Speech

"THE BANKING BILL OF 1935"

RADIO SPEECH

OF

MARRINER S. ECCLES

GOVERNOR OF THE FEDERAL RESERVE BOARD

SATURDAY, MAY 25,1935

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THE BANKING BILL OF 1935

I should like to talk to you as plainly as I can about the Banking

Bill which is pending before Congress. In the brief time at my dis­

posal I shall have to confine myself to the most controversial features

of the bill and omit discussion of many other provisions of the bill

which would, in my judgment, contribute towards recovery, as well as

towards the better coordinated and more efficient administration of

the Federal Reserve System.

I shall assume that you believe that in order to have our money

system controlled for the benefit of the nation as a whole, and not for

the benefit of special interests, this control must be in the hands of a

responsible body. If after all that this nation has gone through during

the past five years you still believe that we can leave our monetary

system to chance or to fate, then it would be futile for me to try to

Persuade you that our present system can and should be improved.

With the banking cataclysm so fresh in our memories, we would

be justified in saying that the Government had failed in its duty if

it neglected to correct at least some of those apparent defects in our

hanking system which contributed to bringing untold distress to

millions of our people and threatened to plunge our entire economy

into the abyss. We are told that there is no emergency at this time

which demands prompt action to correct these defects, but surely we

should not wait for another crisis before taking the steps necessary

to remedy obvious defects which painful experience has exposed.. We

should profit by the lessons we have learned from the emergency.

The real problem is the control over the volume and cost of money.

The defects which I have mentioned are not due to the absence of

Powers of control, but to the fact that the present responsibility for

the exercise of these powers is so diffused and divided as to hamper

seriously, if not to frustrate, their effective use.

We need also to state the objective towards which these powers

should be directed. At present there is no objective for monetary

policy stated in the law. The Banking Bill as passed by the House

of Representatives proposes a definite objective which is, in a word,

that monetary policy shall be directed towards the maintenance of

stable conditions of production, employment, and prices so far as this

can be accomplished within the scope of monetary action.

I do not wish to be understood as believing that by monetary action

alone we can eliminate all booms and depressions and achieve a per­

manent and unvarying stability. I do believe firmly, however, that

by monetary means exercised promptly and courageously we can

greatly mitigate the worst evils of inflation and deflation.

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What are these powers of control to which I refer? There are three

principal means of control which now exist. /The first is the power to

raise and lower the discount rate, /that is, to determine the cost at

which banks can borrow from the Federal Reserve banks and conse­

quently to influence the cost at which the public can borrow from the

banks. The importance of this power is apparent. By lowering or

increasing interest rates it is possible to lower or increase the cost of

doing business and, therefore, to have an influence over the contraction

or expansion of business. This power is now vested in the Federal

Reserve Board at Washington.

The second means of control to which I have referred is the power

to raise or lower reserve requirements of the banks which are members

of the Federal Reserve System./ This power more directly influences

the volume of money because under our law the amount of deposits

that banks can create is limited in proportion to the amount of re­

serves they possess. Therefore, an increase or a decrease in the

volume of reserves tends to increase or decrease the volume of deposits

which are our principal means of payment, or money. Since 1933

this power has been vested in the Federal Reserve Board, but it can

only be exercised when the President declares that an emergency

exists and gives his approval. The responsibility for declaring an

emergency should not be placed upon the President. Even if an

emergency did not exist, the declaring of it would almost certainly

create one. The bill proposes to give the Federal Reserve Board the

use of this most important instrument of control without requiring

the President to declare an emergency, which might involve insur­

mountable political obstacles. The Federal Reserve Board should be

in a position to exercise this power in the normal course of events for

the very purpose of preventing an emergency.

/ The third means of control is what is known, perhaps somewhat

mysteriously, as open-market operations. Without going into the

details of this technical matter, open-market operations mean that

the Federal Reserve banks when they wish to increase the volume of

money can do so by buying Government securities in the open market.

The money they pay for these purchases is added to the reserves of

the member banks. Conversely, when the Reserve banks wish to

diminish the volume of member bank reserves they can sell securities

and in effect lock up the money paid by the banks for the securities.

__In this way they can directly influence the available volume of money.

At the present time the control over this power is distributed between

a committee of twelve governors of the twelve Federal Reserve banks,

who now have the responsibility for recommending purchases or sales,

the Federal Reserve Board, which has authority to approve or dis­

approve the recommendations of the governors, and 108 directors of

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the twelve Reserve banks, who in turn have the right to determine

whether or not they will buy or sell in accordance with the policy that

has been recommended by the governors and approved by the Board.

A more effective means of diffusing responsibility and encouraging

delay could not very well be devised.

On this point I have recommended that the power over open-market

operations be entrusted to the Federal Reserve Board, which consists

of eight members, six of whom are appointed by the President and

confirmed by the Senate, and two ex-officio members, the Secretary

of the Treasury and the Comptroller of the Currency. The Board

Would be required, however, before taking action on open-market

operations as well as on discount rates and reserve requirements, to

consult with a committee of five governors selected by the Federal

Reserve banks. In this way the responsibility for action will be

unescapably fixed.

To my mind, the all-important thing is to place responsibility for

the exercise of these three means of control in a clearly defined body

and to state the objective towards the attainment of which that body

shall exercise these powers. I do not wish to be dogmatic about how

this body shall be constituted. I have recommended placing responsi­

bility for the exercise of these powers in the Federal Reserve Board,

Which was established by law to serve the best interests of the nation

in banking and monetary matters. /However, there are powerful

groups which are irreconcilably opposed to this plan and wish to

Perpetuate the present unsatisfactory situation in which these powers

cannot be effectively exercised.

This attitude is by no means characteristic of all of the bankers

of the country. In all fairness, I wish to emphasize that in discussing

this issue most of the leaders of the American Bankers Association

have adopted a constructive and cooperative attitude. This is in

sharp contrast with the attitude of a few bankers and business leaders,

Particularly in New York. Many of the bankers have frankly recog­

nized the need and importance of the major changes proposed in the

Banking Bill and have accepted them in principle.

With these bankers the issue over the Banking Bill narrows down

largely to a question of the composition of the controlling body.

Thus, the American Bankers Association proposes that the exercise

of monetary powers shall be entrusted to a committee consisting of

the Federal Reserve Board, which shall be reduced to five members,

and a committee of four governors selected by the governors of the

twelve Federal Reserve banks. This plan would give the governors

of the Federal Reserve banks, who are selected by directors twothirds of whom are appointed by private bankers, four votes as against

five votes for members of the Federal Reserve Board.

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There has been considerable support for another proposal which

would entrust the powers of determining monetary policy to a com­

mittee consisting of the Federal Reserve Board of eight members, as

now constituted, together with five governors of the Federal Reserve

banks. These governors would be selected with reference to a fair

representation of the different regions of the country, one member

to represent the Eastern Federal Reserve districts; one, the Middle

West; one, the South; one, the far West; and one to be selected at

large.

It is not for me to determine in whom these powers shall be vested.

My recommendation was that they be vested in the Federal Reserve

Board, with a committee of five governors acting in an advisory

capacity. I have just mentioned two other proposals. It is for the

representatives of the people of the United States in Congress to

determine whether they want to give these powers to an independent

public body, to private interests, or to a combination of the two.

The one principle on which I feel there can be no reasonable ground

for disagreement is that the powers must be vested in a clearly

defined body which will have adequate authority and full and unescapable responsibility for the use of these important powers.

As I have said, the purpose of the bill is not to create new powers

but to place existing powers in a responsible body where they may

be effectively exercised. Against this proposal the cry of political

control has been raised. This is not a new cry. It was raised against

the original Federal Reserve Act more than twenty years ago. It

was raised by about the same interests which are now resisting the

passage of this bill—the same interests that have repeatedly been

against all progressive social and economic legislation, such as the

income tax, even when it was proposed to make it as low as 2 percent;

against child labor legislation; against the Federal Trade Commission

and the Federal Power Commission; the Securities Exchange Com­

mission; against pensions of all kinds, both State and national; in

short, against all that enlightened legislation which has long since

been accepted and now forms the basis of such economic and social

advance as we have achieved.

If it is fair to charge that the Federal Reserve Board is political,

then the same accusation must be made against the Interstate Com­

merce Commission, against the Federal Trade Commission, and

against other governmental bodies the members of which are nomi­

nated by the President and confirmed by the Senate. Experience has

demonstrated that these bodies have consistently acted not for

political advantage but in the public interest.

Some of the opponents of the bill are raising all the familiar buga­

boos that they have so often trotted out in the past whenever any

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attempt has been made in the interests of the country as a whole to

limit their influence in national affairs. I think that Mr. Walter

Lippmann well stated the tone and temper of these irreconcilable

opponents when, in a recent article, he referred to their hysterical

methods. He pointed out that they tell us in one breath that we are

threatened with a grave emergency because of the dangers of un­

controllable inflation while in the next breath they tell us that no

emergency exists which requires the enactment of this legislation,

designed as it is to enable us to deal effectively with just such an

emergency. As Mr. Lippmann says with reference to the incon­

sistency of these opponents, “It does not make sense. If we are faced

with these hideous dangers, are we not criminally negligent if we fail

to fix clearly the responsibility for averting them?”

As I say, this cry of “wolf” is not new. I have had occasion to

delve into the history of banking legislation and I note with some

degree of consolation that the Federal Reserve Act was denounced

in language so nearly identical with that being used today by much

the same organized opposition, that unless you knew the dates you

could not distinguish between what they said more than twenty

Years ago and what they are saying today.

Then, as now, the same interests were crying inflation and political

control. Then, as now, they demanded full control. Indeed, they

Undertook to persuade President Wilson that they should have banker

representation on the Federal Reserve Board. Senator Glass of Vir­

ginia in his authoritative and illuminating book on the Reserve

System entitled, “An Adventure in Constructive Finance,” tells of

how these bankers made their arguments to Mr. Wilson, and according to Senator Glass, when they had finished, President Wilson said

quietly,

“Will one of you gentlemen tell me in what civilized country of the

earth there are important government boards of control on which

private interests are represented?”

“There was,” wrote Senator Glass, “painful silence for the longest

single moment I ever spent; and before it was broken, Mr. Wilson

further inquired,

“ ‘Which of you gentlemen thinks the railroads should select mem­

bers of the Interstate Commerce Commission?’ ”

And Senator Glass adds in his book,

“There could be no convincing reply to either question * * *.”

Let me quote another pertinent paragraph from this illuminating

book:

“While the Federal Reserve bill was pending,” wrote Senator Glass,

“it was mercilessly condemned in detail by certain interests. Where

there was any praise in these quarters, it was faint enough to damn.

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This hostile criticism reflected not alone the attitude of bankers, as

the class which imagined that it was chiefly affected by the proposed

readjustment; but it voiced the disapprobation of those business

groups which are most readily impressed by banking thought. This

was not surprising, since the phenomenon was and is of frequent

recurrence.”

Unfortunately this is all too true. You are witnessing the same

phenomenon again today. You are hearing the same cry that the

banking bill means reckless inflation—that the purpose of the bill is

to obtain control of the banks so that the administration may be able

to finance an endless series of government deficits. The complete

answer to this bugaboo is that if the administration had such a

purpose it would not need this bill, for this or any other adminis­

tration will always find means to raise the funds which the repre­

sentatives of the people in Congress have appropriated.

As a matter of fact, the administration has at its command, in the

Stabilization Fund and under the so-called Thomas Amendment, more

than 5 billions of unexpended dollars. Demand for the purchase of

government bonds is so great that the average interest rate has

dropped by more than 25 percent since the administration took office.

In the face of these facts, do you believe the opponents of this bill

when they tell you that the administration wants the banking bill

enacted in order to enable it to finance governmental deficits?

The organized opposition to the banking bill wants to delay its

passage, to leave matters as they are. Our opponents profess to

believe that the issue should be submitted to a commission for further

study. But manifestly this is not an issue which will be settled

by further study. It is not an issue as to facts which need to

be gathered together and pored over by another commission. Unless

your memories arc shorter than I believe them to be, you know

the essential facts. The issue is plain. It is an issue of funda­

mental belief. It is whether such powers as we possess over monetary

policy, which affects the welfare of all of us, shall be definitely placed

in a body which shall have not only the necessary means of control

but the fixed responsibility for its exercise, or whether these powers

should be left as at present where they can neither be effectively

used nor the responsibility for their exercise definitely fixed. It

calls for a decision by the people of the United States through their

representatives in Congress. It is my sincere conviction that this

bill is in the interest of the banking system as a whole because it

will enable it better to serve the public interest.

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