The CHAIRMAN. We have concluded with Governor Eccles, and I want to thank you, in behalf of the committee for your faithfulness in attending these hearings, and for the very able presentation you have made of this legislation. All of the committee, I am sure, cannot agree with everything you have said, but we agree with you. Governor ECCLES. I appreciate your courtesy and the patience which the members of the committee have accorded me.

Statement on National income, money, and income velocity, submitted by Gov. M. S. Eccles

MODIFICATION IN THE BANKING BILL OF 1935 PROPOSED BY GOVERNOR ECCLES IN HIS TESTIMONY BEFORE THE HOUSE BANKING AND CURRENCY COMMITTEE

1. SEC. 201. The governors and chairmen and vice governors of the Federal Reserve banks shall be approved by the Federal Reserve Board every three years rather than annually, so that their terms as governors would coincide with their terms as class C directors.

2. SEC. 202. On the admission of insured nonmember banks, the Board shall have authority to waive not only capital requirements, but all other requirements for admission, and that the Board be permitted to admit existing banks to membership permanently without requiring an increase in capital, provided their capital is adequate in relation to their liabilities.

3. SEC. 203. The pension provision shall be modified so that any member of the Board, regardless of age, who has served as long as five years, whose term expires and who is not reappointed, shall be entitled to a pension on the same basis as though he were retired at seventy. That is, he is to receive a pension of $1,000 for each year of service up to twelve.

SEC. 205. Authority over open-market operations shall be vested in the Federal Reserve Board, but that there be created a committee of five governors of Federal Reserve banks, selected by the twelve governors of the Federal Reserve banks, and the Board shall be required to consult this committee

before adopting an open-market policy, a change in discount rates, or a change in member-bank reserve requirements.

5. SEC. 209. The Board shall not have the power to change reserve requirements by Federal Reserve districts, but only by classes of cities. For this purpose banks shall be classified into two groups: one comprising member banks in central reserve and reserve cities, and the other all other member banks. Changes in reserve requirements, therefore, would have to be either for the country as a whole or for the financial centers, or for the country districts. 6. SEC. 210. The conditions on which real-estate loans may be granted by member banks shall be left to the discretion of the Federal Reserve Board to be determined by regulation. No real-estate loan hereafter made shall exceed 60 percentum of the appraised value of the property; but this shall not prevent the renewal or extension of loans heretofore made.

7. It shall be the duty of the Federal Reserve Board to exercise such powers as it possesses to promote conditions making for business stability and to mitigate by its influence unstabilizing fluctuations in the general level of production, trade, prices, and employment, so far as may be possible within the scope of monetary action.

(Thereupon, the committee took a recess until 3 p. m., this day.)

AFTERNOON SESSION

The CHAIRMAN. Dr. Goldenweiser, you have heard the discussion that has taken place in connection with this bill, H. R. 5357. The committee would like to have you discuss the legislation, and I assume that it is to be desired that you give us the benefit of your judgment in the way of explanation of the legislation embodied in title II, in its technical aspects, so that all of us may have a clearer understanding of its mechanics.

Mr. GOLDSBOROUGH. Mr. Chairman, I do not know whether this suggestion is desired by Dr. Goldenweiser, but on various and previous occasions he stated that, in view of the fact that he was on the staff, he preferred not to give his opinion as to matters of policy.

The CHAIRMAN. I undertook to intimate to him that it is not desired to lead him into that field, but that he give us the benefit of his explanations of the mechanics and the technical part of this bill.

STATEMENT OF DR. E. A. GOLDENWEISER

Dr. GOLDENWEISER. Mr. Chairman, I would like to make a brief statement before you ask me questions, if I may. I have not prepared a written statement. One reason that Governor Eccles thought it would be desirable for me to testify was that I could make it somewhat clearer how the provisions of this proposed legislation have been developed out of the experience of the Federal Reserve System under the provisions as they are in the law today, and it is along that line that I should like to make my opening remarks.

I want to state for the record that anything that I say that is not purely factual expresses my own personal opinion, and I am not speaking for the Federal Reserve Board. In my opinion, this bill accomplishes two important purposes: One is to clarify and fix more definitely the responsibility involved in the administration of the Federal Reserve System; and the other is to improve the administration of the credit machinery that the System sets up.

The proposals do not involve as much change from existing law as has been intimated, chiefly in the comments and the general impression in the discussion of the bill outside of this room.

I should like, with your permission, to discuss in some detail a few of the sections of the bill on which I can, perhaps, add a little light, and then leave it to you to ask me such questions as you may desire.

The first section of the bill-and I am speaking entirely of title II of this bill, H. R. 5357-the first section is one that arranges for combining the offices of governor and chairman of the Federal Reserve banks, and to make the appointment of the person to occupy the position subject to the approval of the Federal Reserve Board. It has been explained to you just why it is necessary that the Board be consulted, and I shall not discuss that phase of it, but I would like to say a few words about the effect of this dual organization under which we have been functioning for 20 years, which has, in part, not proved entirely satisfactory, either to the banks or to the Board. In many cases it has worked very well. In the final analysis, it is all a question of personalities, but you are setting up a charter for the bank, and you ought to provide against the possibility of undesirable contingencies developing, rather than to depend on human qualities to be such as to result in smooth administration, even though the machinery be calculated to produce the reverse.

I do not want you to get the impression that in numerous cases it has worked in an unsatisfactory manner, but still there have been cases where it has worked in an unsatisfactory manner.

Under existing law and practice the Federal Reserve bank has two heads: The chairman of the board, appointed by the Federal Reserve Board, who is also a class C director and is also the Reserve agent and the Federal Reserve Board's local representative in the banks; and then it has the governor, who is appointed by the directors and is responsible entirely to them, except that his salary is subject to approval by the Federal Reserve Board and he is subject to removal for cause.

In most cases it has worked out that the governor has been the principal executive officer of the bank, although there have been cases where, as a matter of personal equation, the chairman has been the principal executive officer. It has been a question of personalities, as to which one has been dominant. It seems clear that it ought to be made perfectly plain in the law just who is going to run the banks, whether it is going to be the chairman or the governor, and the only way to do that, without defining their duties in very great detail, is to combine the offices.

We have had cases where the chairman and the governor did not get along, where the chairman might have used his prerogatives as chairman to try to keep the governor out of the meetings of the board of directors, which seems absurd, and there ought to be no legal possibility for such a situation. We have had cases where of two men one was first governor and then chairman, and then they reversed themselves and the one that had been chairman became governor, and vice versa, and they continued to be at cross purposes. Usually the Federal Reserve Board feels that it is desirable for it to communicate with the banks through the chairman of the board of directors, who is the Federal Reserve Board's representative on the premises. As it has worked in practice, in some

cases it has been merely a matter of routing the mail to the governor, who is the executive head of the bank, through the chairman. In some cases, however, where the chairman happened to be jealous of the prerogatives of the governor, it has sometimes resulted in the Board's addressing the chairman and the information not reaching the governor, who has the responsibility for the running of the

bank.

It has particularly happened in cases where the governor might be away and the deputy governor, while actively in charge of the bank, would not receive the information coming from the Board to the chairman, and yet the deputy would be the man whose responsibility it was to run the bank.

Now, those things will happen. They are bound to happen so long as we have a set-up where you have two heads responsible and performing different functions. It cannot be expected in all exigencies of daily life and personal equations for them always to be the kind who will talk it over and get along smoothly in their operations. In most cases, they have done that, but there have been cases where they have not.

This proposal will do away with this difficulty and, at the same time, will save the system a considerable operating expense, and will result, I think, within the banks, in smoother operation and also in smoother cooperation between the banks and the board.

The agent's department or the chairman's department in the bank has had several functions of the bank under its charge. It has had the examination division, and the bank-relations division, and the economic services, and while that has worked very well in many cases you will forgive me for taking a particular interest in the economic services, with which I am connected, myself-the fact that they are connected with the chairman, who is not the executive head of the bank, has been an additional handicap in making those divisions function in a way so as to have the information that they collect, and the material which they assemble, finding its way into the hands of the operating officials, who would use it in formulating policies.

The only purpose of the economic services of the Federal Reserve System is to give the operating officials of the banks and their boards the kind of information that they require for their work, and anything in the nature of a hurdle between the economic services and the bank officials is a handicap to the effective working of the economic services, and I think it has seen that to some extent.

Those are the reasons, as I see them, for combining the offices. Those are the reasons that appeal to me, and the fact, as I said, that the combined officer needs to be approved by the Federal Reserve Board, it seems to me, almost goes without saying, because the Board is given the power to appoint the chairman, and it must naturally have the power of approval of the joint officer.

I have not anything to comment upon in the section that deals with the admission of insured banks into the Federal Reserve System. It seems to me that the Governor covered all of that, all that I can think of on the section.

In connection with the qualifications of the Federal Reserve Board, which this bill provides for, the principal thing in the way of their qualifications is, that instead of having it stated that they should be appointed with due regard to agricultural, industrial, and geographical interests, there is substituted a statement that they should be persons, who by training or experience or both, are qualified to formulate economic and monetary policies. It seems to me that that substitution is a very good one, because it states the qualifications of the members of the Federal Reserve Board in terms of the principal function which they have to perform, and because it does away with the idea that the board should consist of representatives of different groups of the population, this man representing agriculture, this man banking, this man trade, and so on. It is better that each member of the Reserve Board, as a matter of law, should feel that he represents the country as a whole, and the interests of the country as a whole, and his job on the Board is to be engaged in the formulation of national credit and monetary policies.

I think that the insertion of that qualification into the text of the law is recognition of the growing conviction on the part of the country that the Federal Reserve System's functions are much broader than was clearly understood at the time the Federal Reserve Board was organized. At that time, it was largely conceived that the Board should be a representative Board and that it should represent the different sections of the population, so that none of them would fail to receive equal consideration. Of course, that is important, and it will continue, but an explicit provision for a national, nonpartisan board, that has the sole objection of serving the interests of the people as a whole, with particular reference to those duties that deal with the quantity and cost of money is an advantage.

It is along the same line as the proposal which Governor Eccles has read to you, stating the objectives of the Federal Reserve System in terms of maintaining the stability of various elements of the business structure, that is, to have men on the Board who will devote their energy to maintaining that stability insofar as it can be maintained by monetary means, and men who should be qualified to formulate national policies.

I would like to say, in this connection, that the idea that the Federal Reserve Board has broader responsibilities than the mere accommodation of commerce and business and the serving of agriculture, trade, and industry. is an idea which has been forced upon the Federal Reserve System by actual experience and which has been gradually developed in the System.

The accommodation of commerce and business, which is the only objective that was mentioned in the Federal Reserve Act, is a vague phrase, and has all of the attributes of a statesmanlike pronouncement. It is vague, it is a glittering generality like the Declaration of Independence, and its content can be changed as circumstances change. It has, therefore, not served any very useful purpose, but has not done any particular harm.

It is now time, in the light of 20 years' experience, to substitute a more clearly defined objective than this vague phrase, which, to my way of thinking, held the place for a more definite objective throughout these years.