In addition to that, I am inserting a statement from other prominent people, showing the importance of supporting these bonds at par. Notwithstanding this overwhelming testimony, convincing testimony that bonds should be supported at par, the Board of Governors, through the Open Market Committee, permitted them to go below par. I hope it is never done again.

AND

SUPPORT GOVERNMENT BOND PRICES: SECRETARY SNYDER AND CONGRESSMEN SPENCE BROWN

Inflation control hearing before the House Committee on Banking and Currency, Senate Joint Resolution 157, July and August 1948, page 252:

Mr. SPENCE. Mr. Snyder, when we had 21⁄2percent bonds the debt of the Nation was $21 billion to $23 billion. When those bonds went to 80 percent, where do you think these 21⁄2-percent bonds, which are taxable as against the others which were nontaxable, if not supported by the Federal Reserve, would go to now when the national debt is $250 billion?

Secretary SNYDER. I would be greatly concerned as to what would happen if we just turned loose the support of the bond market.

Mr. SPENCE. Does the support of the bond market not have a psychological effect upon the holders of the bond very similar to the effect of the Federal Deposit Insurance Corporation on depositors in banks? It gives them a confidence which makes them retain their bonds. Otherwise they would probably put them on the market, and nobody can tell how low they would go; is that not true?

Secretary SNYDER. I think that is true; yes, sir. There would be constant doubt as to just what the level would be.

Mr. SPENCE. How essential is it to maintaining the credit of the Government?

Secretary SNYDER. From my point of view it is the most essential thing to do right now, to maintain confidence in the Government's monetary operations.

Mr. SPENCE. If that confidence were destroyed the inflationary conditions would certainly be very much worse and one can hardly foresee what would happen. I think that is the very basis of the whole thing. Whether the support of the bond market is inflationary or not, it must be continued.

Mr. BROWN. I think by all means we should hold these bonds at par. Any suggestion you have to make to this committee in order to help you do that I think this committee would like to have, because I think that is the most important thing. We should hold these bonds at least at par. I think you are doing a good job on this line. CHAIRMAN M'CABE FOR SUPPORTING GOVERNMENT BOND PRICES

Excerpts from confirmation of Thomas B. McCabe hearings before the Committee on Banking and Currency, United States Senate, 80th Congress, 2d session, March 3, 1948-pages 156-157:

Mr. MCCABE. I would like to say that I am thoroughly in accord with the current. program of the Federal Reserve in supporting the Government bond program.

The CHAIRMAN (Senator Tobey). I take it that events indicate what is in my own mind; that you feel the bonds should be maintained at par for an indefinite period.

Mr. MCCABE. Well, the support program, as you know, follows a pattern on the Government bonds, and my own feeling is that that pattern, certainly as far as I can ascertain today, is a right one.

The CHAIRMAN. You approve of the procedure the Federal Reserve followed in December, when it dropped the price down to make it more uniform?

Mr. MCCABE. I thought that was a very constructive move.

The CHAIRMAN. Then it comes down to this question: I think we are in accord with the theory that we should maintain a uniform pattern, and that we should maintain these at par for an indefinite period; the alternative being, if we reduced the price of the bonds, the evil that would ensue at once in the ruining of so many of our savings institutions that are loaded to the muzzle with Government bonds. How do you feel about that situation?

ETHICAL DUTY TO BOND PURCHASERS

Mr. MCCABE. Well, in the general support program, I feel this: There are three para- mount considerations.

First, there is the refunding, or refinancing, problem of the Treasury.

The second is that I feel we have an ethical responsibility to the people who have purchased Government bonds. Our present Federal debt is a very large one. In fact, it is one and one-half times all the rest of the debt of the United States put together; the total, that is, of private and corporate debt of all kinds.

And the third consideration, I think, is that it is very helpful to commerce and industry and agriculture to know that there is a reasonable range in interest rates, and they can reasonably count on that in refinancing of businesses, business enterprises generally.

The CHAIRMAN. You would share my apprehension, would you, to be perfectly frank, as to the danger of price decline below par, and the consequent effect upon savings institutions in the country?

Mr. MCCABE. Well, when you talk about the absolute support price, I think, sir, that that has to be reviewed from time to time to ascertain what that level should be.

My own feeling is that I am in full support of the action that has been taken to date in supporting the program.

The CHAIRMAN. And as you look ahead, you have nothing in the back of your mind that would lend you at this time to a mental commitment, or reservation, that would happen in the future, as far as you can see: that reduction below par?

Mr. MCCABE. In the "foreseeable future"I think those are the words.

Page 172:

Senator FULBRIGHT. The fact is that the necessity for supporting Government bond prices, which everyone seems to agree on, has almost nullified the principal owner to control credit.

Mr. MCCABE. It has been a very strong factor.

Senator FULBRIGHT. That was the main tool, and it is practically nullified by these conditions.

Mr. MCCABE. To my mind that must be done.

FEDERAL RESERVE MADE PUBLIC COMMITMENT TO SUPPORT PRICE OF GOVERNMENT BONDS

McCabe, testifying before the Banking and Currency Committee on supporting Government bonds at par, stated on August 2, 1948-page 89, hearings, on Senate Joint Resolution 157:

It is my view that the System is obligated to maintain a market for Government securities and to insure orderly conditions in that market because of the widespread repercussions that would issue throughout the economy if the vast holdings of the public debt were felt to be of unstable value.

Page 88:

In order to keep the prices of Government securities from declining, the Federal Reserve System has continued to carry out its wartime responsibility of supporting the

market by buying at relatively stable prices securities offered for sale and not purchased by others.

Mr. McCabe testified as follows-page 95:

As you know, the System has made a public commitment to support the 21⁄2-percent yield level on long-term Government bonds for the foreseeable future. I gave my reasons for subscribing to that commitment when my confirmation was under consideration by the Senate Committee on Banking and Currency. Although that commitment substantially limits our freedom of action, I believe there is a better way to operate against credit expansion than now to abandon that commitment.

It will be noticed that Mr. McCabe says there is a better way to prevent inflation than to abandon support of Government bonds at par.

Page 101, McCabe stated:

I have a very strong conviction that it is vitally necessary to support the 22 percent bonds.

This was in answer to a question of Chairman WOLCOTT, in which he asked: Do you think that we have to continue to support Government bond prices at par? Mr. McCabe further stated-page 101: The thing that we have to consider is the colossal magnitude of this debt-$250 billion. It is 11⁄2 times all the rest of the debt in the United States put together.

Further-page 101-he says:

If we directly stabilize a portion of this debt so that it cannot be monetized, that is the answer.

In other words, Mr. McCabe says it is not necessary to take the peg from under the support prices-that a portion of the debt can be sterilized and that will be the answer.

FEDERAL RESERVE CHAIRMAN SAYS BONDS SHOULD BE SUPPORTED UNTIL CONGRESS SAYS OTHERWISE

Page 108 of the same hearings, the chairman asked, and Mr. McCabe answered as follows:

The CHAIRMAN. Well, there have been orthodox ways of controlling it heretofore. Ever since 1914 we have controlled the volume of credit by the manipulation of reserve requirements and rediscount rates. I do not know why we have to supplement those with consumer credit controls at the present time, any more than we did before. Mr. MCCABE. I say to you, sir, if it is the wisdom of this Congress that the Federal Reserve Board should not support the Government bond market, then I think Congress should so direct the Federal Reserve. Page 135, I stated:

Mr. PATMAN. I thoroughly agree with you. That is the reason I voted against the taxreduction bill. I wanted to keep that money in the Treasury and pay it on the national debt.

Page 171, Marriner S. Eccles, Governor of the Federal Reserve Board, stated on August 3, 1948, in referring to the Board of Governors:

The chairman is the liaison and of necessity the administration must have a liaison with such an organization as the Federal Reserve System.

Of course, the President appoints all the members of the Board, and he designates who shall be Chairman and who shall be Vice Chairman.

Page 180, Mr. Eccles admitted that the Federal Reserve Banks raised the reserve requirements 100 percent in 1 year. The raises commenced just before the payment to the soldiers on June 15, 1936. It was the first time in 20 years reserve requirements had been raised.

Mr. Eccles stated-page 182-as follows:

I feel-and I know the Federal Reserve people as a whole feel-that we must, so far as we can see it at the present time, and I can give you reasons, if you want them, continue to support the 21⁄2 percent rate.

Page 182:

Mr. PATMAN. The only reason is that it would break every bank in the country if the bonds went much below par, is it not? Mr. ECCLES. Well, I do not think it would do that.

Mr. PATMAN. It would be possible, however? Mr. ECCLES. If they had to sell the bonds while they were down, it would certainly impair some of them. But I will mention it in just a minute, if I can, Mr. Congressman, but to try to peg the short-term rate, and hold that down below the point at which it would r.ormally go in a free market in relationship to the 21⁄2-percent rate does not to my way of thinking make very much sense in the present situation. I would certainly feel that if Congress should give to the Board the authority to increase the reserve requirements, as has been proposed by Chairman McCabe when he appeared before this committee yesterday, that they would also favor, as the Federal Reserve does, and I would also hope that the Treasury would favor, permitting the adjustment in the short-term rate to a market rate. Then we would let the discount rate go up.

Now, there may be some people who think that that would create such uncertainty that that will tend to slow up borrowing. I do not think any such thing. I think that the raising of the short-term rate is minor insofar as its monetary effect is concerned, but it is an important part of the overall creditcontrol mechanism, and I feel that it would not be logical or sensible to increase the reserve requirements of all banks and keep the discount rate down to 14, which would have to be done, and force the short-term rate and continue to hold the short-term rate down to 1%.

Now, aside from its monetary and credit effect, there is a serious question of bank earnings. Especially is that true of the banks in the central Reserve cities and in the Reserve cities. I do not say that that is major, but it is certainly a factor, because all of the commercial paper and business rates are related to that short-term rate.

Their costs have gone up, just like other costs, due to the inflation, very rapidly, and their earnings have dropped very, very fast during the past year. To increase the reserve requirements by 10 percent, which would force them to dispose of 10 percent of their earning assets-their bonds, would affect their earnings quite seriously, and that really is where some of your formidable obJections to this bill come in. I feel that as a part of this control, if it is going to be made effective, the short-term rate should be permitted to rise. Failing to permit it to rise, and increasing the reserve requirements and diminishing their reserve assets would put the banks under pressure to go out and seek loans at as high rates as they were able to find, maybe longer-term loans, even though it did impair some of their liquidity. We feel that if you should increase this reserve requirement, take away from them that much of their earning assets, that that should be partly overcome by permitting the short-term rate to rise. We would not force it up. It will automatically rise. It cannot go very high if you support the 21⁄2-percent

rate. It is not going to create very much uncertainty, so long as you hold the 21⁄2-percent rate, because the range with which the shortterm rate can rise would be within its present 1% and I would say possibly 12 percent. That in itself is not a very great rise.

So I do not agree with those who say that is all that is necessary, because it creates so much uncertainty. It cannot create uncertainty so long as you hold the 21⁄2-percent rate. But if that rate rises, our discount rate rises, in the trend of a credit tightening, and that, in turn, will reflect itself on all other loans and investments. If your dollar is diminishing in price, then, certainly the cost of interest should go up some. The owner of money, the savers, the insurance people, and the investors generally certainly should not be the only ones to suffer to the extent that they have suffered, by holding down the interest rate beyond what seems to be necessary.

Now, getting to the 21⁄2-percent rate, people say, "Well, why do you not let the 21⁄2percent rate go up, so that it will reflect the demand for savings and for investment, so that more people will save and not spend so much? If you let the rate go up, it would be a very important anti-inflationary factor." Well, to let the 21⁄2-percent rate go up raises some very, very serious problems, and these are some of the problems that it raises:

In the first place, it would unstabilize the entire Government bond market, and when the public debt represents 60 percent of the entire debt, you are not playing with any small and minor item. You are playing with $250 billion of a total debt structure of around $400 billion. That is not the tail of the dog. That is the dog. If you are going to have stabilization in the Government market, you cannot have the public in a position of complete uncertainty as to how far the price of securities-Government bonds, and, of course other bonds and mortgages-would reflect the price-municipals; they would all reflect the price of a dropthe uncertainty as to what the market value of their assets as well as what the cost of interest was going to be. That is especially true for the reason that the Government has falling due in the next 12 months $49 billion of debt-$49 billion in 12 months. Another $46 billion within the next 5 years. There is close, to a hundred billion dollars in 5 years, with '$49 billion in 1 year.

The job of refunding that much debt is no simple and easy task in a market that is unsupported and unsecured and unstable. How do you price the issues each week and each month that you have to offer to the public? Who is going to buy the issues, and at what price, when they do not know what the price may be after they have bought them? How can you finance longterm or short-term municipals, and corporate and other securities that are falling due every day and every week, and when new money is being raised, when there is no basis upon which to price them?

ALL FAVOR HOLDING LONG-TERM RATE

Mr. Eccles stated further-page 185: Now, it is true, I suppose, that legally the Open Market Committee could say to the Treasury, "You must price your securities at such and such a price. We will not support the market at the prices that have been outstanding." But, as I brought forth before this committee, the Open Market Committee and the Federal Reserve Board are in favor, with the Treasury-and I think with the great majority of bankers and the public generally of holding the long-term rate.

Page 196, Mr. Eccles replied, in answer to the question of Mr. SPENCE, "What was the bonded indebtedness of the United States at the time the bonds went to 82?"

Something around 24 to 25 billion dollars. I might ask this question: If Government bonds, totally tax exempt, yielding a rate of 42 percent, without any support by the Federal Reserve System, could go to 82 or 83, then when our national debt was $25 billion only, the query is, where would a 22 percent fully taxed bond, taxable bond go, if the Federal Reserve withdrew from its support, when there was a debt of $250 billion?

In a colloquy between Mr. MULTER and Mr. Eccles, the following-pages 215216:

Mr. MULTER. I think you might have made some comment about what would happen to the E, F, and G bonds if Government support of the bond market were withdrawn.

Mr. ECCLES. Well, I am glad you mentioned that, because we do have a demand liability in the form of E, F, and G bonds of something like $53 billion. Certainly any sale of E, F, and G bonds would stop while the long-term interest rate was unsettled and uncertain, and there might be a large cashing in of those securities, because if the interest rate on market securities should go up, which it would if the prices go down, there would be no reason why holders of E, F, and G bonds would not want to either shift to the market bonds-which, of course, in itself, might stabilize the price, except that the Government would have to borrow money to pay off the E, F, and G bonds, in some form-but the holders of E, F, and G bonds might very well cash in their securities and hold idle cash waiting to see what to do with that money, or they might cash in the bonds and try to spend the money for an automobile or for stocks or any number of things. It would be most unfortunate if the holders of those large savings bonds should start cashing them in on a large scale, which could very well eventuate if you withdrew support from the long-term market bonds. I am glad you reminded me of that, because that is just another argument supporting the arguments that I have already made for maintaining the present rate of 21⁄2 percent on long-term Government bonds. SECRETARY SNYDER SUGGESTS CONGRESS SHOULD DIRECT IF SUPPORTS ON GOVERNMENT BONDS TO BE REMOVED

On page 233, Secretary Snyder answered a question, "If it is necessary to support the long-term rate, we have adopted a policy of that sort, yes." Page 248, Secretary Snyder stated:

If the Congress wants to direct us to remove our support prices from the bonds, it is within their scope to do it.

On page 249, Secretary Snyder and Mr. Smith:

Mr. SMITH. Mr. Snyder, the question was asked you of Mr. Monroney, if you would let bond prices drop, whether that would not be inflationary. You answered the question by saying it would be disastrous. Would you answer the question directly, whether that would be inflationary or deflationary?

Secretary SNYDER. Well, there is no question but what it could be inflationary. Mr. SMITH. Would be which?

Secretary SNYDER. The immediate step might be inflationary but the end result would be a disastrous deflation.

Mr. SMITH. Why do you say the immediate effect would be inflation?

Secretary SNYDER. It would build up prices in other fields.

Mr. SMITH. Well, explain that.

Secretary SNYDER. Well, the people would liberate their money from Government bonds. If they take their money out of Government bonds and put it in other things, they would be building up prices of other things.

Mr. SMITH. But generally there would be a drop; is that not true?

Secretary SNYDER. Over the long range there would be a disastrous drop; yes, sir. We are just as interested, Congressman, in avoiding a disastrous deflation as we are in not creating inflation. We have the double problem always before us. It is not a clearcut problem. Right now the inflationary pressures are greater so we are having to address ourselves to that angle. At the same time we have to bear in mind the effect that deflation would have, or what deflation could do to us.

PROMISE TO PURCHASERS OF GOVERNMENT BONDS

Page 258, while Secretary Snyder was a witness, I stated:

Mr. PATMAN. I am sorry; I was not here. The reason I am asking you the question is that I know there is a lot of sentiment in this Congress to do away with support prices on Government bonds and to let them seek their level. I think it would be one of the most disastrous things which could possibly face our country-for the same reason that we had such a condition after the other war, when bonds went down to 75 cents, as you well recall.

This time it was contemplated that we would not permit bonds to go down. I know when the Ways and Means Committee was considering war financing, before the war, I appeared before the committee in support of a program that would prevent that very thing, and I was assured by the members of the committee that that committee-the Ways and Means Committee would do everything within their power to prevent that disaster occurring again.

It was going to be the policy of the Government always to keep those bonds above par, and to assure the people that they would be above par-and so far they have done that.

Now, if we go back on that—what we might call an implied promise and a recognized promise by congressional leaders of that time after people bought bonds on the strength of that fact, and if the word were to get out that support prices are likely to be done away with, I do not know what might happen in this country, because the people would begin to run to the banks, run to the Treasury, and they would begin to cash their bonds.

I can see in that one of the most disastrous things, or possibly the most disastrous thing, that is proposed in this whole program.

CRIMES OF 1920'S TO BE PREVENTED Hearing on the debt limit of the United States, H. R. 1470, January and February 1943, commencing at page 10, I stated as a witness before the Committee on Ways and Means:

The CHAIRMAN. Suppose the Federal Reserve banks balk?

Mr. PATMAN. They can't balk. They are an agency of the Congress. They have to do what Congress says.

The CHAIRMAN. These bonds can't all be held by the Federal Reserve banks; they have to be scattered throughout the country.

Mr. PATMAN. I am afraid we are talkng about different things. I am afraid you are talkng about the usual industrial or commercial transaction, and I am talking about the Government finances.

The CHAIRMAN. I beg your pardon. I am Borry; I ddn't follow you.

Mr. DISNEY. As I understand it, these banks are heavily loaded with Government bonds, so heavily loaded that a sharp decrease in the value of Government bonds would wipe out their capital stock.

Mr. PATMAN. Two or three points decrease would wipe out their capital stock, but there is no danger of that.

Mr. DISNEY. Suppose there was a sharp decrease in the value of Government bonds, that would have a tendency to wipe out a part of the capital stock of the banks, or some of them, and if any sizable number of

them should get in that position, they would be liable to be in trouble and go broke and take the rest of the banks with them. How could we prevent that?

Mr. PATMAN. That is already provided for, Mr. Disney. The open market committee, which, by the way, has been moved from Washington to New York, has already arranged that any bank in dstress can get a hundred cents on the dollar on its bonds any time. There is where the Government's credit comes into play again. They just issue more Federal Reserve notes to buy those bonds, and they are not going to let the banks suffer. They have already told them they will not let them suffer. There is no danger of that at all.

Mr. DISNEY. No danger of Government bonds

Mr. PATMAN. Declining; absolutely not. It is, in effect, guaranteed by the United States, and there is no danger in the world. In fact, I think it is a good thing, although it is the Government's credit being used again, free. It is perfectly all right.

Mr. KNUTSON. Right at that point, why did Government bonds drop to 82, along in the fall of 1921?

Mr. PATMAN. Because of a situation you gentlemen had vision enough to guard against when this war started. In 1914, when the war started in Europe, and in 1917, when we became engaged in the war, we did not make any provision to protect the people who bought United States Government bonds. They had to sell them in the open market. Consequently, when the war was over, and everyone wanted to sell their bonds, naturally the market went down and down, and some of them sold as low as 75 cents on the dollar. It was the crime of the age to permit that to be done. Men in the armed services had paid for their bonds a few dollars a month over a period of time. And when they came out of the service they saw these bond manipulators force the price down to 75. It was absolutely a crime. But you gentlemen provided—and if you will remember, I appeared before this committee in connection with that and invited your attention to it, and asked you, for God's sake, to prevent any such thing happening in the future. Not necessarily because of my testimony did you do it, but you provided, anyway, that now they can get their money 100 cents on the dollar, and the people of this Nation should appreciate what this committee did to initiate that type of legislation which will protect them against that awful crime that happened after the other

war.

Page 15:

FEDERAL RESERVE CREATES MONEY

Mr. PATMAN. Let me read a little more of the testimony of Mr. Eccles, in answer to questions asked him by Mr. Dewey. I have had an awful time getting these things, Mr. Chairman. The witnesses have shown irritation, sometimes, in being compelled to answer questions, but over a period of years I have gotten the Secretary of the Treasury, Mr. Morgenthau, the Under Secretary, Mr. Bell, and Mr. Eccles and other high officials of the Government to prove every statement that I make concerning this. I mean not my own opinions or conclusions, but statements of fact. I have other testimony to prove it. Let me read Mr. Eccles' testimony when he was interrogated by Mr. Dewey on June 17, 1942 [reading]:

"Mr. ECCLES. No; the Federal Reserve would buy in the open market. If the Federal Reserve then bought a billion dollars of securities in the open market that would be new Treasury issues. The banks would still hold them, and the Federal Reserve would put into the banks another billion of excess reserves. If they used that billion they could buy 5 billion more of Governments, and you could keep the price up. For every billion

of the Federal Reserve banks put in the open market operations, the private banks could buy 5 million.

"Mr. DEWEY. That comes pretty close to some other ideas I have heard.

"Mr. ECCLES. I mean they could buy 10 billion. I mean the Federal Reserve when it carries out an open market operation, that is, if it purchases Government securities in the open market, it puts new money into the banks which creates idle deposits.

"Mr. DEWEY. There are no excess reserves to use for this purpose.

"Mr. ECCLES. Whenever the Federal Reserve System buys Government securities in the open market or buys them direct from the Treasury, either one, that is what it does

"Mr. DEWEY. What are you going to use to buy them with?

"Mr. ECCLES. What is who going to use? "Mr. DEWEY. The Federal Reserve to make these purchases?

"Mr. ECCLES. What do they always use? "Mr. DEWEY. You are going to create credit?

"Mr. ECCLES. That is all we have ever done. That is the way the Federal Reserve System operates. The Federal Reserve System creates money. It is a bank of issue."

Page 18:

FEDERAL RESERVE BANKS PROVIDE MONEY FOR COMMERCIAL BANKS

Mr. Eccles testified before the Banking and Currency Committee June 17, 1942, on a bill to amend the Federal Reserve Act. His testimony which appears at page 15 of the hearings discloses that commercial banks can buy all the bonds they desire to buy and if they are called on for money to pay their depositors the nearest Federal Reserve bank can always furnish them the money they need. His testimony is as follows:

"Mr. PATMAN. Is it not a fact that you did send out letters to the banks which made the statement that the Federal open market committee was ready to buy all the bonds at par?

"Mr. ECCLES. No, sir; not buy, but we adopted a policy, each bank did, that would loan par on them.

"Mr. PATMAN. That would loan par on Government securities?

"Mr. ECCLES. Yes.

"Mr. PATMAN. Do you charge the interest rate that is effective in that particular Federal Reserve district?

"Mr. ECCLES. One percent.
"Mr. PATMAN. One percent?

"Mr. ECCLES. Yes.

"Mr. PATMAN. Have you ever told all the banks that you stand ready to make loans at par at a 1-percent interest rate?

"Mr. ECCLES. Each Federal Reserve bank has done that."

Page 20:

FEDERAL RESERVE USES GOVERNMENT OBLIGATIONS (CURRENCY) TO BUY GOVERNMENT OBLIGATIONS INTEREST BEARING KEEP BONDS AND DRAW THE INTEREST

On the same day Mr. Eccles testified, at page 25 of the hearings:

"Mr. PATMAN. Mr. Eccles, the day before yesterday, I had gotten down to the point where, if we needed more money, one way to give the banks extra reserves to purchase Government bonds would be for the Open Market Committee to buy Government bonds in the open market, and I suggested if you bought for the Federal Reserve bank one billion dollars' worth of bonds, that would automatically create a billion dollars of reserves in the banks, and, after the reserves had been reduced to 50 percent, the maximum that would enable the banks to purchase $50,000,000,000 worth of bonds. Now, let us assume that has happened

"Mr. ECCLES. $10,000,000,000 worth by the purchase of a billion dollars' worth of bonds in the market?

"Mr. PÁTMAN. I got the two mixed up. The purchase of a billion dollars' worth of bonds in the market, after the excess reserves had been reduced, will enable the banks to buy ten billion?

"Mr. ECCLES. That is right.

"Mr. PATMAN. Where the fifty billion came in was if you would automatically reduce the reserves now, which you have a right to do, that would give them $5,000,000,000 of excess reserves, which they could use to purchase $50,000,000,000 worth of bonds.

"Mr. ECCLES. That is right.

"Mr. PATMAN. Now let us assume that we not increase the reserves in the banks, and you go into the market and buy a billion dollars worth of bonds; you buy them with Federal Reserve money, do you not?

"Mr. ECCLES. Well, we buy them with Federal Reserve credit.

"Mr. PATMAN. I know; but suppose the banks call for the money, you issue Federal Reserve notes, do you not?

"Mr. ECCLES. What we do, tf we purchase Government securities in the market, is, we credit the account of the bank that turns them in. They usually come through the banks.

"Mr. PATMAN. That is right.

"Mr. ECCLES. Even though they may be individuals who are selling the securities; and we debit the bond purchase account, showing that the Federal Reserve has a liability to the banks to the extent of $1,000,000,000, which represents their reserves on the one hand, and that they own $1,000,000,000 of bonds in what we call the portfolio, on the other hand.

"Mr. PATMAN. I know in practice that is exactly the way it is done, Mr. Eccles, but suppose the banks want the billion dollars in currency, you would pay it in Federal Reserve notes, would you not?

"Mr. ECCLES. That is right.

"Mr. PATMAN. Those Federal Reserve notes, as we have often discussed, are obligations of the United States Government?

"Mr. ECCLES. That is right.

"Mr. PATMAN. Then you use those Government obligations to buy interest-bearing Government obligations and you place them with the Federal Reserve banks-12 of them? "Mr. ECCLES. That is right.

"Mr. PATMAN. And they would continue to receive interest on those Government obligations as long as they were outstanding? "Mr. ECCLES. That is right."

Page 21:

On June 17, before the same committee, at page 21 of the hearings on the bill to amend the Federal Reserve Act, Mr. Eccles testified:

"Mr. ECCLES. No; the Federal Reserve would buy in the open market. If the Federal Reserve then bought a billion dollars of securities in the open market that would be new Treasury issues. The banks would still hold them, and the Federal Reserve would put into the banks another billion of excess reserves. If they used that billion they could buy five billion more of Governments, and you could keep the price up. For every billion of the Federal Reserve banks put in the open market operations, the private banks could buy five billion."

Page 22:

AMOUNT OF MONEY FEDERAL RESERVE BANK COULD ISSUE

When Dr. E. A. Goldenweiser, Director of Research and Statistics for the Board of 'Governors of the Federal Reserve System, testified before the Banking and Currency Committee of the House on October 1, on the price-control bill, the following questions were asked and the following answers given, page 1538, volume 2, of the hearings.

"Dr. GOLDENWEISER. The total reserves of the Federal Reserve are about 20 billion, not 23 billion.

"Mr. PATMAN. I am talking about the total gold supply that is either owned by the United States Government or claimed by the Federal Reserve banks through the

"Mr. GOLDENWEISER. The amount of the stabilization fund is not available to the Federal Reserve.

"Mr. PATMAN. No; but I am presuming that it will be available. That will be 23 billions?

"Dr. GOLDENWEISER. All right.

"Mr. PATMAN. That leaves 16 billions unattached?

"Dr. GOLDEN WEISER. Yes.

"Mr. PATMAN. How much bonds could the Federal Reserve Open Market Committee buy in the United States, Government bonds, based upon that?

"Dr. GOLDENWEISER. It depends on how much of it will be in deposits and how much in notes. But, roughly speaking, about three to three and a half times.

"Mr. PATMAN. Three and a half times? "Dr. GOLDENWEISER. No; not three and a half times. From two and a half to three times.

"Mr. PATMAN. That would be about $40 billion?

"Dr. GOLDENWEISER. That is right. "Mr. PATMAN. When that money is paid out, suppose they pay it to the commercial banks, they could expand about five to seven times to one on that, couldn't they?

"Dr. GOLDENWEISER. If they paid that much assessment?

"Mr. PATMAN. Yes; they would have the power to under the existing law?

"Dr. GOLDEN WEISER. That is right. "Mr. PATMAN. That means that, say, an average of six times-that is about right now, isn't it-about six?

"Dr. GOLDENWEISER. Approximately. "Mr. PATMAN. That means that they could inflate about $240 billion more?

"Dr. GOLDENWEISER. That is right."

It will be noted that the Federal Reserve banks and the commercial banks could expand their deposits sufficiently to purchase $240 billion worth of Government bonds at the time Dr. Goldenweiser testified. When the reserves are reduced to the limit that they can be reduced, these banks may purchase as much as $480 billion of Government bonds without having any more capital stock or assets than they now have except, of course, as Mr. Eccles always adds, that they will have the Government bonds.

Page 3, how money is created by privately owned banking system:

During the first week in December, Gov. Marriner S. Eccles, Chairman of the Federal Reserve Board, stated in a letter to all banks:

"Continuing the policy which was announced following the outbreak of war in Europe, Federal Reserve banks stand ready to advance funds on United States Government securities at par to all banks."

Page 10-11:

LEON HENDERSON'S TESTIMONY ON NO DEBTS,

NO MONEY

In the hearings before the House Banking and Currency Committee on the pricecontrol bill, the following questions were asked by me and the following answers given by Mr. Leon Henderson (pp. 981-982):

"Mr. PATMAN. You stated yesterday that everybody should take advantage of this period of rising prices to pay their debts. You really don't believe everybody should pay their debts, do you? If you mean that, what we do for money, since our money is based on debt?

"Mr. HENDERSON. I have been through that, the same as you have, and I don't believe our economy would come to a halt if people paid their debts. "Mr. debts?

PATMAN. If everybody paid their

"Mr. HENDERSON. If you are going to say that I have discounted the trade acceptances which the Federal Reserve has created by a couple of bookkeepers, that is not the connotation debt has for me.

"Mr. PATMAN. You had in mind individual debts, personal debts?

"Mr. HENDERSON. Yes.

"Mr. PATMAN. And if the policy is good for individuals, why isn't it good for corporations?

"Mr. HENDERSON. I think it is.

"Mr. PATMAN. All right. If everybody paid their debts, where would you get money to carry on business?

"Mr. HENDERSON. You would get into debt and come out again. I assume the healthy process of credit is that you do liquidate debt as you do the trade acceptances."

Mr. Speaker, Mr. Henderson's very clever reply was, in effect, that it is all right to pay the debts, but you should get right back into debt again in order for the country to have this circulating medium.

NO DEBTS, NO MONEY (ECCLES)-CHAIRMAN MARRINER S. ECCLES' TESTIMONY ON NO DEBTS, NO MONEY, IN HIS TESTIMONY ON THE PRICE-CONTROL BILL BEFORE THE BANKING AND CURRENCY COMMITTEE

Chairman Eccles, of the Federal Reserve Board, testified as follows, page 1338 of the hearings, September 30, 1941:

"Mr. PATMAN. • • • You made the statement that people should get out of debt instead of spending their money. You recall that statement, I presume?

"Mr. ECCLES. That was in connection with installment credit.

"Mr. PATMAN. Do you believe that people should pay their debts generally when they can?.

"Mr. ECCLES. I think that depends a good deal upon the individual; but, of course, if there were no debt in our money system

"Mr. PATMAN. That is the point I wanted to ask you about.

"Mr. ECCLES. There wouldn't be any money. "Mr. PATMAN. Suppose everybody paid their debts, would we have any money to do business on?

"Mr. ECCLES. That is correct.

"Mr. PATMAN. In other words, our system is based entirely on debt."

Mr. Speaker, there can be no dispute about the statement that our system is based entirely upon debt, and if a person and corporation paid their debts, we would not have sufficient money to do business on.

Page 12:

CREATE MONEY, BUY BONDS, AND COLLECT INTEREST

When the Honorable Marriner S. Eccles, Chairman of the Federal Reserve Board, was before the Banking and Currency Committee of the House, of which I am a member, on Tuesday, September 30, 1941, I interrogated him about how he obtained for the 12 Federal Reserve banks the $2,000,000,000 in Government bonds, which the system is now holding and charging the Government interest thereon. The questions and answers appear in the printed testimony, volume 2, page 1342, and is as follows:

"Mr. PATMAN... How did you get the money to buy those $2,000,000,000 of Govern

ment securities?

"Mr. ECCLES. We created it.

"Mr. PATMAN. Out of what?

"Mr. ECCLES. Out of the right to issue credit, money.

it, is there, except the Government's credit? "Mr. PATMAN. And there is nothing behind

"Mr. ECCLES. We have the Government bonds.

"Mr. PATMAN. That's right; the Government's credit."

BANKERS SHOULD NOT BE ON BOARD OF
GOVERNORS

The truth is the Board of Governors should not be composed of bankers. There is a difference between the science of money and the use of money. Bankers use money, and they are clever. They are professionals. They are qualified to use it, and they serve a very useful and constructive purpose in our country. We could not get along without the commercial banking system. We must have it. We want it to remain privately owned; we want it to make a profit. because we want a good system. If it were within my power, I would encourage every person who has enough money to check on to have an account in a bank, even if the banks had to be helped with public funds to pay the cost of the banks carrying unprofitable accounts. It would be in the public interest. It would be so helpful in many ways. But the banking system as such should be separated from the science of money and the use of money and credit to maintain an expanding economy to provide adequate production and maximum employment. As it is now, the Government manufactures money, but it is done through the Federal Reserve System, created through the Federal Reserve System. The Federal Reserve System will take a million dollars' worth of new money that is made over at the Bureau of Engraving and Printing and trade that million dollars in the open market for Government bonds of a similar amount, that are drawing interest. Then they keep the bonds, they use this Government obligation, which cost them nothing, because they are a Government agency, and they trade that new money for Government bonds. They hold the bonds and draw the interest.

WARTIME INTEREST RATE PATTERN FOR LONGTERM GOVERNMENT SECURITIES BROKEN MAY 1, 1953

The Treasury broke the pattern for interest rates on our World War II war debt on May 1, 1953, when a bond issue was sold which provided a 34-percent interest rate. This was three-fourths of a percent higher than any other marketable long-term Government bond that has been issued in 20 years.

There was a good reason for fixing the interest rates on Government bonds low. Most of the money that was used for war financing was not genuine money in the sense that actual money was borrowed by the Government on Government bonds, but it was synthetic money that was created on the books of the commercial banks or the books of the 12 Federal Reserve banks. However, the money created was just as good as the other money. In fact, it all comes off the same printing press or created with the same ink on the same paper and carries the same United States Government guaranty.

But there is a difference in the money insofar as the lender is concerned. In one case, the lender is a bona fide citizen who has actually worked and earned the money. It is his money, and if he parts with it by letting the Government use it to finance the war, he is entitled to a fair rate of interest on the money.

In the other case, where the money is created by the banks, and that is where most of our money comes from-created money-the taxpayers are really paying through the nose in having to pay enormous annual interest charges every year for this synthetic money. The real bad thing about it is that a Government bond never seems to be paid off. It is always refunded. So as bad as it is for a taxpayer to pay interest on synthetic money for 1 year, the bad effect is multiplied by the payment each year for 25 years, 50 years, or 100 years. This type money should be paid as quickly as possible and the interest burden removed.

It is all right to pay interest on all money borrowed by the Government regardless of the kind of money-real or created-so it all has the same purchasing power but bank-purchased bonds with created money should be paid off first.

I do not oppose banks creating money under our fractional reserve system. I am only opposed to the abuse of the privilege. I oppose banks putting themselves into a position of security with adequate earnings in this way to the extent that they will fail to take care of local needs.

TRADING PRINTED MONEY FOR GOVERNMENT
BONDS

When the Federal Reserve banks obtain from the Bureau of Engraving and Printing here in Washington printed currency, they can trade this money for United States Government bonds, which carry an interest charge. The former is bond. They both represent the Governcurrency and the latter is a Government ment's credit. They are really one and ernment's promise to pay. the same thing. Behind each is the Gov

The Federal Reserve banks, after trading non-interest-bearing currency for interest-bearing securities, retain the interest-bearing securities and collect the interest when due from the United States Treasury. This is the way the banks get their income. After their expenses are paid and 10 percent is set aside for surplus in each of the 12 banks, the remainder-90 percent-goes back into the United States Treasury.

The Federal Reserve banks have $25 billion of these bonds today acquired in that way, and they are collecting five or six hundred million dollars in interest annually from the taxpayers. Normally, your agent, acting for you, if he were negotiating with someone that you owed a promissory note, and that agent gave a check for a thousand dollars on you to pay that note, you would expect to get that note back, canceled. Naturally you would. But in this case, contrary to that businesslike way and supported by logic and reasoning, this agency of our Government takes this Government obligation which draws no interest, Federal Reserve notes, which you use as currency every day, and they trade that currency for interest-bearing obligations and the interest-bearing obligations are not canceled, although it is a Government agency using it. They are retained in their vaults and in their portfolios, and the interest is collected, which is comparable to you permitting your agent to keep

that $1,000 promissory note and requiring you to pay him interest every year as the interest is due. That would be a comparable situation. That is exactly what is going on today through the Federal Reserve System.

The banks have permitted themselves to do a lot of things that normally they would not do if they had any opposition, but they have not had any opposition in this country for 40 years and they have been allowed to do anything they wanted to do, and the Board of Governors has been composed largely of bankers, people who naturally have the bankers' viewpoint. They are permitting the banks to do a lot of things that are not in the interest of the banks themselves over the long run or in the interest of the country. So I think the Federal Reserve Board should be changed; the bankers should be taken off the Board of Governors and the Open Market Committee entirely, divorced wholly from the banking system, and let this Board and Committee operate in the interest of the people and in the interest of the Government. It is just as ridiculous as it would be if we permitted the railroad owners to be appointed on the ICC to fix freight and passenger rates.

Since the Federal Reserve Board was organized we have in this country what is known as the Maximum Employment Act of 1946 that sets up a duty and obligation of the Government agencies to perform in keeping this country on an even keel, to keep it prosperous and under maximum employment. This Board should do certain things, and they should look at it from the standpoint of the country and not from the standpoint of the banks. This is a new duty the money masters have that they did not have before 1946.

I am inserting in connection with my remarks statements from the different Chairmen of the Board of Governors of

the Federal Reserve System and of the

different Secretaries of State about the Employment Act of 1946, and its importance.

IMPORTANCE OF THE MAXIMUM EMPLOYMENT ACT OF 1946

Comments on the applicability of the Employment Act of 1946 before the Subcommittee on General Credit Control and Debt Management 1952, of the Joint Committee on Economic Report:

Reply by John W. Snyder, Secretary of the Treasury, compendium, page 2:

The Employment Act of 1946 now represents the basic policy directive bearing upon economic objectives for the Treasury, as well as for other Government departments and agencies.

Reply by William McC. Martin, Chairman of the Board of Governors of the Federal Reserve System, compendium, page 209:

Employment Act of 1946: Applicable to the Board of Governors as well as to other Government agencies is the following declaration of policy contained in the Employment Act of 1946.

Reply by Chairman Martin, compendium, page 212:

This statement of purpose in layman's language applies to the credit and monetary sphere the principles set forth in the con