Speech

MONETARY PROBLEMS OF RECOVERY ADDRESS OF MARRINER S. ECCLES GOVERNOR OF THE FEDERAL RESERVE BOARD BEFORE THE ANNUAL MIDWINTER MEETING OF THE OHIO BANKERS ASSOCIATION, AT COLUMBUS, OHIO FEBRUARY 12, 1935 PRINTED IN THE CONGRESSIONAL RECORD OF FEBRUARY 14, 1935, BY REQUEST OF HON. DUNCAN U. FLETCHER OF FLORIDA UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON: 1935 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ADDRESS OF MARRINER S. ECCLES Mr. FLETCHER. Mr. President, on the 12th of February Mr. Marriner S. Eccles, Governor of the Federal Reserve Board, delivered to the Ohio Bankers Association a very interesting address bearing directly upon pending legislation. I ask to have it inserted in the Congressional Record. There being no objection, the address was ordered to be printed in the Record, as follows: Mr. ECCLES. I am grateful for this opportu for that on other occasions. I propose this nity to address the members of the State afternoon, rather, to discuss the general Bankers Association of Ohio and their friends philosophy underlying the bill as a whole. I who have joined them on this occasion. have chosen this method of approach because I In taking up my duties in Washington, believe that it will enable you to appreciate first with the Treasury and then with the more fully the significance that we attach to Federal Reserve Board, I was, of course, its various provisions, and the result that we under the necessity of resigning my own hope to accomplish through their practical banking connections. Nevertheless I have operation. every reason to feel entirely at home in an Broadly speaking, there are four main objects assembly of bankers, and I am genuinely glad which we seek to accomplish. In the first to be here. This is, in fact, the first opportu place, we wish to make the banking system a nity I have had to address a large number of more efficient instrument for the promotion of bankers since I became Governor of the Federal stable business conditions in the future; sec Reserve Board. ondly, various proposals in the bill are designed When I accepted the invitation I received to bring our banking system into closer con from your president in December, I was some formity with modern conditions and, more im what at a loss to decide what subject to discuss mediately, to aid in business recovery; thirdly, with you. Since then the banking bill of 1935 we seek to make certain rather fundamental has been introduced and I feel sure that there changes in the law relating to deposit insurance is no subject in which bankers will be more in order to make the system sounder and more interested than the provisions of that bill. equitable; and, finally, we seek to correct I am especially glad to be able to present to you various inequalities, ambiguities, and abuses my conception of the objectives of this measure, that have developed in the banking system in because I believe that all who are of the banking the course of time. In the limited time at my fraternity, no less than those of us who are disposal I shall have to confine myself to a dis identified with the administration in Washing cussion of the broad principles behind the pro ton, have every reason of common interest posals which are designed to secure the first two and common purpose to desire the solution of objectives mentioned, stability and recovery. the monetary problems of recovery in the How may our banking system be so regulated manner in which the banking bill of 1935 and adapted that it may become a more efficient seeks to solve them. instrument for the promotion of business sta But it is not my intention this afternoon to bility and the mitigation of industrial fluctua go into a detailed discussion of each provision of tions? A complete answer to this question the bill. There will be ample opportunity demands much fuller treatment that I can 117809—35 ( Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis possibly give it here. Book after book has depression of the magnitude of the one from been written on this subject. Because of the which we are just emerging. need for brevity I fear the statement of my Proceeding, then, on the assumption that views may appear to be dogmatic. I shall, business stability is a desirable, nay, a neces however, have to run this risk, as I feel that sary objective which cannot be achieved with in no other way can I indicate to you the sig out conscious effort, I wish to develop the thesis nificance I attach to the various proposals. that the banking system can and should be one The fundamental premise underlying the bill of our chief instruments for the promotion of and underlying my discussion this afternoon is stability. that business stability is a desirable objective. The first elementary principle which it is I feel sure that no one will disagree with this essential to grasp and which it is not necessary premise and to my way of thinking agreement for me to expand upon is that the bulk of our on this one vital point alone will lead you to money supply today is composed of deposits lend your whole-hearted support to the banking subject to check. Out of a total volume of bill of 1935. $24,000,000,000 of money, or units of purchas The second fundamental premise upon which ing power, nearly $19,000,000,000 is composed I proceed is that business stability cannot be of checking accounts in commercial banks. achieved without real thought, real effort, and The second general principle in the theory of real courage. To establish this point it is not monetary control is that variations in the com necessary to accept and defend any one single munity's supply of money have an effect on the explanation of the business cycle. It is merely state of business activity There is no general necessary to call to mind that in the heyday of agreement as to the extent or nature of the laissez faire, before any attempts at conscious effect such variations have on business condi control were undertaken, business fluctuations tions. If I presume, as a layman, to enter this on a disastrous scale occurred with distressing controversial field, it is because I feel that the regularity. If we had a perfectly flexible cost question "What effect have variations in the and price structure—which would have to supply of money on business conditions ?" can include, I may remind you, an equally flexible not be answered in general terms or in a dog wage and interest structure—our economy matic manner. The effect depends on a large could probably adjust itself to rapid expansions number of circumstances. Thus, at certain and contractions with little resultant unem times an increase or decrease of 5 percent in the ployment. Without such flexibility, however, money supply may modify substantially the expansion and contraction, instead of calling course of business. At other times the effect into play forces that adjust and correct such of a variation of 20 percent may be barely dis movements, tend to feed upon themselves and cernible. One point on which I think there is for a considerable period to generate further general agreement, and the only point which it expansions and contractions. is necessary for me to make here, is that in It is not realistic, however, to say that all creases in the money supply tend to stimulate that is necessary is to introduce more flexi business activity while decreases in the money bility into our system. Numerous rigidities supply tend to restrict activity. and inflexibilities have developed in our The third principle in my general thesis of economy, and the trend in the recent past monetary control is that the operation of the plainly points to more rather than less rigidity banking system left to itself with no conscious in the future. If there is one thing that to me effort of control tends to intensify rather than seems clear, it is that, unless conscious effort to counteract business fluctuations. The se is made to prevent them, booms and collapses quence of events may be briefly outlined. will continue to recur in capitalistic democ When business activity is increasing, there is racies. It also seems evident to me that neither an increased demand for bank loans and a capitalism nor democracy can survive another growing disposition among banks to loan Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 3 liberally. When banks lend more, thus increas completely nullified by those who control the ing their assets, they also increase their deposits. money supply. Consequently, at the very time when the The theory of a democratic state presupposes community is increasing its expenditures, there that the will of the majority shall prevail. If is a tendency for the supply of money to in minorities feel that the acts of the majority crease. Similarly, when expenditures are de make life unbearable, they may try to change creasing, the demand for bank loans falls off, the views of enough voters to change the com bankers become more cautious, maturing loans plexion of the majority, or they may revolt and are repaid, and deposits are extinguished. try to establish a rule of the minority. If they Our banking system, therefore, not only fails succeed in the latter course, the State ceases to act as a compensatory agent, but actually to be democratic. Majorities may, and some intensifies fluctuations. For example, in the times do, abuse their power. It is necessary period from 1929 to 1933, when expenditures to remind ourselves, however, that so long were falling rapidly and the national income as we remain a democracy the will of the was being cut in half, the supply of deposit majority is expected to prevail in monetary money decreased by approximately one-third. policy as well as in other matters of national Part of the decrease can be attributed to bank concern. failures, accentuated by withdrawals of cash It is my personal conviction that our system for hoarding, and part to the contraction of of broad political representation, faulty as it loans and investments by surviving banks. may be, constitutes a better guarantee that the No one person or body is responsible for this general interest will be served than would con decline. The responsibility must be shared trol by a group of individuals chosen, let us by the entire system. say, entirely by bankers or business leaders. The fact is that laissez faire in banking and The power to coin money and to regulate the the attainment of business stability are incom value thereof has always been an attribute of a patible. If variations in the supply of money sovereign power. It was one of the first powers are to be compensatory and corrective rather given to the Federal Government by the Con than inflammatory and intensifying, there stitutional Convention. The development of must be conscious and deliberate control. deposit banking, however, introduced into the The difficult and controversial question is, economy numerous private agencies which have Who should do the controlling? I would the power to create and destroy money without gladly follow the course of the worthy divine being aware of it themselves and without being who looked a difficulty boldly in the face and recognized as creators or destroyers of money passed it by, but that is not the kind of boldness by the Government or the people. The trend that will lead us out of the wilderness. I shall since 1913 represents a gradual recognition of state, therefore, as my fourth principle that this condition and a reassertion by the State the controlling or regulatory body must be of a power which it always possessed. one which represents the interests not of any The President stated the underlying princi particular class or group of people but of the ples controlling the relation of the Government Nation as a whole. and the banks last October in his speech before There is no political or economic power more the American Bankers Association. He then charged with the general or social interest than remarked that "the old fallacious notion of the the power to increase or decrease the supply bankers on the one side and the Government on of money. If the sovereign authority delegates the other as a more or less equal and independ this power to a particular group or class in the ent units has passed away. Government by community, as it has done in large part in this the necessity of things must be the leader, must country, it divests itself of a part of its effective be the judge of the conflicting interests of all sovereignty. The purposes of the Nation, as groups in the community, including bankers. expressed in its national administration, can be The Government is the outward expression of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 4 the common life of all citizens." That, I think, I should be left to the individual decisions of expresses the matter very effectively. some 15 thousand local bankers. It is scarcely I am here merely stating the broad principles more logical that the variations should reflect involved. I shall not like to be understood uncoordinated decisions of the 12 Federal as arguing for a highly centralized control of Reserve banks. all banking activities. Local versus national It may be helpful if I here summarize the control is not a subject on which one should various steps in my argument to this point. take sides irrespective of the question at hand. My fundamental premise is that business The administration of certain interests can stability is a desirable objective which it is obviously be handled more efficiently locally. worth making every effort to achieve. Varia Similarly, there are other things which can be tion in the supply of money, which in this handled more efficiently on a national scale. country is furnished largely by our commercial We should consider each case on its merits and banks in the form of checking accounts, in provide for local control or national control, fluence business activity to an unknown degree whichever is in the public interest. Let us but in a known direction. The banking sys now apply this principle to banking. tem, left to itself, behaves in an intensifying Banks in this country perform two main rather than a compensatory fashion. If it is services. They act as middlemen for the invest to be made to behave in a compensatory ment of a substantial portion of the communi fashion, there must be conscious and deliberate ty's savings, and, through the provision of control, and this control must be exercised by checking facilities, they supply the bulk of the a body which represents the Nation. community's means of payment. So far as the Let us now examine the Federal Reserve investment of savings is concerned, a large System in the light of the preceding discussion. degree of local autonomy should be left with I propose, first, to discuss the development of the individual bankers. The State should lay open-market policy. down minimum standards to be observed in In 1913 the framers of the Federal Reserve the interests of protecting savings of individ Act had certain definite purposes in mind which uals, but these standards can only be minima, did not iuelude, as the bill was enacted, any and chief reliance for the safe investment of reference to national monetary policy. They the community's savings must rest on the wished to prevent the periodic suspension of judgment and knowledge of the individual payments which occurred under the old na banker. tional-banking system, and to provide an When we come to the second function of agency where banks could rediscount commer banks—namely, that of providing the com cial loans in order to supply temporary, sea munity's money supply—a different range of sonal, and emergency needs of their customers factors must be taken into consideration. The for credit and currency. Broadly speaking, effect of variations in the supply of money is I think it is true to say that the Reserve banks Nation-wide and cannot be localized. The were looked upon as emergency lending insti Reserve administration may make conditions tutions. From this viewpoint it was proper favorable for the creation of new deposits, but that the regional Reserve banks should have it cannot insure that the new money will be almost complete autonomy, and that the Fed used in any particular section of the country, eral Reserve Board should have only a limited or spent on any particular kind of goods. amount of supervisory and coordinating power. Since, therefore, the effect of monetary policy In the post-war period our concept of the is Nation-wide, the formulation of monetary functions of the Reserve administration gradu policy should be by a body which represents ally changed. It became evident that through the Nation, and which is activated by national the control of the reserves of member banks considerations. It is inconceivable that varia the Reserve administration could influence the tions in the community's money supply volume of deposits, and hence the volume of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 5 loanable funds of commercial banks. The Governors of the 12 Federal Reserve banks. trend away from autonomous regional action These Governors are independent of the Fed to a more coordinated and centralized control eral Reserve Board. After the Open Market was evidenced by a significant development in Committee has formulated its policy, its rec 1922 and 1923. In 1922 certain of the Re ommendations may be adopted or rejected by serve banks began to buy securities, mainly the Federal Reserve Board. Even after the for the purpose of increasing their earning assets. policy has been formulated by the committee The purchase of these securities, however, took and approved by the Board, any Federal Re place in New York and gave deposits and re serve bank, through its board of directors, is serves to New York commercial banks. These free to decline to participate in the policy. banks utilized these increased reserves to re Since you are all administrators, I do not think duce their borrowings from the New York that I need spend much time in pointing out to Federal Reserve Bank. It appeared, there you how bad this set-up is from an adminis fore, that the attempt of other Reserve Banks trative point of view. The body which is ulti to increase their earning assets resulted in a mately responsible for policy—the Federal decrease in the earning assets of the New York Reserve Board—legally can take no part in Reserve Bank. It also became evident that the formulation of the policy. The body increased or decreased purchases of securities which formulates policy, on the other hand, by the Reserve banks affected member banks' legally has no power to bring the policy into reserves, and in this way member banks' de operation. The boards of directors of the indi posits, and loans and investments. A small vidual Reserve banks, who take no part in committee of Governors was thereupon set up the formulation of policy, have the power to to coordinate purchases and sales. In 1923 obstruct its operation. It is a well-known fact this committee became the open-market com that the more people there are who share a mittee, composed of the Governors of the Fed responsibility for policy, the less keenly does eral Reserve Banks of New York, Boston, any one of those people feel his own personal Philadelphia, Chicago, and Cleveland. Its responsibility. stated duty was to formulate open-market The theory, therefore, back of the open- policy, subject to the approval of the Federal market provision in the recent banking bill Reserve Board, with primary regard to the becomes clear. The bill provides for a small, accommodation of commerce and business, and responsive body which is charged with the duty to the effect of such purchases or sales on the of acting in the national interest in formulating general credit situation. This marked a step open-market policy and in accepting respon toward the theory of conscious and continuous sibility for its consummation and results. control. From this date onward the volume of You will observe next that we propose to money in the United States was influenced leave the essentially regional organization of greatly by actions of the open-market com the Federal Reserve System virtually un mittee and the Federal Reserve Board. changed. I feel that in a country the size of It appears, therefore, that the System itself ours the regional system of Federal Reserve by virtue of necessity has developed a large banks must always play an important and measure of coordinated activity in regard to necessary role in our banking system. They open-market operations, the single most im afford, for one thing, an essential link between portant instrument of Reserve control. This the thousands of individual member banks, on coordination, while it represented a great ad the one hand, and the Federal Reserve Board, vance over the situation which prevailed up to on the other. Besides keeping in close touch 1923, nevertheless leaves much to be desired. with member banks the Reserve banks examine The body which is charged with the formula member banks, admit banks to membership, tion of open-market policy is the Federal Open provide check-clearing facilities, make loans to Market Committee, which is composed of the individual member banks, carry the reserves of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 6 member banks, and supply the currency needs I turn now to proposed changes in the oper of their localities. ation of the Federal Reserve banks. Hiere is but one change in the internal or Two of the proposed changes now in the bill ganization of the Reserve banks which, in the have been widely commented upon and have interests of economy, efficiency, and coordina been as widely misunderstood. I refer to the tion, I think it is necessary at this time to provision that the type of paper eligible for re- effect. Officially the Federal Reserve Board discounting at Federal Reserve banks shall not has no relations with the governors of the be defined in the law, but shall be subject to Reserve banks. In their dealings with the the regulation of the Federal Reserve Board: Reserve banks the Board is supposed to work and to the provision that segregation of collat through the chairmen, who are not the chief eral for Federal Reserve notes shall be repealed. executive officers of the banks. It is proposed In order to understand our reasons for wish to end the dual administration of the Reserve ing to modify the present requirements in the banks under the chairman of the Board, who law relating to eligibility, it is necessary to is appointed by the Federal Reserve Board, recount briefly certain developments that have and the Governor, who is appointed by the occurred in the history of the Federal Reserve local board of directors, to give the governors System. Apparently it was the theory of the a legal status and to combine their position framers of the Federal Reserve Act that bor with that of chairmen of their boards of direc rowings on commercial paper from the Reserve tors. Inasmuch as the Federal Reserve Board banks and the issue of Federal Reserve notes is surrendering the appointment of the chair would be closely connected. It was provided, man, it is obviously desirable in the interests therefore, that Federal Reserve notes issued by of coordination and harmony that the appoint Federal Reserve agents should be secured by ment of governors by the local boards be 100-percent collateral in gold or eligible paper subject to the approval of the Federal Reserve and that Federal Reserve notes in actual cir Board. culation shall have a 40-percent reserve in In laying down a guiding principle for the gold. It was apparently believed that the President in his selection of future members of demand for notes arose from commercial bor the Board, it seemed desirable to substitute for rowers, that the collateral requirements would the somewhat meaningless phrases in the law restrict the issue of notes to such borrowers, the unequivocal requirement that the members and that this would afford elasticity and pre should be persons qualified by education and vent the danger of overissue. experience to take part in the formulation of This line of reasoning did not take cognizance national economic and monetary policies. of a profound change in our monetary habits. This is a recognition in the law of the principal In a deposit-using country such as the United function of the Federal Reserve Board. States, currency is seldom borrowed from a In view of the enormous difficulty of the bank. Borrowers normally receive deposit task of the Federal Reserve Board, the bill credits and pay their bills with checks. The attempts to make a position on that Board as demand for currency arises chiefly from indi attractive as possible for the purpose of secur viduals and businesses who for the sake of con ing and retaining the services of the best talent venience desire to convert a portion of their in the country. The attractiveness of a posi checking accounts into currency. The volume tion on the Board will be increased by the of money in circulation fluctuates with changes added powers granted to it and by providing in the volume of those activities which employ that its members shall be relieved as far as the largest amount of cash, namely, retail trade possible from financial worries. A position on and factory pay rolls. A consequence of this the Board is one of the most important posts development is that the Reserve banks play a in the Nation, and recognition of this fact is passive role in supplying Federal Reserve notes accorded in the bill. for circulation. If they issued Federal Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 7 notes in payment for securities purchased, the expires this year unless extended by the Presi sellers of the securities would immediately dent for a maximum of 2 more years. deposit the notes in the member banks and It is realistic and desirable at this time to the member banks would send them in to the do away with the collateral requirements Reserve banks. If they sold securities for altogether. They add nothing to the safety Federal Reserve notes, the buyers of the of the Federal Reserve notes since these notes securities would get the notes from their are an obligation of the United States Govern member banks and these banks in turn would ment and have a prior lien on the assets of the get them from the Reserve banks. Federal Reserve banks. This does not mean Thus, it will be seen that the framers of the that notes will be issued without adequate Federal Reserve Act were mistaken in two of backing. Any increase in the note issue their expectations regarding note issue. Notes must be counterbalanced by a corresponding are not associated in any direct or immediate increase in Federal Reserve bank assets. It way with the needs of business for commercial makes no change in the requirement for a 40- loans. Neither is there any need to place percent reserve in gold certificates or lawful restrictions on the issue of Federal Reserve money. It is merely a proposal to get rid of notes since, as we have just seen, the volume an antiquated feature in the Federal Reserve outstanding is not susceptible to control in a Act which has never served a useful purpose predominantly deposit-using country. and has in the past at times prevented the Although the requirements that Federal timely launching of an essential monetary Reserve notes be secured by eligible paper or policy. gold does not serve as a restriction on the The restriction of the rediscounting privilege issue of Federal Reserve notes, it may in the to a particular and narrowly restricted type of future, as it has in the past, severely restrict bank loan is in accordance with a theory of the ability of the Reserve administration to reserve banking which I think we have now increase the volume of deposits through open- outgrown. The major task of the Reserve market operations. Thus, in 1931 there oc Administration is not to encourage the exten curred simultaneously a demand for gold for sion of a particular type of loan. The re export and for notes to hoard. Owing to the striction of the borrowing privilege to com shortage of eligible paper held by the Reserve mercial loans has no connection with regula banks, more than a billion dollars in gold in tion of the volume of bank credit or of the excess of the 40-percent gold requirement had access to the Reserve banks. The aggregate to be earmarked for the account of Federal amount of paper eligible for rediscounting has Reserve notes. Had the Reserve banks bought been at all times greatly in excess of the vol securities in order to build up member banks ume of rediscounts. Moreover, banks have reserves, the rediscounts would have decreased been permitted to rediscount their own notes and more gold would have had to be pledged secured by Government obligations. To con against Federal Reserve notes. The Reserve trol the amount of borrowing from Reserve administration felt at that time that its hands banks the Reserve Administration relies upon were tied and that it could take no action to the rediscount rate and the general policy, stem the course of deflation so long as the note- amounting to unwritten law, that borrowing issue provisions remained in the law. The should not be continuous and should be for Glass-Steagall Act of 1932, by making Govern emergency and seasonal purposes only. ment securities bought in the open market Hence, the elimination of technical restric eligible as collateral for Federal Reserve notes, tions on eligibility does not involve any danger permitted the Reserve Administration to buy of excessive use of Reserve bank facilities. securities, get member banks out of debt, and But it does enable the Reserve banks to come thus stem the process of deflation. This act to the assistance of banks who may have Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 8 sound assets but may be devoid of eligible j short-dated commercial loans and investments. paper. For the emergency such a provision [ But I need not tell you that, if this suggestion was made by the Glass-Steagall Act, but not were acted upon, the result would be fatal to until great harm had resulted from the ina the banks. bility of the member banks to receive help In October 1934 the eligible paper of member from the Reserve banks in the emergency. banks, within the meaning of the Federal The bill provides for admission of nonmem- Reserve Act, amounted to only slightly more ber banks into the Federal Reserve System than $2,000,000,000. No doubt, based upon prior to 1937 without regard to the size of your past experience, you would find that a their capital. This will enable small banks, much smaller amount would be acceptable if it which would otherwise be confronted with the were offered to the Reserve banks. Even in dilemma of either foregoing the protection of 1929 this paper amounted to only 4% billion deposit insurance or promptly raising addi dollars. Banks cannot live on the interest of tional capital, to join the Federal Reserve such a small volume of loans and an attempt to System with their present capital, and thus to confine themselves to these loans would greatly become eligible for admission to the insurance curtail the scope of banking. The more busi system. The resultant unification of banking ness the banks refuse the more will be handled under the Federal Reserve System and the by other agencies, including the Government, provision in the bill giving the Federal Re and the less room will remain for the operations serve Board power to change member bank of the private banking system. reserve requirements will contribute to the I am fully aware of the fear with which bank Board's ability to exercise effective monetary ers view the extension of other lending agencies control. and the uneasiness they feel at having to rely Let us now consider the proposals in the bill more and more on holdings of Government that are designed more specifically to aid in obligations to keep up their income. I might business recovery. I shall confine my dis point out, however, that these developments cussion chiefly to the one proposal which I are a consequence of the failure of the banking regard as the most important in this respect system to perform its functions adequately. and at the same time the one most susceptible If the banking system would utilize in real- to misunderstanding. I refer to the provision estate loans and other long-term investments permitting banks to make loans on improved the savings and excess funds that it now pos real estate up to 75 percent of its appraised sesses, bank business activity would be greatly value and on an amortization basis for a 20- stimulated, and the Government would then year period and an aggregate amount up to be able to withdraw rapidly from the lending 60 percent of their time deposits. field. It has been asserted that this is an invitation The bankers also feel a deep concern about to banks to make loans of a character that does the constant growth of the Government's not conform to sound banking principles or deficit and of the public debt, and yet a standards. The collapse of real-estate values considerable part of this debt is incurred in is cited as an illustration of the dangers asso refinancing mortgages and in undertaking ciated with such loans. It is constantly stated other functions which the banks have failed to that the troubles of our banking system were perform. Release of banking funds in these due entirely to the acquisition of long-term fields would enable the Government to diminish assets by the banks. It is suggested that banks its expenditures and to reduce the rate of in the future should confine themselves to growth of the public debt. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis I am, you will carefully note, criticizing the consist of super-liquid open-market paper. banking system and not the bankers as What we want to accomplish is to make it individuals. I do not see how you as individ possible for banks, without abandoning pru ual bankers, having to secure liquidity alone dence or care, to meet local needs both for and unaided, could safely have followed a short- and for long-time funds. We want to different lending policy than you did. make all sound assets liquid by making them This, then, is the dilemma that faces the rediscountable at the Reserve banks, and then banks. If they go into the longer-term lending to use the powers of monetary control in an business, they run the risk of depreciation and attempt to prevent the recurrence of national of inability to realize quickly upon their assets conditions which result in radical declines of in case of need. If they do not go into this national income, in the freezing of all bank business, they cannot find an outlet for their assets whether they are technically in liquid funds. Their earnings will suffer and the form or not, and in general unemployment and justification for their existence diminishes. destitution. If we can bring this about, then How can this dilemma be solved? It is pro the banks, as well as all other enterprises, will posed in the bill to solve it by removing the be safer than they can ever be under a policy problem of liquidity as such from the concern of each for himself and the devil take the of the banks, by bestowing liquidity on all hindmost. sound assets through making them eligible as In conclusion, let me make myself clear that a basis of borrowing at the Reserve banks in I do not expect the passage of the banking bill case of need. This will enable the banks to of 1935 to solve the problem of the business concentrate their effort on keeping their assets cycle. What I do expect is that its passage will sound and to pay less attention to their form make conditions more favorable for its eventual and maturity. solution. My own view is that, while through Reliance on the form of paper as a guide to the compensatory action of the banking sys soundness and eligibility has not protected the tem much can be done to moderate fluctuations, banking system from disaster. We wish to it will be necessary for the Government also to divert bankers' attention from the semblance help in offsetting and counteracting rapid of paper to its substance; to emphasize sound expansion and contraction of expenditures on ness, rather than liquidity. To require that a the part of the community at large. It can real-estate loan shall be repaid in 5 years, as do this by varying its expenditures and by the the present law requires, does not even improve use of the taxing power in securing a better liquidity but rather, through the excessive distribution of income so as to insure employ strain it places on the borrower, acts to promote ment, thus maintaining the necessary distribu foreclosures and insolvency. tion of wealth production as currently produced. What we are proposing is that the problem One thing is certain: We will not obtain of liquidity shall cease to be an individual con stability unless we work for it. A policy of cern and shall become the collective concern of laissez faire presupposes an economy possessing the banking system. A single bank which a flexibility which I think it is hopeless for us to adopts a policy calculated to pay off all of its expect to achieve. Therefore it is absolutely deposits at a moment's notice, even though the essential to develop agencies which by con national income is cut in two, cannot adequately scious and deliberate compensatory action will perform its duty of serving its community. obviate the necessity of drastic downward or Since good local loans go bad when a depres upward adjustments of costs and prices, wages, sion sets in, the bank's portfolio would have to and capital structures. If we do not develop Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 10 such agencies, our present economy, and, per I have outlined to you, and, what is even more haps, our present form of government cannot important, by cooperating with the policies for long survive. the promotion of which the changes in our bank For this reason it behooves all of us, who are ing structure are proposed, the bankers of the charged with the responsibility of managing our country will be working not only in their own money and credit mechanism, to devote our best interests but also in the interests of best thought and greatest effort to promote an recovery and the establishment, within our intelligent understanding of the monetary and economic and political framework, of a more economic problems confronting the Nation. stable and equitable national economy. By supporting the proposed legislation which o Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Marriner S. Eccles (1935, February 11). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19350212_eccles

@misc{wtfs_speech_19350212_eccles,
  author = {Marriner S. Eccles},
  title = {Speech},
  year = {1935},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19350212_eccles},
  note = {Retrieved via When the Fed Speaks corpus}
}