the commercial hank, the lo a n , and i t s e l f ,
would have the power to ta k e over the lo a n , This type a c
t i o n , however, would he c o n tin g e n t upon the lo a n a c t u a l l y
h e in g in d i f f i c u l t y o r in d e f a u l t , n o t j u s t to g iv e the com
m e rc ia l hank the money i t n e e d e d .5®
T h ird , no lo a n would he extended f o r more th a n te n
y e a r s . The g u a ra n te e could n o t t o t a l more than n i n e t y p e r
ce n t o f the u n p aid balan ce o f the l o a n . 5^ The p r i n c i p l e
purpose o f the p ro p o s a l would he to extend term lo a n s to
sm all b u s in e s s e s who ex p erien ce d i f f i c u l t y in s e c u rin g c a p i -
57 H e a rin g s . S. 40 8 . o n . c l t . . p .1 8 . S tatem ent o f
M a rrin e r E c c le s , A p r il 17, 1947.
55 H e a rin g s . H.B. 3268. o n . c l t * . p* 298, S tatem ent
o f M a rrin e r E c c le s , June 3 , 1947. "
59 I b i d . . pp. 304 f f .
^ H e a rin g s . S. 408. o n . c l t . . pp. 1 f , E x e rp ts from
the proposed Is i l l , A p ril 17, 194TT"
1 6 7
t a l . 6^ The t o t a l amount o f lo a n s g u a ra n tee d and h e ld by the
F e d e ra l Beserve Banks would n o t he more than the combined
s u rp lu s o f a l l o f the Banks a t any one tim e . Ho more than
f i f t y p e r o en t o f the g u a ra n te e s and commitments to purchase
would he o v e r #100,000 a t any one t i m e .6^
The f e e s charged f o r a guarantee^w ould p a r a l l e l t h a t
o f the V -loan program and s e c t i o n 1SB. The f i v e p e r c e n t
maximum I n t e r e s t charge would he c o n tin u e d . W ith in t h i s
l i m i t , f e e s from te n to t h i r t y p e r c e n t o f the i n t e r e s t r a te
Annual R e p o rt, 1946. op . c l t . . pp. 9 f . The Board
o f G overnors p a r t i c u l a r l y s t r e s s e d the f in a n c in g needs o f
sm all b u s in e s s . They claim ed t h a t sm all b u s in e s s owners
want term n o t e q u ity lo a n s sin ce the l a t t e r would d i l u t e
t h e i r ow nership c o n t r o l . Term lo a n s a re more e a s i l y amor
tiz e d o u t o f p r o f i t s . I b i d . . p . 10. E q u ity c a p i t a l and
lo n g -te rm c r e d i t , a v e rre d Mr. McCabe, a re the f i n a n c i a l
needs o f sm all and la r g e b u s in e s s , and com mercial banks. In
the p ro p e r perform ance o f t h e i r d u ty , cannot u n d e rta k e to
su p p ly them. The expense o f p ro c e s s in g and s e r v ic in g many
sm all b u s in e s s lo a n s , he n o te d , was p r o h i b i t i v e because o f
sm all b u s in e s s ' low c r e d i t demand. He was aware t h a t f i n a n
cin g was o n ly one o f many complex sm all b u s in e s s problem s,
b u t he b e lie v e d t h a t the p ro p o sa l would a m e lio ra te a t l e a s t
t h i s one d i f f i c u l t y . See H ea rin g s, Small B u s in e ss Act o f
1950, o p. c l t . . pp. 134-39, June 27, 1950. F o r a r e c e n t
stu d y o f the needs of sm all b u s in e s s , see A. I). H. K aplan,
Small B u s in e s s ; I t s fflape and Broblems (Hew York: McGraw-
H i l l BooF^Soimpany, I n c . , 1948).
62 Annual R e p o rt. 1946. l o c . c l t . Also see H e a rin g s .
S* 408, o p. c l t . . pp. 1 f , A p ril 17, 1947 and Thomas McCabe,
Reply o f the Chairman o f the Board o f G overnors (Washington:
Board o f Governors o f the F e d e ra l Beserve System, 1949),
p . 93. Some o f the p r o v is io n s noted were m odified In 1950.
F o r the d i f f e r e n c e s , see H e a rin g s . Small B u sin e ss Act o f
1950, op. c l t . , pp. 146 f . S tatem ent o f Chairman McCabe,
June 277
1 68
would be l e v i e d , a c c o rd in g to the p e r c e n t o f the lo a n g u a r
a n te e d * ^ 5
Arguments F o r and A g ain st the P ro p o sa l
Mr. E a r l R. M uir, a member o f the Small B u sin e ss C re
d i t Commission o f the American Bankers A s s o c ia tio n , d e c la re d
th a t th e ABA was opposed to the g u a ra n te e in g o f lo a n s by the
Reserve Banks* He p re s e n te d a t l e a s t s i x re a s o n s f o r t h i s
stand* f1) F e d e r a l Reserve fu n d s, in a c t u a l i t y , belong to
the Government and any l o s s e s the Reserve Banks m ight s u s
t a i n would mean l e s s money e n t e r in g the tre a s u ry * (Z) Xt
would be a Government in v a sio n o f th e p r i v a t e c r e d i t f ie ld *
(&} The p ro p o s a l would le ad to the ussuance o f unsound lo a n s
by the p r i v a t e banks, w hich, w hile bad f o r th e le n d e r and
the bo rro w er, would be u n f a i r to the b o rro w er’ s c o m p e tito rs ,
(4) The c e n t r a l bank should n o t have a s one o f i t s f u n c tio n s
the le n d in g , however i n d i r e c t , to i t s d e p o s i t o r s , (6) I t
would be u n f a i r to c o n fro n t the businessm an who o b ta in e d h i s
c a p i t a l in the u s u a l manner w ith those who re c e iv e easy c r e
d i t , (6) M a n a g e ria l a b i l i t y , n o t ea sy c r e d i t , c o n s t i t u t e s
the g r e a t e s t need o f b u s in e s s * 64
^ H e a rin g s , H.R* 3268, o p . c i t , , p . 299, S tatem ent
o f M a rr in e r E c c le s , June &, 1947,
64 I h i d . , pp. 349 f f , June 4, 1947.
169
Mr. K. H. C ravens, a member o f th e C r e d it P o lic y Com
m is sio n o f th e ABA s a id t h a t lo a n g u a ra n te e s were " c la s s
s u b s i d i e s . " He b e lie v e d the banking system had a l l o f the
n e c e s s a r y re s o u rc e s and a b i l i t y to su p p ly b u s in e s s , la r g e
and s m a ll, w ith i t s c r e d i t n e e d s .65 He remarked t h a t the
ABA was opposed " . . . to g iv in g the incom petent o r the
m a rg in a l borrow er a p r e f e r e n t i a l r a t e . • . ."66 i f t h i s was
done, Mr. Cravens contended, a l l b u s in e s s would be harmed,
f o r the incom petents would s t i l l f a i l , a lth o u g h i n i n c r e a s -
ing numbers, and " th e re i s no c o m p e titio n t h a t i s so hard to
m eet a s th a t o f th e b u s in e s s t h a t i s on the way to i n s o l
vency. • • ,
Mr. McCabe s t i l l b e lie v e d th e re was need f o r g u a ra n
teed lo a n s , b u t agreed t h a t most o f the fo re g o in g p o i n t s
go
m e rite d a t t e n t i o n . Mr. E c e le s was n o t so k in d . He d e
c la r e d t h a t th e l a r g e r banks o f th e ABA were the r e a l oppo
n e n ts to the p ro p o s a l f o r i t would encourage borrow ers to
go to t h e i r lo c a l banks f o r t h e i r c r e d i t su p p ly . The sm al-
65 H e a rin g s . H.E. 5868. o p . c i t . , p . 567, June 4,
1947.
66 I b i d . . p . 569.
^ Sdem
68 H e a rin g s . Small B u sin ess Act o f 1950, op. c i t . .
p* 1£4, June 27, 1950.
1 70
l e r "banks would "be a b le to extend c r e d i t , which a t p r e s e n t
they a re u n ab le to do, w ith o u t the a id o f t h e i r l a r g e r
b r e t h r e n . 69
The s ta te m e n ts o f Mr. Cravens and Mr. M uir were n o t
r e p r e s e n t a t i v e o f the g e n e r a l banking p u b l i c , d e c la re d Mr.
E c c l e s . ^ He d en ied t h a t bank f a c i l i t i e s were adequate to
meet th e c r e d i t n eed s o f b u s in e s s , e s p e c i a l l y th e lo n g -term
c r e d i t needs of sm a ll b u s in e s s . He noted t h a t the Committee
f o r Economic Development and the Small B u sin ess A dvisory
Committee to the Department o f Commerce fav o red the p ropo-
A s tro n g f e a t u r e of the Beserve System 1s argument
f o r the p ro p o sa l was t h a t i t had had v a lu a b le ex p erien ce In
the lo a n g u a ra n te e f i e l d , r e f e r r i n g to s e c t i o n 13B a c t i v i
t i e s and, e s p e c i a l l y , the Y -loan p ro g ra m ,1 ^2 In these a c -
69 H e a rin g s , H.B. 3268. 0£ . c i t . . pp. 309 f , June 3,
1947.
F o r the remarks o f a p r i v a t e b an k er who concurred
In la rg e p a r t w ith views such a s Mr. E c c le s p r o fe s s e d , see
H e a rin g s . Small B u sin ess Act o f 1950, o p , c l t . , S tatem ent of
W alter E. C o s g r if f , P r e s i d e n t , C o n tin e n ta l N a tio n a l Bank and
T ru s t Company, S a lt Lake C ity , June 28, 1950, pp. 163 f f .
Mr. C o s g riff noted t h a t th e American Bankers A s s o c ia tio n had
a ls o been a g a in s t th e F e d e ra l Beserve A ct, the F e d e ra l De
p o s i t In su ran ce A ct, and the Banking Act o f 1935.
^ H e a rin g s . H.B. 3268. o p , c l t . . pp. 377 f f , June
10, 1947.
^ * > ee A n n u al Be p o r t . 1 9 4 6 . o p . c l t . . p. 1 0 ; M cCabe,
1 71
t i v i t i e s , Mr. E e c le s a rg u e d , ". . . the re c o rd is n o t one o f
lo o se l e n d i n g . ” 73 Under s e c t i o n 13B, ap p ro x im a te ly $ 5 6 0 ,-
000,000 i n advances and commitments to purchase were handled
by the Reserve Banks. N early 1 0 .5 b i l l i o n d o l l a r s in guar**
a n te e s were a u th o riz e d under the V -lo an program .
The i n t e r e s t and f e e s c o l l e c t e d in c o n n e c tio n w ith t h i s
t o t a l o f about $ 1 1 ,000,000,000 o f o p e r a tio n s were more
than s u f f i c i e n t to cover expenses and l o s s e s and to show
some p r o f i t s . 74
o p . c i t . , p. .92; and H e a rin g s . H.R. 5268. o p . ci t . . pp.
I!98 f , S tate m e n t o f M. S. E c e le s , June 3, 1947.
72 r b t a * . P* 299.
Idem. I t i s n o t b ein g doubted t h a t a p r o f i t was
made on the V -loan program , however the f i n a n c i a l p r o f i t a
b i l i t y o f 13B .l o a n s , in many in s ta n c e s s i m i l a r to the p ro
posed g u ara n te e d lo a n s , rem ains in d o u b t. In 1940, one p e r
son noted t h a t the Reserve Banks, a s a w hole, were o n ly
b reak in g even on 13B i n d u s t r i a l ad v a n ce s. See D. R. F u l l e r ,
government F in an c in g o f P r i v a t e E n te r p r is e (S ta n fo rd : S ta n
fo rd U n iv e r s ity P r e s s , 19 4 8 ), p . 91. Mr. Robert V. Rosa,
a s s o c ia te d w ith the New York Reserve Bank, made a s tu d y o f
two hundred and f i f t y sm all co n cern s to whom a id was g iv e n
in the 193Qfs by th e New York Bank u n d er s e c t i o n 13b. He
d is c u s s e d the c o s t to the Reserve Bank o f th e c r e d i t in v e s
t i g a t i o n i t had to make. ”What i s a b i t s ta g g e r in g i s the
f a c t , w ith o u t any a l l o c a t i o n o f such f ix e d c o s ts a s o f f ic e
sp a ce, l i g h t and h e a t , the combined expense o f the New York
Bank (b efo re l o s s e s on g ra n te d lo a n s ) averaged ab o u t #625
p e r form al lo a n a p p l i c a t i o n . Of t h i s amount, a t l e a s t $400
can be a t t r i b u t e d to the c r e d i t i n v e s t i g a t i o n p r o c e s s , a l
though t h a t p a r t o f the expense r a n much h ig h e r in some i n
d iv id u a l c a s e s , ” With the fo re g o in g in mind, he concluded:
"These mundane f a c t o r s o f i n v e s t i g a t i o n c o s t and the need
f o r o p e r a tin g ad v ice seem to me th e g r e a t e s t o b s ta c le s in
ex te n d in g adequate lo a n c r e d i t s to sm all b u s in e s s on the
b a s i s o f the sample o f co n c ern s exam ined.” R, V. Rosa,
" S n a il B u sin ess P ro b le m s,” Jo u rn a l o f F in a n c e . 2 :9 5 , A p r il,
1 72
The l o s s e s from g u a ra n tee d lo a n s , Mr. E c c le s p o in te d
o u t, would f i r s t fee sufetraeted from the fund c re a te d fey the
g u a ra n te e fe e s ch arg ed . I f t h a t fund was d e p le te d , l o s s e s
would fee ta k en from the Reserve Banks* e a r n in g s . l a s t l y ,
l o s s e s would come o u t o f th e surplus* o f the Reserve Banks,
i f the f i r s t two so u rc e s were used up, This r e s p o n s i b i l i t y ,
he s a id , would fee such t h a t easy o r unsound c r e d i t s would
n o t fee encouraged*7®
Mr. Gunderson, alth o u g h s t a t i n g t h a t h e, p e r s o n a lly ,
did n o t have any o p in io n a s to w h eth er the Reserve Banks
should o r should n o t have the g u a ra n te e a u t h o r i t y , observed
t h a t th e re were two f a c t s which le d some people to oppose
1947. Mr. A.. B. H. K aplan s t a t e d t h a t such a s th e fo re g o
ing * *• • . was in p a r t a n e x p la n a tio n of th e sm all number o f
firm s t h a t proceeded to q u a l i f y f o r (13B) l o a n s . ” Even so,
he c o n tin u e d , ”. . . the F e d e ra l Reserve Banks avoided show
ing a d e f i c i t o n ly fey O m itting to a l l o c a t e f u l l a d m in is t r a
tiv e overhead to the 13B p ro g ra m .” K aplan, op. c i t •, pp.
165 f . I n the 1950 C o n g ressio n a l h e a r in g s , one o f the b i l l s
in tro d u c e d , S. 3625, would have g u a ra n te e d v e ry sm all lo a n s
w ith o u t any p r e lim in a r y rev iew . This was approved fey Mr.
McCabe. In h is w ords, th e se would fee the lo a n s "• • « which
would n o t J u s t i f y the expense and work o f r e i n v e s t i g a t i o n fey
the in s u rin g agency on an in d iv id u a l b a s i s . ” H e a rin g s ,
S n a il B u sin ess A ct o f 1950, op. c i t . , p . 146, June 27, 1950.
In e f f e c t , such a p r o v is io n would fee s i m i l a r in many r e
s p e c ts to the 1946 b la n k e t g u a ra n te e o f th e R e c o n stru c tio n
Finance C o rp o ra tio n which Mr, E c c le s had h e a v ily c r i t i c i z e d
and which th e RFC l a t e r w ithdrew . See H e a rin g s . H.R. 3268,
o p . c i t . . pp. 314 f , June 3, 1947.
76 I b i d . . p. 2 9 9 .
the pro p o sal# 2)he f i r s t was the hanking d is c o u n ts o f the
Beserve System. " I f th e y were to commit t h e i r funds on
lo a n s th e n in tim es o f s t r e s s th e y w ouldn*t have a n y th in g
l e f t . " 7* * Second# Mr# Gunderson n o te d , "• . • they a re a su
p e r v is o r y agency o f hanks, and i t is q u e s tio n a b le w hether
th e y ought to he s u p e rv is in g t h e i r own o p e r a t i o n s . " 7T He
did n o t h e lie v e t h a t people tr y in g to o b ta in lo a n s should
he r e q u ire d to go th ro u g h more d i f f i c u l t i e s than was then
n e c e s s a ry , nor did he h e lie v e the c r e a t i o n o f a new c r e d i t
agency would answ er the f i n a n c i a l problem s o f sm all b u s i
n e s s . 7®
Mr, John Goodloe, a member o f the RFC, q u estio n ed
w hether the Beserve Banks would make lo a n s w. . . in s u f f i
c ie n t number to m eet the c r e d i t re q u ire m e n ts o f borrow ers
u n ab le to o b ta in c r e d i t through normal banking c h a n n e ls ." 7®
7® Douglas Subcommittee, H e a rin g s , op. c l t . . p . 160,
Hovember 17, 1949.
7 7 Mm
7® I b i d . . p . 158. F o r two c o n d itio n s n e c e s s a ry to
se cu re an HFd lo a n , see s u p r a . p . 160. In 1947, Congress
made two changes in the RFC Act* One o f the changes added
th re e w ords, "encourage sm all b u s i n e s s ," to the b u s in e s s -
lo a n s e c t i o n as a f u r t h e r purpose o f the A ct. Ibid** P*
167. P erh ap s t h i s i s what Mr. Gunderson had in mind when
he s a i d , ^by p u t t i n g in the F e d e ra l B eserve, i t i s j u s t one
more p la c e th e y (p erso n s d e s i r i n g lo a n s ) must go to b e fo re
th ey come to us f o r h e l p . " I b i d . . p . 160.
79 H e a r in g s . S . 4 0 8 . o p . c l t . . p. 9, A p r il 1 7 , 1 9 4 7 .
1 7 4
Mr* I c e l e s r e p l i e d th a t the Reserve System had s u f f i c i e n t
funds to make the re q u ir e d amount o f loans*®®
M a rrin e r E c e le s q u e stio n e d the le n d in g a c t i v i t i e s o f
the RPC* He n o te d t h a t i t had heen in te n d e d , o r i g i n a l l y ,
a s a tem porary agency— the F e d e ra l Reserve System, on the
c o n t r a r y , was a perm anent arran g em en t.
I t was c e r t a i n l y my im p ressio n • • • t h a t when a e r e d i t
emergency was over and we had i n f l a t i o n a r y r a t h e r than
d e f l a t i o n a r y c o n d itio n s , the Severnment would n o t he
p ro v id in g f o r f u r t h e r e x te n siv e c r e d i t and th a t p r iv a te
c r e d i t a g e n c ie s would take c a re o f most o f the e r e d i t
needs o f the c o u n tr y .81
While he n e v e r d i r e c t l y advocated the a b o l i t i o n o f the RFC,
he d id say : " I t seems to me t h a t th e f u r n is h in g o f d i r e c t
e r e d i t by a Government o r Government a g e n c ie s should be d i s
c o n tin u e d . "82
A Task Force R eport o f the Hoover Commission recom
mended, w ith re g a rd to le n d in g to com mercial e n t e r p r i s e s ,
" t h a t RFC be d is c o n tin u e d and the F e d e ra l R eserve Banks be
a u th o riz e d to g u a ra n te e lo a n s to b u s in e s s e n t e r p r i s e s made
by p r i v a t e f i n a n c i a l i n s t i t u t i o n s . T h e Task Force a p -
80 H e a rin g s , S > . 408, o p . c l t . , p. 9, A p ril 17, 1947.
8^ H e a rin g s , H.R. 3268, o p . c i t . , p* 306, June 3,
1947. “
8S I M d . , p . 307.
®3 U.S. Commission on O rg a n iz a tio n o f the E xecutive
1 7 5
proved a p la n s i m i l a r to the p ro p o sa l p r e s e n t eel In t h i s
c h a p t e r . 84 Hoover Commission I t s e l f did n o t recommend
l i q u i d a t i o n o f the RFC, n o r the enactm ent o f lo a n g u a ra n te e s
by the Reserve Banks. I t urged a r e o r g a n iz a tio n o f th e Cor
p o r a tio n to g u a ra n te e com mercial hank l o a n s . 8 ®
Mr. McCabe, then Chairman o f the Board o f G overnors,
o f fe re d a compromise.
I t l a my view t h a t b o th th e F e d e r a l Reserve Banks and
the R e c o n s tru c tio n Finance C o rp o ra tio n may, w ith o u t I n
c o n s is te n c y , o p e ra te to g e th e r In p ro v id in g f i n a n c i a l a s
s is ta n c e f o r b u s in e s s e n t e r p r i s e s , p ro v id e d , however,
th a t th e re I s w r i t t e n In to the law a p r o v is io n which
would re q u ire the R e c o n s tru c tio n F inance C o rp o ra tio n ,
b e fo re I t ex te n d s f i n a n c i a l a s s i s t a n c e to a b u s in e s s en
t e r p r i s e , to c o n s id e r w h eth e r such a s s i s t a n c e i s a v a i l
a b l e , n o t o n ly from commercial banks, b u t through the
Reserve Banks. This would be in the n a tu re o f a c l a r i
f i c a t i o n o f the p r e s e n t s t a t u t o r y re q u ire m e n t t h a t the
C o rp o ratio n s h a l l re n d e r f i n a n c i a l a s s i s t a n c e o n ly i f i t
i s "not o th e rw ise a v a i l a b l e on re a s o n a b le te r m s .8*
I I I . TEE NATIONAL MONETARY ARB CREDIT COUNCIL
I n r e c e n t y e a rs the p ro p o sa l has been advanced by
s e v e r a l groups and in d iv i d u a ls t h a t the f ls o a l- m o n e ta r y -
Braneh o f the Government, Task Force R ep o rt, Lending Agen
c i e s , Appendix R (W ashington: U.S. Government P r i n t i n g Q f-
f l c e , 1949), p . ^ x i l l . (To be known as Lending A g en c ies) .
84 I b i d . , pp. 27 f f .
^ Hoover Commission Report (New York: McGraw-Hill
Book Company, I n c . , 1 9 4 9 ) , p. 402.
86 M cC abe, ojo. c l t . . p. 92.
176
la n d in g a c t i v i t i e s o f the F e d e ra l Government he co o rd in ated *
The scope o f F e d e r a l a c t i v i t y in th e s e th re e f i e l d i s t r e -
! I
mendous, as Table VI, on the n e x t p age, p a r t i a l l y re v e a ls*
The Hoover Commission gave some in d i c a t i o n o f the imm ensity
o f Government o p e r a tio n s when i t d e c la r e d : "There a re f o r t y
a g e n c ie s i n the F e d e ra l Government engaged in le n d in g , g u a r
a n te e in g , and in s u r in g ( o th e r than s o c i a l s e c u r i t y and pen
s io n a g e n c ie s ) * " 87 The p o s i t i o n and v o ic e of the F e d e ra l
Beserve in such a c o u n c il should he a m a tte r o f concern to
a l l , f o r m onetary p o lic y would he v i t a l l y a f f e c t e d — f o r b e t
t e r o r f o r worse*
Purpose o f the C ouncil
The purpose o f the C ouncil would he more o r l e s s ob
v io u s , i * e . , to s e t t l e in te ra g e n c y c o n f l i c t s * D isp u te s have
d eveloped, as one group p u t i t , because no form al o r i n f o r
mal mechanism e x i s t s . • to a s s u re c o o r d in a tio n between
F e d e r a l Beserve m onetary p o lic y and the p o l i c i e s o f the many
Government le n d in g a g e n c ie s * ”8 8 . A nother Task F o rc e , a f t e r
87 Hoover Commission B e p o rt, op. c i t * . p . 386* l i n e
o f the f o r t y a g e n c ie s a re in l i q u i d a t i o n o r have ceased
le n d in g b u t s t i l l have lo a n s o u tstan d in g * Idem* With the
passage o f the Defense P ro d u c tio n Act o f 1950, the D e p a rt
ments o f the Army, Havy, A ir F o rc e , Commerce, I n t e r i o r , Ag
r i c u l t u r e , and the G eneral S e rv ic e s A d m in is tra tio n can ex
tend c r e d i t . S u p ra. p . 162*
68
U.S. Commission on O rg a n iz a tio n o f the E xecutive
177
TABLE V I
FEDERAL ACTIVITIES IK THE FIELDS OF MONEY, CREDIT AND F IS
CAL OPERATIONS, AND THE CONTROLLING
GOVERNMENT AGENCIES89
A c t i v i t y . F e d e r a l agency
I . P ro v is io n o f a l e g i s l a t i v e fram e
work f o r the m onetary, c r e d i t , and
f i s c a l system :
1 . L e g i s l a t i o n d e f in in g the mone- Congress
ta r y u n i t ; d e te rm in in g the
r o l e s o f g o ld , s i l v e r , and p ap
e r money; d e te rm in in g the pow
e r s o f a d m in is t r a tiv e and ex e c
u tiv e a g e n c ie s in the f i e l d ;
r e g u la tin g the e s ta h lis h m e n t
and o p e r a tio n s o f p r iv a te mone
t a r y and c r e d i t i n s t i t u t i o n s ,
le v y in g ta x e s , and d e t e r a in in g
Government ex p e n d itu res*
II* The issu e o f c o in and p a p e r money:
1* Issu e o f F e d e r a l Reserve n o te s . F ed. Res. Sys.
2. Is s u e of T re a su ry co in and * T re a s.
p ap er money.
I I I . Commercial hank c h a r t e r i n g , su p e r
v i s i o n , and ex am in atio n :
1. C h a rte rin g o f n a t i o n a l hanks. Comp, o f C urren
cy
Branch o f the Government, Task Force R ep o rt, R e g u lato ry Com
m i s s io n s . Appendix N (W ashington: U.S. Government P r i n t i n g
O f f ic e , 19491, p . I l l * ( H e r e in a f te r , t h i s r e p o r t to he n o t
ed as R e g u lato ry Commissions). I t n o te d , a s a case in p o in t
"the co n tin u ed l a r g e - s c a l e e x te n s io n o f cheap housing c r e d i t
d u rin g th e postw ar p e rio d in s p i t e o f stro n g i n f l a t i o n a r y
p r e s s u r e s and F e d e ra l Reserve p r o t e s t s . . . . " Idem
Source: U.S* C ongress, Report o f the Subcommittee
on M o n etary . C r e d i t , and F i s c a l P o l i c i e s o f the J o i n t Com-'"
m itte e on the Economic R e p o rt. January 23, 1950, pp. 7 f .
H e r e in a f t e r , t h i s r e f e r e n c e noted by the name o f the Subcom
m i t t e e 's e h a ira a n , S en ato r P. H. D ouglas.
1 7 8
TABLE V I ( c o n t in u e d )
FEDERAL ACTIVITIES IN THE FIELDS OF MONEY, CREDIT AND FIS^-
CAL OPERATIONS, AND THE CONTROLLING
GOVER8MENT AGENCIES
A c t i v i t y F e d e ra l agency
S. Bank s u p e rv is io n and examina
t i o n .
IV, G eneral m onetary and c r e d i t manage
m ent:
1* R e g u la tio n o f th e t o t a l su p p ly
and c o s t o f money and e r e d i t .
2 . S e le c tiv e c r e d i t c o n t r o l .
V. In su ra n c e o f hank d e p o s i t s .
V I. A g ric u ltu r e c r e d i t .
1. Loans f o r r u r a l e l e c t r i f i c a
t i o n .
2. Loans to farm c o o p e ra tiv e s .
3. Prom otion and r e g u l a t i o n o f
p ro d u c tio n c r e d i t a s s o c i a
t i o n s .
4. Loans to , and d is c o u n ts o f pap
e r f o r , v a r io u s i n s t i t u t i o n s
th a t extend s h o r t-a n d In term e
d i a t e - t e r m lo a n s to farm ers and
t h e i r c o o p e ra tiv e s .
5. Loans to and r e g u l a t i o n o f n a
t i o n a l fa rm -lo a n a s s o c i a t i o n s .
6. Loans and g u a ra n te e s o f p r i v a t e
lo a n s to sm all farm ers unable
to secu re adequate c r e d i t e l s e
w here.
7. N onrecourse lo a n s and g u a ra n ty
o f p r i v a t e lo a n s on a g r i c u l t u r e
p ro d u c ts .
V II. Housing c r e d i t .
Comp, o f C urren
cy, Fed. Res.
Sys • , and FDIC
T re a s. and Fed.
Res. Sys.
Fed. Res. Sys.
FDIC
G eneral r e g u l a
tio n by Farm
C r e d it Admin.
REA
IS banks f o r co
o p e r a t iv e s
12 p r o d u e tio n -
c r e d i t c o rp o ra
tio n s
12 F e d e ra l i n
term ed ia te - c r e
d i t banks
12 F e d e r a l lan d
banks
fa rm e rs Home
Admin.
Commodity C re
d i t Corp.
O v e r - a ll s u p e r
v i s i o n by Hous
ing and Home
Finance Agency
179
TABLE V I ( c o n t in u e d )
FEDERAL ACTIVITIES I I THE FIELDS OF MONEY, CREDIT AND F IS
CAL OPERATIONS, AND THE CONTROLLING
GOVERNMENT AGENCIES
A c t i v i t y
F e d e r a l agency
1# G uaranty o f m ortgages on r e s -
d e n t i a l r e a l e s t a t e and home
m o d e rn iz a tio n .
2. C h a rte rin g o f F e d e r a l sa v in g s
and lo a n a s s o c i a t i o n s and s u
p e r v is i o n o f i n s t i t u t i o n s o f
t h i s ty p e ,
3 . Loans to sa v in g s and lo a n a s
s o c i a t i o n s and to c e r t a i n
o th e r I n s t i t u t i o n s o f t h i s
type •
4. P ro v is io n o f a secondary m ar
k e t f o r c e r t a i n In su red m o rt
g a g e s.
5. In su ran ce o f sav in g s a c co u n ts
a t sa v in g s and lo a n a s s o c i a
t i o n s .
6. Loans and s u b s i d ie s to l o c a l
p u b lic housing a g e n c ie s f o r
lo w -re n t housing and slum
c l e a r a n c e •
V I I I . In su ran ce o f home, farm , and
b u s in e s s lo a n s to v e t e r a n s .
IX. O th er lo a n s and Insurance o f
l o a n s :
1. Loans to f i n a n c i a l i n s t i t u
t i o n s .
2. Loans to S ta te s and t h e i r
s u b d iv is io n s .
3 , Loans and g u a ran te e o f p r i
v a te lo a n s .
F e d e ra l Housing
Admin.
Home Loan Bank
Board
11 F e d e r a l Home
Loan Banks
F e d e ra l N a tio n a l
' Mortgage Asso
c i a t i o n
F e d e ra l Savings
and Loan I n s u r
ance Corp.
P u b lic Housing
Admin.
Ve t e r a n s 1 Admi n •
(a lso o th e r
a g e n c ie s in the
perform ance o f
t h e i r f u n c tio n )
RFC, Fed. Res.
Sys•, and ce r -
t a i n o th e r
a g e n c ie s l i s t
ed above
RFC and c e r t a i n
o t h e r a g e n c ie s
l i s t e d above
RFC and Fed.
Re s • Sys.
180
TABLE V I ( c o n t in u e d )
FEDERAL ACTIVITIES IN THE FIELDS OF MONEY, CREDIT AND F IS
CAL OPERATIONS, AND THE CONTROLLING
GOVERNMENT AGENCIES
A c t i v i t y F e d e ra l agency
4 . G uarantee o f lo a n s f o r the con->
s t r u c t i o n and r e c o n s t r u c t i o n o f
s h ip p in g .
5. Loans to f o r e ig n b o rro w ers.
X. F i s c a l p o lic y :
1* T ax atio n , in c lu d in g d e te rm in a
ti o n o f ty p e s, b a s e s , and r a t e s
o f ta x e s ,
2, Spending, in c lu d in g d e te rm in a
t i o n o f tim in g , amounts, and
p u rp o ses o f e x p e n d itu r e s .
3, Debt management.
i n v e s t i g a t i n g the v a r io u s F e d e ra l le n d in g a g e n c ie s , came to
s u b s t a n t i a l l y the same c o n c lu s io n .90 Aside from e f f o r t s ex
90 Task Force R ep o rt, Lending A g e n c ie s, op. c i t . .
pp. v i f f . I n t h i s re g a rd , the a s s o c i a t i o n o f the RFC and
the F e d e ra l Reserve i s e n l ig h te n in g . When asked how the
le n d in g a c t i v i t i e s o f the RFC were c o o rd in a te d w ith the Fed
e r a l R eserve, in g e n e ra l c r e d i t p r o c e s s e s , Mr. Gunderson r e
p l i e d , "R ath er l o o s e l y . " In cu rb in g i n f l a t i o n in the p o s t
war p e r io d , he s a i d , the C o rp o ra tio n t r i e d " c o n s c ie n tio u s ly "
to conform to what the Reserve System was d o in g . See Doug-
M aritim e Commis
s io n
E x p o rt-Irap o rt
Bank and c e r
t a i n o th e r
a g e n c ie s
Congress
Congress and
th e a g e n c ie s
g ra n te d d i s
c r e t i o n as to
the tim in g ,
r a t e , purposes
o f t h e i r ex
p e n d itu re s
T re a s. and Fed,
Res. Sys.
1 8 1
pended a t c r o s s - p u r p o s e s , as in h o u sin g and i n f l a t i o n , t h i s
Task Force p o in te d o u t the c o n f l i c t between the re q u ire m e n ts
o f the T re asu ry and the re q u ire m e n ts of the F e d e ra l Beserve
System in r e l a t i o n to the i n t e r e s t r a t e . 9^ -
Mr# McCabe, a f t e r rem arking on the absence o f any
agency to c o o rd in a te the c r e d i t p o l i c i e s o f Government o r
g a n iz a tio n s w ith o v e r - a l l o r e d i t p o l i c y , s a id :
I n approaching t h i s a s p e c t o f F e d e r a l c r e d i t a g e n c ie s
we should tak e in to acco u n t the im portant nonmonetary
p u rp o ses t h a t are se rv e d by the le n d in g a c t i v i t i e s o f
these a g e n c ie s and the f a c t th a t nonmonetary c o n s id e r a
t io n s may be com pelling in d eterm in in g the p o l i c i e s o f
in d iv id u a l a g e n c ie s . At the same time i t should be
borne in mind t h a t c r e d i t extended does become a p a r t o f
the c o u n t r y 's money su p p ly and can i n t e r f e r e w ith o r f a
c i l i t a t e the e f f e c t i v e n e s s o f n a t i o n a l c r e d i t p o l i c y .
At tim e s, m oreover, m onetary e f f e c t s o f the e r e d i t a c
t i v i t i e s o f F e d e ra l a g e n c ie s may be a m ajor c o n s id e r a
tio n o f the Government in d eterm in in g the o v e r - a l l con
t r i b u t i o n o f i t s numerous and v a rie d a c t i v i t i e s to a c
com plish the o b je c ti v e s o f the Employment Act o f 1946.
F o r such re a s o n s , c o n s id e r a tio n s o f the b e a rin g o f
the le n d in g and l o a n - in s u r in g p o l i c i e s o f F e d e ra l a g e n - .
c i e s on g e n e ra l e r e d i t p o lic y should n o t be ig n o re d .
These a g e n c ie s have v a ry in g d e g re e s o f d i s c r e t i o n a r y
a u t h o r i t y which can be used to In flu e n c e the volume o f
c r e d i t ex ten d ed . I t would be d e s i r a b l e , m oreover, t h a t
those r e s p o n s ib le f o r g e n e ra l c r e d i t p o lic y be f u l l y i n
formed a t a l l tim es as to the p ro b ab le e f f e c t s o f v a r i
ous lo a n o r lo a n - i n s u r i n g programs on the supply o f c r e -
l a s Subcommittee, H ea rin g s, oj>. c i t . . pp. 164 f , November
17, 1949. As f a r a s can be d eterm in ed , th e re was no c o r r e
spondence nor m eeting between r e p r e s e n t a t i v e s o f the two;
the RFC m erely fo llo w ed the g e n e ra l d i r e c t i v e from the P r e s
id e n t to curb i n f l a t i o n .
9* * - Task Force R ep o rt, Lending A g e n c ie s, l o o , c i t .
182
d l t , so t h a t g e n e r a l c r e d i t p o lic y could he fo rm u lated
in the l i g h t o f th e se p ro s p e c tiv e developm ents*92
He recommended the e s ta b lis h m e n t o f a C ouncil to b r in g the
p o l i c i e s o f the v a r io u s a g e n c ie s in to c lo se r e l a t i o n w ith
one another.**3
George 1 . Bach fav o red the e s ta b lis h m e n t o f a Coun
c i l , say in g t h a t i t was a m a tte r o f p r a c t i c a l governm ent.
The fo llo w in g are the th re e p u rp o ses he b e lie v e d i t would
need to accom plish*
(1) To a s s u re f u l l in fo rm a tio n on, and c o n s id e r a tio n
o f , the im p o rta n t in te ra g e n c y im p lic a tio n s o f proposed
in d iv id u a l agency p o l i c i e s p r i o r to a d o p tio n . . .
f2) To f a c i l i t a t e compromise between the a g e n c ie s
concerned o f as many in te ra g e n c y d i f f e r e n c e s as i s p r a c
t i c a b l e , r e s u l t i n g in in fo rm a lly agreed on " o p e ra tio n a l"
u n d e rs ta n d in g s o r programs*
(3} To focus up f o r su b m issio n to the P r e s i d e n t , and
p erh ap s u l t i m a t e l y to C ongress, those m ajor in te ra g e n c y
p o lic y c o n f l i c t s on which no working agreem ent can be
r e a c h e d .94
The S tru c tu re o f the C ouncil
There is a s u r p r i s i n g confluence o f o p in io n a s to the
s t r u c t u r e the C ouncil should ta k e . G e n e ra lly , the H a tio n a l
A dvisory C ouncil on I n t e r n a t i o n a l M onetary and F in a n c ia l
P roblem s, commonly known a s NAC,**5 has been r e f e r r e d to as
92 McCabe, op,, c i t . . p . 90*
93 Idem
94 Bach, o p * c i t * , p* 200*
93 The HAC i s a n a d v is o ry committee to the P r e s id e n t
1 8 3
a model f o r the C ouncil.® 6
The members who would com prise the R a tio n a l M onetary
and C re d it C ouncil did n o t have complete agreem ent among
those who urged I t e s t a b l i s h e d . I t was unanim ously agreed
t h a t the S e c r e ta r y o f the T reasu ry and the Chairman o f the
F e d e ra l Reserve should be on the C o u n c il, bu t d i f f e r e n c e s
aro se beyond t h i s p o in t.® ^ The q u e s tio n o f who the Chairman
on I n t e r n a t i o n a l f i n a n c i a l m a t t e r s . I t a ls o c o o rd in a te s the
f o r e ig n le n d in g o f th e F e d e r a l a g e n c ie s . I t was c re a te d by
the B r e tto n Woods Agreement Act o f 1945. The s ix members
are the heads o f the T re a su ry , the S ta te D epartm ent, the
Commerce d e p a rtm e n t, the EGA, the E x p o rt-Im p o rt Bank, and
the Board o f G overnors. The S e c r e ta ry o f th e T reasury I s ' -
the Chairman. See U .S. Commission on O rg a n iz a tio n o f the
E xecutive Branch o f the Government, Task Force R eport, F o re
ig n A f f a i r s . Appendix H (W ashington; U.S.' Government P r i n t
ing O f f ic e , 19491, p . 66.
®6 See Douglas Subcommittee, R e p o rt, o p ; c i t . . p . 48;
Task Force R e p o rt, R e g u la to ry Commissions, op. c i t . . p . 112;
Task Force R ep o rt, Lending A g e n c ie s, op. c i t . . p . x i l ;
McCabe, op. c i t . . pp. 90-95. The two Task Force R eports
urge the u ltim a te c o n s o lid a t io n o f the HAC and the C o u n cil.
97
The Task Force R ep o rt, R e g u lato ry Commissions, op .
c i t . . p . 111, wished the D ir e c to r o f the Bureau o f th e Bud
g e t and one r e p r e s e n t a t i v e o f the le n d in g a g e n c ie s a s the
o t h e r two members. The recommendation assumed a s i m p l i f i c a
t i o n o f the p r e s e n t F e d e ra l le n d in g s t r u c t u r e . The Task
Force R ep o rt, Lending A g e n c ies, o p . c i t . . p . x l i , urged t h a t
the o th e r members should be the Chairman o f the E xport-Im -
p o r t Bank, the Home Loan Bank, *the FDIC, the RFC ( i f c o n t in
ued in e x i s t e n c e ) , and the Farm C r e d it Board ( i f i t was c r e
a te d a s recommended in the Task Force R e p o rt). The Douglas
Subcommittee, R e p o rt, o p. c i t . . p . 47, in i t s recommendation
f o r membership, urged t h a t a l l o f the e x i s t i n g fo re g o in g
a g e n c ie s a s w e ll as the EGA and the V e te r a n 's A d m in is tra tio n
be in c lu d e d . Mr. McCabe contended t h a t th o se F e d e ra l agen-
1 8 4
of the C ouncil should he r a is e d the p o in t o f m ajor d i v e r
gence among the p ro p o n en ts o f the p ro p o s a l* 9®
Almost a l l b e lie v e d th a t the C ouncil should he e s t a b
l i s h e d by s t a t u t e * 99 There was a concurrence o f o p in io n
t h a t i t should have c o n s u l t a t i v e and a d v is o ry f u n c tio n s o n ly
t h a t i s , i t should n o t have the a u t h o r i t y to issu e d i r e c
t i v e s to a g e n c ie s n o r to v eto agency d e c isio n s * I t would
t on
r e p o r t to Congress and to th e P r e s i d e n t . w
F e a tu re s o f th e Counc 11 - -S is c u s s io n
While th e re has been no p r o t r a c t e d d is c u s s io n o r d e
b a t e s co n cern in g the n a t i o n a l M onetary and C re d it C o u n cil,
i t i s s u r p r i s i n g t h a t i t s p ro p o n en ts could agree on so many
f e a t u r e s o f the p r o p o s a l, y e t d i f f e r so w id ely on one a s p e c t
o f i t — i t s chairman* The su c c ess o f the p ro p o s a l p ro b ab ly
l i e s in who t h a t p e rso n would b e, l* e * , what agency would
have i t s r e p r e s e n t a t i v e a s head o f the Council*
c i e s e x te n d in g lo a n s , lo a n in su ra n c e , and lo a n g u a ra n te e s
should be on the C o u n c il. McCabe, o p . c i t *, p . 94.
98 I n f r a . pp. 185 f . .
99 McCabe b e lie v e d t h a t o p e r a tin g ex p e rie n c e would
give the C ouncil i t s most e f f e c t i v e form and, t h e r e f o r e , i t
m ig h t be b e s t to t e s t o u t the C ouncil under e x e c u tiv e a u
t h o r i t y f i r s t . McCabe, op* c i t . , p . 95*
See Task Force Report* Lending A gencies.: l o c » c i t *
Task Force R ep o rt, R e g u la to ry Commissions. l o c . c i t *. and
Douglas Subcommittee, R e p o rt, op* c i t . . p . 48.
1 8 5
One o f the Task Forces* urged t h a t the S e c r e ta r y o f
the T reasu ry hold the chairm anship because "the p rim ary f i
n a n c i a l r e s p o n s i b i l i t y In the Government Is v e ste d in the
T re asu ry D epartm ent. "-*-91 I f t h i s recommendation was f o llo w
ed , the Chairman o f the Board o f Governors would be named
v ic e chairman.-*-^2
A nother Task Force d id n o t a g r e e . I t s t a t e d :
Any such c o u n c il should be s p e c i f i c a l l y re s p o n s ib le to
the P r e s i d e n t , w ith freedom l e f t to the P r e s id e n t to
choose a chairm an f o r the group. . • .103
The members o f t h i s l a t t e r Task Force b e lie v e d t h a t e x c e s
siv e s t a t u t o r y r i g i d i t y would le a d to the b y p a ssin g o f the
Council by the P r e s i d e n t : " . . . no amount o f s t a t u t o r y
p r e s c r i p t i o n can fo rc e the P r e s id e n t so to use an a d v is o ry
c o u n c il Is he chooses to d is r e g a r d it."-**04 The members
urged th a t the fo u r a g e n c ie s i t recommended a s C ouncil mem
b e rs should speak " . . . w ith ro u g h ly eq.ual s t a t u s in p o l i
cy d i s c u s s i o n s . ”105 S e c re ta ry o f the T re asu ry , as
chairm an, **• . . would co n tin u e the a g e -o ld T re asu ry b i a s in
1^1 Task Force B eport, le n d in g A g en c ie s, l o o , c l t .
1 0 2 i a e m
103 Task Force B e p o rt, R eg u lato ry Commissions, l o c .
c l t .
1 0 4 I d e m
^•95 jaem
1 8 6
fa v o r o f too ea sy money in i n f l a t i o n p e r io d s , a g a in s t e f f e c
tiv e m onetary r e s t r i c t i o n s *
A nother group s t a t e d t h a t the C ouncil should he head
ed hy the Chairman of the C ouncil o f Economic A d v iso rs. !D w o
re a s o n s were p re s e n te d f o r t h i s view . F i r s t , the CEA C h a ir
man would he f r e e o f the h ia s t h a t m ight go w ith h e in g head
o f an agency charged w ith the r e s p o n s i b i l i t y f o r a d m in is te r
ing th e program the C ouncil would h ave. Second, . • t h i s
f u n c tio n i s in lin e w ith the p rim ary f u n c tio n of the C ouncil
o f Economic A dvisors as economic a d v is o r to the P r e s i -
M a rrin e r E c c le s did n o t p la ce much f a i t h in the e f
f e c t i v e n e s s o f th e C ouncil p e r s e .
I t m ight he d e s i r a b l e to have such an in te rd e p a r tm e n ta l
com m ittee, h u t i t would seem to me t h a t , w h atev er the
p o lic y o f the a d m in is t r a tio n was a t the tim e, i t would
p r e v a i l in such a c o u n c il, and i t would i f a n y th in g , r e
duce the independence o f th e Board and n o t in c re a s e
i t . 108
106 ruagfc poree R ep o rt, Regulator.v Commissions, l o c .
c l t .
107
Douglas Subcommittee, R e p o rt, op. c i t . , p . 48.
Congressman W o lc o tt, a member o f the Subcommittee, did n o t
approve the Subcom m ittee’ s choice o f Council chairm an. He
recommended t h a t the chairm an ”. . . be a p erso n o f n e u t r a l
i n t e r e s t s as much as p o s s ib le from the d i r e c t in flu e n c e o f
e i t h e r the E xecutive o r th e F e d e ra l Reserve B o a rd .” I b i d . .
p . 4.
108 Douglas Subcommittee, H e a rin g s , o p . c i t . . p . 237,
November 23, 1949.
1 8 7
He would p ro b a b ly have agreed wi th Mr. Bach who s t a t e d th a t
c o o r d in a tio n between the F e d e ra l Beserve System and th e
T re asu ry "• • . has been re a s o n a b ly c lo se but alm o st i n v a r i
a b ly through su b se rv ien ce o f F e d e ra l Beserve to T reasu ry
view s on m ajo r is s u e s ." I Q 9
IT . SUM M ARY AND CONCLUSIONS
The th re e p ro p o s a ls in t h i s c h a p te r b e a r no d i r e c t
r e l a t i o n s h i p to one a n o th e r . T h eir in c lu s io n in one chap
t e r has been done, p r i m a r i l y , f o r the sake o f co n v en ien ce.
I t has been proposed by the Board of G overnors t h a t
I t be g ra n te d a g r e a t e r degree o f c o n t r o l o v e r bank h o ld in g
companies in re g a rd s to t h e i r expansion and to the type of
a c t i v i t i e s in which th e y engage. The Board c laim s the p r e
s e n t law i s n o t e f f e c t i v e in prom oting h e a l t h f u l co m p e titiv e
c o n d itio n s in the banking system ; t h a t th e re i s a d an g er o f
the h o ld in g companies becoming m onopolies. T h is, o f c o u rse ,
has been denied by those most im m ediately concerned. The
h o ld in g companies a s s e r t t h a t th e B oard’s pow ers, as they
p r e s e n t l y e x i s t , a re a d e q u a te .
The Board has a ls o asked Congress to g r a n t to the
F e d e ra l Reserve Banks the a u t h o r i t y to g u a ra n te e lo a n s to
p r i v a t e b u s in e s s e s , e s p e c i a l l y to sm all b u s in e s s . A lthough
109 B a e h , 0£ . c i t . . , p . 1 8 9 .
the Board, u n d er s e c tio n 13B of the F e d e r a l Beserve A c t, has
the a u t h o r i t y to do t h i s , i t claim s th e law i s too r e s t r i c
t i v e . The main argum ent used in f a v o r o f the p ro p o sa l i s
t h a t many B u s in e ss e s, though sound, are u n ah le to secure
adequate fin a n c in g o r e r e d i t from the p r i v a t e hanking s y s
tem. The p ro p o sa l would c r e a te c o n d itio n s so th a t a com
m e rc ia l hank could g r a n t the c r e d i t w hich, a t p r e s e n t , i t
can n o t; the Reserve Banks would g u a ra n te e the lo a n s so made,
h u t th e y would he u n ah le to extend c r e d i t d i r e c t l y them
s e l v e s . Opponents o f the p ro p o sa l f in d i t an In v a sio n o f
the p r iv a te c r e d i t f i e l d , an im propoer f u n c tio n o f the pow
e r s o f the Reserve System, a c e r t a i n method o f lo s in g money,
and an inadequate method o f m eeting the m ajor need o f sm all
b u s i n e s s —m a n ag eria l a b i l i t y .
The t h i r d p ro p o s a l, the e s ta b lis h m e n t o f a N a tio n a l
M onetary and C r e d it C o u n c il, a s k s f o r an o r g a n iz a tio n to
c o o rd in a te the m yriad le n d in g , m onetary, and f i s c a l p o l i c i e s
o f the Government. The absence o f such a C o u n c il, i t i s
claim ed, has in the p a s t led to c o n f l i c t i n g and d is r u p tiv e
p o l i c i e s among F e d e ra l a g e n c ie s who, though having p a r a l l e l
o b j e c t i v e s , o f te n p u l l in c o n tra ry d i r e c t i o n s . The m ajor
disa g re em e n t among the p ro p o n en ts o f the p ro p o s a l (and th e re
a re few opponents) c e n te r s upon the q u e s tio n o f whom s h a l l
he the head o f the C o u n e il, nominated from among i t s mem-
1 8 9
b a r s .
Viewing the p ro p o s a ls one by one, t h i s w r i t e r f in d s
h im s e lf in fa v o r o f one o f them, d is a g r e e in g w ith a n o th e r ,
and undecided about the t h i r d . The p ro p o s a l t h a t the Board
have a g r e a t e f degree o f c o n tro l o v er bank h o ld in g companies
i s w ith o u t fo u n d a tio n as th e f a c t s have been p re s e n te d so
f a r . The B o a rd 's p r o p o s a l, a s co n tain ed in s e v e r a l C ongres
s io n a l b i l l s , g r a n ts the System too much a u th o rity * The
Board has n o t p re s e n te d a case w orthy o f the recommendation
i t has en d o rse d . T h e ir f a c t s are in co m p lete, t h e i r a rg u
m ents l a r g e l y based on s u p p o s itio n , and they a re g u i l t y o f
u n d e r s t a t i n g t h e i r p r e s e n t powers to the C ongress. That
th e re a re e v i l s e x i s t i n g in some bank h o ld in g companies i s
perh ap s t r u e , but the Board has n o t proved t h i s . M oreover,
i t would seem c o r r e c t to say th a t the p r e s e n t a u t h o r i t y o f
the Board i s g r e a t enough to c o r r e c t any e v i l s found in
bank h o ld in g com panies.
The e s ta b lis h m e n t o f a n a t io n a l M onetary and C re d it
C ouncil would be a s te p forward in s y n th e s iz in g the many
and d iv e rs e e f f o r t s o f th e numerous Government a g e n c ie s
which c r e a te o u r n a t i o n a l fis o a l-m o n e ta r y - le n d in g p o lic ie s *
As an a r b i t e r o f in te rd e p a r tm e n ta l d is p u t e s , such a C ouncil
could do much to b e t t e r u n i t the p o l i c i e s o f the d i f f e r e n t
a g e n c ie s . The choic o f a chairm an f o r the C ouncil need n o t
1 90
be any o f the heads of the dep artm en ts composing the Coun
c i l ; I t could he some o u ts id e p erso n n o t connected w ith any
o f the members' a g e n c ie s . This g o a l, the n e u t r a l i t y o f the
chairm an, m ight e lim in a te the m ajor d if f e r e n c e among the
p ro p o n en ts o f the p la n .
As to w h eth e r o r n o t the F e d e r a l Reserve Banks should
g u a ra n te e lo a n s to b u s in e s s , rem ains a moot p o i n t , This
w r i t e r i s s t i l l undecided w h eth er o r n o t b u s in e s s , e s p e c i a l
l y sm all b u s in e s s , should have a n o th e r agency in the le n d in g
g i e l d . I t Is to be doubted t h a t th e re i s a need f o r such a
p ro p o s a l I n s o f a r a s b u s in e s s i s unable to o b ta in c r e d i t .
More b u s in e s s e s are in o p e r a tio n to d ay than e v e r b e f o r e . I f
i t were a q u e s tio n o f the RFC o r the F e d e ra l Reserve Banks
o p e r a tin g such a p la n , then t h i s w r i t e r ' s choice would be
the Reserve Banks, T h is , however, i s n o t the is s u e . I f i t
could be shown t h a t b u s in e s s was in v i t a l need o f such a
p r o p o s a l, then the recommendation would be approved. While
t h i s h as been c laim ed , i t has n o t been e f f e c t i v e l y e s t a b
l i s h e d .
The Board has overlooked a m ajor p o i n t in i t s p la n
f o r g u a ra n te e in g lo a n s . Rone o f the b i l l s t h a t have been
p re sse d b e fo re Congress f o r a p p ro v al have c o n ta in e d a d e f i
n i t i o n o f "business.*" The p r o p o s a l, i t i s claim ed, i s e s
p e c i a l l y f o r sm all b u s in e s s , y e t sm all b u s in e s s i s n o t d e
191
fin e d in t o t a l a s s e t s , y e a r l y tu rn o v e r, number o f em ployees,
e t e , in any of the h i l l s . C o n tin g en t upon the s iz e o f the
b u s in e s s is the o o st o f the c r e d i t i n v e s t i g a t i o n —how much
w i l l i t he? W ill the program pay f o r i t s e l f ?
Jhe p ro p o sa l i s m e r ito r io u s in the f a c t t h a t the Re
serve Banks, th em selv es, would n o t te n d e r c r e d i t ; i t would
he done hy the commercial hanks, This co n cep t seems to he
a forward s te p in red u cin g the amount o f Government c r e d i t
now heing is s u e d . I t i s doubted th a t the com mercial hanks
cannot p ro v id e f o r the overwhelming p r o p o rtio n o f the n a
t i o n ' s c r e d i t needs w ith o u t Government c r e d i t h ein g u se d .
CHAPTER V I I
BANK SUPERVISION AND THE FEDERAL RESERVE SYSTEM
Aside from I t s r e s p o n s i b i l i t y f o r m onetary and c r e
d i t p o lic y in t h i s c o u n try , the F e d e ra l Reserve System has
the d u ty o f s u p e rv is in g commercial banks. Two o th e r F e d e ra l
a g e n c ie s share t h i s work— the O ffic e o f the C o m p tro ller o f
the C urrency and the F e d e ra l D ep o sit In su ran ce C o rp o ra tio n .
Under the s u p e r v is io n o f th e se th re e are alm o st a l l o f the
n a tio n * s banks. Each o f the f o r t y - e i g h t S ta te s p a r t i c i p a t e s
in s u p e rv is in g those banks having a S ta te c h a r t e r . D i r e c t l y
o r i n d i r e c t l y , each S ta te works w ith one, two, o r a l l o f the
F e d e ra l s u p e r v is o r s .
At the minimum, th e n , th e re are f i f t y - o n e a g e n c ie s
doing work o f the same c h a r a c t e r . This s u p e rv is o ry bank
s t r u c t u r e , though l a r g e , i s n o t a s cumbersome n o rm ally as i t
would seem. In te ra g e n c y agreem ents, t a c i t o r o th e rw is e ,
have e lim in a te d much o f the d u p lic a t io n th a t would ap p ear
w ith the absence of c o l l a b o r a t i o n . D espite t h i s , d is c o n te n t
w ith the arrangem ent has p e r s i s t e d . R e cen tly , p ro p o s a ls
have been advanced reoommending s i m p l i f i c a t i o n o f and f u r
t h e r c o o rd in a tio n between the departm ents con cern ed . This
c h a p te r has r e f e r e n c e , p r i m a r i l y , w ith these p ro p o s a ls as
th ey r e l a t e to the th ree F e d e r a l bank s u p e r v is o r s , i t being
193
d i f f i c u l t and unwise to d is c u s s the Reserve System, in t h i s
re g a rd , a p a r t from i t s s u p e rv is o ry b r e th r e n .
The o h a p te r w i l l f i r s t b r i e f l y c o n s id e r s u p e rv is io n
p e r s e , what i t c o n s i s t s o f , e t c . and the th r e e F e d e ra l su
p e r v is o r y d ep artm en ts and t h e i r r e l a t i o n to the f i e l d . F o l
lowing t h i s , the c o o r d in a tio n o f a c t i v i t i e s among the th re e
w i l l be n o te d , in c lu d in g some o f the p o in ts o f d is p u te b e
tween them. L a s t, the v a r io u s p ro p o s a ls and recommenda
t i o n s , w ith the re a s o n s advanced f o r t h e i r enactm ent, w i l l
be p r e s e n te d .
I . THE COMPONENTS AND AGENCIES OF BANE SUPERVISION
Bank s u p e r v is io n i s n o rm a lly co n sid ered as being com
posed o f c h a r t e r i n g , ex a m in atio n , and l i q u i d a t i o n , w ith re g
u l a t i o n s , r u l i n g s , re q u ire d r e p o r t s , e t c . being c o l l a t e r a l
to each of the th re e main a r e a s . The core o f the p ro c e s s
c o n s i s t s o f bank ex a m in a tio n .
The Components o f Bank S u p e rv isio n
Bank o ha r te r i n g . —Bank c h a r t e r in g i s the p r e s c r i p t i o n
o f term s u n d er which new banks may be e s t a b l i s h e d . Since
the " fre e banking" laws we;re f i r s t adopted by New York in
G. L. Bach, "Bank S u p e rv isio n , M onetary P o lic y , and
Governmental R e o r g a n iz a tio n ," Jo u rn a l o f F in a n c e , 4 :269, De
cember, 1948.
1 9 4
in the 1830*s , the system o f s p e c i a l l e g i s l a t i v e c h a r t e r in g
has gLven way to g e n e r a l hank c h a r t e r in g s t a t u t e s among the
S t a t e s . 2 On the F e d e ra l l e v e l , the C o m p tro ller o f the Cur
rency i s the s in g le i s s u e r o f N a tio n a l hank c h a r t e r s . His
a u t h o r i t y stems from the N a tio n a l Banking Act o f 1863.
Bank l i q u i d a t i o n . —Bank l i q u i d a t i o n i s the s a le o f a
h a n k 's a s s e t s to s a t i s f y the demands o f i t s c r e d i t o r s a n d /o r
the law . Ihe C o m p tro lle r o f th e C urrency m ust c lo se a Na
t i o n a l hank and a p p o in t a c o n s e rv a to r (by law a N a tio n al
hank) b efo re l i q u i d a t i o n p ro cee d in g s can commence. He i s
im m ediately r e q u ir e d , however, to a p p o in t the F e d e ra l Depos
i t In su ra n ce C o rp o ra tio n to handle the l i q u i d a t i o n . ^ I n
deed, the FDIC i s in charge o f the l i q u i d a t i o n o f a l l c lo se d
in su red hanks. Uoday, f o r t u n a t e l y , l i q u i d a t i o n s a re uncom
mon. Dhe FDIC
. . . working w ith the o th e r s u p e rv is o ry a g e n c ie s i n
v o lv e d , works o u t m ergers and c o n s o lid a t io n s o f weak
Ijanks to p re v e n t th re a te n e d f a i l u r e s . In t h i s l a t t e r
p ro c e d u re , which has heoome acce p ted p r a c t i c e r a t h e r
than l e t t i n g in cu re d hanks f a i l , the FDIC u se s th e i n
surance fund to purchase weak a s s e t s where n e c e s s a ry to
e f f e c t u a t e the m erger or c o n s o l i d a t i o n .4
2 ¥• B. S a i l o r , "Bank S u p e rv isio n and th e B u sin ess
C y c le ," Jo u rn a l o f F in a n c e . 3 :6 7 -6 8 , O cto b er, 1948. Mr.
S a i l o r i s C hief o f the D iv isio n o f Examiners o f the FDIC.
2 Bach, o p . c i t . , p . E74.
^ jHbid. , p . 272. Since 1943, th e re have been ten
hank su sp e n sio n s; two N a tio n a l hanks, th ree nonmember i n
sured hanks, and f iv e n o n in su red nonmember hanks. No Na-
1 9 5
This type a c t i o n Is a r e c o g n itio n o f the e f f e c t s o f bank
su sp e n sio n s upon the economic l i f e o f the community, bo th
l o c a l and n a tio n a l*
Bank e x a m in a tlo n *--The c h a r t e r i n g a u t h o r i t y in t h i s
c o u n try re s e r v e s to i t s e l f the r i g h t to examine the books
and re c o rd s o f the banks i t c h a r t e r s and to iss u e r e g u la
t i o n s concerning e x a m in a tio n s. Today, bank exam in atio n ex
tends beyond the c h a r t e r in g a u t h o r i t y , the C o m p tro ller o f
the C urrency, and i s shared w ith the FDIC and the F e d e ra l
Reserve System. Each has the a u t h o r i t y to iss u e r e g u la tio n s
b in d in g upon the banks i t exam ines.
The F e d e ra l A gencies in Bank S u p erv isio n
U n til 1914, the C o m p tro ller o f th e C urrency was the
s o le F e d e ra l bank s u p e rv is o ry agency. With the passage o f
the F e d e ra l Reserve A ct, in l a t e 1913, a second examining
agency e n te re d the f i e l d . I t was n o t u n t i l 1917, however,
t h a t the F e d e ra l Reserve System a c t u a l l y commenced i t s e f
f o r t s in t h i s a r e a , f o r the o r i g i n a l Act
. . . p la c e d the r e s p o n s i b i l i t y f o r examining S ta te mem
b e r banks in the hands of the C o m p tro ller o f th e C urren
cy* a p p e a r e n tly on the assum ption th a t S ta te member
banks would be s u b je c t to most o f the s u p e rv is o ry r a
t i o n a l bank has suspended sin c e 1944; no nonmember in su red
bank sin c e 1945. Four no n in su red nonmember banks suspended
o p e r a tio n s in 1949. See F e d e ra l Reserve B u l l e t i n . 36:847.
J u ly , 1950.
1 9 6
s t r i c t i o n s imposed on N a tio n a l banks.®
This s i t u a t i o n d e te r r e d S ta te banks from becoming members o f
the Beserve System. The law was changed, p la c in g the r i g h t
to examine S ta te member banks in the tw elve F e d e ra l Beserve
Banks.® A lthough the F e d e ra l Beserve System has the s t a t u
to r y a u t h o r i t y to examine a l l N a tio n a l banks, in p r a c t i c e i t
r a r e l y does so . I t a c c e p ts th e C o m p tr o l le r ^ r e p o r t s in
l i p u o f i t s own examination.*^
On August 23, 1935, a t h i r d F e d e ra l departm ent en
te re d the s u p e rv is o ry f i e l d . The y e a r-o ld F e d e ra l D eposit
In su ran ce C o rp o ra tio n was g ra n te d the power to examine i n
sured S ta te nonmember b an k s. The C o rp o ra tio n could a ls o ex
amine N a tio n a l a n d /o r S ta te member banks, b u t to do so r e
q u ired the w r i t t e n p erm issio n o f the C o m p rtro lle r, f o r Na
t i o n a l banks, and the Board o f G overnors, f o r State-member
b a n k s .8
® S a i l o r , o p . c i t . . p . 68*
6 *
7 Bach, o p . c i t . , p . 274.
8 U.S. S t a t u t e s a t L a rg e , P u b lic Laws (Washington:
IJ.S. Government P r i n t i n g O f f ic e , 1936}, XLIX, p . 693. As a
s u p e r v is o r , the FDIC i s somewhat n o v e l. In p r a c t i c e , the
powers of th e C o rp o ra tio n ". . . ap p e ar to depend in c o n s id
e r a b le p a r t on p ersu a d in g S ta te s u p e r v is o r s to enforce the
S ta te laws which govern most o f S ta te banks* a c t i v i t i e s . "
Bach, o p . c l t . , p . 271.
1 9 7
Thus, by 1935 the components of hank s u p e rv is io n were
s c a t t e r e d among th ree F e d e ra l d e p a rtm en ts. In two o f the
a g e n c ie s , the F e d e ra l Reserve System and the FDIC, s u p e r v i
s io n , c o n s i s t i n g m o stly of ex a m in a tio n , was a d ju n c t to a
more prim ary p u rpose, m onetary and c r e d i t p o lic y and d e p o s it
in su ran c e r e s p e c t i v e l y . S u p e rv isio n p e r se continued to he
O
the m ajor f u n c tio n o f the C o m p tro ller.
Each o f the three s u p e rv is o rs has a segment of the
n a tio n * s hanks which i t a lo n e , among the th r e e , exam ines.
The N a tio n a l, the S ta te member, and the in su red nonmember
hanks are examined r e s p e c t i v e l y hy the C o m p tro ller, the Fed
e r a l Reserve Banks, and the FDIC. The r e p o r t s of each are
a v a ila b le to the o th e r two. The commercial hanks are p r o
te c te d from ex c e ssiv e d i s r u p t i o n o f t h e i r b u s in e s s hy t h i s
® A f o u r t h agency, n o t c o n s id e re d in t h i s c h a p te r ,
the R e c o n s tru c tio n Finance C o rp o ra tio n , has ” • • • c o n tr a c
t u a l power to s u p e rv is e th o se hanks in which i t s t i l l h o ld s
p r e f e r r e d sto c k o r c a p i t a l n o te s a r i s i n g from i t s d e p re s s io n
p e rio d a c t i v i t i e s in re -o p en in g h a n k s .” Bach, o p . c i t . ,
p . 271. The RFC had an o r i g i n a l c a p i t a l in v estm en t'^fin ap
p ro x im a te ly 6,000 hanks) which to ta le d n e a r l y $ 1 ,1 7 0 ,0 0 0 ,-
000. A ll hut ab o u t $119,000,000, held on 499 hanks, has
been r e p a id . See U.S. C ongress, H earings Before the House
Committee on Banking and C u rrency, S. 2822, June 22, 1950,
p . 121. A ll o f the hanking a g e n cie s have been p r e s s in g the
hanks w ith in t h e i r j u r i s d i c t i o n to repay t h i s in d e b te d n e ss.
See i b i d . . p. 20, S tatem en t o f Maple H a rl, Chairman o f the
o f the FDIC, June 20, 1950. Also see th e F e d e ra l Reserve
B u l l e t i n , 33;4Q4, A p r i l, 1947. The p o s i t i o n and a u t h o r i t y
o f the RFC in hank s u p e rv is o ry r e l a t i o n s h i p s i s shown in
C h art I , i n f r a ,1 p . 199.
1 9 8
c o o rd in a tio n *
i i . coordination of supervisory a g s s c ie s
"At the p r e s e n t time* the d i f f e r e n c e s between the ex
a m in a tio n p o l i c i e s o f the F e d e r a l R eserve, the FDIC, and the
C o m p tro ller • . • are n o t o f m a t e r i a l co n seq u en c e."1® The
o v e rla p p in g r e l a t i o n s h i p s among the bank s u p e rv is o ry d e p a r t
m ents, shown in C hart I one the n e x t page, i s te stim o n y to
the la r g e a re a of c o o rd in a tio n th a t m ust be e x i s t e n t to
evoke such a comment by the th e n Chairman of the Board o f
G overnors. As y e t , Congress has n o t issu ed a s p e c i f i c d i
r e c t i v e r e q u ir in g c o o p e ra tio n between the th re e ind ep en d en t
a g e n c ie s , a lth o u g h the C o m p tro ller is ex o f f i c i o member o f
the Board o f D ir e c t o r s o f the F D IC .H
See Thomas McCabe, Re p ly of the. Chairman of the
Board o f G ovem ors (Washington: Board o f Governors o f the
F e d e ra l Reserve System, 1949), p . 85. For a s i m i l a r o p in io n
by J . 1. R obdrtsob, Deputy C o m p tro lle r o f the C urrency, see
TJ.S. C ongress, H earings B efore th e Subcommittee on M onetary.
C r e d i t . and F i s c a l P o l i c i e s o f the J o in t Committee on the
Economic R e p o rt. November 1.6» 1949, p'. 89. (Here i n a f t e r ,
t h i s re fe re n e e w iI I be n o te d by the name o f the Subcommit
t e e ^ chairm an, S enator B. H. D ouglas). A c o n c u rrin g o p in
io n has been exp ressed by the Chairman o f th e F e d e r a l Depos
i t In su ran ce C o rp o ra tio n , Maple H a rl. See i b i d . , p . 107,
Ho vembe r 17, 1949. .The y we re a l l re fe rririg t o the examina-
tio n i t s e l f Q p i M d n S d i f f e r w id ely a s the d is c u s s io n
to u ch es on' the purpose o f ex a m in atio n . F o r t h i s d is c u s s io n ,
see i n f r a . pp. 210-14.
1 1 M cC abe, oj>. c i t • , p p . 85 f .
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PR IN C IPA L B A N K SU P E R V ISO R Y RELATIONSHIPS
She P o o lin g of In fo rm a tio n
On the f i r s t work day o f each week the D iv is io n o f
E xam inations o f th e Board o f Governors sends to the examina
tio n d i v i s i o n o f the FDIC the l i s t o f S ta te member banks
whose exam ination r e p o r t s have been re c e iv e d d u rin g the p r e
v io u s week. The r e p o r t s the C o rp o ra tio n w ishes to review on
the l i s t are made a v a i l a b l e . A fte r the C o rp o ra tio n e x t r a c t s
the in fo rm a tio n i t w ishes f o r i t s own f i l e s , the r e p o r t s are
re tu rn e d to th e Board. A s im ila r arrangem ent e x i s t s w ith
the C o m p tro lle r .I 3 Thus, each agency has the most r e c e n t
in fo rm a tio n on the n a tio n * s commercial banks.
The Unlfoim A sse t A p p ra is a l P o lic y
The s ta n d a rd s f o r the a p p r a i s a l o f bank a s s e t s are
n e a r l y uniform among bank exam iners, S ta te and F e d e r a l. A
w r i t t e n agreem ent was adopted by the th re e F e d e ra l a g e n cie s
and the N a tio n a l A s s o c ia tio n o f S u p e rv iso rs o f S ta te Banks
in 1938 in t h i s r e g a r d . This agreement was r e v is e d in 1949
and, a g a in , i t was approved by a l l . l ^ T h is, however, does
\
13 See U.S. C ongress, H earings B efore the Senate Com
m itte e on Banking' an d 1 C u rren cy . 28£2. Statem ent o f Thomas
McCabe, January 30, 1950, pi 1057
^ C o m p l e t e agreem ent on t h i s m a tte r , however, has
n o t b e e n ,a t t a i n e d . As the Board remarked in 1938: "The e f
f e c t iv e n e s s o f t h i s agreem ent, however, depends, ih the
f i r s t p la c e , o n 'th e co n tin u an ce o f c o o p e ra tio n between the
a g e n c ie s , and, in the second p l a c e , on the n a tu re o f i n t e r -
s o x
n o t mean t h a t r a l e s are u n ifo rm . When asked I f th e y w ere,
J . 1 . R obertson r e p l i e d :
Bo; n o t uniform r a l e s in any sense t h a t I can th in k
Of. : We do h a te an u n d e rsta n d in g be tween the th r e e agen
c i e s on investm ent s e c u r i t i e s , on the a p p r a i s a l o f a s
s e t s , th a t i s , c l a s s i f y i n g them, p a t t i n g them in to sa b -
s ta n d a rd , d o u b tf u l, o r l o s s , and to th a t e x t e n t , y e s ,
th e re a re uniform p o l i c i e s , b u t th e y are n o t r u l e s in
any sense o f the word. She p o l i c l e s we have" a re to a
la r g e ' e x t e n t u n ifo rm . ’ ’
The re i s n ' t any such th in g a s a manual which can be
used in d eterm in in g the c r e d i t soundness o f a g iv e n a s
s e t , because the f a c t o r s in e v e ry s in g le s i t u a t i o n w i l l
v a r y . . I t i s im possible to have m anuals. C e r t a i n l y we
have books of i n s t r u c t i o n to our exam iners; so does the
F e d e ra l R eserve; so does the FDIC. W e have co p ie s o f
t h e i r s ; th e y have c o p ie s o f o u rs . I f you were to com
pare them, a s a layman, you would th in k th e y were p r e t t y
u niform , b u t t h a t i s n o t an answer to your q u e s tio n . I t
i s the man in the f i e l d who i s a p p ly in g those i n s t r u c
tio n s who i s the la r g e f a c t o r in de term ing the c r e d i t
soundness o f any g iv e n a s s e t . I t i s im possible to ob
t a i n complete u n if o rm ity in the exam ination o f a bankwl®
At the top s t a f f le v e l in Ylashington ev ery e f f o r t i s
made to b rin g c l o s e r c o o rd in a tio n between the dep artm en ts on
a l l m ajpr problem s. As Mr. R obertson p u t i t :
p r e t a t i o n p la ced by the d i f f e r e n t a g e n c ie s on th e agreed
p r i n c i p l e s o f e x a m in atio n . A s i m i l a r i t y o f i n t e r p r e t a t i o n
i s . ’ d i f f i c u l t , to a t t a i n because the ag e n c ie s have d i f f e r e n t
r e s p o n s i b i l i t i e s , and, t h e r e f o r e , d i f f e r e n t ap p roaches to
the p ro b lem ." Annual Report o f the Board of G overnors o f 1
the Fe de r a 1 ;Re serve System . 1938 (Washington:~Board o f Gov
e rn o rs o f th e F e d e r a l Reserve System, 1939), p . 15. (Here
i n a f t e r , t h i s r e fe re n c e to be known a s Annual R e p o rt) . For
a d is c u s s io n o f th e c o n fu sio n r e s u l t i n g from " i n t e r p r e t a
tio n " see i b i d . . pp. 11-16.
A ' '
15 Douglas Subcommittee, H e a rin g s, o p . ci t . , p . 91,
Hovember 16, 1949. I t a l i c s n o t in the o r i g i n a l .
202
W e hold c o n fe re n c e s and d is c u s s ways and means o f s o lv
ing problem s. Even g o in g one ste p f u r t h e r , the a s s i s
t a n t c h i e f exam iners in our o r g a n iz a tio n , the a s s i s t a n t
c h i e f s in the F e d e ra l R eserve, and a s s i s t a n t c h i e f s in
the FDIC, are on th e telephone ev e ry day c o n fe rr in g
about given c a s e s . 16
F ie ld A c t i v i t i e s
D esp ite the f a c t t h a t exam iners o f the F e d e r a l agen
c i e s see l i t t l e o f one a n o th e r, in te r- a g e n c y f i e l d r e l a
tio n s h ip s a re a m ica b le. Mr. Bach, in h i s a r t i c l e on bank
s u p e rv is io n , rem arked:
E xam ination p ro c e d u re s and a t t i t u d e s i n the f i e l d tend
to be e s s e n t i a l l y s i m i l a r f o r a l l th re e a g e n c ie s . Most
exam iners tend to view t h e i r ^obs in the f a i r l y narrow
l i g h t o f examining t r a d i t i o n . As one Reserve Bank c h i e f
exam iner has p u t i t , th e y lik e and u n d e rsta n d som ething
th e y can "g e t t h e i r t e e t h into*1 r a t h e r than g e n e r a l d i
r e c t i v e s a s to p o l i c y and a t t i t u d e .
E f f o r t s to b roaden the approach o f the exam iner, to make him
see the r e l a t i o n s h i p o f n atio n -w id e economic developm ents
and the in d iv id u a l bank " . . . have moved slo w ly in a l l
th re e s t a f f s ,
I I I . AREAS OF DISPUTE
N o tw ith sta n d in g the f a c t t h a t most o f the d is p u te s
16 Douglas Subcommittee, H e a rin g s , lo o . ci t .
3 * 7 Bach, o p . c i t . . p . 276.
Idem
203
■between the a g e n c ie s a re s e t t l e d in an in fo rm al manner,
w ith o u t s e r io u s c o n tro v e rs y , th e re are tim es when no s e t t l e
ment i s rea c h e d . The d if f e r e n c e s can he tr a c e d , a s id e from
the e x is te n c e o f th ree groups perform ing s u b s t a n t i a l l y the
same f u n c t i o n , to two broad a r e a s . The f i r s t i s the con
f l i c t i n g s t a t u t o r y a u t h o r i t y under which each agency d e r iv e s
i t power. The second Is the i n t e r p r e t a t i o n o r scope each
g iv e s to th e word " s u p e r v i s i o n ."
F e d e ra l S u p e rv isio n and th e haw
Issuance o f r e g u l a t i o n s . — The th re e F e d e ra l a g e n c ie s
are a u th o riz e d u n d er the law ". . . to issu e and i n t e r p r e t
r e g u la tio n s a p p lic a b le to the c l a s s e s o f banks u n d er t h e i r
r e s p e c tiv e j u r i s d i c t i o n s which r e l a t e to th e same g e n e ra l
s u b je c t m a t t e r . • • . Under such a s i t u a t i o n , c o n f l i c t s
i'
a re i n e v i t a b l e . The problem i s h e ig h ten e d when, a s i t hap
p e n s, one a u t h o r it y * s r e g u l a t i o n s a r e , in c e r t a i n a r e a s ,
a p p l ic a b le to a c l a s s of banks m o stly under the j u r i s d i c
tio n o f a n o th e r a u t h o r i t y . At tim es, th e Issuance o f a
r e g u l a t i o n by one agency, b in d in g on the banks o f the o th e r
a g e n c ie s , has touched o f f b i t t e r in te rg o v e rn m e n ta l b a t t l e s .
A prime example concerned the d e f i n i t i o n o f the word " I n -
McCabe, o p . c i t . , p. 87. I t a l i c s n o t in the o r i g
i n a l •
£ 0 4
t e r e s t.”20
George Bach has noted some s p e c i f i c in s ta n c e s of
o v e rla p p in g a u t h o r i t y .
For example, the F e d e ra l Beserve has f u l l a u t h o r i t y to
g r a n t t r u s t pow er.to n a t i o n a l hanks and to issu e re g u
l a t i o n s covering t h e i r u s e , h u t s u p e rv is io n o f the uti«*
l i z a t i o n of the powers i s in the hands o f the Com ptrol
l e r . . . O rg a n iz a tio n o f a new n a t i o n a l hank o r r e o r g
a n i z a t i o n o r am algam ation to save a weak n a t i o n a l hank
must he approved hy o f f i c i a l s o f a l l th re e f e d e r a l agen
c i e s , though the C o m p tro ller has f i n a l a u t h o r i t y ; f o r a
s t a t e hank, th r e e a u t h o r i t i e s are a ls o l i k e l y to share
s u p e rv is io n . The C o m p tro ller is s u e s r e g u l a t i o n s g o v e m -
2^ Under the a u t h o r i t y o f the Banking Act o f 1935,
the Board o f Governors was a u th o riz e d to determ ine what
should he deemed ’’i n t e r e s t . ” I t p r e s c r ib e d r e g u la tio n s to
t h i s e f f e c t . This a c t i o n was aimed a t the e lim in a tio n o f
i n t e r e s t paym ents, hy d i r e c t o r i n d i r e c t means, w hich the
Banking Act o f 1933 had p r o h ib ite d . Since th e passage o f
the l a t t e r Act th e Board has a ttem p ted to in c lu d e a b s o rp tio n
of exchange a s a payment o f i n t e r e s t ; the FDIC, t a c i t l e a d e r
o f hanks who d e riv e a good share o f t h e i r income from ex
change ch arg es and a b s o r p tio n , has p e r s i s t e n t l y fo u g h t such
a move. I n 1937, a compromise d e f i n i t i o n was agreed upon
hy the two which couched " i n t e r e s t ” in g e n e r a l t e r n s and a l
lowed the d e f i n i t i o n to r e s t upon the f a c t s o f each i n d i v i d
u a l case in v o lv e d . N e ith e r o f th e a g e n c ie s was s a t i s f i e d ;
the FDIC did n o t view exchange a b s o rp tio n as I n t e r e s t ; the
Board d id . In 1943, the long sm oldering d is p u te b ro k e. For
o v e r a y ear the h i t t e r c o n t e s t was b e fo re the p u b lic and
C ongress. E v e n tu a lly , the c o n t e s ta n ts q u i t , n o t from a la c k
or change of c o n v ic tio n h u t from a l o s s o f i n e r t i a and con
c e rn o v er o th e r m a tte rs which needed a t t e n t l o n - - s u c h a s the
w ar. N othing was s e t t l e d . Whether or not the a b s o r p tio n of
exchange ch a rg e s i s or i s n o t an i n d i r e c t payment o f i n t e r
e s t has n o t been d eterm in ed . For th e C o n g ressio n al h e a rin g s
on t h i s s u b je c t, in c lu d in g as i t does a l l shades o f o p in io n ,
see U.S. C ongress, H earings Before the House Committee on
Banking and C u rrency, H.B, 3956. December 1943-F eb ru ary
1944; U.S. C ongress, H earings Before th e Senate Committee on
Banking and C u rren cy . S. 164B. December, 1944.
205
ing the p u rch ases o f investm ent s e c u r i t i e s by a l l member
banks, which are en fo rced by him f o r n a t i o n a l banks, and
by the' F e d e ra l Reserve f o r s t a t e member banks. Under
the S e c u r i t i e s Exchange Act o f 1934, the Board is s u e s
r e g u l a t i o n s go v ern in g the e x te n s io n o f c r e d i t by a l l
banks f o r p u rch asin g o r c a rry in g l i s t e d s to c k s ; the r e 1-
ev an t r e g u la tio n i s en forced by the C o m p tro ller f o r n a
t i o n a l banks, the F e d e ra l Reserve f o r s t a t e member
banks, and the f o r t y - e i g h t d i f f e r e n t s t a t e a u t h o r i t i e s
f o r n o n -in su re d b a n k s.21
The s tr in g e n c y o f laws and r e g u l a t i o n s . — S u p e rv isio n
among the d i f f e r e n t c l a s s e s o f banks, member and nonmember,
in su re d and n o n -in s u re d , in v o lv e s the enforcem ent o f s t a t u
to r y d is c r i m i n a t i o n , The N a tio n a l and State^member banks
a re s u b je c t to r e s t r i c t i o n s more s t r i n g e n t th an those a p p l i
cable to in su re d o r n o n -in su re d S ta te banks. Table V II p r e -
r
s e n ts some o f th e se law s. Most o f them, i t w i l l be n o tic e d ,
become a p p lic a b le to a bank e n t i r e l y upon t h a t b an k s' choos
in g , i . e . , i t can j o i n the Reserve System o r c a r r y d e p o s it
in su ran ce o r forego b o th , a s i t d e s i r e s . "This sy ste m ,"
w rote a C o n g ressio n al subcom m ittee, "under which a banks
i t s e l f d eterm in es which F e d e ra l laws and r e g u l a t i o n s w i l l
a p p ly to i t m e r its a r e v ie w ." 22
21 Bach, op . c l t . . pp. £72 f f . I t a l i c s in the o r i g
i n a l .
22
U.S. C ongress, R eport o f the Subcommittee on Mone
t a r y . C r e d i t . and F i s c a l P o l i c i e s o f the J o i n t Committee on
the Economic R e p o rt. Jan u ary 23, 1950, p . 39. H e r e in a f t e r ,
t h i s re fe re n c e w i l l be noted by the name o f the Subcommit
t e e ' s chairm an, S enator P. H. Bouglas.
2 0 6
A ll o f the laws and r e g u la tio n s p re s e n te d in la b le
V II do n o t d i r e c t l y concern m onetary o r c r e d i t c o n t r o l s .
P a r t XI, f o r example, r e f e r s to the m aintenance o f hank
s a f e t y and l i q u i d i t y * the p re v e n tio n o f monopoly, and the
d i s t r i b u t i o n of c r e d i t . Surveying them the Douglas Subcom
m itte e s a id :
I t i s n o t a t a l l c l e a r why th e se p r o v is io n s should he
a tta c h e d to membership in the F e d e r a l Reserve r a t h e r
th an to membership in the F e d e ra l D ep o sit In su ran ce Cor
p o r a tio n which should have a s p e c ia l i n t e r e s t in prom ot
ing bank s a f e ty and l i q u i d i t y . The p re s e n t arrangem ent
seems to imply t h a t monopoly among banks t h a t a re n o t
members o f the F e d e ra l Reserve i s n o t o b je c ti o n a b le , and
i t g iv e s r i s e to many c a se s in which banks have enough
c a p i t a l and a re sa fe enough to have t h e i r d e p o s its i n
sured by the F e d e ra l D ep o sit In su ra n ce C o rp o ratio n b u t
s t i l l cannot m eet the s t r i c t e r re q u ire m e n ts fo r member
sh ip in the F e d e r a l R eserve. Ih e re seems to be no j u s
t i f i c a t i o n f o r t h i s . . .
One m onetary a u t h o r i t y observed t h a t each o f the su
p e r v is o r y a g e n c ie s ten d s to i d e n t i f y i t s e l f w ith the banks
u n d er i t s a c tiv e s u p e rv is io n . D isp u te s between the th r e e
have r e s u l t e d o v e r a tte m p ts , a lle g e d o r o th e rw is e , o f one
agency to secure w ith in i t s purview banks a lre a d y in a n o th e r
s u p e rv is o ry a r e a . 24 No ch an n els to a d ju d ic a te d i f f e r e n c e s
between them e x i s t . Bach c o n s id e rs i t s e l f independent and
w ith i t s own a u t h o r i t y . C onsequently, c o n tr o v e r s ie s may
P3
D o u g la s S u b c o m m itte e , R e p o r t, l o c . o i t .
24 B a ch , o p . c i t . . p p . 2 7 4 f .
2 0 7
TABLE V I I
SOME OF THE PRINCIPAL PROVISIONS OF FEDERAL STATUTES
REGTJLATINS THE PRINCIPAL CLASSES OF BANKS2 »
I . A p p licab le only to n a t i o n a l banks:
1. R e s t r i c t i o n s on r e a l - e s t a t e loans*
2 . R e g u la tio n s governing th e e x e rc is e o f t r u s t
powers.
S. R e s t r i c t i o n s on a c tin g a s in su ran ce a g e n t.
4. R e s t r i c t i o n s on a c tin g a s r e a l - e s t a t e lo a n
b ro k e r.
5. Requirement th a t o n e - te n th o f e a rn in g s be
t r a n s f e r r e d to s u rp lu s u n t i l s u rp lu s e q u a ls
common c a p i t a l .
6. P r o h i b i t i o n a g a in s t h o ld in g o th e r r e a l e s t a t e
f o r more than f iv e y e a r s .
7. R e s t r i c t i o n s on a b s o r p tio n o f a n o th e r bank.
8. L im ita tio n s on in d e b te d n e ss which bank may
i n c u r •
II* A p p licab le on ly to n a t i o n a l banks and to S ta te
banks th a t are members o f the F e d e ra l R eserve:
1. L im ita tio n s on t o t a l lo a n s to one borrow er.
(S ta te member bank lo a n s to one borrow er a re
n o t s u b je c t to the l i m i t a t i o n s a p p lic a b le to
n a t i o n a l banks, b u t lo a n s in ex c ess o f the
l i m i t s a p p lic a b le to n a t io n a l banks a re n o t
d is c o u n ta b le a t the F e d e ra l R e serv e).
2 . R e g u latio n s governing purchase o f investm ent
s e c u r i t i e s .
3. P r o h i b i t i o n a g a in s t p u rch asin g s to c k s .
4. P r o h i b i t i o n a g a i n s t engaging in u n d e rw ritin g
o f investm ent s e c u r i t i e s and s to c k s .
5. R e s t r i c t i o n s on lo a n s to ex e cu tiv e o f f i c e r s .
6. R e s t r i c t i o n s on d e a lin g s w ith d i r e c t o r s .
7. R e s t r i c t i o n s on in te r l o c k in g d i r e c t o r a t e s or
o th e r i n te r l o c k in g r e l a t i o n s w ith o th e r
banks and s e c u r i t i e s com panies.
8. P r o h i b i t i o n a g a in s t a bank having l e s s th a n
f iv e o r more than tw e n ty -fiv e d i r e c t o r s .
9. P ro v is io n a u t h o r iz in g s u p e rv is o ry a u t h o r i t y
^ S o u r c e : D o u g la s S u b c o m m itte e , R e p o r t, o p . c i t . ,
p p . 38 f .
208
TABLE V I I ( c o n t in u e d )
SOME OF THE PRINCIPAL PROVISIONS OF FEDERAL STATUTES
HEGTJLATINS THE PRINCIPAL CLASSES O f BANKS
to remove o f f i c e r s and d i r e c t o r s f o r con
tin u e d v i o l a t i o n s o f law s o r continued u n
safe o r unsound p r a c t i c e s .
10# P r o h i b i t i o n a g a in s t a f f i l i a t i o n w ith s e c u r i
t i e s company.
11. R e s t r i c t i o n on h o ld in g company a f f i l i a t e s .
12. R e s t r i c t i o n s on bank s to c k r e p r e s e n tin g
sto c k o f o th e r c o r p o r a tio n s .
13. L im ita tio n s on lo a n s to a f f i l i a t e s .
14. Requirem ents o f r e p o r t s o f a f f i l i a t e s and
p u b l i c a t i o n th e r e o f .
15. Requirem ents f o r exam ination o f a f f i l i a t e s .
16. L im ita tio n s on investm ent in bank p re m ises.
17. Minimum c a p i t a l re q u irem e n ts.
18. Minimum c a p i t a l req u irem en ts f o r b ra n c h e s.
19. P r o h i b i t i o n s a g a in s t lo a n in g on o r p u rc h a s
in g own s to c k .
20. R e s t r i c t i o n s on w ithdraw al o f c a p i t a l and
payment o f unearned d iv id e n d s .
21. Requirement t h a t r e s e rv e s s p e c i f i e d in the
F e d e ra l Reserve Act be m a in ta in e d .
22. Requirem ent f o r s p e c i f i c number o f c o n d i
ti o n r e p o r t s a n n u a lly and f o r p u b lic a t io n
th e r e o f .
2 3 .Requirem ents in co n n e ctio n w ith the p a r
c le a ra n c e c o l l e c t i o n system .
24. P r o h i b i t i o n a g a i n s t f a l s e c e r t i f i c a t i o n o f
checks.
25. L im ita tio n s on acceptance pow ers.
26. P r o h i b i t i o n a g a in s t a c tin g a s a g e n t f o r
nonbanking i n s t i t u t i o n s in making lo a n s
to b ro k e rs and d e a le r s in s e c u r i t i e s .
27. L im ita tio n s on lo a n s to one borrow er on
s to c k s o r bonds.
2 8 . . L im ita tio n s on ag g reg ate lo a n s to a l l b o r
row ers on sto c k s o r bonds.
29. L im ita tio n s on d e p o s its w ith nonmember
b a n k s•
I I I . A p p licab le to n a t i o n a l banks, S ta te member
banks, and nonmember banks in s u r in g t h e i r d e
p o s i t s w ith the FDIC:
209
TABLE V I I ( c o n t in u e d )
SOM E OF THE PRINCIPAL PROVISIONS OF FEDERAL STATUTES
REGULATING THE PRINCIPAL CLASSES OF BANKS
1. Requirement f o r approval o f e s ta b lis h m e n t o f
b r a n d ie s .
2. R e s t r i c t i o n on c o n s o lid a tin g o r m erging w ith
n o n in su red hank, assuming l i a b i l i t y f o r such
b a n k 's d e p o i s t s , o r t r a n s f e r r i n g a s s e t s to
such bank f o r assum ption o f d e p o s its .
3. R e s t r i c t i o n s on payment o f i n t e r e s t on depos
i t s .
4. R e s t r i c t i o n on paying time d e p o s its b e fo re ma
t u r i t y o r w aiving n o tic e b efo re payment o f
sa v in g s d e p o s i t s .
5. P r o h i b i t i o n a g a i n s t payment o f d iv id e n d s w hile
d e lin q u e n t on d e p o s it in su ran c e assessm e n t.
6. P r o h i b i t i o n s a g a i n s t lo a n s o r g r a t u i t i e s to
bank exam iners.
7. P ro v is io n a u th o r iz in g s u p e rv is o ry a u t h o r i t y
to p u b lis h exam ination r e p o r t i f bank does
n o t fo llo w recommendations based th e re o n .
8. P ro v is io n a u th o r iz in g s u p e rv is o ry a u t h o r i t y
to re q u ire t h a t banks p ro v id e p r o te c tio n
and indem nity a g a in s t b u r g la r y , d e f a l c a
t i o n , and s im ila r in s u r a b le l o s s e s .
IV. A p p licab le to a l l banks:
1 . P ro v is io n s r e g u la tin g lo a n s f o r the purpose
o f p u rc h a s in g or c a rry in g s e c u r i t i e s r e g i s
te re d on n a t io n a l s e c u r i t i e s exchanges.
2. Laws g r a n tin g c e r t a i n tax ad v an tag es in con
n e c tio n w ith the o p e ra tio n o f a common
t r u s t fund i f o p erated in c o n fo rm ity w ith
the r e g u l a t i o n o f the Board of G overnors.
l a s t f o r long p e rio d s and Congress u l t i m a t e l y , though b e l a
te d ly , has to a c t a s a r b i t e r . Labors a re l o s t and energy
26
m is d ire c te d in sueh a s i t u a t i o n .
^ B a c h , ojo. c l t . , p . 2 7 6 .
210
The Purpose of S u p e rv isio n
In normal tim es l i t t l e d if f e r e n c e i s noted in the
ex am in atio n s of the th re e a g e n c ie s , p o lic y o u tlo o k n o t ex
ten d in g to the f i e l d . There a r e , however, two c o n c ep tio n s
a s to the purpose o f s u p e rv is io n among the heads o f the
hanking a g e n c ie s . The o u tlo o k one a c c e p t a s to s u p e rv is o ry
purpose i s fundam ental to the lo c a t i o n one would su p p o rt f o r
c o n c e n tra tin g s u p e r v is io n .
The F e d e ra l Reserve System contends s u p e rv is io n
should he i n te g r a te d w ith the n a t i o n a l m onetary and c r e d i t
p o lie y . The FBIC o b j e c t s to t h i s v ie w p o in t; i t contends
t h a t nsoundw hanking, th e p r o t e c t i o n o f d e p o s i t o r s , i s the
purpose o f s u p e rv is io n . The O ffice o f the C o m p tro ller o f
the C urrency, which has a p p a re n tly viewed s u p e rv is io n
". . . r a t h e r more as a job o f e n fo rc in g the a p p lic a b le
s t a t u t e s and r e g u la tio n s • . .*27 a g re e s w ith the FDIC*s
s ta n d . In s h o r t , one o p in io n is t h a t the soundness o f the
in d iv id u a l hank depends upon the soundness o f th e hanking
system ; the o t h e r o p in io n i s t h a t the soundness o f th e s y s
tem r e s t s upon the s t r e n g t h o f the in d iv i d u a l hank.
S u p e rv isio n and m onetary and c r e d i t p o l i c y . — Speaking
f o r h im s e lf, though expounding a view held hy the members o f
^ B a c h , 0£ . c l t . , pp. 278 f .
211
the Board o f G overnors, M a rrin e r E c c le s stated ,: "Exam ination
procedure is a to o l o f "bank s u p e rv is io n and r e g u l a t i o n which
\
should he I n te g r a te d w ith and re sp o n siv e to m onetary and
c r e d i t p o l i c y . " 28 He f ir m ly b e lie v e d i n the soundness o f
the in d iv id u a l hank as a r e q u i s i t e o f a sound economy; su-,
p e r v is i o n p o l i c i e s , however, should c o n s id e r th e economic
s i t u a t i o n and not pursue a d is r u p tiv e c o u r s e .29
The macro-economic view o f the Board of Governors was
e v id e n t in 1947. In i t s y e a r ly p u b lic a t io n , the Board
s t a t e d :
A sse ts o f in d iv id u a l hanks may he sound h u t, p a ra d o x i
c a l l y , the a g g re g a te o f s p e c i f i c ty p es o f a s s e t s held
hy the hanking system may a t tim es re a c h p ro p o rtio n s
dangerous to the system a s a whole and thus a f f e c t the
in d iv id u a l hank.
B ast ex p erien ce has c l e a r l y shown t h a t many problems
and subsequent l o s s e s have t h e i r o r i g i n in a s s e t s a c
q u ired d u rin g boom c o n d itio n s such a s p r e v a ile d in
1947. High l e v e l s o f b u s in e s s a c t i v i t y tend to ob
scure u n d e rly in g w eaknesses in hank a s s e t s and to i n
c re a s e the d i f f i c u l t y o f t h e i r p ro p e r a p p r a i s a l both
hy exam iners and hy management.^0
Mr. G. 1 . Bach agreed w ith s e n tim e n ts such as the
Board ex p ressed and c a r r i e d the su p e rv isio n -m o n e ta ry ( e r e -
d i t ) p o lic y co n n ectio n even f u r t h e r . She r e a l - b i l l s doo-
28 Douglas Subcommittee, H e a rin g s, op . c i t . . p . 219,
November 22, 1949.
29 I b i d . , pp. 218 f .
A n n u al R e p o r t. 1 9 4 7 . o p . c i t . . p. 41.
212
t r i n e o f banking, under which m ost o f the bank s u p e rv is io n
laws were e n a c te d , gave l i t t l e cognizance, he s a i d , to the
p r e s e n t r e l a t i o n s h i p between th e n a t i o n a l government and
economic a c t i v i t y * 3- * - Though he was n o t c e r t a i n t h a t e x c lu
siv e p re o c c u p a tio n w ith c o u n t e r - c y c l i c a l s u p e rv is o ry p o l i
c i e s , in c o n t r a s t to a more t r a d i t i o n a l and I n d i v i d u a l i s t i c
approach, would be e f f e c t i v e , he argued, d e s p ite t h i s , t h a t :
• . • the d i s a s t r o u s consequences o f d e f l a t i o n - r e i n f o r c
ing exam ination p o l i c i e s a re c l e a r ; i f bank exam ination
p o l i c i e s cannot h e lp m it ig a t e b u s in e s s c y c le s , th ey can
in d u b ita b ly i n t e n s i f y d e f l a t i o n .
S u p e rv isio n and "sound" b an k in g . — The o f f i c e r s o f the
1*1)10 and the C o m p tro lle r's departm ent b e lie v e t h a t s u p e r v i
s io n should lo o k to th e s tr e n g t h o f the in d iv id u a l bank— to
i t s a s s e t s , i t s management, i t s le n d in g p o lic y , e t c . As the
Deputy C o m p tro ller rem arked:
S u p e rv isio n should be co m p letely ind ep en d en t, w ith no
c o n f l i c t i n g m o tiv e, no c o n f l i c t i n g d u t i e s . I t s h o u ld n 't
be used as a means o f c a rry in g ou t what i s a Oovernment
economic p o lic y o f the moment. . . I th in k t h a t i s a
much sounder b a s i s to o p e ra te on th a n i t would be i f th e
ex am in atio n s were being made by one whose p r i n c i p l e duty
i s n o t the s a fe g u a rd in g o f the soundness o f the i n d i v i d -
3 - * - Bach, oj). c i t . , pp. 270 f .
32 I b i d . . p . 279. There are c o n f l i c t i n g o p in io n s as
to the e f f e c t o f s u p e rv is o ry p o l i c i e s upon the economy d u r
ing the p e rio d 1929-32, to which t h i s sta te m e n t a l l u d e s .
F o r s e v e r a l a c c o u n ts , see i b i d . . pp. 279 f f ; S a i l o r , op .
c i t . , pp. 72 f ; and the Douglas Subcommittee, H e a rin g s , op.
c i t . , p . 93, S tatem ent o f J . D. B obertson.
£13 '
u a l bank, "but I s p ro v id in g the atm osphere f o r s ta b le
economic c o n d i t i o n s . 33
Mr. E. E. Brown, Chairman o f th e Board o f D ire c to rs
o f the F i r s t N a tio n a l Bank o f Chicago, was in fa v o r o f the
t r a d i t i o n a l type o f s u p e rv is io n . To him, s u b o rd in a tio n o f
s u p e rv is io n to o v e r - a l l c r e d i t and m onetary p o lic y was dan
g e ro u s . I n asmuch a s man i s f a l l i b l e , a m istak en o p in io n
as to the co u rse o f the economy, w ith s u p e rv is io n p o l i c i e s
p r e d ic a te d on i t s b ein g a c c u r a te , m ight work g r e a t h a rd
s h ip s upon the banks and the economy.*54
Mr. C lark W arburton, econom ist f o r the FDIC, a l s o was
in fa v o r o f "sound” s u p e rv is io n . The o p p o site p o in t o f view
was the r e s u l t o f confused th in k in g between money and the
c i r c u l a t i n g medium on one hand,
. . . and c r e d i t o r the making o f lo a n s o r borrow ing o f
money on the o t h e r . I t in v o lv es a m isu n d erstan d in g o f
the purpose o f bank ex a m in a tio n s. • . TTse o f bank ex
am in a tio n s to implement m onetary p o lic y would mean the
lo o se n in g o f q u a l i t y req u ire m e n ts and l i t t l e s c r u t i n y
o f bank a s s e t s when encouragement o f bank expansion i s
d e s ir e d and the tig h te n in g o f q u a l i t y req u irem e n ts and
more s t r i n g e n t in s p e c tio n o f bank a s s e t s when d is c o u r
agement o f bank ex p an sio n i s d e s ir e d . Such a procedure
would s u b v e rt the p ro p e r fu n c tio n o f bank ex a m in atio n s.
An a tte m p t to e v a lu a te a s s e t s on the b a s i s o f v ary in g
s ta n d a r d s would d e s tr o y the u s e f u ln e s s o f exam iners and
33
Douglas Subcommittee, H earin g s, o p . c i t . . p. 95,
S tatem ent o f J . I . R obertson, November 16, 1949.
24 I b i d . , p. £ 5 1 , N ovem ber £ £ , 1 9 4 9 .
2 1 4
©f t h e i r r e p o r t s o f e x a m in a tio n s .35
IT . PROPOSALS— THE COICENTRATION OP SUPERVISORY AUTHORITY
An econom ist o f some note has drawn up fo u r argum ents
used a g a i n s t the c o n s o lid a tio n a n d /o r s i m p l i f i c a t i o n o f the
F e d e ra l s u p e rv is o ry s t r u c t u r e . While never a p p e a rin g so
’'i m p o l i t i c l y , ” in summary they a r e : (1) the p re s e n t system
works f a i r l y w e ll d e s p ite i t s eumhersomeness; (2) p o l i t i c a l
l y , the is s u e would he a h eated one, f o r S t a t e ’s r i g h t s ,
even though n o t involved in Government r e o r g a n iz a tio n , would
he championed hy those to whom F e d e r a l a c t i v i t i e s are s u s
p e c t; (3) g e n e r a lly , the p r e s e n t arrangem ent i s favored hy
h ankers a s th ey can s h i f t from one j u r i s d i c t i o n to a n o th e r,
p la y in g the ag e n c ie s a g a i n s t each o th e r and th u s avoid a
more v ig o ro u s s u p e rv is o ry p o lic y ; (4) numerous checks and
b a la n c e s a re needed to c o u n te ra c t the c o n c e n tr a tio n o f Fed
e r a l a u t h o r i t y . 35
As i s a p p a re n t, the above argum ents c o n ta in l i t t l e
v a l i d s u b s ta n c e . T h is, however, does n o t p re v e n t them from
heing a fo rc e in any c o n tro v e rs y o v er a proposed change in
35 C lark f/a rh u rto n , "C o o rd in atio n o f M onetary, Bank
S u p erv iso ry , and Loan A gencies o f the F e d e ra l G overnm ent,”
J o u rn a l o f F in a n c e . 5:162, March, 1950.
35 Bach, 0£ . c i t . . p . 277.
t
215
th e s u p e r v is o ry fram ew ork. T h e ir in c lu s io n h e re o b v ia te s
the n e c e s s i t y o f t h e i r ap p e aran c e e lse w h e re and a ls o p r e
p a r e s one w ith a b a s i s f o r u n d e rs ta n d in g some o f th e o p p o s i
t i o n to the p roposed ch a n g e s.
The f e d e r a l R eserve System a s S u p e rv is o r
Two Task F o r c e s ' o f th e Hoover Commission have r e c
ommended the c o n s o l i d a t i o n o f a l l F e d e r a l bank s u p e rv is o ry
a c t i v i t i e s in to th e F e d e r a l R eserve System . One Task F orce
u rg ed t h i s a c t i o n b ecause o f the o v e r la p p in g r e s p o n s i b i l i
t i e s and f r i c t i o n s , due to d i f f e r e n t s ta n d a r d s , in th e e x
i s t i n g a rra n g e m e n t. The m ost im p o rta n t r e a s o n , how ever, was
b ecau se ” , . . banks a re f r e e to escap e F e d e r a l R eserve mem
b e r s h ip though th e y may r e t a i n F e d e r a l D e p o sit In s u ra n c e
37
C o rp o ra tio n I n s u r a n c e .” F our a d v a n ta g e s were claim ed f o r
the p r o p o s a l: (1) i t would red u ce in te r a g e n c y c l a s h in g ; (2)
i t would e lim in a te th e ten d en cy o f s u p e r v is o r s to compete
f o r b an k s; (3) i t would p ro v id e a more even a p p l i c a t i o n o f
s u p e rv is o r y s ta n d a r d s ; and (4) in th e e v e n t o f a n o th e r b ank
ing c r i s i s , i t would a llo w a u n i f i e d p o l i c y to be p u rs u e d ,
37
U .S . Commission on O rg a n iz a tio n o f th e E x e c u tiv e
B ranch o f the G overnm ent, Task F orce R e p o rt, R e g u la to ry Com
m is s io n s . A ppendix I (W ashington: U .S . Government P r i n t i n g
O f f ic e , 1 9 4 9 ), p . 115. H e r e in a f t e r , t h i s r e f e r e n c e w i l l be
known a s R e g u la to ry C om m issions.
28 I M S . , p p . 1 1 6 f .
216
i
T his Task f o r c e o f f e r e d the F e d e r a l R eserve a s the
"m ost p ro m isin g " l o c a t i o n f o r hank s u p e r v is io n b ecau se s u
p e r v i s i o n co u ld he more e a s i l y c o o rd in a te d w ith p o l i c i e s to
av o id I n f l a t i o n and d e f l a t i o n in an o r g a n iz a tio n p r im a r il y
concerned w ith s t a b i l i z a t i o n # An added c o n s id e r a ti o n In
f a v o r o f th e R eserve System was th e d i s p e r s i o n o f the tw elve
R eserve Banks th ro u g h o u t th e n a t io n , p r o v id in g an e x i s t i n g
fram ework o f o p e r a t i o n s .^ 9
The o th e r Task F o ree a ls o u rg ed F e d e r a l R eserve domi
n a t io n o f hank s u p e rv is io n # The FBXC would be s u b s e r v ie n t
to the S y s t e m . T h o u g h the O ffic e o f the C o m p tro lle r o f
the C u rren cy was n o t w ith in the I n v e s t i g a b l e b o u n d a rie s o f
I t s s tu d y , the members b e lie v e d th e y would have made a r e c -
29 Task F orce R e p o rt, R e g u la to ry C om m issions, o p .
c i t . . p . 1 1 7 . The Task F orce s t a t e d t h a t i f i t s recommenda
t i o n was a c c e p te d the FDIC could c o n tin u e a s a s e p a r a te i n
su ra n c e c o r p o r a tio n ; th e l i q u i d a t i o n o f c lo s e d banks could
e i t h e r be r e ta in e d by i t o r t r a n s f e r r e d to th e F e d e r a l Re
s e r v e . I t u rg e d t h a t a member o f th e B oard, the Chairman o r
th e V ice C hairm an, be on th e FDIC*s Board o f D i r e c t o r s . Idem
40 XT.S. Commission on O rg a n iz a tio n o f th e E x ec u tiv e
B ranch o f the G overnm ent, Task F orce R e p o rt, L ending Agen
c i e s . Appendix R (W ashington: U .S. Government P r i n t i n g Of
fice ", 1 9 4 9 ), p . 52. T h is Task F orce co u ld f in d "« • . n o
c o m p e llin g re a s o n f o r the c o n tin u e d e x is te n c e o f th e C o rp o r
a t i o n a s an agency s e p a r a te from . . . th e B o a rd .” D e p o sit
in s u ra n c e would he s u b o rd in a te d to th e g e n e r a l r e g u l a t i o n o f
money and c r e d i t . The FDIC would be a d m in is te re d u n d e r the
a e g is o f th e Board o f G overnors ”. . . a s a m u tu al in su ra n c e
t r u s t , in such m anner a s the Board . . . deems f i t . ” I b i d . .
p p . 52 f .
217
ommendation u r g in g i t s in c o r p o r a tio n in to the R eserve Sys
tem# The r e a s o n in g advanced f o r the c o n c e n tr a t io n o f s u p e r
v i s i o n was s i m i l a r to t h a t g iv e n hy the p r e v io u s ly m entioned
Task F o r c e .4- * *
W ith h i s em phasis upon m o n e ta r y - f is c a l p o l i c y , i t
l o g i c a l l y fo llo w ed t h a t George Bach ad v o c ate d th e c o n c e n tr a
t i o n o f s u p e r v is io n , s u b o r d in a tin g i t to w hat he b e lie v e d
the c r u c i a l a r e a . 4 * * As did th e two Task F orces* he n o te d
t h a t a " re a s o n a b ly good c a s e " co u ld be made f o r d e c la r in g
e i t h e r the FDIC o r the C o m p tro lle r the s o le bank s u p e r v is o r y
a g e n c y , y e t he chose th e Ee se rv e System .
E x e rc is e o f s u p e r v is o r y pow ers f i t s in c l o s e l y w ith F e d
e r a l R eserve program s o f b a n k e r-b u s in e s s " e d u c a tio n " on
c r e d i t p o lic y i s s u e s . T h is ease r e s t s n o t on s u p e r io r
F e d e r a l R eserve s u p e r v is o ry perform ance to d a te f f o r
th e r e i s l i t t l e to choose among th e th r e e a g e n c i e s ) , b u t
on the f a c t t h a t th e b a s ic p o lic y r e s p o n s i b i l i t i e s o f
the F e d e r a l R eserve a re p ro b a b ly more conducive to adop-
4^ I n s te a d o f a convergence o f th e FBIC and the F ed
e r a l R eserve System , a s b o th Task Forces* recommended, th e re
h as been a m arked d iv e rg e n c e . On Septem ber 21, 1950, the
FJ3IC was e s t a b l i s h e d a s a new le g a l e n t i t y . S e c tio n 12B o f
the F e d e ra l R eserve A c t, the l e g a l b a s i s Of the C o rp o ra tio n
s in c e i t s i n c e p ti o n , was w ithdraw n from t h a t A ct and a new
and s e p a r a te law was e n a c te d . F or the f u l l t e x t o f t h i s new
A c t, see F e d e r a l R eserve B u l l e t i n , 3 6 :1 5 2 1 -3 9 , O cto b e r 195Q.
AO
■ Mr. Bach b e lie v e d th e p r e s e n t arran g em en t would
work s a t i s f a c t o r i l y in a c r i s i s p e r io d , w ith w hich he was
m a in ly co n c ern ed , if. th e a g e n c ie s would a g re e o r co u ld a g re e
on s u p e rv is o r y p o l i c y . The second c o n d i tio n was t h a t the
Government would a g re e on a p r o p e r m onetary p o l i c y , Bach,
o p . c i t . , p p . 278 f f .
218
4.3
t l o n o f s a l u t o r y s u p e rv is o ry s ta n d a r d s .
The FBIC, u n d e r h i s p r o p o s a l, would be in c o rp o r a te d in to th e
R eserve System , th e re b y e x te n d in g th e System ’ s s u p e rv is o r y
a a
a u t h o r i t y o v e r a l l in s u re d b an k s.
Mr. C la rk W arburton was opposed to th e fo re g o in g p r o
p o s a l s . To him , th e p r o v is io n o f a good m o n etary and c r e d i t
p o l i c y was a t a s k o f such im portance and d i f f i c u l t y t h a t
" . . . i t sh o u ld n o t be confused w ith th e e s s e n t i a l l y e x
tra n e o u s d u t i e s o f c h a r t e r in g o r s u p e r v is io n o f in d iv i d u a l
b a n k s. . . The B oard, he s a i d , sh o u ld be r e lie v e d o f
^ B ach, o p . c i t . , p . 281. H arold B. Heed o f C o rn el
U n iv e r s it y , though he a g re e d w ith v iew s s u b s t a n t i a l l y id e n
t i c a l to th o se o f M r. B a c h 's , had a d i f f e r e n t o b je c ti v e in
m ind. He d e s ir e d th e e l im in a tio n o f th e n a t i o n a l b an k in g
system and the s u b s t i t u t i o n o f a com pulsory r e s e r v e system
composed o f S ta te c h a r t e r e d b an k s. See H. L. Heed, " P r i n c i
p l e s o f B anking R efo im ," American Economic Review , 3 7 :2 7 7 -
88, May, 1947.
^ M r. Bach gave th r e e re a s o n s (p re s e n te d h e re in
summary fo im ) f o r in c o r p o r a tin g th e FBIC in to th e R eserve
System . (1) A ll in s u re d banks sh o u ld b elo n g to the System
to make m o n etary p o l i c y more e f f e c t i v e . (2) The a d m in is
t r a t i o n o f m o n etary ( c r e d i t ) p o lic y b y th e R eserve System
h a s , to a la r g e d e g re e , p re v e n te d bank f a i l u r e s from o e e u r-
in g on a wide s c a l e ; th e FBIC h as I t s m ain work in d e a lin g
w ith i s o l a t e d and in d iv i d u a l e a s e s o f ban k in g d i f f i c u l t i e s —
.n o t w ith w h o le s a le r u n s . Thus, i t i s a c t u a l l y th e System
w hich p r o v id e s s a f e t y from b an k in g l o s s e s . (3) P ro v id in g
f o r ban k in g l i q u i d i t y i s a r e s p o n s i b i l i t y o f th e R eserve
System . U nder p r e s e n t a rra n g e m e n ts, t h i s i s p ro v id e d by
b o th th e FBIC and th e System a s when f u n d s a r e advanced to a
bank in d i f f i c u l t y upon i t s weak a s s e t s . The "norm al" i n
su ran c e p ro c e d u re s a re b y -p a sse d in th e s e c a s e s , B ach, o p .
c i t . . p p . 282-84.
^ W arb u rton , o p . c i t , , p . 1 6 3 .
219
s u p e r v is io n and i t s r e l a t e d work; t h i s sh o u ld be t r a n s f e r r e d
to a g e n c ie s a l r e a d y in t h i s f i e l d and who d e a l w ith the i n
d iv id u a l b a n k --th e FDIC and th e C o m p tro lle r. There sh o u ld
be a s h a r p e r l i n e o f d e m a rc a tio n , n o t a c l o s e r a d ju s tm e n t,
betw een th e Board o f G overnors and th e o th e r F e d e r a l s u p e r
v i s o r y a g e n c i e s .46
V* SOM M ABY M B CONCLUSIONS
Three a g e n c ie s , th e F e d e r a l E eserve System , th e Of
f i c e o f th e C o m p tro lle r o f the C u rren cy , and the F e d e r a l De
p o s i t In s u ra n c e C o rp o ra tio n , form th e F e d e r a l t r i o o f bank
s u p e r v is o r s . T h e ir d u t i e s , r e s p o n s i b i l i t i e s , and a u t h o r i t y
o v e rla p one a n o th e r in many in s ta n c e s w ith th e n o t too s u r
p r i s i n g e f f e c t o f d u p l i c a t i o n o f e f f o r t , in te ra g e n c y f r i c
t i o n , and th e d e s ir e to "grow a l i t t l e " a t th e exjhense o f
one a n o th e r . A lthough th e s t r u c t u r e o f th e combined th r e e
i s la r g e and cumbersome, t a c i t and e x p l i c i t a rra n g e m e n ts b e
tween them have g iv e n the c o u n try an e f f e c t i v e bank s u p e r
v i s i o n s e r v ic e in o r d in a r y tim e s .
A d o u b t e x i s t s in the m inds o f many t h a t a u n i f i e d ,
46 W arburton, l o c . c i t . T his a l s o a p p e a rs to be th e
o p in io n o f t h e . C o m p tro ller* s o f f i c e and the FBIC. See Doug
l a s Subcom m ittee, H e a rin g s , o p . c i t . . p p . 75-104, S ta te m e n t
o f J . L. B o b e rtso n , November 16, 1949and i b i d . , pp 1 0 5 -4 4 ,
S ta te m e n t o f Maple H a rl, November 17, 1949.
22 0
c o n s t r u c t i v e , o r e f f e c t i v e p o lic y would be fo rth c o m in g from
the th r e e s e p a r a te a g e n c ie s in a p e rio d o f b an k in g a n d /o r
g e n e r a l economic c r i s i s , o r t h a t th e p r e s e n t agency a g r e e
m ents would c o n tin u e in th e fa c e o f c o n f l i c t i n g d e p a rtm e n ta l
o p in io n a s to th e p r o p e r p o lic y * C o n se q u e n tly , p ro p o s a ls
have been o f f e r e d w hich would c o n c e n tr a te s u p e r v is o r y a u
t h o r ity * Inasm uch a s th e R eserve System p ro p o se s a s u p e r
v is o r y p o l i c y s u b o rd in a te to y e t c o o rd in a te w ith m o n etary
and c r e d i t p o l i c y , w h ile the o th e r two a g e n c ie s en d o rse th e
more t r a d i t i o n a l p o l i c y o f " s o u n d n e s s ,” th e " p ro p e r" l o c a
t i o n o f F e d e r a l s u p e r v is io n h in g e s on w h e th e r o r n o t one
p r e f e r s th e macro o r th e m icro-econom ic a p p ro a c h .
S h is w r i t e r would p r e f e r the F e d e r a l R eserve System
a s th e m ain agency f o r s u p e r v is in g th e n a t i o n ’ s b an k s. She
o t h e r two d e p a rtm e n ts sh o u ld be p la c e d s u b o rd in a te to the
System . P u re ly a s a m a tte r o f e f f i c i e n c y and good a d m in is
t r a t i v e p r o c e d u re , t h i s a rran g em en t would e lim in a te much o f
the d i f f i c u l t y in h e r e n t in th e p r e s e n t s t r u c t u r e .
3?he q u e s tio n w hich i s o f im portance to the above
p r e f e r e n c e i s w h e th e r o r n o t s u p e r v is io n sh o u ld be c o o r d i
n a te d w ith m o n etary and c r e d i t p o l i c y o r c o n tin u e d in the
more t r a d i t i o n a l m ethod. H e ith e r o f th e s e two p o s i t i o n s , a s
e x tre m e s , i s found d e s i r a b l e . B oth have w o rth y c h a r a c t e r i s
t i c s w hich should be in c o r p o r a te d in to the s u p e r v is o r y p o l l -
221
c y . As to what t h i s p o lic y would be when f i n a l l y fo rm u la
te d , o r how e f f e c t i v e i t would tu rn o u t in o p e r a tio n , r e
m ains unknown, h u t t h i s w r i t e r b e l ie v e s i t w ould be p r e f e r
a b le to th e p r e s e n t m ethod.
I f th e R eserve System were to have a l l F e d e r a l s u p e r
v i s i o n c o n c e n tra te d in i t s hands and i t were to p u rsu e i t
w ith o n ly th e m o n etary ( c r e d i t ) p o lic y o u tlo o k , th e n the
System would n o t be th e d e s ir a b le l o c a t i o n f o r s u p e r v is io n .
N e ith e r would e i t h e r o f th e o t h e r two a g e n c ie s i f , th e y were
to have s u p e r v is o r y a u t h o r i t y a lo n e and fo llo w e d o n ly th e
c o n c e p t o f " s o u n d n e s s ."
A
CHABTEE T i l l
COHCDTJSIONS
The many p r o p o s a ls f o r change in the F e d e r a l E eserve
System , w ith w hich t h i s t h e s i s d e a l s , could h a r d ly he con
s tr u e d a s an a f f i r m a t i o n o f th e o ld brom ide a b o u t e c o n o m ists
n o t b e in g a b le to r e a c h a c o n c lu s io n , f o r the t h e s i s b r in g s
to g e th e r p r o p o s a ls f o r change w hich w e re , and a r e , c o n tr o
v e r s i a l w ith many g ro u p s and in d i v i d u a l s o th e r th a n econo
m is ts* To t h i s w r i t e r , the p r o p o s a ls and th e c o n tro v e rs y
o v e r them e x e m p lify th e p r o c e s s e s by w hich change o c c u rs ,
a l b e i t n o t in th e p a r t i c u l a r d i r e c t i o n o r f o r the i d e n t i c a l
end f o r w hich the o r i g i n a l p r o p o s a ls were made. I t seems to
be human n a tu r e f o r o p in io n s and c o n c lu s io n s o f i n d i v i d u a l s
and g ro u p s to v a ry ; each s id e to a d isa g re e m e n t can fin d
s u b s t a n t i a t i n g "e v id e n c e " f o r th e v a l i d i t y o f i t s argum ents*
I t rem ain s a s tr u e to d a y a s when Pope w ro te i t :
*Tis w ith o u r judgm ents a s o u r w a tc h e s, none
Go j u s t a l i k e , y e t each b e l ie v e s h i s own.
From w hat has been s a i d , th e r e a d e r w i l l soon become
aware t h a t w hat w i l l fo llo w w i l l be the "ju d g m e n ts” o f t h i s
w r i t e r . D ocum entation w i l l n o t be found; enough o f t h i s h as
been done in th e t h e s i s a l r e a d y , n e i t h e r w i l l th e r e a d e r
d is c o v e r a r e - m a s tic a te d v e r s io n o f th e c o n c lu s io n s found a t
th e end o f each c h a p te r* I t m ight be w e l l , how ever, to read
223
A ppendix A, i f t h i s h a s n o t "been done, f o r a b e t t e r u n d e r
s ta n d in g o f th e c o n c lu s io n s .
I . THE TREND OF CENTRALISATION
The m ain c o n n e c tin g theme betw een th e v a r io u s p ro p o
s a l s seems a p p a r e n t. W ith o u t e x c e p tio n , th e Board o f Gov
e r n o r s h a s c o n s i s t e n t l y en d o rsed (and p ro p o se d ) recommenda
ti o n s w hich would in c r e a s e i t s own a u t h o r i t y . T hat few o f
th e s e p r o p o s a ls have been e n a c te d in to law seems i r r e l e v a n t .
T hat th e p r o p o s a ls w ere e n d o rse d , and t h e i r enactm ent u rg ed
w ith an u l t e r i o r m o tiv e , a s some m ig h t b e l i e v e , a p p e a rs u n
l i k e l y ; i t i s p e rh a p s i l l u s t r a t i v e o f th e p rim a ry tre n d o f
r e c e n t tim e s — in c r e a s in g c e n t r a l i z a t i o n o f g o v ern m en tal a u
t h o r i t y . The c e n t r a l body can alw ays f in d w hat i t deems to
be v a l i d r e a s o n s , f o r e x te n d in g i t s scope and pow er. The
fo re m o st re a s o n g iv e n i s th a t i t can more e f f e c t i v e l y and
e f f e c i e n t l y p erfo rm i t s d e s ig n a te d d u t i e s w ith the in c re a s e d
a u t h o r i t y .
In 1933 and a g a in in 1935, th e Board o f G overnors had
i t s a u t h o r i t y b ro a d e n e d ; no p re v io u s Board had had such
♦
la r g e c o n t r o l p o w ers. The economic c o n d itio n s o f th e tim e s
a s w e ll a s p a s t a b u s e s o f th e law seemed to w a rra n t the
m o n etary law s t h a t were p a s s e d . W ith in th e p assag e o f a
decade th e Board found t h a t i t s new pow ers were n o t broad
2 24
enough; a c o m p le te ly new m onetary s i t u a t i o n e x i s t e d , v a s t
m o n etary changes were in p r o c e s s , and i t s own " m a r k e t,”
m o n etary p o l i c y , was th r e a te n e d hy a p o w e rfu l c o m p e tito r,
th e t r e a s u r y D ep artm en t, T his s i t u a t i o n s t i l l e x i s t s . I n
f a c t (b u t n o t in th e o ry ) th e Board d is c o v e re d t h a t i t had
become s u b o rd in a te to th e T re a s u ry . To r e g a in i t s p a s t
p r e s t i g e and a u t h o r i t y i t re c o g n iz e d t h a t i t needed a d d i
t i o n a l pow ers o r a b roadened scope o f a u t h o r i t y o r t h a t i t s
c o m p e tito r sh o u ld have l e s s in flu e n c e th a n i t h ad . The
ch a n ce s f o r a d e r o g a tio n o f T re a su ry power was u n l i k e l y .
C o n se q u e n tly , the Board s t a r t e d to p o i n t o u t i t s w eaknesses
to C ongress and to the p u b lic and in d ic a te d ways and means
to s tr e n g th e n th o se w e a k n e sse s. I t i s to be n o tic e d t h a t
m ost o f the p r o p o s a ls i n t h i s t h e s i s em anated from the Re
se rv e System .
As to th e tre n d o f c e n t r a l i z a t i o n i n th e F e d e ra l Re
se rv e System , i t i s n e c e s s a r y t h a t we ad h e re to the p ro p o
s a l s a s th e y a p p e a r to in d ic a t e such c e n t r a l i z a t i o n . To go
beyond t h i s would be to go beyond the work in v o lv e d . E x c lu
s io n o f o th e r m a t e r i a l does n o t , t h i s w r i t e r b e l i e v e s , l e s
sen the v a l i d i t y , i f such i t i s , o f what w i l l be w r i t t e n .
F i r s t , by v ie w in g a l l o f the p r o p o s a ls a s a group one
can p e r c e iv e one s tr o n g l i n k , i . e . , endim ic to e a c h , though
v a ry in g in s t r e n g t h betw een them, i s the p r o p o s itio n t h a t
225
the Board o f G overnors and th e F e d e r a l R eserve System n eed s
a d d i t i o n a l a u th o r ity * T h is does n o t im ply t h a t th e a u t h o r i
ty , i f a llo w e d , w ould he unw ise o r m isu se d , An o p in io n on
t h a t h as heen g iv e n a t the end o f each c h a p te r . The o n ly
e f f o r t h e in g made h e re i s to a f f ir m th e e x is te n c e o f the
tr e n d , w hich, i t i s b e l ie v e d , i s e s t a b l i s h e d .
Second, w ith th e tre n d e s t a b l i s h e d , th e p o in t i s
r a i s e d as to th e d e g re e o f s u c c e s s enjoyed by the R eserve
System . I t i s b e lie v e d to be l a r g e . I f one would g iv e a
n u m e ric a l w e ig h t to e a ch o f the p r o p o s a ls and th e n t o t a l a
sc o re f o r the number o f them w hich have b een e n a c te d , and
th e n p r e d ic a te a c o n c lu s io n as to s u c c e s s on t h a t s c o r e ,
such c o n c lu s io n would be v a l u e l e s s . W ith th e e x c e p tio n o f
the unpegging o f the Government s e c u r i t y m a rk e t, n o t a s i n
g le p r o p o s a l in t h i s t h e s i s has r e c e iv e d the s a n c tio n o f
la w . Why th e n , i t may be a s k e d , h as i t been concluded t h a t
the R eserve System h a s had s u c c e s s in ex p an d in g i t s c o n t r o l?
The re a s o n s a re a t l e a s t t h r e e . F i r s t , th e com m ercial banks
o f to d ay are n o t too com m ercial in c h a r a c t e r . In th e a g g re
g a te , bank in v e stm e n ts b r in g more income th a n do e a rn in g s
from lo a n s and d is c o u n ts . Most o f th e s e in v e stm e n ts a re in
the form o f Government s e c u r i t i e s . The l i q u i d i t y and s a f e t y
o f th e s e s e c u r i t i e s , in the s h o r t ru n , r e s t upon the a c t i o n s
o f the System . The com m ercial b an k s a re n a t u r a l l y s e n s i t i v e
226
to a c t i o n s w hich would a f f e c t t h e i r p o r t f o l i o s , and in t h i s
r e s p e c t th e S ystem ’s power i s in c r e a s e d . T h is was n o t the
c a se when com m ercial "bank a s s e t s c o n s is te d p r im a r il y o f com
m e r c ia l p a p e r and o t h e r such ite m s .
Jk second re a s o n f o r b e l ie v i n g th e R eserve System h as
g a in e d in a u t h o r i t y r e s t s upon the c o n d itio n o f th e tim e s .
Worldwide te n s io n and c r i s i s le a d th e p eo p le to lo o k to
t h e i r n a t i o n a l governm ent f o r l e a d e r s h i p . I n t h i s c o u n try ,
th e y lo o k to W ashington. I t seems h ig h ly p ro h a h le t h a t in
su ch an in s ta n c e th e R eserve System ’ s h e a d q u a r te r s and c h i e f
o f f i c e r s , th e Board o f G o v ern o rs, m ust be in c lu d e d a s a p a r t
o f the n a t i o n a l e a p i t o l , th e ex p e cte d source o f o u r l e a d e r
s h ip . from i t , p o l i c i e s a re is s u e d w hich everyone hopes
b e t t e r u n i t e our e f f o r t s . When p o lic y s ta te m e n ts a re is s u e d
f o r th e n a t i o n ’ s banks th e y s t r i c t u r e th e freedom o f the
banks in some way; h a r d s h ip s a re u n d o u b te d ly e x p e rie n c e d in
many i n s t a n c e s . C o l l e c t i v e l y , the p o l i c i e s a re d e f e n s ib le
f o r th e y have the h ig h o b je c tiv e o f n a t i o n a l s e c u r i t y , b u t
i f th e p o l i c i e s a r e i l l - a d v i s e d , I f th e h a rd s h ip c a s e s need
n o t e x i s t , the b e s t re c o u rs e i s to th e B oard— i t h o ld s th e
power o f p o lic y d e te r m in a tio n .
The above i s p u re h y p o th e s is , o f c o u r s e , a s th e Board
en d e av o rs to p r e v e n t p o o r p o lic y -m a k in g , b u t i f the p o lic y
u n d e r d is c u s s io n was one o f l i m i t i n g c r e d i t e x p a n sio n , co u ld
227
n o t a ca se "be c o n s tru c te d ? Bank o f f i c e r s have to i n t e g r a t e
t h e i r own p o l i c i e s w i t h th o se o f the B oard. (This i s n o t to
deny th e need f o r such p o lic y in tim es o f te n s io n , h u t th e
is s u e h ere i s grow th o f th e B o ard f s in f lu e n c e .
The Board and the R eserve System h as grown i n power
in a t h i r d way, s t i l l w ith o u t th e en actm en t o f new la w s .
Government le n d in g a g e n c ie s have in c re a s e d i n number and op
e r a t i o n i n the p a s t tw en ty an d , e s p e c i a l l y , th e l a s t f i f t e e n
y e a r s . W hile th e s e a g e n c ie s m a in ta in th e y is s u e c r e d i t o n ly
in th o se a r e a s w hich th e com m ercial hanks a re u n a b le to a t
te n d , su ch i s n o t alw ays the e a s e . There i s th e c o n s ta n t
and v e ry human d e s ir e f o r th e s e le n d in g a g e n c ie s to expand
t h e i r e f f o r t s . Government c r e d i t and p r i v a t e c r e d i t m eet
head lo n g in c e r t a i n f i e l d s . D is re g a rd in g w h e th e r the e f f e c t
o f th e se a g e n c ie s i s good, had, o r i n d i f f e r e n t th e p o in t r e
m ains t h a t th e hanks a re fo rc e d in upon th e m selv es to r e s i s t
th e s e e f f o r t s . They lo o k to the Board o f G overnors a s t h e i r
l e a d e r i n t h i s r e s p e c t . The r e c o r d s o f the Board r e v e a l
t h a t i t h as p u t f o r t h s tr o n g e f f o r t s on th e com m ercial
h a n k s ’ b e h a lf a g a i n s t governm ent c r e d i t . A gain, i t h as a
s tre n g th e n e d in flu e n c e o v e r the com m ercial h an k s; th e y m ust
l i s t e n and ad h e re to the p o l i c i e s the Board s e t s i n t h i s r e
g a r d .
Thus, th ro u g h the com m ercial h a n k s ’ la r g e h o ld in g s o f
228
Government s e c u r i t i e s , th ro u g h the r i s e and c o n tin u a n c e o f
w orld p o l i t i c a l and economic te n s io n , and th ro u g h th e grow th
o f Government c o m p e titio n in th e le n d in g f i e l d , th e F e d e ra l
R eserve System h as g a in e d in i t s in flu e n c e o v e r the n a t i o n 1s
com m ercial banks# The en actm ent o f law s d i r e c t l y co n c e rn in g
th e System d id l i t t l e to a rra n g e the s i t u a t i o n .
W ith th e tre n d tow ard c e n t r a l i z a t i o n assumed and th e
m easure o f s u c c e s s l a r g e , a t h ir d m a jo r a r e a rem ain s to be
e x p lo re d in d e te rm in in g th e in c re a s e d power o f the R eserve
System# T hat a r e a i s the e f f e c t i v e n e s s o f the a u t h o r i t y
w hich the System h a s gained# S h is w r i t e r * s o p in io n i s t h a t
i t h as n o t been n o r w i l l n o t be a s g r e a t a s the Board would
d e s i r e i t , n o r a s g r e a t a s i t m ight appear# The R eserve
System i t s e l f h as been a v ic tim o f th e th r e e s i t u a t i o n s j u s t
d e s c r ib e d , t h a t i s , the p u b lic d e b t, w o rld te n s io n , and Gov
ernm ent le n d in g . Added to t h i s i s the dominance o f the
m o n etary f i e l d by th e T re a s u ry D ep artm en t. W hile i t h as i n
c re a s e d in a u t h o r i t y , r e l a t i v e l y i t h as l o s t ground to the
trem endous g a in s o f the T re a su ry and governm ent le n d in g #
The System h a s to p la y th e r o le a s s ig n e d to i t by th e o t h e r
two* C h a p te r I I h a s g iv e n some i n d i c a t i o n o f t h i s s i t u a
t i o n .
I I . THE MACRO-ECONOMIC APPROACH
A second theme w hich i s a p p a re n t in m ost o f th e p r o
229
p o s a ls i s th e m acro-econom ic ap p ro ach ta k e n by th e Board o f
G o v ern o rs. I t i s tr u e t h a t the Board r e p r e s e n t s th e c o u n try
a s a w hole; i t s p o l i c i e s and a c tio n s a re f o r the g ro u p , n o t
the in d i v i d u a l , f o r th e n a t i o n , n o t th e r e g io n . Such a ta s k
i s a trem endous o n e, r e q u ir in g mem o f g r e a t c a p a b i l i t i e s and
s u b s t a n t i a l d i s c r e t i o n . There i s a c o m p la in t, how ever, o f
t h i s ap p ro a c h .
The Board se e k s and y e t d is a g r e e s w ith v o lu n ta r y
ag ree m en ts among ban k in g groups to c o n ta in o r r e l e a s e c r e d i t
when such i s n e e d e d . The e f f e c t s o f c o m p e titio n and e x i s t
in g economic c o n d i tio n s , th e Board f e e l s fo r once b e l i e v e d ) ,
n u l l i f i e s such a g re e m e n ts, f o r i f the o u tlo o k i s good, lo a n s
a re made, and i f n o t, th e y a re n o t . These a c t i o n s , i t
c la im s , a r e e x a c t l y c o n tr a r y to th o se r e q u i r e d . I t would
have th e power to d e te rm in e th e a g g re g a te l e v e l o f e x i s t i n g
c r e d i t lo d g ed w ith i t s e l f . In a l o g i c a l s e n s e , such an a r
rangem ent i s i d e a l , y e t th e c o u n try i s too l a r g e , i t s n ee d s
and i n t e r e s t s too d i v e r s i f i e d , econom ics too e x p e rim e n ta l,
and man too im p e rfe c t to e x p e c t such a s i t u a t i o n to work
o t h e r th an p o o r ly . A lso , the a r r o g a tio n to a few p e rs o n s o f
p o l i c i e s and a c tio n s f o r m e rly made by th o u sa n d s, a llo w s the
p o s s i b i l i t y f o r e r r o r s o f prime m agnitude to a r i s e .
The m acro-econom ic ap p ro ac h was d e v ise d f o r a n a l y t i
c a l p u rp o se s to b e t t e r s o lv e common p ro b lem s. A ll o f o u r
820
econom ic problem s a re n o t o f the a g g re g a te ty p e ; many con
tin u e to p la g u e u s on an in d iv id u a l b a s i s . The a g g re g a te
ap p ro ac h can be o v erd o n e.
I I I . DEBT M ANAGEMENT
Many o f th e p r o p o s a ls in t h i s t h e s i s a re fo u n d ed , to
a g r e a t e r o r l e s s e r d e g re e , on the huge n a t i o n a l d e b t and
i t s e f f e c t s on th e b an k in g sy stem . They a r e p r e d ic a te d on
th e c o n tin u a n c e o f a su p p o rte d s e c u r i t y m a rk e t, m eaning a
r e d u c tio n o f F e d e r a l R eserve in f lu e n c e . At p r e s e n t , th e
m ark et i s n o t s u p p o rte d , b u t the q u e s tio n o f w h e th e r o r n o t
i t w i l l be su p p o rte d i f w ar comes a g a in re m a in s . As in
t a x a t i o n so in p r e d i c t i o n , th e re sh o u ld be few er e x c e s s
" p ro p h e ts " to contend w ith , y e t in t h i s p a r t i c u l a r ca se th e
p r e d i c t i o n s , though q u a l i f i e d , a r e in e s c a p a b le .
I t i s e n t i r e l y p o s s i b le t h a t th e T re a s u ry D epartm ent
allo w ed m a rk e t su p p o rt to be w ith d raw n , in M arch 1951, b e
cau se i t b e lie v e d a g e n e r a l w orld c o n f l i c t was in the o f
f i n g . The K orean war was a lm o st n in e m onths o ld when su p
p o r t s were w ith d raw n . I f th e T re a s u ry f i n a l l y a g re e d t h a t
the i n t e r e s t r a t e s , a s m a in ta in e d from the pre-W orld War I I
d a y s, were in c o m p a tib le w ith the trem endous in c r e a s e i n mon
ey and c r e d i t , p e rh a p s th e y assumed t h a t a r e l a t i v e l y f r e e
m a rk et was n e c e s s a r y , f o r a tim e , to a llo w the r a t e s to f in d
221
a new le v e l* The m onetary co n seq u en ces o f a new and h ig h e r
r a t e would he l e s s d i s r u p t i v e , in the e v e n t w ar broke and
g r e a t sums o f money were a g a in n ee d ed , th a n would th e th e n
e x i s t e n t r a t e .
Assume the f o re g o in g were tim e and the problem to be
s o lv e d i s the p o s i t i o n to be h e ld by the F e d e r a l B eserve
System in w ar-tim e d e b t managem ent. Should i t s u p p o rt the
m a rk e t? More im p o rta n t, should i t be a p a r t n e r in d e te rm in
in g the r a t e s on s u c c e s s iv e s e c u r i t y is s u e s ? T his w r i t e r
would answ er b o th q u e s tio n s in th e a f f i r m a t i v e . The c o r r e
l a t e d o b je c ti v e s sh o u ld be t h a t the Government have the sums
I t n ee d s and t h a t th o se sums sh o u ld c o n s i s t o f sa fe money,
i . e . , money (and c r e d i t ) w hich w i l l n o t l a t e r become a so u rce
o f economic d i s r u p t i o n . T h is w a r-tim e a s s o c i a t i o n o f th e
T re a su ry and th e B eserve System f o r d e b t management w ould,
i t i s b e lie v e d , b e t t e r f u l f i l l th e re q u ire m e n ts o f the two
o b j e c t i v e s . N e it h e r agency sh o u ld be the dom inant member.
T h at sueh a p a r t n e r s h i p would o c c u r i f a w ar comes i s
doubted u n le s s C ongress sh o u ld make i t m an d ato ry .
I F . A SINGLE BANKING SYSTEM
I t would a p p e a r t h a t th e tim e i s coming when a l l o f
th e n a t i o n ’ s banks w i l l be members o f th e F e d e r a l B eserve
System , e i t h e r a s S ta te member banks o r a s N a tio n a l b an k s.
232
T his w r i t e r f a v o r s su ch an e v e n tu a lity *
1 1 though m ost o f the hanks to d ay a re s u b je c t to some
s o r t o f F e d e r a l r e g u l a t i o n , the m a jo r i ty o f them a re n o t
members o f th e B eserve System . The co n c ep t o f d u a l i t y ,
S ta te c h a r te r e d and F e d e r a l c h a r t e r e d , i s enough d i v i s i o n in
th e b anking w orld i s b o th ty p e s a re members o f th e B eserve
System . The r e s p o n s i b i l i t i e s and th e c o s t o f m o n etary p o l i
cy-m aking should be sh a re d by a l l b a n k s. There should be no
room f o r some banks to se c u re th e a d v a n ta g e s o f t h a t p o l i c y ,
do much to d e te rm in e i t , y e t , in no way, sh a re i t s c o s t s .
The co n c ep t o f b anking d u a l i t y , a s p r e s e n t l y fo u n d ,
i s a h e a te d one p o l i t i c a l l y , re v o lv in g around S ta te s * r i g h t s
a s a g a i n s t F e d e r a l encroachm ent upon th o se r i g h t s . In t h i s
p a r t i c u l a r in s t a n c e , i t i s b e lie v e d t h a t th e h e a t i s m o s tly
f r i c t i o n g e n e ra te d from o r a t o r y , n o t from any d o ubt a s to
the j u s t i c e o f the p ro p o sed c o u rse o f a c t i o n . S ta te s *
r i g h t s sh o u ld be p r o te c te d o n ly i n s o f a r a s th e y would s t i l l
have th e power to c h a r t e r b an k s. I n d i v i d u a l s would s t i l l
have th e cho ice o f a F e d e r a l c h a r t e r o r a S ta te c h a r t e r .
BIBLIOGRAPHY
BIBLIOGRAPHY
A. BOOKS
Adams, 1 . S . , M onetary Management* Hew York: Ronald P re s s
Company, 1950.
B ach, George L . , F e d e r a l B eserve P o lic y -M a k in g . Hew York:
A lfre d A. K nopf, 1950.
Bopp, K. R ., and o t h e r s , F e d e r a l B eserve P o l i c y . W ashing
to n : Board o f G overnors o f the F e d e r a l R eserve System ,
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C h a n d le r, I*. Y ., The Economics o f Money and Bank in g . Hew
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York: M cG raw -H ill Book Company, I n c . , 1946.
F u l l e r , D. R . , Government F in a n c in g o f P r i v a t e E n t e r p r i s e .
S ta n fo rd : S ta n fo rd U n iv e r s ity P r e s s , 1948.
G a r is , R. I . , P r i n c i p l e s o f Money. C r e d i t , and B anking. Hew
Y ork: M acm illan Company, 1954.
G o ld en w elser, E, A ., M onetary M anagement. Hew York: MoGraw-
H i l l Book Company, I n c . , 1949.
H a rt. A, G .. Money. Debt and Economic A c t i v i t y . Hew York:
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Re se rv e System . T w elfth e d i t i o n ; Hew York: H arper &
B r o th e r s , 1950.
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235
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P r a t h e r , C. L . , Money and B an k in g * F o u rth e d i t i o n ; C hicago:
R ichard B. Ir w in , I n c . , 1949.
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S t a t e s t r e a s u r y . 1789-1941. Hew Y ork: Colum bia U n iv e r
s i t y P r e s s , 1943.
IT. S. S t a t u t e s a t L a rg e , P u b lic Laws. 55 v o l s . ; W ashington:
U. S, Soveram ent P r i n t i n g O f f i c e , 1787- •
W arburg, P a u l M ., The F e d e r a l Re se rve S y stem : I t s Crowth and
O r i g in . Hew Y ork: M acm illan Company, 1930.
W e s te r f ie ld , R. B . , Money. C r e d it and B anking. R evised e d i
t i o n ; Hew Y ork: Ronald P r e s s Company, 1947.
B . CQNGrKESSIOHAL PUBLICATIONS
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B anking and C u rre n c y . S. 3 § 5 9 . S. 2 9 9 8 . 7 6 th C o n g ress,
t h i r d s e s s io n .
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~ S. 2250. 7 7 th C o n g re ss, second s e s s io n .
H e a rin g s B efo re th e House Committee on Banking and C u rre n c y .
^9 5 6 . 7 8 th C o n g ress, second s e s s i o n .
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c y . S. 1 6 4 2 . 7 8 th C o n g ress, second s e s s io n .
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“ H.R. 2124. 7 9 th C o n g ress, f i r s t s e s s io n .
H ea rin g s B efore th e Subcom m ittee o f th e S enate Committee on
b an k in g and C u rre n c y . S. lfflSO. 7 9th C o n g ress, second
s e s s io n . * “
H ea rin g s B efore th e House Committee on B anking and C u rre n c y .
H.B* 2233, 8 0 th C o n g ress, f i r s t s e s s io n .
H ea rin g s B efore th e S enate Committee on Banking and G u rren -
S. 4C?6T 8 0 th C o n g re s s, f i r s t s e s s io n . ;
806
H e a rin g s B efore the House Committee on Banking and C u rre n c y .
(Che C r e a tio n and C o n tro l o f C r e d i t, p a r t 8 , 8 0 th Con
g r e s s , f i r s t s e s s io n .
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She C re a tio n and C o n tro l o f C r e d i t, p a r t 3 , 8 0 th Con
g r e s s , f i r s t se ssio n *
H e a rin g s B efore the S enate Committee on B anking and C u rre n
c y . S. 8 8 9 . 8 0 th C o n g ress, f i r s t s e s s i o n .
H e a rin g s B efore the S enate Committee on B anking and C u rren
c y . S.JY R es* 1 5 7 . 8 0 th C o n g ress, f i r s t s e s s io n .
H e a rin g s B efore th e J o i n t Committee on th e Economic R e p o rt.
8 0 th C o n g ress, f i r s t s e s s io n .
H e a rin g s B efore th e House Committee on Banking and C u rre n c y .
' S .£ . R es. 1 5 7 . 8 0 th C o n g ress, second se ssio n *
H ea rin g s B efore th e S enate Committee on B anking and C u rren
c y . C o n tro l o f I n f l a t i o n , 8 0 th C o n g ress, second s e s s io n .
H e a rin g s B efore the J o i n t Committee on the Economic R e p o rt.
8 0 th C o n g ress, second s e s s io n .
H e a rin g s B efore th e House Committee on B anking and C u rre n c y .
1151. 8 1 s t C o n g re ss, f i r s t s e s s io n .
H ea rin g s B efo re the Suhcom m ittee on M o n etary , C r e d i t , and
F i s c a l B o l i d e s o f th e J o i n t Committee on th e Economic
R e p o rt. 8 1 s t C o n g re ss, f i r s t s e s s i o n .
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8 1 s t C o n g ress, f i r s t s e s s io n .
R e p o rt o f the Suhcom m ittee on M o n e tary . C r e d i t , and F i s c a l
B o l i d e s o f the J o i n t Committee on th e Economic R e p o rt.
8 1 s t C o n g ress, second s e s s io n .
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c y . S. 8888. 8 l s t C o n g ress, second s e s s io n .
H e a rin g s B efore th e J o i n t Com mittee on th e Economic R e p o rt.
8 1 s t C o n g ress, second s e s s io n .
H e a rin g s B efore the. House Committee on B anking and C u rre n c y ,
H.R. 7894, 8 i s t C o n g re ss, second s e s s i o n .
237
H e a rin g s B efore the Subcom m ittee o f th e S enate Commit.tee on
Banking and C u rre n c y . S# 2318. 8 1 s t C o n g ress, second
se ssio n #
H e a rin g s B efore the House Committee on B anking and C u rre n c y .
S . 2882. 8 1 e t Qongre s s , seeond se ssio n #
H ea rin g s B efore th e Senate. Committee on B anking and C u rre n
c y . M a l l b u s in e s s A ct o f 1950, 8 1 s t C o n g ress, second
se ssio n #
C. GOVERNMENT AGENCY PUBLICATIONS
Board o f G o v ern o rs, Annual R e p o r ts . 1937-1949#
C o m p tro lle r o f the O u rren o y , Annual R e p o rt. 1940#
F e d e r a l D e p o sit In s u ra n c e C o rp o ra tio n , A nnual R e p o rt. 1944#
F e d e r a l R eserve System , F e d e r a l R eserve B u l l e t i n . 1940-1950#
D. JOURNALS, PERIODICALS, AND RESEARCH PUBLICATIONS
B ach, G* L#, "Bank S u p e r v is io n , M onetary P o lie y , and G overn
m e n ta l R e o r g a n iz a tio n ," J o u rn a l o f F in a n c e . 4 :2 6 9 -8 5 ,
December, 1948#
"The F e d e r a l R eserve and M onetary P o lic y F o rm a tio n ,"
American Economic R eview . 3 9 :1 1 7 3 -9 1 , December, 1949#
C a rr , H# C#, "The Problem o f Bank-H eld Government D e b t,"
A m erican^Economic Review . 3 6 :8 3 3 -4 2 , December, 1946.
C h a n d le r, L# 7 # , " F e d e ra l R eserve P o l i c y and F e d e ra l D e b t,"
A m erican. Economic R eview . 3 9 :4 0 5 -2 5 , M arch, 1949.
Dunkman, W # E #, "P o stw ar Commercial Bank L ending P o l i c i e s , "
J o u r n a l .o f F in a n c e . 4 :8 7 -1 0 0 , Ju n e, 1949.
H a r r i s , Seymour E . , "A One P e r Gent War?" A m erican Economic
R evlew . 3 5 :6 5 7 -7 2 , S eptem ber, 1945. -
L e la n d , S. E#, "The G overnm ent, th e B anks, and th e N a tio n a l
D e b t," J o u rn a l o f F in a n c e . 1 :5 - 2 1 , A ugust, 1946#
2 38
M cCracken, P . 1 . , "The P r e s e n t S ta tu s o f M onetary and F i s c a l
P o l i c y . " J o u rn a l o f F in a n c e . 5 s2 4 -4 8 , M arch, 1950#
n a t i o n a l C ity Bank o f Hew Y ork, M onthly B e t t e r . 3 9 -4 1 , A p r i l,
1951.
Hew York F e d e r a l R eserve Bank. M onthly R eview . 3 0 :7 3 , J u ly ,
1948.
B ath ^e, F* C ., "The Dual System W o rk s,” Banking Law J o u r n a l .
6 3 :7 -8 , J a n u a ry , 1946.
Reed, H. L , , " P r i n c i p l e s o f B anking R eform ," A m erican Eco
nomic Review . 3 7 :2 7 7 -8 8 , May, 1947.
R osa, R, V ., "Sm all B u sin e ss P ro b le m s ," J o u r n a l o f F in a n c e .
2 :9 1 -1 0 0 , A p r i l , 1947. !
S a i l o r , V. L . , "Bank S u p e rv is io n and the B u sin e ss C y c le ,"
J o u r n a l Of F in a n c e , 3 :6 5 -7 7 , O c to b e r, 1948.
Sam uelson, P . A ,, "The E f f e c t o f I n t e r e s t Rate In su ra n c e on
the B anking S ystern." Am erlcan Economic R evlew . 3 5 :1 6 -2 7 ,
M arch, 1945.
S e l t z e r , L. S . , "The Problem o f Our E x c e ssiv e B anking Re
s e r v e s ," J o u rn a l o f the A m erican S t a t i s t i c a l A s s o c ia
t i o n . 3 5 :2 4 -3 6 , M arch, 1940.
_______r _ , "The Changed Environm ent o f M onetary-B anklng P o l l
o y ," A m erican Economic Review, P ro c e e d in g s , 3 6 :6 5 -7 9 ,
May. 1946.
Simmons, E. C ., "S econdary R eserve R equirem ents f o r A ll Com
m e rc ia l B a n k s," Ame r l c a n Economic R eview . 4 1 :1 2 3 -3 8 ,
M arch, 1951.
TJ. S. Commission on O rg a n iz a tio n o f th e E x e c u tiv e B ranch o f
the G overnm ent. Task F orce R e p o rt. F o re ig n A f f a i r s . Ap
p e n d ix H, 1949.
. Lending A g e n c ie s. A ppendix R, 1949.
. R e g u la to ry C om m issions. A ppendix H, 1949.
W a llic h , H* C ., "The Changing S ig n if ic a n c e o f th e I n t e r e s t
R a te ," A m erican Economic Review. 3 6 :7 6 1 -8 7 . December.
1946. *
239
W arburton, C la rk , "C o -O rd in a tio n o f M o n etary , Bank S u p e rv i
s o ry , and Loan A g en cies o f the F e d e r a l S o v ern m en t,"
J o u rn a l o f f i n a n c e . 5 :1 4 9 -6 9 , M arch, 1950.
W i l l i s , J . B ., "The Case A g a in s t the M aintenance o f the War
tim e P a t t e r n o f Y ie ld s on Sovernm ent S e c u r i t i e s , " Am eri
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. "S econdary R eserve R e q u ire m e n ts," J o u rn a l o f f i
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Woodward, B. B . , "The B u h lic D ebt: E f f e c t s on I n s t i t u t i o n s
and Inco m e." American Economic Review. P ro c e e d in g s . 37:
1 5 7 -8 3 , May, 1 94?; ” '
E . MAGAZINES
B u sin e ss Week. F e b ru a ry 1 0 , 1951.
B u s in e ss Week. M arch 24, 1951.
APPENDIX
APPENDIX A
MONETARY POLICY, FISCAL POLICY, AND
SOM E OF THEIR CONFLICTS
I . THE CONCEPT OF MONETARY POLICY
The F e d e ra l R eserve System i s v e s te d w ith -ate form u
l a t i o n o f sound m o n etary p o lic y in th e U n ite d S ta te s * In
com plying w ith th e d u t i e s o f t h i s r e s p o n s i b i l i t y the System
r e g u l a t e s th e s u p p ly , c o s t , and a v a i l a b i l i t y o f money and
c r e d it* T h i s 'i s u s u a l l y acco m p lish ed th ro u g h a c tio n s which
a f f e c t banfc re s e rv e s * T h is prim e f u n c tio n of th e R eserve
System can , in broad te rm s , be c a lle d m o n etary p o l i c y .
The fo re g o in g i s o b v io u s ly w ith o u t n o v e l ty —p ro b a b ly
few ec o n o m ists would deny i t s v a l i d i t y ; t h i s JLs m onetary
p o l i c y . However, c a u tio n i s n e c e s s a r y — i n t e r p r e t a t i o n o f
th e word " s o u n d ,” in the e x p re s s io n "sound m o n etary p o l i c y , ”
o r the degree to w hich th e System should p ro cee d in r e g u la
tin g " th e s u p p ly , c o s t , and a v a i l a b i l i t y o f money and c r e
d it,"* i s n o t so e a s i l y a g re e d upon by e c o n o m is ts . O n e's
o p in io n a s to w hat m o n etary p o l i c y c o n s i s t s o f , i t s d e f i n i
t i o n , e t c . , depends upon w hat one would have m onetary p o lic y
a c c o m p lish . I t s g o a l s , a s p eo p le would have th o se g o a l s ,
a re m y ria d . The d e f i n i t i o n o f m onetary p o l i c y , th e n , i s
o n ly a g e n e r ic one; I t i s o n ly an a g re e d s t a r t i n g p o in t f o r
242
"basic d i f f e r e n c e s o f o p in io n s betw een e c o n o m ists.
These a t t i t u d e s a r e n o t so l e y th o se o f "econom ic
m en," i . e . , th e y a re n o t fa s h io n e d by economic c o n s id e r a
t io n s a lo n e . U n d o u b ted ly , economic f a c t o r s are o f m in o r im~
p o rta n c e in many in s ta n c e s and among many e c o n o m ists in the
d e te r m in a tio n o f a p r a c t i c a l m o n etary p o lic y c o n c e p t. In
f a c t , t h i s w r i t e r b e l i e v e s th e " in s ta n c e s " a re the common
c a s e . So, w ith o n ly an a g ree d b e g in n in g and no common m eet
in g ground one c a n s e a rc h f o r a v a l i d d e f i n i t i o n w hich i s
e v e r e l u s i v e , even though i t id w ith in th e c o n f in e s (n o t too
w e ll d e fin e d ) w hich a re u n d e rsto o d a s i t s l i m i t s .
Be tu r n in g to the p o in t o f s t a r t i n g , one f in d s i t
i
e a s i e r and l e s s d i s r u p tiv e to a c c e p t th e b road d e f i n i t i o n .
I n r e a l i t y , how ever, I t la e k s the m eaning one in te n d s to
g iv e to th e te rm . F o r exam ple, who would f l a t l y a c e e p t i t
a s h i s d e f i n i t i o n of m o n e tary p o lic y u n le s s he could a ls o
e n la rg e upon i t to show h i s u ltim a te g o a l? in d who would
deny t h a t he w anted "sound" m onetary p o l i c y , y e t would be
u n w illin g to en d o rse su c h "sound" p o lic y u n le s s th e w o rd 's
d e f i n i t i o n w ere s i m i l a r to h i s own? P ro b a b ly no o n e. The
s t a r t i n g p o i n t , th e n , i s u n s a t i s f a c t o r y in e v e ry r e s p e c t,
e x c e p t c o n v e n ie n c e .
I n most books on econom ics w hich d e a l w ith o u r to p ic ,
the a u t h o r s 1 s t a t e d d e f i n i t i o n o f t h e i r m a jo r term i s u s u a l
243
l y a p t extended beyond t h a t w hich h as been p r e s e n te d h e r e .
A c tu a lly , a re n o t th e d e f i n i t i o n s g iv e n in th e s e boo k s, w ith
a l l o f t h e i r s t r e s s , q u a l i f i c a t i o n , and scope* th e e n t i r e
c o n te n ts o f the books th e m se lv e s? Are n o t th e i n g r e d ie n ts
o f the books, to each i n d iv i d u a l a u th o r , a t o t a l o p in io n a s
to the p r o p e r m o n etary p o lic y ? I f s o , th e v a r io u s w r i t e r s
w ould have d i f f i c u l t y r e c i t i n g t h e i r own d e f i n i t i o n when i t
b e g in s w ith th e f i r s t and ends w ith the l a s t page o f t h e i r
book— even more so would a s tu d e n t o f t h e i r p r i n t e d e f f o r t s .
F u r t h e r , when th e y use tho e x p r e s s io n "m onetary p o lic y " in
t h e i r books a r e th e y n o t i n d i c a t i n g i t s m eaning to th e r e a d
e r by r e f e r r i n g him to the com ponents o f th e e n t i r e book
w hich i s b e in g re a d ? I f t r u e , th ey a re g u i l t y o f a b ro a d -
guage ta u to lo g y , a t th e l e a s t , and of p r e s e n tin g a h o p e le s s
s i t u a t i o n , a t the most*
c o n tin u e in the above l i n e o f re a s o n in g i s to move
in e n d le s s c i r c l e s , f h i s s tu d e n t b e l i e v e s th a t m onetary
p o l i c y h as n o t y e t been d e f in e d . F or c e r t a i n , such d e f i n i
t i o n w i l l n o t be found in t h i s t h e s i s . I f i t i s e v e r w r i t -
te n , i t i s doubted w h e th e r i t w i l l be encom passed in to any
sim ple s ta te m e n t, e a s i l y com m itted to memory and p a p e r.
W hatever th e v a l i d i t y o f the above, m o n etary p o lic y
w i l l c o n tin u e to be used a s a term ; i t w i l l be used and a r
gued o v e r, even a s in t h i s t h e s i s , a s i f i t had an a g ree d
and e x a c t foxm -^which I t lias n o t n o t.
844
I I * FISCAL A m MONETARY-FISCAL POLICY
The term m o n e ta r y - f is c a l policy^* h a s b een s c a t t e r e d
b r o a d c a s t In r e c e n t tim e s . I t s m eaning h as n o t covered th e
same a r e a . F i s c a l p o lle y m ight be d e fin e d a s th e c o o rd in a
te d a c t i v i t y o f th e v a r io u s f i e l d s o f F e d e r a l p u b lic fin a n c e
and le n d in g a rra n g e m e n ts toward some s p e c i f i c g o a l ,^ Mone
ta r y p o l i c y , f o r t h i s p u rp o s e , u s e s the d e f i n i t i o n a s a p -
p e a re d In the f i r s t s e c t i o n o f t h i s A ppendix, i , e . , the r e g
u l a t i o n o f th e s u p p ly , c o s t , and a v a i l a b i l i t y o f money and
c r e d i t . The two t o g e t h e r one p i c t u r e s a s an e f f o r t , a c o o r
d in a te d e f f o r t , to a m e lio r a te , o r a t l e a s t a l l e v i a t e , the
n a t i o n 's m a jo r econom ic p ro b lem s. M onetary p o l i c y alo n e
could n o t b e g in to r e a l i z e such a n a m b itio u s u n d e r ta k in g ;
n e i t h e r could f i s c a l p o l i c y a c tin g s i n g l y , 3
T h i s .w r t t e r o b j e c t s to the term , n o t from the m ar
r ia g e o f th e two w ords, b u t from the b e l i e f t h a t th e w rong,
th e l e s s d o m in an t, word h as been p la c e d f i r s t ,
2
F o r exam ple, f u l l em ployment. I t would seem f o l l y
to deny t h a t t h i s exam ple, t h i s s p e c i f i c t a r g e t , i s a v a i l
a b le to any b u t a sh o tg u n ap p ro a c h ,
g
M ost ec o n o m ists would p ro b a b ly a s s e n t to th e c o o r
d i n a t i o n o f th e two f o r the n a t io n a l b e n e f i t . However,
th e r e would p ro b a b ly be a d iv e rg e n c y among them a s to the
wisdom o f the o v e r - a l l g o v ern m e n tal p o l i c y w ith in w hich
m o n etary p o lic y would be g iv e n an a s s ig n e d r o l e ; t h a t i s ,
245
D is re g a rd in g f o r t h i s t h e s i s th e s e p a r a te m e r it s and
d e m e r its , pow ers and w e a k n e sse s, o f th e two o v e r th e le n g th
of the b u s in e s s c y c l e , 4 I t i s im p o rta n t to lo c a t e the
so u ro e o f m o n e ta r y - f is c a l p o lic y * l i t t l e e f f o r t I s needed
to d is c o v e r t h a t i t I s th e P r e s id e n t who u l t i m a t e l y d e t e r
m ines m o n e ta r y - f is c a l p o l i c y . The l i m i t s o f t h a t p o lic y
a re imposed upon him by C o n g re ss. P r a c t i c a l l y , i t i s the
S e c r e ta r y o f th e t r e a s u r y , a c lo s e member o f th e P r e s i d e n t s
e x e c u tiv e f a m ily , who s e t s and w ie ld s t h i s p o l i c y . The
Board o f G o v ern o rs, i t a p p e a rs c e r t a i n , d o es n o t have much
in f lu e n c e in sh ap in g p p l i e y . I t s Chairman i s n o t an i n t i
mate o f th e P r e s i d e n t i a l c i r c l e . M onetary c o n s id e r a ti o n s
p la y a r o l e se c o n d a ry to th e G overnm ent's f i s c a l and le n d in g
p o l i c y . C h a p te r I I h as a lr e a d y g iv e n some i n d i c a t i o n o f
t h i s s i t u a t i o n .
I t m ig h t be w ondered as to why th e Board o f G overnors
m o n etary p o l i c y c o u ld , could n o t , o r sh o u ld n o t a tte m p t to
f u l f i l l t h a t r o l e . The d i f f e r e n t o p in io n s would p ro b a b ly be
r e p r e s e n t a t i v e o f one o f th e th r e e c u r r e n t sc h o o ls o f mone
t a r y th o u g h t: (1) th e q u a n t i t y th e o ry s c h o o l; (2) th e e q u i
lib r iu m s c h o o l; and (&) the E e y n e sia n s c h o o l. The l a t t e r
h as been somewhat dom inant in the p a s t f i f t e e n y e a r s .
4 I t would seem o n ly n e c e s s a r y to quote D r. G olden-
w e is e r : " F is c a l p o lic y may c r e a te income b u t by i t s e l f i t
can n o t c r e a te money n o r d e te rm in e i t s a v a i l a b i l i t y and c o s t."
M onetary p o l i c y can c r e a te money and d eterm in e i t s a v a i l a
b i l i t y and c o s t b u t can n o t o f i t s e l f c r e a te incom e." E. A.
G o ld en w e iser, Monetar.v Management (lew York: M cGraw-Hill
Book Company, I n c . , 1 9 4 9 ), p . 4 .
246
and th e Reserve System would n o t "balk a t p la n s to w hich th e y
o b j e c t ; th ey have enormous powers s t i p u l a t e d in v a r io u s laws
and th e y a re r e s p o n s ib le to C o n g ress, n o t to th e E x e c u tiv e
b ra n c h o f governm ent. T h is , how ever, i s im p ra c tic a b le f o r
a t l e a s t two r e a s o n s . F i r s t , the Board h a s been u n w illin g
to p u rsu e a cou rse o f a c t i o n w hich would be d i s r u p t i v e to
th e governm ent, T his i s sim ple l o g i c . A c o u rse of a c t i o n
w hich would be d i s i n t e g r a t i n g to the n a t i o n ’ s c r e d i t , p u r
sued o n ly to prove i t s in d ep en d en ce, would b r in g th e s e v e r
e s t c r i t i c i s m down upon th e B oard, and j u s t l y so .
The problem o f c e n t r a l bank independence i s n o t n a
tiv e to t h i s c o u n try a l o n e . Mr. B ach, in an a r t i c l e , n o te d
th e fo llo w in g o f f - t h e - r e c o r d comment o f a g o v e rn o r o f one o f
th e w o rld ’ s m a jo r c e n t r a l b a n k s;
The g o v ern o r was a s k e d , "Bo you f e e l y o u r bank h as the
r i g h t to d efy th e G overnm ent?” w Oh y e s , ” he r e p l i e d ,
"We v a lu e t h a t r i g h t v e ry h ig h ly —and w o u ld n 't th in k o f
e x e r c is in g i t . ”®
A second re a s o n f o r th e c e n t r a l b a n k ’ s a c tu ie s e n e e to
T re a su ry p o l i c i e s l i e s in th e p o te n t m onetary powers p o s
s e s s e d by th e T re a s u ry D ep artm en t. These "m onetary a s p e c ts
o f f i s c a l p o l i c y " 6 a re based p r i m a r i l y upon th e T r e a s u r y 's
6 G. It. B ach, "The F e d e r a l R eserve and M onetary P o l i
cy F o rm a tio n ," Am erican Economic Review. 39 :1 1 8 3 . December.
1949. .. ' ~ -------
6 0 . I*. P r a t h e r , Money and Banking (C hicago: R ichard
D. I r w in , I n c . , 1 9 4 9 ), p . gSo.
247
I
c o n tr o l o v e r "bank r e s e r v e s an d , th u s ly , o v e r 'bank d e p o s its
and "bank le n d in g p o lic ie s * F o r exam ple, the T re a su ry can
choose e i t h e r th e com m ercial hanks o r th e F e d e r a l B eserve
Banks a s d e p o s i t o r i e s f o r i t s fu n d s , and, dep en d in g upon i t s
c h o ic e , hank r e s e r v e s a re expanded o r c o n tra c te d * The same
e f f e c t o c c u rs in i t s h a n d lin g o f the v a s t (o v e r $ 3 5 ,0 0 0 ,0 0 0 ,-
000) Government t r u s t fin d s* The T re a su ry can change th e
amount and type o f s e c u r i t i e s a v a i l a b l e f o r hank p u rc h a se
w hich, i n t u r n , in f lu e n c e s th e amount and p a t t e r n of hank
in v e s tm e n ts . V ia the Exchange S t a b i l i z a t i o n Fund
. . . i t can r e g u la te th e im pact o f th e i n t e r n a t i o n a l
g o ld flo w s and f o r e ig n exchange t r a n s a c t i o n s on the do
m e s tic h a n k in g s t r u c t u r e and in flu e n c e th e volume o f
hank r e s e r v e s . 7
I t m ig h t a l s o be n o te d , to co n tin u e w ith th e exam
p l e s , t h a t f in a n c in g g overnm ental d e f i c i t s w ith hank c r e d i t
i s n o t w ith o u t many m onetary im p l ic a tio n s . The u se o f a
Government s u r p lu s to reduce the n a t i o n a l d e b t h as m o n etary
r a m i f i c a t i o n s o f v a ry in g d e g re e s depending upon the type o f
s e c u r i t i e s redeemed and the r e c i p i e n t s o f the f in d s p a id
o u t.® L a s t, in c r e a s in g o r d e c re a s in g th e r a t e o f spending
by th e Government h as wide m o n etary e f f e c t s .
7 G. L. Bach, F e d e r a l Reserve P o lic y Making (Hew
York: A lfre d .A . K nopf, 1 9 5 0 ), p . 17.
s
P r a t h e r , o n . c i t . . p p . 531 f .
248
R e la te d to th e m onetary pow ers o f th e T re a su ry i s th e
de f a c to j u r i s d i c t i o n i t has o v e r th e m onetary a u t h o r i t i e s .
L e g a lly , th e r e i s no d i r e c t c o n n e c tio n betw een the T re a su ry
and the R eserve System i n r e g a r d s to th e o p e r a tio n o f th e
l a t t e r . The F e d e ra l R eserve System d e r iv e s i t a u t h o r i t y
from th e F e d e r a l R eserve l o t and i s r e s p o n s ib le to C o n g ress.
The T re a su ry D ep artm en t, th ro u g h th e P r e s i d e n t , r e l i e s on
th e C o n s titu t io n f o r i t s a c t s and on th e C ongress f o r the
scope o f those a c t s . A side from th e System b e in g th e f i s c a l
a g e n t o f the T re a s u ry , no l e g a l l i n e s e x i s t betw een th e two.
However, th e v a s t sums o f money and c r e d i t r a i s e d and s p e n t
by the T re a su ry and o t h e r G overnm ental a g e n c ie s h as m o n etary
r e p e r c u s s io n s no m a tte r how g r e a t the e f f o r t to av o id i t .
By i n d i r e c t i o n , c o n s c io u s ly o r o th e rw is e , th e Government
works w ith in the m onetary s p h e re . T h is i s n o t m eant a s
c r i t i c i s m ; i t i s o n ly to show how the ta s k o f th e m onetary
a u t h o r i t i e s i s in c re a s e d and i t s a u t h o r i t y reduced th ro u g h
no a c t i o n on i t s own p a r t . T h e o r e t i c a l l y , th e Government
has th e id e a l a rra n g e m e n t--m o n e ta ry r i g h t s and p r i v i l e g e s
w ith o u t th e co n c o m itan t d u t i e s and o b l i g a t i o n s .
To r e t u r n to the m o n e ta r y - f is e a l p o l i c y c o n c e p t, one
can p e rh a p s see t h a t th e f i r s t h a l f o f th e term is m is le a d
in g . P o s s ib ly f i s c a l p o lic y should be used in p la c e o f the
term , r e s e r v in g m o n etary p o l i c y , p u b lic f in a n c e , and le n d in g
249
p o lic y a s s e p a r a te a r e a s o f s tu d y — th e l a r g e r e x p r e s s io n em
b ra c in g the th r e e s u b o r d in a te s .
A ll o f the f o re g o in g i s w ith o u t n o v e lty ; n o th in g h a s
been added to w hat i s a l r e a d y known. The im p lic a tio n s o f
the s i t u a t i o n a re w hat a re im p o rta n t. How s h a l l the changed
lo c u s o f m onetary a u t h o r i t y be re s o lv e d w ith th e l e g a l p o s i
t i o n o f t h a t a u t h o r i t y ? . Sould the T re a su ry c o n tin u e a s the
dom inant agency? I s th e s i t u a t i o n a n a t u r a l g ro w th o f F ed
e r a l f u n c tio n s ? Should th e F e d e r a l Government, i n e f f e c t ,
c o n t r o l i t s c r e d i t o r , i . e . , sh o u ld i t d e te rm in e th e term s
and the amount o f th e lo a n s i t d e s i r e s from th e System ? I f
th e answ ers a re u n fa v o ra b le to the T re a s u ry , what sh o u ld the
s i t u a t i o n be and how ea n i t be j u s t i f i e d , i f a t a l l , w ith
the in c re a s e d a u t h o r i t y o f th e n a t i o n a l governm ent?
Our problem i s h e ig h te n e d by th e in c r e a s in g power o f
th e F e d e r a l a u t h o r i t i e s . Everyone seems to be a g a in s t i t in
i t s o v e r - a l l a s p e c t s , y e t few p e rso n s w ish to see th a t power
le s s e n e d in th o se a r e a s where such a r e d u c tio n would harm
them* P . W. McGrackenL-sees t h i s a s " . . . a la c k o f a r t i c u
l a t i o n i n o u r t o t a l economic and s o c i a l p o l i c y m easu res and
o b j e c t i v e s * ”^ He i l l u s t r a t e d h i s p o s i t i o n .
The p o stw a r boom i l l u s t r a t e s t h i s w e l l . Were some
9 p . W. M cCracken, ”The P r e s e n t S ta tu s o f M onetary
and F i s c a l P o l i c y , ” J o u r n a l o f F in a n c e , 5 :3 6 , M arch, 1950.
250
p e o p le * s h o u sin g n e e d s n o t h e in g m et? Was i t because
p e o p le could n o t pay th e p r i c e s ? V ery s im p le , l e t them
borrow m ore—100 p e r c e n t, i f n e c e s s a r y . Bid t h a t make
th e m onthly te r n s too h ig h ? E a s i l y s im p le . Extend th e
p e r io d ; lo w e r th e r a t e s . And i t was done.
Were ta x e s a c o n s t r a i n t on sp en d in g ? Then C ongress
m ust lo w er them . And i t d id .
Was th e b u rd en o f p ay in g i n t e r e s t on th e d e b t a p t to
be o n ero u s? The s o lu t io n ? W ell, the i n t e r e s t on a d e b t
tw ice a s b ig i s the same i f i n t e r e s t r a t e s a r e h a l f a s
h ig h , l e t th e T re a su ry keep t h a t in m ind. And i t d id .
I s a.b o n d more v a lu a b le a t p a r th a n below p a r ? Then
l e t the f e d e r a l R eserve know i t i s e x p e c te d to keep them
a t p a r . And i t d id .
T his could be ex p e cte d to add up to an economic s i t u
a t i o n t h a t d id n o t p a r t i c u l a r l y p le a s e anyone. And I t
d i d . 10
The s o l u t i o n to o u r problem i s n o t a s n e a r a t hand a s
could be d e s i r e d . T h is m ig h t ac co u n t f o r th e la c k o f any
s u b s t a n t i a l program to y e t come from C o n g r e s s .H
I I I . THE TREASURY VERSUS THE FEDERAL RESERVE SYSTEM
S e v e ra l y e a rs ago H. G. M o u lto n , th e p ro m in en t econo
m is t now a s s o c ia te d w ith the B rookings I n s t i t u t i o n , asked
the fo llo w in g q u e s tio n : " I s the F e d e r a l R eserve Board u n d e r
th e d o m in atio n o f th e T re a su ry Departm ent?.”! 2 T his i s what
1° M cCracken, l o o , e i t ♦
*1 The weleome e x c e p tio n to t h i s i s the R ep o rt o f the
Subcommittee on M o n e tary . C r e d i t , and F i s c a l P o l i c i e s o ? th e
«foint dom m lttee on th e Economic R e p o rt. Ja n u a ry 23. 1950.
H e r e i n a f t e r , t h i s r e f e r e n c e w i l l be n o te d by the name o f th e
Subcom m ittee*s ch airm an , S e n a to r P . H. D o u g las.
I 2 H. G. M o u lto n , The F in a n c ia l O rg a n iz a tio n o f So
c i e t y (C hicago: U n iv e r s it y o f Chicago P r e s s , 1921}, p . 515.
251
he w r o te :
I t i s a s s e r t e d th a t T re a s u ry f i s c a l re q u ire m e n ts have
dom inated th e p o lic y o f th e F e d e r a l R eserve Board a t
tim es when b an k in g re q u ire m e n ts were param ount and d id
n o t ru n p a r a l l e l w ith T re a su ry re q u ir e m e n ts . C o n c re te
l y i t i s u rg ed t h a t th e d e s ir e o f th e T re a su ry D e p a rt
ment to make a re c o rd in f l o a t i n g huge . . . lo a n s a t
v e ry low r a t e s o f i n t e r e s t was r e s p o n s ib le f o r th e p o l i
cy in a u g u ra te d u n t i l a f t e r the V ic to r y Loan was com
p l e t e d , o f k eeping ( i n t e r e s t ) r a t e s a t v e ry low l e v e l s
and hence s tim u la tin g s p e c u la tio n and i n f l a t i o n o f c u r
r e n c y .! 3
The s i t u a t i o n d e s c r ib e d i s m odern ev en though the
p a ra g ra p h was w r i t t e n in 1921. low w e ll M r. M oulton bespoke
h im s e lf f o r the f u tu r e d o u b te d le s s he d id n o t r e a l i z e . I t
seems p ro b a b le t h a t th e s i t u a t i o n was n o t one o f m ajor con
c e rn to him . P e rh a p s i t was w r i t t e n o n ly to show h i s in d ig
n a t i o n o v e r th e u s u r p a ti o n o f m onetary pow ers by th e T re a s
u r y . I t is - n o te w o rth y h e re f o r a t l e a s t two r e a s o n s : (1) i t
r e v e a ls a p a s t aw aren ess o f th e T r e a s u r y 's m onetary p o w e rsi4
and (2) i t g iv e s a p r e c e d e n t, however s m a ll, f o r the c o n d i
ti o n o e c u rin g two d ecad es l a t e r . T h is second re a s o n p o s s i
b ly i n d i c a t e s t h a t th e c u r r e n t s t a t u s betw een the T re a su ry
and th e c e n t r a l bank h as a grow th and developm ent e x te n d in g
13 M oulton, o p . o l t . . p p . 615 f . The word " i n t e r e s t "
h a s been s u b s t i t u t e d f o r e d i s c o u n t " i n th e l a s t s e n te n c e .
14 F o r a n o th e r a u th o r o f t h i s p e rio d who was n o t u n
aware o f th e s e pow ers, see P a u l M. W arburg, The F e d e r a l Re
se rv e By ste m : I t s Grow th and O rig in (Sew Yoric: M acm illan &
Company, 19<50), I I , p p . 4 70-72.
252-
f a r b ack in to o u r n a t i o n a l h i s t o r y . 15
The m ain is s u e h e r e , though, i s the r e o e n t d is p u te
betw een th e t r e a s u r y D epartm ent and th e F e d e r a l E eserve Sys
tem, o r , a s some have e a lle d i t , th e " i n e v i t a b l e con
f l i c t . " 1 ® One answ er g iv e n f o r th e e x is te n c e o f t h i s con
f l i c t , w hich t h i s w r i t e r p r e f e r s , h as been g iv e n by S e n a to r
D ouglas,
How, sin c e the T re a s u ry i s n o t lodged w ith th e r e
s p o n s i b i l i t y f o r l e g i s l a t i n g th e v a lu e o f money o r m ain
t a i n i n g a p r ic e l e v e l , l e t u s s a y , and sin c e i t s p rim a ry
r e s p o n s i b i l i t y i n t h i s c o n n e c tio n i s th e management o f
th e d e b t, i t seems to me t h a t u n d e r th o se c irc u m sta n c e s
th e T re a su ry would have an a lm o st i n e v i t a b l e d e s ir e to
red u ce th e t o t a l of i n t e r e s t c h a rg e s upon th e d e b t in
o r d e r to reduce th e t o t a l o f governm ent e x p e n d itu r e s and
to m a in ta in the p r i c e o f Government s e c u r i t i e s a t n o t
too f a r below p a r .
On th e o th e r h an d , th e E eserve System , b e in g p r i m a r i
l y changed w ith th e r e g u l a t i o n o f th e v a lu e o f money in
i t s b r o a d e s t a s p e c t s , w i l l have a n a t u r a l ten d en cy when
p r i c e s a re r i s i n g to t r y to check t h a t r i s e in p r ic e and
w i l l , t h e r e f o r e , f e e l in c lin e d to check th a t by th e i n
s tru m e n ts w hich i t h a s a v a i l a b l e .
. . . T h e re fo re , i r r e s p e c t i v e o f p e r s o n a l i t i e s , i t would
15 F o r an a u th o r who would a g re e to t h i s v ie w p o in t,
see E s th e r E. Taus, C e n tr a l B anking F u n c tio n s o f th e U n ite d
S t a t e s T re a s u ry . 1789-1941 (Hew Y ork: Columbia U n iv e r s ity
E r e s s , 1 940J•
15 S e n a to r D ouglas u sed t h i s e x p r e s s io n b u t he gave
A lla n S p ro u l c r e d i t f o r i t s o r i g i n a t i o n . See U .S . C o n g ress,
H ea rin g s B efore th e Subcommittee on M o n e ta ry . C r e d i t , and
F i s c a l P o l i c i e s o f t h e J o i n t Committee on th e Economic Re
p o r t , December 3 , 1949, p . 488. H e r e in a f t e r , t h i s r e f e r e n c e
w i l l be n o te d by th e name o f th e S ubcom m ittee’s ch airm an .
S e n a to r P . H. D ouglas.
253
seem to me t h a t i n a p e rio d o f I n f l a t i o n th e Reserve
System would have an I n e v ita b le te n d en cy to w ant to i n
c re a s e I n t e r e s t r a t e s a s a means o f c h e ck in g f h r t h e r u n -
due e x p a n sio n o f the volume o f p r i v a t e l y c r e a te d p u r
c h a s in g power by the b an k s; b u t to do t h a t would n e c e s
s a r i l y in v o lv e , in view o f the f a c t t h a t the Government
d e b t i s now so im p o rta n t, a n in c re a s e in th e i n t e r e s t
O harges w hich the t r e a s u r y an d , t h e r e f o r e , th e Govern
ment would have to p ay , upon t h i s p u b lic d e b t, and< m ight
in v o lv e —an d , in f a c t , r e c i p r o c a l l y would tend to i n
v o lv e — some r e d u c tio n in th e p r i c e s o f Government s e c u
r i t i e s in o r d e r to send th e y i e l d s o r tr u e i n t e r e s t r a t e
up**?
The moving re a s o n f o r th e d is p u te would a p p e a r to be
a d e s ir e on th e p a r t ©f the p a r t i c i p a n t s to have t h e i r p a r
t i c u l a r d ep artm en t f u l f i l l i t s ta s k i n the m ost econom ical
manner* Each seems w e ll aware t h a t th e l o s e r h as n o t o n ly
th e u n e n v ia b le ta s k o f a c t i n g c o n t r a r y to i t s own i n t e r e s t s
b u t o f a id in g th e w inner* This d o es n o t mean to im ply t h a t
th e y ig n o re th e n a t i o n a l w e lfa re to se rv e t h e i r own p u r
p o s e s ; i n s t e a d , each seems to work on th e assu m p tio n th a t
i t s own ends a r e , n a t i o n a l l y , th e m ost b e n e f i c ia l*
The f i r s t s e c t i o n s o f t h i s A ppendix e a s i l y r e v e a ls
t h i s w r i t e r ’ s b e l i e f t h a t th e F e d e r a l R eserve System n eed s
m ore, o r th e T re a su ry l e s s , power to p r o p e r ly b a la n c e o u r
m o n e tary , f i s c a l , and le n d in g p o lic ie s *
The fo llo w in g a re two exam ples, two c o n c re te exam
p l e s , o f th e T re a s u ry -F e d e ra l R eserve c o n f l i c t . In the
^ D o u g la s S u b com m ittee, H e a r in g s , l o o * c l t .
254
f i r s t o n e, the t r e a s u r y h o ld s f o r t h th e w in n e r; the R eserve
su c c e d s In th e l a t t e r , h u t w ith q u a l i f i c a t i o n s .
The Demotion o f th e Chairman o f th e Board o f G overnors
fh e dem otion, In 1948, o f M a rrln e r S. E e c le s from
Chairman to a G overnor o f the Board o f G overnors was th e
outcome o f two c o n f l i c t i n g p la n s f o r c o n t r o l l i n g the p o stw a r
in fla tio n .^ -® Since th e t r e a s u r y 's p r o p o s a ls w ere th o se p u t
in to e f f e c t , th ey need n o t he n o te d .
B eginning in 1943, the Board o f G overnors in i t s pub
l i c a t i o n s c a u tio n e d a g a i n s t unw ise economic m easu res in th e
p o stw a r p e rio d w hich would enhance th e power o f th e sw o lle n
money and c r e d i t su p p ly o v e r th e reduced su p p ly o f consum er
and p ro d u c e r g o o d s, th e war ended on A ugust 1 4 , 1945. Four
days l a t e r E x ec u tiv e O rd er 9599 I n s tr u c te d F e d e r a l a g e n c ie s
to move a s qm lekly a s p o s s i b le tow ard th e rem oval o f p r i c e ,
w age, and o th e r c o n t r o ls w ith th e ad m o n itio n t h a t In doing
so the economic s t a b i l i t y o f th e c o u n try m ust n o t be endan
g e r e d . By th e end o f the y e a r o n ly sm a ll p o r t i o n s o f th e
c o n tr o l s t r u c t u r e rem ain ed . She r e le a s e d money and c r e d i t
soon sw elled the n a t i o n 's economic stre a m .
A p e r u s a l o f th e f a b le o f C o n te n ts o f t h i s ! t h e s i s
IS
C o n tra ry to p u b lic o p in io n , Mr. E c e le s was n e v e r
a p p o in te d a s V ice C hairm an. I n f r a , p . 257.
255
shows v a r io u s p r o p o s a ls , a l l r e l a t i n g to th e F e d e r a l R eserve
System , Some have to do w ith ©hanging i t s s t r u c t u r e ; m ost
a re concerned w ith in c r e a s in g th e System ’ s a u t h o r i t y to m eet
th e changed economic environm ent w ith in th e p a s t te n , and
e s p e c i a l l y , w ith in t^te l a s t s i x y e a r s . The g r e a t e r p a r t o f
t h i s l a t t e r p o r tio n w ere th e p a r t i a l s o l u t i o n s o f the Re
se rv e System to the i n f l a t i o n problem . Few, i f any o f them,
re c e iv e d P r e s i d e n t i a l o r T re a su ry support.-*-9
M r. E e c le s was the Chairman o f th e Board o f G overnors
d u rin g and a f t e r the war.^® While Chairm an, he a c t i v e l y en
gaged in e f f o r t s to o b ta in th e enactm ent o f the p r o p o s a ls ;
t h i s , no m a tte r th e o p p o s itio n , f o r he b e lie v e d th e y would
m it ig a t e i n f l a t i o n a r y p r e s s u r e s . When he found m easures
w hich he b e lie v e d were n o t conducive to the tim e s , he was
n o t h e s i t a n t in denouncing them. The i n t e r e s t r a t e p o lic y
- * - 9 Ho a tte m p t i s b e in g made h e re to uphold th e Re
se rv e System a s b e in g e o r r e c t in a l l o f i t s a c t i o n s r e g a r d
in g th e i n f l a t i o n . In d e e d , one r e f e r e n c e n o te d many i n
s ta n c e s where th e System ’ s a c tio n s prom oted i n f l a t i o n . See
E. W. Memmerer and P , P.-H am m erer, The ABC o f th e F e d e r a l
R eserve System (Hew Y ork: H arper & B r o th e r s , 1 9 5 0 ), p p . 173-
7 8 . A lso , th e r e may be more th a n a l i t t l e t r u t h i n th e
c la im t h a t th e p r o t e s t s o f th e F e d e r a l R eserve o f f i c i a l s
a g a i n s t the G overnm ent’ s p o stw a r le n d in g program w ere a cov
e r f o r th e S y ste m 's own u n w illin g n e s s to tak e m o n etary m eas
u r e s n e c e s s a r y to -co m b a t i n f l a t i o n . See Bach, F e d e r a l Re
se rv e P o lic y M aking, o p. o f t . , p p . 113 f . ^
20
A c tu a lly , he was Chairman from th e l a t t e r p a r t o f
1934 to th e b e g in n in g o f 1948.
256
o f the f r e a s u r y , w hich th e R eserve System su p p o rte d in th e
m a rk e t, was a tta c k e d r e p e a te d ly hy M r. S o c le s . H is r e s i s
tance to f r e a s u r y p o lic y in c re a s e d a s the p o stw a r y e a rs
le n g th e n e d .21
Ihe ca p sto n e to Chairman S e c i e s ’ dem otion rev o lv e d
around h i s te stim o n y In the S p e c ia l S e ssio n o f C ongress c a l
le d In Bovember 1947 to c o n s id e r ways and means to h a l t th e
I n f la tio n * A t t h a t tim e he u rg ed th e enactm ent o f s e v e r a l
m o n etary c o n t r o l s w hich d id n o t have f r e a s u r y a p p r o v a l. Hot
th e l e a s t o f th e recom m endations he p u t forw ard was the s p e
c i a l r e s e rv e p l a n . 2* * He h a s s in c e s t a t e d t h a t h i s p ro p o s a ls
had had th e a p p ro v a l o f th e A d m in is tra tio n some m onths p r i o r
to h i s I n tr o d u c tio n o f them in to C o n g ress. When he d is c o v
ere d th e y no lo n g e r had t h a t a p p r o v a l, he s t i l l p re s s e d Con-
21 R egarding P r e s id e n t frum an’s 8- p o i n t program to
h a l t i n f l a t i o n , M r. S o c le s rem arked; "fhe program , ta k e n a s
a w hole, c e r t a i n l y does n o t make economic s e n s e ." See XJ.S.
C o n g ress, H e a rin g s B e fo re the Senate Committee on Banking
and C u rre n c y . I n f l a t i o n C o n tro l, J u ly 30, 1948, p . 1&7.
( H e r e in a f te r , t h i s re f e r e n c e w i l l he n o te d a s H e a rin g s . Sen
a t e . I n f l a t i o n C o n t r o l) . He s a id t h a t th e o p in io n o f the
R eserve System on d e b t management p o l i c y , w hich p o lie y i t
had to s u p p o r t, was seldom sought and more o f te n d is r e g a r d
e d . "D e c isio n s a re a p p a r e n tly made by th e f r e a s u r y l a r g e l y
on i t s g e n e r a l d e s ir e to g e t money a s c h e a p ly a s p o s s i b l e . "
See D ouglas Subcom m ittee, H e a rin g s , op. p i t . , p . 223, Novem
b e r 22, 1949. When asked i f t h i s was th e p o l i e y o f the
f r e a s u r y , th e S e c r e ta r y o f th a t body r e p lie d s h o r t l y ; " I t i s
n o t . " See i b i d . . p . 425, S tatem en t o f John W. Snyder, De
cember 2 , 1949.
22 See C h a p ter V.
257
g r e s s f o r t h e i r enactm ent
A ccording to G r. R. Bach, th e Board Chairm an was one
o f the f i r s t w itn e s s e s in th e C o n g re ssio n a l h e a r in g s on the
P r e s i d e n t ’ s e i g h t - p o i n t a n t i - i n f l a t i o n program . In Mr.
B ach’ s w ords:
I t was w id e ly a lle g e d t h a t th e B o ard ’s a g g r e s s iv e a c tio n
p la y ed a c r u c i a l r o le in le s s e n i n g th e ch an ces o f Con
g r e s s i o n a l a d o p tio n o f any s u b s t a n t i a l p a r t o f the P r e s
i d e n t ’ s p r o g r a m .^
Mr. E ecles* term a s Chairman o f th e Board ended in
Ja n u ary 1948—a b o u t a m onth and a h a l f a f t e r he ap p eared b e
fo re C o n g ress. On Ja n u a ry 27, 1948 he was r e p la c e d , fhe
P r e s i d e n t , in h i s l e t t e r to E e c le s a s k in g f o r th e l e t t e r ' s
r e s i g n a t i o n , d e c la r e d t h a t he d id n o t la c k c o n fid e n c e in
him ” . . . o r d i s s a t i s f a c t i o n i n any r e s p e c t w ith y o u r pub
l i c s e r v ic e o r d isa g re e m e n t on m o n etary o r d e b t management
p o l i c i e s . . . , l,25 A lthough In h i s l e t t e r th e P r e s id e n t
u rg ed M r. E c e le s to a c c e p t th e V ice C hairm anship o f th e
B oard, th e fo rm e r Chairman h a s p o in te d o u t t h a t h i s a p p o ln t-
See U .S . C o n g ress, H ea rin g s B efore th e House Com
m itte e on Banking and C u rre n c y . j |. £ . R es. 1 5 7 . A ugust 3,
1948, p p . 190 f . H e r e i n a f t e r , t h i s r e f e r e n c e w i l l be n o te d
a s H e a rin g s . H ouse, S , J* R es. 157.
^ B ach, F e d e r a l R eserve P o lic y M aking, o n . c l t . ,
p . 161. ' ' '
p C
H e a r in g s . S e n a t e . I n f l a t i o n C o n tr o l, o p . c i t . ,
p . 5 5 , J u ly 2 9 , 1 9 4 8 .
258
ment to t h a t ra n k n e v e r app eared and so he w ithdrew h i s name
a s a c a n d id a te and assumed d u t i e s a s a G overnor o f th e
B oard.
U n o f f i c i a l l y , th e r e was c o n s id e ra b le agreem ent in the
p r e s s and elsew h ere t h a t Chairman E ccles* dem otion r e
f l e c t e d th e P r e s i d e n t 's d e s ir e to o b ta in a new chairm an
who would be l e s s o u t o f harmony w ith the m ild e r view s
o f th e t r e a s u r y on d e b t and c r e d i t p o lic y , and who would
th u s be more a c c e p ta b le to th e S e c r e ta r y o f th e T re a su ry
and to th e la r g e b an k in g and f i n a n c i a l i n t e r e s t s who had
long Q uestioned many o f G overnor S e c i e s ' v ie w s . The
move was w id e ly view ed a s a trium ph f o r the S e c r e ta r y o f
th e T re a su ry in the m o n e ta r y - f is c a l p o lic y -m a k in g a r e a .
I t was a ls o c o n s id e re d a s te p in th e d i r e c t i o n o f l e s s
s tr o n g dominance o f the Board chairm an in System p o lic y
m a k in g .2 ”
The Abandonment o f M arket S upport f o r Government S e c u r i t i e s
I n economic te x tb o o k s , th e F e d e ra l E eserve System i s
g iv e n a u t h o r i t y o v e r m onetary management; the T re a su ry e x e r
c i s i n g d e b t management pow ers. Such a n ic e dichotom y h as
o n ly s le n d e r r e l a t i o n to r e a l i t y . I n t h i s A ppendix, we have
H e a rin g s , S e n a te . I n f l a t i o n C o n tro l, l o o , e l t .
27
Bach, F e d e ra l E eserve P o lic y M aking, o p . c l t . ,
p . 65. S u r p r is in g l y enough, M r. E c c le s h a s d en ied t h a t he
was dem oted. In h i s own w ords: "How, I was n o t dem oted. I
was j u s t n o t r e a p p o in te d a s Chairm an. T hat i s , o f c o u rs e ,
• . . a p r i v i l e g e o f th e P r e s i d e n t . " The p r i v i l e g e o f the
P r e s id e n t i s u n d e n te d , how ever, E ccles* s ta te m e n t seems con
f u s in g fo llo w in g a s i t does upon h is rem ark t h a t th e d u ty o f
the Board Chairm an, in h i s o p in io n , I s to convince th e a d
m i n i s t r a t i o n t h a t i t should go a lo n g w ith ” . . . the view s
. • • th e Board m ight have w ith r e f e r e n c e to the Q u estio n s
upon w hich th e Board h a s r e s p o n s i b i l i t y . ..." See H ear
i n g s , H ouse. S .£« H es. 1 5 7 , o p . c l t . , p . 171.
259
viewed some o f th e t r e a s u r y ’ s m o n etary p o w e rs.2® E a s i ly a p
p a r e n t i s the f a c t t h a t i t s g r e a t e s t a u t h o r i t y o v er m o n etary
p o lic y i s e x e rc is e d by th o se who d e te rm in e d e b t management
p o l i c y . As i t h as been p u t:
. . . in r e c e n t y e a rs the t r e a s u r y h as e x e rc is e d i t s
g r e a t e r in f lu e n c e on m o n etary p o lic y th rough i t s d e b t
management p o l i c i e s , and e s p e c i a l l y th ro u g h i t s power to
f i x th e v a r io u s te rm s, in c lu d in g i n t e r e s t r a t e s , on i t s
new i s s u e s . 2®
th e above i s a p p a re n t to th o se who a re f a m i l a r w ith
r e c e n t m onetary h i s t o r y . I s th e ch arg e a d m itte d by the
T re a su ry ? The answ er i s in th e a f f i r m a t i v e . S e c r e ta r y Sny
d e r b e l ie v e s th e f e d e r a l E eserve System h a s th e p rim a ry r e
s p o n s i b i l i t y f o r m onetary pow er, b u t
I f you in c lu d e d e b t management in m o n etary p o lic y , t h a t
i s a n o th e r m a tte r . The T re a s u ry D epartm ent w ith o u t
q u e s tio n — th e S e c r e ta r y o f th e T re a s u ry —h a s the re s p o n
s i b i l i t y f o r d e b t management, and i t was g iv e n to him by
C ongress.® 0
The f e d e r a l E eserve System d id th e u n p a rd o n a b le ; i t
q u e s tio n e d S e c r e ta r y S n y d er’ s "w ith o u t q u e s t i o n ." I t argued
t h a t th e m ain ten an ce o f m ark et s u p p o rt in th e p o stw a r p e rio d
was fo rc e d upon i t by the T re a su ry and th e p o lie y fo llo w ed
was e n t i r e l y too r i g i d . M r. E c c le s d e c la r e d t h a t i t promo
28 S upra, p p . 24& f ♦
29
D ouglas Subcom m ittee, R e p o rt, o p . c l t . . p . 29.
D o u g la s Su b com m ittee, H e a r in g s , o p . c l t . , p . 4 1 3 .
December 2 , 1 9 4 9 . ----------- - —
260
ted i n f l a t i o n .
In m aking a cheap money m arket f o r th e T re a s u ry we c a n
n o t av o id m aking i t f o r every b o d y . A ll m onetary and
c r e d i t r e s t r a i n t s a r e gone u n d er sueh c o n d itio n s ; the
F e d e r a l R eserve becomes sim p ly an en g in e o f i n f l a t i o n .® 1
M r. Snyder an sw ered : "The T re a su ry D epartm ent h a s
n e v e r ta k e n an I n f l e x i b l e p o s i t i o n in r e f e r e n c e to th e i n -
32
t e r e s t r a t e s . " In d e e d , he avowed t h a t th e re had been
" c o n s id e r a b le f l e x i b i l i t y " in th e i n t e r e s t r a t e . 33
T his v e r b a l feud betw een th e T re a su ry and th e R eserve
System was c o n tin u o u s in th e p o stw a r e r a . I t , how ever, a l
ways ended w ith the System o b je c tin g b u t com plying. A
change was in th e o f f i n g .
«
On Ja n u a ry 18, 1951, S e c r e ta r y Snyder v o ic e d h i s ex
p e c t a t i o n s o f f in a n c in g d e fe n se n ee d s a t ab o u t th e th e n p r e
v a i l i n g r a t e o f i n t e r e s t * He d en ied M r. S e c i e s ’ e h a rg e , r e
i t e r a t e d h e r e , t h a t th e f ro z e n i n t e r e s t r a t e made th e Re
se rv e System an "en g in e o f i n f l a t i o n . " H ig h er i n t e r e s t
r a t e s would o n ly in c re a s e d e b t c o s t s , he s a id ; th e y would
n o t d e t e r peo p le from borrow ing.® 4 He re g a rd e d the 2 -1 /2
31 D ouglas Subcom m ittee, H e a rin g s , op. c i t * . p . 224,
November 22, 1949.
r b I d . . p . 409, December 1 , 1949.
3 3 iaem
34
B u s in e s s Week. F eb ru ary 1 0 , 1 9 5 1 , p p . 24 f .
261
p e r c e n t r a t e a s f i x e d , The System e x p re sse d i t s r e lu c ta n c e
• • to s u p p o rt th e governm ent s e c u r i t i e s m a rk e t on a
f ix e d s c a l e , a s d e s ir e d by the A d m in is tr a tio n .w2^
On Ja n u a ry 31, the Open M arket Committee was in v ite d
to the W hite House* T h ere, th e P r e s id e n t d is c u s s e d th e need
o f in s u r in g t h a t d e fe n s e needs were a d e q u a te ly f in a n c e d .
S e v e ra l days l a t e r th e P r e s id e n t s e n t a l e t t e r to th e Board
o f G overnors th a n k in g them f o r the a s s u ra n c e t h a t Government
is s u e s would he s t a b i l i z e d a t the p r e v a i l i n g l e v e l s , Mr,
S o c le s im m ed iately is s u e d a p u b lic s ta te m e n t to the e f f e c t
th a t no su ch agreem ent had been e n te re d upon a t th e W hite
House m e etin g an d , in f a c t , had n o t even been d i s c u s s e d .26
The feu d f l a r e d up and i t s h e a t a t t r a c t e d many o b s e rv e rs .
I t was p ro m in e n tly d is p la y e d in the new spapers o f th e n a
t i o n .
On F e b ru a ry 26, a t a W hite House c o n fe re n c e on c r e d i t
p o l i c y , the P r e s i d e n t took s te p s to end th e d i s p u t e . He d i
r e c te d a com m ittee, composed o f the S e c r e ta r y of the T re a s
u r y , th e Chairman o f th e Board o f G ov ern o rs, the D ir e c to r o f
D efense M o b iliz a tio n , and th e Chairman o f th e C o u n c il o f
Economic A d v iso rs, to s tu d y ways and means o f r e c o n c ilin g
26 n a t i o n a l C ity Bank o f Hew Y ork, M onthly L e t t e r .
M arch, 1951, p . 28. ----------- -------
26 B u s in e ss Week, l o c . c i t .
862
th e fo llo w in g two o b j e c t i v e s :
F i r s t , th e need to m a in ta in s t a b i l i t y in the Govern
ment s e c u r i t y m ark et and f u l l co n fid e n c e in th e p u b lic
c r e d i t o f th e U n ite d S t a t e s , and seco n d , th e need to r e
s t r a i n p r i v a t e c r e d i t ex p a n sio n a t t h i s tim e.*57
On March 3 , the S e c re ta r y o f th e T re a su ry and th e
Board Chairman announced t h a t " f h l l a c c o rd " had been a t
ta in e d betw een t h e i r d e p a rtm e n ts w ith r e s p e c t . t o d e b t man-
^ 7 H a tio n a l C ity Bank o f lew Y ork, l o o , c i t . He
ask ed t h a t th e group s tu d y a t l e a s t th r e e s p e c i f i c m easu res
w hich he l i s t e d : (1) th e fo rm a tio n o f v o lu n ta r y g ro u p s to
l i m i t p r i v a t e sp ending a s w e ll a s by d i r e c t Government con
t r o l s ; (2) p ro v id in g the R eserve System w ith a d d i t i o n a l r e
serv e re q u ire m e n t pow ers; and (3), m ost s t a r t l i n g , the P r e s i
d e n t ’ s u t i l i z a t i o n o f th e powers he p o s s e s s e d in the Banking
A ct o f 1933 and th e T rading W ith th e Enemy A ct o f 1917, a s
amended. The pow ers he p ro b a b ly r e f e r r e d to a re n o t in the
1933 Banking A ct; th e y a re in th e Bank C o n s e rv a tio n A ct o f
1933. The im p o rta n t p a r t o f th is power s t a t e s t h a t in an
em ergency p e rio d "♦ • . n o member bank o f th e F e d e ra l Re
se rv e System s h a l l t r a n s a c t any banking b u s in e s s e x c e p t to
such e x t e n t and s u b je c t to su ch r e q u ire m e n ts , l i m i t a t i o n s
and r e s t r i c t i o n s a s may be p r e s c r ib e d by the S e c r e ta r y o f
the T re a s u ry , w ith the a p p ro v a l o f th e P r e s i d e n t . " See U*S.
S t a t u t e s a t L a rg e , P u b lic Laws (W ashington: U .S . Government
P r i n t i n g O f f ic e , 19&4), XLVIII, p . 2 . The p o r tio n o f the
T rading W ith th e Enemy A ct o f 1917, a s amended, to w hich he
p ro b a b ly r e f e r r e d was a ls o c o n ta in e d in the Bank C onserva
t i o n A c t. The amendment s t i p u l a t e d t h a t in an em ergency
". « • the P r e s id e n t may, th rough any agency he may d e s ig
n a t e , and u n d e r su ch r u l e s and r e g u l a t i o n s a s he may p r e
s c r i b e , by means o f i n s t r u c t i o n s , l i c e n s e s o r o th e rw is e ,
• • . r e g u la te o r p r o h i b i t any . . . t r a n s f e r o f c r e d i t o r
paym ents betw een o r paym ents by b anking i n s t i t u t i o n s a s d e
fin e d by th e P r e s i d e n t ." I b i d . , p . 1 . These pow ers have
n e v e r been used in the p a s t . They a r e , how ever, s t i l l a v a i l
a b le f o r u se in an em ergency p e rio d such a s , sa y , e x i s t s t o
d ay . C lose re a d in g o f th e powers r e v e a l th a t the P r e s i d e n t
h as a b s o lu te a u t h o r i t y o v e r a l l banks in an em ergency p e rio d
i f he so eh o o ses to ex e rc ise 'T iT s f u l l a u th o rity *
agem ent. Two days l a t e r I t was a p p a re n t t h a t System su p p o rt
o f lo n g -te rm F e d e ra l s e c u r i t i e s had heen abandoned* On
March 12 lo n g -te rm Governm ents d e c lin e d in p r ic e helow p a r
f o r th e f i r s t time in o v e r te n years* The T re a su ry a n
nounced t h a t a new bond i s s u e , soon to a p p e a r, would b e a r a
2 - 3 /4 p e r c e n t r a t e o f i n t e r e s t . 58
On March 9 Chairman McCabe asked f o r h i s r e l e a s e from
th e Board* Three days l a t e r , th e P r e s id e n t a c c e p te d h is
r e s i g n a t i o n , e f f e c t i v e M arch 31, Thomas M, M a rtin , A s s i s
t a n t S e c r e ta r y o f th e T re a su ry , was a p p o in te d s u c c e s s o r to
Mr. McCabe*
Many pages could be w r i t t e n in d is c u s s in g the im p li
c a tio n s o f th e fo re g o in g a c tio n s * T his w i l l n o t be done
here* The o n ly c o n c lu s io n to be made i s t h a t t h i s w r i t e r
b e l i e v e s the F e d e r a l B eserve System h a s n o t g a in e d , by t h i s
r e c e n t a c t i o n , w hat i t w ould have g a in e d i f i t had p u rsu ed
such co u rse o f a c t i o n i n , sa y , 1946. The f u tu r e o f m o n etary
p o lic y h as been g r e a t l y in flu e n c e d by what was n o t done*
W hether t h i s w as, i s , o r s h a l l be f o r the b e t t e r o r f o r th e
w orse depends upon o n e ’ s economic and p o l i t i c a l b e l i e f s and
f o r the f u t u r e t t o r e v e a l .
38
F o r an e x c e l l e n t d is c u s s io n o f th e m echanics and
te c h n iq u e s used i n lo w e rin g th e su p p o rt l e v e l , see N a tio n a l
C ity Bank o f Hew York M onthly B e t t e r . A p r i l , 1951, p p . 39-
42.
APPENDIX B
CONFLICT BETWEEN TRANSiMERICA CORPORATION AID
THE BOARD OF SOYEHNORS
Tli© C o n g re s sio n a l h e a rin g s on bank h o ld in g com panies
was I n t e r e s t i n g f o r re a s o n s o th e r th a n th e p ro p o s a l i t s e l f *
By v i r t u e o f s ta te m e n ts made, i t a p p e a rs e v id e n t t h a t th e
Board had T ran sam erica C o rp o ra tio n s p e c i f i c a l l y i n mind when
i t drew up i t s p ro p o s a l to l i m i t the power o f bank h o ld in g
com panies. Mr* E c c le s d e n ie d t h a t th e p ro p o sed l e g i s l a t i o n
was so d i r e c t e d , sa y in g t h a t T ransam erica was u sed in th e
h e a rin g s a s an exam ple, m a in ly because i t i s th e l a r g e s t on©
in th e c o u n try * 3 * D e sp ite t h i s , he had e a r l i e r rem arked t h a t
w h ile m ost o f the bank h o ld in g company managements had coop
e r a te d w ith th e B oard, on proposed bank a c q u i s i t i o n ,
. . . th e re i s one ca se where a h o ld in g company manage
m ent h a s o p en ly d e fie d the Board in i t s a tte m p t to h a l t
an u n b r id le d bank e x p a n sio n program . I r e f e r to the
T ran sam erica C o rp o ra tio n . • . .2
I t would a p p e a r t h a t th e Committee members were w e ll
aware o f a t whom th e p ro p o s a l was d i r e c t e d . I t was S e n a to r
Tobey who r h e t o r i c a l l y asked Mr. McCabe: "You know t h i s l e g -
U .S . C o n g ress, H ea rin g s B efore th e S enate Committee
on Banking and C u rre n c y . &. 829. June 1 1 , 1947, p p . 170 f .
T his r e f e r e n c e w i l l be known a s H e a rin g s . S. 829.
2 I b U . . P. 22, May 26, 1947.
265
i s l a t i o n was aimed a t t h a t crowd, do you n o t ? ”® I t i s en
t i r e l y c l e a r t h a t he m eant th e G ia n n in i ”crow d."
A nother f a c e t o f t h i s T ransam erlca-B oard o f G overnors
”fe u d " was th e Board p ro c e e d in g (h e ld in San F ra n c is c o )
a g a in s t T ra n sam erica . The is s u e s o f t h i s p ro c e e d in g e n te re d
in to the C ongressL onal h e a rin g s on hank h o ld in g com panies.
I n Mr. MeCahe *s w ords, th e s e p ro c e e d in g s commenced i n June
1948 u n d e r the a u t h o r i t y v e s te d in th e Board hy the C lay to n
A n t i t r u s t Act
. . . to d eterm in e w h e th e r o r n o t T ran sam erica C o rp ., in
th e a c q u i s i t i o n o f s to c k s o f v a r io u s h a n k s, has v i o l a t e d
s e c t i o n 7 o f the C la y to n A ct w hich p r o h i b i t s the a c q u i
s i t i o n hy one company o f the s to c k s o f two o r more com
p a n ie s engaged in commerce, whenever th e e f f e c t o f such
a c q u i s i t i o n may he e i t h e r to s u b s t a n t i a l l y le s s e n compe
t i t i o n betw een th e com panies so a c q u ire d o r to r e s t r a i n
tr a d e o r commerce o r tend to c r e a te a monopoly o f any
l i n e o f com merce.4
Mr. McCabe s a id the p ro c e e d in g s had no c o n n e c tio n w ith th e
h e a rin g s on S. 2318 a s the l a t t e r was r e g u l a t o r y in c h a ra c
t e r w h ile the fo rm er d e a l t w ith an tim o n o p o ly p r o v is io n s o f
th e C lay to n A c t .5
Mr. S te w a rt, c o u n s e l f o r T ran sam erica and i t s w itn e s s
U .S . C o n g ress, H earin g s B efore the Subcommittee o f
the S enate Committee on Banking and C u rre n c y / S. 2318.
March 1 , 1950, p . 26. T h is re fe re n c e w i l l be Baown a s H ear
i n g s . S. 2318.
4 I ^ i d . . p . 30.
5 Idem
266
a t th e h e a r in g s , was s k e p t i c a l o f rem arks such a s were p r o
f e s s e d by M r. McCabe. He b e lie v e d t h a t the Board was a t
te m p tin g to g a in m a s te ry o v e r T ran sam erica and t h a t the mo
t i v a t i n g f o rc e behind th e B o ard ’ s a c tio n s was in th e p e rso n
o f J . I*, Townsend, s o l i c i t o r f o r the B oard. M r. Townsend,
c o n tin u e d M r. S te w a rt, when s e rv in g a s c h i e f p r o s e c u to r f o r
th e S e c u r i t i e s and Exchange Commission, was th e i n s t i g a t o r
o f th e Com mission’ s e i g h t - y e a r u n s u c c e s s fu l a t t a c k upon
T ransam erioa f o r m is le a d in g f i n a n c i a l s ta te m e n ts . T h is
ch arg e was e v e n tu a lly dropped by the SEC. I n 1946, Mr.
Townsend moved to th e Board and soon became the a u th o r o f
S. 829 and S. 2318. When S. 829 f a i l e d to p a s s , he i n s t i g a
te d th e a n t i t r u s t p ro c e e d in g s a g a i n s t T ra n sa m e rie a , in w hich
. . . he has a d m itte d t h a t th e re i s no ev id en ce o f pub
l i c in ju r y ; he has contended t h a t the p u b lic i n t e r e s t i s
i r r e l e v a n t ; he h a s contended t h a t a l l he h as i s a s t a
t i s t i c a l c a se an d , on the b a s i s o f t h a t s t a t i s t i c a l
e a s e , th e re sh o u ld be an in ju n c tio n e n te r e d , in s p i t e o f
th e f a c t t h a t , a t the in s ta n c e o f the B oard, th e A t t o r -
n e y -C e n e ra l o f th e U n ited S t a t e s had conducted a tw o-
y e a r i n v e s t i g a t i o n o f th e s i t u a t i o n , and had w r i t t e n a
fo rm a l o p in io n t h a t th e re was no ev id en ce o f abuse and
no re a s o n f o r p r o s e c u tio n .® ,
Mr. S te w a rt l a t e r q,uoted from a t r a n s c r i p t o f the
p ro c e e d in g s in which Mr. Townsend had s t a t e d :
. . . the s o le q u e s tio n in th e c a s e , t h e r e f o r e , f o r you
to d eterm in e u l t i m a t e l y . . . I s w h eth e r by h av in g
6 H e a rin g s , S. 2318. o p . c i t . , p p . 164 f , March 15,
195Q. -*1 -
867
reached around f o r t y p e r o e n t o f tlie t o t a l in t h i s f i v e -
S ta te a re a we a re g e t t i n g around th e d an g e r p o i n t , and
should th e y he p e r m itte d to go on*7
From th e s e f a c t s d id Mr* S te w a rt "believe t h a t th e re
was a c lo s e c o n n e c tio n betw een the h i l l , S. 2318, and the
p ro c e e d in g s ; th e y were b u t two d i f f e r e n t a p p ro ac h es to the
same th in g — th e a b i l i t y o f th e Board o f G overnors to sto p
bank a c f t u i s t i o n s - i t b e lie v e d to be u n d e s ir a b le . I n th e p r o
c e e d in g s , he s a i d , th e Board a s s e r te d t h a t i t had th e power
to sto p it* "Yet a t th e same tim e, th e same people a re h ere
b e fo re you g en tlem en a s k in g f o r new a u t h o r i t y and a new law
to do the same thing*"® He d e c la r e d t h a t i f th e Board was
s u c c e s s f u l , b o th in th e p ro c e e d in g s and in s e c u r in g p assag e
o f th e b i l l , . . th e re w o u ld n 't be much l e f t in T ra n s
am erica."® . -
M r, Townsend d en ied t h a t he was making a c a r e e r o f
p r o s e c u tin g T ransam erica* He s t a t e d t h a t th e p ro c e e d in g s by
th e S 1 X 3 and th e b i l l s in tro d u c e d in to C ongress to cu rb h o ld
in g com panies had s t a r t e d p r i o r to h i s employment w ith
e i t h e r the Commission o r the B o a r d . ^ The o th e r c h a rg e s
7 H e a rin g s . S. 2318. p p . p i t . , p* 330, March 21,
1950. ~
8 I b i d . . p p . 229 f .
9 i d * . p . 155, March 15, 1950.
10 Iftld. , p . 230, March 17, 1950.
268
made by Mr. S te w a rt were n e i t h e r a ffirm e d n o r den ied in the
h e a rin g s by any member o f th e R eserve System .

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Asset Metadata

Creator Cawley, John Douglas (author)

Core Title Major changes proposed in the Federal Reserve System since 1940

Degree Master of Arts

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag economics, general,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Garis, Roy L. (committee chair), Anderson, William H. (committee member), Phillips, E. Bryant (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c20-440205

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Rights Cawley, John Douglas

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Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

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