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No. 19 "The Pending Banking Bill: An Analysis of a Proposal to Subject the Nation's Monetary and Banking Structure to the Exigencies of Politics," March 11, 1935. American Liberty League. 400dpi TIFF G4 page images Digital Library Services, University of Kentucky Libraries Lexington, Kentucky Am_Lib_Leag_19 These pages may freely searched and displayed. Permission must be received for subsequent distribution in print or electronically. No. 19 "The Pending Banking Bill: An Analysis of a Proposal to Subject the Nation's Monetary and Banking Structure to the Exigencies of Politics," March 11, 1935. American Liberty League. American Liberty League. Washington, D.C. 1935. This electronic text file was created by Optical Character Recognition (OCR). No corrections have been made to the OCR-ed text and no editing has been done to the content of the original document. Encoding has been done through an automated process using the recommendations for Level 1 of the TEI in Libraries Guidelines. Digital page images are linked to the text file. Pamphlets Available Copies of the following pamphlets may be obtained upon application to the League's national headquarters: American Liberty League Speech by Jouett Shouse The Tenth Commandment Why, The American Liberty League? Statement of Principles and Purposes Progress vs. Change Speech by Jouett Shouse Recovery, Relief and the Constitution Speech by Jouett Shouse American Liberty League Its Platform An Analysis of the President's Budget Message N. R. A. Its Past, and Recommendations for the Future Analysis of the $4,880,000,000 Emergency Relief Appropriation Act Economic Security A Study of Proposed Legislation Democracy or Bureaucracy? Speech by Jouett Shouse The Bonus -An Analysis of Legislative Proposals The Constitution Still Stands Speech by Jouett Shouse Inflation Possibilities Involved in Existing and Proposed Legislation The Thirty Hour Week Dangers Inherent in Proposed Legislation â˜… â˜… THE PENDING BANKING BILL â˜… â˜… â˜… An Analysis of a Proposal to Subject the Nation's Monetary and Banking Structure to the Exigencies of Politics â˜… Write to american liberty league NATIONAL PRESS BUILDING WASHINGTON, D. C. american liberty league T^atuynal Headquarters NATIONAL PRESS BUILDING WASHINGTON, D. C. Document No. 19 March, 1935 The Pending Banking Bill â˜… The proposed Banking Act of 1935 contains provisions which would confer undue and improper power upon the executive branch of the government. The bill, described by the President in a letter to committee chairmen as "a tentative draft," makes these revolutionary changes in present practice: 1. It provides for abdication by the Congress of its constitutional duty to regulate the value of money. 2. It delegates to the executive branch unrestricted authority to control the volume of currency and credit without so much as declaring a policy. 3. It makes our monetary and banking structure subject to the whims of political influence. 4. J.t strengthens the President's power over the Federal Reserve Board and makes it impossible for that agency or the Federal Reserve banks to be independent. 5. It shifts to the Federal Reserve Board powers now exercised by the non-political Federal Reserve banks. 6. It destroys safeguards in present law affecting the use of currency and credit. 7. It facilitates inflation and offers no adequate means of checking tendencies in this direction. 8. It opens the door to unsafe banking. A Central Banking Bill The changes which propose to overturn the principles upon which the Federal Reserve Act was based are embodied in Title II of H. R. 5357 and S. 1715 introduced by Representative Henry B. Steagall of Alabama, chairman of the House Banking and Currency Committee, and by Senator Duncan U. Fletcher of Florida, chairman of the Senate Banking and Currency Committee. This Title, taken in conjunction with provisions of recent monetary laws, goes far toward the creation of a government-owned oen-tral banking system. It is more objectionable than most central bank proposals because of the lack of a declaration of legislative policy. The Congress in the enactment of the Federal Reserve Act in 1913 rejected the idea of a central bank whether government-owned or pri-2 vately owned. Instead it adopted a system of regional Federal Reserve banks, owned and controlled by member banks under the supervision of a Federal Reserve Board which was intended to be free from political influence. Such powers over currency and credit as were conferred by the Congress upon the Federal Reserve banks were to be exercised under carefully prescribed rules. There was no carte blanche authority to experiment with new theories respecting money and credit. The Federal Reserve form of organization has met all proper central banking needs. While the Federal Reserve Board has become increasingly a body subject to the influence of the political officers of the government, the theory of the framers of the original Act was that the long and overlapping terms of appointive members and the conditions governing their selection would assure their independence. The experience of nations throughout history has been that, when governmental influence over banking systems assumes the nature of management rather than supervision, financial ruin follows. In such circumstances the fiscal requirements of Treasuries rather than of industry and agriculture tend to become the prime consideration in the determination of policies. The outstanding examples of disastrous inflation in the world have resulted from political control of central banks. Executive Power Already Increased Developments of the past two years have placed the management of the banking system in the hands of the government to a much greater extent than previously. Central banking functions have been lodged in the Treasury under the Gold Reserve Act of 1934. The Treasury has displaced the Federal Reserve banks as the custodian of the monetary gold reserves. The Treasury through the stabilization fund can buy and sell gold, foreign exchange and government securities and can expand credit through operations comparable to open market purchases by the Federal Reserve banks. Under the Silver Purchase Act of 1934 silver certificates as well as gold certificates can be used in the Treasury's program of currency management. The powers of the Treasury to expand credit are so vast as to render futile any effort the Federal Reserve system may make to contract it. Besides giving the Secretary of the Treasury 3 added powers over money and banking the new laws have greatly broadened the authority of the President. The metallic contents of the gold and silver dollars have been made subject to adjustment by him. The Thomas Inflation Amendment has given the President the right to interfere in the management of the Federal Reserve system. Under the Emergency Banking Act the government has become the owner of capital stock in thousands of banks. Wider Authority Proposed The pending bill strengthens the present grip of the chief Executive upon the Federal Reserve system. It provides that the President shall designate the governor of the Federal Reserve Board for an indefinite term and that this official shall cease to be a member when no longer governor. In choosing the governor the restriction in the present law prohibiting the selection of two appointive members from the same Federal Reserve district shall not apply. It is obvious that under the proposed arrangement the governor would be merely a spokesman for the policies of the President. The nonpartisan and independent board envisioned by the original framers of the Federal Reserve Act would be out of the question. The language is such that it would be possible for the President to name each member of the Board as governor in turn, removing each after a day's service, and then appointing an entire new group. Upon a shift in administration a President by this method might change the membership. Control by the Federal Reserve Board over the determination of such matters as remain in the hands of the Federal Reserve banks is made certain by several changes in the law. The combination office of chairman and Federal Reserve agent of each bank is abolished and the duties merged with those of the governor, who is made chief executive officer and who shall be selected annually by the board of directors of the bank, but subject to the approval of the Federal Reserve Board. A vice governor shall be named similarly. The governor shall be ex-ofncio chairman of the board of directors and chairman of the executive committee of the bank and all other officers and employees shall be directly responsible to him. The reorganization of the Federal Reserve banks shall take place 90 days after the enactment of the Act. In the process any chairman of a board who is not appointed as governor shall cease to be a Class C director. The Class C directors form a group selected by the Federal Reserve Board. Class A directors, who are bankers, and Class B directors, who represent industry and agriculture, are chosen by the stockholder member banks. The bill facilitates the elimination of some of the holdovers from the former regime by providing that no director of a Federal Reserve bank other than the governor and vice governor shall serve more than two consecutive terms of three years each, incumbents being allowed to complete present terms. The Federal Reserve banks are required to take orders from a new Federal Open Market Committee, consisting of the governor of the Federal Reserve Board, two members of the Reserve Board selected by the Board, and two governors of the Federal Reserve banks selected by the governors of such banks. This committee would displace an existing committee set up under the Banking Act of 1933 composed of one representative of each of the 12 Federal Reserve banks. The Federal Reserve banks under the bill shall conduct open market operations as directed by the new committee which also shall make recommendations as to discount rates. The effect of the proposed legislation is to place the President, through the governor of the Federal Reserve Board, in a dominant position with respect to policies of the Reserve banks as well as of the Board. Abdication by the Congress The Congress under Clause 5 of Section VIII of Article I of the Constitution is given exclusive power to coin money and regulate the value thereof. Some advocates of a government-owned central bank have pointed to this clause as support for their opposition to the continued issuance of currency by the privately owned Federal Reserve banks. Under the present law, however, the Reserve banks control currency and credit only under carefully defined statutory rules. The pending bill largely wipes out the restrictions under which the Federal Reserve banks now operate. The new authority conferred upon the Federal Reserve Board is of a blanket character. The Congress by the terms of the bill 5 would relinquish entirely its right and duty under the Constitution to define principles to govern the administrative agency. The general rule prescribed for the guidance of the boards of directors of the Federal Reserve banks in Section 4 of the present Federal Reserve Act' is that credit shall be extended with due regard to the maintenance of sound conditions and "the accommodation of commerce, industry and agriculture." The law contains specific requirements as to the character of paper that shall be eligible for discount, the collateral in addition to gold which must support Federal Reserve notes and the amount of reserves which must be maintained behind deposits of member banks. While the bill does not repeal the rule in Section 4 it nullifies it by taking control of credit out of the hands of the Reserve banks, wiping out present restrictions respecting eligible paper, collateral and reserves and vesting broad power in the Federal Reserve Board. The bill provides that any sound asset of a member bank shall be eligible for discount at a Reserve bank, subject to regulations of the Federal Reserve Board; that the Board shall have authority to prescribe limitations on the maturity of advances to member banks; that all obligations guaranteed as to principal and interest by the United States government shall be eligible for purchase by Reserve banks without regard to maturity; that the requirement for collateral for Federal Reserve notes in the form of eligible paper or government securities above the minimum 40 per cent gold shall be repealed; and that the Board may change reserve requirements for deposits, both time and demand, in any or all districts or classes of cities. Economic Planning A highly significant change in the qualifications for members of the Federal Reserve Board sheds light on what is in contemplation. The bill provides that the President shall choose "persons well qualified by education or experience or both to participate in the formulation of national economic and monetary policies." The law now provides that the President shall have "due regard to a fair representation of the financial, agricultural, industrial and commercial interests, and geographical divisions of the country." The present clause is in harmony with the rule that the law shall be administered with a view to "the accommodation of commerce, industry and agriculture." What the proposed change means is that the Federal Reserve system is to be used for experimentation with economic and monetary theories. Prior to the present administration Federal Reserve officials consistently refused to use such powers as open market operations and discount rates to control commodity prices and the purchasing power of the dollar. Their theory was that the law properly required them to determine policies with a view to the needs of industry and agriculture. Under such policies they felt that higher prices and an expansion of credit would follow an improvement in business. They doubted that an improvement in business would follow an increase in prices induced by an expansion of credit. The House of Representatives in May, 1932, passed the Goldsborough Price Stabilization bill which directed the Federal Reserve authorities to restore and maintain the price level of the 1921-29 period by the control of the volume of credit and currency. The Senate failed to approve it. The pending measure makes possible what was contemplated under the Goldsborough bill. As introduced, however, it does not give specific authorization by the Congress for the adoption of such a policy. Complete freedom is allowed to the Executive branch in the determination of policies permitting manipulation of currency and credit. By the clause respecting qualifications of members of the Federal Reserve Board there is implied a sanction of economic planning in the monetary realm on an extensive scale. The elimination of statutory restrictions facilitates experimentation and thus increases the possibilities of danger. The present requirements as to character and maturities of eligible paper tend to prevent the assets of the Reserve banks from becoming frozen. A central banking system, maintaining the ultimate reserves of the commercial banks, must be kept liquid. If the Congress fails to define eligible paper which may be discounted at the Federal Reserve banks, it will give too much discretion to administrative officials. An independent Federal Reserve Board might be depended upon to act wisely, but a board which is subject to political pressure would be certain to show too great a leniency. The repeal of requirements for collateral in the form of eligible paper or government securi- ties to supplement gold in support of Federal Reserve notes is another relaxation which may prove dangerous. It opens the way to the issuance of notes against frozen assets and tends to defeat the purpose of the Federal Reserve system to provide an elastic currency which expands and contracts to meet the needs of business. It makes it possible to base currency on Treasury deficits, now authorized only as a temporary expedient. The authority to change reserve requirements permits favoritism and discrimination. Either the present fixed percentages for reserves in different classes of cities or a flexible scheme such as heretofore has been under consideration is preferable. The elimination of these restrictions as sought in the pending bill is contrary to American principles. It tends toward further centralization of power in the hands of the Executive. It gives authority which might be used to the detriment of the nation's banking system. Treasury Financing One of the most important phases has to do with Treasury financing. The bill tends to give assurance that policies of the Federal Reserve Board will be in harmony with the desires of the Treasury. It is made easier for the Treasury to finance deficits through the Reserve banks and the commercial banks. Past experience of all nations proves that a government should not be in a position to dominate a central banking system. Too close an alliance encourages policies which may be helpful for immediate needs of a Treasury but give encouragement to inflation and in the long run are injurious to industry and agriculture. It is not the function of any banking system to afford the government a higher credit rating than it is entitled to under prevailing market conditions. Excessive government financing tends to interfere with normal commercial banking operations. Any proposals to eliminate present restrictions upon government financing should be considered most carefully. The bill allows the Federal Reserve banks to purchase obligations of government corporations guaranteed both as to principal and interest, without any restrictions as to maturity. Under such a policy the Treasury might shift to the Reserve banks the financing of the Reconstruc- tion Finance Corporation. The home and farm mortgage refinancing might be similarly handled. Heretofore, the Congress has refused to allow this type of obligations to be carried by the Reserve banks. The repeal of collateral requirements for Federal Reserve notes encourages the Reserve banks to hold securities of the government and its various corporations. The power given the Federal Reserve Board to change reserve requirements makes it easier to force government securities upon the member banks of the system. Already our banks are overloaded with government securities. At the end of the last fiscal year, June 30,1934, the banks, including Reserve banks, held nearly $13,000,000,000 of Federal obligations or about 50 per cent of the $26,000,-000,000 of then existing interest-bearing debt. Including government securities held as collateral on loans the total was as much as 60 per cent. On June 30, 1930, the banks held only about $4,500,000,000 out of a total of $15,200,-000,000 of interest-bearing debt. Present holdings, which have continued to increase since the end of the last fiscal year, are considerably more than three times the total of 1930. Legislation which tends to aggravate an already unhealthy banking status should be viewed with suspicion. Who Should Control? In behalf of the new bill it has been urged that there must be conscious and deliberate governmental control of banking, and that the regulatory body must be one which represents the interests not of any particular class or group but of the nation as a whole. Even if it is granted that a greater measure of control is desirable, its assumption by a politically dominated body would most certainly not assure action consistent with the best interests of the nation as a whole. The mechanism devised under the Federal Reserve Act whereby the policies of a central board are tempered by the checks and balances set up through the regional banks is much better fitted to produce policies in the national interest. Under the operation of the present law the Federal Reserve Board has had a large measure of authority. In looking back over the years there is evidence to indicate that its judgment was not always as good as that of the directorates of the Reserve banks. The inflation which followed the World War was encouraged by the policy of the Federal Reserve Board which, at the instance of the Secretary of the Treasury, kept discount rates at a low level to facilitate the floating of the Victory Liberty Loan. When the Board decided in 1920 to contract credit, its methods were blamed for a harmful deflation of agriculture. _ In 1927 the Board adopted easy money policies with a view to stimulating business in this country and encouraging a flow of gold to European countries which were asking for assistance. The Board forced the directors of the Federal Reserve Bank of Chicago to reduce discount rates although its power to do so was of doubtful legality. The view of the Chicago directors that such action would divert money from the middle west to the East and that it would encourage speculation subsequently proved to be correct. The Board's policy at that time gave a start to the wave of speculation which culminated in the stock market crash of 1929. The Board during the year before the collapse refused to permit advances of discount rates to as high levels as directors of Reserve banks believed were warranted. Such increases as were made failed to halt speculation. The proposed legislation unquestionably would greatly facilitate credit expansion policies. It would encourage inflation. It is difficult to see how it provides any real powers to control harmful tendencies beyond those given in the Banking Act of 1933. Unsafe Banking The bill encourages a departure from principles which experience has shown to be essential to safe commercial banking and violation of which contributed to widespread banking failures. It proposes to allow member banks of the Federal Reserve system to loan an amount equal to their entire capital and surplus on real estate for periods of 20 years and up to a sum ranging from 60 to 75 per cent of the value of the property. The effect would be to freeze assets of a commercial banking system which to a much greater extent than is necessary in investment banking should be kept liquid. Furthermore, the frozen assets can be shifted to the Federal Reserve banks at the will of the Federal Reserve Board which is relieved of restrictions as to eligible paper, collateral behind notes and reserves. The 10 real estate provision together with those relaxing restrictions and permitting obligations of government corporations to be absorbed by the Reserve banks threatens seriously the liquidity of these institutions. Another provision which might condone unsafe banking is that which allows the Federal Reserve Board to waive capital requirements in the admission of insured banks into the system prior to July 1, 1937. This is intended to be a step toward unification of the present dual banking system, part of which is under the supervision of the Federal government and part of which, except for such authority as is exercised through the Federal Deposit Insurance Corporation, is subject only to control by the states. A unification is highly desirable but to admit into the Federal Reserve system banks with inadequate capital will only weaken the banking structure. There might be danger rather than advantage in building up a banking system under a politically dominated Federal Reserve Board. No Need for Haste This analysis deals with a limited part of the Fletcher-Steagall bill known as Title II. The Title contains no provision for which there is emergency need. Necessary amendments to banking laws are in Title I which relates to deposit insurance and in Title III which embodies clarifying changes in several existing statutes. Nothing will be lost by present elimination of Title II. Before approval of such important changes in policy as are involved in Title II there should be a comprehensive study of banking and monetary matters by a national commission of appropriate character. The Congress has enacted many banking and monetary measures during the past two years under the spur of an emergency. No further laws of a permanent character should be countenanced except under conditions favorable to sound judgment. 11