LIBERALIZING THE CREDIT FACILITIES OF THE FEDERAL RESERVE SYSTEM HEARINGS BEFORE THE COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPRESENTATIVES SEVENTY-SECOND CONGRESS FIRST SESSION ON H. R. 9203 A BILL TO LIBERALIZE THE CREDIT FACILITIES LIBERALIZING THE CREDIT FACILITIES OF THE FEDERAL RESERVE SYSTEM FRIDAY, FEBRUARY 12, 1932 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, Washington, D. C. The committee met at 10 o'clock a. m., Hon. Henry B. Steagall (chairman) presiding. The CHAIRMAN. The committee will be in order. The committee has been called together this morning to consider H. R. 9203. This bill was prepared by Senator Glass, other members of the Senate and myself. It is the result of demands on the part of Members of the House and Senate during the present session for legislation to liberalize the credit facilities of the Federal reserve system. Several bills have been introduced designed to accomplish this result and some have gone beyond this purpose in the effort to bring about a stabilization of prices. Mr. Goldsborough of this committee has been deeply interested and a close student of the subject. We have had before us for some time measures introduced by him the purpose of which was the same as is undertaken to be accomplished by the bill now before us. Mr. Goldsborough, along with others, has been insisting on legislation of this kind and the sentiment for it has grown from day to day. I have been giving attention to it for some time with a view to working out legislation that would be acceptable. The administration called conferences to discuss methods for agreeing on legislation along this line that would meet the approval of members of the committees of the House and Senate. On Wednesday the President called a number of Senators to the White House to discuss the matter with them and later called several Members of the House for a conference, myself included. The bill before us was introduced on yesterday in the Senate by Senator Glass and in the House by myself. But I am not going to take up the time of the committee in making a statement of my own at this time, but I may ask the privilege of inserting a short statement later and let it appear in the hearings. I am sure that the committee would like to hear General Dawes, and to give him a full opportunity as we may to discuss this bill and any suggestion that he sees fit to offer the committee. I will say to gentlemen of the press that I am sure it is not necessary to explain to you that there may be reasons why General Dawes refers this discussion to be in executive session, because we are dealng with matters of more or less delicacy. General DAWES. My intentions are honorable, gentlemen. The CHAIRMAN. General Dawes, it has been suggested that you should make a general statement without interruption, if you so desire, and later members of the committee may desire to ask you some questions. You may proceed. General DAWES. If I understand what your chairman wants me to say, it is not so much a discussion of the technical features of this bill: I have one or two ideas about that, but that is not the important thing. Mr. STEVENSON. It is the necessity for a bill of this sort. General DAWES. That is right. The CHAIRMAN. General, we do not propose to limit you. If you desire to touch on the technicalities of the act, you may do so. (General Dawes thereupon addressed the committee, his remarks not being stenographically reported at his own request.) The CHAIRMAN. Mr. Mills, we should now be glad to have either you or Governor Meyer give us the benefit of your judgment on this bill. If you should prefer to do so in executive session. that will be satisfactory; but it would be desirable to have a record of at least so much of your statement as should properly go in the hearings, and I suggest that you proceed in that manner, telling us what you can for the record, and if at any point there is anything that you wish to say off of the record, you may do so. Mr. Mus. If it is agreeable to you, I should prefer to have Governor Meyer begin the discussion. The CHAIRMAN. That will be all right. Governor, we will hear you now. STATEMENT OF HON. EUGENE MEYER, GOVERNOR FEDERAL RESERVE BOARD Mr. MEYER. Mr. Chairman and gentlemen, some weeks ago, when you were considering the bill to create the Reconstruction Finance Corporation, we had a general discussion and I presented to you a picture of the general situation in the banking business, so that I do not think it is necessary to rehearse the picture then drawn. Since then the Reconstruction Finance Corporation act was ap proved, and the board of directors of the corporation was organized a few days ago. Good progress has been made in establishing agen cies and in assembling experienced and competent people, several of whom had actual experience in the old War Finance Corporation. and forms have been adopted, approved, printed, and distributed. I believe that the consideration given to the Reconstruction Finance Corporation measure and its passage by Congress has been very help ful in a general way in giving people throughout the country mot confidence in the future. There are, however, other steps which for some time have needed your attention. In December we were awaiting some announce» ment from the Senate Subcommittee on Banking and Currency with regard to a measure which they were going to propose. That mea ure is one that deals with a large number of subjects. Considerable time has elapsed, and, that measure being as comprehensive as it is, more time will have to be taken to study and consider it. It was felt, however, that there were certain matters connected with the Federal reserve system upon which it would be desirable to obtain more speedy action than due consideration of that measure, in all of its aspects, would seem to permit. The desirability of more prompt action on certain matters, therefore, led to a conference, at which you were present, Mr. Chairman. At that conference, which was bipartisan in its congressional repreentation and which some of us in the executive branch attended, it was felt that it might be of benefit to the country if a special measure taking in some of the points under consideration in Federal reserve banking matters were to be more promptly considered. The bill now before you embodies the principal points that were agreed upon in a general way at that conference. The first section of this bill provides for borrowing through group action by member banks, permitting, in cases where community action is desirable and practicable, access to the resources of the Federal reserve bank in the district in ways that will be reassuring Mr. GOLDSBOROUGH. On the fourth line, page 2, reading "the liability of the individual banks in each group to be limited Mr. MEYER. Before we discuss the wording of the act, may I ust go over the bill in a general way? This is a provision which, had it existed in the last year, might have been used in a number of important cases, perhaps in many rases, because certainly it is to the interest of neighbors in the banking business to save one of their number if unliquidity is the main lifficulty affecting the condition of an important banking member of the community. This section, by its existence, will increase conidence: it is one of those things that will make banks feel safer by providing facilities which can be availed of in an emergency. Mr. STRONG. That refers to the clearing-house certificates? Mr. MEYER. Yes. The bill provides that the rate of interest on y such advance shall not be less than 1 per cent above the disount rate in effect at the time of making such advance, and loans of this kind by the Federal reserve bank made under this section would not be eligible as security for currency. There are other strictions about foreign obligations and so forth.. The second section is designed to meet a situation which occurs casionally even under normal conditions, but is particularly freent at this time, on account of withdrawals of deposits which have en general. Some banks, particularly in certain locations, either cause of unsatisfactory business conditions, or through unusual withdrawals of deposits, have reached the point where their remainng paper, although good, is ineligible for rediscount. The second tion, 10 (b), is designed to permit the Federal reserve banks in ch cases to make advances on paper which is technically ineligibut which would be adequate and safe security. Banks generly will gain greater confidence and greater assurance through the istence of that provision. The benefits will not be confined to inks that avail themselves of the privilege. The question what going to happen to a bank when it sees its supply of paper which eligible for rediscount reduced in order to meet withdrawals will ase to be the threatening factor which causes other banks to curail their loans and to worry about their own condition. This will a confidence-inspiring factor. |