You said this morning-you kept talking about the accord. Don't you agree, in order for you to say that you have a real accord, like in March 4, 1951, that you would have to have not only the Federal Reserve, but you would have to have the President in on it--he would have to be a party to it, would he not? Mr. MARTIN. Well, the President was a party to it. Mr. MARTIN. Well, I am not in a position to question the President. The CHAIRMAN. Mr. Truman-he says he was not a party to it. Mr. MARTIN. I wish you would read President Truman's letter to Mr. McCabe, commending him for his part in arriving at this accord. The CHAIRMAN. I know. But he commended him on the theory that he had just been in with the whole Board and promised that he would not let that long-term interest rate go up, didn't he? Mr. MARTIN. Oh, no, Mr. Patman. That came following that. The Board meeting was in the latter part of January, if I remember correctly, and the accord was on the 4th of March. The CHAIRMAN. Well, I can tell you now Mr. MARTIN. I had some small part in working on that. The CHAIRMAN. I know you did. And Mr. Truman did not agree to that accord, and the President of the United States fixes the long-term interest rate. You agree to that, don't you? Mr. MARTIN. I agree that the President agreed to fix the longterm interest rate? The CHAIRMAN. He is the one that agrees to the amount of interest on a long-term rate. Mr. MARTIN. On Government securities, he has to approve it, yes. The CHAIRMAN. That is what I say. That is the reason it is neces sary for him to be a party to it. Mr. MARTIN. Well, he was a party. We issued at the time of the accord, as you will recall, a 234-percent nonmarketable bond, which was sold to the insurance companies in very large measure, and took the overhang off the market. And the President's signature is on that piece of paper. The CHAIRMAN. There are two people that have never been heard on that one of them is Mr. Truman, and the other one is Mr. McCabe, who was chairman. We might ask him to testify. Mr. MARTIN. I have no objection to your calling either one of them. I merely want to point out to you that the accord which was announced-I think it was in the papers on March 4 of that year-was negotiated over a period of about 6 weeks preceding its arrival. And it was a meeting of the minds at that time. I was authorized by the Secretary of the Treasury, my superior, to go over to the Federal Reserve Open Market Committee and negotiate with them on his behalf. And I went over-I think it was on the first of March or thereabouts. I have been looking through some of my notes in my diaries on this. And it was on the first of March, I think, the Open Market meeting at that time, that I went over and negotiated with the Open Market Committee on behalf of the Treasury. The CHAIRMAN. Mr. Snyder was in the hospital at that time. Mr. MARTIN. Mr. Snyder was kept fully informed. I went with Under Secretary Foley out to the hospital, and despite the fact that he was suffering and lying on his back, and was, as you say, incapacitated, he was informed. Now, the accord may not have worked out the way you wanted it, or the way I wanted it, necessarily. But that was an accord-in my judgment it is an indisputable fact of history. The CHAIRMAN. We will go into that a little more, because I think it is important in connection with this study. Now, I have a bill here, H.R. 9685 to amend the Federal Reserve Act to provide that interest received by Federal Reserve banks on obligations of the United States will be covered into the Treasury as miscellaneous receipts, to authorize appropriations for the expenses of the Federal Reserve banks and the Board of Governors of the Federal Reserve System, and for other purposes. (The bill, H.R. 9685, referred to, follows:) [H.R. 9685, 88th Cong., 2d sess.] A BILL To amend the Federal Reserve Act to provide that interest received by Federal Reserve banks on obligations of the United States shall be covered into the Treasury as miscellaneous receipts, to authorize appropriations for the expenses of the Federal Reserve banks and the Board of Governors of the Federal Reserve System, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 7 of the Federal Reserve Act is amended by inserting immediately after the section heading the following new paragraph: "The full amount of all interest and discounts received by Federal Reserve banks on obligations of the United States shall be paid or credited by such banks to the Secretary of the Treasury and covered into the Treasury as miscellaneous receipts. To the extent that the income of such banks from other sources is insufficient for the payment of their expenses, there are hereby authorized to be appropriated such sums as may be necessary." SEC. 2. (a) The third paragraph (12 U.S.C. 243) of section 10 of the Federal Reserve Act is amended to read as follows: "There are hereby authorized to be appropriated such sums as may be necessary to pay the expenses of the Board of Governors of the Federal Reserve System and the salaries of its members and employees. Subject to the availability of appropriations, the Board may maintain, enlarge, or remodel its office building in the District of Columbia and shall have sole control of such building and space therein." (b) The fourth paragraph (12 U.S.C. 244) of section 10 of the Federal Reserve Act is amended by striking out the third sentence. SEC. 3. The first section and section 2 of this Act shall take effect on the first day of the first fiscal year which begins after the date of enactment of this Act. During the period between the date of enactment of this Act and the effective date of the first two sections, the several Federal Reserve banks and the Board of Governors of the Federal Reserve System shall take such steps as may be necessary to change their accounting period from the calendar year to the fiscal year and otherwise to bring their accounting practices and procedures into conformity with those employed by other agencies of the United States operated with appropriated funds. The CHAIRMAN. Now, that is to do away with what is known as back-door financing. And you are opposed to that. You gave your reasons for it. Mr. MARTIN. That is correct. The CHAIRMAN. Now, then, the bill to require the payment of interest on certain funds of the United States held on deposit in commercial banks to provide for reimbursement of commercial banks for service performed for the United States, and for other purposes. (The bill, H.R. 9686, referred to, follows:) [H.R. 9686, 88th Cong., 2d sess.] A BILL To require the payment of interest on certain funds of the United States held on deposit in commercial banks, to provide for reimbursement of commercial banks for services performed for the United States, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That (a) no deposit exceeding such amount as the Secretary of the Treasury may by regulation prescribe may be maintained in any commercial bank to the credit of the Treasury Department or any bureau or officer thereof unless such bank pays a reasonable rate of interest thereon. (b) The first sentence of the thirteenth paragraph (12 U.S.C. 371a) of the Federal Reserve Act is amended by inserting "(other than a deposit to the credit of the Treasury Department or any bureau or officer thereof)" immediately after "pay any interest on any deposit". (c) The first sentence of section 18(g) of the Federal Deposit Insurance Act (12 U.S.C. 1828 (g)) is amended by inserting "(other than deposits to the credit of the Treasury Department or any bureau or officer thereof)" immediately after "the payment of interest on demand deposits". SEC. 2. The Secretary of the Treasury shall pay such compensation for services performed by a commercial bank for the Treasury Department or any bureau or officer thereof as may be justified, taking into consideration both the value of such services and the value of benefits conferred on such bank by the United States, Federal Reserve banks, and any departments or agencies of the United States. The CHAIRMAN. Have you made your comments on that one, Mr. Martin? That is H.R. 9686. Mr. MARTIN. I don't think I have seen that. The CHAIRMAN. All right. I just introduced it yesterday. It is to require the payment of interest on these so-called tax and loan accounts, and to give the bank credit for any services rendered after measuring and taking into consideration and evaluating the services the bank renders, and also the services and benefits that the Government rendered to the banks. After taking those two factors into consideration-where it is justified to levy an interest charge for keeping of those tax and loan accounts. Mr. MARTIN. Well, the tax and loan account, as you know, Mr. Chairman, the Treasury is the one who operates that. The CHAIRMAN. That is right. You would not want to comment on that? Mr. MARTIN. They are primarily concerned. I will only comment on it to the extent of saying that when I was in the Treasury, which was some time ago, we did make studies of this. And, by and large, we were inclined to believe that net there was an advantage to the Government in the way it is presently handled. Now, times may have changed. I think it is perfectly justifiable to investigate that. The CHAIRMAN. Well, anyway, that is one of the bills. And the Treasury has more to do with that, as you said. Mr. BALDERSTON. Chairman Patman, may I make an observation at that point? The CHAIRMAN. Yes, sir. Mr. BALDERSTON. There are two reasons, from the standpoint of monetary policy, for maintaining the tax and loan account. One is that the transfer of funds from the private sector to the Government sector at the time of a financing is cushioned. The CHAIRMAN. I know. That is the reason you have a Federal Reserve System-to ease that. Mr. BALDERSTON. Market operations would be made much more difficult if it had to take account of a sudden influx of funds at the time of financing. As it is, they are cushioned. The CHAIRMAN. Yes, sir. But like it is now, they keep an enormous amount in those accounts. And sometimes a bank will buy, say, a million-dollar bond from the Government, and then they commence getting the interest on it immediately. Say it is a 4-percent bond. Then instead of paying the million dollars into the Treasury, where the Treasury could pay it on the national debt, and it would be an offset, they keep that money in their bank. Mr. Neilan, the president of the U.S. Chamber of Commerce, says that his bank invests it in 3/4-percent bonds. Well, that means that as long as the Treasury keeps its balance idle, the taxpayer is paying interest twice. He is paying interest on the original long-term bond that the bank bought and then, of course, he has to pay the interest on those 314-percent bonds. So there is the Government paying out 74-percent interest. I do not see where that can be justified-having the taxpayers pay interest twice. Recently the Committee brought out a report about the tax and loan accounts. Did you see it. Mr. Martin? Mr. MARTIN. No; I have not seen it yet. The CHAIRMAN. Well, it shows the balance in the tax and loan account in each bank in the United States on October 15, 1963. And, of course, when I asked for the material, I gave a little leeway there on the date, thinking it would be more convenient one time or another. But the date selected was-I don't charge anybody with any improper doing or anything like that was one on which the national balance was abnormally low, at about $4 billion plus, when it has sometimes been up as high as $10 billion. What is in these figures is about two-thirds of the average for 1963— which is about $5 or $6 billion for the country as a whole. And, of course, I am going to try to persuade Congress to pass a bill to cause interest payments on that, giving credit to the banks for any services rendered. And then I have one here to amend the Federal Reserve Act-H.R. 9687 by eliminating the prohibition against the payment of interest. on demand deposits. (H.R. 9687, referred to, follows:) [H.R. 9687, 88th Cong., 2d sess.] A BILL To amend the Federal Reserve Act and the Federal Deposit Insurance Act by eliminating the prohibition against the payment of interest on demand deposits Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 19 of the Federal Reserve Act is amended by striking out the following paragraph (12 U.S.C. 371a): "No member bank shall, directly or indirectly, by any device whatsoever, pay any interest on any deposit which is payable on demand: Provided, That nothing herein contained shall be construed as prohibiting the payment of interest in accordance with the terms of any certificate of deposit or other contract entered into in good faith which is in force on the date on which the bank becomes subject to the provisions of this paragraph; but no such certificate of deposit or other contract shall be renewed or extended unless it shall be modified to conform to this paragraph, and every member bank shall take such action as may be necessary to conform to this paragraph as soon as possible consistently with its contractual obligations: Provided further, That this paragraph shall not apply to any deposit of such bank which is payable only at an office thereof located outside of the States of the United States and the District of Columbia: Provided further, That until the expiration of two years after the date of enactment of the Banking Act of 1935 this paragraph shall not apply (1) to any deposit made by a savings bank as defined in section 12B of this Act, as amended, or by a mutual savings bank, or (2) to any deposit of public funds made by or on behalf of any State, county, school district, or other subdivision or municipality, or to any deposit of trust funds if the payment of interest with respect to such deposit of public funds or of trust funds is required by State law. So much of existing law as requires the payment of interest with respect to any funds deposited by the United States, by any Territory, District, or possession thereof (including the Philippine Islands), or by any public instrumentality, agency, or officer of the foregoing, as is inconsistent with the provisions of this section as amended, is hereby repealed." SEC. 2. Section 18(g) of the Federal Deposit Insurance Act (12 U.S.C. 1828 (g) ) is amended by striking out the following sentence: "The Board of Directors shall by regulation prohibit the payment of interest on demand deposits in insured nonmember banks and for such purpose it may define the term 'demand deposits'; but such exceptions from this prohibition shall be made as are now or may hereafter be prescribed with respect to deposits payable on demand in member banks by section 19 of the Federal Reserve Act, as amended, or by regulation of the Board of Governors of the Federal Reserve System." The CHAIRMAN. How would you feel about that one? You know in the 1935 act-I think it was written in the 1933 act first-there was a provision that thereafter it would be unlawful for national banks to pay interest on demand deposits. And then, of course, the same thing was written in the FDIC law-that would apply to all banks insured, in addition to national banks. Now, this is to repeal that provision, which says it is a violation of the law to pay interest on demand deposits. Would you be for this bill or against it? Mr. MARTIN. Well, I would be against this bill at the present time, Mr. Patman. This is an outgrowth of the difficulties we had in the 1932 period. The CHAIRMAN. But that period is over, Mr. Martin-I hope. Mr. MARTIN. Yes, that period is over. But the whole structure of the banking business has been impressed with the results of that period. And I would favor, as I have indicated before, eliminating perhaps regulation Q-any ceiling on time and savings deposits. But in the case of demand deposits The CHAIRMAN. You mean take the ceiling off of time deposits? Mr. MARTIN. Time and savings deposits-I would think we would permit competition there without seriously disrupting either the market or the banking system. money In the case of demand deposits-I think you would give the big banks of the country a very great advantage, and that they would tend, at least for some time, to siphon off from the smaller banks of the country, the ones that you are very much interested in, as I know-you would siphon off from them a good portion of deposits that come to them, because the larger banks would be able to pay for this. Now, I know there are two sides to this argument, and this has been argued for many years. There are some people who say banking should be a completely competitive business, and we should not worry about that-the bankers can be prudent and take care of themselves. |