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/ There are ten CHAPTERS and the original press release. Link to them here -- I • II • III • IV • V • VI • VII • VIII • IX • X • press release
The full text of the subcommittee’s press release, including the proposed reforms, is published below: /
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HOUSE OF REPRESENTATIVES SUBCOMMITTEE ON DOMESTIC FINANCE
OF THE COMMITTEE ON BANKING AND CURRENCY EIGHTY-EIGHTH CONGRESS
WASHINGTON, D.C.
(Press release for Sunday a.m., June 28, 1964)
THE SUBCOMMITTEE ON DOMESTIC FINANCE OF THE HOUSE BANKING AND CUBRENCY
COMMITTEE RELEASES “PROPOSALS FOB IMPROVEMENT OF THE FEDERAL RESERVE”
The Domestic Finance Subcommittee today submitted for circulation and discussion a set of corrective proposals to strengthen the Federal Reserve System.
All of the Democratic members of the subcommittee joined in this action. The Republican members did not join in the release.
The Democratic members of the subcommittee are Wright Patman, chairman (Democrat, Texas), Henry S. Reuss (Democrat, Wisconsin), Charles A. Vanik (Democrat, Ohio), Claude Pepper (Democrat, Florida), Joseph G. Minish (Democrat, New Jersey), Charles L. Weltner (Democrat, Georgia), Richard T. Hanna (Democrat, California), and Charles H. Wilson (Democrat, California).
The text follows:
“PROPOSALS FOB IMPROVEMENT OF TIlE FEDERAL RESERVE SUBMITTED FOR DISCUSSION
BY THE SUBCOMMITTEE ON DOMESTIC FINANCE
“We have heard considerable testimony on the Federal Reserve System. The testimony strongly suggests that some revision of the System is indicated to improve future monetary policy and thereby our economy’s
performance, in accord with the Employment Act of 1946. A set of corrective proposals Which emerges from the tetltimony given before the subcommittee is presented herewith for further consideration.
“We are not suggesting. of course, that these proposals cannot be improved upon. While the subcommittee has not settled on any specific proposal, it intends to consider the entire set in public hearings after the next Congress convenes in January 1965. ‘I’he proposals, though preliminary and tentative, are circulated at thIs time to allow for full study and discussIon by the Congress, the executive branch. the Federal Reserve, and the public:
“A. To emphasize the public character of the Federal Reserve:
“1. Provide for the retirement of the Federal Reserve stock.
“2. Vest all power to conduct open market operations in the Federal Reserve Board.
“B To increase the effectiveness of monetary policy by assuring the recruitment of an outstanding Federal Reserve Board and an adequate response to advances in economic knowledge:
“1. Remove the present requirement that the President, In selecting Governors of the Federal Reserve Board’· * • shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests and geographical divisions of the country: Instead. require only that the Governors be men of integrity devoted to the public Interest.
“2. Reduce to five the number of Governors of the Federal Reserve Board.
“3. Reduce to 5 years the terms of office of the Governors and allow for reappointment.
“4. Make the term of the Chairman of the Board of Governors coterminous with that of the President.
“5. Raise the salaries of the Governors.
“C. To insure public control over the expenditures of public monies:
“1. Provide for a public audit by the Comptroller General of all expenditures by the Federal Reserve Board and the Reserve banks.
“2. Provide for paying into the Treasury as miscellaneous receipts all capital gains and interest received by the Federal Reserve from U.S. Government securities.
“3. Authorize appropriations by the Congress of the expenses of the Federal Reserve banks and the Federal Reserve Board.
“D. To provide statutory guidelines for monetary policy and assure coordination of all of the Government’s economic policies in achieving the goals of the Employment Act of 1946:
“1. Require that the President set forth in his periodic Economic Reports, in conjunction with his recommendations on fiscal and debt management policy, guidelines concerning monetary policy, domestic and foreign-including the growth of the money supply, as defined by himnecessary to attain the goals of maximum employment, production, and purchasing power of the Employment Act of 1946.
“2. Express the sense of Congress that the Federal Reserve operate in the open market so as to facilitate the achievement of the President’s monetary policy; and require tb’at the Federal Reserve, if its monetary views and actions diverge from those recommended by the President, file with the President and the Congress a statement of reasons for its divergence, in form like the President’s Economic Report.“
E. To allow for greater specialization in performing the monetary control function: “I. Permit the Federal Reserve Board to concentrate on monetary policy by transferring its present bank supervisory functions to the Comptroller of the Currency, the FDIC, or, alternatively, to a newly created Federal banking authority.”
F. In addition, the Federal Reserve System should immediately undertake studies appraising the effectiveness of their present methods of controlling the money supply. It may well be, as recent economic stUdies indicate, that the Federal Reserve’s control of the money supply is defective-leading to the kindof divergencies economists have observed between what the Federal Reserve claims It is doing, with respect to the money supply, and what has actually happened ..
G. The cost and benefits of using tight money as the most important checkrein on the economy should be reappraised (if, indeed, the Federal Reserve has ever made a thorough appraisal of the subject). The Federal Reserve should consider alternate ways to obtain the same effects-their efficiency and seemliness. It is my confident belief that the policy of raising interest rates from one plateau to another with each period of business recovery has few if any beneficial effects, while it has played havoc with the Nation’s general well-being. Restoring interest rates to saner levels will materially cut the ,11 billion yearly cost of carrying the Federal debt, make corresponding reductions in the Federal budget, and trim down the billions of dollara of purchasing power which have been transferred from the budgets of low- and middle-income families into the budgets of the interest-income families.
H. The Federal Reserve System should buy a larger portion of new U.S. securities issues directly from the Treasury, then sell them in the open market when sales are propitious and coordinate with overall monetary policies. This would make the Reserve banks the dealers in U.S. securities. Only the Government’s central bank can hold and carry out an orderly marketing of large quantities of Government securities, just as only the central bank can carry out monetary policies. Isolating the central bank from the function it can best perform is an absurdity indeed.
Most industrial nations of the world have long since recognized this and placed debt management affairs in the hands of their central banks. Quite aside from the advantage of coordinated Treasury and central bank operations, Federal Reserve management of the Federal debt would result in two direct financial savings to the Government: First, the present system, by which the Government first asks the large financial institutions what they will pay for a new obligation; then issues the obligation at a price (or interest rate) which the buyers are determined to have, will be eliminated. The Government would no longer be the captive of a few large and well-eoordlnated buyers of Government securities.
Second, direct purchases by one agency of the Government from another would save, for the Government, the security dealers’ cost -- and profit-- which now enters into the indirect transactions between the Treasury and the Federal Reserve.
As was pointed out in the previous chapters, by having one agency of the Government supporting the other, the interest costs on 91-day Treasury billswhich recently were at 3lh percent and above-never rose above one-half of 1 percent during World War II and the years immediately following. Similarly, the interest costs on long-term Government bonds never rose above 2¥,z percent- until the Federal Reserve System seceded from the Government In 1951. Furthermore, it will be clear to those who have read the previous chapters, that the purchase and holding of large amounts of Government securities bythe Federal Reserve during the World War II years had no connection with the increases in the money supply made in those years. Those increases In the money supply resulted from other conscious and deliberate poliey decisions including the decision to let private banks create large sums of money to acquire and hold Government securities.
I. The Federal Reserve should divide the money-creating power between the Federal Reserve banks and the private banks more favorably to the taxpayers and less favorably to bank profits. In short, under responsible public control, the Federal Reserve banks will hold more Government securities-returning the interest payments to the Treasury-and the private banks will hold less. At the present time the Federal Reserve authorities have divided the Government’s money-creating powers between the Government and the private banks on a basis of about 1 to 7. In many years of questioning high experts on the matter, I have yet to hear even one plausible answer to the question why the Government should extend money-ereating powers to the private commercial banks to be used, without cost, to create money which is then lent to the Government at interest. It is entirely reasonable that the Federal Reserve should, without reducing the present level of bank profits, arrange future additions to the money supply in ways which will gradually bring about a 1-t0-4: division of the Government’s money-creating power, with commercial banks ultimately owning a smaller percentage of the outstanding Government securities, and the Federal Reserve owning a larger one. This can be accomplished by raising reserve requirements back to the 1953 level.
J. The Federal Reserve System should revitalize the practice of extending Federal Reserve credit to the banking system through the 12 regional Federal Reserve banks, particularly through restoration of the practice of discounting eligible paper. This could be aided by making the discount window a matterof right rather than privilege. As the Federal Reserve System was orIginally designed, and as it originally functioned, it extended credit to banks of the various localities as it was needed to meet the needs of local business, farmers, and individuals. When the present custom of extending substantially all Federal Reserve credit to the banking system through open market operations in New York was adopted, Federal Reserve authorities brought into being a small group of professional Government securities dealers. All purchases and sales of Government securities by the Open Market Committee are funneled through these dealers in New York. Therefore, the reserves created by the Open Market Committee first see the light as reserves of the New York banks. The System then relies upon the operations of securities dealers to distribute reserves to the parts of the country where they are most needed. This system has worked very poorly, simply because the original owners of the Government securities sold to the Federal Reserve, through dealers, are likely as not located where the new reserves are needed least. To illustrate, if an insurance compan located in Omaha decides to sell some Government securities to a securities dealer, the new credit which the Federal Reserve extends to the banking system goes to banks in Omaha -- whether Nebraska needs credit or not. The banks in Omaha may already have an excess of loanable funds, while the banks in Peoria, say, do not have sufficient credit to supply the needs of their customers. A particular bank trying to sell eligible paper to its Federal Reserve bank -- at a discount -- provides the best evidence of where Federal Reserve credit is needed. When the Federal Reserve banks again make more of their extensIons of credit to member banks by direct means, they will be performing more of the banking functions for which they have responsibility. The highly questionable Importance of a small group of open market dealers wlll be correspondIngly reduced.
K. The Federal Reserve should create an open market In fact, as well as in name. The discussion of the Federal Reserve’s use of its authority to buy and sell securities in the “open market,” to use tbe words of tbe statute, revealed that the Federal Reserve has, in fact, created a very closed market. Not only is the trading restricted to only 21 professional dealers, but for many years tbis trading went on with only a minimum public knowledge that the so-called market even existed. High Government offiCials, bankers, autborities on money and banking, and even prominent Wall Street operators were unaware of tbe so-called open market. It is probably only because the writer has made some repetitive noises in Congress about this so-called market tbat its existence has come to enjoy the rather limited nonanonymity it enjoys today.
NEEDED FDIC REFORMS
The chapter on the operations of the Federal Deposit Insurance Corporation should have left no doubt that basic changes in the FDIC’s role are needed. FDIC’s function should be restricted to that of deposit insurance. It should not, as it is now doing, let examiners substitute. their judgment for private management’s decisions about bank operations.
If the commercial banks are to serve the credit needs of their communities, and particularly the needs of small business, they must assume prudent risks. They cannot, as the FDIC bank examiners insist, confine their lending to gold-plated, doubly secured loans. Insurance is one thing; bank management is somethmg else again. True, life insurance com:panies all have a stake in their policyholders’ good health and longeVIty. But by insuring our lives the life insurance companies do not get the right to tell us what to eat, when to go to bed, and how to preserve our health.
By the same token, rerforming the deposit insurance function does not warrant the FDIC s assuming the function of maintaining a closed shop for banks. Whether or not a new group wishing to enter the banking business causes inconvenience or competition to the banks already established is no proper question for the FDIC. It should promulgate objective standards of eligibility for deposit insurance, and It should be required to issue deposit insurance to any comers who meet those standards.
NEEDED TREASURY REFORMS
With the mechanics of debt management operations properly in the hands of the Federal Reserve System, most of the Treasury’s objectionable operations in this field will come to an end. The practice of seeking advice from buyers will be eliminated; so, too, will the practice of leaning on underwriters-professional distributors and profiteers- to find ultimate buyers of Treasury securities.
This leaves for correction, however, the Treasury’s present practice of leaving on deposit with the private banks an average of $4 billion of Treasury funds. It has been argued, of course, that the Treasury leaves this minimum deposit with the banks, interest free, to comfensate them for various services to the Government. Not the least 0 the services claimed-and this is not made in humor-is that the commercial banks purchase Government securities. It would appear, therefore, that there is a theory that the Government should not only extend its money-creating power to the banks, cost free (to be used to extend credit to the GOvernment on an interest basis) but that the Government should also leave the funds thus created with the banks who can then lend them to still other borrowers at interest. A minimum balance of $4 billion of Treasury funds in private banks means, of course, that the Federal debt is at all times considerably higher than it need be; taxpayers are paying the interest charges on the excess debt. For compensation, the taxpayers should receive interest on Treasury deposits left with the commercial banks. If substantial services are rendered the Government by the commercial banks, then appropriate fees for these services should be negotiated and paid the banks directly. I have introduced legislation to this effect.
OBJECT OF PROPOSED REFORMS
What principles should guide public policy toward the private commerclal banking system and the use by the private banks of the Government’s power to create money?
Late in 1941, and again at the beginning of 1943, I succeeded in obtaining committee consideration of a proposal of mine which was to have the Federal Reserve System purchase ----- on an interest·free basis -- all obligations issued to finance the war which could not be placed at the then prevailing interest rate with individuals and savings institutions. The object was to draw on savings to the maximum amount possible; having failed to sell to individuals and savings institutions the remainder was not to be placed with the commercial banks on bank-created money.
Mr. Marriner Eccles, who was then Chairman of the Federal Reserve Board, objected on the grounds that bank profits were then low and bank costs, like all other costs, were rising. As a consequence, reasonable bank profits would have to be maintained by one means or another. In conclusion, Mr. Eccles said that the banks would have to “increase all kinds of service charges and the question whether the public that paid the service charges to the banks under these circumstances would be better off through that process than they are with the present process.” (Hearings before the Committee on Banking and Currency,House of Representatives, 77th Cong., 1st seas., on H.R. 5479, 1941, p. 1349.)
Mr. Eccles’ point is well taken. On the face of it commercial banks are highly socialistic institutions. From one angle, they “live off the Government,” using the Government’s money-creating power free of cost and receiving a variety of other .more or less direct subsidies from the public purse. The essential point is, however, that the private banks provide a necessary public service through use of the Government’s money-creating power. They create money to lend to individuals and private business firms. Such loans involve an element of risk. They require an element of judgment, and so private risk taking.
The Government does, of course, make direct loans to individuals and business firms in certain instances. But when the Government makes loans to private citizens, the lending must, to the maximum extent, be made on the basis of objective standards under which a]] would-be borrowers are treated alike, not on the basis of intuition. Risk taking often involves seemingly arbitrary discrimination, which is understood and acceptable conduct for a private bank; as the conduct of Government, it would be intolerable.
This suggests that the guiding principle for immediate monetary reform should be encouragement of commercial bank lending to busIness and consumers -- indeed, there is a crying need for an expansion of such lending-and discouragement of commercial bank lending to the Government.
As has been previously suggested, the only reason why the Government should extend its money-creating powers to private banks is, in the last analysis, to guarantee enough bank profits to assure adequate banking services for the general public benefit.
(Index will follow when we put it together) ................... mrc