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a member who has served the full term for which he was appointed. These restrictions are applicable only to the heads of the three banking agencies and not to the employees of those agencies.

We would be opposed to any legislation which would impose an absolute prohibition against employees or former employees accepting employment with banks for a period of years. Such legislation would seriously impair our ability to attract capable young men to our examining force. For practical purposes such young men joining our examining staff would do so with the knowledge that they must make bank examining a life career or leave the banking industry entirely if they should become dissatisfied with examining banks. For many years it has been our practice to obtain from each examiner an agreement to the effect that for a period of 2 years after he ceases to hold the position of national bank examiner, he will not accept employment of any kind in any bank which he has examined without first receiving permission in writing from the Comptroller of the Currency. This protective procedure has left nothing to be desired.

We are aware of no Federal statutes which would prohibit any employees of the Government other than the heads of agencies from accepting outside employ. ment.

Sincerely yours,

RAY M. GIDNEY, Comptroller of the Currency.

TREASURY DEPARTMENT,
COMPTROLLER OF THE CURRENCY,

WASHINGTON, July 29, 1957.

Hon. BRENT SPENCE,

Chairman, House Banking and Currency Committee,
House of Representatives, Washington, D. C.

MY DEAR MR. CHAIRMAN: During the course of the hearings on S. 1451 and H. R. 7026 Representative Multer requested information about the bonds of the Comptroller of the Currency and the Deputy Comptrollers of the Currency. He also requested information with respect to the bonds of other officials of the Treasury Department.

As required by statute the Comptroller's bond is in the amount of $100,000. Also as required by statute, each Deputy Comptroller is bonded in the amount of $50,000. In addition there is a blanket bond which covers all of the employees of the Office of the Comptroller of the Currency including the Deputy Comptrollers in the amount of $200,000. Thus the Deputy Comptrollers are bonded in a total amount of $250,000.

With respect to other officials of the Treasury Department we find that the Treasurer of the United States is required by statute to be bonded in the amount of $150,000. Certain employees of the mint, the district collectors of customs, and the district directors of internal revenue are required to be bonded but the amounts of their bonds are left to the discretion of the heads of the bureaus.

It is our view that the officials and employees of the Comptroller of the Currency are adequately bonded at the present time. However, we would have no objection if the Congress should deem it advisable to increase the amounts of the bonds required by statute for the Deputy Comptrollers from $50,000 to $250,000 as this would merely require that the present coverage be continued. Likewise, we would have no objection if the Congress should deem it advisable to increase the amount of the bond required by statute for the Comptroller. We make no recommendation as to the amount to which it should be increased as we do not deem it to be sound policy for the person to be bonded to recommend the amount of his bond.

Sincerely yours,

RAY M. GIDNEY, Comptroller of the Currency.

Hon. BRENT SPENCE,

TREASURY DEPARTMENT, COMPTROLLER OF THE CURRENCY, Washington 25, July 29, 1957.

Chairman, House Banking and Currency Committee,

House of Representatives, Washington, D. C.

MY DEAR MR. CHAIRMAN: During the course of the hearings on S. 1451 and H. R. 7026, Representative Anderson inquired whether we could suggest wording to be substituted in section 20, "Preferred stock," which would permit the Comptroller to approve the issuance of preferred stock by national banks only in urgent or unusual situations or under emergency conditions, in accordance with our recommendation, but which would not be as restrictive as the language "only practicable method." We indicated that perhaps this could be done. However, after having given further consideration to this matter, we have concluded that the language "only practicable method" is the language most suitable for restricting the issuance of preferred stock to urgent or unusual situations or emergency conditions.

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Chairman, House Banking and Currency Committee,
House of Representatives, Washington, D. C.

MY DEAR MR. CHAIRMAN: During the course of the hearings on S. 1451 and H. R. 7026, we advised Representative Coad that we would furnish to the committee the caption which appears on reports of examination of national banks. This caption reads as follows:

"This report of examination has been made by an examiner selected by the Comptroller of the Currency and is designed for use in the supervision of the bank. This copy of the report is the property of the Comptroller of the Currency and is furnished to the bank examined for its confidential use. Under no circumstances shall the bank, or any of its directors, officers, or employees disclose or make public in any manner the report or any portion thereof. The information contained in this report is based upon the books and records of the bank, upon statements made to the examiner by directors, officers, and employees, and upon information obtained from other sources believed to be reliable and presumed by the examiner to be correct. It is desired that each director, in keeping with his responsibilities both to the depositors and to stockholders, thoroughly review the report. In making this review, it should be kept in mind that an examination is not the same as an audit, and this report should not be considered to be an audit report."

Sincerely yours,

/ RAY M. GIDNEY, Comptroller of the Currency.

FINANCIAL INSTITUTIONS ACT OF 1957

WEDNESDAY, JULY 31, 1957

HOUSE OF REPRESENTATIVES,

COMMITTEEE ON BANKING AND CURRENCY,

Washington, D. C.

The committee met at 10 a. m., Hon. Brent Spence (chairman) presiding.

Present: Chairman Spence, Messrs. Brown, Patman, Multer, Barrett, Mrs. Sullivan, Mr. Reuss, Mrs. Griffiths, Messrs. Vanik, Coad, Anderson, Breeding, Talle, Betts, Mumma, Bass, and Henderson.

The CHAIRMAN. We will resume the hearings on the Financial Institutions Act.

We have back with us this morning, Mr. Martin, Chairman of the Board of Governors of the Federal Reserve System.

FURTHER STATEMENT OF HON. WILLIAM MCC. MARTIN, CHAIRMAN; ACCOMPANIED BY WOODLIEF THOMAS, ECONOMIC ADVISER; AND D. B. HEXTER, ASSISTANT GENERAL COUNSEL, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM

Mr. REUSS. Mr. Chairman.

The CHAIRMAN. Mr. Reuss.

Mr. REUSS. Mr. Martin, I just wanted to raise a question. We had an interesting discussion the other day on this question. I raised the possibility of saving some of the cost of the national debt by insulating, as we put it, a portion of the national debt, as I recall our discussion, you displayed a good deal of interest in it, and raised some objection and said that you would ask the staff to prepare a short memorandum for me, setting forth the System's up-to-date views on the possibility of it.

Is that a correct summary of our discussion on it?

Mr. MARTIN. I don't recall precisely, but I am sure we will get the memorandum to you just as quickly as we can, Mr. Reuss. (The memorandum referred to is as follows:)

DISCUSSION OF INQUIRY BY CONGRESSMAN REUSS

This statement examines the suggestion that the interest cost on the public debt be kept down or reduced by Federal Reserve purchases directly from the Treasury of Government securities hearing some arbitrarily set low interest rate and that the additional bank reserves thus made available be absorbed by increases in bank reserve requirements in order to prevent undue credit expansion as a result of the operation.

The expressed aim of this proposal is to reduce the interest cost of the Federal Government debt in a manner that would not contribute to inflation. The net effect of using such a device would be to substitute Federal Reserve bank

holdings of Government securities at a low interest rate for a corresponding amount of commercial bank credit. The proposed action would not be in accordance with the purposes of existing law and practices. Both past practice of the System and legislative history indicate that the use of the authority to purchase securities directly from the Treasury is for the purpose of meeting purely temporary needs of the Treasury where necessary to avoid short-time disturbances to the money market or in the case of serious emergencies. The authority to raise reserve requirements is to prevent injurious credit expansion or contraction. To use these powers for the expressed purpose of reducing interest costs for the Treasury would not be in conformity with these purposes. Specific legislation would be needed to permit or justify such action by the Federal Reserve.

The proposed procedure would enable the Federal Government to cover a portion of its expenditures without taxation or without borrowing the savings of the people. In essence and to a degree, it would be the same as financing the Treasury by the issuance of money, while attempting to prevent inflationary consequences by immobilizing the funds in the banks. While such a practice might appear to make little difference if the amounts involved are small, the principles of sound fiscal policy would be violated.

It is vitally important that the Federal Government in its borrowing operations conform to the standards and requirements that are necessary to maintain economic stability and growth. The Treasury, like any other borrower, should endeavor to borrow the savings of the community and should always pay the rate of interest necessary to induce savings. Any attempt to maintain artificially low rates of interest interferes with the processes of the market that tend to keep savings and borrowing in equilibrium.

Federal Reserve bank credit, whether extended to banks, to Government, or to others, may have the same effect as the issuance of fiat money. It adds directly to the money supply and also to the reserve of the banking system, on the basis of which a further multiple expansion of money may be created. Because of unfortunate experiences with continental currencies in our early history, this country has zealously avoided the issuance of money by governmental authority. Only because of the exigencies of war finance has this device for financing been used directly or indirectly and always with unfortunate consequences. Experience with such practices in other countries has often been disastrous.

The Federal Reserve System was established largely because our facilities for providing money to meet the needs of a growing economy with wide seasonal variations were inadequate and inflexible. The System, however, was made subject to various limitations on its operations because of recognized dangers in the unlimited power to create money. Federal Reserve operations have their principal impact upon the banking system because any new money made available by the System is likely to be deposited in banks and be added to bank reserves. Holders of cash deposits most of it in banks and those wanting additional funds to meet working cash needs borrow from banks and pay off their loans when they have available cash. This credit mechanism, flexibly operated, serves to keep the supply of money adjusted to current needs. Interest rates serve the function of encouraging or discouraging borrowing and lending or the repayment of debt. Interest rates may also influence the volume of savings by the public, which must be relied upon in a balanced economy to meet the bulk of the credit needs.

There is a danger that once a procedure such as the one proposed were adopted even on a small scale, it would gradually be extended to meet particular needs on an interest-free basis. This would not only be an inducement to governmental extravagance but would be an attempt to bypass the economic forces of the market. In the end it might impose an unjustifiable burden of nonearning, illiquid assets upon the banking system, as well as create serious distortions throughout the economy.

Such a scheme would interfere with the normal functioning of money markets and the banking system. If carried far, it would seriously hamper banks. It would reduce the availability of Government securities, and thus decrease the supply of liquidity instruments available to banks and other sectors of the credit markets relative to the total supply of funds that banks and the market would be called upon to handle. It would thus diminish the flexibility of banks and of the money market in general in meeting seasonal and other variations in the essential credit demands of the economy.

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