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Washington, D. C. The subcommittee met, pursuant to adjournment, at 10.30 o'clock a. m., in the committee room, Capitol Building, Hon. T. Alan Goldsborough, presiding.

Present: Messrs. Goldsborough (chairman), Busby, Prall, Strong, and Beedy.

The CHAIRMAN. The subcommittee will please come to order. To-day we will hear from Mr. Eugene Meyer, the governor of the Federal Reserve Board.



The CHAIRMAN. Governor Meyer, will you state your connections for the purposes of the record?

Governor MEYER. Governor of the Federal Reserve Board and also chairman of the board of directors of the Reconstruction Finance Corporation.

Mr. GOLDSBOROUGH. You have read H. R. 10517, have you?
Governor MEYER. Yes, Mr. Chairman.

Mr. GOLDSBOROUGH. Now Governor, I think when you appeared before the committee before, you completed your statement and then the subcommittee or any member as the case might be, might ask you such questions as they thought should be asked, and, if you so desire, this hearing will so proceed.

Governor MEYER. That would please me very much, Mr. Chairman.

I had the opportunity, Mr. Chairman, of reading a part of the record of the hearings conducted by the committee which has been put into print.

Mr. GOLDSBOROUGH. That was up to the time Governor Harrison appeared before the committee yesterday?

Governor MEYER. I think so. The subject is such a large one and I have been so occupied

with my various administrative duties, and it has been necessary also for me to be present at hearings before other committees—that, if I have not a prepared statement to give you in the beginning, I hope you will understand that it was not that I did not want to take the time to make a careful and formal record of my views, but rather that I have not had the opportunity.

Mr. GOLDSBOROUGH. If at the conclusion of your statement, Governor, you should like to correct the record before it is printed we shall be very happy to give you the opportunity?

Governor MEYER. I thank you, and possibly to add to it if I may
Governor MEYER. Anything that occurs to me?

Governor MEYER. The whole question is one that has been so much under discussion in the press at home and abroad that it is hard in any limited period to attempt to do justice to it. I appreciate the fact that the members of the subcommittee are approaching the problem in a serious and earnest way, and are anxious to make : contribution of importance to the public interest. I have every sympathy with your general purpose. If I see difficulties which perhaps you do not quite visualize, it is perhaps due to my somewhat intimate experience with the administrative side of this sort of work and to my contact and experience with other factors which I think affect the practicability of accomplishing your purpose entirely by the means here suggested of control over the volume of credit o currency

Stability as I see it is affected in an important way by the volume of currency, including both credit and currency in this general concept

, I do not feel, however, that it is the only factor, and I have in mind that any instrument such as the volume of credit, if used in accomplishing or attempting to accomplish such a purpose, has to be con sidered in relation to a great many other important factors in the situation. For example, I do not think anybody can say right now how much currency is actually hoarded. We use estimated figures to indicate that amount, but in view of the large number of banks that have been closed within the last two years, and the consequent greater use of cash in business, in small amounts in each case, perhaps, but in a large aggregate amount, it is impossible to determine or even to estimate how much of the so-called hoarded currency is not really hoarded but is made necessary by bank closings.

Then, too, with the change in the banking situation, there has been in the past year and a half or two years a considerable decline in the number of small accounts that are paid by checks on account of charges imposed by banks, and that may have been a factor affecting the volume of required currency. Of course, offsetting that is the fact that under normal conditions with the diminished volume of business and the lower price level, it takes less money in circulation to transact business. I mention this merely because it brings out some of the difficulties with which anyone charged with responsibility for regulating the volume of currency would have to contend.

I regard the efficiency of the banking structure as an important element in achieving stability in the price level, and in using for that purpose, to the extent it can be used, the regulation of the volume of currency and credit.

I had the privilege of appearing here, not before this subcommittee but before the whole Committee on Banking and Currency, as far back as in January of 1923, when I said after a study of the banking structure of the country,

Mr. GOLDSBOROUGH. On what bill was that?
Mr. MEYER. It was in connection

with a bill on rural credits which resulted, I think, in the establishment of the Federal intermediate credit banks. After analyzing the banking structure in 1923, as I result of a study of the 4,300 banks to which the War Finance Corpo


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I nosila ration had made loans in the 1921-22 period, I called attention of this

committee to the banking structure of the country as a primary elemement in our economic and financial structure. May I just quote from

that hearing for a moment, dating back as it does over nine years ago,

because I think it is of interest at this particular time? I said then: und the There are necessarily many difficulties involved in our dual system of banking.

We have a State banking system, a national banking system, and a Federal reserve system, the latter having a membership derived from both the State and

the national systems. The State banking departments supervise the State 20 banks, and the Comptroller of the Currency supervises the national banks, while tetI the Federal reserve system has a supervision of its own for the member banks, * B and there has been at times some disposition to competition between the State

and the national banking systems.

The State banking laws frequently permit practices which national banks can not legally engage in. This is creating competition between the two systems which can not be regarded as wholesome and may lead to the gradual weakening of both. The question of branch banking is one that is causing considerable discussion at the present time.

Some of the States permit branch banking on an unlimited scale. As a result, agitation is now going on for an amendment to the national banking act to put national banks on a par with State banks in that respect. I do not propose to discuss the subject of branch banking here. Branch banking may be good or it may be bad. It may be good if carried on in a limited way and bad if permitted

on an extensive scale. But, whether it is good or whether it is bad, branch Is banking should be considered on its merits and should not be the product of com

petition in the endeavor to expand either the State or the national banking organizations. The competition that exists at the present time between State and national banks can not fail to remind one of the competition that prevailed a generation ago among the various States seeking to become domiciles for corporations-a competition that was based upon the laxity of the laws governing incorporation. Nothing could be more disastrous than competition between the State and national banking groups based upon competition in laxity.

I am mentioning this question of the banking structure, Mr. Chairman, particularly at this time because you contemplate using the influence of the Federal reserve system on the volume of credit as a means of affecting the volume of business and the price level. It seems to me that the instrument through which the volume of credit functions is a vital factor in the efficiency with which the Federal reserve system can function, and that instrument is the banking system.

In the hearings which we had a few days ago before the Glass committee with regard to amendments to the Federal reserve act, the board, through me, presented its views in favor of a unified national banking system, and I was rather interested that members of the committee did not seem to be opposed to that thought. On the contrary, Senator Glass and others said that if it could be brought about constitutionally they would be in favor of it. The board, in expressing its support of a unified banking system, did so unanimously. merely call that to your attention at this time because I think that it is a vital factor in what you have in mind in achieving a greater stability for business. I think it can not be denied that an efficiently organized and properly supervised banking structure is vital to the control of inflation and deflation of credit, and efforts to stabilize without fundamental improvement in the banking structure seem to me not to pay sufficient attention to the agency through which sound principles can be put into practice.

In the report which we, as a unanimous board, presented to the Banking and Currency Committee of the Senate there was also incorporated a recommendation for a new method of calculating bank reserves. I quite appreciate that such an important matter as a new method of calculating reserves is one that ought to be given careful study and thorough investigation; but we had in the Federal reserve system a committee working about 18 months studying this question of reserves and they made a report to which I think sufficient attention has not been given by the Congress. It was the result of very careful study, and while it may possibly have some weaknesses, we have the assurance from the men who have been studying it in a conscientious way that they tested it over a considerable period of past years. I think this proposal would be an important factor in achieving stability and preventing undue speculative expansion of credit and its contraction, from which we are now suffering

. This system of reserves would tend to safeguard the banking structure by increasing the reserve requirements in a time of expansion and de creasing them at a time of credit contraction, and would, I believe. assist in the achievement of the more stable conditions which you in this committee are contemplating to a greater extent than this bill which deals only with the control of the volume of currency and credit

. I do not know if this committee is familiar with that report on bank reserves, but, in a word, it abolishes the difference between time and demand deposits so far as their classification for purposes of reserves is concerned, and I think in that respect the recommendation is wise, because the low 3 per cent reserve on time deposits has been an inducement for banks and for depositors to build up to an undue degree time deposits which carry a higher interest rate and a lower reserve. This has induced banks to invest in slower assets in order to get the larger yield necessary to make a profit on the higher rates of interest paid.

Now, the proposed revision of reserve requirements provides for a uniform minimum of 5 per cent on net deposits

, both demand and time, and reserves above the 5 per cent minimum are based on the velocity of turnover. In a true savings deposit there would not be any turnover; therefore, on that business there would be a 5 per cent reserve. Under this proposal, when business expands, and more checks are drawn and the turnover of deposits is greater, as is the case in an inflationary period, a greater reserve would be required based upon the velocity of these deposits.

Mr. GOLDSBOROUGH. That is in the member banks?

Governor MEYER. That is in the member banks. It would also, owing to the fact that larger reserves were required, result in the banks expecting larger average deposits in those accounts that turned over more rapidly, which is proper.

Those are the principal features. The other things are that it allows the banks to count as reserves, up to a certain percentage, their cash in vault. This provision applies to all banks, but country banks are the ones that more frequently need to keep cash in their vaults because they are not so readily accessible to the reserve banks, and to that extent it would benefit the country banks.

There are a few cases where perhaps it would increase the required reserves of individual banks, but as a whole the principle applied would expand the reserves in relation to the expansion of business and particularly would do so in speculative periods, like 1928 and 1928

RE It would also make call loans made by others than banks result is

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