period of days, pay off their claims in cash. From the outset, the Corporation has operated successfully and, as a banker, a former Government official and a businessman, I have always believed that an organization which is operating successfully should not be disturbed or upset by forcing it to change its method of transacting business. To unnecessarily deprive the Federal Deposit Insurance Corporation of its independence and flexibility which its corporate structure was designed to furnish, as is proposed in the pending measure, would, in my opinion, be a very grave mistake. During its 14 years of life, the Federal Deposit Insurance Corporation has not been free from attacks from some who would like to restrict its operations and to see its revenues diverted from the purposes to which they have been dedicated. This measure may make it possible for these opponents to the principle of deposit insurance to achieve their objectives. I earnestly hope that this committee will strike the name of the Federal Deposit Insurance Corporation from the provision in question.

FEDERAL DEPOSIT INSURANCE CORPORATION,

Washington, April 1957.

MEMORANDUM TO THE BOARD OF DIRECTORS RE PROPOSED BILL TO AMEND THE GOVERNMENT CORPORATION CONTROL ACT (H. R. 8332)

The Bureau of the Budget has requested our views on a draft of a bill to amend the Government Corporation Control Act, as amended. The proposed Bureau of the Budget letter to Congress to accompany the proposed legislation states that it is designed to carry out the President's recommendation in his 1956 budget message that the Government Corporation Control Act be amended "to provide for budget and audit control over Government corporations which are authorized, directly or indirectly, to obtain or utilize Federal funds.”

Under the draft bill this Corporation, with several mixed-ownership Government corporations and all wholly owned Government corporations, would be made a "Government corporation" and, as such, would be subject to annual budget review, including limitations on its use of its funds, by the Bureau of the Budget and Congress and subject to broader audit by the General Accounting Office, so long as it is authorized to borrow Government funds.

No need has been demonstrated for budget control of the Corporation. It is important to note at the outset that there has been no charge of extravagant or improper use of funds in the operations of the Corporation during any time since it began operations almost a quarter of a century ago. Further, the continued efficient operation of the Corporation is adequately assured by the interest of insured banks in their assessment costs and assessment credits resulting from such operations, as well as by the fact that the Corporation is regularly audited by the General Accounting Office. Insured banks are furnished with the Corporation's annual report to Congress, which includes the audit report, and also a special report on operations each year.

The entire case for budgetary control is based, first, on the fact that the Treasury is directed by law to loan the Corporation not in excess of $3 billion outstanding at any one time, if requested by the Corporation and, second, on the caim that the Government has a "potential exposure of $105 billion as a consequence of deposit insurance."

1. Subjection of Corporation to budget control because of its $3 billion borrowing authority is inconsistent with the proposed exclusion from such control of other corporations with authority to borrow from the Government or with obligations which are direct obligations of the Treasury. The authority to borrow $3 billion from the Treasury, if needed for deposit insurance purposes, would bring the Federal Deposit Insurance Corporation under the proposed bill with its budget controls, but the power to borrow from the Treasury is a criterion that is not applied to other corporations with respect to the proposed scope of the Government Corporation Control Act. The Federal home loan banks, which will be excluded from the Government Corporation Control Act under the proposed legislation except for audit, are authorized to borrow $1 billion from the United States Treasury (12 U. S. C. 143 (i)); and the Federal land banks, also to be excluded, are authorized to borrow $300 million through the Federal Farm Mortgage Corporation (12 U. S. C. 1020c, c-1, and d). Further, the financial responsibility of the Treasury for possible borrowings by the Federal Deposit Insurance Corporation is far less than its responsibility for actual obligations of the Federal Reserve banks. The Federal Reserve banks, which it is not proposed to place under the Government Corporation Control Act, have outstanding over $25 billion of notes that are a direct obligation of the Treasury (12 U. S. C. 411), and have authority to issue large additional amounts of such notes.

2. There is no. "potential exposure" to the Government in the operation of deposit insurance beyond the $3 billion borrowing authority. The argument that the insurance operations of the Corporation involve "a potential Government exposure" of $105 billion is based on an estimate of insured deposits, and apparently assumes that the insurance of deposits represents a Government guaranty. This is not the case either directly or indirectly. In fact the maximum exposure of the Government is $3 billion, for the Treasury is prohibited by law from holding more than that amount of obligations of the Corporation. Those responsible for the passage of deposit insurance legislation had not the slightest intention of providing a Federal Government guaranty of deposits. In answer to a specific question on this point, Senator Carter Glass, the chairman of the Senate Committee on Banking and Currency, declared on the floor of the Senate that:

"There is no language in the bill that ought to cause any man of ordinary intelligence to think that the Government has anything further to do with it than its initial subscription of $150 million, which members of the committee regard as a recapture fund * * *" (Congressional Record, vol. 77, pt. 4, p. 3729). Further, an assumption that a contingency may occur under which the Corporation would need funds to pay all insured deposits presumes that every bank in the country will fail on or about the same date an economic disaster of such magnitude as has never occurred in the history of this or of any other nation. If it is appropriate to apply budgetary control to the Corporation in anticipation of such a contingency, then it would appear to be necessary also to apply budgetary controls to many other institutions; for example, to life insurance companies on the ground that the Government will have a responsibility to survivors in the event of a catastrophic epidemic or an atomic attack.

3. The Corporation should not be regarded as a wholly owned Government corporation and subjected to the same budget control as such corporations. Since the retirement of the Corporation's capital, there is no basis in the law for any contention that the Corporation is owned by the Government. Congress has on several occasions refused to include the Corporation within the definition of wholly owned Government corporation. There is no provision in the law that residual assets of the Corporation shall pass to the Government upon liquidation of the Corporation, as is provided for the 12 Federal Reserve Banks (12 U. S. C. 290). Nor are any earnings of the Corporation paid into the Treasury, as in the case of the Federal Reserve banks.

The mutual character of the Corporation has been recognized. Congressman Steagall, who was chairman of the House Committee on Banking and Currency when the legislation creating the Corporation was enacted, stated, with reference to that legislation:

"This bill seeks to establish a mutual insurance system supported and maintained by the banks themselves, in their own interests as well as for the benefits of their depositors." (Congressional Record, vol. 77, pt. 4, p. 3837.)

The report of the House Banking and Currency Committee on that legislation stated:

"* * * The bill does not provide that the Government shall guarantee the payment of deposits; but it does provide and require that the banks under Government supervision and regulation shall mutually guarantee the deposits of each other through the medium of a Government-controlled instrumentality designed for that purpose; and that the banks shall make such contributions to the insurance fund provided for, from time to time, as may be necessary to provide for the payment of all deposits in banks which may be closed; and that such contributions shall be made by the banks in proportion to the amount of their deposits (H. Rept. No. 150, 73d Cong., p. 5)

***

that distinguishes funds of all these corporations from funds appropriated from taxes. Consistency of treatment would therefore require that this Corporation be likewise excluded from budget controls.

4. Subjection of the Corporation to budget control is inconsistent with the principle of keeping a monetary agency free from political interference. It is doubtful if there is any serious disagreement with the proposition that a monetary agency should be free from political influence. In the case of any agency dealing directly with the volume of circulating medium, political interests may seek action which is destructive to the principles which Congress itself had previously laid down for the conduct of such an agency. There is no question that it is within the authority of Congress to establish such principles and to alter them whenever it so desires, but once established their implementation requires a maximum degree of independence for the agency concerned, free from the annual influence of budget control. For it must be remembered in this connection that control of the purse strings means more than efficiency control; it means power to influence operations and policy.

In 1933 the report of the House Committee on Banking and Currency accompanying the legislation creating this Corporation contained the following statement:

"* * * Experts advise us that more than 90 percent of the business of the Nation is conducted with bank credit, or check currency. The use of bank credit has declined to the vanishing point. The public is afraid to deposit their money in banks, and the banks are afraid to employ their deposits in the extension of bank credit for the support of trade and commerce. Businessmen and investors are victimized by the same fear. The result is curtailment of business, decline in values, idleness, unemployment, breadlines, national depression, and distress. We must resume the use of bank credit if we are to find our way out of our present difficulties" (H. Rept. No. 150, 73d Cong., p. 6).

The Corporation is a monetary agency established by the Congress under its power to provide and control the Nation's circulating medium, or supply of money. The monetary functions of the Corporation, around which all its operating duties center, are, first, to restore a portion of the circulating medium which has become destroyed or become temporarily unavailable because of bank failure, and, second, to help maintain a sound banking system and thereby prevent contraction of circulating medium because of bank failure. The monetary functions of the Corporation were clearly uppermost in the minds of the architects of deposit insurance, they are well defined in the law, and they have been so recognized by the Federal Reserve System. In connection with the hearings in 1950 on the Federal Deposit Insurance Act before the Senate Committee on Banking and Currency, the Chairman of the Board of Governors of the Federal Reserve System inserted in the record of the hearing a staff study which included the following statement (pp. 110–111) :

"As the agent primarily responsible for monetary stability, the Federal Reserve System is vitally interested in the functioning of an insurance program which has as its primary objective the removal of one of the prime causes of monetary instability. Deposit insurance is potentially one of the more important reforms directed to greater monteary stability by the banking legislation of the 1930's. In essence, these banking reforms aimed at preventing a repetition of the wholesale destruction of the money supply that occurred between 1929-33. * * * From the individual's standpoint, deposit insurance provides protection, within limits, against the banking hazards of deposit ownership. But the major virtue of deposit insurance is for the Nation as a whole. By assuring the public, individuals, and businesses alike that their cash in the form of bank deposits is insured up to a prescribed maximum, a major cause of instability in the Nation's money supply is removed." [Emphasis added.]

The monetary functions of the Corporation are reflected in its operating duties, but the importance of these duties is sometimes forgotten during years of economic prosperity. For this reason a brief review of these duties is warranted. When the Corporation acts to restore circulating medium which is in danger of being destroyed or of becoming unavailable as a result of bank failure, it exercises powers which have an important bearing on the economic life of the country. In the case of an insured bank which becomes involved in serious financial difficulties, the Corporation may take one of a number of actions. If the bank is placed in receivership by the appropriate supervisory authority, the Corporation may pay the depositors of that bank the amount of their insured deposits, or it may determine that its interests, as well as the interests of the depositors, are best served by rendering financial assistance to permit the reopening of the bank, or to facilitate an assumption of the liabilities of the closed bank by another insured bank. If the bank has not yet been placed in receivership, the Corporation may provide funds to facilitate a merger, or may render assistance to the distressed bank to enable it to continue operations.

In a period of economic crisis, when great numbers of banks both large and small may be in difficulty, decisions by the Corporation may be as important and have as far-reaching consequences as those made by officials of the Federal Reserve System. During such times the pressures to which the Corporation will be subject from individuals, from banks, from Government authorities, and from many other sources will undoubtedly be intense. The pressures will be of the same nature as those which will bear upon the Federal Reserve System. It is during such times that it is of crucial importance that the Federal Deposit Insurance Corporation be in a position in which its decisions can be made solely with a view to carrying out its monetary functions.

Operating duties relating to liquidation of assets acquired as a consequence of disbursements to protect depositors also require decisions which can be important in the monetary sphere. Section 11 (d) of the Federal Deposit Insurance Act requires that in liquidating assets the Corporation give "due regard to the condition of credit in the locality * * *." Thus the Corporation is not permitted to consider only the loss which it may sustain. If we assume a period of crisis, such as 1930-33, the Corporation may acquire billions of dollars of assets within a relatively short time, the disposal of which may play a significant role in the acceleration or alleviation of the crisis.

Action taken by the Corporation to protect depositors of failing banks or to liquidate assets acquired thereby may be of a national significance only during periods of economic depression, or if there is a failure of a very large bank. However, in its operating activities relating to supervisory duties the Corporation is daily engaged in helping to maintain a strong and stable banking system. In addition to examination activities there are supervisory duties which are quasi-judicial in nature. For example, Corporation officials must pass on applications for new banks, for branch offices and for mergers of existing banks, and upon recommendations from its examiners that insurance be withdrawn from banks operated in an unsafe or unsound manner. The nature of these supervisory activities requires a degree of impartiality and objectivity in decisions which might be impossible to assure unless the Corporation retains its independent status. For example, proper operation of deposit insurance necessitates (and the law requires) that there be no discrimination against State banks not members of the Federal Reserve System. Decisions relating to withdrawal of insurance from a bank because of its unsafe and unsound operation must be taken solely with regard to the merits of the case in terms of the Corporation's duty to help maintain a sound banking system. How well can these, and other objectives, be accomplished if the Corporation is subjected to influences which may be inclined to give weight, for political purposes, to the pressures which inevitably arise in such instances?

5. Since 1933 the Congress has repeatedly affirmed its original decision to establish an independent corporation and has rejected every attempt or proposal to subordinate the Corporation to any other agency. -In 1933 the Congress rejected a proposal to subordinate the Corporation to the Federal Reserve System and announced its intention of organizing an independent" Corporation (Congressional Record, vol. 77, pt. 6, p. 5862). It has never deviated from that position, whether with respect to the Federal Reserve or to any other Government agency.

The attempt in 1947 to subject the Corporation to budget control aroused virtually unanimous opposition and the Senate rejected the proposal by a vote of 83 to 1. During the course of the debate on this legislation Senator Vandenberg declared:

"* * * The FIDIC is on all fours with the Federal Reserve System with respect to the fiscal structure of the American economy. No one has yet had the temerity to propose that the Federal Reserve System should be robbed of its independence and subordinated to a political bureau of the Government. Yet, here is an institution which is even more sensitive with respect to the necessities for its independence, and we confront a conference report which for the first time proposes to make it possible for political controls to determine what happens. "I am not so much afraid of what the political controls would do, because I assume that they would have an adequate respect for this institution. But I am saying that the fundamental importance and value of the Federal Deposit Insurance Corporation is psychological; it is the faith that for 15 years America has demonstrated it has in this institution. At the moment when the FIC is about completing $1 billion of earnings of its own, so that it can eliminate all Government capital, at this time when there is a billion dollars of money available in the Treasury of the FDIC, if the American people read that, at long last, in Washington something is going on which indicates that the political powers are restless and will remain restless until they can get their hands upon this great institution, the effect will be most deplorable. *** I am confining myself to this fundamental conception, because I submit, Mr. President, that the one thing in the economic life of the United States which is basically essential is the maintenance of banking confidence, which is dependent, fundamentally and primarily, upon the continuing independent sancity of the Federal Deposit Insurance Corporation." (Congressional Record, vol. 93, pt. 8, p. 10123.)

In 1950 the conference report on the Budget and Accounting Procedures Act retained the language of the Senate amendment which provided that the term "appropriations" would "include any other authority making funds available for obligation or expenditure." The conference report, signed by Congressman Dawson, as one of the managers on the part of the House, contains the following statement with reference to the Corporation :

"In retaining the language of the Senate amendment, the committee wishes to make it clear that it is not intended to * * * affect the Federal Deposit Insurance Corporation or its funds. The funds of the Federal Deposit Insurance Corporation are received from assessments on insured banks and are used only for the purposes of deposit insurance. These funds have never been under the Budget and Accounting Act for the reason that they are not Government moneys or appropriations and there was no intention of including such funds in this amendment" (H. Rept. No. 303, 81st Cong., p. 2; Congressional Record, vol. 96, pt. 10, p. 13988).

Throughout the years there have been many men and women of the Congress who have been tolerant of my shortcomings, and I want to express my appreciation to the committee.

Mr. HOFFMAN. I note you refer to the prior congressional record of our former colleague, Mr. Steagall, but I do have a personal recollection of his attitude on this matter.

The only thing that bothers me, Mr. Chairman, is that you introduced this bill by request. Now what is back of it? Who wants it? The CHAIRMAN. The Bureau of the Budget.

Mr. HOFFMAN. Why? They did not tell you?

The CHAIRMAN. The President submitted it to Mr. Rayburn and it was referred to us.

Mr. HOFFMAN. You mean the President sent it to Mr. Rayburn? The CHAIRMAN. Yes, to the Speaker of the House.

Mr. HOFFMAN. Who sent it to the Speaker? You say the Bureau of the Budget? Have you had the Bureau of the Budget on?

The CHAIRMAN. Yes; the Bureau of the Budget was the first witness.

Mr. HOFFMAN. Would you mind telling me, so I will not have to read it, as to why they want it? Is it just for more power, or what? The CHAIRMAN. There is a representative of the Bureau of the Budget sitting right behind you who could probably answer it. Mr. SEIDMAN. This was recommended, Mr. Hoffman, by the President.

it?

Mr. HOFFMAN. Do you think the President knows anything about

Mr. SEIDMAN. Yes, I am absolutely certain.

Mr. HOFFMAN. How can he, with all his problems? As far as I am concerned, it is all nonsense to tell us that the President asked for this, that, or the other, because it is an absolute impossibility for him to know about all these things.