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«COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPRESENTATIVES SEVENTIETH CONGRESS FIRST SESSION ON H. R. 11806 ( Superseding H. R. 7895, Sixty-Ninth ...»

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Mr. HAMLIN. There was a conference at which the various central banks of issue of Europe and the Federal reserve system got together to consider the whole subject of reporting statistically as to banking conditions; making reports as to production and distribution, etc. In other words, the foreign central banks have watched very carefully what the Federal Reserve Board has done, beginning, as Doctor Miller testified, about 1923. Having found that the reserves were no longer a positive indicator of credit policy, the board began, as has been told you, to secure very comprehensive production and distribution data, and Europe has followed that with very great interest.

They have not advanced over there as we have under our system, and they wanted to go into the whole question with a view to learning exactly what our operations were, in the hope that they might extend the same principles over there. That was the sole purpose of the conference.

The CHAIRMAN. I suppose that would enable them more intelligently to cooperate in the various conferences that necessarily will have to take place between the banks of issue in the future.

Mr. HAMLIN. Yes; you have expressed it better than I could.

That is absolutely so. That was the sole purpose; and Doctor Burgess and Mr. Goldenweiser went over and attended that conference.

Mr. KING. What authority did they have to do that?

Mr. HAMLIN. The general authority that I think is given to the Federal Reserve Board in connection with matters of that kind— general investigation.

Mr. KING. YOU think that without this bill the Federal Reserve Board would have authority to do that?

Mr. HAMLIN. Oh, yes. We carefully looked into that before we did it.

I want to say that I consider Mr. Goldenweiser and Mr. Burgess probably easily among the best equipped men in the United States for that purpose. They each have published valuable books on the Federal reserve system. Mr. Goldenweiser is the director of our research bureau. Mr. Burgess is assistant Federal reserve agent of the Federal Reserve Bank of New York. I really felt proud that we could send such men over there to explain the modus operandi of our system.

Mr. KING. DO these European banks desire, and is it their ultimate object, to get legislation in this country which will cut down the Federal reserve money?

Mr. HAMLIN. I have never heard of any such desire. This had solely to do with the reporting of the movements of trade and similar banking statistics.

1502&—28 -26

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Mr. HAMLIN. I will say that these figures have been carefully gone over, and that they are correct. The conclusions you may draw from them are, of course, your own; and mine are as I state them.

This covers a period of five years. Briefly, you are asking now whether the open-market operations contributed to the expansion or inflation. In only two of the five years did the Government securities and acceptances held by the Federal reserve banks increase in amount. During the first year—1923 to 1924—as you have already heard in the testimony, the holdings of Government securities increased $492,000,000. That amount was poured into the circulation;

into the credit pool. Of course, ordinarily that is an enormous amount of money. You would think it would have a very vital effect. But when you realize that in that year the banks paid off, not the $492,000,000, but $620,000,000 of discounts, you see that washed right out; and they had $100,000,000 to spare. In addition to that, in that first year there were net gold imports of $342,000,000, and the total Federal reserve credit did not increase at all—on the contrary, it decreased, although the Government securities increased about $500,000,000. The Federal reserve credit total decreased, because of the large amount of discounts that were wiped out.

Now, taking the same analysis, in three of the years the total Federal reserve credit increased; but in those three years this table shows that the Government securities and acceptances held by the Federal reserve banks decreased. So I say that the only conclusion I can draw from that table is that the open-market operations, taken over this long period, had no permanent appreciable effect in the way of expansion.

The CHAIRMAN. In that connection, do you figure that the openmarket operations are essential to the management of the Federal reserve?

Mr. HAMLIN. I do.

The CHAIRMAN. YOU think that in the carrying out of the Federal reserve policy the open-market transactions are necessary and helpful?

Mr. HAMLIN. I think that the open-market operations are the very heart of the Federal reserve policy, as was well said by Doctor Miller on May 9 in his testimony before the committee. I am frank to admit that they have not worked out exactly as we hoped and expected they would, because of the fact that where we have, for example, Government securities and sell them, we take that money out of the market; the banks come right in and rediscount, and it offsets, and vice versa. I think if we were to abolish the open-market operations it would leave our system practically an emergency system. If that were done, we would have to sit back until the banks came to us.

With the open-market operations we can go to the banks. We can throw our securities in the market and take out the money, and then they have to come in and rediscount; and that gives us a better hold on the situation than any discount rate could.





The.CHAIRMAN. Doctor Miller referred the other day to the limitation on these powers of the board in open-market operations.

Should the board be specifically limited as to open-market operations so as to require the affirmative vote of five members of the board ?

Mr. HAMLIN. I believe not. With discount rates we have the right to approve or disapprove them by a majority vote of the board, and

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the power on its own initiative to put in a rate over the heads of the directors of the bank, and that is what was done in the Chicago case.

The CHAIRMAN. The board, then, is relying on the opinion of the Attorney General as regards the law in that respect?

Mr. HAMLIN. Absolutely. But, of course, in that particular case there was great difference of opinion. For example, some of the members admitted that the board had the power, because the Attorney General had told us we had the power; but, having the power, they believed it was a power that should not be exercised at that time. That was one of the questions before us. Of course, the board, having been advised by the Attorney General that it had the power, is bound so to regard the law. Under the statute they are bound by an opinion of the Attorney General. So we were bound to take up that case on the assumption that we had the power. The only question was whether we should exercise it.

Mr. STEAGALL. Mr. Hamlin, if I understand you correctly, the board is now operating with the accepted view that they have the power, not alcme to review or to regulate but to initiate the rates in the different districts?

Mr. HAMLIN. Yes, sir; we are bound to take that view, the Attorney General having so advised us.

Mr. STEAGALL. The different banks, under the law, accommodate one another whenever it is desirable and practicable to do so, do they not?

Mr. HAMLIN. YOU mean inter-Federal reserve bank rediscounts, as they call them ?

Mr. STEAGALL. Yes; in the matter of loans.

Mr. HAMLIN. Yes; the board has the power to do that.

Mr. STEAGALL. In other words, one bank borrows from another bank?

Mr. HAMLIN. One Federal reserve bank borrows from another;

yes. The board has the power to direct them to do it, also.

Mr. STEAGALL. Yes. They not merely review that action or regulate it, but they have the power to direct that that be done ?

Mr. HAMLIN. By an affirmative vote of five members.

Mr. STEAGALL. Well, I do not see why they should not have it. I did not have in mind that provision of the law for the moment. Here is the question I wanted to ask: In view of all those things, why should not the Federal reserve rate be the same in all the banks at all times?

Mr. HAMLIN. That raises a very broad question. It was so designated in the Aldrich Act, as you know. It was provided there that there should be a uniform rate. I think the framers of that act abandoned that idea. They felt that it would not operate.

Mr. STEAGALL. The Aldrich plan differed, though, from the present law, if I understand it, in that the present law has the 12 districts, whereas the other contemplated a central bank.

Mr. HAMLIN. One central bank, with branches. Here we have 12 practically independent banks subject to the general control of the Federal Eeserve Board.

Mr. STEAGALL. Each operating in a particular section of the country.

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dered if it might not be practical and wise to establish one rediscount rate for all 12 banks.

Mr. HAMLIN. Personally I do not believe it would be wise.

Mr. STEAGALL. Does it not almost work itself out that way naturally ?

Mr. HAMLIN. Yes; at the present time.

Mr. STEAGALL. It has occurred to me that probably it would be a good thing to do it by rule.

Mr. HAMLIN. There has been a tendency actually toward uniformity. When we began, the rates differed, and gradually they got together. Of course the war conditions had something to do with that. They were uniform, as a matter of fact, when we put in the lower Chicago rate, and the other banks went down, and the uniformity continued. But to my mind, in the theory of the law, it would not be wise or proper to put in, if we had the power, one uniform rate, although a uniformity might be reached as the result of the conditions in the various districts of the United States.

Mr. STEAGALL. Well, of course, if conditions should be the same in each district, the presumption arises that the rate would be fixed the same in each district; but inasmuch as they are so nearly the same, and in view of the fact that each bank has access to the resources of every other bank, as a practical proposition, I have wondered if it might not be well for the board to fix a uniform rate for all of them. But I am not attempting to set up my judgment on that or to reach a conclusion about it.

The CHAIRMAN. There is just one other question that you have not answered, and that was, Should the power be limited as to openmarket operations, so as to require a unanimous vote of five members?

Mr. HAMLIN. I do not believe that would be advisable. I think, having the power by majority vote to disapprove or approve discount rates, we should have the same power, assuming that such power exists, of approving or disapproving in connection with openmarket operations.

The CHAIRMAN. DO you think that the law should be changed so as to give you more power over open-market operations than you have now?

Mr. HAMLIN. N O ; I do not see any necessity for any change in the law. The Federal Reserve Board is not an operating board. I think we have ample power now. As I said before, there may be some question as to the legality of our complete power over open-market operations, but, in fact, there is no question that we are exercising the power. Every act of the open-market committee is incidentally reported to us. The question of giving them authority in emergencies is passed on by us and determined, and occasionally that question comes up where they come and get specific authority. So, as a matter of fact, I see no necessity at all fox any change in the law.

The CHAIRMAN. DO you think there is a leak of Federal reserve credit into the stock market, for instance ?

Mr. HAMLIN. I do not think it is possible, looking at the expansion that is taking place, to deny that indirectly what we call Federal reserve credit has'leaked into the market, but I do not see any practicable way of stopping that. For instance, commercial paper is discounted by a bank. The man that gave that paper may have

–  –  –

rower, we have told them the situation and I think we have cleaned it up very effectively, and I believe that in ordinary times the existing laws are adequate.

I think, however, that there should be a change in the laws as to reserves, and on that subject the governor, I think, may have something to say to this committee later.

The CHAIMAN. One other question, now, before you leave. Some statements have been made here about these various conferences that have been held by the heads of some of the Federal reserve banks here with the central banks of issue abroad, more in the form of conversations or informal conference, and it was stated here that the board has no record of these meetings and they were not authorized.

Have you anything to say on that subject?

Mr. HAMLIN. Well, I presume you have in mind, for example, the conference or the coming over here last year of the European representatives The CHAIRMAN. Yes; it was stated here before this committee by Doctor Miller that as a result of the conference in New York participated in by the governors of the Bank of England and the Bank of France and the Reichbank, an informal conference took place here in Washington, after which the discount rate was lowered, and it was stated that there were no minutes or no authority except that the raise in discount rate was the result of those conferences.

Mr. HAMLIN. I think I can speak accurately from memory. Those gentlemen came over here to confer with the Federal Reserve Bank of New York. My recollection is that the board was duly advised that they were coming over. They did come over, and shortly after arriving they all came down to Washington and the governor of the board gave them a lunch and we were with them perhaps an hour or two and then they proceeded back to New York.

Their visit to Washington was purely, as I understand it, a visit of courtesy. I talked with most of them. We had nothing to say about discount rates, merely general conversation, conditions in Europe, and conditions in the United States, and I assume that that was their sole purpose—to pay their respects to the President and the Secretary of the Treasury and the board.

Then, if my memory is correct, they had a conference, a general talk, with the directors of the Federal reserve bank in New York, and my impression is that the members of the open-market committee were also there—I am not sure about that, but that is my distinct impression. Governor Crissinger went on and attended that conference.



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