BANKING ACT OF 1935

THURSDAY, MARCH 21, 1935

HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C. The committee met at 10:30 a. m., Hon. Henry B. Steagall (chairman) presiding.

The CHAIRMAN. Gentlemen, we have with us this morning, Mr. Coolidge, the Under Secretary of the Treasury, who will discuss the bill H. R. 5357.

Mr. Coolidge has prepared a brief statement which he would like to read to the committee, after which he will be glad to answer any questions members of the committee may desire to propound. Mr. Coolidge, you may proceed.

STATEMENT OF T. JEFFERSON COOLIDGE, UNDER SECRETARY OF THE TREASURY

Mr. COOLIDGE. Mr. Chairman, I have a brief statement covering only title II of the bill.

The CHAIRMAN. I presume you desire to address yourself to title II of the bill, and that is really what the committee would like to hear you about.

Mr. COOLIDGE. Title II is the part of the bill which is of most interest to the Treasury Department, because in that portion of the bill it is proposed to amend the Federal Reserve Act.

When the Federal Reserve System was formed conditions were very different from those of today. There were practically no Government securities in the market. The reserve requirements of the System were based on the amount of gold that was in the country and there was no insurance of bank deposits by any agency. The adjustment of money rates was largely automatic and only partially a matter of judgment. Should gold leave the country it became necessary for the banks to borrow to replenish their reserves. The same was true when there was a demand for currency or for an extension of loans. When either of these situations arose it was almost axiomatic to raise the rediscount rates to discourage further borrowing or to replenish the gold stock.

These conditions are very different today. The gold in the country is in excess of any normal legal reserve requirements; Government securities are obtainable for liquidity in large quantities, whereas commercial paper is small in amount compared with previous times, and bank deposits have largely been insured by the Federal Deposit Insurance Corporation. The proposed bill attempts to adjust the

banking laws so that these new conditions can be met in a suitable

manner.

In that portion of the bill covering amendments to the Federal Reserve Act, I want to take up the proposed change in the method of appointing the governors and vice governors of the individual Federal Reserve banks; the proposed change in collateral requirements for loans from the Reserve banks; the proposed change in restrictions on real-estate loans; and the proposed method of openmarket operations together with the power of the Fedral Reserve Board to change reserve requirements.

It seems incongruous to have a governor appointed by the directors of the local bank and a chairman of the board by the Federal Reserve Board at Washington. Under the bill, the directors of the local Federal Reserve bank choose a governor who shall be chairman of the board and a class C director, and their choice is subject to the approval of the Reserve Board at Washington. The approval of the Board should, I believe, make for harmonious relations between the banks and the Federal Reserve Board, while at the same time not deprive the local directors of any of their proper responsibility in the choice of the officers.

At present the Federal Reserve banks are restricted in their loans. to member banks, being able to loan only on specified types of assets. This bill will permit them in their discretion to loan a member bank on any of its sound assets when in their judgment it is a wise thing to do. At the present time this may seem unnecessary as the member banks have great quantities of funds; nevertheless, should there be an unwarranted flow of funds from an individual bank or from certain parts of the country, the banks under the bill could be given proper support by the Federal Reserve banks should their general condition justify it and unnecessary liquidation be prevented.

It is proposed that the existing restrictions on real-estate loans be somewhat liberalized. I personally believe that banks should be permitted to work out their old loans without restriction, while in the case of new loans 60 percent of an appraised value should be high enough. The Federal Reserve Board could properly be given further authority to make regulations within this limit of 60 percent.

Our control of money rates has passed from the automatic stage, because of the great amount of excess reserves, into a condition where automatic standards cannot, I believe, be improvised which can be expected to work under the conditions of the present or immediate future. It would seem that this control must be entrusted to a group of men, and, presumably, will be exercised by open-market operations in Government securities, by a change in the reserve requirements and in rediscount rates, or by a combination of the three.

I would like to state that there are no important conflicting interests in regard to the proper rate for short-time money. Everyone's interest is best served by the proper rate to help make business stable and prosperous. There may be differences of opinion between men or groups of men as to what is the rate most suitable under the conditions of the time, and the best methods of obtaining the desired results. The Treasury has, of course, great powers in influencing the rates for money and it is most important that it coop

erate with those to whom like powers are committed. It is not important to choose men from any particular group to perform this important function, but it is essential that wise men experienced in the effect of money policies be chosen and that they not be influenced by unwise demands of special groups.

For this purpose the bill sets up an open-market committee, three to be chosen by the Federal Reserve Board from their members and two to be chosen by and from the governors of the Reserve banks. It is contemplated that these five men have the responsibility of the difficult and delicate job of buying and selling acceptances and Government securities with Reserve bank money for the purpose of furnishing to the country a proper supply of funds at proper rates to the extent that it is advisable to use this method for the purpose. With conditions as uncertain as they are and with the vast amount of gold in the country this power of buying and selling acceptances and Governments may be insufficient to insure proper control and in ths bill the Federal Reserve Board is given power to change legal reserve requirements of member banks. A raise of legal reserves would impound the idle money of the member banks, thus raising rates; or a reduction of reserve requirements would give the member banks additional funds. These two methods used in combination will equip the Federal Reserve System with supplemental control devices to be available for use when required, although it is to be expected that the need to change legal reserves will occur very seldom.

The CHAIRMAN. Mr. Coolidge, the Treasury favors the enactment of this bill?

Mr. COOLIDGE. The Treasury favors the enactment of this bill and the purpose for which it is intended. The question of changes that may be made, or the methods of accomplishing the purposes is entirely a question for this committee, and there is no reason why the bill should not be considerably modified to carry out the purpose for which it is submitted, so far as the Treasury is concerned.

Mr. GOLDSBOROUGH. The Treasury is in favor of the bill; is that correct?

Mr. COOLIDGE. That is correct.

The CHAIRMAN. That is what I wanted to ask you.

Mr. GOLDSBOROUGH. Under the bill, the directors of the Federal Reserve banks would still elect their governors, subject to the approval of the Federal Reserve Board, and the majority, that is, 6 of the 9 directors are bankers?

Mr. COOLIDGE. That is note quite correct. Six of the nine are elected by the stockholders who are the banks, but only three may be bankers. I think I am correct in that statement. So the other three would not be bankers.

Mr. HANCOCK. The three appointed by the Federal Reserve Board must be bankers, which would mean

Mr. GOLDSBOROUGH. I mean the six would either be bankers or would be members appointed by bankers, which, in my judgment, amounts to the same thing.

Mr. HOLLISTER. You have stated that the bill in its present form is satisfactory to the Treasury. Are you aware of the suggested changes that Mr. Eccles presented to the committee in his testimony?

Mr. COOLIDGE. When you say in the suggested form, I would like to make clear that the purposes and general form of the bill are favored by the Treasury. The exact form is not of particular consequence, or the particular business of the Treasury.

Mr. HOLLISTER. Of course, inasmuch as the bill itself does not state what is purposes are, some people might read different purposes in the bill than others.

Mr. COOLIDGE. My only point is that I do not want to approve every dot on every "i" and every cross on every "t." I do not feel that I am in a proper position to do that, because I have not spent the time that Governor Eccles has spent on the subject.

Mr. HOLLISTER. You have not looked over the memorandum of several pages which Governor Eccles submitted to the committee? Mr. COOLIDGE. I have seen the changes proposed, but I am not prepared to state that the Treasury is back or is not back of those changes. I will be glad to have you enumerate the changes and to say what I feel about them.

Mr. HOLLISTER. I have not that memorandum before me, but there are several of the changes that I can remember.

One, particularly, is this. As I understand it, Mr. Eccles has changed his views with respect to this open-market committee of five, and suggests that it would be much better that the Federal Reserve Board have complete control over the open-market operations, with a committee consisting of the governors of the various regional banks, with which a member would be compelled to advise prior to taking any action.

Mr. COOLIDGE. I do not think I would be personally prepared to back that particular recommendation. I think the committee should be composed of a combination of the two.

Mr. FORD. Was that the testimony given before the committee by Mr. Eccles? I do not remember that that was brought up before the committee; I thought it was suggested that it be composed of two from the Federal Reserve banks and three from the Board.

Mr. HOLLISTER. That is in the bill, and as I understood Mr. Eccles' suggestion, he thought it would be much better to have the Federal Reserve Board have complete control.

I questioned Dr. Goldenweiser yesterday when he was before the committee concerning the statement that the power was left in the regional banks to control in some way the open-market operations, and he finally admitted that the only power given was the power to advise; that there was absolutely no power whatsoever either to initiate or to compel action, or to veto. The full power, under Mr. Eccles' suggestion, would be in the Federal Reserve Board to compel the Federal Reserve banks to enter upon open-market operations. Mr. HANCOCK. I think Mr. Coolidge should be informed about the suggested amendment before he undertakes to answer that question. Mr. COOLIDGE. I have seen the suggested amendment, and what I

say is

The CHAIRMAN. He thinks that the provision of the bill is more desirable.

Mr. HANCOCK. Mr. Hollister failed to state that under the Governor's suggestion, an advisory committee would be appointed from the governors to advise with the Federal Reserve Board before any such power became effective.

Mr. COOLIDGE. I understand that, and I do not wish to make a great point of it. But my personal feeling is that the money is owned. by the Reserve banks, and that some Reserve bank governors should be on the committee investing those funds.

Mr. HOLLISTER. There are two purposes, I suppose, for which openmarket operations can be carried on. One is the easing or tightening of credit or money. That is the chief purpose, so far as I understand it, of the whole theory of open-market operations.

Is it not also true that if full compulsory powers are given with respect to open-market operations, we will say to the Federal Reserve Board, or even to a committee which the Federal Reserve Board controls, that also this power might very well be used to compel the Federal Reserve banks to acquire securities directly from the Government, in the event that the Government has the securities it wishes to sell, and there is no other way of selling them?

Mr. COOLIDGE. That, presumably, would be within the power of the proposed committee if they so wished to use it.

Mr. HOLLISTER. That is something new in the law?

Mr. COOLIDGE. The same powers can now be exercised, only in a more complicated manner. The committee and the Reserve Board combined have the use of the same powers that is now proposed to concentrate in this committee.

Mr. HOLLISTER. But at the present time no reserve bank may be compelled to enter open-market operations if it decides it does not want to.

Mr. COOLIDGE. I think that is true.

Mr. HOLLISTER. Whereas under this bill, if it is passed, the Federal Reserve banks could be compelled by whatever body we decide upon, whether the committee or the Federal Reserve Board, after consultation with the advisory committee, to acquire bonds.

Mr. COOLIDGE. To both buy and sell; that is the intent.

Mr. HOLLISTER. The thing that worries me chiefly about the bill is the compulsory feature, the fact that the credit resources of the country might be compelled, notwithstanding what the great majority of good bankers might think as to the advisability of it-the great credit resources might be compelled to be used in the handling of bond issues, in the event that the Government continued to pile up deficits, and I would like to ask you whether you think that is a wise power to put in any board which is, to some extent, if not entirely, under administration control.

Mr. COOLIDGE. I would like to answer that very directly. I think the power is going to exist somewhere. I think it is rather unfortunate to have the power wielded by 12 separate banks.

I think the power should exist in a board, and that the board should be very carefully selected. The power is going to be some

where.

Mr. HOLLISTER. The affirmative power to compel the regional banks to cooperate in acquiring, and you say also in selling-and I am worried about the acquiring end of it-in acquiring Government securities.

Mr. COOLIDGE. It seems to me, otherwise a regional bank may act on its own and interfere with the action of others, and then you have the picture of 12 regional banks, each with the power to do what you say you do not like to see concentrated.