Secretary SNYDER. It will have to be bottomed on conditions at the time those decisions are made.

Senator DOUGLAS. Is not the best protection for security issues the general prosperity of the country, a balanced budget, protection against the danger of future inflation, and a satisfactory interest rate? . If those conditions are met, to what degree is it necessary for aritficial support to be given by the Federal Reserve System?

Secretary SNYDER. As the Senator knows, I have advocated balanced budgets ever since my opening statement when I became Secretary of the Treasury, and I still feel that we should maintain balanced budgets to the greatest possible extent.

Senator DOUGLAS. If those conditions are met why is it necessary for the Federal Reserve Board to purchase any securities? Why couldn't the bond issue be met by the general investment market?

Secretary SNYDER. Well, in general, I think that you have stated a very proper reason for believing that there would be no occasion, but we would have to look at conditions that have occurred in the past, and also have to measure what might develop in the future as to just what would be the circumstances at any given time under any given condition of the market or of the amount of financing that the Government has to maintain, whether it be refunding or whether it be new issues. As to the using of the interest rate alone, that is a matter that has caused a great deal of debate and discussion, and one which we have tried to meet in our answers to the subcommittee's queries. We have to measure very carefully the decisions that will be made as to interest rates.

Senator DOUGLAS. Well, certainly, in times past the Treasury has asked the Federal Reserve Board to stand ready to purchase Government bonds if there were not enough private subscriptions; is that true?

Secretary SNYDER. The Federal Reserve has offered to do that, and been requested

Senator DOUGLAS. Has not the Treasury requested that it do that? Secretary SNYDER. I was just finishing my answer.

Senator DOUGLAS. I beg your pardon.

Secretary SNYDER. I said they have offered to do that, and the Treasury has requested them to do that; that is correct. Senator DOUGLAS. The Treasury has asked them to do that? Secretary SNYDER. Asked them to support the financing.

Senator DOUGLAS. What would you say to the contention that you are asking the Federal Reserve Board to do that which if practiced by a private underwriter with regard to private issuances, would render him liable to prosecution under the securities and exchange statute by the Securities and Exchange Commission for pegging the market?

Secretary SNYDER. I am sure the Federal Reserve Board got their legal opinion on that before they undertook it.

Senator DOUGLAS. The Securities and Exchange Commission, in order to strike at one of the evils of private underwriting, provides that the issuing house should not without due notice create an artifical market by guaranteeing to support the price of securities by purchases. Now, has not the policy in the past sometimes been in effect to urge the Government to do that which is a penal offense for private underwriters to do?

.

Secretary SNYDER. I am quite certain that when the Federal Reserve adopted such a procedure that they carefully weighed the public welfare.

Senator DOUGLAS. There is no penalty against the Federal Reserve Board's supporting the market without publicly proclaiming that it is doing so. It is not statutorily a criminal offense. But what I am trying to get at is this: Just as we are trying to create natural conditions in the stock market where issues can sell on their merits without artificial support should we not with respect to the Government securities market, depend on the general condition of the country, the soundness of the Federal budget, the protection against the danger of future inflation, and a realistic interest rate rather than upon artificial support through the purchase of bonds by the Federal Reserve to maintain bond prices?

Secretary SNYDER. I think that we have had to measure this each time. Of course, as you know, Senator, there was only 1 year in which there was any net Federal Reserve support of the Government bond market in the postwar period up until the time of Korea; that is beside the point as to your question, but it is interesting to note that net purchases have not been generally the case all the way through the postwar period.

Senator DOUGLAS. It was true 1 year.

Secretary SNYDER. In 1 year; that is correct, sir.

(The following was submitted for the record:)

This matter is discussed in detail in the answer to question 17 of the questionnaire submitted to the Secretary of the Treasury by the subcommittee. The following table provides statistical information relating to the discussion:

Net purchases or net sales of Government bonds by the Federal Reserve, Jan. 1, 1946, to June 30, 1950, inclusive

Secretary SNYDER. That is correct. I think we have to measure carefully the broad public interest, and I am sure that is what the Federal Reserve Board and the Open Market Committee take into consideration in carrying out their obligations.

Senator DOUGLAS. There is a fundamental issue involved here, namely, whether you will provide so-called natural markets for Government securities or the degree to which you will provide artificial markets for Government securities.

Perhaps, I am using question-begging words in referring to the purchase of the Federal Reserve as an artificial device, but the question is the degree to which the Government will maintain its own bond market or to the degree to which it will allow the bond market to be settled by natural forces in the private field.

Secretary SNYDER. Well, it boils down to the meeting of a practical situation, I think, Senator, as long as

Senator DOUGLAS. When you face a practical situation without any general philosophy you are apt to come to great difficulties; and what

we are trying to do here, if this inquiry has any merit-and if it does not have merit we should close it out immediately, Mr. ChairmanSecretary SNYDER. Well, the question is

Senator DOUGLAS (continuing). Is to see if we can try to work out general principles for meeting these concrete situations which lie ahead.

Secretary SNYDER. The question then arises as to whether or not we should have an open-market operation.

Senator DOUGLAS. No, that is not the question. It is the degreeSecretary SNYDER. I think so.

Senator DOUGLAS (continuing). To which the Federal Reserve System should be committed to enable a Treasury issue to be successful or the degree to which a Treasury issue should be allowed to take its own chances in the public bond market or the private bond market. Secretary SNYDER. Î think we have to consider the public interest involved. With the large financings that we have to conduct in these days, with the debt the size it is, there must be some assurance mutually agreed on between the Federal Reserve and the Treasury that these operations will be carried out with assurance as to the stability of the Federal Government bond market.

Senator DOUGLAS. In other words, the Federal Reserve System should be willing and agree to purchase a sufficient number of securities so that the issue can be sold?

Secretary SNYDER. I think that is a matter that will have to be carefully weighed.

Senator DOUGLAS. Who is to determine the interest rate?

Secretary SNYDER. Well, that matter is always discussed very carefully, sir.

Senator DOUGLAS. Who is to make the final decision on it?

Secretary SNYDER. There is only one place that it can finally be made by law, and that is in the Treasury Department.

Senator DOUGLAS. When the Treasury makes the decision, therefore, is the Federal Reserve Board supposed to purchase a sufficient number of bonds so that the issue can be a success at the interest rates determined by the Treasury?

Secretary SNYDER. I think we can work out cooperation.

Senator DOUGLAS. Cooperation is a beautiful word, but it is like an overcoat, it covers quite a range of reality.

Secretary SNYDER. It has to do that, sir. In these days we have to face realities as well as theories.

Senator DOUGLAS. Mr. Secretary, when the Federal Reserve Open Market Committee buys Federal securities, what happens? How does it pay for these Government securities?

Secretary SNYDER. Well, of course, it pays for it out of the funds that it creates.

Senator DOUGLAS. You mean it pays for them by check?
Secretary SNYDER. I beg pardon?

Senator DOUGLAS. You mean it pays for them by check?

Secretary SNYDER. Or by giving credits, which is the same thing. Senator DOUGLAS. When it pays for them by check, these checks go into the hands of the banks?

Secretary SNYDER. It goes to the credit of the bank; yes, sir.
Senator DOUGLAS. And the banks do what with the checks?

Secretary SNYDER. You are just talking about the mechanics of it, are you?

Senator DOUGLAS. That is right.

Secretary SNYDER. When the Federal Reserve buys securities from the banks, why, it is

Senator DOUGLAS. Let us take the situation when Federal Reserve buys from the banks or private security dealers.

Secretary SNYDER. When it buys from a bank, of course, it will issue a check or give it direct credit on the books of one of the Federal Reserve banks. In either event that increases the deposit of the seller of the securities.

Senator DOUGLAS. And of the member bank, is that not true?

Secretary SNYDER. Well then, of course, they increase the deposits. Senator DOUGLAS. Yes; the deposits. When these checks are presented by the banks either directly or the banks' acquiring these checks from the private security dealers, they are deposited by the banks, are they not, in their accounts with the Federal Reserve?

Secretary SNYDER. Yes; the deposits with the Federal Reserve banks are member-bank reserves.

Senator DOUGLAS. I understand. They, therefore, increase the deposits which the member banks have with the Federal Reserve; is that not true?

Secretary SNYDER. Yes.

Senator DOUGLAS. That is right. And it, therefore, increases the reserves which the member banks have; is that not true?

Secretary SNYDER. That is correct.

Senator DOUGLAS. The reserve requirements presently in effect are 14, 20, and 24 percent, respectively, for the country, reserve city, and central reserve city banks. On the average, I believe the reserve requirement is 16 percent, and that is for each dollar of short-time deposits there must be roughly a 16-percent reserve.

That leads me to this question: When the reserves of the member banks increase, what happens to the lending capacity of the member banks?

Secretary SNYDER. In general, it is increased, of course.
Senator DOUGLAS. And approximately in what ratio?

Secretary SNYDER. I do not know just what that ratio is
Senator DOUGLAS. It is approximately 6 to 1, at least theoretically.
Secretary SNYDER. Generally, it is considered somewhere around
5 to 1. What it is precisely I do not know.

Senator DOUGLAS. Well, the Federal Reserve says 6 to 1. The reserve ratio of 14 percent for the banks in the smaller cities, 20 percent is the next group of cities, and 24 in the largest cities

Secretary SNYDER. 5 to 1 or 6 to 1.

Senator DOUGLAS. The Federal Reserve says 6 to 1. So that the increase of the reserves of the member banks in the Federal Reserve System increases their lending capacity in a sixfold ratio to that of their increase in reserves is that not true?

Secretary SNYDER. Something in that area.

Senator DOUGLAS. Yes.

Now, then, banks; do the banks like to keep earning capacity idle? Secretary SNYDER. Well, they would be accused of poor banking if they did.

Senator DOUGLAS. That is right. Therefore, they will want to lend, assuming the risks are sound, up to the limit of their lending capacity, is that not true?

Secretary SNYDER. They, generally speaking, do that; that is their policy.

Senator DOUGLAS. That is, except when you have a period of depression.

Secretary SNYDER. That is the policy of good banking management; yes.

Senator DOUGLAS. Except when you have a period of depression? Secretary SNYDER. Yes.

Senator DOUGLAS. Therefore, the increase of reserves will probably be accompanied by a parallel increase in bank loans, in a ratio up to 5 or 6 times that of the increasing reserves, is that not true?

Secretary SNYDER. It sometimes works out that way.

Senator DOUGLAS. If we have a period of comparatively full employment, such as we have now with unemployment at roughly 3 percent, and unemployment chiefly in localized areas such as Detroit, New York, and certain other regions, will this increase in loans cause substantially more goods to be produced? Will it put idle labor to work with idle resources producing commodities which otherwise would not be produced?

Secretary SNYDER. Would an increase in bank credit accomplish that?

Senator DOUGLAS. Yes.

Secretary SNYDER. Well, it might aid in it; yes.

Senator DOUGLAS. I mean if you have comparatively full employment, in which virtually everyone has a job. Do you think you would effect any substantial reduction in unemployment below the 3.3 percent which we are supposed to have now?

Secretary SNYDER. Well, then we get into the realities of the question. Now when we are talking about

Senator DOUGLAS. Yes.

Secretary SNYDER. The answer to your statement theoretically would be that any expansion of credit under conditions of full employment and full utilization of manufacturing capacity would only tend to oversupply the market.

Senator DOUGLAS. Over-supply what market?
Secretary SNYDER. The credit market.

Senator DOUGLAS. That is a vague phrase. My question was whether you thought there would be any significant increase in physical production because of a further expansion of bank loans when you have substantially full employment.

Secretary SNYDER. Yes; that is what I was addressing myself to. Senator DOUGLAS. Do you think there would be any significant increase in physical production?

Secretary SNYDER. I think that it all depends on whether you want credit to flow to increase production, and that is why I said we get into the realities of whether or not it is a question of supplying credit. Senator DOUGLAS. With unemployment down to 3.3 percent, do you think you can drive it down much further than that by an expansion in bank loans?

ww