Mr. PATMAN. That is a statement that Prof. Parker Willis made when we had under consideration the Banking Act of 1935. Let me read it again: The function of the bank mechanism is that of keeping banking sound and safe, and of keeping it at all times in position to perform its financial functions. Do you agree with that part? Mr. GIDNEY. I think that sounds all right. That is good. Mr. PATMAN. All right. It is not its duty to unstabilize or to stabilize production, trade, prices, or employment. Mr. GIDNEY. Well, I think that statement has a lot of implications that lead you into trouble. I think that is a kind of a splatter-gun statement that I wouldn't want to be the author of, much as I liked and admired Parker Willis. Mr. PATMAN. The truth is, though, Mr. Gidney, is it not, that bankers are not charged with the duty, in running a bank, of looking at it from the standpoint of the national interest. They are charged with a duty to their own depositors, first, and their stockholders, next, aren't they? Mr. GIDNEY. Well, I think that is rather a narrow statement of a banker's functions. I think a banker has responsibilities of a good citizen in every field. Mr. PATMAN. I am talking about the banking business solely of making loans. They primarily look to the effect of the loan on their bank and are not charged with the responsibility for the whole economy, as the Federal Reserve System is? Mr. GIDNEY. Whether they are charged with it or not, they have a very considerable responsibility to their own banking field, their own community. Mr. PATMAN. Yes, sir. Mr. GIDNEY. They can't avoid that. Mr. PATMAN. Do you see any difficulty arising out of the trend of interest rates, and the pressure upon banks, to pay higher interest rates, in order to attract and hold savings deposits? Mr. GIDNEY. Do I see any danger? Mr. PATMAN. Yes, sir, difficulty. Mr. GIDNEY. Well, I am pretty old and have been around a long time, and these interest rates today don't seem as high as some that I knew when I was young. Mr. PATMAN. But you were a pretty young man when they were this high, weren't you, Mr. Gidney? Mr. GIDNEY. No, I remember very well that in the 1920's the standard rate of interest on a savings account was about 4 percent. Mr. PATMAN. Well, now Mr. GIDNEY. And I think that may have been a little high. Mr. PATMAN. This 4-percent note that was put out the other day was the first Treasury note since 1926 on which the Government has paid 4 percent, and 1926 was 31 years ago. Of course, you are not an old man now, but you were a lot younger then. You were a lot younger 31 years ago. So that has been 31 years since the Treasury made 4 percent on a note. Mr. GIDNEY. Well, if you go back a little farther, I remember their paying 434 percent on bonds. Mr. PATMAN. Don't you think, Mr. Gidney, that interest rates are too high now, generally speaking? Don't you think, in other words, that we are requiring the diversion of too much purchasing power from the masses of the people to the paying of interest, while denying them the opportunity of using that additional money to buy the comforts and conveniences, the necessary things and some of the luxuries of life? Mr. GIDNEY. I wouldn't be able to accept that statement, Mr. Patman. Mr. PATMAN. You wouldn't be able to accept it? Mr. GIDNEY. No, sir. Mr. PATMAN. We, the people of the United States generally, are paying today about $10 billion a year more interest than we paid in 1952. If you divide that additional interest by 170 million people, that would come, to the best of my recollection, to about $60 for every man, woman, and child. In the case of a family of 5, don't you think it is likely to be harmful to the general welfare of all the people for that family of 5 to be compelled now to pay $300 more for interest than they had to pay in 1952? Don't you think that it is harmful to divert so much purchasing power away from people who would use it to buy comforts and necessities of life and who put money into the bloodstream of business and commerce, and turn it over to the moneylenders who don't necessarily need it? Mr. GIDNEY. How does that compare with what they pay for cosmetics, whisky or cigarettes? Mr. PATMAN. Well, let's talk about those at another time. Mr. GIDNEY. I think it is small compared to what goes in other directions. Mr. PATMAN. We are not talking about that. We are talking about interest rates. Don't you think that is a rather high price for a family of five to pay, in addition to what they used to pay? Mr. GIDNEY. Well, let's suppose they pay that interest to Mr. Bank or Mr. Savings and Loan or Mr. Saving Bank, and somebody else gets it back, where is the diminution? Mr. PATMAN. The difference is that it raises everybody's taxes immediately. As an example, as interest rates are going up right now, every city council in the country is faced with the problem of raising the rates on electric power, water, telephone, gas, and transportation companies, and all the rest. They are all faced with the problem of raising all those utility rates because of the extra interest rate. It goes down to the local communities. High interest rates unbalance every budget in America. Whenever you charge a family $300 more a year than they paid 4 or 5 years ago, I think that is too much diversion, Mr. Gidney. Don't you think it is too much? Mr. GIDNEY. Well, I can't follow your trail through on all of that. Mr. PATMAN. And you are not willing to say that interest rates are too high? Mr. GIDNEY. I am not willing to say they are too high under the circumstances. Mr. PATMAN. What if they went to 9 percent, like the SEC request yesterday, for permission to sell bonds that would draw 9 percent interest, do you think that is too much? Mr. GIDNEY. I should think that bond would need a little looking into. Mr. PATMAN. Well, do you think it couldn't be good? Mr. GIDNEY. I don't know. I wouldn't care for any, thank you. Mr. PATMAN. Would you agree or disagree with that statement: The trouble of raising savings rates is that you have to look for investment paying high interest. Someday someone is going to get into trouble over this. Do you agree with that statement; if interest rates keep on going up and up, one of these days somebody is going to get in trouble? Mr. GIDNEY. That is a supposition, broad generalization, which I might have made myself sometime. But I think we have to be careful. I think the rates they are paying today are much easier to pay than those they were paying a few years ago. Mr. PATMAN. Do you think people should be charged interest according to their ability to pay? Mr. GIDNEY. I wouldn't say that, exactly. I think that you have a supply and demand factor in interest. Mr. PATMAN. Supply and demand? Mr. GIDNEY. Supply and demand. Mr. PATMAN. Do you mean to say, Mr. Gidney, that you honestly believe there is a free market on money in this country? Mr. GIDNEY. I think so. Mr. PATMAN. Don't you know that the Federal Open Market Committee determines how much money we have? Mr. GIDNEY. I certainly think there is a free market for money in this country, yes, sir. Mr. PATMAN. What is that? Mr. GIDNEY. I may be misguided, but I certainly believe there is a free market for money in this country. Mr. PATMAN. Well, Mr. Humphrey refused to admit it, and Mr. Martin refused to admit it, and Mr. Eccles, the former Chairman, who was Chairman of the Federal Reserve longer than anybody else, said there was not. Mr. GIDNEY. Well, you asked my opinion, and I think there is. Mr. GIDNEY. Yes, sir. Mr. PATMAN. You have a right to think that. Mr. GIDNEY. Thank you. Mr. PATMAN. Would you agree or disagree with the following: The liquidity position of the commercial banks has undergone a considerable change during the past few years. The ratio of short-term— listen to this particularly, Mr. Gidney— the ratio of short-term high-liquid assets to deposits has decreased markedly, while the sharp increase in loans accomplished by substantial reduction in holdings of Government securities has led to a material increase in the ratio of loans to deposits, and a reduction in the ratio of capital bonds to risk assets. Moreover, the character of the loan portfolio has changed. Short-term, selfliquidating business loans have not increased as rapidly as longer loans, such as consumer, term and real-estate loans, the soundness of which is based largely on the ability of the borrower to meet amortization payments and interest payments out of income. In addition, the repayment of commerce loans has slowed down since renewal of matured loans has become more prominent. Do you agree generally with that statement, Mr. Gidney? Mr. GIDNEY. I don't think I should agree to that statement. I don't know who prepared it. There are lots of things in there. I don't know Mr. PATMAN. It is prepared by the Institute of International Finance, Graduate School of Business Administration, New York University. Mr. GIDNEY. Well, that is their opinion. Mr. PATMAN. Yes, sir. But you will admit, Mr. Gidney, won't you, that if this bill is enacted into law, banks will be encouraged to become in a less liquid condition than they are in today? Mr. GIDNEY. I think not. I think this law would have no effect on that. I see nothing in this bill that would do that. Mr. PATMAN. Well, you let them invest 100 percent of their capital and surplus in real-estate loans. Do you mean to say that makes them more liquid or less? Mr. GIDNEY. Where do you find that we allow them to invest their capital stock a hundred percent in real-estate loans? Mr. PATMAN. Well, what about consumer credit? Mr. GIDNEY. Well, let's take a minute there. You have made a statement about real-estate loans. Those arising from a proposed change in the law are construction loans. Mr. PATMAN. Yes, sir. Heretofore Mr. KILBURN. I make a point of order. The witness is not allowed to answer. That is a perfectly valid point of order. Mr. PATMAN. As long as the witness doesn't complain, and I don't complain, why should the gentleman from New York complain? Mr. CHAMBERLAIN. I should like to have answers to the questions that the witness is asked. Mr. KILBURN. We would like to hear the answers, even if you don't. Mr. PATMAN. I am just as anxious as you. I am more than anxious. The CHAIRMAN. Proceed. Mr. TALLE. Will you yield, Mr. Patman? Mr. PATMAN. Certainly. Mr. TALLE. Mr. Chairman, there are three members on this side. who had no opportunity to ask questions yesterday, and they haven't had an opportunity today. The CHAIRMAN. We will recognize them. Mr. TALLE. I would like them to have an opportunity for at least five minutes apiece, if they want the time. They may not want it. Mr. PATMAN. I haven't taken as much time as the chairman took. I am glad he took as much time as he did. The CHAIRMAN. The chairman didn't take that much time. Mr. PATMAN. May I suggest, Mr. Chairman, that since tomorrow morning we are compelled to have a meeting of another committee of which Dr. Talle is the ranking member and Mr. Kilburn is a member, also, I hope that we will be allowed to question the witness after that meeting, if we are not here at our time for questioning. In other words, we don't want to forego our time. The CHAIRMAN. We will try to distribute the time in an equitable. manner. That has always been my purpose. I have tried to get along 95375-57-pt. 1-15 without a limitation on time, and I am still trying. If it doesn't work, we will put a limitation on the time that each member can take. Mr. GIDNEY. I want to be helpfully responsive to these questions, and we have in our annual report, which will come to Congress, a comment on liquidity which Mr. Patman is interested in: A continuing increase in loan volume in 1956 affected the liquidity of national banks less than either in 1954 or 1955. Demand deposits at the end of 1956 were 74 percent covered, and total deposits 542 percent covered by cash, balances due on demand from corresponding and reserve banks and United States Government securities, as compared to 77 percent and 57 percent, respectively, at the end of the 1955 year. At the close of 1954 such liquid assets covered 821⁄2 percent of demand deposits and 612 percent of total deposit liabilities. Now, that is a moderate reduction in so-called liquidity. Of course, how important that is depends on the collectibility of loans there is liquidity in loans, and so on. But I don't think that is anything that we would regard as alarming. You didn't feel that was alarming, Mr. Jennings? Mr. JENNINGS. No, we don't regard that as alarming at all, far from it. Mr. PATMAN. Mr. Gidney, I have the statement that you furnished to me at my request. I asked you yesterday for it, and I expect to put it in the record after I study it. I think it will disclose much of the information we have been discussing here. (The information referred to is as follows:) Ratio of liquid assets to deposits |