Mr. MARTIN. Well, now Mr. PATMAN. Just a minute. Isn't it a fact Mr. MARTIN. Well, now, he moved his head, not his finger. Mr. PATMAN. Well, he moved it here in Washington, where it didn't count. Up there in New York is where it would count. Mr. MARTIN. On, no; that is an allegation, Mr. Patman. The Open Market Committee has been actively directing the manager of the account, and has been very careful in the directives it gives. Mr. PATMAN. Isn't it a fact, Mr. Martin, that the Open Market Committee has charge of all the bonds of all 12 banks, which the manager handles, and that no bank can buy or sell any bonds of any kind? The manager handles every one of them. He buys and sells for each bank, and he pro rates to each bank the amount of interest earned from those Government bonds. Isn't that correct. Mr. MARTIN. Each bank could, but they don't. It is a matter of delegation to the New York bank, where we have placed the open market account. And to revert to your earlier question, the manager of the accountI have repeatedly testified, as you know-and I think that some day we may change that operation, where the manager of the account will be selected by the initiative of the Open Market Committee, and then approved by the board of directors of the New York Reserve bank; we are presently discussing that with the New York bank, and may work that out. But practically, the control of the manager of the account is clearly in the hands of the Open Market Committee, and not in the control of New York bankers or the Board of the New York Reserve bank. Mr. PATMAN. Well, who pays him? Mr. MARTIN. He is paid like all the rest of us in the system. Mr. MARTIN. But the New York bank is an integral part of the Federal Reserve system. Mr. PATMAN. Yes, sir; that is correct. And he has complete control. Now then, Mr. Martin, out of that $23 million plus that the Dallas bank is supposed to have earned last year, $22,600,000 came from initerest on the Government bonds controlled in New York, over which it had no control and which it didn't have to touch, to clip any coupons or to do anything else. It just received that much money without putting forth any effort. Now then, it did perform some duties in addition to that. It collected $13,264 for something, and it collected $830,142 on discounts and advances. But on investigation I find that all those discounts and advances were made on Government securities, except for $13,264. So it required no discretion on the part of anybody to make advances on Government bonds. I would consider that a slide-rule operation which a clerk could do. The only part where they exercised discretion was on two items, advances of $13,000 and $830,000 where Government securities were not used as security. Now, I will admit there has been discretion used as to those two items. But you have expenses of the Dallas bank aggregating about $6 million for last year, but it charged certain agencies of the Government a million dollars, which reduces it to $5,620,000. Now, these statements of the Federal Reserve Board, covering the 12 Federal Reserve banks, shows that 96 or 97 percent of all the earnings of all the Federal Reserve banks comes from interest on Government bonds. Now, Mr. Martin, in acquiring those bonds for the 12 Federal Reserve banks, isn't it a fact that you don't use as backing for the money which you exchange for those bonds, for instance $23 million worth for the Dallas bank, you didn't use the reserve of the member banks; did you? Mr. MARTIN. That is correct. Mr. PATMAN. You did not use the capital stock of the member banks; did you? Mr. MARTIN. That is correct. Mr. PATMAN. You did not use the reserves or the surplus funds of the member banks? Mr. MARTIN. That is correct. Mr. PATMAN. Isn't it a fact that the only thing you used was money that you created which, of course, you have a right to do under the law? You created $23 million in Federal Reserve notes. Whether you actually transferred them physically or not, the result was that you created that much in Federal Reserve notes and traded them for United States Government bonds. That is correct; is it not? Mr. MARTIN. That is one way of stating it. Mr. PATMAN. Now then, how do you distinguish between that and a hypothetical situation like this: The Chairman, here, has a thousanddollar mortgage on his home-which he doesn't, this is just a hypothetical question-and the chairman trusts me to take a thousand dollars of his money, which he gives me from his pocketbook, and he says, "Take this money to John Doe, who holds the mortgage on my house, and pay off my mortgage." I take the chairman's thousand dollars and I go pay John Doe that thousand dollars, and John Doe hands over the mortgage to me, which then I keep and thereafter I charge the chairman interest every year, just as though that mortgage really belonged to me and the chairman had not paid it off. How do you distinguish between the two transactions, Mr. Martin? In other words, why should you be allowed to create and issue a Government obligation-a United States Government promise to payand to take that obligation and buy with it another Government obligation which bears interest, just as the chairman's mortgage bears interest, and instead of canceling that interest-bearing obligation, you keep it and charge the Government interest on it, which the taxpayers have to pay, amounting to about $600 million a year. Will you tell us what the difference is between the two cases, and why one is right and the other wrong? Mr. MARTIN. I can only do that, Mr. Patman, by going back to what our currency system is. Now the base of our currency is gold. We went on the gold standard in 1873. We did not have a managed currency preceding the Federal Reserve Act. The Federal Reserve Act was a major change in the handling of our currency, in 1913. Now under the Federal Reserve Act, the Federal Reserve can create money, it can create money within the limits that the notes which it puts out the Federal Reserve notes-previously notes could be issued by individual commercial banks, but since that time almost 85 percent of the notes in circulation are Federal Reserve notes-it can issue within the limits set by Congress, it can create money so long as the note and deposit liabilities of the Federal Reserve System do not exceed 25 percent of its holdings of gold certificates not gold now, because since the Gold Reserve Act of 1934, we can only have gold certificates. Now the creation of money, in that sense, should not be without limit, nor should be the credit that we are trying to supply here we are trying to regulate this money supply in such a way that we can have it related to the supply of goods and services so that it facilitates high levels of employment and stable prices, rather than upsetting them. That is the only answer that I can give to that type of question, because the mere fact that we use securities as backing for notes is not similar to an illustration of borrowing a thousand dollars and I am sure I would certainly trust the chairman, as you would, completely on that is not the question that you are really asking. You are talking now about mechanics. Mr. PATMAN. Yes; I am. I am not impugning anyone's motives. Mr. MARTIN. I am talking about credit policies. Mr. VANIK. Mr. Chairman. Mr. MULTER. Mr. Chairman, it is now after 12. I know many of us have some questions after Mr. Patman gets through. When do you propose that Mr. Martin and Mr. Robertson will come back. Mr. MARTIN. Mr. Robertson cannot come back, but I will be at your service as long as you want, Mr. Multer. Mr. Robertson is working on Operation Alert, the Defense Mobilization effort at the moment, and cannot return. Mr. MULTER. I do not mean today. But the House is in session. The CHAIRMAN. The House is now in session, and there are some bills in which we are interested on the floor. Mr. PATMAN. Mr. Chairman, may I have permission to insert into the record anything that is germane to my questioning of the witness, without making the request every time? The CHAIRMAN. Have you decided they are germane? Mr. PATMAN. Certainly. The CHAIRMAN. If they are pertinent, you may insert them. Mr. Martin, you can return tomorrow; can you not? Mr. MARTIN. Yes, sir; I am at your service as long as and whenever you want me. The CHAIRMAN. We will adjourn to reconvene tomorrow at 10 o'clock. (Whereupon, at 12: 10 p. m., the committee adjourned to reconvene Tuesday, July 16, 1957, at 10 a. m.) FINANCIAL INSTITUTIONS ACT OF 1957 TUESDAY, JULY 16, 1957 HOUSE OF REPRESENTATIVES, COMMITTEE 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, Mrs. Sullivan, Mrs. Griffiths, Messrs. Ashley, Vanik, Coad, Breeding, Talle, Kilburn, Widnall, Betts, McVey, Bass, Seely-Brown, Henderson, and Chamberlain. The CHAIRMAN. The committee will be in order. Mr. PATMAN. Mr. Chairman. The CHAIRMAN. Just a minute. I want to ask Chairman Martin a question. Mr. Martin, what authority has the Federal Reserve Board now with reference to mergers? FURTHER STATEMENT OF CHAIRMAN WILLIAM McC. MARTIN; ACCOMPANIED BY WOODLIEF THOMAS, ECONOMIC ADVISER; AND D. B. HEXTER, ASSISTANT GENERAL COUNSEL, ON BEHALF OF THE BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM Mr. MARTIN. Only so far as stock acquisitions are concerned, Mr. Chairman. We do not have it and we cannot pass on it if assets are involved. I would like to interject, Mr. Chairman, that due to the alert, Governor Robertson and Mr. Hackley cannot be with me today, but I have Mr. Thomas, Economic Adviser to the Board, and Mr. Hexter, Assistant General Counsel, whom I would also like to use at any time. The CHAIRMAN. You may do that. You may have whomever you please to assist you. Mr. MARTIN. Thank you. The CHAIRMAN. What powers have you to approve branches as a result of a merger? You do have that power? Mr. MARTIN. We have that power; yes, sir. The CHAIRMAN. That power is exercised; is it not? Mr. MARTIN. Yes, sir; that power is exercised. We pass on it regularly. The CHAIRMAN. Is that the only power you have with reference to mergers and resultant mergers? Mr. MARTIN. We have to approve the merger if there is a diminution of capital. Now, this will broaden it to include assets as well as stock. 95375-57-pt. 1—5 57 The CHAIRMAN. To what extent have you used the powers you now possess with reference to the question of diminution of capital? Have you used that power freely? Mr. MARTIN. Yes, sir; we have had that up from time to time. I can't give you, offhand, any specific instances where that has been used, but I think we could give you a record of it. The CHAIRMAN. Has that resulted in the refusal to consent to mergers? Mr. MARTIN. Well, it has seldom gotten to the stage where we have actually publicly refused it, but we have privately indicated that it would not be acceptable. The CHAIRMAN. But whether or not there is a diminution of capital is a question for you to decide. They would all have to be submitted to you to ascertain those facts? Mr. MARTIN. Yes, sir. Mr. MULTER. I think we are talking about two different things. Chairman Spence is talking about all mergers, and you, Mr. Martin are only talking about mergers by means of the acquisition of stock. Is that right, Mr. Martin? Mr. MARTIN. That is right. This law would broaden it to include those involving acquisition of assets. Mr. MULTER. Yes, sir; but I think the chairman is concerning himself with the existing law, and under existing law you are concerned only with mergers by means of the acquisition of stock. Mr. MARTIN. That is stock. The CHAIRMAN. There are not many mergers that result from the acquisition of stock; isn't that true? Mr. MARTIN. There are some; yes, sir. I don't know how many. The CHAIRMAN. But the great majority of them do not result from the acquisition of stock; isn't that true? Mr. MARTIN. Let me ask Mr. Hexter to comment on this, because he has worked actively with this. Mr. HEXTER. In accordance with the Board's supervisory powers, Mr. Chairman, whenever a merger of banks is to take place, in which there will be new branches established by a member State bank, the Board is required by law to pass on that question. Also, if there is to be a merger of banks involving a member State bank, in which the capital stock, or the surplus of the continuing bank will be less than the aggregate capital stock or aggregate surplus of the two banks merging together, the Board is also required by section 18 (c) of the Federal Deposit Insurance Act to give its approval before such a merger can take place. This matter of acquisition of stock has to do with the Clayton Act provision, section 7 of the Clayton Act, under which the Board has jurisdiction with respect to possible violations of the Clayton Act through acquisition of bank stock. The CHAIRMAN. What proportion of the mergers are the result of acquisition of stock and what proportion are a result of purchase of assets? Mr. HEXTER. In connection with bank holding companies, quite frequently, a bank holding company in a State, with banks in a State which permits branch banking, will acquire the stock of another bank, and after such acquisition, will merge it with one of its existing banks, making it a branch of that existing bank. |