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In such a circumstance, I have no choice but to suggest that you inform your troops quite frankly that they can hardly expect their pay before late August or the 1st of September.

Very respectfully yours,

Or we might imagine a circular something like this:

To All Member Banks, Siæth Federal Reserve District:

-, President.

APRIL 4, 1952.

At the time, some 21 months ago, when the Federal Reserve Bank of Atlanta prepared its budget requests for presentation to Congress, we made the most careful estimates of our requiremnts for clerical and supervisory help in the transit department. The tremendous increase in check transactions throughout the country, however, now causes us to be short some 28 people in that department.

Fortunately, while we cannot sort and clear the checks you are sending us, we are able for the present to store your checks in the basement, which is dry. Please be assured that hereafter our budget requests will be ample for all possible contingencies.

In the present situation, we firmly commit ourselves to the equitable policy that has always characterized the Reserve bank: when we can clear these cash letters we will take them up in exactly the order in which they have been received.

In the meantime, of course, you are familiar with our Circular Z-1, in which it is provided that we are not responsible for any loss occasioned by our failure to route incoming cash letters promptly on receipt.

Very truly yours,

President.

Such letters are only to be imagined. They are, of course, unthinkable. It would be totally necessary that they be avoided, and the avoidance could be accomplished in only two ways. Either the Appropriations Committee would be compelled to place substantial discretion in the Reserve banks and the Board of Governors, which is where we came in, or the budget would have to contain a substantial percentage of concealed idleness time.

To be sure, when idleness time is mentioned, there is a pertinent question. Could not the General Accounting Office, for example, or some representative of the Appropriations Committee, or the Budget Bureau come to the Reserve bank in Atlanta and see that the president had concealed idleness time in his personnel roster? The answer to that is, "Yes; provided he were competent enough." But, even if it were found, how else could the problem of carrying an unexpected peak load be solved under an annual appropriation control?

4. Thus far the discussion has involved a truism and many important details. The truism is that the housekeeping expenses and the efficiency of the Federal Reserve System, as well as its monetary policy, are properly matters both of public and private interest.

The details have been important to understanding. They have, indeed, been related, in effect, to establishing what I deem to be a clear distinction between the Federal Reserve System and typical Government departments, or Government corporations exercising public functions, a distinction that was recognized by the founders of the Federal Reserve System.

There is a good deal of confusion on this point. The confusion exists because the working of the System is difficult to comprehend by anyone who has not had an intimate familiarity with the actual day-to-day and month-to-month operations of a Federal Reserve bank, together with the spirit and tradition of the System.

The uniqueness of the System lies not in the fact that the System has earnings. So do many Government corporations and departments. It lies not in the fact that the Reserve banks carry on operations having business characteristics, Many Government departments and corporations also have such characteristics, although the chief operating functions of the Federal Reserve banks have them more clearly and precisely than most Government departments or corporations. The distinction between the Board of Governors and other Government departments lies not simply in the importance of the System's function as the agent of Congress in the management of the Nation's money supply. The Congress has established other Government departments of tremendous importance to the Republic, although the importance of the Reserve System to the weal and woe of the American people can hardly be overestimated. The distinction seems to me, so far as the prudent accounting of money expense and the efficiency of operations are concerned, to lie in these considerations:

That the nature of the banking operation automatically brings forward in the Board of Governors, the Board's staff, and the officials of the Reserve banks men intimately familiar with the practices and importance of money accountability;

That the universal recognition of the importance of money management gave Congress the opportunity of divorcing the governmental branch of the System from political consideration;

That the operating characteristics of the System gave an opportunity for the regionalization of the Reserve banks and produced a keen rivalry in operating efficiency between the Reserve banks;

That the regionalization of the Reserve banks and their banking function gave an opportunity for a wholly nonpolitical election of local directors who, by the manner of their election and their qualification for office, are and must be deeply sensitive to the rigorous standards of efficiency prevalent in private business;

That there is sufficient similarity between operations in the Federal Reserve banks and commercial banks to enable them mutually to observe and benefit from the best operating practices of each;

That all of these factors combine to put the responsible officials of the System in a position in which they have nothing whatever to gain by wasteful expense or by new or bizarre activities under the allegation of public service, and to place the responsible officials of the Reserve banks, wherein 96 percent of the System's expenses occur, not only in the position of gaining nothing by increasing expenses but, indeed, under continuing pressure to reduce them.

Such an organizational opportunity, not merely to induce but to enforce a prudent regard for expenditure responsibility, is not often presented to the Congress. It rarely exists, if ever, with respect to Government departments and corporations. So the uniqueness of the System should be remembered.

Although these characteristics of the System are extraordinarily important, if I had the honor of being a member of this subcommittee, I would base my decision regarding the wisdom of outside verification audits, expenditure budgeting, or appropriations control on a far more fundamental consideration. I would consider whether outside audits, budgets, and appropriations, one or all of them together, created a fundamentally consistent relationship between the legislative branch of government and its central banking organization.

Let me here go back to the wise words of a most distinguished public servant. When he took office as the first Comptroller of the Currency of the United States, the Honorable Hugh McCulloch wrote a great letter of advice to banks and bankers, saying, among other things, that if they found an officer imprudent and reckless in his private affairs, fire him, even though the money he wasted was come by honestly-a letter that, had it been heeded, would have saved our country so much of tragic history.

The point that Hugh McCulloch was making is as old as the ages. It is the point that a prudential and fiduciary relationship to assets or to income, whatever else may be its pitfalls and hazards and troubles, simply cannot be squared with extravagance, waste, and recklessness in the private affairs of the trustee. And it is better not to make the attempt, for, as Hugh McCulloch also observed, there is in the end no way to prevent a thief from cheating you-as I add, of your time, your energy, and your happiness, if nothing else and no way to prevent a reckless man from wasting your substance. There is no remedy for a reckless and imprudent banking officer save to have done with him once and for all.

Let us illustrate the matter. If you gentlemen and I were now to establish a trust account, say, for some entirely worthy purpose, we might well seek out a bank to hold, invest, and administer the funds that we wish to place in trust. We would then wish to know something of the bank's reputation; we would undoubtedly look at its statement; we would inquire as to its trust procedures; note that it was audited; give it some directions in the trust instrument we drew up; ask that statements be furnished us at intervals; and, in order to form our own judgments, go in from time to time to talk to the trust officer in charge of the account.

If we then discovered that our account was to be assigned to a trust officer we believed privately reckless and imprudent, there would be but three remedies: to insist that our account be placed under the management of another trust officer, to place it with some other institution, or to manage it ourselves. But none of us would beguile ourselves with the thought that the trust relationship would be a happy and successful one if only we were to bring in our own firm of auditors to verify the bank's assets and liabilities, or our own comptroller to make its annual budget, or to approve the trust department's payroll and expense vouchers. The source of our uneasiness in the situation would be so grave, so entirely fundamental, that it simply could not be remedied by such mechanical devices.

Now, the Federal Reserve System in its management of the Nation's money supply is the repository of what is probably the greatest trusteeship in the world's history. It has certainly the greatest fiduciary responsibility ever granted by the Congress. If this System, established and articulated with scrupulous care, which itself possesses the highest sense of money accountability, with auditors and independent counterauditors checking each other, cannot now be trusted in the management of its privy purse, so that it must be set upon by still further auditing, then we have, in a sickening plunge, descended from the sublime to the ridiculous.

So, if I had the honor to be a member of this subcommittee, I would reflect that, if I did not have the time to check on the work of the System's auditors or its budgeting, cost control, and operating efficiency, neither would I have the time to check the judgment and competence of another auditor who audited the System's auditors. I would reflect that confidence must ultimately be reposed at some place as the only possible alternative to the impossible alternative of not reposing confidence at any place.

If I believed that the System were reckless, imprudent, or inefficient in the management of its household, I would check the evidence with as much care as I could muster. If the belief still seemed reasonable, I would vote to remove and replace the officers guilty of the misfeasance, or I would vote promptly to abolish the trust. These, I admit, are harsh alternatives. But I would urge that in the premise there is simply no other way out, for there is no possible ultimate reconciliation between great trust of men deemed worthy of great trust and niggling mistrust of the same men. I would want to be neither soft-hearted nor soft-headed enough to imagine that so inconsistent a relationship between the Nation's central bank and its congressional sponsor could be happy or long endure.

Consistency of relationship is fundamental. I think of it all in very homely terms, in terms related to the management of my own household. Just as the Congress established the Federal Reserve System with great care, so I chose my wife with great care. She has had the very greatest responsibility in the management of our joint affairs. She keeps a good set of books, which balance out every month, and, if a dime is missing, pursues it over the hill and dale until it is tagged and accounted for. We sit down together every so often to ask ourselves how we are doing, if we have saved any money, where the money is going. whether we can afford a new paint job on the house, and so on. We shake our heads gravely at the high cost of living and make economies where we can.

I must confess that we have not always been wholly in agreement. There have been a few times when she has bought a lipstick or a bonnet that I did not think she needed. There was a time once when I spent a little more money at the circus than she though was wholly necessary under the circumstances. Still. should I now say to her, "My Dear, you are a magnificent bookkeeper. I trust you to manage our house and to rear the children. Your advice to me has usually been excellent. But, now, I want to put an auditor on your books because I baven't got time to go over them, and I want to know whether you have accounted bonestly for that $71.29 that you spent for groceries last month; and I especially want the auditor to find out why in the world you bought tomatoes when the paper says that turnips are so cheap. Could I address my wife in that way? Well, frankly, no. If I say, "You are competent and capable and I trust you, but I don't trust you, and I am going to get an auditor," at this point I have destroyed the whole basis on which the household functions. I must then assume full responsibility for the household and take over its management myself

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or get a new manager.

So this homely illustration describes what I believe to be the long-run wise and proper relationship of the Congress to the housekeeping of its central bank. The Federal Reserve System is of the household of Congress, It must be cherished and dealt with in a spirit of candid and friendly association, or cast out, and, then, if dealt with at all, dealt with as a total stranger, quite at arm's length. The two of us should ask ourselves how our monetary policy is getting

life-insurance protection from $122 billion at the end of 1941 to $253 billion at the end of 1951, a rise of 107 percent, is a great achievement in increasing family protection. But it must be remembered that in terms of prices prevailing in 1941 the real buying power of the total of life insurance in force today is $148 billion, which means a real increase of $26 billion over 1941, or 21 percent. That is as compared to 107 percent. This is not the whole story, however. The number of families in America has greatly increased. While the average amount of life insurance per family in the United States has increased from $3,400 at the end of 1941 to $5,600 at the end of 1951, the decline in the purchasing power of money has wiped out the effect of increase of insurance protection per family. So serious a decline has taken place during the past 10 years that the real purchasing power of life insurance in force per family today is $3,272, or a loss of $128 since 1951.

Officers of life-insurance companies are trustees of the funds of 86 million policyholders more than one-half the people in the United States. As trustees for so many people, we feel our responsibility very deeply to speak out strongly against inflation that defeats the purposes for which they took out their insurance.

This committee has wisely recognized the importance of general credit-control policies and debt-management policies in dealing with this problem. Your inquiry into these things and the responsibilities of the Federal Reserve System and the Treasury in formulating and carrying out these policies is important to life-insurance policyholders. What Congress does in this field is of great concern to them. There are five matters that I want to discuss:

(1) The objectives of our national economy;

(2) The respective roles of the free market and Government in pursuing these objectives;

(3) Monetary and credit policies consistent with these objectives; (4) Public debt management policies consistent with these objectives: and

(5) The relationship between the Federal Reserve System and the Treasury.

Most of what I have to say will deal with the last three subjects; namely, credit and public debt management policies and the relationship between the Federal Reserve System and the Treasury. However, these subjects can be best dealt with only by first considering briefly the objectives of our national economy along with the roles of the free market and Government in working toward these objectives.

THE OBJECTIVES OF OUR NATIONAL ECONOMY

Our national economic objectives, as I see them, are as follows: (1) Strengthening of our national defenses against the forces of tyranny which threaten the free-world.

(2) Stability of employment of our national resources, including manpower, and stability of the general price level under conditions of general economic prosperity.

(3) A continuing advance in living standards. This advance is to be achieved in the main by increasing our national capacity to produce through the investment of savings and the further development of labor skills. Over the years our free market economy has made

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(Whereupon, at 12:05 p. m., a recess was taken, to reconvene at 2:30 p. m. of the same day.)

AFTERNOON SESSION

Representative PATMAN. The committee will please come to order. Mr. Shanks, come around, please.

STATEMENT OF CARROL M. SHANKS, PRESIDENT OF THE PRUDENTIAL INSURANCE CO. OF AMERICA, AND CHAIRMAN OF THE COMMITTEE ON INFLATION CONTROL OF THE AMERICAN LIFE CONVENTION AND THE LIFE INSURANCE ASSOCIATION OF AMERICA

Representative PATMAN. It is my understanding, Mr. Shanks, that you were presented by Senator Douglas before the session ended at

noon.

Mr. SHANKS. Yes, sir; I was, Mr. Chairman.
Representative PATMAN. And you are now ready to continue.
Mr. SHANKS. Yes, sir.

Representative PATMAN. We shall be very glad to hear you in any way you desire.

Mr. SHANKS. Well, I would like to give a statement which is not too long, and then answer any questions you wish to ask.

Representative PATMAN. All right, sir. We will be glad to hear you. You may proceed.

Mr. SHANKS. I want to make it clear that I am here as a representative of the life-insurance business and not as the president of the Prudential Insurance Co. of America. We conceive that it is our duty to speak in behalf of 86 million life-insurance policyholders on the matters being considered by your committee. These matters go to the heart of the inflation problem and we welcome an opportunity to be heard.

Life-insurance contracts are paid in dollars, and policyholders, beneficiaries often widows and orphans are looking to their lifeinsurance dollars to protect their families. The policyholders believe they are entitled to expect their Government to stabilize the buying power of those dollars so that the protection they are counting on in their insurance dollars will be there in terms of what the dollars will buy when the money is needed. The fact is, however, that our policyholders are being robbed of the protection they thought they had in their insurance, just as all persons receiving a fixed income are being robbed.

Our business is a human business. Our interest is in the families of America. The life-insurance agents are seeing these familiesmany thousands of them every day-and we hear what policyholders are saying about the American dollar and the way it has lost its value in the shops and stores. There is no need for them to read the statistics that are published. They know from experience what has happened over the last 10 years to the cost of living-and to their life-insurance protection on which they counted.

Even the great increase in the amount of life-insurance protection in recent years has not kept up with the decline of the purchasing power of dollars. On the surface it might appear that an increase in

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