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"Any applying bank shall be eligible for membership if it is an insured bank as defined in subsection (h) of section 3 of the Federal Deposit Insurance Act. The capital stock of a state member bank shall not be reduced except with the prior consent of the Board of Governors of the Federal Reserve System."

The CHAIRMAN. And, of course, our point here is that the stock doesn't serve any purpose. It doesn't give the banks even the privilege to vote by reason of their stock. The stock cannot be mortgaged, it cannot be hypothecated, it cannot be sold. It is something that is rigid in the law, going up and down according to the capital and surplus of the bank.

That is correct; is it not?

Mr. MARTIN. Yes, that is correct, Mr. Patman, except that the stock does not fluctuate in value.

The CHAIRMAN. No, it goes up and down according to the 3 percent that is required.

Mr. MARTIN. According to the capital and surplus of the banks. The CHAIRMAN. That is right. I meant to say according to the 3 percent of the capital and surplus. As capital and surplus goes up, the amount of stock goes up. But the stock carries no proprietary interest.

Mr. MARTIN. No proprietary interest-that is a very good state

ment.

The CHAIRMAN. And, for that reason, we feel that the stock should be repaid, because a lot of bankers think they own the Federal Reserve System. And some of them write in that they ought to have a cut on the interest that is paid in on the $33 billion of the portfolio. They are honest in that belief.

Of course, if they did that, they would get a 200-percent dividend practically every year. And, of course, it was intended they get 6 percent, as the law sets out, as you outlined this morning.

The stock business-I don't think there is too much controversy about that.

You believe one way, the Board believes one way, and I believe another, and some of the committee believe like I do and some believe probably the other way.

But where is that stock listed in this annual report?

You have one there with you, don't you-an annual report?

Mr. MARTIN. No, I don't, Mr. Patman. I am sorry. But it is listed in the back.

The CHAIRMAN. Here it is-earnings and expenses in Federal Reserve banks.

Now, where in there will someone hand this report to Chairman Martin?

Where in there would the stock, say, of the New York bank be listed, or where what figure there would include the stock in the New York bank?

Mr. MARTIN. Paid in capital accounts, on page 145, would show $466,926,000.

The CHAIRMAN. That is the total amount of all

Mr. MARTIN. That is the total. And the surplus would be $933,851,000.

The CHAIRMAN. All right.

Now, then, where is that stock now? Where is that money for that stock? Where is it located? Is it in the 12 Federal Reserve banks? Is it in some commercial bank? Where is it?

Mr. MARTIN. The stock certificate is held by the member bank. The CHAIRMAN. But the money that they got for the stock certificate, where is that money?

Mr. MARTIN. That is on deposit as a part of their reserve balance. The CHAIRMAN. Part of their reserve balance.

But I think if you will consider that reserve balance, that was all acquired by reason of interest on Government securities and earnings of the bank; was it not?

Mr. MARTIN. Yes; that is correct.

The CHAIRMAN. I know. But that doesn't include the stock, then, does it?

I don't understand that.

Mr. MARTIN. The earnings on the stock are included in the earnings of the member bank.

The CHAIRMAN. I know. But I don't think you understand me. I just have not made myself plain.

I have made the statement, Mr. Martin, that the stock, this $466 million, is idle and unused. It has never been invested. It is idle and unused now. And, therefore, it ought to be paid back to the banks. And then this $933 million ought to be paid into the Treasury on the theory that the Federal Reserve banks will never need any surplus. You know, we went over that in 1957, I think, over at the House Small Business Committee.

Mr. MARTIN. We did indeed.

The CHAIRMAN. What is that?

Mr. MARTIN. I said we did indeed.

The CHAIRMAN. Yes, sir. And all the members of the Board, I think, were there at different times. And every one of them admitted they could not conceive of any circumstances that would ever require them to need any part of that surplus or capital that there could never be a need for it because you get your money when you need it by creation. You don't need to take the surplus, you don't need to take stock. You create your money. The law gives you that right. That is correct, is it not?

Mr. MARTIN. I didn't concede that we would under no circumstances need it. One of the items is self-insurance that we can engage in. Now, we lost a million and a half dollars in this bank robbery so widely publicized.

The CHAIRMAN. You mean that $71⁄2 mililon-you mean up in Boston?

Mr. MARTIN. Up in Boston.

The CHAIRMAN. You lost $72 million out in San Francisco, too.

Mr. MARTIN. No; we have not lost that.

The CHAIRMAN. Well, you have not found it.

Mr. MARTIN. I feel confident from the course of events that we will. The CHAIRMAN. That is good.

I hope you find it in this country.

Mr. MARTIN. Well, I have grave question whether it is in a numbered account in Switzerland.

The CHAIRMAN. Don't overlook the fact there are numbered accounts in New York.

You realize that, don't you, Mr. Martin?

Mr. MARTIN. I don't have any contact with any numbered accounts in New York, Mr. Patman.

The CHAIRMAN. Well, that is another thing. I object to what is going on. That a State like New York can make what is tantamount to agreements with Switzerland, and tell the officials of Switzerland, “You can establish a bank here in New York State, and we will give the permit, we have the right to do it. We don't have to go to Mr. Martin of the Federal Reserve, we don't have to go to the Treasury, the Comptroller of the Currency, the FDIC. We don't have to go to anybody. We will let you have a bank here, if you let us have one in Switzerland."

They are doing that all the time; are they not?

Mr. MARTIN. Not to my knowledge, on that basis.

The CHAIRMAN. Well, you have knowledge in California, where in Tokyo, Japan, they have several banks there. You have knowledge of that, don't you?

Mr. MARTIN. All of those have come before us.

The CHAIRMAN. All of them have? They were national?

Mr. MARTIN. Yes.

The CHAIRMAN. Now, then, some of them are owned exclusively by Tokyo banks; are they not?

Mr. MARTIN. They must come before a State authority. If they don't come before us, they come before a State authority.

The CHAIRMAN. Just like in New York they came before a State authority.

Mr. MARTIN. That is right.

The CHAIRMAN. That is the part I object to. The Federal Government has the power over money. Why should a State have the right to license a foreign bank, and then let that foreign bank have the benefit of the fractional reserve system here in the United States, which is equal to using the credit of this Nation free of charge? You don't agree to that, do you?

Mr. MARTIN. No; I don't agree. But I don't agree that it is using the fractional

The CHAIRMAN. Why? You don't deny that they are using it. Of course they are using it, all the time.

Mr. MARTIN. Well, the Royal Bank of Canada, for example, that comes in here--what are they doing with respect to these reserves? The CHAIRMAN. The Royal Bank of Canada, I don't know about that. But any bank that is established in New York, they have everything that they have here if they want it, the way I understand it-even a secret account, like Switzerland-they have a numbered account in New York.

Mr. BOLTON. Mr. Chairman, will you yield for a question?

Is the chairman making a point that he doesn't believe in the fact that foreign banks should be able to establish here?

The CHAIRMAN. Without the authority of the Federal Government. I am protesting the States being allowed, the 50 States, each of them, being allowed to contact foreign countries and make trades with foreign countries to establish branches or banks or units in the State, provided that State can let some bank have a branch in their State, or another unit.

Mr. BOLTON. Does the gentleman then, in effect, say he does not believe in the dual banking system?

The CHAIRMAN. Oh, certainly I do.

Mr. BOLTON. But because it is in the international field

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The CHAIRMAN. I don't believe in the States dealing with foreign governments. I think that is a matter for the Federal Government of the United States of America to do.

Mr. BOLTON. And, therefore, because the banks are national banks abroad

The CHAIRMAN. Well, the National and State bank doesn't make too much difference. I object to a State being allowed the privilege of making deals with foreign governments-specifically in Switzerland's

case.

Now, they have a bank in New York that accepts deposits. And they have the fractional reserve system. They issue money on the credit of our Nation. They do everything that a bank in New York does for the reason that the Swiss bank and Switzerland agreed to let the New York bank have units or branches over there. That is the part I object to.

And if one State can do it, and California can do it, 50 States can do it. And where would we be?

I think it is in a mess, myself. And I think Mr. Martin ought to begin to look into it, and make recommendations to Congress on it. Mr. MARTIN. Mr. Patman, I am sure if the State authorities in New York approve a foreign branch that does not come through the Federal orbit, that they check with the State Department at the time that they do it.

The CHAIRMAN. I know. But the State Department is not the monetary part. We are talking about that part of the Constitution which says that Congress shall have the power to coin money and regulate its value. That comes under that.

Mr. MARTIN. We keep in close touch with the State Department on this type of thing.

The CHAIRMAN. The State Department has nothing to do with it. Now, of course, I think where it is national you should. But what I mean-so far as New York is concerned, making a deal with Switzerland, the State Department has nothing to do with that, the way I see it.

Mr. MARTIN. I think they have the foreign policy aspect of it.

The CHAIRMAN. Certainly. But that is Federal, you know. That is the reason you do business with the Federal Government, because this is a Federal proposition. It is not a State deal.

Anyway, I will not take up too much time on that. But I will ask you some questions about this bill.

You said you didn't state-and I am not sure that you did-I think you are correct-that you are one of the ones that did not state that it was inconceivable to you that there would ever be an occasion arise that you would need any part of the surplus. But some members of the Board did state it.

Now, then, under what conditions can you conceive of a situation that would necessitate you throwing $1 or any amount out of that $933 million?

Mr. MARTIN. There are a lot of vicissitudes in this world, Mr. Patman, that you cannot foresee.

The CHAIRMAN. Name one of them.

Mr. MARTIN. I just mentioned one of a bank robbery.

The CHAIRMAN. Bank robbery?

Mr. MARTIN. Where we had self-insurance.

The CHAIRMAN. Would you take that out of the surplus?

Mr. MARTIN. That is what it could be used for.

The CHAIRMAN. I thought you carried insurance. I never did see any reason you should, but I thought you did.

Mr. MARTIN. We have had self-insurance.

The CHAIRMAN. Self-insurance-just like the Government has. A lot of things you have insurance on, don't you?

Mr. MARTIN. We have had it. This has been one of the things that has been discussed frequently in the System.

The CHAIRMAN. All right.

In case of a robbery, you might need part of that surplus. What else would you need it for?

Mr. MARTIN. I could not possibly conjure up a series of cases where we would use it. But this is a businesslike procedure. And I think that there is no reason at all why circumstances, where we are having heavy losses, and our earnings are not substantial-there may come a time

The CHAIRMAN. How could your earnings fail when 99 percent of your earnings come from the interest on Government bonds? And you bought the bonds with created money.

Mr. MARTIN. Mr. Patman, the situation can change very quickly, and has changed before.

If we had a major depression in this country, which I certainly hope will never happen again-but if we did, you would find that all of the circumstances around this would change surprisingly quickly.

The CHAIRMAN. But my point is you could save the taxpayers a lot of money if you paid this into the Treasury today, $933 million. If you had a loss of $5 million, if you had to have it, Congress could appropriate it out of that very fund you turned in to the Treasury. There is no reason why it could not.

But why have a billion dollars almost there that is idle and unused? You have no good reason to believe you will ever need it. But if you did need it, it could be taken care of. And it would save the taxpayers a lot of money every year.

Mr. MARTIN. I question whether in the long run it would save the taxpayers money.

We have set this up in this way as a businesslike procedure. And it is perfectly true, as you say, that we could pay all of this into the Treasury at this juncture, and then if we got into trouble we could come back to the Congress to appropriate the money.

But it seems to me that by and large this was a good, workmanlike, businesslike way of handling it.

The CHAIRMAN. Well, of course, this is not necessarily a private business. This is a Government business.

Mr. MARTIN. Well, I am putting it on a Government business basis. The Congress can change this at any time that you want. I have never denied that. You can take the Federal Reserve Act and rewrite it any time that you want.

The CHAIRMAN. Yes, sir, that is very true.

Mr. MARTIN. That is your prerogative and your authority, and I have never questioned it in any way.

The CHAIRMAN. But it is awfully difficult to get consideration of the subject as important as this.

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