America's Money Machine

214 PART III / DEBACLE OF AN IDEA
ments sufficient to absorb excess reserves, to the extent of double the
percentages mentioned; (c) consolidate the authority ofthe Open Market
Committee by transferring to it the power vested in the Board ofGovernors
to change the reserve requirements within these limits; (d) make
reserve requirements applicable to all deposit banks rather than to member
banks only; (e) exempt reserves from assessments of the Federal
Deposit Insurance Corporation.
The report also recommended repeal of the authority to issue $3
billion greenbacks contained in the Thomas amendment, as well as the
termination of the monetization of foreign silver acquired through the
silver purchase program. It recommended also the termination of the
President's power to devalue the dollar.
The report went on to recommend that new gold accretions be insulated
by being held in the Treasury rather than paid out to the Federal
Reserve banks (in the form of gold certificates).
Finally, and most significantly, it recommended that government deficits
be financedby drawing upon existing deposits rather than by creating
additional deposits through bank purchases of government securities;
and that the budget be balanced as the national income increased. 3
The report did not please Morgenthau, particularly as the market for
governments sold offjust in advance of the report; nor did it please the
liberal wing within the Party, which raised the cry that it was a bankers'
play for higher interest rates.
At a press conference on January 9, 1941, Morgenthau invited attention
to the fact that from the day the report issued, interest rates started
to rise and added, "The decline was absolutely not warranted. There is
no reason I know offor interest rates to harden at this time unless some
such proposal as that of the Federal Reserve Board should be put into
effect."4
As the feud between the two men sharpened Eccles appealed to Roosevelt
for a hearing and for support. Roosevelt as usual temporized and
assured Eccles that he was "confident that it is going to work out all
right."5 But things did not work out all right and the Federal Reserve
soon found itself again the tool of federal fiscal necessities. Between the
end of 1932 and the end of 1939, ofthe increase in public debt of$20,997
million, $9,453 million, or 45 per cent, had been absorbed by the Federal
Reserve banks and the commercial banking system. In order to assist in
financing the defense program the System announced on September 1,
1939, that it would make advances on government securities at par at the
discount rate. The rate was then 1 per cent in New York City and 1 1/2