U.S. Financial System

U.S. FINANCIAL SYSTEM A Call for a "Broad National Inquiry"

THE time has come to conduct a broad national inquiry into the nature, performance and adequacy of our financial system." Thus, in his State of the Union message last week (see NATIONAL AFFAIRS), President Dwight D. Eisenhower formally approved an increasingly debated project: a sweeping study of the nation's complex financial system--something along the lines of the Aldrich inquiries of 1908, which led to the formation of the Federal Reserve System.

The immediate reason for such a study is the rising chorus of complaints about FRB's tight-credit policy. The Administration itself is becoming increasingly worried over apparent inequities in the tight-money policy, fears that the credit pinch may hurt housing and small business too much without putting enough pressure on big business. Bankers, businessmen and economists alike think an inquiry is long overdue, not only into FRB's present policies but into the whole U.S. financial system, public and private. Members of the American Bankers Association and such experts as Allan Sproul, retired president of the Federal Reserve Bank of New York, have recently called for a study. A month ago an advisory panel of bankers and economists to the Senate Banking Committee backed the idea. Last week Texas Representative Wright Patman introduced a resolution into Congress calling for a sweeping look at the whole credit problem. sb The basic question is whether drastic changes should be made in the methods used by FRB to control credit to match the drastic changes that have taken place over the years in the U.S. financial system. When the Federal Reserve was first set up in 1913, it was envisioned as a central bank to provide the nation's main money supply and credit control. Since then, though the Federal Reserve's member banks have amassed assets of $176 billion, so many other financial institutions have grown up that there is an enormous pool of lendable funds outside the Reserve's jurisdiction. Nonmember commercial banks control assets of $31 billion, mutual savings banks assets of $33 billion, while life insurance firms and savings and loan associations have $135 billion to lend or invest as they choose. In addition, some 20 Government agencies, from the Veterans Administration to the Small Business Administration, have taken on important financial duties independent of the FRB. As a result, some economists fear that the nation's many credit operations are not well enough controlled or coordinated, could get out of hand, and turn the boom into a disastrous bust.

Some labor economists have suggested that a series of brand-new organizations be set up to change U.S. credit operations drastically, e.g., a National Capital Issues Committee, which would have dictatorial powers to allocate all credit, set all interest rates, and, in effect, peg the debt level for every businessman and private citizen in the U.S. Another suggestion is that the FRB's responsibility for backing the Employment Act be written into law. While FRB Chairman William McChesney Martin assumed' that he must help maintain full employment, no such basic mission is contained in the original charter. sb But while everyone wants a study, the question of who will make it has already touched off a hot political argument. Representative Patman and Illinois Senator Paul Douglas, both jealous guardians of congressional prerogatives, have put in their bids for a grand-scale "investigation" by Congress. Many other lawmakers, who know Patman as a longtime foe of FRB, are afraid of just that. As House Minority Leader Joseph Martin says, "Congress could turn the study into a witch hunt," and thus confuse instead of clarify the issues. But the main reason that Congress should not make the study, say many Congressmen, is that the project has too broad a scope for any of the regular congressional committees to handle.

Instead of a congressional hearing, the advisory panel to the Senate Banking Committee wants an independent, completely nonpartisan National Monetary Commission of twelve to 17 members. About one-third of them would be drawn from Congress, and the rest chosen by the President from all walks of business and finance. Though FRB is not actively pushing for such a study, it would gladly go along with the idea.

Actually, the strongest reason for studying the U.S. financial system in 1957 is that on the whole it is working so well. Despite complaints over tight credit, FRB feels that its controls are leveling off the boom to the point where credit will ease, possibly within the next six months. Thus, instead of the usual pattern of crash investigations and crisis changes, the study could progress at a careful pace, with plenty of time to make any changes needed to strengthen the system for the future.

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